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Excellent post!

You need to invite Professor C to all of these threads. He is slowly but surely destroying your position by trying to defend it. I agree with him that pure Austrian economics does not explain booms and busts. Those are indeed creatures of human psychology. But he doesn't realize that in admitting excessive credit is a problem, he undermines his and your entire case for monetarism. The Fed is hopelessly reactive (inflation is a very lagging indicator), and because of that it can't stop the credit booms. We are now well on our way to either deep recession or high inflation. There are no other choices, the securities that are now "collateral" will have to be monetized, or rolled endlessly until the Fed can reflate the credit bubble (with the inevitable consequence of making what we are going through now seem like a picnic)

I agree with him that pure Austrian economics does not explain booms and busts.

The little failure here is that this claim puts words in the mouths of the Austrian school, who understand the cycle nature of human activity including investing as well as the next guy. Their argument is that when you get to the end of the cycle where there are diminishing opportunities for sound investment, extending the boom by expanding credit makes the inevitable bust that much deeper.

But Professor C cannot even argue the strawman he stuffed with his own ego, much less deal with the argument of the Austrian school as it actually exists.

You need to invite Professor C to all of these threads. He is slowly but surely destroying your position by trying to defend it.

Which position of mine is he destroying? In which post(s) is he doing so?

Of course credit issuance can run too fast for too long, and specifically can be misallocated to narrow sectors at unsustainable prices. Yes inflation is a lagging indicator of that, and a better practice is as Bagehot knew well in the 19th century, to raise "bank rate" as soon as a boom is seen to be getting underway. Equally, you can adopt a rule to tighten somewhat when the trade balance turns adverse, or one could if most countries typically balanced their savings and investments domestically.

The Fed is instead slow and uses a CPI rule because the political forces in favor of boom financing are stronger than those in favor of long run price stability, as a policy objective for monetary policy. This results in booms a bit longer than we need, busts a bit deeper sometimes, and especially in a rate of inflation across full cycles that is 2% or so higher than it needs to be.

These issues are not instrinsic to a fiat money system with central banking, as better performances by other institutions have shown (e.g. the Bundesbank, Switzerland). But it is par for the course under present political conditions in the anglo saxon countries. It has also arguably kept the secular level of unemployment somewhat lower than it has averaged in tighter systems, with some real gains from that offsetting (somewhat) the capital market misallocation losses involved.

But all of the above is policy optima seeking, not liberty or justice principle about the right of institutions to issue new credit, or the expediency of central banking. The present monetary system is not perfect and it could be run better, but it isn't a "racket", as the populist luddites are pretending when they throw around their class warfare rhetoric, their "picking pockets" and their counterfeiting claims, and the like.

Too much is being asked of monetary policy by all concerned. Instead of demanding even more from it, we should be demanding decidedly less. More of the government's countercyclical policy should be conducted by tax policy changes and means testing of benefit payment systems, and a lot less by monetary policy intervention. Monetary policy should allow continued new credit issuance, but should moderate it sooner in booms (watching financial markets, commodity prices, and the balance of trade or the the savings rate), and should target full cycle inflation rates a percent or two lower than we've had historically, by doing so.

The reason to do that is not that inflation picks anyone's pocket, but that it interfers with rational intertemporal planning, and makes it harder to accurately forecast long run interest rates levels. That results in price swings to long dated assets that encourage capital misallocations through the cycle etc. The goal is not to abolish the cycle or abolish some supreme injustice in bare values changing - neither is achievable or worth aiming for - but simply to make private planning easier, by limiting (modestly) the amplitude of price swings.

In the busts, meanwhile, the system emphatically needs the flexibility to increase the money supply when private debts are rapidly contracting. The last time to get violently vigilant about inflation is when commercial paper is being run off at trillion dollar annual rates and major hundred billion dollar institutions are facing bankruptcy. That is simply stupid, the same sort of stupid as forcing the money supply to contract 30% in the early 1930s, trying to obey an idiotic gold rule.

Fiat money's one real benefit is its ability to replace deflationary absolute smashes with moderate real repricings, instead. That isn't something we should be trying to abolish, and crying over the split milk of the last cycle's slowness to tighten, is not helpful when you are already in the "smash" phase.

If you want to help the present system or improve it, calling it illegimate whenever there is a downswing isn't the way to do it. Calling for maximum tightness when everyone is deleveraging already, isn't the way to do it. You want to advocate greater tightness for the sake of price stability, fine, I'll support such calls - during a boom. We aren't in one.