The Microsoft Answer Effect

[daveon]

There's an article over at, never mind actually, it's a blog I read.  Where they rather smuggly point to another article showing that the Austrian School predicted the credit crunch.

In our house we call that a Microsoft support answer, from the old joke.

A helicopter gets lost in thick fog over Seattle and gets lower and lower trying to find something.  They see a building loom out of the fog and they get the attention of somebody inside.
"Where are we?", shouts the pilot.
"The third floor!" Comes the reply.
"We're over Redmond then," says the pilot.  "The answer was completely accurate but totally useless."

Lots of people saw that problems were building up in the credit and finance markets and it didn't take a trained economist to realise the problems that were being built up in the system by lending money to people who couldn't afford the loans, to extract equity from over priced homes to buy consumer goods or get more credit for things with a high depriciation rate.

Unfortunately, and here's the rub, the same Austrian School proponents were also the ones championing the fantastic ability of the financial services system to generate "weath" and the reasons it didn't need any regulation.

*sigh*

Still.  What can you do?  It's sunny in Seattle today and my dog needs walking...

Comments

[drplokta]

An Austrian School economist would point out that the markets expected that large financial institutions were "too big to fail" and were always likely to be bailed out by the government, which is a reasonable claim, and would then go on to suggest that the credit bubble could never have built up to the same extent if the government really kept out of the financial markets and investors knew that a bust bank would go bust, which seems less likely.

[daveon.livejournal.com]

The thing that is frustrating me is that this wasn't a credit bubble in the "money is cheap so people borrow lots" way that other credit bubbles have happened.

Yes, money was cheap, but quite a few countries managed to avoid explosive credit lending in housing markets because they didn't completely lose their collective minds over what constitutes a sane loan. The problem was a combination of bond markets for loans which could only provide amazing growth IF you had enough debt to throw at them, and insurance systems to protect bond holders against any loses.

Neither of which make the remotest sense and neither of which are a classic component of a low interest rate credit bubble.

Oh, and houses are not magic money making piggy banks.