Much fuss has been made about Rick Perry’s careless remark about Ben Bernanke. While most of the media has honed in on the obvious ridiculousness of basically calling for the lynching of a public official for doing his job, I think it’s more telling from a policy perspective to try to understand why Rick Perry would be so against monetary easing.
Ezra Klein and Matt Yglesias weigh in on this very topic. Klein bemoans an “a much broader, and unfortunate, shift among Republicans on monetary policy.” While Yglesias somewhat disagrees by pointing out that “Perry’s concern is that monetary easing would work well, and he was putting Bernanke on notice to avoid it because he wants to win the election.”
The thing is that they are both right.
I think one of the most startling discoveries I’ve made in the last few years is that the GOP is dominated by Austrian School disciples. I wasn’t even aware of this non-mainstream school of economics until I had a chance encounter with a believer at work, who had manage to convert one of my friends. One of the major theories of the Austrian School is the Austrian Business Cycle Theory, in which they basically blame the Fed for every recession ever:
Proponents believe that a sustained period of low interest rates and excessive credit creation results in a volatile and unstable imbalance between saving and investment. According to the theory, the business cycle unfolds in the following way: Low interest rates tend to stimulate borrowing from the banking system. This expansion of credit causes an expansion of the supply of money, through the money creation process in a fractional reserve banking system. It is asserted that this leads to an unsustainable credit-sourced boom during which the artificially stimulated borrowing seeks out diminishing investment opportunities. Though disputed, proponents hold that a credit-sourced boom results in widespread malinvestments. In the theory, a correction or “credit crunch“ – commonly called a “recession” or “bust” – occurs when exponential credit creation cannot be sustained. Then the money supply suddenly and sharply contracts when markets finally “clear”, causing resources to be reallocated back towards more efficient uses.
So it’s not as if the GOP doesn’t think that monetary easing wouldn’t work in the short term. I think they mostly agree that it would. It’s that they believe that in the long-term we will suffer for it.
So the real problem here isn’t a lack of understanding or a disingenuous ruse to win an election. It’s much worse than that. The entire GOP has been captivated by a non-mainstream school of economics, which proposes long refuted theories, and they are fighting for something they think is right.
The problem is that they are really, really wrong.Read More