Was it some sort of national insanity?

No, it was a power grab, and the current political moment shows precisely how this happens. A small group of elites, cut off from the broader reality, decides to finagle the system to serve itself and its friends in the short term while forgetting the big picture and the long term. Sensible people try to point out obvious facts, but their voices are drowned out.

Not In My Name
http://suddendebt.blogspot.com/2009/01/not-in-my-...

As for Ron Paul, I like Ron Paul. He is on my blogroll and he speaks a truth many do not want to hear. I suspect some of his views may become more mainstream as the depth of contraction becomes apparent.

There is this silly notion that we need to prop up home prices, which you will find at the root of many of the arguments about why a bailout is necessary. If you think we need to prop up home prices, you are part of the problem not the solution. Yes people are under water on their mortgages, but that is rightly so because the value of homes are still far too high compared to historical averages. Now they must decide to stay or walk away. Average real estate values will fall a lot further and they will not reach their previous highs for 10-30 years (the same goes for equities).

The stimulus will only prolong the process. What I mean is that a major correction CAN NOT be avoided, it can only be delayed with detrimental effects. The methods of economic stimulus being used should be viewed as toxic interference in the true recovery. Intervention is just as bad as the junk derivatives and securitized debt monstrosities that we're trying to gently unwind. The problems are so bad, so deep, so systemic that we can't even get honest answers from the Treasury, the Fed, or the companies being bailed out, about the EXTENT of the problem. My best information says that we're looking at a total of between 500 trillion and 1 quadrillion in toxic, leveraged bets. Even the Fed will run out of options soon when the printing press can't handle the weight of the paper money.

At that time though, don't forget that the then Secretary of Commerce, Herbert Hoover, was agitating for intervention but was over-ruled by President Harding who rejected governmental planning and Treasury relief. Harding said that " the excess stimulation from that source is to be reckoned a cause of trouble rather than a source of cure." The 1920-21 recession was subsequently over before Hoover could bring to bear his interventionist anti-depression policies…….but as we all know he got his chance later.

Nevertheless, I have no doubt that these days to be succesful in business over the long term you need a thorough going knowledge of Keynesian economics. This is so you can follow the boom/ bust cycles created by governmental/ central bank 'fine tuning' of the economy…..and then apply Austrian business cycle theory to see how it will really play out.

But, all that means to me is that the present system is wrong.

Sadly, many people simply won't listen because they have too much invested in their current view of reality. In my view we're going to see a major Depression no matter what. Suffering can't be avoided, so it would be better to suffer now instead of later. If we avoid the short term suffering, the amount of EVENTUAL suffering will be even greater (and more prolonged). Just wait a little while… these problems are still far deeper than most people realize. Of course, I hope Schiff, Ron Paul, and all the other bearish people are wrong…

One other thought: Austrian Economics is very concerned with efficiency. As a result, I think many miss the very real human need for fairness both in the short and in the long-term. An efficient outcome does not always seem fair and is thus sometimes inherently unstable. An example might be a monopoly in operating systems for Microsoft. A situation like this will always be seen as unfair and will be resisted regardless of efficiency.

I guarantee you that if you gave a Myers-Briggs test to a random sample of Austrian school devotees, there would be a massive skew toward rationals: NTs. (http://www.wischik.com/damon/Texts/myersbriggs.ht...We rationals (I am clearly a rational) are too fixated on efficiency at the expense of other factors. That often makes proposed remedies unrealistic: think the efficient market hypothesis here.

hbl, thanks for your kind words.

But, seriously, Jim, find me one time when the government sat on its hands when the economy was imploding. 1921 in the U.S. might qualify. But, my point is that intervention is going to happen. It's axiomatic when it comes to crisis. Basic human psychology would predict this. The question is what should/could the government do. You have to remember, absent the need for intervention that I am making, there also is the need to be re-elected. It is not a politically viable decision to sit on your hands. Even the Germans are waking up to this.

So again:
1. Economic pain leads to calls for government action
2. Inaction means no re-election
3. Therefore, government action in crisis (economic or otherwise) is always going to be a factor
4. Therefore, the real question is: what can a government do that is likely to do the least harm, temporarily alleviate economic distress, and allow politicians to keep their jobs.

I live in Washington. I was born here. I know how government works and I understand that the Peter Schiff solution is both improbable because of the politics of crisis and ineffective because of the realities of systemic risk.

I'm an INTx and personally I identify more with Hyman Minsky's theories than Austrian ones, though I think Austrian economics has some real strengths. But I know your argument was many Austrians are NTs, not the converse, so I wonder what other factors come into play.

Also I'm not convinced Austrian prescriptions are even the most efficient approach, given the overshoot and third-party impact that downward momentum can provide in highly complex and coupled systems. Yet this would be difficult to prove or disprove framed as an optimization problem, relative to other prescriptions.

Ed Harrison, I appreciate your level-headed thinking and willingness to adapt your views as events unfold — and thanks for this blog!

But, the market meltdown taught me that a systemic collapse was much more likely than I had thought. There is no way to get out of this mess without a total collapse in the banking system and in the economy without some measure of government intervention and stimulus. SO you could say that my views have been tempered by events while Schiff's have not.