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William White is very good. Thanks for the post.

I've been highlighting William White's work on the "Taking Hayek Seriously" blog for the last year.

I call White "The Man Who Saw The Future".

White seems to have started studying Hayek and Selgin sometime in the early 2000s -- and White was explaining the unsustainable boom to Greenspan and the world's central bankers as early as 2003.

His annual BIS reports 2003-2008 are remarkable.

White needs more than a dash of monetary equilibrium/disequilibrium theory to add to his quasi-Austrian and Minsky approaches. But, I suppose, it is good that he is looking beyond old fashioned Keynesianism, new classical real business cycle theory, and new Keynesian theory.

I rather like New Keynesian theory in a very general way. Modern macro allows for changes in potential output like real business cycle theory (and Austrian theory.) There is price and/or wage stickness, so monetary disequilibrium can cause deviations of real output from changing potential output. These deviations are eventually corrected by changes in prices.

But... to much of it comes down to monetary policy determines "the" nominal interest rate. That nominal rate and expected inflation determines "the" real interest rate. The real interest rate and random shocks causes the output gap. And the output gap and random shocks cause inflation.

Well, that is one way to look at it. But I don't think it is the best way. You can see why they came up with the Taylor rule in this context.

Thanks for posting the article by William White.
He contrasts the Austrian "mailinvestment" approach with the Keynesian "animal spirits" theory. The former is founded on credit/money supply expansion fueled by central banks forcing interest rates below the natural rate; the latter is more a function of uncertainty and large-scale entrepreneurial errors. Discoordinating interest rate changes seem to have less of a causal role in Keynesian theory.

White asks how Austrian insights can be folded into Keynesian theory. It seems to me that he's trying to square the circle here in view of the fact that interest rates have a market coordinating function in Austrian theory, but play no such role in Keynesianism.
Comparing and contrasting the late 1990s dot com bubble with the more recent bubble might be helpful. The former was confined to equities (stocks and private equity, mainly in the venture capital segment of that market). It wasn't caused by credit expansion, yet interest rates were lower than the natural rate (remember that there was a productivity boom from 1995 to about 2004, which would have lead to higher rates). Entrepreneurs were valuing uncertain (miraculous?) cash flows with interest rates that were out of whack with economic reality. I suppose a Keynesian would say that they were suffering from animal spirits gone wild. The former strikes me as consistent with an econiomic and financial analysis; the latter is theater dressed up as economics.

In the 2004-2007 (or whatever dates you want to use--the Nasdaq was up about 40% in 2004) boom,
central bank-fueled credit expansion was the causal force. The effect of sub-market interest rates on various asset classes, including real estate, stocks, private equity, and bonds, was unmistakeable. At the heart of the discoordination story is the effect of interest rates (and interest rate-dependent cash flow calculations, whether rents, stock or private equity values, or other financial flows) on capital markets and the structure of production, and the labor market.

Rather than trying to reconcile the irreconcilable, it might make more sense to study the critical role of interest rate changes on the real economy. Keynesian theory appears unable to do this, unlike the Austrian theory. Comparing these two bubble and bust cycles might be helpful.

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