Has Jerry Bowyer Ever Made His Apologies to the Emperor?
The Strategy of Monetary Policy: Larry Summers from 1991

Malinvestment in the Recession?

I think Daniel Kuehn mistakes Evan Soltas's point. Soltas is arguing not against the fundamentalist Austrians and their claims that the depression is caused by previous malinvestment in the boom. Soltas is arguing against the Martin Feldstein's who claim that interest rates need to be high during the bust in order to guard against additional malinvestments committed then.

Daniel Kuehn:

Evan Soltas has Austrian malinvestments backwards: The problem is that the Austrian position is that malinvestments occur in the boom, not the bust, so this point would actually militate in favor of the Austrians. The bust is allegedly the period where markets are corrected and malinvestments are liquidated. Austrians would expect investments in this period to be more sober-minded and longer lasting. Now Soltas is right that you hear a lot of Austrians (not all, actually) complaining that money is too loose right now, but that's out of fear that an unsustainable boom associated with malinvestments is going to develop. You hear less of that lately out of Austrians--and more monetary disequilibrium and market monetarism from them--precisely because this case is starting to look ridiculous. Where is the incipient unsustainable boom?…

But Daniel adds another ton to the weights keeping the Austrians chained to the bottom of the sea:

Austrians need to do a better job justifying why the relatively lengthened capital structure in booms is "too long" and not "just right" and why the relatively shorter capital structure in busts is "just right" and not "too short". In other words, I would have thought boom years are the "natural" years and bust years are the "unnatural" years. This seems like the obvious assumption. Everything is working during booms and it's not working and people are in a panic during busts. So Austrians need to better justify the logic of flipping that on its head. A Wicksellian way of putting this is why do you think we're hitting the natural rate during recessions and below it during booms?