Austrian Economics Would Save Europe: Nigel Farage Debunks Keynesians


It's a royal irony that if Brussels somehow found a way to impose political union on the people of Europe, anti-EU iconoclast and UKIP leader Nigel Farage would be its most popular candidate. His speeches regularly become YouTube hits. Widely scorned by British pundits as a xenophobic right-winger, scrolling down through the comments you see that ordinary citizens from Poland, Greece, Ireland, and right across Europe are thanking Nigel Farage for being the only one to speak truth to power. 

In a world of grey civil servants, his speeches are rather like the hand that lifts the boulder to reveal the lice (or more accurately... lies) beneath. His latest, addressing the aptly-named Spanish "failout," Nigel points out the folly of mutual indebtedness.

In this remarkable situation, Farage points out that bailing out Spanish banks makes things worse not better: "A hundred billion [euro] is put up for the Spanish banking system, and 20 percent of that money has to come from Italy. And under the deal the Italians have to lend to the Spanish banks at 3 per cent but to get that money they have to borrow on the markets at 7 per cent. It's genius, isn't it?"

Keynesians. With the recent news that UK Chancellor George Osborne has decided to inject further stimulus into the British economy, it is a time of immense frustration for those like Farage who are economically literate. This is mainly because the Western financial and political scenes have been overrun by Keynesians. 

Keynesianism, named after the famous economist John Maynard Keynes, is the ideology that state control of monetary policy, bailing out failed institutions, and inflationary stimulus is the correct public policy response to Recession. It was embraced first of all by President Franklin D. Roosevelt during the Great Depression, and had a resurgence in the 1970s. 

The worst of it is, those policies failed in both cases. The Great Depression lasted over 15 years, and only truly ended after the dramatic downsizing of government post-World War II. The 1970s similarly was a decade of stagnation while Keynesian policies reigned.

The purpose of Keynesianism is that an increase consumer spending will act as a stimulus to the economy. Yet, the vast majority of the bailout money goes into the checking accounts of the banks which receive them, and usually either stays there or is paid to its top dogs as bonuses. Most small entrepreneurs, the engine of growth and jobs, find it just as difficult to get a loan than before (having tried myself to start a business, I know from experience). 

Meanwhile, inflation hurts the working poor most of all, because it reduces the purchasing power of their wages.

The Austrian School. From his speeches, I sense Nigel Farage is an Austrian. For non-economists, this means a student of the Austrian School of Economics. This branch of economic philosophy has elucidated the correct cause of the boom-bust cycle in the first place: malinvestment, central banks, and fractional reserve banking. It is a widely dissed school among the economic establishment, yet its devotees have a funny habit of predicting the collapse of economic bubbles long before anyone else.

The Austrian School claims that the business cycle, long thought by Keynesians to be an unavoidable anomaly in the firmament of the economy, is created by the activity of banking cartels like the Federal Reserve, the Bank of England, and the ECB. For the last ten years, for example, in the wake of the Dot Com bubble, Fed Chairman Alan Greenspan kept interest rates at near zero. This sent out a green light to the economy to take out cheap mortgages, resulting in an inflating Housing Bubble. The Housing Bubble is an example of malinvestment, where capital flows into an unprofitable area of the economy.

Recession is a neccessary consequence of this cycle, because the malinvestment must work its way out of the system for the economy to regain economic health. This means that the bad banks must be allowed to collapse and new ones must rise up to take their place. Yet it is clear that policy makers in the Troika are determined to contravene these natural laws by keeping the cancerous cells inside the body. 

The proof of the pudding, as they say, is in the eating. Iceland, which didn't put a single penny into their bad banks in 2008, is already back to growth. It is sad that the only thing which would solve our economy is exactly what politicians are most unwilling to do: nothing.