It’s past time for beta blockers rather than stimulants for the economy, based on the following analogy.
Let’s take Ben Bernanke as the doctor on the case of the U. S. economy, having succeeded Alan Greenspan while the mid-decade “boom” was beginning to arise from the tech wreck of 2000-2002. Let’s further posit that Dr. Bernanke committed economic malpractice. He failed to properly diagnose the patient as suffering from a surfeit of poor lending practices, with massive misallocation of capital and an amazingly leveraged set of financial companies betting their entire shareholder capital on the chance that housing would avoid a collapse.
Let us segue to a more directly medical analogy. Come 2007, when small finance companies had been blowing up and then Bear Stearns developed problems with some of its deals, Dr. B made a small therapeutic step of cutting the cost of “discount window” rate of credit allocation a bit. But the patient worsened and by the following year, Bear Stearns itself was in critical condition. Nonetheless, the good doctor insisted that the housing market was in solid enough condition that any recession that might be underway would follow an ordinary course. Conservative therapy was continued.
But instead the patient developed worsening chest pains. Rather than order a high-tech treadmill stress test or an angiogram, the doctor continued on course. Finally, in late summer/early fall 2008, the patient suffered a massive myocardial infarction (i.e. a “heart attack”).
Now was the time for heroics. Indeed, the Bernank rose to that occasion. He defibrillated the patient and brought in specialists from around the world to get the patient over the crisis. In medicine, very weak hearts may need their pumping function supported by providing intravenous adrenaline. This was done for the financial system. Nonetheless, so much damage was done that a case of congestive heart failure (i. e., a severe economic downturn) occurred. Extensive economic adrenaline was administered in late 2008 and 2009.
The problem is the following. Adrenaline and its analogues are only beneficial during the acute phase. Paradoxically, the way the heart heals best and improves its pumping function is by giving, as soon as possible, medicine that initially weakens the pumping function of the heart.
The pharmaceutical industry spent a good deal of time in the 1980s and 1990s developing phosphodiesterase inhibitors to treat congestive heart failure. These stimulants indeed strengthened the heart as a pump, and most patients on them had more energy and felt better.
Truly unfortunately, treated patients tended to die sooner than patients on placebo. What was happening was that the same medicine that stimulated the heart to pump harder also overstimulated the “electrical” system of the heart that controls the timing of the heartbeat. This led to an unacceptable incidence of sudden cardiac death from irregularities of the heart rhythm (ventricular fibrillation).
This is about as direct an analogy to the current practice of treating a crisis caused by too much cheap credit with even more and even cheaper credit that I can find. It feels good, but it introduces tons of risk. The risk is now on the sovereign, not merely on corporations that could have been liquidated without the sovereign or society as a whole being greatly impaired for very long.
It also turns out that the treatment of weak hearts following myocardial infarctions may point to a better method of recovering from the crisis.
A type of medicine called a beta blocker was developed decades ago to treat a variety of cardiovascular problems including high blood pressure, coronary artery disease, and rapid heart beats. Beta blockers tend to slow the heart rate and weaken the force of contraction of the heartbeat. Therefore it was against all principles of American medicine to give a beta blocker to treat a weak heart.
In Scandinavia, however, physicians had a different point of view. As early as the 1970s, they had reasons to think that beta blockers were beneficial for weak hearts. Lo and behold, they persisted and by the late 1990s, with numerous setbacks along the way, they began to pick up adherents and organized clinical trials to prove their case.
As it happens, beta blocker treatment of weak hearts and the clinical syndrome of congestive heart failure both decreases the incidence of sudden cardiac death and allows the heart to heal and actually increase its pumping function over time. Slow and steady wins this race, not the short-term fix of stimulants except as the latter are needed during the acute crisis.
The economic analogy that I see supports the Austrian view of credit collapses. If credit is allowed to get scarce following a credit boom, the economy will tend to heal by handling the prior malinvestments appropriately. New expenditures will have to meet a high hurdle rate to go forward. Those new capital and other expenditures will therefore tend to succeed and by the standard miracles of capitalism, will tend to allow additional capital to be created, which so long as capital is kept scarce enough, will then also be handled with care.
As with the proper use of capital after the collapse of a credit boom, this is how beta blockers in fact work in heart failure. They are given in mini doses initially. As the heart recovers, the dose is gradually increased, always blocking the effects of adrenalines (our naturally-produced stimulants). The cardiac cells learn to function more efficiently as they are freed from the adrenergic stimulation that in healthy hearts is normal but in weakened hearts has deleterious effects. The heart ends up both stronger and more resistant to ventricular arrhythmias.
Eventually the Scandinavian view of the proper treatment of weak hearts won. It took a while, but all doctors were united in their desire to do right for their patients, and most thought leaders knew enough to be open to new approaches. Also, the pharmaceutical companies were looking for new uses for old drugs and were willing participants in searching for a new paradigm to treat heart failure.
The challenges for Austrian-oriented thinkers in the field of national economic policy are profound, but there is reason for hope. Outmoded intellectual paradigms such as pre-Copernican astronomy tend to fail due to their inability to explain newer, contradictory data without excessive complexity. We have just been through a decade in which the financial system has lurched from the extremes of record-high stock valuations (a false “new paradigm) to record-high money valuations (i. e. global money yields near zero). None of this wildness makes sense, just as the bizarre paths that astronomical bodies had to follow for the earth-centric view of the solar system to be followed also came to look ridiculous.
I believe that a growing number of people are therefore deciding that something is fundamentally rotten in the state of Keynesianism, as the real world refuses to follow the predictions of the money-printers.
As ideas that were proposed to solve the economic crisis of eight decades ago are twisted and mutated into more and more bizarre forms and work less and less well, I become more and more hopeful that economic common sense will eventually prevail. Per Gandhi:
First they ignore you, then they laugh at you, then they fight you, then you win.