Tuesday, August 9, 2011

Huerta de Soto on the Cause of the Financial Crisis

In this interview by Gold Money Foundation, the great Jesus Heurta de Soto explains the causes of financial crises and business cycles. He draws upon the theory of Mises and Hayek to explain the cycle.

As he explains,
This financial crisis, the crisis we have experienced in the last at least 200 years, has been caused by a previous process of huge credit expansion that was orchestrated by central banks, and that consists of a process of creation of new money that materialises in demand deposits that are created out of thin air by the banks and given as loans to entrepreneurs so that entrepreneurs will receive the signal that they should invest as if real savings in the society have increased, when in fact this didn't happen. The whole process was financed, as I said, through artificial credit expansion. As a result of that, huge malinvestments were committed and the market, which is a very dynamically efficient process of creativity and discovery, sooner or later discovers these malinvestments, and when the discovery is done, the financial crisis comes.

No comments:

Post a Comment