Role of Credit in Booms & Busts: A Case of Being Right with Wrong Reasoning

Researchers at the San Francisco FED have stumbled upon a conclusion that credit plays an important role in booms & bust, something transparently clear to anyone with the faintest idea about Austrian Economics. Yet in reviewing the literature, the team seemed to have no knowledge of the work of Mises, particularly his epic tome, Theory of Money & Credit.

“Credit is a perennial understudy in models of the economy. But it became the protagonist in the Great Recession, reviving a role it had not played since the Great Depression. In fact, the central part played by credit in the downturn and weak recovery of recent years is not unusual. A study of 14 advanced economies over the past 140 years shows that financial crises have frequently led to severe and prolonged recessions. Shining the spotlight on credit turns out to be crucial in understanding recent economic events and the outlook.”