If there is one thing that can bring all Austrians into agreement, it’s that the Federal Reserve is an unreliable tool for monetary stability. Economists often point out that the severity and longevity of recessions has decreased since the Fed’s inception, particularly since the end of World War Two.

Yet, arguably three of the worst economic events in U.S. history have occurred under the Fed’s tenure; The Great Depression, the stagflation of the 1970s, and the financial crisis of 2008-09. Alternative monetary proposals have typically been scant, ranging from constitutional amendments that limit the central bank’s influence in the economy, to the vaguely-named “End the Fed” movement. The Austrian solution de jour is what is called the Pigou effect (or real-balance effect) in which the deflation of prices will increase real income, wealth, and therefore consumption until the decrease in aggregate demand is reversed enough to inspire businesses to hire workers who were laid off during the previous fractional reserve banking-induced recession, increasing output and income further. It has been argued, however, that this is merely a second-best option. In the long-run, economic activity recovers and the market tends towards equilibrium. In the short-run, disequilibrium reigns, yet this can be corrected through monetary policy. At first, Austrians hear the term “policy” and scoff at the idea that a market-based commodity like money should be a tool of government policy.

In Boom and Bust Banking: The Causes and Cures of the Great Recession, several economists’ essays make the case that some form of monetary policy should correct for the previous errors of the Federal Reserve and government intervention. It would be easy to reject the book on this fact alone, but a few of its writers have other intriguing ideas and suggestions. The book has a diversity of perspectives, some of which are from the free banking perspective, while others could be labeled as market monetarism. Chapters 1 and 2 will seem familiar to Austrians due to the emphasis on the Fed’s interest rate policy during the period from 2001-2006. Lawrence White, an Austrian free banker, makes the case that the Fed not only lowered interest rates in the early 2000s, but lowered short-term rates such as adjustable rate mortgages (ARMs) relative to long-term rates such as the thirty year fixed-rate mortgage. The discrepancy between the two doubled by 2004, making housing more attractive through ARMs, exacerbating the subprime bubble which was already well under way by then. David Beckworth looks at the Fed’s low interest rate policy in the international economy, citing the “Monetary Superpower Hypothesis” as the source for the boom. By lowering interest rates due to the fear of deflation, other central banks followed the Federal Reserve in devaluing their currencies due their currencies’ peg to the dollar, stimulating export markets and widening an already apparent current account deficit in the U.S. This lead to foreign savings (foreign exchange reserves) supplementing the domestic lack thereof, enabling an investment boom, particularly in housing. While not quite standard Austrian business cycle theory, it shows how monetary accommodation by the central bank can cause excess liquidity to funnel into U.S. markets through interest rate pegging.

A few of the writers, including Beckworth and Scott Sumner, a market monetarist, use the standard AS/AD model to show how interest rates are not always a good indicator of the stance of monetary policy, a point which some Austrians often miss when blaming low interest rates for malinvesment and disequilibrium. In fact, Sumner shows how many economists misdiagnosed the 2008 crises due to this misunderstanding of interest, claiming that the Fed’s monetary policy was actually contractionary during this period. What is even more interesting is that he uses Wicksellian analysis to make this point, something Austrian economists should be familiar with. Furthermore, some of Sumner’s proposals are more market-oriented than most Austrians will probably give him credit for. In chapter 9, Joshua R. Hendrickson relies, in part, on Hayek’s assessment that price level stabilization through the price level is “not of primary importance and might be misleading with regards to the effects of monetary policy.”

Several chapters, such as “Chain Reaction” by Diego Espinosa, cover the financial aspects of the boom and the Fed’s involvement with creating artificial demand for low-risk investments which led to the growth of subprime, while others cover more mainstream policy solutions such as the Taylor rule and how deviations from such mechanisms can cause wild volatility in both capital and financial markets which we saw after the Great Moderation. The last several chapters put much emphasis on monetary equilibrium and its role in the recession, international currency wars and the role of money, nominal GDP targeting as a rational and practical response by central banks to combat high unemployment and low growth, and methods that guide market expectations so that any deviations can be corrected along a steady trend that can be easily targeted. These topics are what truly separates the market monetarists (which is also considered a heterodox school of thought) from the Austrians; whether the central bank is capable of maintaining some form of money market equilibrium (MET) so that relative prices are allowed to represent real productivity and demand. Bill Woolsey’s chapter is particularly compelling in that it applies a very consistent principle to several theories and shows how numerous perspectives implicitly contain MET at their foundation. He then shows it’s relation to the housing crisis. As a bit of a surprise to opponents of the Fed, the market monetarists acknowledge Hayek’s knowledge problem in terms of the central bank’s ability to utilize market information so that it can properly apply an accurate reading of expectations to it’s policy tools. This could possibly be a middle ground in which both schools can find more in common than originally thought.

George Selgin writes the last chapter which is appropriately called “Central Banks as Sources of Financial Instability”, where he describes the theory and history of free banking, and how competitive issues of bank liabilities and notes can be properly allocated through settlements in clearinghouses, using gold or financial instruments as reserves, rather than government securities or Fed base money as such. This is compared to the inherent inflationary tendencies of central banking, which is no accident from a historical standpoint.

In short, combining the book’s strengths of Woolsey’s MET, Selgin’s productivity norm, Sumner’s nominal income targeting, and Beckworth’s Monetary Superpower Hypothesis, among other concepts, Austrians would benefit greatly from these essays since they contain many elements which Austrians will find both familiar and valid (though refreshing and more nuanced), while certain policy recommendations or ideas contained within provide a worthy challenge to the Austrian perspective. A highly recommended book, indeed.