Dec 17, 2008 at 6:04 AM
Inevitably, topics in Austrian economics are going to be coming up quite frequently on this blog, so it would serve us well to discuss areas where Austrian theory is sound and where it needs work.
From my own analysis (unpublished, I'm afraid, so if you want to read it you'll have to ask) Austrian business cycle theory (ABCT) accurately approximates how Fed activity creates business cycles. However, we have to consider the fact that the Fed (like all central banks) were creates into order to set monetary policy which could correct for 'market failures' and business cycles. It would be circular reasoning to assume that cycles are only caused by central bank policy, because Central banks were created in order to prevent cycles.
Discounting the conspiracy theories that I, more or less, don't believe, we can assume that politicians and economists saw at least some merit in the Bank's ability to control cycles. The most that can be said is that policy makers are overenthusiastic in their trust of the Federal reserve because: a) they can't see the long term affects of central bank policy b) somewhat more sinisterly, policy makers like the power rush they get from having control over the economy.