Why Ben Bernanke and Paul Krugman Are Destroying the Economy

In 1974, Friedrich Hayek (an Austrian Economist) won the Nobel Prize in economics. The following excerpt is part of his prize lecture. I will be adding commentary to demonstrate why Hayek’s speech from 1974 is still relevant today. In the speech, Hayek points out the problems with mainstream economics (which has changed relatively little since Hayek first gave this speech) and why the Austrian view better explains the actions of the market.

Hayek states:

… the very measures which the dominant “macro-economic” theory has recommended as a remedy for unemployment, namely the increase of aggregate demand, have become a cause of a very extensive misallocation of resources which is likely to make later large-scale unemployment inevitable.

Here, Hayek is describing the current demand-side neo-classical (Keynesian) mainstream theory of economics, which is espoused by people like Paul Krugman and Ben Bernanke. Hayek notes that policies which adhere to such theories create a massive misallocation of resources into unproductive jobs, which inevitably leads to mass layoffs.


This is an exact description of the housing bubble. As the Fed drove interest rates down, allowing the GSEs to create extremely low interest rate mortgages, this enticed people to take out excessive home loans. The new money created by the home lending market drew labor and resources into the construction of new homes at a level that was unsustainable. This bubble continued to grow as long as cheap financing was available to the home lending market.


In other words, due to the cheap interest, a bubble was created. After some time, this artificial bubble must pop, leading to mass unemployment as the resources that were directed into housing must now be redirected to different areas of the economy.


Alternatively stated, when the Fed ceases to print money, mass unemployment must result, because the printed money is diverting resources into unproductive tasks. Presently, the Fed has NOT yet ceased printing money. The housing bubble popped due to the banking crisis created by defaulting home loans, but that bad debt was not liquidated as it should have been, instead it was transferred to the tax payer. Now we are in a situation where if the Fed ceases to print money, it will bring about the collapse of the entire banking sector AND the collapse of state financing.

If you think the high unemployment rates from the bursting of the housing bubble are bad, just wait till you see what happens when the bond bubble implodes and the currency becomes worthless. The Fed can’t keep interest rates at zero forever. When they finally rise, economic chaos will ensue.  Imagine if everyone working in finance and government were laid off tomorrow.

The entire speech can be found here at the Nobel Prize website.


Michael Suede is the author of this article, which first appeared on PolicyMic.com

  • FLBook

    Did you not read Hayek? You state it is “an exact description of the housing bubble.”. It is not exact “an exact description of the housing bubble” Do you not understand what Hayek is saying, it is rather simplistic.

    1. Hayek abbreviated ~ The continuous injection of additional amounts o…etc… accelerate at a given rate.

    • guest

      I think he has a fairly good grasp on Hayek.  What are you saying?