The First Great Recession of the 21st Century

The First Great Recession of the 21st Century

Competing Explanations

Edited by Óscar Dejuán, Eladio Febrero and Maria Cristina Marcuzzo

The 2008–10 financial crisis and the global recession it created is a complex phenomenon that warrants detailed examination. The various essays in this book utilise several alternative paradigms to provide a plausible explanation and a credible cure. Great detail is given to this important analysis from different theoretical perspectives, presenting a clearer understanding of what went wrong and expounding misinterpretations of current theories and practices.

Chapter 2: A Brief Note on Economic Recessions, Banking Reform and the Future of Capitalism

Jesús Huerta de Soto

Subjects: economics and finance, financial economics and regulation, history of economic thought

Extract

Jesús Huerta de Soto The financial crisis of 2008–09 and the current worldwide economic recession is one of the most important problems we have to cope with now. The Austrian Business Cycle Theory can help us to understand its causes and the best approach to economic recovery (Huerta de Soto, 2009a). Having witnessed the intellectual and practical defeat of socialism especially during the last decades of the 20th century (Huerta de Soto, 2010), one of the main challenges that still remains for the future of capitalism is the urgent need to privatize money by dismantling the organ of central monetary planning: the Central Bank. In other words, real socialism, represented by state money, central banks and financial administrative regulations, is still in force in the monetary and credit sectors of the socalled free market economies. As a result, we regularly experience, in the area of money and credit, all the negative consequences established by the Theorem of the Economic Impossibility of Socialism discovered by those distinguished members of the Austrian School of Economics, Ludwig von Mises and Friedrich Hayek (Mises, 1981; Hayek, 1997). Specifically, the central planners of state money cannot know, follow and control the changes in both the demand and supply of money. Furthermore, the whole financial system is based on the legal privilege given by the state to private bankers to act with a fractional reserve ratio in relation with the demand deposits they receive from their clients. As a result of this privilege, private...

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