Bad Banks and Skyscrapers

(Also available on Bitchute)

Doug French wrote an article last week called “Bank CEOs Have Their Heads in the Clouds” and he talks about how all of the bank CEOs are very optimistic, but he notes that their real estate agents are optimistic, and so are their loan officers.

In the face of artificial credit expansion, everything looks great and profitable. But the problem is that artificially lowering the interest rate makes projects that seemed unprofitable now appear profitable. But there are huge numbers of such projects, and when they all start buying materials, they cause price rises and now the expected profits drop.

Some projects now appear to be malinvestments and must be halted, and possibly even scrapped. But the materials that were wasted on these projects don’t magically return to the market.

Doug makes the point that banks “go where the loans are,” and artificial credit expansion creates a bunch of new loans… and the banks follow. Some of these loans will not be fulfilled. Such is the form of the bust–a “cluster of errors” as Mises put it (I think).

This article made me think about the book The Skyscraper Curse by Mark Thornton, too. The connection is pretty clear: where bank CEOs are holding the loans, the loans are paying for new projects. As Thornton writes, “You can see the impact of artificially low interest rates today in the boom in higher orders of capital goods.” (page 53)

Skyscrapers are a kind of “crystallized” roundaboutness. Large office buildings are some of the most long-term production processes in the economy, and when artificial credit expansion happens, suddenly longer-term, more roundabout (read: taller) buildings begin to look profitable.

But, as Mises teaches us, this is an illusion. Skyscrapers are started, but when the bust shows up on the horizon, they are paused, capped, cancelled, or even abandoned in the worst case.

It’s worth remembering that “being a good investor” is not a defense against the credit expansion boom and bust. The problem is that real price signals have been distorted–things that are unprofitable actually appear profitable in the moment. Good investors are drawn in a hunt for return, or else the people whose funds they are investing move to (momentarily) greener pastures.

Contra to our friends in the MMT camp, a big problem here is that real goods are wasted. It’s not just money or bonds that get messed up–people buy real steel and concrete to build things that they can’t finish on time or on budget. Those materials are lost, and no amount of printing can bring them back to their original forms!

Entrepreneurs have errors, but artificial credit expansion distorts one of the most important price signals there is: the price of time and time preference. This distortion sends bad signals across the economy and results in a cluster of errors–a real bust in real goods.

All of these reasons contribute to the Austrian economic understanding of how and why artificial credit expansion and money printing are so insidious and so damaging.