I am sympathetic to the Austrian critique, but there's a big problem with refusing to print any money and just letting the debt pyramid collapse. M0, the actual amount of green dollar bills in the world, is at $750 billion. MZM ( Money Zero Maturity, all the money in bank accounts and money market funds) is at $8.5 trillion. If the Fed refuses to use the printing press - ie it refused to print money or give loans to bail out the FDIC, and refused to bail out the money market funds - there will be a giant bank run as everyone with dollars in a money market fund rushes to redeem the holdings with actual green dollar bills. We're not talking about a couple big Wall St. banks going out of business. We're talking about every startup that has VC funding in a money market fund losing everything. We're talking about every mortgage in the world defaulting. Every bank account will vanish.<p>Of course, this won't happen, but only because Bernanke has guaranteed the assets of money market funds and the FDIC by promising to print money. Now, I think it is awful that MZM grew to be 10X the size of M0. The Austrians are right to condemn the fractional reserve policies that caused MZM to get so big. But the only thing the Fed can do now is to print money to make the two match, and then make sure it never happens again.
The article has some good points, but Paul Krugman does too. The modern "keynesian" view that the Great Depression was caused by very bad policy of the Fed (keeping very high interest rates and desperately clinging to the gold standard) seems very close to the truth. But, on the other hand, the people running the Fed now, trying to avoid the mistakes of that era, might be going to the other extreme of keeping interest rates too low and printing too much money.While that might make the current recession relatively short and mild, it will prepare the ground for further bubbles - people, worried about their cash losing value, will invest like sheep into the next big thing, until it bursts again. So, maybe the right balance is somewhere between "keynesian" and "austrian"?