The Austrian perspective on the global financial crisis: a critique

The global financial crisis (GFC) and its aftermath have not just been a challenge to mainstream economics. It has also required a response from heterodox approaches. In the following paper we explore the Austrian response. We argue that Austrians have focused primarily on the role of government intervention in creating the conditions for the GFC. This focus, however, neglects the role of private agent error. We set out the role of collateralised debt obligations and credit default swaps as part of the GFC, in order to highlight that private agent error raises several problems of consistency under an Austrian approach. The basis of private agent error is separable from the role of government intervention (specifically the role of interest rates). Furthermore, the role of private agent error is one rooted in approaches to uncertainty, prediction, and control that are antithetical to an Austrian approach. The implication is that one cannot assume that private agents will produce a spontaneous order in the absence of interference that is preferable to one in which there is intervention. A consistent Austrian approach must also recognise its own historical commitments to the institutional dynamics of an economy. However, as the GFC and its aftermath illustrate, this creates a challenge for Austrian adherents to address the problem of potentially productive regulation.