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DIE 02/17 - Who is John Galt? An Austrian School perspective’s analysis of the 2008 financial crisis

ISSNISSN/ISBN: 2301-1963
AutorAuthor/s: M. Rijos Capecce, Diego
Nº of PagesNº of Pages: 72
The 2008 financial crisis, is perhaps the most significative event in the world’s economy during the XXI century. The present paper tries to explain this phenomena in light of the Austrian Business Cycle Theory (ABCT) developed by the Austrian School of Economics. With that in mind, this paper study the relation between the historical facts that happened during the previous years in the American economy and the stylized facts presented by the theory. In concrete we can observe an expansive monetary police held by the Federal Reserve during the previous years led the Federal Funds Rate below the individual’s intertemporal preference rate, i.e. original interest rate. As consequence of this, we can observe a misallocation of original factors in new ventures that led into a new more roundabout structure of production. Specifically, a conjunction of low interest rates in mortgages contracts and institutional factors led to the formation of a bubble in the real state sector. The growth in subprime lends and new ways to expand the credit via securities led into a financial mess that explodes once the Federal Reserve rises the FFR. As the FFR raised, the credit emitted by banks started to be tightened with less refinancing of default credits, specially affecting the subprime borrowers. As subprime borrowers default their mortgages, the different securities that were backed in them, start to have problems in payments. This affect not only individuals, but also banks, which have strong losses that in some cases led some financial organizations to the bankruptcy. As the securities were bought by agents of foreign economies the crisis spill over the world. As the ABCT predict, in this context the production structure in the expansive phase evolved in a more roundabout structure but as soon as the credit was retracted the structure became less roundabout. From the point of view of the stock market and the original factor’s prices, the behavior of this variables are in concordance with what the theory predict. Giving this, the stylized facts presented by the ABCT seem to be a good theoretical framework to explain this crisis. 
 
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