This week Russ Roberts shared the podium before Congressional staffers with Arnold Kling, explaining what happened and why. Roberts is the second speaker in the audio available here.
Roberts tells a riveting Hayekian macro story of the economic bust — massive leverage via expanding banking money and credit created in part by loaning to each other, distorting the structure of relative prices and production / capital goods across time, accelerated by bandwagon effects / asset price spike profiteering — all of it fueled by the expectation of additional money and credit from the Federal Reserve and the U.S. government whenever “too big to fail” firms needed it to remain solvent. (Note well, for the purposes of Hayek’s macroeconomics, houses and cars are capital goods — Hayek explicitly explains this in his The Pure Theory of Capital. And note also, Hayek explicitly says that the bubble / artificial boom can be completely internal to private banking system and private economy, and he explicitly says that it need not be central bank generated — see Hayek’s 1929 Monetary Theory and the Trade Cycle. In any case, Roberts’ story isn’t fully internal to the private economy, his story turns on the expectation and implicit guarantee of central bank and central government intervention to provide expansions of credit and money whenever necessary to sustain the solvency of increasingly leveraged financial firms.)
Folks are blind to the character of Hayek’s macro if they don’t understand that Roberts’ story is a Hayek story, i.e. his story here of the poker players generating money and credit by loaning to each other and leveraging on shrinking capital reserves — and with this new money getting misdirected into overvalued sectors of the capital asset structure with bandwagon profits — is “straight outta Monetary Theory and the Trade Cycle“. And note well, the implicit “to big to fail” guarantee of a central bank / Federal government bailout generates monetary expectations which are the same thing as any other expectation of central bank interventions to “keep the party going” by increasing the money supply or lowing interest rates as needed to continue the expansion of leveraging and the asset bubble.
In other words, Russ Roberts story is Hayekian all the way down.