The excerpt is originally written by David Stockman and can be at David Stockman's Contra Corner » Stockman’s Corner.
And the appropriate policy response was simple, too: Fill that hole in demand.
True enough, the housing and credit bubbles did burst. But that’s exactly where the rubber meets the road in the debate between Keynesians and Austrians. The latter see bubbles as an artificial expansion of economic activity owing to cheap credit and the malinvestments which flow from it.
When bubbles inevitably burst, therefore, the artificial bloat in investment, output, jobs and incomes is eliminated—or in the old fashioned phrase, liquidated. Moreover, liquidation is the equivalent of purging a cancer; it removes a malignant growth, but does not reduce the true wealth of society or the sustainable living standard of the people.
The reason for this proposition is Say’s Law. That is, sustainable demand must originate in production; valid “spending” must be derived from the income earned in the process of supplying real goods and services. That includes spending that is financed by savers out of their own current incomes, and spending by transfer payment recipients that is financed by taxes on producers.
The full article can be found after the jump here, click here.