Wow. Just wow. It's not often that I find a new exposition of or take on the ABCT that blows me away, but Michael Rozeff has done it. I gain more respect for this guy with everything he writes. You even get pricing of the factors of production thrown in as a bonus!

The boom, Rozeff explains, is an economy wide reaction to a government subsidy, namely the subsidization of financing through an artificially lowered interest rate:

http://www.lewrockwell.com/rozeff/rozeff232.html

The recession then is the mini-recession that always must occur in any industry where a subsidy is withdrawn writ large and economy wide.

He even clearly explains exactly why capital intensive and more lengthy production processes benefit preferentially during the boom from the lowered interest rate; because long duration capital is more sensitive to changes in financing costs than is short duration capital.

The only thing he could have done better in my opinion was to emphasize the consumption of intermediate capital goods during the boom, but Bob Murphy covered that brilliantly recently as well:

http://mises.org/story/3155

Nice articles. In the second one, Murphy explicitly expresses a viewpoint which agrees with what some of us wrote in the Krugman thread regarding Krugman's (lack of) understanding of macroeconomics. Here are a couple of excerpts:

Boro,

I know I'm going off topic from your OP, but something caught my eye, which was this phrase to be exact:

Is it really economy wide? Im not sure, there is some evidence out there that suggests that the ****storm going on in the financial industry is pretty self contained.

I'm not saying that we aren't in a recession, I'm just wondering how much the finance woes actually have to do with it.

"Pretty self contained"? What planet are you living on? The finance woes of the lending industry have everything to do with it.

What is about this forum that inspires people(myself included at times) to be such huge dicks? Anyhow, if you think you are correct, then what is the mechanism by which the problems of the finance industry affect the larger economy? The most commonly cited linkage is the credit markets, but there is some evidence to suggest that the "credit crunch" is a myth. The most notable is a paper by 3 Minneapolis Fed economists, titled 4 Myths of the Financial Crisis. IF you follow economics blogs you'll see that it has been a point of contention among some of the the better econ bloggers, including 2 who share the same blog (Alex Tabarrok and Tyler Cowen at Marginal Revolution).

vulturesrow,

The reason that the financial industry is at the core of the problem is that it is through the artificial lowering of interest rates, and the loans that result, that malinvetments throughout the economy are made. It isn't that the *current* problems that have been revealed in that industry are "spilling over" into the rest of the economy; it's that the loans allowed damage to be done to the real economy (across the board in all sectors) that is only now being revealed. It was revealed first in the housing sector, then the financial sector (this always happens; credit always tightens going into a recession, which is a good thing; interest rates need to go up in order to persuade people to save more), and now it is being revealed across the board throughout the entire economy. This process of revelation of the rot throughout the economy will continue and accelerate throughout the coming months.

If the government didn't interfere, it would start to turn around in a year or so. However, our government has not followed that policy since the depression of 1921 (that nobody remembers because it was so short). Instead, they will intensify it and turn drag it out over years. The Great Depression lasted ~16 years. The recession of the "70s" (which actually began in the late 60s and stretched to the early 80s and was just as bad as the Great Depression in many ways) lasted about the same.

Man, this sucks.