Merger Mondays and malinvestment
When the money鈥檚 cheap, CEOs go shopping was the point I made given at the Institute鈥檚 Houston Mises Circle this January. Despite the fact that from 60% to 80% of mergers fail, CEOs think that when they do a deal two plus two will equal five, the fact is it often turns out that two plus two ends up equaling three.
In today鈥檚 鈥楿p and Down Wall Street鈥� column in 叠补谤谤辞苍鈥檚, Randall W. Forsyth takes up the same theme while weighing in on Microsoft鈥檚 $8.5 billion purchase of very cool, but never made a dime, Skype.
Knut Wicksell takes center stage in Forsyth鈥檚 鈥樷��.
Austrians described this boom and bust cycle as the result of excess credit creation that winds up producing malinvestments that go bust. It actually was a Swedish economist of the late 19th century and early 20th century, Knut Wicksell, that saw central banks as the driver of this cycle, by lowering the market rate of interest below its 鈥渘atural rate,鈥� which drove credit expansion and pushed up prices, including those of commodities. Through this distortion of market prices for money, artificial booms occur as malinvestments are made, leading to the inevitable bust.
Forsyth goes on to explain that Ben Bernanke pooh-poohs the Austrian view. The Fed chair claims that whatever he and his charges are doing over at the Eccles Building has nothing to do with the price of Snickers or Skype.
The real damage is that these malinvestments destroy capital. First, the price paid is often too high, and second, as professor Peter Klein explains,
There鈥檚 plenty of rationalizing going on over at Microsoft, but in the end, as Forsyth explains, 鈥渢hey鈥檙e still malinvestments made possible by e-z and cheap credit.鈥�
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