From the Ludwig von Mises Institute:
I have noticed recently that there is some confusion in public discussions about the Austrian take on recessions, even from sympathetic observers. So let me clarify how most modern Austrians — certainly those of a Rothbardian persuasion — would interpret what has been happening in the last few years.
First, the Federal Reserve’s easy-money policies after the dot-com crash, in conjunction with other government policies, fuelled the housing bubble (see here and here). Many economists (not just Austrians) have now come around to this explanation, but Austrians were saying it well before it was chic. In addition to Peter Schiff’s famous showdowns, the Mises Institute’s own Mark Thornton wrote incredibly prescient columns as early as 2004 on the issue.
Now in the standard Austrian theory of the business cycle, the question is not “How do we get out of a recession?” Rather, the question is “How do we avoid the boom?” According to the Mises-Hayek theory, the preceding boom makes the corrective bust inevitable. The goal, therefore, is not to keep the boom going, but to avoid it in the first place, rendering the bust unnecessary.
Therefore, given that there had been a massive housing bubble for years, by 2007 it was unavoidable that the US economy was in store for a massive bust. That’s why in October 2007 (relying on a forecast I had performed for a bank client in July of 2007) I wrote a Mises Daily called, “The Worst Recession in 25 Years?” As anyone can see from looking at that piece, I wasn’t merely relying on my gut; it was a quantitative exercise looking at what Austrian business-cycle theory blames recessions on.
However, even though Austrians thought a recession was inevitable, the length of the recession and the strength of the ensuing recovery could definitely be influenced by policy. This is why Tom Woods and I spend so much time pointing to the depression of 1920–21 as an example of a severe but quick bust followed by a tremendous economic expansion. Far from providing a “soft landing” in that episode, the Fed jacked up the discount rate to a then-record high, and the government slashed spending an incredible 65 percent in one year! (This was following World War I, remember.) Prices fell half again as much during this depression as they did in any 12-month period during the Great Depression. And yet, as its name suggests, the Depression of 1920–21 was over pretty quickly.