Austrian economics rejected both Monetarism and Keynesianism, because of this very thing:
Higher prices should discourage further demand, but instead encourage more people to borrow in order to play for a further rise in prices...This is the problem. I agree with much of what is said here. However, this Austrian position does not take into consideration the hoarding that is done by the TBTF banks, nor the hoarding of futures contracts.
And there is credit that is necessary to the poor, and credit that is either too easy, or too expensive for the poor. These are the credit offerings that hurt the middle classes as well.
It is my view that the Austrians live in a dream world. Lending for houses creates a rise in prices that you don't see with a loan one gets to pay his heating bill. That is an important thing to remember.
The Austrians think nothing of allowing speculation, and hoarding, but they never saw the futures contracts' buying that actually causes scarcity, even when the underlying commodity demand is falling. That easy money at the top does encourage higher prices in the face of decreasing demand of the underlying commodity!
So, the Austrians have some truth, but are rigid. Their political philosophy of the invisible hand of self interest working toward the good of man is not rigidly correct either. I believe this:
The bankers with their housing bubbles have proven this invisible hand has a dark side, and is not the way to handle out of control bankers, by giving them every deregulation under the sun as has happened in this turn of the century.Therefore, I reject the political will to deregulate bankers, along with the economic will to terminate all lending. However, I am in agreement with the Austrians that easy money lending without some serious collateral or at least a bank account number is hurtful to the economy in the long run.
Keynesianism can work, but only if regulation is in place to stop the bankers from buying up the world and engaging in massive speculation.