Keynes vs. Hayek debate is still alive

Here is an enlightening article about the two theoretical approaches to the economic crises, pioneered by John Maynard Keynes and Friedrich von Hayek. The author claims that the Hayek's approach has been discredited, and that the Keynesian stimulus is the only salvation to the World economy. (In case you have no time to read the whole article, I provide a few relevant quotes below.)

It is worth however noting that the Keynes vs not-Keynes division among the American economists passes precisely along the Republican-Democrat divide. This seems consistent, since the Democrats support more socialist society with a greater role of the government in regulating markets. But in Europe, which is essentially the Democratic ideal of the welfare state, the view seems to be just the opposite - the European Union response to the escalating debt crisis consists of imposing more and more austerity measures in Greece, Spain, Ireland, Italy etc.

This is probably the result of the different economic backgrounds, resulting in the drift of the two continents towards the middle ground, which humorously could be described as the difference between "Continental" and "English-speaking" approach.

The quotes: according to Hayek "the “crisis” results from over-investment relative to the supply of savings, made possible by excessive credit expansion. Banks lend at lower interest rates than genuine savers would have demanded, making all kinds of investment projects temporarily profitable.

But, because these investments do not reflect the real preferences of agents for future over current consumption, the savings necessary to complete them are not available. They can be kept going for a time by monetary injections from the central bank. But market participants eventually realize that there are not enough savings to complete all the investment projects. At that point, boom turns to bust."

The Keynes's position is just the opposite: "under-investment relative to the supply of saving – that is, too little consumption or aggregate demand to maintain a full-employment level of investment – which is bound to lead to a collapse of profit expectations."

Consequently the two economists offered different recipes for dealing with economic crises: "Whereas for Hayek recovery requires the liquidation of excessive investments and an increase in consumer saving, for Keynes it consists in reducing the propensity to save and increasing consumption in order to sustain companies’ profit expectations. Hayek demands more austerity, Keynes more spending."

The last recession is commonly blamed on the sub-prime mortgage crisis: the sharp drop in the price of real estate assets made these assents cheaper than the amount of money previously borrowed to purchase them. This explanations seems to be taken directly from the Hayek's book. Ironically, the stimulus approaches (i.e. more spending) adopted by both George W. Bush and Barack Obama, are the prescriptions taken from Keynes.