Dorian seems like a nice enough girl, and I apologize in advance for holding her up as a representative of a whole body of thought. While this isn't very fair (or nice on my part), I think it is very useful to see how her video illustrates public knowledge of economics and the current debate over monetary and fiscal policy. People like Dorian try to create an economic framework based entirely on their (limited) understanding of "economic crashes." This might be because these ideas are inherently sexier than other economics topic (three cheers for AD-AS!!! no one?). But it also has a lot to do with how "nationally screwing up" is a much more relatable story. We can imagine the debtor that gets in over his head. It's harder to understand more specific macroeconomic problems.
But proper economic management is a much broader subject than crashes, and economic recovery has very little to do with what happened before. Even if (and I'm not conceding that point yet) a "fast cash bubble" was the sole cause of the crisis, it should not immediately stop us from doing similar things to encourage a recovery, especially since fiscal and monetary stimulus are proven solutions to a demand-side shock.
Saying "crash, crash, crash" when you want to "cut, cut, cut" is like a doctor who won't treat your cancer because you were a smoker. Fixing the disease and solving its cause are fundamentally independent problems. That's lesson one.
This is lesson two: there is no economic problem so important that it takes precedence over getting back to full employment. To get to that point you need deficit spending and currency devaluation. The latter can come through higher inflation (which I've talked about before, and is more suitable to big economies) or actual exchange-rate manipulation (the Iceland scenario, which you can do if you're small, open and control your own currency). At this point, especially after the Reinhart-Rogoff meltdown, there is almost no debate about this point. There also is no evidence over the last five years of a country returning to macroeconomic stability using any other set of policies.
No matter which monetary path you choose, the end goal is to get people back to work as quick as possible and encourage hard work. The things you could buy before the collapse are harder to get now (especially imports), but you're all working to a solution together. You'll eventually have to pay more taxes too, which sucks. But as long as everyone keeps working, you'll eventually get out of it.
People often want to make economics into the broad morality play. Even though this is generally a big mistake, there is a bit to think about here. The austerian solution focuses all of the suffering of its policies among the poor and disenfranchised. No rich German is bothered much by the European crisis. On the other hand, a solution that returns to full employment through fiscal and monetary stimulus forces everyone to share the burden of recovery. This is important for the institutions that maintain the long-term well being of a society.
Lesson three is that not all economic problems are the same. A whole bunch of things that led into the crisis, and they continue to plague Europe. This includes the challenges with adopting the Euro, the various housing bubbles, the risk of complex financial instruments (like derivatives), inefficiencies in European labor markets and regulatory challenges facing those countries. Obviously, austerity can't be the solution to all of them. In fact, the euro, for example, has been one of the chief causes of austerity on the periphery. Germany won't accept higher inflation, Greece can't devalue on its own, so they get forced into a debtor's prison version of policy where European bureaucrats decide their budget for them.
Part of the problem with making broad arguments, as Dorian does, is that it reflects a limited understanding of relevant issues. This is true for most people, no fault there. Nonetheless, even the more informed argument against stimulus-based recovery has fundamental problems. Many conservatives look at something like the economic problems of the 80's and then blindly assume that the actions of the Volcker Fed somehow stop us from using loose monetary policy now. This is obviously absurd. Economic problems can have many sources, just as your car can suffer from many different problems. A solution for one problem might not be the same for the other.
So yes, after Europe gets back to full employment (whenever that will be) there will be other things to address (remember lesson two: full employment comes first). Complex financial instruments need more transparency, as does the actions of mortgage originators and intermediaries (the primary actors in the housing bubble that you cite).
Austrian solutions might be suitable to certain aspects of labor markets and other supply-side problems facing Europe, but they're not alone. More importantly, though, is solving a fundamental Austrian myth when we get to the point of trying to address them. I'll let Matt Yglesias explain:
Rich people who don't like paying taxes don't like the idea of macroeconomic stabilization policy. That's because it'd convenient for them if the market economy could be not just a practical tool for allocating goods, but an moral framework imbued with deep ethical significance.
And that, in turn, is an idea that sits oddly with the concept that actually you have a bunch of bureaucrats in the Federal Reserve System making the economy plug along. So rich guys indulge fantasies of shifting back to a gold standard or something else that would restore divine right to the monetary system. But beyond that, the central banker they like best is the central banker who's most obscure. Conventional monetary policy was something economists and bond traders paid attention to, but nobody else. Alan Greenspan raising or cutting rates by 25 basis points wasn't a big spectacle. Since the easing (or tightening) was based on interest-rate targeting rather than quantitative monetary creation, you didn't get articles about "printing money". It was all just there in the background.
Ben Bernanke is as if the Wizard of Oz stepped forward from behind the curtain and turned out to be a really powerful wizard. The whole market economy turns out to be an elaborately orchestrated affair, with deep involvement by government central planners who weigh a variety of situations before determining outcomes. In that kind of world, there may still be reasons to eschew certain kinds of tax hikes. But they're practical, pragmatic reasons. They're not moral reasons, in which taxes violate the natural hierarchy of the market because there clearly is no such hierarchy.It's probably very uncomfortable for people to recognize that the success or failure of a national economy comes down the work of a few bureaucrats. It's probably very uncomfortable to realize the money is fundamentally worthless too. Unfortunately, there's no way to make this more palatable. Economic policy has to be an active and progressive force, since an economy is an inherently managed venture. The Austrians, and more broadly austerity pundits in general, fail to address so many problems because they cannot recognize this fact. And that's lesson four.
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