One of the thought leaders of the Austrian school of economics was Friedrich Hayek, who won the Nobel prize for economics in 1974. Hayek, known for his defense of free-market capitalism, was a contemporary of John Maynard Keynes, a British economist who advocated the use of fiscal and monetary measures to mitigate the adverse effects of economic recessions and depressions. Their philosophical and political differences form the intellectual backdrop to the current debates about the global financial crisis and how to approach it.

Petruzzi, a tenured professor in the School of Business and Economics at California State University, Fullerton, developed one of the first systems to profitably trade Nasdaq stocks with full automation. In the 1980s, Petruzzi was the sole proprietor of ECON Investment Software, developing risk management software for mutual funds, and the same system today is used by nearly 100 of the largest financial institutions in the U.S. He also developed the first arbitrage pricing theory software to operate on a personal computer, which is now used in 65 major financial institutions.

Petruzzi's current firm, Smart Execution LLC, for four years accounted for 4% of the total volume of the Nasdaq, with an average trading volume of 60 million shares per day. "We would buy at bid, sell at ask and pick up the spread and get rebates from the exchanges," he says. At Smart Execution, he developed a consistently profitable automated trading system that averaged more than $100 billion in annual transactions from 2001 to 2007. He is currently taking a leave of absence from teaching to develop patents related to automated trading and fraud protection.

Petruzzi believes the current economic environment fits well with the Austrian Business Cycle Theory (ABCT), which seeks to explain business cycles based on ideas of the Austrian School of Economics. The ABCT, according to Wikipedia, "views business cycles as the inevitable consequence of excessive growth in bank credit, exacerbated by inherently damaging and ineffective central bank policies, which cause interest rates to remain too low for too long, resulting in excessive credit creation, speculative economic bubbles and lowered savings.

Petruzzi likens the market's need to allow only the most fit to survive to natural events, such as a forest fire. In hiking Sequoia National Park, Petruzzi says, he learned that the federal government had for years tried to stop forest fires from burning down the giant sequoia trees. Eventually, authorities learned that intervening was "unproductive," says Petruzzi. "Fires burned down old trees and, as a consequence, new trees spring up from the ashes."

Similarly, the government should have allowed weak institutions to fail. "That would have freed resources up," says Petruzzi. "Instead, people are afraid of putting in new money into these institutions." Homes that should be foreclosed on are left lingering on the market, for example, and people fear investing in real estate because they know it has not hit bottom.
"We would have had sounder banking minds running the banks," says Petruzzi, if Citibank and other weak institutions had been left to fail. "We needed to let it go bust."

Before the Federal Reserve was created, Petruzzi says, recessions usually lasted no more than a year, and depressions not more than two years. "We have taken these calamities and stretched them out."

Rex Macey says the fear gripping markets is "great for advisors." "In the late 1990s, individual investors thought they could buy tech stocks and get rich," says Macey, chief investment strategist at Wilmington Trust. "Now investors want professional advice."

Macey says the survival instinct is driving the markets. Panic selling is a flight from danger, and that's why investors headed to cash. "This is when investment professionals who understand markets and their tendency to overreact can lead clients to be more disciplined," he says.

Macey, a chartered financial analyst and certified investment management consultant, notes that during the waves of selling stocks, prices dropped low enough for the yield on the S&P 500 to exceed the yield on a ten-year U.S. Treasury note-which, he says, has happened only one other time since the 1950s and that was in the dark days of 2008.