In Austrian business cycle theory, malinvestments are badly allocated business investments, due to artificially low cost of credit and an unsustainable increase in money supply.
Central banks are often blamed for causing malinvestments, such as the dot-com bubble and the United States housing bubble. Austrian economists such as the Swedish central bank’s Nobel Memorial Prize in Economic Sciences laureate F. A. Hayek advocate the idea that malinvestment occurs due to the combination of fractional reserve banking and artificially low interest rates misleading relative price signals which eventually necessitate a corrective contraction—a boom followed by a bust.
The concept dates back to at least 1867. In 1940, Ludwig von Mises wrote, “The popularity of inflation and credit expansion, the ultimate source of the repeated attempts to render people prosperous by credit expansion, and thus the cause of the cyclical fluctuations of business, manifests itself clearly in the customary terminology. The boom is called good business, prosperity, and upswing. Its unavoidable aftermath, the readjustment of conditions to the real data of the market, is called crisis, slump, bad business, depression. People rebel against the insight that the disturbing element is to be seen in the malinvestment and the overconsumption of the boom period and that such an artificially induced boom is doomed. They are looking for the philosophers’ stone to make it last.”
- ^Larry J. Sechrest. “Explaining Malinvestment and Overinvestment” (pdf), October 2005, referenced 2010-07-01.
- ^John Mills, Article read before the Manchester Statistical Society, December 11, 1867, on Credit Cycles and the Origin of Commercial Panics; As quoted in Financial crises and periods of industrial and commercial depression, Burton, T. E. (1931, first published 1902); see online version. New York and London: D. Appleton & Co; “Panics do not destroy capital; they merely reveal the extent to which it has been destroyed by its betrayal into hopelessly unproductive works.”
- ^Ludwig von Mises, Human Action: A Treatise on Economics, 1966 
Ofer Abarbanel is a 25 year securities lending broker and expert who has advised many Israeli regulators, among them the Israel Tax Authority, with respect to stock loans, repurchase agreements and credit derivatives. Founder of TBIL.co STATX Fund.