Since I'm on a roll irritating the libertarians, I think I'm going to keep going.
David Brooks today writes that Obama is about begin in the world's biggest political engineering project with his economic stimulus package and other policy proposals. While liberals think that government can fix things, conservatives think that human society is way too complicated and anytime that government gets involved, it makes a right mess of things. Welfare=welfare queens.
While Brooks hopes that Obama is successful, he's worried that he won't be.
All in all, I can see why the markets are nervous and dropping. And it's also clear that we're on the cusp of the biggest political experiment of our lifetimes. If Obama is mostly successful, then the epistemological skepticism natural to conservatives will have been discredited. We will know that highly trained government experts are capable of quickly designing and executing top-down transformational change. If they mostly fail, then liberalism will suffer a grievous blow, and conservatives will be called upon to restore order and sanity.
It'll be interesting to see who's right.
The conservative model has already been discredited. The hands-off approach meant that government turned a blind eye as stock brokers sold crap, people bought cathedral ceilinged monstrosities, and greed raced on without some necessary speed bumps. Now, we are looking at nationalized banks. And the banks are begging for it. There are no libertarians on Wall Street.
I don't know if Obama is going to succeed or not. I have no idea how he's going to create the demand for rubber bands or plastic bags. But the death match between political models has already been fought. The decision has been made.
To put it in terms of economic models, the notion is that if Friedman wasn't right about everything, that must mean that Keynes was right about everything. But of course, the universe is not obligated to follow a neat political bifurcation. They could just as easily both be wrong.
(Or both be right--in some important ways, the disagreement between the two is exaggerated, although the disagreements between their followers often is not. The central insight of Keynes, that prices are sticky and markets don't always clear, is, in fact, the reason that monetary policy matters. But I digress.)
It can both be true that monetary policy will not keep the country from falling into a deep recession, and that massive fiscal stimulus will not get us out again. It can be true that complacent regulators will let bankers get themselves into a bunch of trouble, and that capping CEO pay or nationalizing banks will not get us out again. It can even be true that regulators have little power to keep us out of trouble when 2/3 of the world's savings is swamping our capital markets, short of very problematic measures like capital controls.
There are, clearly, central problems with "the Great Moderation", the until-recently-dominant explanation of the Great Depression, and the American banking system. That doesn't mean that Obama can fix them. It doesn't even mean he'll do a better job than John McCain would have, though we'll never know. There is a very real possibility that in two or three years, America will be in worse shape than it is now--unemployment in the double digits, GDP down by same, corporate and government budgets peeling apart at the seams. I will be curious to see whether the new armchair empiricists of the left see this as casting any doubt on their central theories, or whether they will simply argue the counterfactual.
Total aside http://it.slashdot.org/article.pl?sid=09/02/25/024211 you have a adobe flash virus floating around in your flash ads. Not sure what ad it was but I figure if you haven't heard about it, be aware that someone found an exploit for people using older versions of flash.
I know very few democrats that are saying neoclassical economic approaches are all wrong, or Keynesian all right.
Moderation is key, as always, and finding the line between both is what we're trying to do now after 30 years of neoclassical fundamentalist policy on both sides of the isle.
the pendulum of politics is swinging back, and so too is the view on how to let the economy operate.
I'm not sure why so many people agree with the premise that the past eight years have been such a free market free-for-all.
I can only think of one major action during the Bush years that affected market regulation -- Sarbanes-Oxley -- and that greatly increased regulations.
Did the number of pages of regulations go down during the Bush years? Did the number of fines/prosecutions from the SEC and all the other regulators drop all that much. I know conventional wisdom is that Chris Cox was lax, but what's the evidence there? I haven't seen it one way or the other.
Unless I'm really missing something, our current situation does not refute free markets because we never tried free markets. (That doesn't necessarily mean that free markets are the answer. It just means we don't know because we haven't tried it.) All we really know is that the millions of regulations and the enforcement we have doesn't work and we probably need millions of pages of different regulations and different enforcement.
Not terribly exciting to ideologues but probably closer to the truth.
The currently empowered "Left" is not interested in debating their positions. That's what this person is saying. And they're right not to be. We 'debated' these things for most of two years, someone won, and now they should focus on implementing their policies, especially since we definitely need something to be tried. I suppose that exhibits the 'do-something over do-nothing' bias. But does anyone really think doing nothing is the way to go right now?
Megan,
Why are you spending time responding to tendentious posts by this Laura person or Hilzoy and not engaging with arguments by actual economists such as John Hussman?
The problem of Conservatives is the fault of the dumb politicians. While conservatives have espoused freer markets and less regulation to the public, their politicians have generally thrown as many monkey wrenches into the system as possible. So they'll talk free market with no interference and then they'll interfere in a large variety of ways.
The public hears "free markets" the conservative pols act contrary to that theory and markets get worse. So the public concludes the free markets, which were never free, need oversight.
Meanwhile we'll have a massive amount of spending, that won't fix anything and if the economy comes out of the recession soon (unlikely) it will be in spite of the interference of Democrats, but the Dems will get credit for it anyway.
What is more likely is we'll continue to flounder along and the Dems and public will argue it was the moronic free market principles of the Repubs that messed it up, and they couldn't possibly be asked to fix it in such a short time frame -- that would be asking for a miracle the Dems will argue.
Nevermind the fact that they were elected to solve the "problem" not blame it on someone else.
I got nailed by that Flash ad virus yesterday. Good thing I'm on a Mac, b/c the virus is a .exe file ... but beware of any site that asks you to install a plug-in to view content, because most modern operating systems and browsers already have what they need installed.
Whatever the arguments between Keynesians and Friedmanites in the abstract, Milton Friedman himself is currently an advocate of fiscal stimulus, so those arguments don't seem to be at issue in the present situation. Cue the "Annie Hall" scene with Marshall McLuhan appearing in the movie theater lobby, etc.
"To put it in terms of economic models, the notion is that if Friedman wasn't right about everything, that must mean that Keynes was right about everything. But of course, the universe is not obligated to follow a neat political bifurcation. They could just as easily both be wrong."
The NYT bestseller MELTDOWN, by Thomas Woods makes a convincing case that they are both indeed wrong.
http://www.mises.org/store/Meltdown-P557.aspx
The general tone of the liberals criticism of free markets is that they have brought great excesses on wall street with garish salaries and an "overpriced" housing market. Yet it is these same liberals that step in to freeze the excesses through bailouts where the guilty are protected and mortgage relief for those that tried to make a quick buck in the housing market.
I am one free marketer that would be glad to see the market actually work and reign down vengence on those that have sinned and those that have stood idly by while the economy was racing toward the brick wall of unsustainablity. So before liberals bash the free market, let it do its work on the upside and downside. Soft landings are for losers.
"Whatever the arguments between Keynesians and Friedmanites in the abstract, Milton Friedman himself is currently an advocate of fiscal stimulus, so those arguments don't seem to be at issue in the present situation."
Milton Friedman is dead.
Milton Friedman is currently residing in the Beth David cemetary in Nassau County. As far as I know, he has not made any public statement about the stimulus.
If you are referring to Martin Feldstein, he supports *a* stimulus package, but emphatically not the one that passed: http://www.washingtonpost.com/wp-dyn/content/article/2009/01/28/AR2009012802938_pf.html
Matt S - just a quick point: Milton Friedman is not "currently an advocate" of anything, seeing as he's been dead for over 2 years.
This is an important point that you rightly keep turning to. The empirical macro ideological debates will remain so long as there is no placebo or counterfactual that we actually observe.
Both sides will claim victory, citing what happened and what would have happened in the counterfactual circumstance. Unfortunately, I think the evidence needs to be so overwhelming (on the scale of the Soviet Union collapsing) for one ideological side to give even a little ground.
Obama's fiscal policy may not be left/Keynesian enough that, if it should fail, would convince its proponents that these policies made us worse off (or, conversely, they may not be left/Keynesian enough to convince its opponents, if it should succeed, that it was indeed fiscal policy that made us better off).
Or, put another way, you can think of empirical macro disagreement along ideological grounds as analogous to debating how effective must a treatment be to convince people it is better than the placebo, without seeing the actual placebo.
NotMyPresident failing at economics?
Say it ain't so
/sarcasm
Yup, if only we wouldn't have had that crazy libertarian George Bush doing all his crazy libertarian stuff that caused this disaster. Oh, right.
Where were the regulators who were saying: "gee, maybe we shouldn't make these loans, they seem too risky?" They weren't. And quite a few of those in government were arguing that we should give out more home loans.
This is not to say this factor is wholly the cause of this crisis, or that the government or regulators are exclusively at fault. But to the extent that they were also wrong casts a doubt on anyone who thinks this crisis somehow means all free market ideals are wrong. Honestly, there are people whose understanding of how this all works that any economic downturn, even in a mixed economy like ours, is a symbol of the failure of laissez-faire economics.
To give an analogy she might find some reason in, it would be like me saying: "voting produced Richard Nixon and George Bush -- obviously this means that voting is a worn out, tired system that we should scrap."
But does anyone really think doing nothing is the way to go right now?
Remember, doing nothing is just a point along the line of possible responses. I'm guessing that borrowing and spending a trillion dollars in a sinking economy isn't the right thing to do, but doing nothing isn't the only option. Cutting spending and taxes is certainly more palatable to my ideology.
Monetarism (Chicago School economics) is not dead yet, but it will be. Walter Williams (among others) has become convinced that the Austrian theory is better supported by real world evidence.
Keynes is still popular for telling people what they want to hear, but the truth is that there is no evidence that his theories hold up at all.
Central monetary planning works no better than central agricultural or industrial planning.
"But does anyone really think doing nothing is the way to go right now?"
I do. I'm not alone.
"We mustn't assume that all problems are solvable in the short period. There are problems that we cannot solve or which trying to solve them quickly may do more harm than good."
-F.A. Hayek, Nobel Prize Winner 1975
"The currently empowered "Left" is not interested in debating their positions. That's what this person is saying. And they're right not to be. We 'debated' these things for most of two years, someone won, and now they should focus on implementing their policies, especially since we definitely need something to be tried. I suppose that exhibits the 'do-something over do-nothing' bias. But does anyone really think doing nothing is the way to go right now?"
No. What this woman is saying is that she doesn't want a debate because she is too stupid to have one. I have yet to meet one of BO's supporters who can defend the stimulus bill or anything he is doing. All they can say is something to the effect of "markets and conservatives failed so shut up". If they had an answer as to why the stimulus bill is so great and why BO has something to offer, they would give it. But they don't. They don't even believe in their own policies anymore. They believe in power and nothing more.
The fact is their policies are not going to work. Even if their policies did work, they wouldn't know why and wouldn't know how to impliment them. Somewhere in the back of their minds, people like this nitwit understand that. They know this is all going to fail and fail badly. Their only hope to keep power is to somehow claim that the otherside is worse.
"But does anyone really think doing nothing is the way to go right now?"
I do. I'm not alone.
"We mustn't assume that all problems are solvable in the short period. There are problems that we cannot solve or which trying to solve them quickly may do more harm than good."
-F.A. Hayek, Nobel Prize Winner 1975
Good point about Friedman, Matt Steinglass.
On the other hand, Keynes is currently saying that Obama's plan is an unmitigated disaster that will bring the end times and rain fire down upon us all.
So I guess it's mostly a wash.
Cue the "Animal House" scene where Bluto references the German bombing of Pearl Harbor, etc.
sorry kids, the sun has set on rights thoughts and whileit may take a while for that to seep in, it's over.
you guys killed it. something about a straw and a camel comes to mind.
Where were the regulators who were saying: "gee, maybe we shouldn't make these loans, they seem too risky?" They weren't. And quite a few of those in government were arguing that we should give out more home loans.
Actually, IIRC - there was at least one. He was grilled and subsequently virutally tarred and feathered by a congressional committee for suggesting that we rein it in.
I can't remember where he worked but I do know he was a regulator.
In addition, I seem to remember Barney Frank, Chris Dodd, and Maxine Waters holding the tar and feathers.
Matt is correct- Milton said so on last Friday's episode of The Ghost Whisperer.
Nick,
Anyone who bothered to look has seen the Youtube of Frank saying at a hearing in 2003 that there was no problems in the mortgage market. Of course at that time, his boyfriend was making millions in bonuses at FannieMae on the basis of fraudulent accounting. He purposely squashed talk of the problem so that his boy friend could get his multi million dollar bonus. Meanwhile, Fannie and Freddie continued to gaurentee bad loans and encourage banks to make more bad loans while Geithner at the NY Fed looked the other way while people packaged those loans up into MBSs. But somehow the whole mess is supposed to be the fault of George Bush and the market.
If anything the market is what saved us from worse by finally forcing an end to all of this. I guess that is why people like Marcus hate the market so much. It is what prevents them from getting something for nothing. Now they can go to the government and get something for nothing I guess.
You can never solve a problem until you realize what the problem is. A large number of people in this country refuse to admit what the problem is or even have a reasoned debate about it. Instead they cling to bizare fairy tales about the evils of capitalism and of course George Bush. I used to think that the Dems winning might be good for the country in that it would force a large segment of thier supporters to grow up and face reality and start making hard choices rather than run around and practice politics by temper tantrum. It is pretty clear after a month of Obama, I was overly optimistic.
I remember reading about the implosion of the Dem party right after the election of 2004. Now it's "I won", "decision has been made" and "the sun has set". Looks like there's a resonant force at work on that 'ole pendulum. So marcus, you won't mind a little physical tar and feathers and a short rail -- as opposed to a railroad -- ride the next time around? Remember, we wingnuts have brutish literal minds and hold all the guns to boot...
I for one would really like it if the response out of Obama's mouth to all these requests for bailouts and other assorted interventions would be, "pound sand."
Some things don't change...the more things change...oh, well, you know what I mean.
Climate change isn't....LOL
Megan, are you seriously arguing that FDR should have aimed at a balanced budget during the 30's?
Stan, it's not just the amount of spending, but what is bought that counts. Surely you can see that spending on anything and everything is not the answer, so why should the case be any different with existing spending programs? When a person or country is broke, they have to become more efficient, not just more productive. Buying a Ferrari to get to work faster isn't a sane option.
I remember reading that Hayek had some good things to say about Keynes: that he wasn't doctrinaire and that if he had lived he would have come around to a much more Hayekian view of things.
How much acid must one drop to come to the conclusion thst a giant speculative bubble inflating, and then bursting, in a market that has had the state actively working to create and inflate a bubble in, for decades, by numerous means, is evidence that the state has been inactive?
max, my friend, by the time the republican party regains it's footing, it will look like Clinton's DLC.
the forces at work are beyond the rights control. simple as that.
you guys had a really good run but now the curtain has been pulled back and the whole "we're a center-right country" nonsense has been laid bare.
this was always a game of musical chairs. and as long as the music played the right was tough to beat. but the music stopped a while back and whole lot of middle class people don't like not having a chair to sit in.
"I remember reading that Hayek had some good things to say about Keynes: that he wasn't doctrinaire and that if he had lived he would have come around to a much more Hayekian view of things."
There's that old anecdote about Keynes saying of a meeting of economists he attended during the second world war something like, "I was the only non-Keynesian there".
government does all things better than the private sector.
The Right is headed toward its Lee J. Cobb moment with America. It's the moment in 12 Angry Men when the rest of the jurors realize they can't reason with his character. They see him for what he is.
Obama is of course, Henry Fonda.
And the country is the other 10 jurors.
"The conservative model has already been discredited."
Of all the meme's floating around right now, this has got to be the most aggravating. We never got a chance to have the conservative model discredited because as soon as things started to go south all the pseudo-conservatives ran screaming from the building and look where we are today.
Had we actually followed the conservative model, then we'd be letting the bad banks fail, the legacy US automakers go into bankruptcy, and greedy/irresponsible former home-owners would now be looking for apartments. Instead, we all get to die the death of a thousand cuts while the crooks who used their houses as ATMs and the crooks who used our financial market as their money printing presses get to laugh all the way to the bank (FDIC or congressperson insured).
You didn't have to be a rocket scientist to see this one coming. True to form, when push came to shove doing the right thing meant being unpopular and risking their cushy lifetime political appointments, so out came Congress' checkbook and too bad for the people who played by the rules.
I hate that Basic Fact says that Obama is not his president. Liberals would never say something like that.
As a social liberal, I've always thought the best thing that conservatism was it's idea that personal responsibility was really important.
A responsible person doesn't take out a mortgage where the payments are unknown after a short number of year...
So it seems that a vast number of people weren't really practicing conservatism as the housing bubble, expect for the maybe 70-80% of the country who didn't do stupid things. Hmmm..
Someone said
"But does anyone really think doing nothing is the way to go right now?".
Yes, there are some people who think that, often the same people who saw a speculative housing boom and didn't jump into it.
It is not unreasonable to think that the excesses of the past have to be worked out of the system without intervention -- it may be painful but maybe that's part of the solution to create a psychology that isn't so damn reckless...
Allrighty then, I'm off buying stock in tar manufacturers and chicken farming concerns. That market segment must have bottomed out.
I can never make up my mind whether the mad libertarians irritate me more than the foaming "liberals". Good thing it is not important.
Our general tendency to have faith in one, another or a third miracle remedy for the human habit of walking into a collective mess with our eyes wide shut - that really does worry me.
The usual useless libertarian crap. When Republicans succeed, it's because they respect free markets. When they fail, it's because they don't respect free markets enough.
Had we actually followed the conservative model, then we'd be letting the bad banks fail, the legacy US automakers go into bankruptcy, and greedy/irresponsible former home-owners would now be looking for apartments.
You misunderstand. The failure was getting to this point in the first place. What's been discredited is eight years of "deficits don't matter", tax cuts as a solution to all problems, a toothless SEC, no bank regulation worth discussing, two wars fought off-budget, etc. etc. Anyone who still thinks Republicans are the party of "fiscal responsibility" is too stupid to bother with.
Which Keynes are we talking about? There's the Keynes who believed government was the demand-creator of last resort during a recession or depression, because of its unique ability to print money and/or borrow against future revenues its sovereignty promised. Then there's the Keynes who believed that a not-in-crisis economy could be managed by smaller-scale tinkerings of this sort.
For the life of me, I don't see why the first Keynes is at all controversial. To say that government can't create demand when there's a huge lack of private demand seems totally outlandish to me. The second Keynes is justly controversial, running up against the conservative objections of socioeconomic complexity and so forth. I understand the hubris of Keynesians who sought and seek to use the success of the New Deal to cement their permanent economic vision, and I understand the conservative desire to negate the success of the New Deal to protect what they consider normal functioning of the economy. But anyone who doesn't have a dog in this fight ought to be able to see we're talking about two very different things.
When you're extremely sick, you likely need powerful medicine. When you're not sick, you just need to eat right an exercise. Got it?
From Mike:
You need to tell the new administration this little detail.
The first Keynes is not controversial - he's simply wrong - Not unlike the second Keynes.
The government can "create demand" but to do so completely ignores the capital side of the equation. Consumption alone will not help an economy suffering from a loss of capital.
Please see the article, written by George Reisman, Ph.D. A Professor Emeritus of Economics from Pepperdine University, and linked by my name for a thorough analysis of the situation we're in and why no stimulus package, regardless of size, will help.
Anybody who thinks the seed of this mess was germinated 8 years ago is too stupid to bother with. As someone wh0o stated in 1998 that if George Bush was elected President it would be a fiscal setback, let me also note that plenty of people knew that Fannie and Freddie, along with many other aspects of our bipartisan approach to residential housing and lending, stretching back decades, was going to end very badly. Let it also be noted that the 2004 SEC decision to allow the five major institutions, some now deceased, to greatly increase their leveraage was unanimous, Democrats and Republicans signing on, and the SEC was chaired at the time by a guy who would later be an Obama supporter. Anybody with any sense knows that what rules in D.C. is a kleptocracy that towers over any party affiliation. Greed isn't all that awful in and of itself, but when it is joined to the state's monopoly on violence, all notions regarding regulation for the common good tend to become laughable conceits.
Rich in PA,
The first Keynes is wrong in that it misdiagnoses the disease as a lack of demand. The real problem is a deficit of productive capital. In the present case, this deficit of productive capital has been building for decades (it reveals itself in the debt to GDP ratio), and more consuption by government cannot cure it- at least not the way the government is consuming right now. We have created a lot of unproductive capital, and we have squandered a lot of our productive capital through a failure to maintain and enhance it.
Just look at the US economy- is a demand that is debt-based a real, sustainable demand? I will answer- no, it isn't. The government's demand is also debt-based now in the time of $2 trillion dollar deficits. More capital consumption, and at an ever accelerating rate.
When has a majority of Americans ever favored "free markets"? I bet if you put it in a poll, it always comes out 2nd to state nannyism. Bottom line, like David Brooks said the nation is in a panic. Like a bunch of chickens without heads. So proud to be an American right now.
You said: "Anyone who still thinks Republicans are the party of "fiscal responsibility" is too stupid to bother with."
I never said Republicans, I said conservative and just as we'd both agree there's no overlap between the Republican and "fiscal responsibility" sets, I'd also argue there's no longer any overlap between the Republican and the conservative sets. (If there every actually was...)
Had there been anyone who believed that conservative principles would actually be enforced we'd have either a) not allowed ourselves to get in this much trouble or b) not worried about it since the rest of us would be picking up houses and car companies and banks at rock bottom prices.
Fear of consequences can be a good way to modify behavior; when the consequences went so did the restraints. I'd argue that people across the spectrum (housing speculators, rating agencies, wall street) had figured out long before the bubble burst that there would be no consequences if they gambled. When the phrase "too big to fail" started getting trotted out in Washington there was no longer any chance that anyone was going to have to pay for their bad behavior.
Ultimately, they bet on Congress doing what was in their own narrow self interest and that turned out to be a pretty safe bet. (Shocking, I know.)
Liberals definition of "fiscal responsibility" is trillion-dollar deficits as far as the eye can see and "we'll print more".
spe - the price of all these bailouts for everybody is to distort pricing in the market. Nobody knows what anything is worth right now.
Megan, I thoroughly enjoy your analysis - smart economics and finance with some cutting dry wit, but to often you seem to not really argue anything, you just kind of argue against what other people are arguing for. Sorry if that jumble doesn't make much sense. But after all, I am commenting on a blogger's comment's about a blogger's comments about a columnist's piece on the president's proposal. (All the sudden I have a headache)
I like this post, a great critique of where Laura and other technocratic liberals fall short, but what say you about Brooks' piece, his overarching argument? At least the lefties have a central theory; an organizing principle is more convincing than nothing but incisive sniping. Does Obama's plan raise Burkean alarm bells and if so what should he do as an alternate?
I see entirely too much criticisms of Obama's trying-to-do-everything attitude without any alternative proposed. Doesn't an honest response to his proposals require, well, a response to his proposals? He's got a tough, tough, tough job; I for one won't be convinced he's on the wrong track by people who don't offer their own positive vision for where our decisionmakers should take us.
You offer great critiques, but I'll take a positive vision for our future over a negative critique any day of the week.
What is really funny about these comments is if you actually look north of your border, you will see a country that learned 25 years ago that what you are doing now will fail absolutely and catastrophically.
Does any sane person not see the US federal gov't borrowing somewhere around $850 billion every three months as the source of the problem?
The banks are gone. They are bankrupt, can't move due to impossible debt obligations. The car companies are gone due to years of poor products and having (in Ontario) 48000 pensioners supported by 13000 workers. Those people with huge housing debt that they couldn't afford in the boom times can't afford them now, no matter what token government help. The only way they could afford the payments was another mortgage on the increasing value of the home.
Doing nothing is far far better than wasting and throwing away a couple of trillion dollars. Sure it will hurt. Foolishness usually does eventually.
Derek
Megan is caught up in the empirical now. Perhaps she or her glibertarian acolytes can produce the following*:
1. For the following years, 1998 to 2008, average rates on 30 year FRMs.
2. For the following years, 1998 to 2008, the dollar volume of residential mortgage loans deemed to be conventional/conforming, jumbo, subprime, and Alt-A.
3. For the following years, 1998 to 2008, the dollar volume of MBS/ABS issuance by agency (the GSEs) and non-agency.
4. For the following years, 1998 to 2008, the names of the following individuals:
a. President of the United States.
b. Chairman, the Board of Governors of the Federal Reserve System.
c. Chairman, U.S. Senate Committe on Banking, etc.
d. Chairman, U.S. House Committee on Financial Services.
For extra credit, list, for the time period cited above, the various heads of the FDIC, OCC, and regional Federal Reserve banks.
At that point, she can get back to blaming all of us for this crisis, which I know she's been doing since her earliest days of blogging.
* The sea change between 2004 and 2007 is a feature not a flaw.
Nick and Yancy: I think you're endorsing a tendentious definition of what causes downturns, strictly in order to deny the efficacy of government as instigator of demand. There's no shortage of capital--there's a shortage of useful productive things to put capital into. Note that Treasury bonds are going at basically zero interest, so bereft of outlets is capital nowadays. That's because nobody is buying anything, and Keynes had an answer for that.
Having studied some macroeconomics and found it over my head and therefore unconvincing (unlike micro, where I could do the math and see that its internal consistency meant that it therefore must be true, irrespective of institutional, cultural and human behavioral differences across societies), I have no clue regarding Keynes, Friedman, Hayek et al.
But I do find it curious that Brooks's attributes All in all, I can see why the markets are nervous and dropping to Obama. If, for instance, Obama were to say, "no stimulus, no bank bail out, no auto compnay loans" would Brooks expect the market to rise?
Essentially the market is falling because Wall Street sees that it is not going to get a total free handout, in the form of the USG buying toxic debt assets at well above their current prices and likely eventual worth.
We are entering a depression. Of course the market is nervous and dropping. Many of us individually don't feel all that differently. The worst is yet to come. We've just had an enormous 15 year pig out, it's not goping to be an overnight purge and everythng's hunk dory again.
Bearded Spock,
I've seen you often post on the forums, as an eloquent advocate of the Austrian school. I have a question, regarding what you would perceive as the Austrian position on an alternative cause of the current crisis to traditional thought of the Austrian business cycle.
I've read mush of Nassim Taleb's works on "Black Swans". It seems to me that the systematic under-appreciation of risk due to Gaussian assumptions, and thus neglecting the high-impact, low probability "Black Swan" events was a primary cause of the collapse of financial institutions; with more rational risk evaluation, the problems caused by Fannie/Freddie/The Fed would have been much less than catastrophic.
Can the Austrian view be reconciled with the theory of Taleb?
Also, regarding the positions of Hayek, wasn't he also the originator of the quote:
"probably nothing has done so much harm to the liberal cause as the wooden insistence of some liberals on certain rules of thumb, above all of the principle of laissez-faire capitalism"? Wouldn't that seem to advocate some sort of government involvement, not simply doing nothing?
But does anyone really think doing nothing is the way to go right now?
Count me as someone who thinks that as well. Of course no politician in his right mind will allow himself to be seen as doing nothing during what has been dubbed a crisis.
The really irritating thing is when the economy recovers, like it always does, people will be saying it's the result of the wasteful spending spree in which Congress is currently engaged. This will encourage the same bad behavior in the future, just like the New Deal did.
That one quote is why I think Hayek was allowed to win the Nobel Prize after Mises and the other Austrians were panned. The Bank of Sweden is not immune to politics when it comes to giving out the prize. The selection of Krugman is a perfect example of that.
Probably nothing has done so much harm to the understanding of economics as the wooden insistence on the infallibility of one's favorite economist.
Hayek wasn't perfect, neither were Mises or Rothbard. For example, I think they were wrong about "intellectual property." Hayek advanced economics the same way Newton advanced physics without understanding relativity. We stand on the shoulders of giants and see farther than they do.
I love the phrase: "Systematically underestimating the risk of high impact, low probability risks."
Let's examine such a situation: The Small Martingale betting strategy at Roulette.
Make a bet that returns even money, say red or even. If you loose, double up on the next bet. Keep going until you win. Sounds unbeatable, right? You can make a lot of money betting this way.
But what if you run out of money or reach the table limit? In practice, if you play the Small Martingale long enough, you are guaranteed to get wiped out. You end up taking huge risks for tiny net gains. I've actually seen this happen.
The banking system is built on a giant, overly-complex small martingale structure. With fiat money, fractional reserves, FDIC and now Bernanke's admission that some banks are "too big to fail", what happens is that the risks just get bigger and bigger until the wipe-out is global. This will happen, but nobody knows when.
The odds of the roulette marble turning up red twenty times in a row is tiny (1 in 2^20), but if you make 1,048,576 bets, the odds of getting wiped out are 1 in 2. We have been betting since 1971.
There is not much incentive for "rational risk evaluation" when the profits are privatized and the losses are socialized via bank bail-outs and FDIC insurance. Bankers are not angels.
You might as well be saying "if lions were vegetarians, they'd make good pets."
Now imagine playing Roulette with a AmEx black card on a table with a trillion dollar limit. that's what Bernanke's doing. With our money.
The accounting firm Arthur Anderson went bankrupt after giving Enron a clean bill of health, but nothing happened to the SEC after Madoff. Government isn't held accountable to the same level as the private sector. The Fed is a de facto arm of the government. The member banks are effectively branches of the Fed.
Economics is based on the simple concept that incentives work. Moral hazard is a perverse incentive to take excessive risk. The FDIC and bank bail-outs are morally hazardous. When added to the perverse incentive to dilute the money supply (fiat currency), a binary explosive is created. Given enough time, that explosive will be detonated by something.
We tried it your way for eight years (tax cuts, tax cuts and deficits don't matter) and look where it got us. What was the quote a couple of days ago -- its like a heroin addict chiding you for putting sugar in your coffee.
We haven't exactly had the 'hands off approach' for a very long time.