There’s a lot of discussion of The Economist’s recent articles on the failure of economics. I have commented on this previously in Screw the stimulus, shoot the macroeconomists. Let me try to adopt a more conciliatory tone. Like many Americans, I am experiencing a lot of frustration watching our dysfunctional government with the perspective of a Boomer’s life experience. So many mistakes, repeated so many times….
The political system is incapable of applying good macroeconomic models even if they exist. Take for example the slope of the yield curve as a recession indicator, which I used in my model along with my “animal spirits” variable. Introductory managerial finance texts teach that an inversion of the yield curve is a reliable signal of a recession arriving within about a year. The Fed knows this, most financially astute people know this.
The yield curve inverted in 2000 and again in 2006. What was the policy response? To pump up the money supply, credit and lending and debt expansion! Why? Because Alan Greenspan and Ben Bernanke both saw the potential for deflation. Was this the right thing to do? No! The reason deflation was realistically in the outlook was because we had too much debt already!
By pumping up credit, our exalted Fed chairmen thought they could save the economy, or perhaps at least not have it collapse on their watch. Bernanke was publicly quoted many times in 2007 saying the economy was in good shape.
We live in a political economy.
So what should we do? Take care of the people! Make policy on moral grounds with minimal reliance on models. When people become unemployed, help them. My basic requirements for the stimulus as noted in the reference above are a poverty level dole for the unemployed, and universal health care. It is truly barbaric that you lose your health care when you lose your job (or it becomes so expensive you can’t afford it). The government can’t be trusted to spend our money wisely much beyond that. Too much of the stimulus will be on wasteful projects.
I know this is way too reasonable for the professional economists to buy into. I am a Ph.D. economist. The academics are all riding their particular hobby horses, charging their favorite windmills.
We are living with political economy they’ve helped to create, a mish-mash of broken theories that come in and out of vogue with the amount of money backing their political spokes-clowns. Remember “supply-side economics”? How about “real business cycle theory”? Or “efficient markets theory”? All these impressively mathematical theories were marshaled to support policies that had major distributional consequences.
Please! Let’s try looking directly at who gets what out of these policies, and whether a majority of Americans think they’re fair. It’s our money.
That’s my modest proposal.
Via: Ritholtz.com The Jalopy Economy. What central banking and modern macroeconomics (Keynesian or monetarist) have brought us.
All the fuss about “financial innovation” is largely about the illusory gains due to increasing indebtedness. The rise in debt has fueled Wall Street’s compensation, asset bubbles, and has brought the U.S. to the brink of bankruptcy (and this doesn’t include the hidden indebtedness arising from social program promises).
The article: Ben "Systemic Risk" Bernanke proves that Bernanke knowingly maintained a strict monetary policy long after he knew of the sub prime problem as he knew it would be the only cause of the "Depression".
ReplyDeleteIt shows that he probably engineered it on purpose!
If you want to sleep tonight, Don't Read It!
"In contradiction to the prevalent view of the time, that money and monetary policy played at most a purely passive role in the Depression, Friedman and Schwartz argued that "the [economic] contraction is in fact a tragic testimonial to the importance of monetary forces" (Friedman and Schwartz, 1963, p. 300).
.....
The slowdown in economic activity, together with high interest rates, was in all likelihood the most important source of the stock market crash that followed in October.
In other words, the market crash, rather than being the cause of the Depression, as popular legend has it, was in fact largely the result of an economic slowdown and the inappropriate monetary policies that preceded it.
Of course, the stock market crash only worsened the economic situation, hurting consumer and business confidence and contributing to a still deeper downturn in 1930."
Governor Ben S. Bernanke
Money, Gold, and the Great Depression.
At the H. Parker Willis Lecture in Economic Policy, Washington and Lee University,
Lexington, Virginia.
March 2nd, 2004
You can read also: Preparing for the Crash, The Age of Turbulence Update: 22/07/09., which tries to accomplish Greenspan Mission Impossible:
"Much as we might wish otherwise, policy-makers cannot reliably anticipate financial or economic shocks or the consequences of economic imbalances. Financial crises are characterised by discontinuous breaks in market pricing the timing of which by definition must be unanticipated - if people see them coming, then the markets arbitrage them away.
.....
That is mission impossible. Indeed, the international financial community has made numerous efforts in recent years to establish such oversight, but none prevented or ameliorated the crisis that began last summer. Much as we might wish otherwise, policy makers cannot reliably anticipate financial or economic shocks or the consequences of economic imbalances. Financial crises are characterised by discontinuous breaks in market pricing the timing of which by definition must be unanticipated - if people see them coming, then the markets arbitrage them away."
Alan Greenspan
The Age of Turbulence: Adventures in a New World [Economic Order?].
Plea for a New World Economic Order. explains the nature and causes of economic depressions and proposes a plausible alternative solution.