Fed Credit Charts as Fine Art
For those who have long suspected that economics is not a science, I am ashamed to report that several of us PhDs can’t even agree on whether there was a “credit crunch” during the first half of the year.
Exhibit A is the Mark Thoma/Alex Tabarrok feud. They look at the exact same charts and conclude opposite things. (Here is Alex responding to the Thoma link, so you can see what I mean.)
For my part, I side with Alex. Below I reproduce just two of the charts Thoma shows, but the others all show a similar pattern. During the dark days of the credit crunch, when we were warned the entire financial system would collapse if we didn’t cough up $700 billion, the supply of “industrial and commercial loans at all commercial banks” was at an all-time high, and in fact its year/year rate of growth at its lowest point was “only” 12% or so. If you exclude the last few years–which everyone agrees was an insane period with perhaps criminally lax lending standards–then the year/year rate of growth in these loans was higher than at any point going back to the early 1980s. Really, this is amazing, given all the fear-mongering we’ve been hearing. Just study the picture below for a few moments and let it sink it. (Remember, this is is year/year growth; look at the units on the left axis.)
But here’s my favorite. Even if we look at “real estate loans at all commercial banks,” we see that the year/year growth rate was always positive, and in fact stayed above 4% the entire time (I’m just eyeballing the chart, it’s probably close to 5%).
That’s right folks, during the “credit crunch” fueled by the subprime crash etc., the volume of real estate loans made by commercial banks only experienced a significant slowdown in its rate of growth. Sounds like something worthy of bank nationalization to me.
Good job on all this, Alex. Fight the power.
One closing caveat: If you dabble with these series at the Fed site (and it’s very convenient to do so–you might as well get something for the depreciating dollar), you will see that in some cases, there was a drop in the level starting in 2008. But still, the charts above show that there was still year/year growth. I.e. even though some credit items fell from, say, December 2007 to March 2008, those items were still higher than they had been in March 2007. If one wants to argue that the economy was slipping off of a cliff, and Paulson needed to save us, OK that’s consistent with the charts. But it is NOT true that we were already in a crisis (vis-a-vis the entire scope of the various credit markets) when Paulson and Bernanke had no choice but to go for the Fidel Castro option.
The Problem With Minarchist Analogies
This post will be critical of John Stossel, so I just want to make clear that he is awesome and is doing a lot to spread free market ideas. Now then…
In a recent WSJ op ed, Stossel compares society to an ice skating rink, and explains that he filmed an attempt to “centrally plan” 100 skaters using a bullhorn. (This was Daniel Klein’s idea.) Then they even got Brian Boitano to try it as well, and even here the outcome was obviously inferior to a “deregulated” skating environment.
Well, in today’s WSJ, there were a bunch of cynics pointing out that if you slightly changed the analogy to make it closer to the financial bailout, then Stossel would obviously want a “referee.” (E.g. if there were so many skaters that if they piled onto one area of the rink, the whole building would collapse and kill the spectators.) And then someone else sarcastically agreed with Stossel, and said he also thought we should get rid of stoplights. Somebody else said you need referees in professional ice hockey.
Now, I’m sure Stossel’s TV show was worth doing; it sounds like they did it pretty cleverly, and bringing the “expert planner” Boitano in was a great twist. (I must confess that I can’t hear that guy’s name without thinking of South Park.)
This exchange of views illustrates the difficulties of minarchism. A Rothbardian anarchist can quite consistently say, “Yes, it’s not whether there are ‘rules’ or not, it’s that owners should set the rules on their property. So darn tootin you get rid of government streetlights and stop signs, and you sell the roads to the private sector. Let them decide how to provide the best service to their customers.”
If you are a consistent champion of the free market, then all these nagging problems fall away. You’re not in the awkward position of having to say that the financial bailout is wicked and stupid, but the Pentagon and Supreme Court are virtuous and brilliant.
Wanda Sykes on the Bailout
A surprisingly libertarian analysis. (She’s actually pretty good on other issues too since her Bush-bashing matches up with most of my views. I’m sure I will hate her comedy routines during an Obama administration, though.) HT2 Mitche.
Scott Horton Interviews Murphy on Credit Default Swaps, etc.
This interview is another long one–you people are probably wondering how I get anything done. What’s good about these ones is that Scott and I are close enough that if he sets up a premise, I’m not afraid to disagree with him.
Incidentally, in our original interview Scott asked me whether things would have been different had the Fed tried to do a “soft landing” after the Greenspan stimulus. (I’m not sure if this portion was retained in the edited version linked above. And my computer is messed up and I can’t just listen to that portion of the interview to check.) I explained that that is exactly what they tried to do. As the graph below indicates, they raised the rates back up very gradually, and they made sure the markets knew exactly what was coming.
This episode really underscores the importance of capital theory. If macroeconomics were really just about aggregate spending and “the price level” and so on, then the Fed did a great job handling the dot-com crash and then 9/11. In fact, that’s why they hailed Greenspan, and why so many supply-siders were so bullish for so long. (After all, Bush cut taxes, and the markets were fairly deregulated.)
But subscribers to Austrian business cycle theory knew that the housing boom had sown the seeds for a recession. The entire world’s capital structure was altered into an unsustainable condition by the injections of central bank funny money. If the Fed had kept rates at 5.25 percent back in September 2007, the US would have entered a sharp recession. (On the bright side, we would probably be through the worst of it by now.) But instead the Fed started cutting rates and–more important–giving lifelines of artificial credit to all of the needy bankers. The economy has been limping along in a state of denial ever since.
A Call to Popperians: How Can We Pit Cowen vs. ABCT?
In this post, Tyler Cowen acknowledges my capital-consumption story, and contrasts it with his own explanation. In a nutshell: Tyler is saying that the housing boom was fueled by the real savings of foreigners, and this explains how it is physically possible that Americans consumed more (TVs, iPods, etc.) at the same time that they were expanding the housing sector.
In contrast, Tyler says, the Austrian story would need to link the booming housing sector with falling consumption. After all, if the boom is artificial and based on Fed funny money, then there is a tradeoff between houses and iPods; Americans couldn’t have had more of both from 2001 – 2006.
Especially as Tyler clarifies in the comments of the above thread, his point is that yes, capital consumption (a la my sushi story) is theoretically possible, in order to reconcile the facts with the Austrian story. But, he says, the evidence seems to point to his theory.
Well let’s do a test! And to make it extra scientific, let’s lay out our criteria right now, and THEN go look at the data. (Obviously I know how some of the below will turn out, but not all of it.) So in the comments please give me additional areas in which Tyler’s theory and mine give opposite post-dictions (i.e. predictions after the fact).
(1) If I’m right, housing prices should have gone up when Fed was cutting rates, and they should have peaked/started falling when Fed starting raising them.
(2) If Tyler is right, housing prices should have gone up with increased savings in foreign countries that invest in US assets. We could probably refine this some; help here. E.g. maybe we want to look at growth in Treasury holdings by the Bank of China. And then housing prices should peak / fall when the foreign banks slow down their purchases.
(3) If Tyler is right, rising home prices should be accompanied by a rising (or at least stable) dollar. After all, if it’s foreign savings coming in that are pumping up the housing sector, that has to put upward pressure on the US dollar. (I grant this this is self-serving, since we know what happened to the dollar. But the direction is right, don’t you agree? I.e. if Tyler’s story were true, wouldn’t it have propped up the dollar?)
(4) I admit I haven’t fully worked out all the nuts and bolts of it, but surely the theory that there was massive capital consumption occurring is consistent with a falling dollar. As I say, it’s a bit tricky because the Austrian story is that people were consuming capital without being aware of it.
Any other ideas? The obvious problem with the above is that I know how at least 3 of them are going to turn out, so there’s a danger that I say, “Yeah, my story predicts a falling dollar” when maybe I wouldn’t have said that in 2000.
So can people come up with ways to separate Tyler’s theory from mine, that rely on rather obscure things that aren’t currently common knowledge? Or maybe that rely on things that switch, to mark the difference between the expansion and the contraction? I’m thinking of things that would happen in the different sectors of the Chinese and US economies, in terms of a Hayekian triangle.
I guess another obvious one is:
(5) Tyler’s theory shouldn’t require a major recession, whereas mine does.
And the beauty of (5) is that it’s still not decided! So I will say this, if unemployment has peaked, then I am wrong. We have not yet begun to recess, if the ABCT explains what happened with housing.
Jeff Tucker Interviews Murphy on Austrian Business Cycle Theory, and the Sinister Bailout
This is a fairly long one [mp3], but I know some of you are students and some are retired.
I Can Die Now
Tyler Cowen links to my article “The Importance of Capital Theory”–via a foreign website, strangely enough. You can read his post and my response, which is about 30 comments from the top.
What I don’t get is that Tyler keeps thinking the coincidence of high consumption and high investment is a problem for Austrian business cycle theory. No it isn’t. It is a cornerstone of Garrison’s Power Point expositions, and it’s in Mises and Hayek too. So it’s not merely that I’m scrambling to defend ABCT from this unexpected thrust; on the contrary, this feature is why the Austrians say the boom period is unsustainable.
In other words, what Tyler is calling an inconvenient truth for the Austrian explanation, is actually one of its necessary ingredients. If consumption fell in order to free up resources to “fund” the expansion in investment, then there wouldn’t be a bust period. To switch to Krugman’s “hangover theory” label: It’s as if Cowen is saying, “Obviously the theory that the hangover is due to a drinking binge is silly. Why, drinking large amounts of alcohol can mess with your system.”
(If the above two sentences don’t make any sense, good. Just like Tyler’s “critique” of ABCT doesn’t even make sense, let alone is it correct.)
Tom Woods, Manipulator of Crowds
I don’t understand how this happened. I knew Tom Woods was going to be giving a rousing speech at the Ron Paul rally (down the street from the McCain convention), and I kept asking him when it was going to be on YouTube. And then somehow, I didn’t end up watching it until a few days ago.
Anyway, it is pasted below. I have watched it twice now, and I’m still trying to figure out how Tom got them to go nuts over the dorkiest parts of his speech. That takes real talent.
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