29 Oct 2008

Two Interesting Posts from Arnold Kling

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In this one, he quotes his former classmate, Bob McDonald, who says in an Oct. 9 post:

[Bob McDonald:] At this time, the government is the only agent in a position to intervene, but the government is also part of the problem. No private solution will emerge with the government hovering in the background, making decisions on the fly (will a particular institution be rescued or abandoned?) and essentially commandeering markets.

This is in synch with my much more zealous LRC piece in late September:

[Murphy:] And yet, there is no rhyme or reason to the government’s decisions. Lehman Brothers was allowed to fail. In essence, you’ve got a massive beast stalking the financial markets. This creature has many trillions of dollars ultimately at its disposal, and oh yes, I should add: It is not afraid to send armed men to your house if you should ever really cross it. In this environment, is it any wonder that the credit markets are “frozen”? When the SWAT team bursts into your kitchen window, you freeze up, right? Why should things be so different on Wall Street?

(BTW I’m not accusing McDonald of plagiarism, I’m just saying you heard it here first.)

Then in another post, Kling has some very revealing quotes that show just how bankrupt mainstream macroeconomics is. Here’s Bernanke in an interview he gave to a guy writing a book (not sure of the date of this):

[Ben Bernanke:]A price target that avoided deflation would have de facto forced abandonment of the gold standard and would have eliminated a major channel of depression…So I do agree that stabilizing prices is the ultimate lesson of the Great Depression and also of the 1970s. There really is nothing more a central bank can do for domestic economic stability than make sure that inflation remains low and stable over long periods.

So do you see why, in retrospect, that’s pretty damning? There was price stability (in consumer goods) during the 1920s–that’s why monetarists think the Fed did a great job during the Roaring decade. And there was very low consumer price inflation during the housing boom–again, that’s why monetarists thought the Fed rates reflected changes in the “real economy,” and weren’t generating the boom in housing. Oops.

Now Kling also quotes Brad DeLong who (courageously) admits that he didn’t second-guess Greenspan’s decision with interest rates at the time–or even six months ago. It is only now that he is having second thoughts:

[Brad DeLong:] The current financial crisis has its roots in Greenspan’s decision to keep interest rates very low in 2002 and 2003 to head off the danger of a deflation-induced double-dip recession, and his subsequent decision that the costs of cleaning up after a housing bubble were likely to be less than the costs of the high unemployment that would be generated by a preemptive attempt to pop a housing-speculation bubble. Two years ago, I would have said that Greenspan’s judgment here was correct. Six months ago, I would have said that his judgment was probably correct. Today — in the middle of the largest nationalizations in history — I can no longer state that Greenspan made the right calls with respect to the level of interest rates and the housing bubble in the 2000s.

Seriously folks, why oh why can’t these economists just admit that central planning is a bad idea when it comes to the capital markets? Why is that so hard? Is it because the Austrians have annoying personalities (and yes many of us do!) and our gloating would be really really obnoxious?

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