An Old Argument on Austrian Strategy
Over at The Austrian Economists, Greg Ransom and I (plus some others) are arguing with Pete Boettke about the best way for Austrian economists to advance the school. I wisely said last night that I would be making my last post, so now honor forbids me from correcting the latest posts from Boettke (and now Roger Koppl) demanding an answer. Ah well, it’s probably all for the best. For sure the way NOT to advance Austrian economics is to devote more than one hour to a single thread on TAE.
MasterResource Post on Oil Speculation
Over at MasterResource I make another guest blog post, this time tackling Robert Bryce’s possibly premature concession on whether speculators were driving oil prices. I don’t really take a stand but just try to clarify the debate:
In the broadest sense, any price is caused by “supply and demand.” The prices for Las Vegas real estate in 2006, as well as for Dutch tulip bulbs in 1637, balanced the quantity demanded with the quantity supplied. Even at the height of a speculative bubble, sellers can only receive what buyers are willing to pay.
In the present context, however, it is common for people to contrast “the fundamentals” from mere “speculative demand.” In the case of oil, if demand has increased because factories need to run their machines harder or because refiners expect motorists to buy more gasoline, then that is deemed a legitimate, fundamental driver of higher oil prices. On the other hand, if hedge fund managers invest in oil futures contracts not because they forecast higher fundamental demand, but rather because they are simply betting that the market value of the contracts will appreciate, allowing the hedge fund to unload the contract before physical delivery, then that is considered pure speculation.
Incidentally, I knew when I wrote it that that last sentence was a bit long. But man, that last sentence is a bit long.
WSJ: Families Save More And Wreck Economy
I’m not making this up. The actual headline is, “Hard-Hit Families Finally Start Saving, Aggravating Nation’s Economic Woes.” (HT2LRC) Here’s some great analysis from the nation’s “economically savvy” newspaper:
As layoffs and store closures grip Boise, these two local families hope their newfound frugality will see them through the economic downturn. But this same thriftiness, embraced by families across the U.S., is also a major reason the downturn may not soon end. Americans, fresh off a decadeslong buying spree, are finally saving more and spending less — just as the economy needs their dollars the most.
Usually, frugality is good for individuals and for the economy. Savings serve as a reservoir of capital that can be used to finance investment, which helps raise a nation’s standard of living. But in a recession, increased saving — or its flip side, decreased spending — can exacerbate the economy’s woes. It’s what economists call the “paradox of thrift.”
Good for you, American consumers! Too bad the government increased its debt by more than one trillion in 2008 on your behalf. (HT2 Tim Swanson)
If you would like a careful unpacking of the “paradox of thrift,” see my earlier article. It’s bad enough when the Nobel laureate brings it up, but now the Journal? Oh man.
The Free Advice "Speak Out!" Award Goes to Mario Rizzo
Our first Speak Out! award goes to Mario Rizzo. Both on his new blog and in the comments section at other sites, Mario has continually pounded home the message that microeconomics is still relevant, even when there is a recession. The second link above is to an Arnold Kling EconLog post. Kling says he’s “firmly” against a big stimulus, but would instead “prefer a small stimulus.” (Whoa, you should have warned us to sit down before dropping that bombshell, Arnold!) Rizzo says:
Why is there a case for any (fiscal)stimulus at all? If we are simply talking about indulging the public in their fantasies about an easy way out of the economic mess, then I am no expert on this.
However, since so much of the current problem has its roots in the misdirection of resources we must be careful not to frustrate allocative adjustments by renewing the misdirection of resources towards over-expanded sectors. These are not sustainable in terms of the preferences of consumers and investors. The operative resource allocation principle in the political process is toward those areas with the greatest political influence. (BTW, none of this is to be taken as opposing the maintenance of sufficient high powered money to prevent outright deflation.)
Of course, even Rizzo inexplicably thinks that creating more money out of thin air will help with relative price coordination, but that’s why you have me.
Tyler Cowen Opposes Fiscal Stimulus on NPR
He still wants to bail out state and local governments, but nobody’s perfect. All in all, great stuff Tyler. Perhaps my constant nagging on his site is paying off?
Marianne Sierk Standup
Somebody ages ago mentioned to me that Marianne Sierk, a girl from my high school class, was doing stand up in NYC. For some reason I googled her today, and she’s pretty funny. (I didn’t really know her in high school, what with her being a girl and all, and me being interested in physics and a fan of Star Trek.) OK Marianne, it’s a race to see who gets on Leno first!
James Hamilton Gets Us Up to Speed on the Fed Balance Sheet
Jeff Hummel passed this post along. I haven’t read it carefully yet, but it looks promising, with lots of charts and not assuming the reader is an expert. And I was definitely intrigued when I saw this:
And how about the Fed’s “free money” from the ballooning excess reserves? If those funds do start to end up as cash held by the public, then the Fed will need to worry again about inflation, in which case it has two options. One is to sell off some of its remaining assets (or fail to roll over some loans). In this case, the consequences for the Treasury are the same as above– that income from the Fed’s earnings is no longer coming back to the Treasury, and it’s as if the $800 billion in excess reserves was again replaced by direct Treasury borrowing.
The second option is just allow the inflation.
The bottom line is that Bernanke has made a gamble with something approaching 2 trillion. If the gamble wins, taxpayers owe nothing. If the gamble loses, taxpayers are committed to borrow a sum equal to any losses and start making interest payments on it.
James Grant Is the Man, though Idealistic for the NYT
The NYT reviews James Grant’s book, Mr. Market Miscalculates, which reflects on his warnings about the financial storm (HT2 von Pepe). The reviewer basically credits Grant for making spot-on predictions, then takes away the compliment through various nitpicks. A representative excerpt:
Mr. Grant’s targets have been many, but none more so than the Federal Reserve. During the height of Alan Greenspan’s maestro acclaim, Mr. Grant made the case against him, then took up the cudgel against his successor, Ben S. Bernanke. He accused them of inflating bubbles and of fighting what Mr. Grant sees as the false bogeyman of deflation.
Beyond the tilting, though, one question begs an answer: Is it possible to have robust growth without the follow-on crises? Essentially, Mr. Grant answers, no.
Capitalism, like invention, is disruptive, he has observed many times, while arguing that past efforts to ensure future safety have only increased long-term instability. That’s because well-meaning protections against “systemic risk” — even government insurance for bank deposits — encourage recklessness. Such was the backdrop to the financial engineering that computers made possible.
IN addition, as Mr. Grant sees it, the world went to hell after 1971, when the United States abandoned the gold standard. “Gold not only collateralized the currency but also tempered the growth in bank credit,” he admonished in 1999 — and, it seems, every year, before and since.
Unhitching economic growth from the vicissitudes of mining freed the Fed to issue endless liquidity to prop American employment and G.D.P. But cheap credit meant that investors, already egged on by Uncle Sam’s implied backstop guarantees, became flush with gambling money.
Mr. Grant is dead right about the long-run tendency of central banks to debase their own paper currencies, but permanently returning the dollar to a gold standard is no more practicable than reducing the government’s size to 19th-century levels. Still, as he warned in 2002, “very low interest rates often ignite booms, but even ultralow interest rates may not fix busts.” Live by the Fed’s pump-priming, die by the Fed’s pump-priming.
Can someone tell me what is up with this “practicable” line? How “practicable” is our current mess? Is the NYT guy really arguing that Grant is right, but the suggestion is impractical, or is he really not even taking Grant seriously?
Eight months ago, how “practicable” would it have been if Paul Krugman suggested that the feds nationalize major portions of the financial sector, and borrow a trillion more dollars for stimulus? Times change quickly.
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