Laffer Excoriates the Bailout
My ex-boss has an uncharacteristically harsh op ed in today’s WSJ. When I worked at Laffer Associates a couple of years ago, he would sometimes have to tell his critics, “I’m not always an optimist, I just happen to be right now.” Well, I don’t think he’ll need to worry about that particular caricature for the next few years… Some excerpts:
No one likes to see people lose their homes when housing prices fall and they can’t afford to pay their mortgages; nor does any one of us enjoy watching banks go belly-up for making subprime loans without enough equity. But the taxpayers had nothing to do with either side of the mortgage transaction. If the house’s value had appreciated, believe you me the overleveraged homeowner and the overly aggressive bank would never have shared their gain with taxpayers. Housing price declines and their consequences are signals to the market to stop building so many houses, pure and simple.
…
If you don’t believe me, just watch how Congress and Barney Frank run the banks. If you thought they did a bad job running the post office, Amtrak, Fannie Mae, Freddie Mac and the military, just wait till you see what they’ll do with Wall Street.
I am glad that a solid group of free market economists are yelling and screaming that this bailout is nuts. At least we will be on record when the excrement hits the rotating blades.
I Have a Hard Time With the Story of Noah’s Ark
I think a lot of people are shocked to discover that I believe that, say, Jesus really healed the lame, and that He really did walk on water. Well I do, and if you think that I must not understand modern science, then I think you must have way too much confidence in your understanding of what is “possible.” Keep in mind, for example, that the apostles who saw Jesus “walking on water” wouldn’t have examined the situation with the eyes of Richard Feynman. I haven’t done research on the topic, but just to give you an idea of what I mean, it’s possible Jesus was standing on the back of an aquatic creature. You see people “coasting on water” every time you go to Sea World.
Or how about bringing people back from the dead? Does “modern medicine” teach us that is impossible? Of course not. If you were watching Nova and they interviewed a guy in a white coat with an MD after his name, and he said how a person was clinically dead but they fished her out of the frozen lake and revived her, you would totally believe that tale; you wouldn’t even bother googling for corroboration. And yet you wouldn’t hesitate to confidently tell me the Gospels are myths because it is “impossible” that Jesus raised Lazarus from the dead.
(Incidentally, some Christians get annoyed when I “cheat” like this; it seems like I’m taking away from God’s miracles. But c’mon, I already believe that God created the universe and all of its laws. Obviously God can do whatever He wants. I just think it is more elegant if matter behaves according to some simple rules, and even so yields “miraculous” outcomes that were completely unanticipated by dull humans. This seems more impressive than parlor tricks where He suspends the laws of physics that operate 99.999% of the time.)
OK, now that you know where I am coming from, let me confess that I am having a very hard time taking the story of Noah and the flood seriously. (See Genesis 6-8.) Put aside the logistical problems of getting all the different animals on board, how to feed them, get rid of their waste, etc. etc. There are still some really serious problems with this story.
For one thing, it’s not clear to me how the waters can “recede” after it stops raining. If a local area is flooded by rain, then yeah the water levels recede after it stops, but that’s because the water goes somewhere and ends up raising the water level in a lake or the ocean.
But if the whole earth was underwater, even the mountains, then how could the water levels have receded? I suppose there could have been cracks in the ocean floor that allowed the water above to drain into underground cavities, but it sure seems like this was a tall tale written by someone who was extrapolating from his experience with regional flooding after a lot of rain.
(It occurs to me that maybe a bunch of the water evaporated. Does anyone know how much water the atmosphere holds? I have no idea, but I’m guessing it doesn’t hold so much that a shell of water bigger than the globe would shrink much. But maybe I’m wrong.)
Now a second huge problem: The wording is ambiguous, but it seems that 47 days after dry land first appears, Noah releases a dove from the ark and it flies back with a freshly plucked olive leaf. So how did that happen? Even if you say that somehow the seed of an olive tree survived the flood, even so, 47 days is not enough time for it to grow and generate a leaf, right?
Again, this smacks of someone who is writing a story and didn’t think through all of the implications.
So when people ask if I believe the literal word of the Bible, I’m not sure how to answer. I don’t, since I’m prepared to say that the story of the flood did not play out exactly as the Bible describes it. But on the other hand, I don’t just think the Bible is a collection of myths “with a good lesson.” I really think there was a guy named Jesus who healed the sick and rose from the dead. In future posts, I will eventually explain why I think my belief in Him is more “rational” than those who dismiss it as a fairy tale.
Stephen King on the Financial Panic
The byline says it’s Stephen King, “managing director of economics at HSBC,” but it’s got to be the famous novelist. This piece (HT2 Jeff Tucker) is weirder and scarier than Firestarter. There’s no point in me even excerpting it; let’s just say, the author implies that Alan Greenspan ignored the warnings–given by both Keynes and Mises & Hayek–that unregulated markets can’t adequately cope with the problems of time.
Someone please make the voices stop. I can’t take much more of this.
Megan McArdle & ABCT: The Silly Woman Theory of Error
Reader Bashkim Rrahmoni notified me of a Megan McArdle attack on Austrian business cycle theory. I was going to cut her some slack, but the more I thought about it, the more ridiculous her post struck me. In “The evil man theory of failure,” she tries to play it above the fray, transcending the foolishness of left and right:
Both right wing Austrians and many liberals have a common theory of how all this happened: Alan Greenspan dunnit. The mechanisms by which he accomplished his foul task are different in the two cases, of course. Austrians, and many other free-market types, believe that by lowering short-term interest rates after 9/11, Alan Greenspan made the housing bubble, and its eventual bust, inevitable. The liberals think that by failing to regulate . . . er, something (usually either mortgage originations or CDS’s) more closely, he made the crisis inevitable….
Here’s the problem: if markets are so great, how come the entire system can be brought low by a smallish injection of short-term capital? The alternative question for the liberals: if regulation is so great, how come one guy, or one fairly minor bill, can apparently single-handedly destroy the most heavily regulated industry in America that doesn’t actively involve radioactive material? If your preferred system is really that fragile, then maybe we should be looking into alternatives.
OK, we all get her point, and maybe it’s a good one with regard to the leftists. (Will Wilkinson takes this tack too, and I think he and McArdle are on to something. But that’s probably my bias talking; maybe a leftist could blow them up the way I’m about to do to McArdle.)
OK, first we’ll show the specific details of how silly McArdle’s post is (vis-a-vis the Austrians), and then we’ll pull back and do a “McArdle is a Moron” from 50,000 feet.
This “smallish injection of short-term capital” corresponded to the lowest that the Fed had set inflation-adjusted rates since 1979. I explain the matter in this piece, but here’s the relevant graph:
And note too in the above chart, it’s not like Greenspan had cheap credit for three weeks or something. He held the (nominal) fed funds rate at a ridiculous 1% for an entire year. And the year in question was June 2003 to June 2004. Did that coincide at all with the housing boom? Surely a coincidence.
OK sure, Greenspan made credit really cheap. But maybe that was partly a result of the infusion of foreign investment, the bogeyman that Tyler Cowen and Alan Greenspan are blaming. (“And my scheme would’ve worked, too, if it hadn’t been for those meddling savers in China!”) So let’s just look at something that Greenspan directly controlled, namely the monetary base. The below chart shows the absolute change in the monetary base from the prior year; so be careful, this is in dollars, not percentages:
As you can see, Greenspan let the base grow far more than at any time in prior US history. (The big spike up and down is because of the Y2K scare; they flooded the system with liquidity so people wouldn’t pull out their money. Also, in % terms Greenspan’s actions were not unprecedented, but still significant.) From January 2001 to June 2004, the monetary base grew by $154 billion–and remember, this is the base of the money-and-credit pyramid. I know Ms. McArdle gets a lot more readers than I do, but still, if she considers $154 billion in base money just a “smallish injection”–te salute, Ms. McArdle!
Finally, the big picture: Suppose I blamed the economic disaster in interwar Germany on the guy(s) running the printing press. Would McArdle ridicule that as an evil Kraut theory?
Greenspan Surrenders in the Battle Over Narrative
I hope this post doesn’t disillusion some of our younger readers, but we don’t hold back here at Free Advice: Ever since the financial crisis became obvious to all, many other free marketeers and I have been consciously trying to make sure government gets the blame for this, not “laissez-faire capitalism.” Obviously we are doing this because we think it is true, but I do want to acknowledge the strategic aspect of it. In particular, I have been trying to drive home the Austrian business cycle theory now that there is a brief window in which many academics, as well as a bunch of nerdy investors, would be far more receptive than ever before.
But alas, with Greenspan’s recent testimony, we lost. He conceded defeat. It doesn’t matter how many impassioned pleas or delectable analogies I write. The single person on earth who bears the most responsibility for the housing bubble is taking responsibility–by saying it was his faulty faith in deregulated markets. Here’s the smoking gun:
Waxman: Dr. Greenspan, I’m going to interrupt you. The question I have for you is… You had an ideology … You had the authority to prevent the lending practices that led to the subprime mortgage crisis, you were advised to do so by many others, and now our whole economy is paying the price. Do you feel that your ideology pushed you to make decisions that you wished you had not made.
Greenspan: Well, remember what an ideology is. It’s a conceptual framwork for the way people deal with reality. Everyone has one. To exist, you need an ideology. The question is whether it is accurate or not. And what I’m saying to you is that I found a flaw – I don’t know how significant or permanent it is – but I’ve been very distressed by that fact. But if I may, can I just answer the previous question?
Waxman: You found a flaw in the reality…
Greenspan: I found a flaw in the model that I perceived is the critical functioning structure that defines how the world works.
Waxman: In other words you found that your view of the world, your ideology, was not right. It was not working.
Greenspan: That’s precisely the reason I was shocked because I was going for forty years or more with very considerable evidence that it was working exceptionally well.
Checkmate. Weisberg 1, Liberty 0.
Sure, we will keep writing, just for posterity. People 50 years from now can read our reports to understand precise details that would otherwise be forgotten. But let’s not kid ourselves that we can still spin the narrative to exonerate markets.
Nope, this is about as damning a concession as if Don Rumsfeld testified, “Yeah, I am quite frankly shocked at how badly things turned out in Iraq. I mean, the use of overwhelming firepower worked so well in World War II and the first Gulf War. I have to rethink my views on diplomacy.”
Can you imagine Bill Kristol trying to spin that? So now you feel my pain.*
Oh, at this point it probably goes without saying that Tyler Cowen disagrees with me; he doesn’t think Greenspan conceded much at all.
* Don’t get mixed up, folks. I was against the Iraq invasion. And so I’m saying, it would be hilarious to me to watch an intellectual try to justify militarism in light of the chief architect admitting it didn’t work. So by the same token, how can I possibly be taken seriously by leftists who distrust the market, after its leading “proponent” and architect of the housing bubble admitted that the Invisible Hand doesn’t work after all?
"If You’re So Scared, Why Don’t You Stockpile Water?"
So asks Pete Leeson in a provocative blog post (see the opening thread, and then in this one a bunch of us [ex] Hillsdale profs tag team the poor pirate pedant*).
In response, I pointed out that we don’t need to do that yet, because so far (except for gasoline) the government hasn’t imposed price controls. And on the gas situation, I’m referring to the “anti-gouging” measures in some states that kept stations from raising their prices after the hurricanes. In Nashville, we really did have maybe 40 – 50% of the gas stations closed for a few days, and then long lines–spilling out onto the roads–at the remaining, open stations.
Anyway, it would not surprise me in the least if, a few years from now, there is a black market in bottled water. Check this out (HT2 Dan Simmons):
BTW, it occurs to me that because Google is inexplicably flashing pro-Obama ads all over my blog, I should clarify for newcomers that I do NOT endorse the views in this trailer. My point is, there is a growing campaign to demonize bottled water. Even a relatively free market guy like David Zetland has blog posts calling bottled water “evil.” (In fairness to David, I should mention that he opposes government restrictions on bottled water.) So my fairly alarmist views on the Paulson heist etc. don’t imply a rush to stockpile canned goods (contrary to Leeson’s caricature), but some of this other garbage might, a few years down the road. Specifically, what could happen is that the recent shenanigans will lead to massive price hikes, and then a solidly liberal Democrat federal government will “protect the poor” with various measures. Then you might want to stockpile on water and tuna while they’re still on the shelves.
* “Pedant” is a word with negative connotations, which I didn’t really intend. I couldn’t think of a better word that started with “p” though.
Hollywood Behind the Drug War?
When I was much younger, I was shocked to read that mobsters might favor gambling and drug prohibition, since they were involved in those areas. I.e. I still clung to the naive view that actual businesspeople longed to be left alone by the government.
In that spirit, it occurred to me the other day–after watching No Country for Old Men–that Hollywood might be behind the Drug War. After all, think of how many cool movies would be totally boring if drugs were legalized! You’ve got obvious ones like Traffic and Serpico, but also The Godfather and, most recently, No Country for Old Men. And as cool as Russell Crowe and Denzel Washington are, American Gangster would have been rather lame if drugs were legal. “Frank Lucas is the most intimidating importer in the country! He’s pulling in, like, ten grand a month! Let’s make sure he’s not violating OSHA rules!”
Arnold Kling Is Not Impressed With Mainstream Macroeconomics
This guy might be crankier than me! He quotes from a widely circulated Blanchard paper that summarized the state of macro and concluded it was “good.” Kling merely paraphrases Blanchard’s observations (fairly, too–i.e. Kling isn’t putting words into Blanchard’s mouth), and then points out that one might easily have concluded that mainstream macro is in the toilet. Here’s Kling:
So, the state of macro is this:
1. We have a workhorse model, with no capital or financial markets.
2. We have some work on asymmetric information and financial markets that is not really integrated into the workhorse model, but which suggests that when “shocks” occur, their effects may be amplified relative to the workhorse model.
3. Real-world data have interesting patterns that either are unexplained by or contradict the most widely-used models.
4. Papers follow a “haiku-like” ritual in order to be published.And this is “good.” I agree with all four propositions, but I disagree with the conclusion.
Then in another angry post, Kling says:
I am shocked at the behavior of my fellow economists during this crisis. They are claiming to know much more than they do about causes and solutions. Rather than trying to understand and explain what is going on, they are engaged in a fierce battle over narrative.
Later on he has this quotable quote:
I have always thought that the issue of the relationship between financial markets and the “real economy” was really deep. I thought that it was a critical part of macroeconomic theory that was poorly developed. But the economics profession for the past thirty years instead focused on producing stochastic calculus porn to satisfy young men’s urge for mathematical masturbation.
I didn’t know Kling was so feisty! He’s bald so I bet he worries about everything like I do, too! As Little Big Man’s grandfather said (in reference to General Custer): “I’d like to meet this man, and smoke with him.”
Recent Comments