Tuesday, October 19, 2010

Robert Murphy Takes On Krugman's "Hangover Theory" Caricature

In recent blog posts, Paul Krugman has been claiming that the Keynesian paradigm has been vindicated by recent employment and financial statistics, but that officials foolishly are listening to the "hangover theory" nonsense.

Since Krugman does have a perch at the NY Times, he is able to control his side of the debate, but he cannot control the facts. Robert Murphy, who in my view is a much better economist than Krugman ever will be (given that Krugman has decided that being a political partisan is much more fun -- and lucrative -- than being an economist), demonstrates that two can play the graph game.

In a recent post on the Mises site, Prof. Murphy takes on Krugman's contention that the breakdown of employment numbers "proves" his points correct. First, he posts a graph used by Krugman that "proves" that the downturn is due to a general fall in "aggregate demand," as opposed to problems within the structures of production (as Austrians maintain). (I post the graph below, including Krugman's explanation):

I tried, in that old piece on hangover theorists, to explain what's wrong with this view in general. Among other things, "this story bears little resemblance to what actually happens in a recession, when every industry — not just the investment sector — normally contracts."

And this is strikingly true this time around. Kocherlakota would have us believe that there's a big problem of mismatch because manufacturing is trying to hire, while construction has slumped. But here's the employment reality:


Manufacturing employment has slumped, not risen — in fact, it has fallen more than construction employment. The problem is lack of overall demand, not worker mismatch.
However, Prof. Murphy does what any good economist should be doing: breaking down the data to see what trends lie in numbers dehomogenized from their aggregates. He writes:
First of all, Austrians can easily explain why there is a general drop in employment after a bubble pops, rather than just drops in (say) capital-goods industries. The problem in the aftermath of a bubble isn't merely that a "given" level of demand switches from one sector to another. On the contrary, people in general are poorer than they thought they were at the height of the boom.

In particular, during the boom, people unwittingly consumed capital. In a simplistic Keynesian model with "no time and no capital," it's not surprising that Krugman finds the Austrian story nonsensical. But as I spelled out in my "sushi article," a distortion in the interlocking capital structure of a modern economy can quite obviously lead to a general rise in unemployment across many sectors, as the mistaken investments are flushed out of the system.
Prof. Murphy then directly takes on the employment issue by noting that a breakdown of employment in construction trades and in durable and non-durable goods does demonstrate -- contra Krugman -- that the kind of employment shifting that Austrians would predict actually has happened. The graph is shown below:


Add Prof. Murphy:
I submit that the above chart is entirely consistent with the Austrian explanation of business slumps following an unsustainable boom period. Contrary to Krugman's misleading chart, in percentage terms the construction sector has taken a larger hit than "manufacturing" in general, and construction has been brutalized compared to the mild downturn in nondurable-goods manufacturing.

Moreover — and this is presumably what motivated Kocherlakota's comments — a naive extrapolation of year-to-date trends suggests that the manufacturing sector has bottomed out and is on the road to recovery. Construction employment, on the other hand, is still falling.

The Austrians can easily interpret the above chart. How does Krugman? If the recession is really just about falling aggregate demand, then why did construction fall so much more than nondurable manufacturing, and why has durable manufacturing risen in 2010 while construction still languishes?
I'm not always enamored with the "my statistics are better than your statistics," but I do think that Prof. Murphy has added some important things to the current debate. Now, I doubt that all the statistical "proof" in the world would dislodge Krugman from his position, but at least I can appreciate someone like Bob Murphy who takes on Krugman at the very points where the Princeton Prof believes he is triumphant.

72 comments:

AP Lerner said...

It’s hard to take Robert Murphy serious as an economist since he has bought into all the usual neo-liberal myths, and very clearly is clueless regarding the monetary system of a country like the US. He sums it up in this quote from the above article:

“Those of us Austrians who have been warning of price inflation have not (yet) been vindicated”

And you will never be vindicated. Frankly, this piece of ignorance is more relevant than the useless back and forth over structural and cyclical unemployment. Fortunately, the NY Fed has been posting a serious of really important research notes lately (does anyone on this blog bother to read anything outside of mises.org?) supportive of MMT, and everything I have been saying lately regarding the operations of the monetary system. This is very important because once the Fed realizes how the monetary system of the US works then a) policies that actually support full employment will be implemented, and b) much of this Austrian theory will be put to rest since their ideology is based off the false belief that the bond vigilantes are coming and increases in the monetary base actually causes inflation

From the NY Fed piece:

“Primary dealers are also required to participate in all auctions of U.S. government debt and to make reasonable markets for the New York Fed when it transacts on behalf of its foreign official account-holders.”

http://www.newyorkfed.org/aboutthefed/fedpoint/fed32.html

Translation: the US government spends first, mops up reserves w/ bond issuance second. Why does this matter? Because once you realize the US government does not represent a credit risk, and bond issuance by the treasury is a monetary, not a fiscal operation, then you realize the risk of becoming the next Greece is exactly 0%. Once this is realized, then policy decisions (like the elimination of the payroll tax) can be implemented that actually help employment. This note, combined with the myth of the money multiplier research:

http://www.federalreserve.gov/pubs/feds/2010/201041/201041pap.pdf

pretty much destroys the Austrian views on fiscal and monetary policy, and solidifies MMT. Murphy routinely demonstrates his ignorance of the monetary system every time he publishes an essay, which makes it almost unbearable to read his articles. Until Austrian’s realize the relationship between the public and private sectors (public deficits = private savings) most of what they write will remain deeply flawed. At least Krugman gets that part of the equation correct. You may not like his solutions, but he gets how the monetary system works, as he demonstrates here:

http://krugman.blogs.nytimes.com/2010/07/17/i-would-do-anything-for-stimulus-but-i-wont-do-that-wonkish/

burkll13 said...

Until Austrian’s realize the relationship between the public and private sectors (public deficits = private savings) most of what they write will remain deeply flawed.

until you understand the difference between correlation and causation, what you write will remain deeply flawed

William L. Anderson said...

OK, guys. I'm not posting any new KIW for a couple of days, so have at it!! I have to take care of some Day Job things this week. (Imagine that: Frostburg expects me to work....)

jason h said...

Here we go again...Austrians understand the man-made accounting identities. Unfortunately the accounting completely ignores actual resources and humans.

The State prints $1 trillion dollars, collects $500 billion in taxes and magically private savings equals $500 billion. Too bad the State didn't actually create $1 trillion dollars worth of stuff.

There in lies the rub. The private sector must create the $1 trillion in stuff for the gov't to consume. Any real resources it wants to save must be in excess of the resources consumed by the gov't.

Bob Roddis said...

There is no evidence that AP "hut tax" Lerner has the slightest familiarity with basic Austrian School concepts such as acting man, subjective value, economic calculation and/or the distortion of the capital structure. His thoughtless nostrums have been eviscerated over and over again in these comments while he refuses to learn the Austrian basics if only to be able to engage in an informed debate.

Lord Keynes said...

The belief that ABCT can provide any serious explanation of the 2000s housing bubble or the financial crisis of 2008 is utterly false:

http://socialdemocracy21stcentury.blogspot.com/2010/10/austrian-business-cycle-theory-its.html

Subprime loans are "consumer loans" not loans made to businesses investing in higher order capital goods.

Reckless lending to people who couldn't repay debt caused the subprime meltdown. Also, financial innovation and securitization is not explained by ABCT. The financial crisis was caused by CDOs that went bad, that set off a crisis in overleveraged investment banks and a liquidity crisis.
Minsky's financial instability hypothesis does a far better job of explaining this.

And even Rothbard notes that as loans to consumers grow in a credit bubble, the less ABCT is even relevant:

To the extent that the new money is loaned to consumers rather than businesses, the cycle effects discussed in this section do not occur.

Rothbard, M. N. 2004 [1962]. Man, Economy, and State: A Treatise on Economic Principles, Ludwig von Mises Institute, Auburn, Ala. pp.
995–996.

Bob Roddis said...

It is clear that “Lord Keynes” has no familiarity with the basic concepts of the Austrian School (what else is new?). Rothbard’s footnote refers to loans going to consumers to buy consumer goods. (I tend to disagree with Rothbard here, because artificial demand for consumer goods can mislead businesses into malinvestments in capital goods. Back when Rothbard wrote that, credit cards and home equity loans were not yet prevalent).

Houses are, at the very least, durable consumer goods, which generally must be paid for over a long period.

The main reason people wanted to buy houses was to have a store of value because central bank money dilution was diluting the value of cash holdings. This would not have been the case with sound money. Thanks to dissembling Keynesians and other varieties of double-talking statists, the simple and obvious fact that inflation is caused solely by the central bank’s money diluted is deflected and ignored so as to be confusing to the average person. (Keynesianism itself is designed primarily to make fairly obvious to the sophisticated but somewhat surreptitious wealth transfers obscure to average people.)

The artificial increase in loanable funds in excess of real savings was the source for the bidding up of the price of housing. Ultimately, it became obvious that there were no buyers around with $700,000 worth of real goods and services to trade for what had recently been a $150,000 house. The capital and investment structure of the housing and construction industries was artificially created by the central bank funny money and both needed to be restructured ASAP. People and businesses found themselves much poorer than they had been led to believe due to the lending of the funny money. The bust ensued. This is classic ABCT.

Numerous other Austrians other than the two cited who predicted the collapse far in advance are Mark Thornton, Frank Shostak, Stefan Karlsson, and Robert Wenzel.

Hans Sennholz wrote in 2002:

The real estate bubble is bound to burst as soon as the distortions become visible to ever greater numbers of participants.

Peter Schiff's youtube is still fun. Ron Paul also repeatedly predicted the collapse of the housing bubble.

Lord Keynes said...

The main reason people wanted to buy houses was to have a store of value because central bank money dilution was diluting the value of cash holdings

That is pure rubbish.
They were buying houses because of reckless lending by financial institutions: e..g, liars' loans , NINJA loans.

The capital and investment structure of the housing and construction industries was artificially created by the central bank funny money and both needed to be restructured ASAP. etc etc. ...This is classic ABCT.

It isn't "classic" ABCT at all, tortuous attempts to make it so notwithstanding.

You didn't need ABCT to call the housing bubble and a financial crisis, Post Keynesian economists did that too:

Dean Baker in the US, Co-director, Center for Economic and Policy Research, in August 2002 predicted the housing bubble.

Lord Keynes said...

And furthermore even Marxists correctly called the housing bubble and a bust that would lead to a crisis:

2004:
As Greenspan acknowledged, the biggest factor in rising consumer spending was the low interest rates engineered by the Fed ... “the lowest home mortgage rates in decades were a major contributor to record sales of existing residences, engendering a large extraction of cash from home equity.” That cash was used to support personal consumption spending, home improvement, and the repayment of higher cost debt. In other words, far from indicating a healthy economy, the increase in consumption spending was largely the result of the housing bubble created by the Fed’s low-interest rate regime.

http://www.wsws.org/articles/2004/feb2004/gpan-f16.shtml

2004:
http://www.wsws.org/articles/2004/sep2004/hous-s27.shtml

2005:
http://www.wsws.org/articles/2005/aug2005/hous-a06.shtml

2007:
http://www.wsws.org/articles/2007/sep2007/econ-s03.shtml

Do you think any of this *vindicates* the Marxist theory??

Lord Keynes said...

Here are the years for your Austrians:

2004 (same year as Marxists started calling the bubble):

Mark Thornton, June 04, 2004
http://mises.org/daily/1533

Robert Wenzel, July 6, 2004
WHY HOME PRICES ARE THE NEXT BUBBLE,
http://web.archive.org/web/20040816043836/www.economicbriefing.com/sabat/fedbubble.html

Stefan Karlsson, November 08, 2004
http://mises.org/daily/1670

2005:
Frank Shostak, August 04, 2005
http://mises.org/daily/1882

2006:
Peter Schiff, August 2006
http://www.youtube.com/watch?v=IU6PamCQ6zw

The Keynesian Dean Baker predicted the bubble in August 2002.

The Austrians don't have any special predictive power.

Marxists called it too - but Austrians and Marxists have economic theories that are severely flawed.

Anonymous said...

@LordKeynes: Your assertions would have more merit if you could source the post-keynesians predicting the crash as easily as you could post the Austrians. How are we supposed to take you seriously if you can't source your own arguments as easily as you can source your opponents'?

Anonymous said...

@LordKeynes: Schiff's first prediction concerning the housing bubble was in 2001, not 2006.

http://www.youtube.com/watch?v=B0XJu9l3Mfk

References are a lovely thing, aren't they? Oh, wait. Neither of the claims you've made about keynesians predicting the collapse have direct references or quotes.

Bob Roddis said...

1. ANYBODY could have and should have predicted the housing bubble. I predicted it in 2004. I know many people in the lending industry who don't know ABCT but figured things would collapse simply due to adjustable rate mortgages. Krugman himself had doubts in 2005. I'm not going to argue about who was on first.

2. Of course RECKLESS LOANS caused the bubble. And where did they come from? They were created out of thin air as fiat money. An impossible situation without fractional reserve banking and fiat money.

3. There is nothing tortuous about my explanation as classic ABCT. The key idea is ROUNDABOUTNESS. The distortion of long term investment because NO ONE KNOWS WHAT THE HELL ANYTHING IS REALLY WORTH because money dilution makes economic calculation impossible. How that might play out depends on the facts and circumstances of each particular case. It's always possible for an Austrian to get facts wrong in a particular case and make an incorrect analysis. LK wouldn't understand any of this because, like Mr. Hut Tax, he doesn't know the basic Austrian concepts, only some of the corollaries.

Lord Keynes said...

Your assertions would have more merit if you could source the post-keynesians predicting the crash as easily as you could post the Austrians.

LOL..
In 2 minutes of Googling, you can do it:

Dean Baker calls bubble in August 2002:

http://www.cepr.net/index.php/publications/reports/the-run-up-in-home-prices-is-it-real-or-is-it-another-bubble

Lord Keynes said...

Michael Hudson is a Distinguished Research Professor of Economics at the University of Missouri (Kansas City .... In 2005 Hudson wrote ‘The Road to Serfdom: An Illustrated Guide to the Coming Real Estate Collapse’, which was published in April 2006 in Harper’s Magazine. In it he wrote that ”almost everyone involved in the real estate bubble thus far has made at least a few dollars. But that is about to change. The bubble will burst

http://www.cepr.net/index.php/publications/reports/the-run-up-in-home-prices-is-it-real-or-is-it-another-bubble

Lord Keynes said...

Regarding your reference to Peter Schiff:

http://www.youtube.com/watch?v=B0XJu9l3Mfk

This from May 2002!!

But you say:

Schiff's first prediction concerning the housing bubble was in 2001

So you are wrong.

Anonymous said...

@Lord Keynes:

Ever heard of a typo? You were still off by about 4 years.

Now, if that one Keynesian got things right, why did the others get things wrong? What were they overlooking that he didn't?

Lord Keynes said...

Peter Schiff's prediction here in 2002:

http://www.youtube.com/watch?v=B0XJu9l3Mfk

(1) Bear market in stocks from 2002 onwards - FALSE, that didn't happen until 2007

(2) US dollar collapse that sends US interest rates through the roof - FALSE

At 7.25, he refers to a "bubble" but does NOT say it is a housing bubble.

Lord Keynes said...

if that one Keynesian got things right, why did the others get things wrong?

They didn't:

http://econospeak.blogspot.com/2009/08/did-heterodox-economists-do-better-at.html

Anonymous said...

@Lord Keynes: I find it fascinating that your source is also rather unsourced, and doesn't include dates.

The point still stands. The prediction of the crisis was rather unanimous of the Austrian school. If it was so unanimous in the Keynesian school, where was Krugman's prediction of the crisis? Where was Mankiw's? Why did Peter Schiff appear to be the only economist appearing on CNBC/Fox News/CNN who was predicting the crisis?

Bob Roddis said...

Krugman's typical dissembling double-talk and a desperate attempt at plausible deniability from October 2006:

Paul Krugman: As Paul McCulley of PIMCO remarked when the tech boom crashed, Greenspan needed to create a housing bubble to replace the technology bubble. So within limits he may have done the right thing. But by late 2004 he should have seen the danger signs and warned against what was happening; such a warning could have taken the place of rising interest rates. He didn’t, and he left a terrible mess for Ben Bernanke.

Of course, since only the Austrians understand economics, only the Austrians predicted and explained the housing bubble/bust for the right reasons: IT WAS CAUSED BY THE KEYNESIANS! That is the essential point to be made.

Lord Keynes said...

If it was so unanimous in the Keynesian school

There is not a single Keynesian school: there are (1) New Keynesians like Mankiw who are basically neoclassicals (except that they think prices and wages are not fully flexible), and (2) the Post Keynesians, who reject neoclassial theory.

Post Keynesians as a group predicted the crisis just as well as Austrians, better probably.

New Keynesians are not far from the New Classicals: they both subscribe to the "new consensus macroeconomics" - which is pure rubbish. Some of these "New Keynesians" don't even believe that fiscal policy works!

There are some mavericks like Stiglitz and Krugman, but these guys have basically moved towards the Post Keynesian camp.

Lord Keynes said...

I find it fascinating that your source is also rather unsourced, and doesn't include dates.

I just gave you the *direct* source for Dean Baker above.

Want more?

Michael Hudson, July 2006
"The new road to serfdom:
An illustrated guide to the coming real estate collapse"
http://www.harpers.org/archive/2006/05/0081029

Steve Keen
“[i]n December 2005, almost two years before the crisis hit, I realized that a serious financial
crisis was approaching. I was so worried about its probable severity–and the lack of awareness
about it amongst policy makers–that I took the risk (for an academic) of going very public about my views. I began commenting on economic policy in the media, started the DebtWatch Report,
registered a webpage with the apt name of www.debtdeflation.com, and established the blog Steve
Keen’s Oz Debtwatch.”
He first publicly predicted Australia’s financial troubles in December 2005 in an interview
on Perth radio and ABC Radio.


http://www.debtdeflation.com/blogs/pre-blog-debtwatch-reports/

Anonymous said...

@LordKeynes: Uh-huh. Are we going to fixate on semantics now? Sheesh. First you latch onto a typo, then a reference term. I can say 'Keynesian' to refer to both new and post keynesian schools.

If the post-keynesians were so effective at predicting the crisis, where were their predictions? You've managed to source one, compared to five austrians.

Anonymous said...

@LordKeynes: 2006? That's the best you've got? You'd have to be brain-dead not to see it by then. Look at the majority of your Austrian sources. They made their predictions in 2004, and Schiff made his first one in 2002.

Anonymous said...

@LordKeynes: It also might be worthwhile to note that Steve Keen and Michael Hudson are not post Keynesian.

http://www.nea.org/assets/docs/HE/TA09EconomistGalbraith.pdf

Lord Keynes said...

Then clearly you cant read. A summary of the above:

(1) Post Keynesian Dean Baker calls bubble in August 2002,
http://www.cepr.net/index.php/publications/reports/the-run-up-in-home-prices-is-it-real-or-is-it-another-bubble

(2) Post Keynesian Michael Hudson calls bubble and collapse in "The new road to serfdom: An illustrated guide to the coming real estate collapse"
written in 2005 and published in
April 2006 in Harpers

http://www.harpers.org/archive/2006/05/0081029

(3) Post Keynesian Steve Keen in his Debtwatch reports from 2006:
http://www.debtdeflation.com/blogs/pre-blog-debtwatch-reports/

And I have already give you links to Marxists who were calling the bubble from 2004.

Try reading links.

Anonymous said...

@Anonymous: Um... Yeah, they are. That link just says they're heterodox, if I remember correctly.

@LordKeynes: So that makes 3, two of which were in 2006. And Dean Baker certainly didn't seem to feel the need to go very public about it.

I'll address the Marxian links you posted when I get around to analyzing them... And when I have enough tequila to dull the edge. 'Das Kapital' damn near killed me when I tried to read it. =P

Lord Keynes said...

It also might be worthwhile to note that Steve Keen and Michael Hudson are not post Keynesian.


Really? Let's put that to the test, shall we?

Steve Keen:

Steve Keen is an Associate Professor in economics and finance at the University of Western Sydney. He identifies as post-Keynesian, criticizing both modern neoclassical economics

http://en.wikipedia.org/wiki/Steve_Keen


Michael Hudson in his own words:

Four years ago at a post-Keynesian “heterodox economics” conference at the University of Missouri at Kansas City (on whose faculty I have been for some years now)
[footnote 3]
http://www.globalresearch.ca/index.php?context=va&aid=14153

The Kansas City school is Post Keynesian, bud.
See http://en.wikipedia.org/wiki/Post-Keynesian_economics
under "Kansas City School" at the bottom.

Anonymous said...

@LordKeynes: Although, judging by the quote there, they seemed to call the Housing bubble for the same reasons that the Austrian's did; The fed pushing down interest rates, causing a subsequent increase in consumption which market players interpreted as economic growth. They may not be of the same school, but if they saw the same signals, interpreted them the same way, reached the same conclusion, etc as the Austrians, then it still vindicates that aspect of the Austrian school. Just because someone may be a Scientologist, it doesn't mean he's wrong when he says that a gas tank next to a fire is going to explode.

You seem to be interpreting this as some kind of all-or-nothing game. That's not a very good methodology, you know.

Anonymous said...

@LordKeynes: Sorry. I saw that and did a quick google search. I didn't know that post-keynesian was considered heterodox.

But like the other guy said, their predictions were in 2006. You've only got one guy who predicted very far in advance in 2002.

Lord Keynes said...

They made their predictions in 2004, and Schiff made his first one in 2002.

Marxists started calling the bubble in 2004 too!

As for Schiff, he predicted no housing bubble in 2002 in this youtube video:

http://www.youtube.com/watch?v=B0XJu9l3Mfk

He talks about a bubble that ALREADY EXISTS at 7.25, but it is clear he is referring to stocks and shares.

Anonymous said...

@LordKeynes: Did you forget the 2001 recession? Or the fed's reaction to it?

And, as I said, their prediction very closely follows, if not mirrors, ATBC. I don't care what school a theory comes from so long as it makes an accurate prediction. Ergo, in the end, it's really more of a support for ATBC.

I find this fascinating, actually. If you understood ATBC, you would've known that before you shot yourself in the foot.

Lord Keynes said...

And, as I said, their prediction very closely follows, if not mirrors, ATBC.

"Classic" ABCT has nothing to do with reckless lending to consumers, and asset bubbles, or securitization.

It's about loans to businesses who invest in higher order capital goods.

Anonymous said...

@LordKeynes: And what made the loans reckless? The fact that they defaulted? Are we to judge every loan that isn't paid back as reckless?

You say asset bubble, I say malinvestment.

If you hand bankers a bunch of free money and give them the impression that you'll bail them out because they're 'too big to fail', what do you expect is going to happen? It's like taking a bunch of frat boys and hookers to a party and getting surprised when people are having sex.

And, yet again, you're getting hung up on semantics. Worse, the semantic problems you bring up don't even exist half the time.

I repeat; if you understood ATBC, you would avoid shooting yourself in the foot so often.

eep said...

It looks like Robert Blumen publicly called the bubble back in 2002 as well.
http://mises.org/daily/986

Lord Keynes said...

If you hand bankers a bunch of free money and give them the impression that you'll bail them out because they're 'too big to fail', what do you expect is going to happen?

In the neoliberal system created by Greenspan, with a severely flawed system of financial regulation, you get reckless lending and bubbles.

In the 1945-1970 period, there were plenty of years with low interest rates and easy credit as well. But no devastating housing bubbles and financial crises erupted, because financial markets were properly regulated back then:

http://socialdemocracy21stcentury.blogspot.com/2009/11/financial-deregulation-and-origin-of.html

Before the 1980s, credit and debt was limited by effective financial regulation. It began to be dismantled in a serious way by Reagan, with the beginning of the neoliberal bubble era in severely flawed deregulatory bills like the “Depository Institutions Deregulation and Monetary Control Act” (1980) and the “Garn–St. Germain Depository Institutions Act” (1982). The Savings and Loan crisis that resulted was related to these acts. Clinton’s abolition of Glass–Steagall was a serious mistake too.

Lord Keynes said...

Even Robert B. Ekelund and Mark Thornton, “More Awful Truths About Republicans,” 9/4/2008, understand that in a world of fiat money Glass Steagall made sense:

But an insidious form of "market-based policy" is also a real culprit in the current mess. In 1999 a bill was passed by a Republican Congress and signed by Democratic President Bill Clinton that rescinded the Depression era's divorce of commercial banking activities from investment banking, called the Glass-Stegall Act of 1933. That opened a floodgate of "creative" financial instruments backed by notes and other commercial paper. Much of the banking regulation of the Roosevelt administration — including abandonment of the gold standard — made absolutely no sense, but markets can fail with dire short-run consequences under a fiat monetary system. With Glass-Stegall, Congress put its finger on and mitigated the tendency and temptations of banks to create massive costly externalities to society, in this case, by holding bundled mortgage-backed securities which were deemed safe by rating agencies but which ultimately failed the market test.

http://mises.org/story/3098

Lord Keynes said...

It looks like Robert Blumen publicly called the bubble back in 2002 as well.

Same time as the Post Keynesian Dean Baker.

Anonymous said...

@LordKeynes: Actually, if I remember correctly, the largest amount of financial deregulation occurred during the late seventies. I won't expect you to take that at face value until I find the study again, but it may take me a while, and I'm about to go to bed.

About the S&L Crisis, I've already got a bit of copypasta addressing that.

And your bit from mises.org is taken a bit out of context. What that person means is that without adequate competition to weed out reckless bankers in addition to the easy credit, removing glass-steagall was a mistake. It's like this- imagine that a glassware shop has a bull as its mascot. One manager decides it'd be cool to have a live bull in the shop. He sets it up with a steel cage and everything to make sure it won't go nuts. Then, another manager decides it'd be easy money to sell the cage and just tie the bull up with a strap of leather. Lo and behold, the bull goes nuts in the china shop. All the quote is essentially saying is that it was stupid to trade out the steel cage for the leather strap. Both of us would agree that it was stupid to put the bull in the shop in the first place.

Anonymous said...

@Lordkeynes: Copypasta, away!

How the New Deal Caused the S&L Crisis

Contrary to popular belief, fraud and imprudent lending practices played only a very small part. The problem stems from the artificial distinctions between S&Ls, commercial banks and insurance companies put in place in the wake of the Great Depression. The US is the only nation to create such distinctions and their lack has never harmed their economies. S&Ls were given a very restricted role offering mortgages based upon savings deposits.

This creates an enormous problem as mortgages are very long term (illiquid) instruments and savings deposits can be removed on demand and offer savers a very low return, particularly since the law placed a ceiling on how much could be offered in interest on those deposits. So long as market interest rates remained low enough that the cap didnt interfere with their ability to retain deposits, the system only experienced periodic problems. But the market doesnt care about such caps.

(cont.)

Anonymous said...

@Lordkeynes:

(part 2)


By the 1970s, S&Ls had been requesting deregulation for years as higher interest rates were steadily draining their deposits. They couldnt even offer CDs that, at least, could better support longer term lending because there were restrictions on their withdrawal. While no taxpayer money had yet been lost, the crisis was already well under way. By the beginning of 1979, with high interest rates in the marketplace well over half of the capital in the savings and loan industry was gone and the whole industry was facing serious net worth problems.

With S&L failures already occurring at a rapidly increasing rate, the pleas for intervention were finally heard, but by the time the Depository Institutions Deregulation and Monetary Control Act was passed in March, 1980, to address these asset-liability management problems inherent in the thrift portfolio structure, the industry as a whole was already insolvent. Worse, by trying to deregulate gradually, the underlying problems were still largely unaddressed.

By the time the Garn-St. Germain bill was passed in 1982, inevitable losses already far outstripped any existing insurance. A significant minority of S&L managers in a "damned if you do, damned if you dont" situation took riskier chances on higher return instruments in hopes that these returns would restore solvency and allow them to survive, but that would only have worked if the housing boom continued (and that had only occurred due to Fed policies that had already been reversed ... sound familiar?).

(cont.)

Anonymous said...

@Lordkeynes: Part 3

A tiny minority (that got most of the press: Lincoln, Silverado, etc.) abandoned all pretense of caring about solvency and attempted to make as much as they could as quickly as they could without regard for depositors, shareholders or insurers. In all, more than half a trillion in capital was lost since the early 1970s, and well over half of that was gone before any "deregulation" occurred. The bill to taxpayers, only a tiny portion of which was due to fraud or mismanagement, came to about $125 billion.

This last bit was due to a specific assertion by the other individual with which I was corresponding and is not necessary to answer your question but I include it as potentially valuable information I'd already put together:

No causal or contributory link has ever been established between the crisis and the 1991 recession (in no small part because the timing is radically off and fits almost exactly to the timing of the invasion of Kuwait). And the losses due to fraud and mismanagement PALE before the losses related to regulations that stemmed from New Deal era regulations that never served any beneficial purpose anyway.

Enjoy.

eep said...

Great! Bravo to those post-Keynesians (and all others) who predicted the crash. Sadly, their numbers are quite small though, they look to be exceptions rather than the rule.

Lord Keynes said...

The US is the only nation to create such distinctions and their lack has never harmed their economies

Rubbish. Plenty of other counties had similar systems where financial institutions are separated on the basis of what they do (e.g., mortgage providers, commercial loans, investment banks).

Anonymous said...

@LordKeynes & eep: As far as can be told, we have one post keynesian who predicted the crash as early as the Austrians. Strangely enough, the modern credit cycle theory that post-keynesians emphasize had its origins in... guess what? ATBC. Seems the PKs can't have a good idea without ripping it off from the Austrians. =P

LordKeynes: Could you name one and cite sources, please? Particularly where said separations are legally enforced.

Anonymous said...

@Lordkeynes: And might I add, once again, that you're focusing on very minor aspects of the copypasta's overall argument, forgoing the main points in favor of trivial details? Actually, that sounds quite a bit like a keynesian. =P

Bala said...

Actually, I am having a fairly elaborate discussion with Lord Keynes out here

http://blog.mises.org/14283/putting-austrian-business-cycle-theory-to-the-test/

My point with his is simply that ex-ante, the houses bought by sub-prime borrowers, NINJA loan takers, home flippers, etc. were not consumers' goods but producers' goods.

The basis of my argument is Rothbard's point that from a catallactic ppoint of view, a good is not the physical thing but rather the services it renders. Secondly, it is the ex-ante analysis that is important for the catallactic study of demand and thus to understand any particular demand as demand for consumers' goods or demand for producers' goods.

My arguments are on that thread. If I am right, his arguments carry no value. It would help if Austrians, maybe even Prof. Anderson, could evaluate my argument and give their assessment.

Lord Keynes said...

As far as can be told, we have one post keynesian who predicted the crash as early as the Austrians.

The claim that Schiff "predicted" the housing bubble in 2002 in these Youtube videos is utterly false:

http://www.youtube.com/watch?v=B0XJu9l3Mfk

http://www.youtube.com/watch?v=hv1rI41W838&feature=related

Schiff talks about a bubble that ALREADY EXISTS at 7.25 (in part 1), but it is clear he is referring to stocks and shares.

The interviewer refers briefly to "housing prices up" (in part 1) but that's it.

And what about his actual predictions in these videos?:

(1) A long bear market in stocks from 2002 for years onwards - FALSE, the S&P had a bull market from 2003 to 2008; the NASQAQ had a bull market from 2003-2008.

(2) US dollar collapse that sends US interest rates through the roof - FALSE.

Your claim that Schiff is some kind of prophet of the 2000s housing bubble in these videos is nonsense.

Lord Keynes said...

Australia: In Australia, building societies evolved along British lines. Because of strict regulations on banks, building societies flourished until the deregulation of the Australian financial industry in the 1980s. Eventually many of the smaller building societies disappeared, while some of the largest (such as St. George) officially attained the status of banks.

http://en.wikipedia.org/wiki/Building_society

Anonymous said...

@LordKeynes: His predictions were based on the Fed's actions in response to the recession of 2001/2002. At that time, it would've been difficult to predict exactly where the crash would begin. However, he was correct that the Fed's actions would lead to a bubble that would eventually burst. So we have two austrians predicting a bursting bubble utilizing ATBC, and a post-keynesian making a similar prediction through credit cycle theory, which is based on ATBC. And this disproves ATBC, how?

Once again, you're getting caught up in the details. In the end, the prediction of a bursting market bubble brought about by the federal reserve's actions is still valid. Aristarchus' model of the solar system had all the stars equidistant from the sun and each other. Does this invalidate his accurate placement of the planets in their orbits around the sun, in the right order?

That doesn't look like a forced legal separation between S&L, commercial banks, and insurance companies like he's talking about. And even the article you reference discusses how, in Britain, loosening up restrictions helped building societies compete with banks, while it helped banks compete with building societies in Australia. Neither case seems to be tied to any financial problems.

Anonymous said...

@LordKeynes: Ah. I see. Those restrictions/separations in Australia/UK were lifted in the early-late 80s, which resulted in the outcomes seen above. Glass Steagall was repealed in 1999. The copypasta written above was done after the year 2000. It's fair to say that those examples you gave had done away with the legal separations for about 20 years before the US did.

William L. Anderson said...

Wow! Do you guys ever sleep?!?

But, to be honest, the back-and-forth is what I had in mind when I created this blog. Granted, lots of insults get traded, but that is part of it all, too.

As I have said before, I have no problem with someone going after me, even if I have to put up with the "You only teach at Frostburg" line. (I call it the True FSU, although I admit that the other fsu plays better football.)

Lord Keynes said...

His predictions were based on the Fed's actions in response to the recession of 2001/2002.

His predictions were wrong!

(1) A long bear market in stocks from 2002 for years onwards - FALSE, the S&P had a bull market from 2003 to 2008; the NASQAQ had a bull market from 2003-2008.

(2) US dollar collapse that sends US interest rates through the roof - FALSE.

At that time, it would've been difficult to predict exactly where the crash would begin.

He never predicts a housing bubble in that video - again I challenge you or anyone to point out where Schiff predicts a housing bubble in these videos:

http://www.youtube.com/watch?v=B0XJu9l3Mfk

http://www.youtube.com/watch?v=hv1rI41W838

Any takers????
I bet not.

However, he was correct that the Fed's actions would lead to a bubble that would eventually burst.

He predicted no housing bubble. And he talks about the over valued stock market in these videos.

So in other words: you've got nothing.

Lord Keynes said...

So we have two austrians predicting a bursting bubble utilizing ATBC

Nope. Schiff predicts no housing bubble - he refers to a bubble in stocks and shares that ALREADY EXISTS.

Contrast that with a real prediction by Dean Baker:

This paper shows that there is no obvious explanation for a sudden increase in the relative demand for housing which could explain the price rise ... In the absence of any other credible theory, the only plausible explanation for the sudden surge in home prices is the existence of a housing bubble. This means that a major factor driving housing sales is the expectation that housing prices will be higher in the future. While this process can sustain rising prices for a period of time, it must eventually come to an end ... the collapse of the housing bubble will lead to a loss of between $1.3 trillion and $2.6 trillion of housing wealth. This collapse will slow the economy both by derailing housing construction and by its impact on consumption through the wealth effect. In addition, millions of families are likely to face severe strains in their personal finances. The average ratio of equity to home values is already near record lows. This ratio will plunge precipitously if the housing bubble collapses, leaving many families with little or no equity in their homes. This situation is especially troublesome since the population is comparatively old, with much of the baby boom generation on the edge of retirement.

Dean Baker, The Run-Up in Home Prices: Is it Real or Is it Another Bubble? August 2002, pp. 17-18
http://www.cepr.net/documents/publications/housing_2002_08.pdf

Lord Keynes said...

and a post-keynesian making a similar prediction through credit cycle theory, which is based on ATBC. And this disproves ATBC, how?

Unfortunately, that credit has something to do with business cycles was taken up 70 years by Irving Fisher, in his debt deflation theory of the Great Depression. That theory was developed by the Keynesian Hyman Minsky.

To the extent that Austrians brought in credit as a theory of the business cycle, they made some original contributions 70 years ago. But those ideas were also had by other economists and have been developed in new and serious ways outside the Austrian school. Meanwhile, Mises-Hayek-Garrison ABCT is a stagnant and pretty much irrelevant theory today.

Bob Roddis said...

Here is the brilliant Dean Baker:

"Tax cuts directed at low and moderate-income families are a good way to jump-start the economy, as would be government investment aimed at neglected infrastructure needs, such as re-building New Orleans and preventing the collapse of more bridges. Pushing down the value of the dollar should also be a top priority. There is no way to correct our trade imbalance with an overvalued dollar providing a massive subsidy for imports and imposing a tariff on U.S. exports. A lower dollar will make U.S. manufactured goods far more competitive in the [p.130] world economy, and will thus create a large number of relatively high-paying jobs. One benefit of the housing meltdown is that it should be much easier to get our trading partners to go along with a lower dollar now that we can show them how much money they lost by investing in U.S. financial assets that have gone bad.

Finally, we must get people on the Federal Reserve Board who take financial bubbles seriously. Greenspan recently asserted that "the human race has never found a way to confront bubbles." But it is possible for the Fed to do so, most obviously by repeatedly and publicly warning against stock, housing or other market bubbles as they arise. This would educate even the stupidest hedge fund managers, or at the very least make them fear personal liability for mismanaging billions of dollars. Clearly, Greenspan was not up to the job. We will need more qualified people running the Fed in the future."


Yes, the donut eater state must push down the value of the dollar. Just brilliant. Just trick people into accepting lower wages and prices without asking them about it. That's authorized in the constitution, right? None of that "stagnant" Austrian theory here.

Lord Keynes said...

Bob Roddis,

Nice bait and switch!!
So obviously you cant deny Baker predicted the housing bubble.
You cant point out where Schiff *predicts* the 2000s housing bubble in the youtube videos.
Like other commentators here - you got nothin', bud

Anonymous said...

@LordKeynes: And with that last straw-man, which I already addressed, I dismiss thee as irrelevant. It's ironic that a post-keynesian would criticize an Austrian theory as being 'irrelevant', considering the school's place in economics and its importance in developing the Credit-Cycle theory they place so much emphasis on.

And personally, I find Dean Baker's 'just cuz' explanation behind the housing bubble a bit odd.

At the least, I can see my macro teacher was right. One should debate a post-keynesian at least once, for the sake of being exposed to a different perspective. He was also correct that it is very much like debating a conspiracy theorist.

jason h said...

What debate Anon? Mostly a pissing contest over who predicted the housing bubble first. No actual augments against ABCT (the only coherent theory on the cause of the business cycle).

Banks didn't just up and decide to lower their lending standards in 2002, they were pushed by Congress and discrimination lawsuits. It was all fueled by cheap money fresh off the printing press.

Long term capital investments were made in all industries assuming there were (non-existent) resources and wealth actually available.

Another Anonymous said...

"No One Saw This Coming": Understanding Financial Crisis Through Accounting Models Has a nice table and appendix of accurate prophets of DOOM, including most of those mentioned above.

Lord Keynes said...

My comment above:

I challenge you or anyone to point out where Schiff predicts a housing bubble in these videos:

http://www.youtube.com/watch?v=B0XJu9l3Mfk

http://www.youtube.com/watch?v=hv1rI41W838

Any takers????


The earlier claim that Schiif predicted it in 2002 remains pure nonsense.

Anonymous said...

Banks didn't just up and decide to lower their lending standards in 2002, they were pushed by Congress and discrimination lawsuits

Of all the dumb comments in this thread, this may be the dumbest. Noboby forced New Century and Countrywide into making garbage loans. And nobody forced borrowers to take the garbage loans. Typical for this blog: when you have no idea what you are talking about, blame the government. Convenient.

Bob Roddis said...

Nice bait and switch!!
So obviously you cant deny Baker predicted the housing bubble.


I’ve never denied that Baker sorta predicted the housing bust. In my comment supra I expressly said that anybody and everybody should have seen it coming.

My point latest point is that, like all Keynesians, Baker is a moral degenerate who thinks that debauching and diluting fiat money is the key to solving economic problems when it’s the cause.

BTW, we’re all breathlessly waiting for you so show the slightest familiarity with basic Austrian concepts.

Bob Roddis said...

This blog is about Krugman. What did Krugman say around New Year’s Eve 2001?:

The good news about the U.S. economy is that it fell into recession, but it didn't fall off a cliff. Most of the credit probably goes to the dogged optimism of American consumers, but the Fed's dramatic interest rate cuts helped keep housing strong even as business investment plunged. The pain is far from over — unemployment looks set to keep on rising, even if the G.D.P. starts growing again — but our worst fears have not been realized.

Krugman is cheerleading for the rate cuts that caused the housing bubble. There's nothing further to argue about here.

Austrian Hans Sennholz wrote in 2002:

The real estate bubble is bound to burst as soon as the distortions become visible to ever greater numbers of participants.

Krugman and Baker are inflationist loons. The fact that they may or may not have predicted an EXTREME Keynesian-induced housing bubble and bust* is quite irrelevant in relation to their obvious philosophical deficiencies. This “debate” is one-sided, silly and boring.

The Austrians win again.

*I'm quite certain that the Keynesians did not predict an extreme Keynesian-induce recession in so many words.

jason h said...

Of all the dumb comments in this thread, this may be the dumbest. Noboby forced New Century and Countrywide into making garbage loans.

Really? Oblivious troll is oblivious.

The CRA left them vulnerable to discrimination lawsuits if they didn't make said 'garbage loans'.

Fannie and Freddie guaranteed the 'garbage loans'

The Fed printed the money driving down interest rates for said 'garbage loans'

If you sat out the housing bubble you didn't make money, and if you lost your shirt you got a bail out.

Still want to blame capitalist greed and animal spirits?

Lord Keynes said...

So Hans Sennholz called a housing bubble in November 2002, about 3 months after Baker did in August 2002??

Confirms what I said above.

My challenge for you to point out where Schiff predicts a housing bubble in these videos:

http://www.youtube.com/watch?v=B0XJu9l3Mfk

http://www.youtube.com/watch?v=hv1rI41W838

is still unrefuted.

The silence is deafening.

Anonymous said...

The CRA left them vulnerable to discrimination lawsuits if they didn't make said 'garbage loans'.

If the CRA caused the bubble, the bubble would have been concentrated in Harlam and Watts, not San Francisco and Ft Lauderdale.

Fannie and Freddie guaranteed the 'garbage loans'

Uh no. They were shrinking their balance sheets during ge bubble.

Get a clue.

Another Anonymous said...

Randall Wray and Wynne Godley wrote a bunch of papers about Goldilocks and the Three Bears starting in 1998 - saying the Clinton surpluses, trade deficits, speculation, debt, financialization etc. would lead to a crisis. Godley is deceased, so even though they did not focus on the housing bubble, I think Wray deserves the title of NostWraydamus. He's been a little bit sheepish about being too prescient.

Bob Roddis said...

Like the housing bubble, I recall most EVERYONE being concerned about the dot-com bubble, which really made no sense, and anticipating a bust. With housing, at least you had a house to live in.

This "who was on first first" stuff is pathetic. Are you saying Sennholz stole his ideas from Baker? If you don't have an economic theory that makes sense, you have nothing.

And how did those surpluses in 1920-1923 impede that quick recovery from depression?

It is so clear the Keynesians and Chartalists have absolutely nothing to offer, ever. It brings hope that our opponents are noodle-brains. It's also pretty depressing.

Bob Roddis said...

Yes, I am so ashamed to have allowed myself to get involved in such a stupid argument.

As interest rates have come down, people have built and bought homes. The effect has been felt throughout the economy, especially in construction, materials, labor, furnishings, etc. Low interest rates have given rise to a bubble in the housing market with home prices rising continually ever since the early 1990s.

Hans Sennholz, May 24, 2002

http://mises.org/daily/967

Meanwhile, economic policy should encourage other spending to offset the temporary slump in business investment. Low interest rates, which promote spending on housing and other durable goods, are the main answer.

Paul Krugman, October 7, 2001

http://www.pkarchive.org/economy/ML071801.html

Some people warned of a housing buble. Some people promoted it.

Anonymous said...

@Lord Keynes

Did you even watch the first video? Because it happens at 5:45. Also, if you knew anything about Austrian economics, or economics in general (which by your posts, everyone knows you don't), you would know that when Peter states that the market is overvalued (by these low interest rates), it is implied that the boom will turn to bust.

Refuted, sorry.