I don’t know. They both sort of have a point, don’t you think?
Erik Kain
Erik writes about video games at Forbes and politics at Mother Jones. He's the contributor of The League though he hasn't written much here lately. He can be found occasionally composing 140 character cultural analysis on Twitter.
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on Open Mic for the week of 11/18/2024There are also risks in giving in to Russia's demands. There are well established international norm… on Paper: Inflation and the 2024 US Presidential Election"It is possible to commit no mistakes and still lose." - Jean-Luc Picard. on ICC Follows Through on Arrest Warrants for Israeli PM Netanyahu & OthersThe US isn't a member country of the ICC, so it doesn't even put any obligations on the US governmen…
on Ordinary Times Needs Your Helpyes, I will consider it for sure.
on ICC Follows Through on Arrest Warrants for Israeli PM Netanyahu & OthersOnly Israel/Jews have agency while the Palestinians/Muslims have utterly no agency at all. They just… on ICC Follows Through on Arrest Warrants for Israeli PM Netanyahu & OthersWell, this doesn't give Netanyahu much incentive to end the Israel-Hamas war or stop being Prime Min…
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Keynesian economics is micromanaging. Austrian economics is delegation. There are times and places for each strategy, but for the most part our political leaders have shown themselves to be poor trustees of the Keynesian tools.
Incidentally, the cop in that video is a former professor of mine. He’s a smart guy.Report
Proof that we live in a blessed age.
Letting the slip show a little more than the last one when it comes to the biases of the creators. That said, I agree with those biases, so I can’t complain much.Report
So I think Hayek sounds really good on paper – bottom-up decisions, organic economy, etc. But in real life it seems to me that many of these ideals are compromised, and what we’re left with is simply a different form of top-down control, economic inequality, etc. Watching this it struck me that there must be some middle-ground. Where it is, what it is, I don’t know. I think I’m intuitively drawn to a Hayekian vision of society, but the society we have makes me retreat into Keynesian ideas. Maybe that’s just the reality of our massively screwed up system.Report
Both worldviews are equally corrupted by absolutism. There is in many smart people a fundamental need to build worldviews only logically and consistently from absolute assumptions, and that’s reinforced when people start declaring loyalty to philosophical systems, which are built that way by definition.
Personally, I think the only fundamental belief systems should be moral/ethical ones as well as some form of the scientific method (which is really just a restating of a commitment to be open to and learn from your mistakes) and everything else is ad hoc.Report
Everything else is ad hoc. I like that.Report
“I think I’m intuitively drawn to a Hayekian vision of society, but the society we have makes me retreat into Keynesian ideas. Maybe that’s just the reality of our massively screwed up system.”
I’m realizing just what a good comment this is now. Hayekian prescriptions make more sense in a world where the many don’t depend on the few for their livelihoods. Unfortunately, so many Americans are now under the aegis of corporate employment (thanks in no small part to just how difficult it is to be self-employed here in every possible sense), that what is good for our heavily financed corporate sector is good for the American economy as a whole.
Hence, massive Keynesian stimulus distributed through the existing network of powerful, connected corporations is the only way to save the economy from collapse. Each time we do this, however, it saturates the economy even more with politically-connected corporations, which in turn reinforces the concentration of wealth and power in the hands of the few.
The only way to break this cycle is to develop an economy consistent with long-term sustainability is to let companies that fail to meet th demand of consumers fail, hence the intuitive appeal of the Austrian position.Report
Unfortunately, so many Americans are now under the aegis of corporate employment (thanks in no small part to just how difficult it is to be self-employed here in every possible sense), that what is good for our heavily financed corporate sector is good for the American economy as a whole.
Dude. This is an *AWESOME* insight.
If you want to open a bar downtown, just a simple place that sells beer, wine, and salted nuts, you have to jump through so many hoops and get so many forms and make sure so many beaks are wet before you’re even allowed to open your door (let alone hire someone to jerk beer taps and someone else to wait tables) that it’s easier to just make a comparable amount of money selling routing help desk trouble tickets.
Meanwhile, one third of the storefronts downtown are empty… and the corporations are finding that non-native English speaking Costa Ricans can fill out trouble ticket forms half as well as native English-speakers for less than half the cost.Report
But if it weren’t for all those regulations, then people might be exploited by business owners. Or those business owners would cut corners and sell dangerous products, dump hazardous waste, do all kinds of nasty things.
I mean, it’s clear–just by looking at the activities of the regulatory bureaucracy–that anyone who wants to own a business is a money-grubbing, lazy, greedy bastard who would sell his own mother to make a dollar.Report
Heh. Hypothetical hoo-hah about fine upstanding Bidnesses and the vast herds of Waskawwy Owd Wegulators.
On Plank Road in Baton Rouge, I photographed a little refrigerated trailer advertising “Fresh Coon”. I showed my pictures to an elderly woman of color who solemnly told me. “Be careful when you buys you a coon. Make sure the feet is on, cause you might be buying a cat”Report
And so the cycle continues.
We have to make it more difficult to open a bar than it was even 10 years ago because the alternative is people selling cat meat despite marketing it as coon meat.Report
After $5,000 for a license from the Coon Regulatory Authority, $2,000 per worker spent on a mandatory coon-handling safety course from one of one officially recognized entities, $25,000 spent complying with building and fire code regulations, and $12,000 in miscellaneous lawyers fees, only Sara Coon, PepsiCoon, Ajinocoon, and Coonsanto would be willing to take the risks that entry into the notoriously volatile and fraud-prone coonmeat market entails. Hence, rubber coons.Report
I have one acronym that takes this far from the realm of the hypothetical: CPSIA.,Report
Chris – yes, this is exactly it. This describes essentially my conundrum, the entire bloody conflict I’ve been unable to resolve with my own political outlook between liberalism and libertarianism.Report
Of course both have a point. Hayek’s problem is common to all prophets: the disciples become dogmatic. Hayek was no advocate of a Free Market as the phrase is used today. Hayek’s attacks on socialism were directed against how it was being implemented in his own time: by the time this reader got through the Road to Serfdom, he felt quite reassured in Hayek’s caveats and proscriptions and exceptions to this Free Market business. Clearly the Free Market is utterly dependent on effective regulation: the happy zenith on the parabola defined by the zeroes of Totalitarianism and Terminal Deregulation. Every sensible person from Libertarian to Squishy Socialist ought to be able to find his coordinates on that parabola, and it’s Keynes who gives us Hayek’s principles, this time as a set of formulas.
Keynes suffers the same fate as Hayek, his ignorant disciples obscure and simplify his message to the point of idiocy, with Paul Samuelson being the great exception to this rule. Hayek and Keynes were not so different: if Hayek could grasp the necessity of regulation, Keynes understood it just as well and elucidated the ability of unwise interference in markets rather more explicitly than Hayek.
I would argue Paul Samuelson was an extension of Keynes, but Samuelson was ultimately proven wrong by the very point Hayek had made all along: the USSR would fail, not because it could not plan, but because governments cannot make markets. As E.D Kain points out, markets are a bottom-up proposition. Hayek was ultimately correct insofar as markets arise of necessity, that government meddling does more harm than good. But Samuelson got one thing right, which the Austrian School has never accepted: that markets do not tend toward order, but chaos.Report
Eh, Keynes always makes more sense to folks in power. It tells them to double down. Just another few months and then we will see results. These things take time.
Hayek rarely makes sense to folks in power. The problem is that Hayek is argued against as if the option is the status quo vs. dismantling everything, getting rid of public sidewalks, and then killing people who can’t afford to pay The Corporation for Airre(tm).
Everyone understands that we can just go a little deeper into Keynes territory by the tiniest of increments… but to argue that we ought to go the other direction is to invite questions about getting rid of the fire department.Report
If only the Austrians would accept that markets are self-regulating. Hayek never said such a thing. It is unfortunate for Hayek that so many kooks and ignoramuses like Glenn Beck misread him and frantically lie about what he had to say. After 2008, the Austrian School was as thoroughly discredited as the Communists: nobody should ever take them seriously again. Deregulation did not bring about the promised benefits; it brought chaos and misery. The statues of the rogues who preached the doctrines of Communism have all been carted off to the smelters. Would that someone would do the same with the Austrians.Report
urgh… that markets are not self-regulating.Report
And thus, when given the choice between moving more in the direction Keynes wants to go and more in the direction that Hayek wants to go, the choice is framed as the difference between the status quo and deregulation, chaos, and misery.
Hey, Keynes will work. Just give it a couple more months.
These things take time.Report
Hayek was not a fool: he understood the obvious need for regulation. His viewpoint is entirely necessary: even Keynes admired him. We mustn’t resort to these silly simplifications of either man. Markets are something of a miracle, especially markets in risk. The one truth about markets is this: they thrive when they are well-regulated. Over- or under-regulation is the death of a market. Though everyone calls Samuelson a Keynesian, he’s incorporated many aspects of Hayek malgré lui.Report
Good discussion guys. I agree, Hayek is misused badly.Report
I don’t think its that clear BlaiseP.
I’ll freely admit to being relatively uninformed about Austrian Economics (I’m more of a Chicago meets George Mason guy), but I don’t think the Austrians ever said that a lack of regulations means nothing bad will ever happen ever.
At its core, what happened was a classic speculative bubble, and the trouble with those is that you just can’t stop them, not with regulation, not with anything. I’ve actually read some of the experimental work that’s been done on bubbles and what they found was 1) once a bubble gets going its impossible to stop 2) there are two things that help prevent bubbles a little: highly liquid derivatives markets for the good and not letting your interest rates get too low. Oddly enough, those prescriptions are actually more consistent with Austrian thinking than other groups of thought.Report
George Mason is considered an Austrian stronghold, James KReport
Really? Cowen is GM right? He’s no Austrian.Report
Probably the most well-known Austrian economists are Peter Boettke and James Buchanan, who are both professors at George Mason. Tyler Cowen exhibits the skepticism of empirical approaches and the focus on the individual as the decision-making agent that are the hallmarks of the Austrian tradition. Cowen is extremely sympathetic to Austrian ideas if not quintessentially Austrian, although I will admit that the label is more than a bit squishy (not unlike “Keynesian”.)Report
To the extent George Mason is Austrian I am not George Mason. In any event I’m a microeconomist so I don’t spend much time thinking about monetary policy.Report
“In any event I’m a microeconomist so I don’t spend much time thinking about monetary policy.”
That sounds like something an Austrian economist would say.Report
I think the defining characteristic of Austrian economics is as the first attempt to use micro-economics to build and consistent and useful maco-economic theory. Like the Chicago school but 100 years earlier. The important things the original Austrian school laid down were theories of capital formation and business cycles. The theories were wrong, but contained very important insights that a lot of the mainstream is still having trouble with.Report
What would you say some of those insights are?Report
Primarily that in some important sense finance doesn’t matter for growth, where finance includes all kinds of promises to deliver real goods and services later, including money. What matters is the real economy and the financial world can only remain detached from it for so long before it becomes clear that the assets are not worth what people claim and someone somewhere must take a loss. Then the only question is “who?”
What they missed – and what the present-day Mises fan-boys refused to accept – is that just as finance promotes growth, its collapse during bust can cause a real contraction.Report
I wouldn’t say so. GMU’s economics department is unique – there are a bunch of extremely idiosyncratic thinkers there – but to the extent its consistently anything, its part of the “Virginia school”. While they have things in common with the Austrians, they’re not Austrians in any very recogninisable sense. They don’t, for example, accept the Austrian business cycle theory.
I’d go as far as to argue that the Austrian school as a coherent active research programme is dead. Its succeeded by libertarian dogmatists who claim to be the heirs of Mises and Rothbard, but also by monetary disequilibrium theorists like George Selgin who have more in common with the mainstream (but also with Hayek) that Rothbard did, and by the Virginia school. Both groups are doing interesting work, but they’d not be recongised by the internet pop Austrian’s who’ve claimed the title.Report
I’d agree with that the way you’ve phrased it. When I learned about Hayek and Mises, they were part of the “psychological school”. We never used the term “Austrian” in class. And I’ll agree that the Austrian business cycle theory as it is articulated on the Internet is generally not well respected by the mainstream economists who research in the tradition of early-to-mid-twentieth century economists who brought economic ideas from Central Europe to the Anglo-American world; but I’d imagine that a large part of the relative lack of Internet Austrian support for Tyler Cowen is not that the Internet adherents cannot grasp the basic ideas of the tradition (skepticism of empirical approaches and focus on individual subjective decision-making) but that the economists at George Mason are so heterodox as to generally defy classification as a school even while they share more in common with what is commonly called Austrian than they do with what is considered the mainstream. Although several of them do specifically refer to themselves as “Austrian”.Report
I think that’s generally right. As a matter of interest, though, which GMU economists label themselves as Austrian? Tyler and Bryan Cowen are both ex-Austrians. I don’t know what on earth Arnold Kling is. Maybe Russ Roberts?Report
Roberts has said on Econtalk that he’s somewhere in the Atlantic Ocean – half way between Chicago and Austria.Report
Peter Boettke, Virgil Storr and several others play a leading role in the Society for the Development of Austrian Economics.Report
I have written a good deal of trading software over the years. There is a fairly obvious route to bubble prevention; market clarity. Let us posit a Bizarro World where credit default swaps had been traded on an open market, let’s say MERC or NYMEX, instead of over the counter, where they couldn’t be seen.
I presume I do not have to explain the process whereby a tranche of mortgages is developed, bundled and sold. It’s currently an insane proposition, more properly a swindle, the way the banks were valuating those tranches. Truth is, nobody really understood the valuation process.
Now here’s how a legit contract could be established to bet on the strip. A contract is established on a bundle of mortgages, all established at the same percentage rate. The underlying payoff data from those mortgages is exposed and the actual strip data is derived. In a perfect world, everyone pays their mortgage on time, the interest fraction equals the paper predictions, there’s a perfect strip. The real world says some of those mortgages will pay late, others will go into default, the underlying property repossessed, a less than perfect strip with a cash market in defaulted properties. Options on that market could then be established on the basis of the difference between the market value of the underlying properties and the anticipated difference from the perfect strip.
If a real estate bubble develops, the open market then starts absorbing the risk and we see it in the bid/ask data flows at various interest rates. Some will be betting on the appearance of Greater Fools, puffing up the bubble, but others will bet against the bubble. Mortgage banks will be able to use this data as a fulcrum point and investment banks can work the lever ends. As interest rates rise and fall, a spectrum of mortgages moves with it.
Real estate isn’t the only market which gets into bubble situations of this sort. It’s easy to pop a bubble, once you’ve moved the risk/reward scenario into the open.Report
And yet equities and commodities do have exchange-traded derivatives whose prices are public knowledge. And yet equities and commodities suffer bubbles.
It’s true that derivatives markets do help prevent bubbles form forming, but there’s no silver bullet here.Report
There is no silver bullet to the problem of bubbles. Hayek teaches us a bitter lesson in The Use of Knowledge in Society, and one which cannot be improved upon: price discovery and price signalling are our only real guides to supply and demand. The 2008 Crash was the direct result of a violation of a basic principle of the free market: the investment banks were in over their heads with risk, thinking they could violate the law of price discovery by a pitiful little insurance policy.Report
After 2008, the Austrian School was as thoroughly discredited as the Communists
Only to the ignorant. For several years before 2008, Austrians were predicting that the historically low interest rates that had prevailed for a very long time would produce a speculative bubble. This is precisely what Austrian business cycle theory says, going all the way back to the early twentieth century.
They were 100% correct on this, even if, as many believe, their remedies in time of recession are too harsh. The Austrians diagnosed the present disease, and they deserve full credit for it all the same.Report
Jim Rogers predicted it in his 2003 book “Adventure Capitalist”. There’s a passage in there that is basically a blueprint for exactly what happened, starting with housing and then spreading to the rest of the economy. This kind of stuff was in plain sight long before the actual economy hit the fan. You had Austrian economists predicting exactly what would happen and how. I don’t see how that has discredited the school.Report
Do you really think so? There are other explanations.
I foresaw this bubble with the repeal of Glass-Steagall. The investment banks went crazy.
Now I’ll tell you what I saw. I redid the architecture behind Citigroup’s loan processing rules processing engine back in 2005 and 06. It was implemented in FICO Blaze. They wanted me to divide their rules engine into two parts: actual loan policy and a set of pricing trees. Where loans would have failed previous policy rules, those loans were routed higher and higher into the pricing tree.
Where was all this miraculous money coming from? Not from the Fed, but from structured investment vehicles and we both know it. It’s patently absurd to think this was the Fed’s doing: all these unpaid mortgages were so much paper and certain financial morons were treating them like assets. No they bloody well weren’t assets, there were also big entries under L on the A = L + C chart of accounts and when the bubble burst, it was the unfunded liabilities which created this mess. Had Glass-Steagall been in place, none of this would have happened and the fuddy-duddy home mortgage market went on a colossal toot to Pleasure Island with their investment banker buddies.
Let’s find a point of agreement: the bubble began in housing. But the S&L debacle, which is where I really began my consulting career in earnest, cleaning up after that mess, was also the result of deregulation.Report
Let’s find a point of agreement: the bubble began in housing.
But why did it begin there? The Austrian answer would be that the real estate market brought the American middle class closest to the source of the artificially low interest rates, which was the Fed. As a result, housing took on all the aspects of an Austrian misallocation of investment capital. If it weren’t for the low interest rates, people wouldn’t have taken out the credit that they did to buy housing. They’d presumably have invested their money in more productive directions.
Yes, it’s a counterfactual, but it’s not entirely implausible. People really did claim that they were attracted to housing as an investment, and a big part of that attraction was surely the low interest rates.Report
Because it always begins in housing, Jason. Jeebus…. why do you think Glass-Steagall was enacted in the first place? To keep banks from collapsing on the basis of unrealistic speculation. I should not have to explain this sort of thing.Report
The Great Depression didn’t begin in housing. The Panic of 1873 didn’t begin in housing. Or that of 1893. Or that of 1819.
Speculation, yes. Housing, no.Report
Land, housing, it’s the same problem domain. The Great Depression began with the farms, bringing down the banks which brought down everything else in its wake. Farms and farmers were more numerous then, but the problem lay foursquare in the failure to separate commercial banks from investment houses.
The speculation moved into the mortgage space, first with the deregulation of the S&Ls. This failure taught Greenspan nothing, mired as he was in the Lincoln S&L scandal. I personally handled the Lincoln data as it moved through FSLIC at the time.
You’ll never guess which bank got first dibs on underwriting securities upon the repeal of Glass-Steagall…. Yep, that’s right, good old JP Morgan, where Alan Greenspan had been chairman. And you’ll never guess who allowed banks to have a quarter of their portfolios in speculative investments, gosh, you’re right again, Alan Greenspan.
No stopping those laissez-faire boys once they’re on a roll. Sure enough, the big banks gobbled up the little ones and sent forth every two-bit huckster capable of using a mortgage interest calculator to spread the gospel of subprime mortgages.
And finally, dragged into Congress, old and wretched in 2008, there was good ol’ Alan Greenspan, once the devoted acolyte of Ayn Rand, whose every word was once analyzed to a fare-thee-well, finally admitting deregulation had created this nightmare, that he had never really foreseen the consequences. Well, yes, because he had never really understood the nature of risk. And to this day, he still calls himself a fan of laissez-faire capitalism, every fact to the contrary. And lo, as with the Birthers and other such Doubters of the Obvious, the Libertarians will go on believing, every fact to the contrary, that deregulation wasn’t the problem.Report
Would the regulations that they got rid of have solved this problem had they kept them?
I ask because people who believe in technocracy tend to sweep all regulations under one broom. If regulations regulating X are deregulated, and bad thing involving Y happens, the problem is *ALWAYS* the regulations involving X (even if Y wouldn’t have been covered anyway).Report
Yes. Had Glass-Steagall been kept in place, had the investment banks and the commercial banks been kept apart from each other, the Crash of 2008 would not have happened.Report
I do have to say that the 2008 crash is notable for being so obvious. It’s like someone said “what is the exact thing we should not do? Okay, let’s do exactly that!” It’s almost comical in its simplicity. This is one of those things that people will read about fifty years from now, and be all “really? really, guys? I mean, you didn’t know how stupid that was?”Report
Yes, but Austrians are always calling bubbles. If you do so consistently you will be right once every ten years or so, and spectacularly right once every 50. They’re not alone in this – Bob Schiller, who is some kind if Minskyite as far as I can tell, called the housing bubble every year from 2003 onwards. Which sounds impressive, until you realize he wasn’t right until 2006. George Soros called more or less the entire 1980s a bubble. Basically, its a characteristic of people more involved in finance than in maco-economics that they see the speculative nature of their activities and their tenuous attachment to real savings and development and assume there is no real saving or capital development going on. Where in fact there is and they’re doing it in spite of themselves.Report
There’s some truth to this. But objectively, going by interest rates, the recent housing bubble conformed more closely to the Austrian model than any of the other bubbles Austrians predicted (rightly or wrongly). There was speculation; it was fueled by credit; the credit came because a central banker held interest rates artificially low. Nothing I can think of in the time since Mises conforms so closely to the prediction.
One thing to note is that other factors may also produce a bubble. Artificially low interest rates may be sufficient under some conditions but not necessary to do it.Report
When it comes to predicting bubbles, it’s always useful to know the difference between a banker and a broker.
A sly grin comes over me, down in secret places, to see the Libertarians now blame the Fed for this mess. Alan Greenspan was the greatest advocate of laissez-faire capitalism the world has ever known. It was Alan Greenspan who was instrumental in the downfall of both the Savings and Loans and the Great Recession of 2008. Under his august leadership, unfunded liabilities grew to well over 100 trillion dollars. If proof for the inevitable failure of laissez-faire capitalism is ever needed, the answer comes in two words: Alan Greenspan.Report
How is choosing an artificial number around which everything turns laissez faire? Why do you think the Ways and Means committee chair is the most coveted position in politics?Report
Here’s how it’s supposed to work. Mortgages are the largest financial transaction most people will ever make. They have good reason to stay in their homes, it’s treated as a secure investment vehicle, or was, until the deregulation of the 90s.
So lowering the interest rates was supposed to provoke a big round of refinancing. Cash emerges from home equity and enters the market, putting wind in the sails of the economy. But there’s only so much equity in those homes and it was the result of years of paying interest to the point where any equity was formed. You see, a mortgage is an idiot’s savings plan, but when shows turn up on TV labeled “Flip this House” where some entrepreneurial couple puts in a new kitchen and some foo-foos in the bathroom, then sells for a big profit to a Greater Fool, well, the whole idea of lowering interest rates goes bonkers in an orgy of speculation.Report
I agree with that, but don’t you think that housing policy – specifically policies designed to circumvent clear market outcomes (see David Harvey’s Marxist analysis of the 2008 financial crises) – played a stronger role in creating that speculative bubble than a lack of housing policy, which is what you’re implying with the words “laissez faire”.
Also, the Keynes-Hayek debate is fundamentally a chicken-and-egg story where basically a bunch of corporate types prey on citizens because some government types create shortsighted and overly-optimistic policies which result in a bunch of corporate types preying on citizens.Report
Stop wriggling. Deregulation is the mother’s milk of Libertarian policy, their recommended cure for everything from measles to menstrual cramps to monetary policy. I have yet to see a Libertarian admit the deregulation of the 80s and 90s was anything but madness.Report
Andrew Napolitano for one continually insists that the very word “regulate” as it is supposed to mean “to keep regular” (in the sense of regular markets for instance) has been seized and redefined in an Orwellian sense to mean special privileges for corporate/government elites.
Also, a significant portion of self-described libertarians are very publicly against NAFTA, for one, so I don’t know where your unfounded assertion at the end comes from.
I’m wondering where these corporate toady libertarians are or whether they even exist. Can you point out a “libertarian” that fits into your caricature?
Basically the only significant difference I see between libertarians and liberals is that libertarians appear to be in favor of decentralized, bottom-up solutions to problems, and liberals appear to favor centralized, top-down solutions. Both seek freer societies and tend to define them in similar fashion.Report
I am put in mind, reading Cato’s latest Handbook for Policymakers of that bit of Orwell: All political thinking for years past has been vitiated in the same way. People can foresee the future only when it coincides with their own wishes, and the most grossly obvious facts can be ignored when they are unwelcome.
The Cato Institute long advocated for the repeal of Glass-Steagall, from the 1995 Edition:
Glass-Steagall Act and Bank Holding Company Act. The former mandates the separation of commercial and investment banking; the latter prevents banks from providing nonbank services. Both make the American economy less competitive and should be repealed.
Now, of course, Cato has changed its tune. Rather than own up to their own manifest idiocy and that of Alan Greenspan, they have taken to the sort of Two Minute Hate sessions we saw in 1984, now blaming the Policies of the Fed, as if they did not pull out the props in the coal mine of the developing risk markets in mortgage backed securities.
Competitive is as nasty a bit of Newspeak as Regulation, Chris. If I am to read Cato aright, Competitive means No Regulations. Freedom is indeed slavery.Report
There’s an Austrian interpretation of the bubble, sure. I don’t find it very convincing though. Leaving aside the various things the ABCT doesn’t explain for any bubble the specifics in this case that are problematic are:
1. Interest rates are problematic as measure of monetary policy, since the incorporate lots of different expectations as well as Fed policy Most importantly inflation, and future Fed policy, Since inflation was low and everyone expected it to stay low, interest rates stayed low and there was no reason for the Fed to mess with that. No measure of the money supply grew especially fast either. The Internet Austrian tendency tends to play games at this point claiming that “inflation” means something other than consumer price inflation or that it was really higher than the BLS measured it as being. Please don’t. I like you.
2. Credit increases during booms and collapses in busts. Credit accelerates the velocity of money by moving it more rapidly to where its needed. So it seems sort of plausible (and I’m sympathetic) to blame credit for them. Unfortunately, sales of everything increase in booms and collapse in busts, and all sales accelerate the velocity of money by moving it from people who have it to people who need it. So can we blame increased sales of, say, oranges for booms and busts? Or more to the point, is it increased demand for house that causes increased credit, or is it increased credit that causes increased demand for housing? I’m sympathetic to the idea that credit is special, but I don’t think the Austrians ever really justified the idea. Note that I think the Rothbard/Mises emphasis on banking and fiat money would explain why credit is special if it was correct, but its unclear to be why these particular institutions are meant to be different from, say, free banking with gold currency and a liquid market fo CDs and bonds. You can get just the same kind of uncontrolled credit expansion in the latter.Report
To be more specific, Keynes appeals in a recession. When times are good, the Keynesian prescription of running surpluses garners no more political interest than Austrian thought.Report
When did “free markets” become synonymous with anarchy? If there’s one thing that authoritarians and liberals [classical or otherwise] agree upon, it’s that anarchy is the worst possible state of affairs.
As in all human endeavors, there are crooks and cheats in the marketplace; laws and punishments are required to restrain them. “Regulation” is a necessary component of freedom as long as there is more than one person involved. [Only the hermit is truly “free.”]Report
When did “free markets” become synonymous with anarchy?
January 20, 1981.
“The hogs were really feeding. The greed level, the level of opportunism, just got out of control” — David Stockman.Report
Interesting, Mr. Schilling, but not germane, since the topic is regulation and free markets, not tax policy. Full context here; Stockman was speaking of Congress:
Stockman’s dour outlook was reinforced two weeks later, when the Reagan coalition prevailed again in the House and Congress passed the tax-cut legislation with a final frenzy of trading and bargaining. Again, Stockman was not exhilarated by the victory. On the contrary, it seemed to leave a bad taste in his mouth, as though the democratic process had finally succeeded in shocking him by its intensity and its greed. Once again, Stockman participated in the trading–special tax concessions for oil–lease holders and real-estate tax shelters, and generous loopholes that virtually eliminated the corporate income tax. Stockman sat in the room and saw it happen.
“Do you realize the greed that came to the forefront?” Stockman asked with wonder. “The hogs were really feeding. The greed level, the level of opportunism, just got out of control.”
Indeed, when the Republicans and Democrats began their competition for authorship of tax concessions, Stockman saw the “new political climate” dissolve rather rapidly and be replaced by the reflexes of old politics. Every tax lobby in town, from tax credits for wood-burning stoves to new accounting concessions for small business, moved in on the legislation, and pet amendments for obscure tax advantage and profit became the pivotal issues of legislative action, not the grand theories of supply-side tax reduction. “The politics of the bill turned out to be very traditional. The politics put us back in the game, after we started making concessions. The basic strategy was to match or exceed the Democrats, and we did.”
But Stockman was buoyant about the political implications of the tax legislation: first, because it put a tightening noose around the size of the government; second, because it gave millions of middle-class voters tangible relief from inflation, even if the stimulative effects on the economy were mild or delayed. Stockman imagined the tax cutting as perhaps the beginning of a large-scale realignment of political loyalties, away from old-line liberalism and toward Reaganism.
http://www.theatlantic.com/past/docs/unbound/flashbks/classics/stockman.htmReport
You’re correct about the provenance of the quote, but to my mind the practice of letting regulated industries write their own legislation, also a GOP tradition that began in the Reagan era, is close enough for government work.Report
Feeding at the trough was quite cooperative between the parties, not anarchy, Mr. Schilling. I think you can scaffold a coherent argument here, but at the expense of your partisan debate points.
We are going from flower to flower here, in hopes of hitting some nectar. I’m not saying you’re wrong, but one flower at a time, por favor.Report
The Democrats have proven faithful to the tradition: viz. the disgusting route to passage of HCR, wherein Karen Ignagni decided the role of the health insurance industry.Report
We should turn over economic policy to a perfect Keynesian robot that runs surpluses when economic times are good and everything, that way when things don’t go as Keynes predicted they should, Paul Krugman and Brad DeLong can’t just blame it on Austrian cooties and Republican obstructionism.Report
One problem is that trying to do Keynesianism in the real world of democratic politics doesn’t yield what Keynes prescribed. Instead, we run deficits in good times, and bigger deficits in bad ones. It seems likely that even the bigger deficits aren’t large enough to end a recession, as the video incarnation of Hayek mentions.Report
I’d make the same argument pertaining to Austrian approaches, although I’d prefer to err in that direction.Report
Since the housing market is a common thread among many in this, I’ll just say that, contrary to how many might assume a libertarian sees it, I think the very idea of residential housing as an investment (ESPECIALLY the house you live in) is insanity. Pure madness, never should’ve been taken seriously.
BTW: During the onset of full collapse, I considered a way that the flipping and CDS mess could’ve been strangled in its crib, merely by recognizing that there’s two sides to any contract.Report
The reason that housing is seen as an investment is that if you could not make money through appreciation of property, then a better use of your money would be to rent a house and put your money in a mutual fund.
This would encourage the centralization of ownership, and the development of a large class of people who owned nothing but their cars and the clothes they stood in.Report
Disagreeing with the concept isn’t the same as calling for an outright ban of it. Property changes in value, that isn’t something that can be changed by the stroke of a pen, the problem is that in housing a completely irrational bubble formed and the speculation assumed permanent upward growth, providing people with a false sense of net worth when they counted the home they lived in to the numbers.
Subtract primary residence home value from the wealth equation and the gap between the top & everyone else becomes pretty obvious. We’re pretty close to that renters class you describe as it is.Report
Sadly the elephant in this room is the fact that politicians indeed are in bed with their masters/buddies – the temptations to control that much wealth is simply too strong to resist. Hayek may be wrong in trusting markets because there are temptations there too, but as he says in the video: Do you trust the few or the many?Report