The centerpiece of our crash was not the relatively free stock or real estate markets, it was the highly regulated commercial banks.
A Chicago school economist decides that the cause of the crash was regulation, there's a surprise. It's difficult not to ad hom him here, but the article drips with scare quotes, special pleading, straw men and appeals to authority, so what's one more fallacy?
In fact, although I imagine he wants it to be taken seriously, it reads like little more than an angry forum comment dressed in academic robes. He's obviously heated and insulted by Krugman, and given that Chicago is broadly seen as discredited by the recent crash he is also concerned for his image, and is responding in kind.
The real economic lessons of the past few years are not to be found here, or anywhere. They will emerge in years to come. The difficulty is we only have the ability to really push through changes and learn from them now, so everyone's trying to be a part of that action. At least it's clear from both Krugman and Cochrane that the incentives enjoyed by bankers are very badly designed, and that's one issue we can address.
>A Chicago school economist decides that the cause of the crash was regulation
I don't think that's the point he was making with that quote. What he was getting at was that extensive regulation and oversight did not stop the problem from occurring in that sector. Ergo, extensive government regulation and oversight and intervention throughout the economy is also unlikely to prevent major problems.
If our choices as a society are: 1) major government intervention and problems, or 2) little government intervention and problems, I think I'd prefer the latter.
Yes, I can see your reading of it now. But I think it would be disingenuous of him to make that claim, given the repeal of Glass-Steagall and the large reductions in regulation that allowed the problems in banking to be exacerbated (though this claim is itself questioned by other economists).
A position that regulation either failed or was absent from banking adds a third choice, which isn't far from Krugman's: 3) better government intervention and fewer problems.
Have you seen the charts of the amount of banking regulation per year, as measured in lines of regulation? I wish I could Google it up. The repeal of Glass-Steagall isn't even a blip in the graph, IIRC. It might be lines of above-average importance, but net-net the Bush administration continued piling on the regulations at pretty much the expected rate; I doubt a Democrat would or could have done much more.
The other major problem is that it wasn't regulation that failed, it was regulators. Many regulations that already existed weren't enforced. Looking at the rate of regulation increase it isn't hard to see why. How do you propose to solve this problem with more regulations? There's a real engineering problem here or even a computer science-style information theory problem with information flows totally exceeding the ability of the processing nodes to handle. Clearly, adding more processing work to be done isn't the answer to that problem, and we probably can't afford enough processors to make even our current set of regulations actually get enforced.
Lines of regulation is not a good measure. A lot of banking regulation is related to well, banking. Glass-Steagall is specifically related to investment banking which is a whole other ball game, and to call the repeal of that act insignificant because it isn't that "big" is patently absurd.
The repeal is not insignificant. My point was to counter the idea that banking had some sort of massive deregulation in the Bush era. One law repealed + massive growth in other regulations is hardly "deregulation".
Ever heard of regulatory capture? That's where a regulated group attempts to get control over the regulators, so they can then regulate their own industry for their own benefit. It is universal that regulated organizations will attempt this, and usually they succeed.
After a regulated industry undergoes regulatory capture you will see is a steady growth in the amount of regulation, and a simultaneous decrease in how much the regulation prevents that industry from doing what it wants. The regulations are added because they benefit the industry in some way, for instance by creating barriers to entry for potential competitors.
That is what happened in finance. Glass-Steagall really kept companies from doing what they wanted to do, and got dropped. But we got new "regulations" like the optional alternative way of calculating net capital ratios introduced in 2004 that allowed the 5 major broker dealers to double their leverage. The result? More lines of "regulation" that reduced how much actual regulating there was. Oh right, and a few years later a bunch of failed broker dealers. See http://www.nysun.com/business/ex-sec-official-blames-agency-... for verification of that.
Therefore a steadily increasing number of lines of regulation is not evidence that there wasn't major deregulation in the same time period.
Also, "deregulation" is a buzzword intended to frame the debate and make you believe that they are reducing regulation and therefore creating some kind of free market.
Most so-called deregulation could be better termed re-regulation, it's just changing the rules to benefit different parties, not abolishing them.
(Having said that, btilly above uses deregulation in its new derogatory sense, much like the euphamism downsizing had to be replaced with rightsizing once everyone realised it still meant redundancies. Relatedly the depression was named that by people who thought it wouldn't be as bad as a proper recession, now depression means a really bad recession)
How do you propose to solve regulatory capture with more regulations? Or more regulators? Given the obvious failure of regulation, why is the only answer that anyone can conceive of "more regulations"? Like trying to quench a fire by adding more fuel, oxygen, and heat.
And in light of the inability of regulators to enforce the regulations and the plain failure of them to do so, who cares what the regulations actually said anyhow?
I don't have a way to solve it long term. However I believe that it can be worthwhile to have a regulation that temporarily makes things better even if it eventually fails. For example I think that Glass-Steagall was a good thing for a very long time.
Certainly, not all regulation is created equal. Historically speaking, Glass-Steagall was one (actually two technically speaking) of the most effective bills passed in the past hundred years. It was written in the wake of the stock market crash by people who were determined to make sure that such a calamity did not reoccur, attacking a systematic problem with the financial market at its root cause. I contest that the other regulations you refer to tend to be far less significant and effective, likely (though I may have my work cut out for me substantiating this) because the legislation treats symptoms rather than basic issues.
Additionally the Gramm-Leach-Bliley Act of 1999 that removed the last vestiges of Glass-Steagall (the parts that are related to this argument) happened under Clinton. The trend of financial market deregulation started in 1980, due to a shifting tide in economic though in the neoclassical (chicago school) vein and a multi million dollar banking lobby.
It's easy to wave your arms and ask for "better" government intervention, but the government's already doing the best it can. It has ups and downs in each department as attention shifts, but on average it probably won't get any better over the long run.
Economic systems need to be designed so that mediocre government regulation doesn't lead to catastrophes.
Your option three reminds me of T.S. Eliot's review of George Orwell's classic Animal Farm.
Eliot wrote: “After all, your pigs are far more intelligent than the other animals, and therefore the best qualified to run the farm – in fact there couldn’t have been an Animal Farm at all without them: so that what was needed (someone might argue) was not more communism but more public-spirited pigs.”
>if our choices as a society are: 1) major government intervention and problems, or 2) little government intervention and problems, I think I'd prefer the latter.
If this summation was accurate, I would tend to agree with your conclusion that little government intervention is preferable. However, I respectfully disagree with the premise, pointing to the success of Glass-Steagall (read 'government intervention') in maintaining a healthy separation of depository/commercial financial intermediaries and their investment bank counterparts. It was, clearly, the deregulation and removal of said safeguard that allowed for the conditions of 'too big to fail' and gave meaningful, even disastrous implications for the average citizen. Finally, the author is either misinformed or intentionally ignoring the causal relationship between deregulation embodied in the Gramm-Leach-Bliley Act and the financial meltdown.
There's a book out now called "This Time is Different: Eight Centuries of Financial Folly". Throughout history, in various types of governments and economies w/ varying degrees of regulation, there have always been financial disasters. There will always be financial disasters. So the issue is not more or less regulation. The issue is how to quickly recover from the next inevitable disaster. The best thing the government can do is quickly pay down the debt so that, in 10-15 yrs, it can borrow like mad during the next depression.
"extensive government regulation and oversight and intervention throughout the economy is also unlikely to prevent major problems" - I see this recurring theme over and over again. Government vs free markets. The belief that some supernatural entity (the invisible hand on the free market) will make us all happy in the end is refuted by all human experience in the last millennia. As Karl Popper once said "Truth is not manifest". Humans will have to hack their environment continually in the face of hardship and arbitrarity - and in a democracy, the elected government is given the responsibility to execute that mission. Nature has not evolved to make humans happy, it's our task to make our world (economy) better - one hack at a time ...
Cochrane was trying to set the context of the crisis. He even notes that the credit crises was an effective run on the banks. For more, see Slapped in the Face by the Invisible Hand: Banking and the Panic of 2007 http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1401882
"given that Chicago is broadly seen as discredited by the recent crash"
By whom exactly? Mostly by those who tend to propagate further government influence on the markets. There are equally valid arguments which were made that government intervention in mortgage markets, fed policy etc. caused the crisis and the crisis could have been averted by having a truly free market.
I just want to point out that you seem to be influenced by biases as well. To point out other people's biases but not to acknowledge your own seems unfair.
That is why that whole 'lessons from the crash' thing is so difficult to grasp. Because everyone's analysis is ridden with pre-conceived notions and biases, it's hard to make out the actual truth.
Of course, the author of those blog posts, Brad DeLong, is also known as the author (only somewhat jokingly) of the Efficient Krugman Hypothesis (Postulate 1: Paul Krugman is always right. Postulate 2: If your analysis suggests Paul Krugman is wrong, see Postulate 1.),
There's a fair amount of this on the right, as well--a lot of your goldbugs and "Austrians" are, like Krugman, taking one side in a 1930's era doctrinal dispute and ignoring the last several decades of economics.
Maybe economics really has gone wrong in the past 40-80 years, and there's no salvageable content in all the research since then. But a lot of economists (particularly the behavioral school) are doing real empirical science lately, and I'd bet that they're likely to be onto something.
"There's a fair amount of this on the right, as well--a lot of your goldbugs and "Austrians" are, like Krugman, taking one side in a 1930's era doctrinal dispute and ignoring the last several decades of economics."
Can you show me a goldbug with a Nobel Prize in Economics and a column in a New York Times-class newspaper or other similar venue?
I know what you're saying, and it is literally true, I don't deny that. But Krugman should be held to a higher standard.
Personally, I find him very disappointing. A guy with a Nobel Prize in Economics ought to be making compelling arguments that are a surprise to me, and thus contain information in the information theoretic sense. (That's my favorite way of looking at information in an English context.) Instead, I can predict in advance what Krugman's position on a topic will be now with virtually 100% confidence, which should not be possible if he's actually writing with insight that someone of such stature should be bringing to topics, as I most assuredly hold a Nobel Prize in absolutely nothing. Even if he chooses doctrinaire liberal choices completely reliably, he should be able to defend them with far more interesting arguments than I actually see from him, the kind of interesting that even when you disagree you at least stop to think.
I was writing mostly for the audience of people who already dismiss Krugman as an incorrigible liberal but might consider the opinions of self-trained Austrian economists who post on comment threads. Those of us who dismiss goldbugs on comment threads already should have been convinced by the article to give up on Krugman.
Austrians are not goldbugs. They're free market money advocates. A lot of them just happens to think gold would be the currency to emerge in a free market.
The debate being doctrinal seem to make the debate seem unimprotant especially when people don't know what it is about. The debate is about how to study the science of economics and the proper use of the scientific method. That's a pretty improtant debate that has been waging on for years.
Note: Edit to correct inaccuracy in the presentation of my comment's intention.
The point isn't so much that Austrians are wrong, or that they are goldbugs, but rather that they don't learn--and don't value--the past several decades of economic research. The debate's been going on for years, yes, but the self-proclaimed Austrians are making 70 year old arguments against a 70 year old straw man while ignoring any points that have been made over those 70 years.
Austrian's and Goldbugs not the best comparison. Instead, I would say Krugman is the left's equivalent of the right's extreme supply-siders who assert that government revenues will increase relative to T0 for all decreases in tax rates (something that no well-respected economist currently says but many partisan's love to claim).
Probably true, but I haven't seen nearly as many Laffer curve enthusiasts trolling comment threads, loudly redefining the word "economics" to refer to their pet theory, and dismissing all the real economists who argue otherwise.
I do enjoy Mankiw. I thought HN would appreciate the Cochrane article the most because IMO it was the best critique and because it resonates with PG's How To Disagree http://www.paulgraham.com/disagree.html
Depends. Krugman's actual economics has been brilliant, for the most part. The problem is no one knows him for his economics. People know him for his New York Times column, and the two are only very tangentially related.
I mean, I took an international trade theory class that was dedicated to Krugman's work... I know he is only popular because of his NYT blog, which, for the most part, seems to only exist to bolster liberal political initiatives, and, to clarify, that is why I think he is overrated.
Depends. Krugman's actual economics has been brilliant, for the most part. The problem is no one knows him for his economics. People know him for his New York Times column, and the two are only very tangentially related.
(For some reason, I had no reply button on lil_cain's comment).
Cochrane even notes that Krugman's actual econ work was brilliant. I'm old enough to remember when Krugman was young, working out the interactions of game theory and increasing returns in international trade for which he won the Nobel Prize...He once wrote eloquently about how only math keeps your ideas straight in economics." I would agree with lil_cain -- Krugman's econ work was brilliant -- while point out that Cochrane's critique was largely that Krugman is no longer practicing economics.
yet economists do make predictions, and they make them based on abstract models. Read the krugman piece for some examples of such models and their predictions.
One concrete example, when the fed raises or lowers interests rates it's based on a prediction of where they believe the market is going, where they believe it's at, and a prediction of the effect of the rate change. Otherwise what is the profession doing?
The profession is still in the stage of gathering data and looking for patterns. Some theorists believe they have testable hypotheses, but this is debatable (in my opinion)
The Fed makes forecasts but monetary policy is based on consensus among various schools of thought, not models. It doesn't work like NOAA.
If you could reliably predict the markets you'd make a fortune -- and the markets would adjust and become unpredictable again. This is a basic feature of markets, agreed to by all comers, last I checked.
IANAE, but I'm hearing over and over again that Krugman is making political points, not economic ones. That's fine, but it makes it difficult for laymen like myself to determine if we're having a political discussion or an economic one.
That's a very good point. That is the feeling I have been getting during that past year from Krugman when I started reading his columns. I wanted to read him because of his reputation as an economist, but it is almost like he is parlaying that to push his political agenda.
I'm getting the sense that you haven't really read krugman. For starters, if you did read him on the NYT then you couldn't have missed the giant OPINION label at the top. It's an op-ed, it isn't claiming to be anything else.
Second, if you read the article in question he specifically talks about this particular school of economists using rigorous mathematical models, and the problems he has with those models (in laymans terms). Did you miss that part or did you not read the article in question?
About two weeks ago, there was a thread on Krugman's Op-Ed http://news.ycombinator.com/item?id=803793 in the NYT. This is a response to that op-ed by a fellow economist.
Of course not, it's all a point of view. It's just a critical point to know in the context of fellow economists that the Chicago school is under attack, whether rightly or wrongly, for the current state of the economy.
This article is terrible. Here are some examples of why.
"If a scientist, [krugman] might be a global-warming skeptic, an AIDS-HIV disbeliever, a creationist, a stalwart that maybe continents don’t move after all."
I wouldn't say terrible. He makes a point he just tried to enhance that point with language that I'll agree was a little too...how shall we say...colorful (ironic considering he took Krugman to task for attacking other people but what can you do)
But there is an arguably logical thought process behind the post itself
There are some lessons to be learned from this article. Namely, John Cochrane demonstrated the type of knee jerk, incensed reaction that has landed many otherwise upstanding academics in the bad graces of their peers. His piece was much more inflammatory than it needed to be - in fact, I would argue that the tone invalidates his position.
To me, the piece sounds like it is coming from a man that has simply had enough of his institution being attacked for its historical tendency towards a particular party of economic thought. Understandable, but highly disappointing in its effect.
You're assuming the policy decisions of the executive branch of the US fed government was the reason for the disaster.
You're also assuming that the advice acted upon by the POTUS was based on the Chicago school.
For the former point, it leaves out FNM/FRE, housing speculation, easy credit by the fed, a weak dollar, increasing debt from foreign wars, the piss-poor rating agencies, the asset bubble driven by chinese liquidity, etc.
For the latter point, there were economic decisions made that do not align with that school of thought.
The author of the article discusses not just Chicago School monetarism, but also the many other strains of economic thought over the past decades, including the 'New Keynesians.' Krugman apparently also disagrees with the New Keynesians, and the rest of the economic mainstream of the past 30 years, not just the Chicago School.
What the author is getting at is that Krugman doesn't seem to be reading economics anymore, from any school of thought.
Looking at the author's CV (http://faculty.chicagobooth.edu/john.cochrane/research/Paper... [DOC]), he appears to be a libertarian. Libertarians weren't exactly well-represented in the Bush administration, and CATO were among its fiercest critics on financial and foreign policy issues.
The anger over Krugman's piece doesn't seem to be limited to Cochrane or Chicago School economists either. Cochrane's personal web page also links to a similar piece featured on Huffington Post rebutting Krugman: http://www.huffingtonpost.com/david-k-levine/an-open-letter-...
Regardless of what one thinks of Krugman's positions, he clearly deals in personal attacks far too often. If he's trying to educate the public, that's not helping his cause.
I'm not sure what instances you are thinking of, so perhaps I am mistaken, but from what I have read, Krugman wants to promote greater accountability. When he criticizes the decision or prognostication of an economist or politician, it's to avoid the passive voice - "Mistakes were made" and identify the party responsible for the error. I think he would expect others to hold him to the same standard.
Krugman is not offering up a hypothesis that is better at explaining observations than his opponents. He is making an argument based on an ideological position while ignoring evidence suggesting, at a minimum, that his hypothesis is not supported. This is not science.
As Cochrane notes in one of his "minute points", *Pretty much all we have been doing for 30 years is introducing flaws, frictions, and new behaviors, especially new models of attitudes to risk, and comparing the resulting models, qualitatively to data." This set of "we" includes the behaviorists and "complexity economists" (i.e. people who really enjoy massive simulations of simple agents).
Articles about economics are ok. This is political squabbling. If I saw the Krugman column where he called Cochrane a barbarian posted here on hacker news I would flag that also. This is full on reddit territory.
I joined you in flagging it (and flagged the Krugman one for good measure :-). It's virtually impossible for any article about economics to not devolve into political squabbling on internet forums. Just look at the ratio of people with degrees in economics vs people who are, as philwelch describes them, "self-trained Austrian economists who post on comment threads". And if you start posting Krugman articles, it's like waving a red flag in front of a bull for our "Austrian" (and others of their ilk) HN brethren - they're going to want to post their stuff too.
I think economics is fascinating, but ultimately it serves, and is very closely related to what a society's goals and values are, which is politics.
A Chicago school economist decides that the cause of the crash was regulation, there's a surprise. It's difficult not to ad hom him here, but the article drips with scare quotes, special pleading, straw men and appeals to authority, so what's one more fallacy?
In fact, although I imagine he wants it to be taken seriously, it reads like little more than an angry forum comment dressed in academic robes. He's obviously heated and insulted by Krugman, and given that Chicago is broadly seen as discredited by the recent crash he is also concerned for his image, and is responding in kind.
The real economic lessons of the past few years are not to be found here, or anywhere. They will emerge in years to come. The difficulty is we only have the ability to really push through changes and learn from them now, so everyone's trying to be a part of that action. At least it's clear from both Krugman and Cochrane that the incentives enjoyed by bankers are very badly designed, and that's one issue we can address.