Greenspan, Friedman and Summers win Dynamite Prize in Economics
Alan Greenspan has been judged the economist most responsible for causing the Global Financial Crisis. He and 2nd and 3rd place finishers Milton Friedman and Larry Summers, have won the first–and hopefully last—Dynamite Prize in Economics.
They have been judged to be the three economists most responsible for the Global Financial Crisis. More figuratively, they are the three economists most responsible for blowing up the global economy.
Most than 7,500 people voted—most of whom were economists themselves from the 11,000 subscribers to the real-world economics review. With a maximum of three votes per voter, a total of 18,531 votes were cast. The poll was conducted by PollDaddy. Cookies were used to prevent repeat voting.
Dynamite Prize Citations
Alan Greenspan (5,061 votes): As Chairman of the Federal Reserve System from 1987 to 2006, Alan Greenspan both led the over expansion of money and credit that created the bubble that burst and aggressively promoted the view that financial markets are naturally efficient and in no need of regulation.
Milton Friedman (3,349 votes): Friedman propagated the delusion, through his misunderstanding of the scientific method, that an economy can be accurately modeled using counterfactual propositions about its nature. This, together with his simplistic model of money, encouraged the development of fantasy-based theories of economics and finance that facilitated the Global Financial Collapse.
Larry Summers (3,023 votes): As US Secretary of the Treasury (formerly an economist at Harvard and the World Bank), Summers worked successfully for the repeal of the Glass-Steagall Act, which since the Great Crash of 1929 had kept deposit banking separate from casino banking. He also helped Greenspan and Wall Street torpedo efforts to regulate derivatives.
The vote totals for the other finalists were:
Fischer Black and Myron Scholes 2,016
Eugene Fama 1,668
Paul Samuelson 1,291
Robert Lucas 912
Richard Portes 433
Edward Prescott and Finn E. Kydland 403
Assar Lindbeck 375
This blog established the prize in response to attempts by economists to evade responsibility for the crisis by calling it an unpredictable, “Black Swan” event. In reality, the public perception that economic theories and policies helped cause the crisis is correct.
But of course not all economists are to blame. It is the delusional mindset of ‘neoclassical’ economists that caused the GFC. There are realist approaches to economics but which through power politics have been suppressed in universities and excluded from government policy making.
Some practitioners of these other approaches did what neoclassical economists falsely claimed was impossible: they foresaw the Global Financial Crisis and warned the public of its approach. In their honour, this blog now calls for nominations for the inaugural Revere Award in Economics, named in honour of Paul Revere and his famous ride. It will be awarded to the 3 economists who saw the GFC coming, and whose work is most likely to prevent another GFC in the future.”
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I am really very disappointed at this result, because I don’t really consider Mr Greenspan to be an economist at all – since when did being a shill for Wall Street qualify you as an economist? Milton Friedman (for instance) has infected generations of economists with his snake-oil, starting with the myth that he ‘saved’ Chile, and the sheer persistence of the venom with which he has infected social sciences more generally is out of all proportion to his importance as an individual economist. Surely the longevity of your sheer wrongness should count for something, as much as the toxic effects of your actions in the immediate lead-up to the crisis? I want a re-count….
Yeah and the sad thing is Friedman went to his grave actually believing that his simplistic nonsense worked.
And don’t forget Robert Rubin. I know, not an economist but he did to the US Treasury what you say Friedman did to Social Sciences. Perverted it with a set of poorly conveived ideas.
What does the lady-like, smart, honorable Brooksley Born get for refusing to fold for the nasty boys?
In addition to his other failings, in 2001 Greenspan came close to putting the kibosh on Bush’s Reaganesque whacked-out tax cuts for the rich and increased spending, but caved in and supported them after succumbing to Bush’s cajoling.
So Greenspan is responsible for the crash in not just the theoretical sense, but in the very real practical sense as well.
I hate to tell you this but the belief that Bush’s tax cuts were “for the rich” is to be believed only by the math challenged. Read this slate article. The percentage reduction in taxes for the less wealthy was much more than for the rich. Someone making $60,000 a year saw a 24% tax cut, while someone earning $350,000 a year got a cut of only 12.5%.
“Pre-Bush, the $1 million a year couple paid 33 times as much as the $60,000 couple; today they pay more than 38 times as much.”
So Bush made taxes more progressive. Exactly what leftists scream for.
So where does this myth about tax cuts for the rich originate? Well it’s because the left is math challenged. They purposely confuse totals with percents. Of course, if I get a 99% rebate in taxes and Bill Gates gets a .005 percent rebate then Gates total tax rebate that is way larger than mine. However, if he was already paying twice the tax rate as me, 20% vs my 10% then it will change the ratio in my favor by 200 to 1 vs the old 2 to 1. Since with increased spending it also shifts taxes into the future that means that Gates is going to be on the hook for a much larger percent of the total tax pie.
Under the above scenario if I’m making %50,000 a year and Gate ten billion a leftist would complain that I only got a $4950 tax cut vs. Gate’s one million dollar rebate. That even though I’m now only paying $50 in taxes a measley one tenth of a percent whereas Gates is paying $1999000000 which is 19.999 percent.
Leftists stupidly focus on the wrong metric as the very very often do on other measures. All to paint a totally dishonest picture of what is actually going on. They did that recently with the state cuts to schools here on Long Island recently. Made it sound like the rich schools were getting a bargain when their subsidies were cut by some gigantic percentage, and the poor schools by a tiny fraction. The reason why it sounds so bad the other way is because poor schools were getting several orders of magnitude more state tax revenue.
So stop listening to leftists if you can’t do the math yourself.
Name calling is the best way to excuse yourself from an adult conversation.
This comment would read much better without the constant reference to “leftists.”
Do a google search for “we on the left”, socialist, etc. When you can’t distinguish between using a self chosen label to identify a group and name calling then maybe you’ll be able to carry on an adult conversation. It’s amazing how many socialists, leftists, and communists don’t want to be identified for what they are.
Since you mention Mr. Bill Gates so emphatically (and assuming that he pays a lot of taxes…), I could not resist the temptation to draw your attention to the fact that Microsoft has moved/registered its “official world headquarters” (for the Software Royalties) to Ireland, where Mr. Gates’ company pays 0% on royalties and 12.5% on corporate income (profit) as opposed to the 35% he (or the Company) would have to pay in the USA.
As a certain economist (Anwar Shaik – a “leftist”, of course…) once wrote “A Wealth of Algebra, A Poverty of Theory”…
That particular “leftist” economist happens to be fully trained in “economic mathematics”.
You said:
“Someone making $60,000 a year saw a 24% tax cut, while someone earning $350,000 a year got a cut of only 12.5%”.
Now,
do you mean to say that the richer person got a rebate (or “tax cut”) of $43,750 whereas the “less rich” person got a rebate (or “tax cut”) of only $14,400 ?
Interesting arithmetic…
Logic is part of math, and it’s obvious you failed that portion. Bush’s tax cuts did not include the provisions that allow people to move assets overseas to avoid taxes.
You’ve shown your ignorance once again. I betcha if we investigate that we will finde plenty of Democrats that voted for these provisions and take advantage of them. It has nothing to do with the tax cuts.
Another thing you forget is that the the money was NOT earned by the government. The money is earned by the taxpayer and the government needs to justify what it takes.
I used the term “rebate” very loosely, but even in a rebate it’s really your own money. More like they don’t have to pay for even more stuff they never get.
I wanted to vote for the 2nd – Krugman, but he’s not in that list. Only second because Greenspan was actually at the helm.
He calls for a bubble, he believes in huge monetary expansions and calls for interest rate cuts every time he gets.
I fail to see how a man like that still comes out of his house everyday and spill out the same garbage proven false decades ago. 1 bubble, 2 bubbles, and the solution is another bubble.
He believes the economy is a series of levers and buttons to push. Someone tell him it’s people down there, not Sid Meier’s Civilization VI.
I find the supporting statement for making Milton Friedman responsible to be extremely dubious. There’s no specifics. You could replace his name with Keynes and it would be just as accurate and also just as uninformative. I just don’t think those things that Friedman advocated were actually harmful nor cause the collapse. It was mainly the Fed, GSEs, FDIC, and other government agencies and policies that caused the problem. Removing trade barriers and the stifling interference of third world governments over their economies, Friedman’s ideas that were actually implemented, had very little to do with it.
“It is the delusional mindset of ‘neoclassical’ economists that caused the GFC.”
The neoclassical synthesis is also known as the neo-Keynesian synthesis because it is based on the theories of Keynes. Monetarists were actually opposed to neoclassical theory. So why is Milton Friedman on the list when there were so many other neoclassical/neokeynesians to pick from such as Paul Samuelson, and Krugman? What about Keynes himself since he is the guy who rationalized the entire Federal reserve fiat money system that caused this problem, along with all the governmental intrusions that amplified problems that already exist with fractional reserve banking.
“I find the supporting statement for making Milton Friedman responsible to be extremely dubious. There’s no specifics.”
Huh? Friedman more than anyone else is responsible for the “market will solve everything” shibboleth. That’s specific enough.
That said, there’s much better candidates for #2. Greenspan definitely deserves #1, though.
Claiming that Friedman thought and taught that the market will solve everything is a gross distortion, so no it is not specific enough. It’s like saying “We shall overcome” is about racial supremacist conquest.
“I fail to see how a man like that still comes out of his house everyday and spill out the same garbage proven false decades ago. 1 bubble, 2 bubbles, and the solution is another bubble.”
No, his solution is easing in the context of a liquidity trap. Probably incomplete; only solution is (unfortunately) some way of writing off all this dept.
I suppose your solution is Mellon-style liquidationism?
Why don’t you learn something about Harding-style depression fighting? We need a new Harding not a new FDR. You only assume it is the only solution because you were suckled at the teat of Keynes, and you aren’t even aware of that fact.
The notion that Krugman has ever called for a bubble as the solution to economic problems is a lie, and people spreading that lie should be ashamed of themselves but, alas, I doubt they ever will be, either because they’re too stupid to know the difference between a lie and a fact, or because they are ideologues who care more about their ideology than about such quaint things as “truth”. In fact, Krugman was talking early and often that a housing bubble could cause the same problems for the United States that it caused for Japan once the bubble burst. Heck, he even wrote a whole freakin’ *BOOK* (The Return of Depression Economics) on that subject back in ’99 or so, where he talked about Japan’s real estate bubble burst that put Japan into a “lost decade” (now a lost *two* decades) and how that same thing could happen to other nations, even the USA. Those are facts. You can go to your local public library and check that book out for yourself and validate what he said for yourself, for cryin’ out loud. Yet for some people, those facts are not relevant because they don’t agree with some lie that the person chooses to instead believe. Inexplicable.
“To fight this recession the Fed needs more than a snapback; it needs soaring household spending to offset moribund business investment. And to do that, as Paul McCulley of Pimco put it, Alan Greenspan needs to create a housing bubble to replace the Nasdaq bubble.” – Paul Krugman
In fact your main evidence for Krugman is actually evidence against him. He used the example of Japan to explicitly advocate low interest rates and money pumping in response to the popping of the internet bubble (which was caused by the same).
What he didn’t understand was that both the internet and housing bubbles were not confined to just those sectors. They were much more broad based and both due to the low interest rates distorting not only the entire economy but the entire world economic infrastructure. The bubbles were only one symptom.
He also didn’t understand that the damage to the economy occurs during the boom phase and that the bust phase is actually the healing process. In calling for the blowing of the housing bubble he was actually advocating the extension of the economic distortion and destruction, just as he is doing now.
Brian, you are confusing an observation with a policy prescription and takes a quote out of context to lie about what Krugman actually said. The quote immediately before that quote in THAT VERY SAME PARAGRAPH specifically refutes your claim that Krugman wanted or advocated a housing bubble: “This was a prewar-style recession, a morning after brought on by irrational exuberance.” It is quite clear both in the context of the article and in the context of Krugman’s entire body of work that Krugman no more wanted irrational exuberance in the housing market than he wanted it in the Internet stocks market, but that Krugman believed, as Paul McCulley did, that Alan Greenspan was attempting to create a housing bubble.
But you are correct that in that article (“Dubya’s Double Dip?”, August 8, 2002), Krugman did not predict that Alan Greenspan was going to be able to pull off Greenspan’s goal of creating a housing bubble, he was skeptical about the notion because of high household debt and stagnant incomes. In this, Krugman was a bit short-sighted — he did not factor in the innovativeness of our financial industry, which used Dubya’s tax cut money to finance a speculative bubble in CDO’s that was quite sufficient to finance a speculative bubble in housing… well, until it all came crashing down, anyhow.
Badtux,
I suggest you look up Krugman’s article in The Slate titled “Baby Sitting the Economy” in which he lays out not only what inspired him to become and economist but what he still believes, since he’s still advocating it. It’s all about how money pumping is the savior of the economy. It also shows a complete misunderstanding of what the purpose of money is in the economy, or even what money is. He is so naive that he doesn’t understand the difference between money and labor dollars, and makes many other economic errors in his article.
Badtux,
No, I am not confusing an observation with a policy prescription. He’s argued elsewhere that bubbles are a small price to pay for rescuing the economy.
That single sentence you quoted out of context (and the spin you put on it) doesn’t refute anything I have said. In that article the main point Krugman was arguing that there was going to be a double dip recession (a wrong prediction) and the only way to prevent it was for business to come to the “rescue.”
As an aside, don’t be confused by the title of the article “Dubya’s double dip” because he doesn’t devote a single sentence to supporting any responsibility on Bush’s part for any double dip, dishonest weasel that Krugman is. Why isn’t it titled, “Greenspan’s double dip?”
His first paragraph lays out main thesis:
His villain here is a continuation of the recession and the cavalry coming to the rescue is business investment. He uses the term rescue over and over. He does so in the opening. He says it again with, “but again and again rescue is delayed.”, and again with “Will the rescuers arrive in the nick of time?”
He then argues that it won’t happen and that their will be a double dip recession (an incorrect prediction).
Now that we have the context of the article let’s look at the full paragraph in question:
The first two sentences go together and you only quoted the second. In context we can see he was lying because the recession was triggered by interest rate raises in 2000 and 2001 that was done specifically to quell the stock market. So, by his own argument, lowering interest rates should have a snapback effect on consumer. He was arguing [counter factually] that this was not the case and therefore he was pessimistic that Greenspan could prevent the double dip recession. His pessimism lay with the continuation of the recession and with Greenspan’s ability to get us out of it, and not with any concerns over causing a housing bubble.
Note, too that Krugman is completely conflicted in his beliefs here. He thinks that “irrational exuberance” is a cause of bubbles, not low interest rates. Yet he also thinks that bubbles are caused by low interest rates.
It is because of the contradictions in Krugman’s own thinking that one can use his writings to come to any conclusion one wants. This is a well know result in the field of logic. If you assume P and not P then you can use that to support any position. Look it up. Hell, I’ll look it up for you. “One of these is that in first-order predicate calculus any proposition can be derived from a contradiction.”
This is why we both can derive completely different conclusions from the same statements made by Krugman. However, let’s not rely on this one article. Let’s do as you say and look to his other writings to see if Krugman himself interprets things differently. So the question is, did Krugman think a housing bubble was the right prescription for getting us out of the recession?
According to that article he believed that the interest rates Greenspan was already pursuing were insufficient to end the recession and that in order to get us out of the recession they would need to be even lower triggering a housing bubble. In order to support my position I only need to find articles where he was advocating that Greenspan do more in the area of lowering interest rates even further.
That’s easy for me. In fact, I can do much better. Here’s a quote that completely contradicts all of your claims:
– Krugman, NYT May, 2, 2001
Wow! Here he argues that bubbles are a small price to pay for keeping the economy chugging along. I have bolded the parts where he claims that his position was to cut interest rates even further than Greenspan did and that his theory is that the recession could have been completely avoided by doing so. He also argues that is a good thing.
Here’s another Krugman quote:
It’s quite clear that you are wrong in claiming this was an observation and not a prescription. Krugman has written too many articles where he has specifically argued for using interest rates to pump up the housing market as his solution to the recession.
You can’t support your position by going out and finding some other quote by Krugman where he says something contradictory to this, because he would be contradicting himself. It’s not my problem if he does so. It doesn’t make me a liar. It just proves that Krugman is not to be listened to.
What you need to do now is retract this nonsense you wrote:
If you maintain this position it will be you who is the “liar”, you who should be “ashamed of themselves”, and you who is “too stupid” or an “ideologue.”
You’ve got a lot of nerve writing all that when it is obvious that you have only read a very narrow portion of Krugman’s writings and his opponents arguments. Krugman, Kling and you need to be ashamed.
No, they are based on pre-1929 Keynes — just look at academic papers that cite Keynes — over 90% are for pre-GD papers. If they are based on the theories of Keynes, then where does his debt-deflation theory (1933) feature?
You have confused Keynes with Fisher. It was Fisher who wrote “The Debt-Deflation Theory of Great Depressions” in 1933, and yes it was Fisher who was absolutely and utterly wrong about the looming problems in pre-1929. Why listen to Fisher when we already have Austrian theory that prior to 1929 was predicting a crash. Austrian theory already explains what happens and does a better job than Fisher. Why? Because Austrian theory can explain why the depression of 1920 was so short while the 1929 one was so long. Fisher cannot.
Austrian theory explains why we had the particular symptoms we had before this current downturn. For example according to Austrian theory the large trade deficit is an artifact of opening trade with third world countries which reduced their level of socialism, the Feds loose monetary policy, government deficit spending, FDIC insurance, increased bank and GSE leverage, bailouts of foreign investment, fiat currency pegging, etc.
Blaming a man (Keynes) who is dead for over 60 years as the responsible for the current GFC, that is delusional… you could only blame the ones who follow his theories blindly and radically…
Maria,
My reply to you made last month is still in moderator purgatory. Not sure why.
Thank you Brian for your lengthy contribution [s]. Your distaste for Krugman is evident. I have exactly the same distaste for Friedman and his ideologically driven pursuit of free markets. I find the extension of Friedman by his followers at Chicago to be nothing but an attempt to ram through an ideological rather than a purely economic agenda. So on those matters we disagree.
Perhaps we could return this thread to its original purpose.
I think Friedman more than deserves to be on any short list of causal intellectual contributors to the recent disaster in our financial system. His reputation is well deserved.
You ask for specifics: Friedman wrote to the SEC to encourage that organization to allow the establishment of options trading in Chicago. Up until then options had been regarded as gambling. His reputation was sufficient to change the SEC’s position. There is thus a straight line between his involvement and the explosion of the derivatives etc during the crisis. Friedman has his finger prints all over the collapse.
Plus, Friedman’s zealous attachment to the efficacy of markets gave an intellectual underpinning to the deregulatory policies of the last three decades. The results provide all the empirical data we need to disparage his ideas in that regard. To argue that government involvement precipitated the crisis is nonsense. No government wrote a sub-prime mortgage. No government wrote a toxic CDS or CDO or any other piece of financial engineering. Private banks, unhindered by oversight, did all that. The extension of real estate loans outside of the regulatory framework is where the rot started. To the extent there was government action to blame it was the right wing agenda to encourage home ownership – something straight from the Friedman playbook.
More to the point the at the onset of crisis, magical market system froze up, failed to adjust smoothly, and failed to identify or correct the problems as they emerged. Self regulation – so beloved of Friedman and his ideological followers – completely failed to prevent the collapse. It took massive government involvement to get things working again … at great cost to taxpayers and great loss to the economy in terms of jobs.
Elsewhere Friedman’s influence over things such as Efficient Market thinking infected the risk management of our banks. He originated the school that gave us those noxious models that completely failed us.
Finally Friedman’s attempt to establish ‘positive economics’ was a deliberate attempt to cleanse the subject of its political and social core. Since economics is firmly rooted in social and political structures, as Friedman was no doubt aware, his ‘positive economics’ can only be viewed as an attempt to skew the subject in support of his particular political and social agenda. I don’t fault him for trying, but his apologists have to take the hit when that agenda produces the results is does. The recent collapse was built on that agenda. Unequivocally. Fridman’s New Classical agenda has had very real social and economic costs. His place in infamy is well deserved.
Overall I can understand why you want to attack Krugman for political purposes, but the weight of evidence is firmly on his side.
Thank you anyway for joining our discussion.
Your mistake is thinking there are only two sides to this. Both Krugman and Friedman are wrong. Krugman is just vastly more wrong. Krugmans policies were and they failed as I thoroughly establish. Krugman’s loose monetary policies have lead to a housing bubble [as he advocated] and economic disaster. Clearly this kind of government intrusion was not free market. Instead of letting the market set interest rates a central planning committee did.
I think it is you who is trying to score political points because you certainly don’t understand the economics. My distaste for Krugman lies in the fact that he is a horrible economist. Read that babysitting article and then the linked criticisms and you will see that he doesn’t understand money. That’s assuming you can understand the articles at all.
First the snide implication I’m writing for political points, and now the claim that I had derailed the thread. For someone who doesn’t understand stock options you are pretty full of yourself.
It is a common political strategy to blame options for stock market rises and falls. Of course it relies on the complete economic ignorance of those who are politically targeted by the propaganda.
Every option has a counter party. Thus there is no net loses for any options trade. Absolutely none. One persons loss is another/s gain. Yes, it is gambling, just like car insurance is gambling. One can use gambling to lower ones risk or raise it.
I’ve lost money on options where I was using them to insure myself against a movement in the opposite direction of my position. The counterparty then acts the same as an insurance company.
Even if neither party actually held a stock position the option doesn’t effect the outcome of the stock price any more than betting on a football game effects which team wins.
If I were to lose money on options it would have the exact same effect as if I were to decide to gift the money to the counterparty out of the goodness of my heart. You got something against my charity?
Think before you suck up economic ignorance like a vacuum cleaner. Friedman’s supposed fingerprints here evaporate with even a tiny amount of economic understanding.
The same is true of the CDS and CDOs. These were not the cause of the crisis. They were used as an excuse by the fat cats to bail out their rich friends. You like many others have fallen for the political propaganda. Your other claims are equally incorrect.
You have already demonstrated ample misunderstanding of what caused the crisis. It’s absolutely clear that you do not have a scientific understanding of economics but instead the thinking of a sociologist on the subject.
“Private banks, unhindered by oversight, did all that.”
Your belief that banks are unhindered by oversight is appallingly incorrect. Banking is one of the most regulated industries, if not the most. In fact, in other countries none of the “deregulation” that you complain about ever happened. Yet, there are many countries around the world that have experienced housing bubbles, and each with their own banking crisis. What they had in common was NOT the issues you have complained about.
What Friedman didn’t understand, and what you similarly don’t understand is that the banking systems of all countries are in effect governed by central planning committees. Those who are for free markets have been criticizing Friedman for years about his mistakes that are in the politically socialist direction. Of course, any governmental system where the government assumes the risk and the private sector the benefits is going to be unstable. Government assumption of private risk was NOT for the most part happening because of any deregulation. In fact, it was happening because of misguided attempts by politicians to help people (special interests).
Here’s something written sixty years ago by a man who would whole heartedly agree with Freidman on the belief that markets are efficient. It will give you a hint of just one of the governmental intrusions in the free markets that lead to the crisis.
Read the whole thing.
The cause of the crisis was government sponsored central banking, fiat currencies, FDIC insurance, government subsidies, government bailouts, government assumption of risks.
Social Security is the next bomb on the horizon. Everyone will be trying to retire on capital that the government never saved but instead squandered. There are no real capital goods backing the governmental social security accounts. That too will be blamed on the market when it happens by the political shills. A Ponzi scheme of such vast proportions and on economic transactions of such a broad timeline as retirement savings should be expected to have a very large half life to decay.
Whose fault is that? I certainly didn’t want to bail out anybody. Again it was the government that forced private losses on the taxpayer. So it was the governments fault. I would have let them fail. It was done in 1920 and the economy recovered in 18 months. The damage to the economy occurred since the beginning of the Clinton administration. The economic bust is in fact the exposure of the economic malinvestments caused by government sponsored low interest rates. The question when the bust comes is, “Who should suffer the losses”. I think it quite clear that those who were profiting from the risky behavior should have bore the costs of the collapse.
Also again you are mistaken in your belief because of your economic ignorance when you claim that “it took massive government involvement to get things working again”. In fact, according to good economic theory, the actions the government has been taking are exactly the wrong ones to let the economy work properly. Every action taken has been wrong. Lowering interest rates, government takeovers of industry, cash for clunkers, tax rebates for new home buyers, stimulus spending, fat cat bailouts, etc. It has added to the severity of the crisis.
”Thank you anyway for joining our discussion.”
The “us against you” ploy is an old and disingenuous rhetorical trick. The majority agreed with me that Greenspan was responsible for this mess. I have the distinction of actually complaining about Greenspan back when Clinton was in office. I only wish people like you would not force people like me, to participate in your idiotic economic schemes via ridiculous political policies.
For what it is worth, I have put together a narrated Powerpoint presentation on the origins of the current financial meltdown that covers the beginning stages of deregulation and other shifts in public policy that exacerbated rather than mitigated an already dysfunctional economic structure. My professional work is not in economics but in finance, as a market analyst and business manager at Fannie Mae until 2005. The perspective I offer is from one who worked in the trenches, so to speak, and observed the unraveling take place first-hand. I tried to warn my upper management but their concerns were the maintenance of business volume, market share and meeting projections of double-digit profits to satisfy Wall Street analysts.
The above presentation and another titled “The Depression of 2010” are available at http://www.authorstream.com (freely downloadable). Click “BROWSE” on the home page, then enter “edward dodson” in the search line. These and several other presentations will come up. If you want to share your reactions or observations, please feel free to do so.
Edward,
Fannie Mae is a government entity, not a free market one. To speak of “deregulating” Fannie Mae is to make a category error. You can no more deregulate Fannie than you could deregulate the Fed itself. Both are government institutions and anything they do is in the name of regulation. Fannie Mae was one of the main instruments by which governmental regulations were used to create and prop up the economic bubble. It was also one giant slush fund for the Democrats, which is why the republicans were calling for it’s “regulation”. In fact the Republicans were mistaken as the Austrians would point out. Fannie Mae was being regulated in exactly the way the Democrats wanted.
I sat through your first video presentation and you had nothing other than a shallow and complete misinterpretation of past economic events. The period of 1915 to 1929 was one of ever increasing government intervention via the FED. In fact the Fed didn’t exist prior to 1915 and prior bubbles all followed the creation of other governmental central banks and government sponsored monetary inflation.
Your second video is also full of the same, you even trot out the old cliche that WWII got us out of the Great Depression. No it didn’t. Manufacturing bombs and placing US workers in European foxholes is not economic recovery, it’s false employment and there was a real drop in economic welfare all during the war. Ever here of the ration card? It was the death of Roosevelt and the abandonment of his policies that did get us out, that along with the complete destruction of most of the industrial world except for free market economies like Sweden that remained neutral and free market well into the late 1950s.
You make it sound like we should go to war. Yet we have just experienced a downturn with a war and the war did nothing to increase economic health.
I’m half way through your second video and it’s been a total waste of my time. Each time I stop and listen it’s more charts, more information that most people should know already. I’m moving on to the third video. Hopefully this will be the one you wanted to point us to in the first place.
Unfortunately, it’s more of the same. I don’t even see a point in these presentations where you even talk about deregulation.
I suggest you look up Thomas E. Woods for a better historical perspective on what happened during the period of 1920 to the 1930’s. Your presentation is pretty much what you get in any high school history class, and quite inaccurate. His video, “Why you’ve never heard of the Great Depression of 1920’s” might be a good start for you.
Brian,
1. There were loads of bubbles before people even imagined something like a central bank, to begin with the tulip bubble. A Central Bank can add to a bubble (the Greenspan example), but it is absolutely not necessary, plain human folly and herd behavior suffices.
2. It sure was WW II which pulled the USA out of the Great Depression. You’re completely wrong there. No, WW II was not prosperity. It was war. But that did make and end to Depression. Anything even resembling a depression went away: unemployment went way down, hours worked per year went way up, production – however measured – increased by leaps and bound (surely not as much as indicated by ‘1941 prices GDP’ as relative prices of planes and tanks decreased, but even then). After the war, in 1946, productivity per hour was 20% up on 1941! Remember: GDP does not measure prosperity, it measures production and income – and production as wel as income went up (though expenditures went up less, as there was forced saving during the war). Despise it as much as you like, but making a Saddam Hussein statue does require labor, capital and bronze. And adding labor income of the makers of the statue to GDP is as necessary as adding the bronze used to a ‘make/use table’ of availability and use of bronze in a country. Making the statue takes labor and capital and bronze away from more usefull activities – but GDP measures (the consequences of) what people do (or are forced to do), not wat they ought or like to do. Not adding sugar production of a slave labor sugar plantation to total sugar production is rather inconsistent when you want to know total production.
The real miracle is not that the war effort ended the Great Depression. The real miracle is that post war depression in the USA (and in Canada and Australia) was limited, while unemployment stayed low.
On the (Keynesian) demand side this can easily be explained by buoyant consumption (remember the forced savings?) and investments (during much of the thirties investments were low, sometimes even below replacement rates) ans well as increasng (net) exports, which made up for the fall in government demand. A prime example of the Keynesian idea that it’s total demand that matters!
On the (Austrian) supply side this was caused by a very drastic decline in the number of hours worked per person as well as an amazing ability of companies to adapt to peace time circumstances (which was partly possible as during the war the amount of people with technical training increased while investments needed for the war effort could also be used for peace production).
You see: at least I do not experience any kind of contradiction between Keynesian and Austrian explanations of 1946 (your line of reasoning is developed by ‘libertarian anarchist’ Robert Higgs). And I do like some aspects of these libertarian peaceniks: shred all yet fighters, as these have to be paid with taxes (Cameron is actually shredding part of these planes! Great!). But these 1946 markets might have worked so well because the New Deal gave people a sense of security which made the consume more (in 1946 and beyond, the consumption function shifted upwards compared with the pre war situation according to (there he is again) Krugman), and, as soon as that was clear, companies started to invest again.
About Roosvelt: look at the Krugman blog from yesterday and see government debt declining in the yearw before 1942… Over the entire 1933-1941 period, this guy ran (according to NIPA data) a surplus.
The evidence that Roosevelt was bad for investments is limited, to say the least. In fact, investments were low already before Roosevelt became president and increased slightly when Roosevelt was president, at least until 1937 (though not to pre Depression levels) – until the 1937 second dip made them decline again. The larger problem with this argument is however that investments in other countries followed roughly the same pattern as USA investments – while these countries did not have a Roosevelt.
There was a central bank driving Tulip mania, the Bank of Amsterdam, est. 1906. This was before Tulip mania. Not only had they imagined it they established one. Don’t write to me about things you are totally ignorant about.
Also, you don’t understand my views if you think that I think bubbles require a central bank. They can also happen where the government props up fraudlent schemes like making fractional reserve banking legal.
I believe that such bubbles don’t require a central bank. All they require is fractional reserve banking, a form of fraud supported by the government. They can also be spawned by government debasement of coin.
However, in this case you are wrong. There was a central bank in Amsterdam prior to Tulip mania. Their first central bank and first bubble.
The other famous bubbles were also generated by monetary mischief perpetrated by governments.
Your information on the Great Depression is equally bad, and your reasoning is ridiculous to say the least. Money is only a medium of exchange. It is the real goods that the economy produces that matters. People can’t eat, live in, or wear Saddam Hussien statues. Likewise tanks, bombs, and bullets. WWII didn’t improve the economy, and in fact made things worse.
It was only after FDR died and WWII ended that things improved. It’s kinda hard not to do well when the infrastructure of all your major competetors has been bombed to hell.
agree with edward
Brian Macker wrote:
Fannie Mae is a government entity, not a free market one. To speak of “deregulating” Fannie Mae is to make a category error. You can no more deregulate Fannie than you could deregulate the Fed itself. Both are government institutions and anything they do is in the name of regulation.
Ed Dodson here:
Until being pushed into conservatorship by the financial and economic meltdown, Fannie Mae (and Freddie Mac) were regulated but publicly-held corporations. The significant contributions of these two GSEs was to provide liquidity to the mortgage market, as portfolio investors and as guarantors of mortgage-backed securities. That Fannie and Freddie management made serious mistakes in business judgment (either to satisfy Wall Street’s demand for continued earning growth or to maximize executive compensation) is hard to dispute. Yet, the core business model of the GSEs was sound with a consistent effort to price for risk while serving the needs of a segment of the population underserved for decades in the housing finance market.
Brian wrote:
Fannie Mae was one of the main instruments by which governmental regulations were used to create and prop up the economic bubble. It was also one giant slush fund for the Democrats, which is why the republicans were calling for it’s “regulation”.
Ed Dodson here:
I agree that the GSEs contributed to the economic (essentially property market) bubble by annualling increasing their maximum loan amounts to accommodate rising land prices (mistakenly and consistently described by economists and the media as “housing” prices). It is also true that the GSEs devoted considerable time and resources to cultivating support for their mandate and business model on the part of members of the Congress — both Democrat and Republican. The senior management of both GSEs included influential former staffers and lobbyists in both parties.
Brian wrote:
In fact the Republicans were mistaken as the Austrians would point out. Fannie Mae was being regulated in exactly the way the Democrats wanted.
Ed Dodson here:
The story is rather more complicated, I suggest. Of course, the long process of dismantling of the financial regulatory environment began under a Democrat — Jimmy Carter and was accelerated by every President thereafter.
Brian wrote:
I sat through your first video presentation and you had nothing other than a shallow and complete misinterpretation of past economic events. The period of 1915 to 1929 was one of ever increasing government intervention via the FED. In fact the Fed didn’t exist prior to 1915 and prior bubbles all followed the creation of other governmental central banks and government sponsored monetary inflation.
Ed Dodson here:
Well, what I prepared is a perspective, and one that attempts to cover a great deal of ground in a short timeframe. In my defense, I have delivered this analysis at a number of conferences with economists in the audience. No one agrees on every aspect of the story, but the feedback I have received has been generally positive.
Brian wrote:
Your second video is also full of the same, you even trot out the old cliche that WWII got us out of the Great Depression. No it didn’t. Manufacturing bombs and placing US workers in European foxholes is not economic recovery, it’s false employment and there was a real drop in economic welfare all during the war. Ever here of the ration card? It was the death of Roosevelt and the abandonment of his policies that did get us out, that along with the complete destruction of most of the industrial world except for free market economies like Sweden that remained neutral and free market well into the late 1950s.
Ed Dodson here:
As you are surely aware, the U.S. economy experienced a deepening of the recession in 1937. Despite the “New Deal” programs, unemployment remained high and private investment was lagging. Business cycles do eventually turn around, and, I agree that the depression would have come to an end without the stimulus of war production. As one would expect during a global war, the production of consumer goods was heavily curtailed. Life for most people was no picnic but people were able to find employment and meet basic needs.
Brian wrote:
You make it sound like we should go to war. Yet we have just experienced a downturn with a war and the war did nothing to increase economic health.
Ed Dodson:
If my language suggested this, it certainly is not my position or intent. War destroys lives, destroys property, destroys culture, destroys progress. And, in all wars the financial cost is borne by many least in a position to absorb higher taxation. Rather than imposing higher taxes on those with the most to lose, governments consistently issue bonds that pay interest to investors — thus, we borrow from the wealthy at interest, then raise taxes on everyone else to service that debt.
Brian wrote:
I’m half way through your second video and it’s been a total waste of my time. Each time I stop and listen it’s more charts, more information that most people should know already. I’m moving on to the third video. Hopefully this will be the one you wanted to point us to in the first place.
Ed Dodson here:
I wish it were the case the most people knew this information and how it comes together to tell the story of how we got into such a financial and economic mess. It takes me two semesters teaching a course “Understanding our Political Economy” to cover this ground.
Brian wrote:
Unfortunately, it’s more of the same. I don’t even see a point in these presentations where you even talk about deregulation.
I suggest you look up Thomas E. Woods for a better historical perspective on what happened during the period of 1920 to the 1930’s. Your presentation is pretty much what you get in any high school history class, and quite inaccurate. His video, “Why you’ve never heard of the Great Depression of 1920’s” might be a good start for you.
Read his book “Meltdown: A Free-Market Look at Why the Stock Market Collapsed, the Economy Tanked, and Government Bailouts Will Make Things Worse” for a good understanding of the current situation, and why things are far from over.
Ed Dodson here:
I will try to keep an open mind and look at what Mr. Woods has to say. My own analysis comes out of seven years of research for a three-volume work, “The Discovery of First Principles.” I recommend two historians, in particular: Frederick Lewis Allen and Carroll Quigley, but there is a long list of others, including the economist Harry Gunnison Brown.
This story is complex and more research needs to be done. Perhaps others will find more insight from the story I have tried to tell than you have.
Since the nobel is awarded every year why should a dynamite prize not be awarded every year?
I second Pathrik above: I would like to see the Dynamite Prize as an annual event.
And I would be ready to nominate the work reviewed in the link below:
“have won the first–and hopefully last—Dynamite Prize in Economics.”
HA HA… you think so? When our cultural conciousness is committed to capitalist growth economics, and our biosphere’s limits are being reached at the same moment in time, there can only be more economic collapse in the works. Don’t kid yourselves.
“$43,750 whereas the “less rich” person got a rebate (or “tax cut”) of only $14,400 ?”
Yes, because the person who earned less had given less in the first place. You don’t get a $2000 rebate on an ice cream sandwich, but you might on a car.
Why are guys like you so math challenged? The guy truly earning more is still pulling weight for the poor by paying for their roads and sanitation. I’m not talking of political thieves like democrat Franklin Raines who looted Fannie Mae. I’m talking about guys who actually made their money honestly.
Why should the average Japanese American who waits till his/her middle age to start a family (and therefore has an high average income) have to subsidize the average Puerto Rican that pumps out so many kids their averasge age is nearly half that of the Japanese-American, and therefore makes way less? Income goes up with age and with the ability to invest more in fewer children.
Not only are you math challenged but you believe in unjust results.
In this line of work a dymatie prize is desperately needed and a year is too long to wait when we have been waiting 30 years for some decent policy. I think whats needed here is a cluster bomb award -(will kill one woeful authour and every mate in his bibliography list).
Hmm is anyone else experiencing problems with the images on this blog loading?
I’m trying to figure out if its a problem on my
end or if it’s the blog. Any feedback would be greatly appreciated.
No, images load fine.