Tyler Cowen misconstrues Austrian theory, supports Krugman

I'm shocked. Shocked.

See here.

DeLong demands more debt and money dilution

See here

DeLong fraud

What Is Austrian Economics?


Me, over at Martin Wolf's Exchange:



Let me give eight propositions that I think of as "Austrian," meaning that they have been maintained by some "Austrian" somewhere and somehow, and assess them:



(1) IF THE FEDERAL RESERVE HAD FOLLOWED A "SOUND" MONETARY POLICY--"SOUND" MEANING THAT IT SHRANK THE STOCK OF HIGH-POWERED MONEY AT THE SUM OF THE TREND GROWTH RATES OF THE INSIDE MONEY MULTIPLIER AND OF VELOCITY--THEN WE WOULD NOT HAVE FINANCIAL CRISIS OR BIG RECESSIONS.



Status: FALSE. Requiring trend deflation at the rate of labor force and labor productivity growth in order to keep nominal spending without a trend would be more likely to generate waves of universal bankruptcy, deep financial crises, and big recessions than our current system.



(2) SPECULATION AND LACK OF PRUDENCE IN FINANCIAL MARKETS LED TO OVERBUILDING IN HOUSING IN THE MID-2000S.



Status. TRUE.



(3) OUR ONLY SIGNIFICANT PROBLEM IS GOVERNMENT: IT WAS FECKLESS AND OVEREXPANSIONARY GOVERNMENT POLICY LED TO THE SPECULATION AND THE BUBBLE THAT CREATED THE PROBLEM.



Status. FALSE. It is certainly the case that sufficiently austere policy can keep any bubble from ever arising, but the costs of such policy are high. And periods in which monetary policy is overexpansionary are periods in which households, feeling flush, expand their consumption spending and create consumer price inflation. There was no wave of rising consumer price inflation in the 2000s.



(4) OUR ONLY SIGNIFICANT PROBLEM IS GOVERNMENT: IT WAS GOVERNMENT GUARANTEES OF FANNIE, FREDDIE, OF COMMERCIAL BANKS, AND OF TOO-BIG-TO-FAIL UNIVERSAL BANKS THAT WERE THE ONLY SIGNIFICANT CAUSES OF OUR CURRENT PROBLEMS.



Status: FALSE. We had financial crises and recessions like this long before we had FANNIE, FREDDIE, or commercial bank deposit insurance. And the princes of Wall Street and the shareholders of our universal banks now all wish that they had emulated Jamie Dimond and Lloyd Blankfein and gone short the subprime mortgage market in 2006. "Heads we win--tails the government pays" was not in the forefront of the minds of those whose wealth was invested in the bank stocks that have still lost much more than half their value since the summer of 2007.



(5) BECAUSE OF OVERBUILDING IN HOUSING, WE WERE DOOMED TO HAVE A PERIOD OF HIGH UNEMPLOYMENT AS THE ECONOMY REBALANCED ITSELF AND TRANSFERRED RESOURCES OUT OF THE HOUSING CONSTRUCTION SECTOR.



Status: FALSE. There is generally no period of high unemployment when resources are transferred out of consumption-producing sectors into investment goods-producing sectors. There is no necessity that the transfer of resources out of investment goods-producing sectors be accompanied by high unemployment. The business of shifting resources between sectors is pretty much orthogonal to the business of maintaining near full-employment and proper capacity utilization. Indeed, high unemployment and low capacity utilization are much more obstacles than aids to sectoral readjustment and reallocation: how can the market figure out where resources have their best economic use when no use produces a profit on the market?



(6) OUR CURRENT PROBLEMS ARE THE RESULT OF THE NEED TO TRANSFER RESOURCES OUT OF HOUSING CONSTRUCTION AND RESTORE TREND GROWTH EQUILIBRIUM BETWEEN THE SECTORS.



Status: FALSE. The housing sector adjustment is over. We are now back to trend in the number of houses. And we are well below trend in new houses being built. If this period of depressed economic activity were primarily a way of transferring resources out of housing construction and shrinking the housing capital stock and the house-building industry back to its sustainable long-run trend size, the period of depressed economic activity would be over.



(7) EXPANSIONARY MONETARY POLICY IS UNWARRANTED BECAUSE IT WILL ONLY BOOST SHORT-TERM EMPLOYMENT IF IT WILL ONLY LEAD TO ANOTHER BOUT OF ASSET PRICE INFLATION AND A BIGGER RECESSION DOWN THE ROAD.



Status: FALSE. See "crying 'Fire! Fire!' in Noah's Flood..."



(8) EXPANSIONARY FISCAL POLICY IS UNWARRANTED BECAUSE IT WILL ONLY BOOST SHORT-TERM EMPLOYMENT IF IT LEADS TO ANOTHER BOUT OF ASSET PRICE INFLATION AND A BIGGER RECESSION DOWN THE ROAD.



Status: FALSE. See "crying 'Fire! Fire!' in Noah's Flood..."



In general, exercises like this are much more fruitful if they are applied not to a vague concept--an "Austrian"--but to a living, breathing articulate example of Economicus Danuviensis...





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UPDATE: Here's one, posted below my comment by Luis H. Arroyo: Economicus Danubiensis in the 1930s:



Does Austrian economics understand financial crises better than other schools of thought?
Martin Wolf's Exchange: ...still more difficult to see what lasting good effects can come from credit expansion. The thing which is most needed to secure healthy conditions is the most speedy and complete adaptation possible of the structure of production. If the proportion as determined by the voluntary decisions of individuals is distorted by the creation of artificial demand resources [are] again led into a wrong direction and a definite and lasting adjustment is again postponed. The only way permanently to 'mobilise' all available resources is, therefore to leave it to time to effect a permanent cure by the slow process of adapting the structure of production...

Krugman: Liar or dingbat? How about both at the same time.

Due his Princeton professorship and Nobel Prize, I had always assumed that Krugman was simply a brilliant liar.  But after reading this piece in the The New Yorker, the only conclusion one might have is that he is a true blue dingbat.  He's still a prodigious liar, but a very stupid liar. 

Here we find a brilliant Krugman critique of libertarianism.  Pitiful.

UPDATE:  The New York Times graciously printed my comment to Krugman's post here.

Stimulus vs stimulus

There's no question that when a specific person receives government cash (specifically, cash that has been described as Keynesian "stimulus") that such person is now richer than before. 

The problem is the idea of "stimulus".  The Keynesians (being dunderheads) see "the economy" as a merry-go-round stuck in neutral without "stimulus". That's preposterous.  There's no basis for such an assumption in fact, logic or history (which is why Keynesians get absolutely hysterical and call you names when you challenge them). 

As we can all see from recent events, the forced wealth transfers do nothing to restart the stalled merry-go-round (which is stalled in the first place DUE TO KEYNESIAN POLICIES).

Keynesian Dean Baker and the media

That's the alleged topic of his blog.  Here, he finds Steven Pearlstein of the WaPo minimizing how poor reporting by the press (I call it ghastly and horrible) exacerbated our present crisis.

He [Pearlstein] tells readers that:

"Three years after the onset of what was then thought of as the "subprime crisis," there remarkably is still no consensus on why it happened, who is to blame, how necessary the government bailouts were and what needs to be done to prevent such a cataclysm from happening again. Over time, the issues have been overwhelmed by populist anger, infused with political ideology, distorted by partisan maneuvering and special-interest pleading, and ultimately eclipsed by economic recovery."

Yeah, it's all really really complicated. Except it isn't.

Nationwide house prices had diverged from a 100-year long trend, increasing by more than 70 percent in real terms. There was no remotely plausible explanation for this run-up. What is hard to to understand to about this? What is complicated? Third grade arithmetic was all that was needed. It's simple, not complicated.

The run-up in house prices was driving the economy. This was also really easy to see. The government publishes GDP data every quarter. The data showed that housing construction had exploded as a share of the economy. You just had to look at the data. It's simple, not complicated.

The data also showed that consumption was booming and savings had fallen to near zero. This was driven by the well-known housing wealth effect. It's simple, not complicated.

It's even more simple than Baker thinks because the entire mess was caused by his beloved Fed and its program of theft and fraud.

Is Robert Reich a crazy right winger?

In his Salon.com post of April 12, 2010, the famously liberal Robert Reich notes:

Sixty years later, we boomers have a lot to be worried about because most of us plan to retire in a few years and Social Security and Medicare are on the way to going bust [NO!!]. I should know because I used to be a trustee of the Social Security and Medicare trust funds. Those of you who are younger than we early boomers have even more to be worried about because if those funds go bust they won’t be there when you’re ready to retire.

It’s already starting to happen. This year Social Security will pay out more in benefits than it receives in payroll taxes. The tipping point came sooner than anyone expected [anyone?????] because the recession has kicked so many people off payrolls. But it was coming anyway.

By saying that these entitlements were unfunded and are going broke, I guess that makes Reich a crazy right winger.

Glenn Greenwald: More cause and effect in the War against Terrorists and O'Reilly is insane

From Greenwald's 4/12/10 Salon post:

As I wrote about last week, American troops in mid-February entered a village in the Eastern Afghan province of Paktia, killed five civilians (a male government official, his brother, and three female relatives, including two pregnant women and a teenager) and then lied about what happened. ABC News this week described the efforts of U.S. Special Forces to apologize to Haji Sharabuddin -- the 80-year-old patriarch of that family who lost two sons, two daughters and a granddaughter in the attack -- by offering him two sheep [!!!!] (a gesture of begging forgiveness in Pashtun custom)......

We know that drone launched missiles have killed hundreds of innocents.  700 dead by some accounts.  BHO couldn't be a war criminal, could he?

The mass slaughter of third world innocents:  Finally, O'Reilly finds a reason to love Obama.  I guess that makes me a right wing crazy AND a member of the "extreme left" simultanously.

Martin Wolf and Keynes by Mattias Svensson

Check this out.  A great blog post on Wolf and Keynes by Mattias Svensson.

Krugman Charges Neanderthals with Being Self-Hating Jews

An excellent post by Robert Wenzel:

Well, not quite, but almost the same.  He is suggesting that Austrian economists are self-hating Keynesians:

What happens, instead — or at least that’s how I read it — is that Austrians slip Keynesianism in through the back door. Implicitly, they associate booms and slumps with rising or falling aggregate demand — utterly unaware that their own theory doesn’t actually make room for such a thing as aggregate demand to exist, or at least to affect overall employment. So Austrians are basically Keynesians in denial — self-hating Keynesians? — pretending to themselves that they’re not using ideas that are in fact essential to their story

You can't call Neanderthals self hating-Jews because they roamed the land long before Jews even existed.

 And you can't call Austrians self-hating Keynesians because most of the work in Austrian business cycle theory was done pre-Keynes.

Ludwing von Mises wrote the Theory of Money and Credit in 1912.

Friedrich Hayek published the German version of Monetary Theory and the Trade Cycle and The Paradox of Saving in 1929.

Keynes' two-volume Treatise on Money wasn't published until 1930. And the Keynesian bible, The General Theory of Employment and Interest, wasn't published until 1935, by this time even Hayek's Prices and Production had been in print for four years.

Further, even the Nobel Committee, Krugman might recognize them as an authoritative body, pointed out that Hayek had developed enough of his business cycle theory before the 1929 crash to be one of the few to warn of that crash:

Perhaps, partly due to this more profound analysis, he was one of the few economists who gave warning of the possibility of a major economic crisis before the great crash came in the autumn of 1929.

 Some, self-hating Keynesian. The time-line doesn't fit.

Bottom line. Krugman continues to fail to look at the important role money plays in directing economic activity, when a central bank manipulates the money supply. It's almost as if he hates to think about the influence of money.

As I explained in a prior post, Krugman might best be described as a self-hating Austrian (of course, this entire smear of a self-hating anything is absurd).  He demands government money dilution, then notes that the economy runs off the rails. So he wants government regulation to fix the problem while blaming the problem on laissez faire.

Keynesian Liaquat Ahamed wins Pulitzer for another restatement of the false narrative of the Great Depression

Liaquat Ahamed has been awared a Pulitzer Prize for his 2009 book "LORDS OF FINANCE - The Bankers Who Broke the World"

Back in January 2009, Joe Nocera of the New York Times gave a glowing review containing yet another restatement of the relentless fraud which holds that "economic orthodoxy" and the "straightjacket of the gold standard" caused and prolonged the Great Depression.

Besides, the central bankers were prisoners of the economic orthodoxy of their time: the powerful belief that sound monetary policy had to revolve around the gold standard. That is, each country’s reserve bank had to have a certain amount of gold in its vaults to back up its currency — and indeed, “all paper money was legally obligated to be freely convertible into its gold equivalent,” as Ahamed says. Again and again, this straitjacket caused the central bankers — especially Norman, gold’s most fervent advocate — to make moves, like raising interest rates, that would allow their countries to hold on to their dwindling gold supplies, even though the larger economy desperately needed help in the form of lower interest rates.

******

The central bankers of the 1920s and ’30s were flying blind; Ahamed makes that quite clear. They could only hope the moves they made would help the economy instead of hurting it. Sometimes they were right, but often they were wrong. We like to think that today we have a better grasp of the machinery that moves an economy — but do we? Federal Reserve Chairman Ben Bernanke and former Treasury Secretary Henry Paulson were much quicker than the earlier lords of finance to throw money at the banking system to prevent it from collapsing, a lesson they learned from the inaction of the Federal Reserve in the 1930s. But Paulson also allowed Lehman Brothers to default, an event that set off a contagion of failure around the world.

Of course!  Because Paulson allowed Lehman Brothers to default set off a contagion of failure around the world.  Our problems were all caused by A LACK OF MORE BAILOUTS!  What would we do without the NYT?

L. Albert Hahn and "The Economics of Illusion" from 1956

L. Albert Hahn wrote "The Economics of Illusion" in 1956 about the Keynesian Hoax. It most surely is a hoax.  He states in his introduction about Keynes' theory :

The ensuing picture of the economy appears to the non-Keynesian as a sort of trick film. Everything happens in a manner that is exactly the opposite of what he is used to. It is no longer the supply of labor, but the propensity to consume that determines the volume of production; the old and oft-refuted underconsumption theories — of which Keynes's theory is no more than a replica — once more become respectable.

Indeed.

Dean Baker is a Keynesian

We all knew that.  Here he responds to DeLong's critique of Baker's new book:

I don't ordinarily use BTP for addressing items that mention me or my work, but I'll make an exception in the hope of getting a good exchange going. Brad DeLong was good enough to begin a review of my book False Profits on his blog. After graciously giving me credit for recognizing the housing bubble and the dangers it posed, Brad goes on:


"But let me start by saying how I disagree with the book. I think that its story of the linkages between our current crisis and Federal Reserve policy is significantly overstated. Its argument about how excessively-low interest rates caused the housing bubble is exaggerated. I think that its belief that the Federal Reserve could have taken much more action to curb the housing bubble while is underway is also exaggerated, and does not recognize the very real constraints that the Federal Reserve works under and all but ignores the costs of austerity. And it overstates the strength of the links between the housing bubble and the housing crash on the one hand and our current situation of macroeconomic despair on the other."

Okay, let's go point by point.

1)"Its argument about how excessively-low interest rates caused the housing bubble is exaggerated."

That doesn't sound like my book. I argued that the weak economy caused by the crash of the stock bubble demanded stimulatory policy. Low interest rates were the right policy -- we needed them to recover from the stock bubble. However, this did create an environment that was conducive to the growth of bubbles. If the Fed had kept the Federal Funds rate at 5.0 percent I feel pretty confident in saying that we would not have had a housing bubble -- very high unemployment, but no housing bubble.

2) "I think that its belief that the Federal Reserve could have taken much more action to curb the housing bubble while is underway is also exaggerated, and does not recognize the very real constraints that the Federal Reserve works under and all but ignores the costs of austerity."

Let's see, my policy prescription was to have every last staffer at the Fed devoting all of his/her time to documenting the evidence for the bubble and the dangers it would cause to the economy. I would have had Alan Greenspan use his congressional testimonies and other public speaking engagements to warn of the risks of the bubble. This doesn't mean mumbling "irrational exuberance," it means carefully showing with charts and graphs how house prices have followed an unprecedented and unsustainable path. He also should have warned explicitly what would have happened to the banks that had made big bets on the bubble when it burst.

In addition, they should have made full use of their regulatory power (including working with other regulators) to crack down on the issuance and securitization of junk mortgages. The "who could have known?" line is crap. These loans were being issued by the million, there is no way Greenspan could not have known about them.

Would this have worked? Brad for some reason is very confident it would not have. It certainly would have been nice if the Fed had tried (what was more important?), then we would both know for sure.

As a last resort I would have raised interest rates. I hate to throw people out of work (except Wall Street bankers and economists), but it would have been better to preemptively burst the bubble rather than let it run its course and be where we are today.

3) "it overstates the strength of the links between the housing bubble and the housing crash on the one hand and our current situation of macroeconomic despair on the other."

There is a pretty direct line from the falloff in residential construction due to the overbuilding caused by the bubble, the falloff in non-residential construction due to the overbuilding caused by the bubble, and the falloff in consumption as a result of the lost housing bubble wealth and where the economy is today. I don't see much obvious room for a financial crisis in this explanation. The crisis may have brought the downturn on more quickly, but it seems that the basic problem is the loss of the demand generated by the bubble.

I have a strong ally in this argument: Spain. Spain did not have a financial crisis, but it now has 19 percent unemployment, the highest in the EU. The explanation is that Spain had a really huge housing bubble. It is not easy to find new sources of demand to replace 8-10 percentage points of GDP.

--Dean Baker

To understand these guys, one must first wrap one's brain about two little assumptions that they make:

1.  Keynesian economics is primarily a theory designed to explain how market economies can remain persistently depressed (so claims Krugman here).

2.  They are a lot smarter than the rest of us and have a duty and a right to treat us like rats in their maze.

Both of these assumptions are false.  "Market economies" don't remain persistently depressed and neither Baker, DeLong nor Krugman are sufficiently omniscient to allow them to overcome the need for free-market pricing.  You know, the little problem of "socialist calculation".

Paul Krugman the self-hating Austrian

Krugman is just a self hating Austrian. He dimly realizes that money dilution causes problems. But in his little totalitarian "I'm smarter than the masses" mind, those problems can and must be solved by the BIG NANNY Mary Poppins, not by the market and an elimination of money dilution.

As Krugman and the Keynesians dimly take note of the mess caused by money dilution, they nevertheless attribute the malinvestments that invariably occur therefrom to laissez faire and the free market. Thus, if the Fed and the banks lend money created out of thin air while the borrowers of that new fiat money can still spend/invest that new money however they please, that system must be called "laissez faire" according to Krugman.

This is what we are up against: Fraud ab initio even at the definition stage of the debate by Krugman and his minions.

1933 pro-inflation clip

1933 pro inflation clip:

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

Liars, scumbags, Krugman, Blodget and Yahoo Finance (excuse the redundancy) demand that savers be wiped out

Can you believe these guys?

Everyone thinks the Fed's job is to fight inflation, but right now the Fed is actually doing everything it can to cause inflation.  Why?  It part to help the economy get cranking again. Inflation provides an incentive for people to spend cash rather than saving it, because if they save it, the cash will lose value rapidly.

Inflation also helps solve another problem, though--our debt problem. The more inflation we have, the less our dollars will be worth. Because our debts are based on a specific number of dollars and not a specific value, the less our dollars are worth, the easier it will be for us to pay off our debts.

(Imagine owing someone 100 Zimbabwe dollars at a time when the currency is collapsing. If you wait a week, the value of the Zimbabwe dollar will have collapsed, and you'll be able to pay off your 100 Zimbabwe-dollar debt with currency that is only worth half as much as it was the week before).

The Fed can't admit that one reason it wants high inflation is to reduce the real burden of our debt, but you can bet that that's one of its objectives. What's more, says Nobel-winning economist Paul Krugman, inflation should be one of the Fed's objectives. Because that's how we've gotten out from under debt burdens in the past.

Here's Krugman:

So how did the U.S. government manage to pay off its [World War 2] wartime debt? Actually, it didn’t. At the end of 1946, the federal government owed $271 billion; by the end of 1956 that figure had risen slightly, to $274 billion. The ratio of debt to G.D.P. fell not because debt went down, but because G.D.P. went up, roughly doubling in dollar terms over the course of a decade.

In other words, after World War 2, we didn't "pay down" our debt. We grew into it.
And, importantly, this growth came from a combination of real growth AND inflation:
The rise in G.D.P. in dollar terms was almost equally the result of economic growth and inflation, with both real G.D.P. and the overall level of prices rising about 40 percent from 1946 to 1956.

So inflation is an important tool in getting us out of this mess. It's painful and unfair--those who have been responsible and saved money will pay the price for those who borrowed money, racked up huge debts, and spent more than they could afford. But it's what the Fed is (quietly) aiming for.

Then we get "banned for life" fraudster Henry Blodget calling for wiping out of the savings of savers and those on fixed incomes: