Clash of Economic Ideas

For those who are interested in the debate of the 1930s on the potency of different economic policies in fending of economic downturn, which of course is relevant to the current debate on how to react to the current economic crisis, Austrian economist Larry White at U of Missouri St. Louis, is in the process of writing a book on the topic.

Here is one of the chapters. (Scroll down the page and you will see it, Larry is presenting the paper at the NYU market process seminar)

Dr Doom

An interview of NYU's Nouriel Roubini, aka Dr Doom, in WSJ, more here.

Here are the best bits:

What exactly is Nouriel Roubini's economic philosophy? "I believe in market economics," he says, with some emphasis. "But to paraphrase Churchill -- who said this about democracy and political regimes -- a market economy might be the worst economic regime available, apart from the alternatives.

"I believe that people react to incentives, that incentives matter, and that prices reflect the way things should be allocated. But I also believe that market economies sometimes have market failures, and when these occur, there's a role for prudential -- not excessive -- regulation of the financial system. The two things that Greenspan got totally wrong were his beliefs that, one, markets self-regulate, and two, that there's no market failure."

How could Mr. Greenspan have been so naïve, I ask, hoping to get a rise. "Well," says Mr. Roubini, "at some level it's good to have a framework to think about the world, in which you emphasize the role of incentives and market economics . . . fair enough! But I think it led to an excessive ideological belief that there are no market failures, and no issues of distortions on incentives. Also, central banks were created to provide financial stability. Greenspan forgot this, and that was a mistake. I think there were ideological blinders, taking Ayn Rand's view of the world to an extreme.

Can Keynes Save Us All?

A short answer is no, and that's the conclusion of this interesting piece by Nobel Prize winner in economics (2006) Edmund Phelps in FT.

This bit is my favourite, at the very end of the piece:

Capitalism theory stresses diversity in sources of new commercial ideas, in the pool of entrepreneurs available for their development, in sources of finance – angel investors, venture capitalists and the rest – and in the array of end users.

It also stresses how important it is that owners of financial and business enterprises be accountable to no one (except their own consciences) – thus free to use their intuition – in contrast to the strict accountability rightly required of state employees. Thus a greatly increased presence of the central government in a country’s investment sector could constrict innovation and lower the quality of the innovations that are made. We would be left still in a slump.

At the end of his life Keynes wrote of “modernist stuff, gone wrong and turned sour and silly”. He told his friend Friedrich Hayek he intended to re-examine his theory in his next book. He would have moved on. The admiration we all have for Keynes’s fabulous contributions should not sway us from moving on.

Anna Schwartz: Blame Greenspan for the Sub-prime Crisis!

"There never would have been a sub-prime mortgage crisis if the Fed had been alert. This is something Alan Greenspan must answer for," she says.

More here from the British Paper the Telegraph. HT to Austrian Economists for the pointer.

Best Line I Have Read Today

The fundamental basis of capitalism is that mistakes must be borne.

That's professor Charles Wyplosz in FT commenting on the central banks' joint efforts in providing liquidity to curb the transformation of the sub-prime problem into a massive credit crunch.

The Most Intelligent Commentary on Sub-prime "crisis"

Here is the bottomline:

The deeper moral is simple. Financial markets exist to do risky things. The more risk they take, the higher the (expected) returns. You can use regulation to squeeze risk out of a segment of the market, say banks, but you don’t eliminate the risk, you just move it elsewhere. New segments, say hedge funds, emerge to take over the risk and the high (expected) returns that go with it.

The problem is that little is known of the new segment and its players, so the armies of regulators and supervisors that protect us look in the wrong direction because they don’t know where to look. There has been much talk about regulating the hedge funds; it might happen, so the game will move elsewhere.

The only way to eliminate financial crises is to fully eliminate risk. Kim Jung Il knows how; eliminate financial institutions. But that means no (expected) returns. (my emphasis)

The post is witty, well written and mostly jargon free. It tackles the sub-prime issue at a conceptual level that is hard to find in your daily paper. No, you won't even find it in your copy of FT or WSJ. Read the whole thing here.