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‘Fight of the Century.’

By: Moe Lane (Diary)  |  April 28th, 2011 at 11:00 AM  | 

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(Via Instapundit [and @Aaron_RS]) EconStories has another one of their extremely good Keynes v. Hayek videos up:

My only issue with this series is that it’s fairly obvious that the creators are fundamentally on Hayek’s side… and while they do (I think) a credible job of being fair to Keynes it would be helpful for the economic debate if there was somebody who was ready to as passionately, entertainingly, and creatively argue Keynesian theory on its own merits.  Of course, there is some argument whether Keynes himself would be comfortable with some of the stuff done in his name these days…

Moe Lane (crosspost)

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  • Death_of_the_Donkey

    1) Keynesian economic will work provided they are used under the assumptions Keynes had (ie that we had roughly balanced budgets during good times and that his policies were mainly to be used to counteract credit type collapses, not typical cyclical recessions). In other words the potential benefits of Keynesian policies are diminished when you essentially run them non-stop for the last 30 years.

    2) The Austrians may very well be right in the long run, but to invoke their policies will involve considerable short-term pain (ie another deep recession) AND we would first have to solve the issues related to financial regulation and limitations of “financial innovation” in order to prevent another situation like we had in 2008. You cannot simply say no bailouts, if you set rules up that allow financial firms to potentially destabilize the entire economy through their failure.

  • http://teapartisan.wordpress.com Loren Heal

    is that since people make money when times are good, making more money will cause times to be good.

    But it doesn’t work that way. The reason it doesn’t work is that recessions are caused by a combination of misallocated labor and capital. People with money are trying to do the wrong things, either because they tried what everyone else was doing or are stuck with old technology. People who sell their labor have skills no one wants, at least in their local labor market, or expect too much money in return for it than the people with the money are willing to pay.

    So throwing more money at these inefficiently allocated resources only continues the conditions as they were.

    So yeah, the Austrians are right. The Keynesians are wrong.

    I should blog this.

  • The_Gadfly

    You can’t have Stagflation if Keynesianism is factual. Liberals are unwilling to admit to this because it was the only economic theory that supports their policy desires.

  • Jim

    “You cannot simply say no bailouts, if you set rules up that allow financial firms to potentially destabilize the entire economy through their failure.”

    This is why proponents of Austrian economics are typically against (or at least very skeptical of) central banking, fractional reserve banking, and fiat money. The argument is that in the absence of these institutions and activities there would be significantly less monetary inflation and artificial credit expansion that leads to the sugar-high booms/bubbles and subsequent crashes. With no “lender of last resort” that typically bails out the financial firms in question, they would be forced to behave more responsibly since they are on the hook for their activities (i.e. they can actually go bankrupt) and cannot lean on the taxpayer or the printing press. That is true and effective regulation in the free market sense.

  • Ann_W

    Fannie and Freddie’s quasi governmental status and agenda caused mortgages to have a much higher level of risk than they had had historically. But issues of them guaranteeing garbage mortgages and the govt already bailing out “too big to fail” interests (see Mexico’s debt) interfered with the normal market mechanisms that would have prevented 2008.

    My husband’s co. had already pulled out of mortgage related instruments before the crash because of risk questions. More companies would have been skeptical if the government wasn’t interfering and enabling bad behavior.

  • Death_of_the_Donkey

    you remove corporate protections from Wall Street and put the partners at risk personally (like all those firms were up through the 80s I believe). Bankruptcy isn’t that huge of a threat if you can suck profits out with no future liability.

    As for fiat money, I hate to say it, but specie is dead. You simply cannot have a global, dynamic, and growing economy with the gold standard.

  • Death_of_the_Donkey

    but CFMA and FSMA that made all those financial innovations not only legal, but essentially unregulated. It also wasn’t fannie/freddie who let the i-banks (and hedge funds) lever up at 40:1. And it surely wasn’t fannie/freddie that made high frequency trading or the explosion in commodity (and leveraged) ETF’s legal. Banks are supposed to be the facilitators of the economy, not an entity of creation in and of themselves.

  • steve010

    Volker and the all the stagflationers believed in this until the theory was totally disproven during the Carter Admin. Says that the economy can’t sustain unemployment and inflation at the same time. So to cure unemployment, just inflate your way out of it. The problem now, I think,is Bernanke still believes this claptrap. Should have sold everything and bought silver at 11.

  • Jim

    You’re right, I guess I was a little lazy in my description. When I said bankruptcy, I meant what you said, not the legal protections that allow partners to be shielded from harm.

    As for the fiat money question, I don’t think it is as simple as saying we live in a more complicated world, therefore a stable monetary unit is not feasible. We have only been under a truly fiat money system for about 40 years and it can be argued that it has resulted in a unprecedented amount devaluation of the currency and loss of purchasing power of the monetary unit. I am not saying a return to the the classical (19th century) gold standard is the answer, but this purely fiat money system post-1971 cannot be viewed as clean as the wind driven snow.

  • Ann_W

    But the issue is that Fannie and Freddie required and pushed on mortgages that were very risky. Their guarantee of purchasing mortgages from lenders caused those lenders to not worry about much higher levels of risk than were historically found in mortgages. When these mortgages were bundled and played with the people making the instruments were using historical risk numbers that were no longer applicable because of govt. interference.

    These shenanigans should have caused the management of these cos. to be afraid of and research these new instruments, however, the history of govt. rescuing when problems were too big + the cozy relationship these firms had bought with Congress contributed to management not worrying too much. And they were right– how much of the management that was responsible felt the consequences of crashing the cos. they were in?

  • http://impudent.edublogs.org/ kyle8

    simply brilliant. Every part of it.

  • DaveWT4

    Shuffling along, unaware that they are dead, their appetites for brains (money) forever unfulfilled.

  • http://impudent.edublogs.org/ kyle8

    what he is doing is scary as hell.

  • http://impudent.edublogs.org/ kyle8

    There is no substitute for sound money and sound lending policies. Anything else leads to bubbles and busts.

    The Fed is marginally useful, but it should operate under strict monetary standards, we give the Fed board too much leeway.

    Another problem is that we ignored our anti-trust laws allowing ever more mergers among financial institutions that led directly to “too big to fail”.

  • Raven

    It’s when a salesman buys his own product to increase commissions and drive up demand.

  • http://impudent.edublogs.org/ kyle8

    They believe what they believe and are immune to evidence to the contrary. It is their religion. (or rather their favorite part of an overall religion of liberalism.)

  • Death_of_the_Donkey

    The Republican Congress in 1999 (and signed by Clinton) passed FSMA which not only allowed commercial banking to combine with i-banking again (ie repealed Glass-Steagal), but also essentially eliminated size constraints.

  • Death_of_the_Donkey

    not some government decree. And exchange rates will always vary with different interest and growth rates globally. While we should strive for conditions that would otherwise make our economy strong (and hence a stronger currency), we should not tie ourselves down to an exchange rate (or policy of such) that would force slow growth just to hit those targets.

  • Death_of_the_Donkey

    until very late in the bubble. Prior to that it was almost an entirely mortgage broker (ie non-CRA covered entities) to Wall Street game. The real culprits here that have completely been let off the hook are the ratings agencies that gave all this crap AAA ratings. Had those agencies been honest and rated the subprime crap what it should have been, the bubble would have been much smaller in scope because the demand for lower rated securitizations would have been dramatically less, thereby preventing the mortgage brokers from lending.

  • http://www.examiner.com/x-1597-Charlotte-Law--Politics-Examiner Mike gamecock DeVine

    Keynes himself denounced FDR’s “reform” before “recovery” policies that resemble Obama’s.

    Bernanke made his academic mark as an expert on the depression and is obsessed with not having a restrictive money supply be the cause of a 2nd great depression. more later

    Ben was in lock-step with Greenspan’s way-too-loose money supply policies after 911 and for way too long thereafter, that helped cause all the real estate investment that could produce a bubble so large that it took on the role of a 1929 equivalent to the stock market crash.

    Bernanke is Greenspan only more pure.

    Mush as Obama voted for all the TARP and budgets of Bush’s last 2 years!

  • http://impudent.edublogs.org/ kyle8

    and they all were, none were judged too big, or to questionable.

  • Diogenes314

    It was Congress that attempted to legislate a ‘right’ to home ownership-whether you could make the payments or not. It was Congress that decreed 20% of all loans go to high risk mortgages. It was Congress that empowered groups like ACORN to blackmail, coerce and threaten financial institutions into doing so.

    Great video, BTW.

  • Jim Tomasik

    on Married with Children even though Al did not like it much.

  • Jim Tomasik

    xxx

  • banzaibob

    This war is lost.

    We spend more and more and we still have poor.

  • Diogenes314

    But at least he isn’t Nobel Prize material. Then we’d be in real trouble.

  • Ann_W

    You’d think when something was unsuccessful for so long they’d at least try a different approach.

    Same w/ education– it gets worse and worse, yet, if we could just give yet more money to the teacher’s union they know it will work!

  • Ann_W

    Even the ratings agencies were affected by new realities for which they didn’t have historical data to analyze. You’re not going to convince me that private corporations would have created this huge mess if their livelihoods were completely on the line.

  • aesthete

    To add to that, regulation of financial markets needs a major overhaul regardless of whether we went Austrian or maintained the current paradigm. The truth of the matter is that economies of scale and globalization necessitate mega-banks, and that regulation needs to take account of this (i.e., not necessarily pursue a policy of shrinking or dismantling that sector) while avoiding the pratfalls associated with regulatory capture and other harmful public-private “partnerships”.

  • aesthete

    Even better than the first one. I would not recommend it for someone looking for a fair take on both Keynesian and Austrian economics, though. It was really more like a very clever Austrian fighting with his (only somewhat intelligent) strawman version of Keynesianism.

    I would be interested in seeing a Keynes v Friedman/Fischer for the next video, or perhaps even Hayek v Friedman.

  • http://www.examiner.com/x-1597-Charlotte-Law--Politics-Examiner Mike gamecock DeVine
  • The_Gadfly
  • The_Gadfly

    Something we agree on.