108d4836_brary_of_Economics_and_Liberty__ast_Highlights_HIDE_HIGHLIGHTS
[Time] 19:32
Application: current financial mess and implications for the economy. Symposium at Cato, on Cato Unbound. Larry White: Don't want to use greed because it's always there. Explanation has to do with government's guarantee of Fannie and Freddie, pushing up the demand for housing, bad tax policy pushing up the demand for housing, lowering interest rates pushing up the demand for housing.... Housing bubble, securitization. Brad Delong critiqued Larry's explanation: The timing's been all wrong; just like greed's always been around, Fannie and Freddie have always been around, Community Reinvestment Act (CRA) has always been around, therefore those can't be the cause of the crisis. Ignores that Fannie and Freddie's mission did change around 1995 explicitly to lend more to poor people. Don't want to argue that just because they've existed longer that nothing changed. Magnitudes. At end of Delong's critique: So why does Larry White's diagnosis of what is going on differ so much from mine? I think that what is going on is a characteristic weakness of the Austrian tradition: the baseline assumption that all evils must have their origin in some form of government misregulation. If government could be drowned in the bathtub, then an Eden in which people indulged in their natural propensity to truck, barter, and exchange would emerge. And this automatically rules out what I regard as the most likely and fruitful road to walk down to understand this financial crisis: the road that starts from investigating how human psychological limits lead to bad private-sector contract design that then magnifies psychological biases. I am not happy with the state of such explanations--they seem to involve, at the moment, a great deal of handwaving. But in my judgment it is less handwaving than required to make the case that our current financial crisis is the result of our abandonment of a proper gold standard and our embrace of fractional-reserve banking and government-sponsored mortgage lending enterprises. Poor Larry White, hampered in understanding. Could make same critique of Delong; or Joseph Stiglitz, who in an article in Vanity Fair blames it on deregulation, Glass-Steagal Act, Bush tax cuts and failure by Greenspan to regulate. If we could just get the right regulation an Eden would emerge. So, is there any way to get to the truth about what happened in this financial mess? Both sides try to create an ex-post narrative to explain a single event. Not the best way to do science. Podcasts on the New Deal. Do we just need a really big stimulus package? Paul Krugman? What's the evidence? Very thin. Opposition not empirical but logical: spending on one thing will reduce spending on something else. Crucial policy issue: how much evidence either way, or do sides just talk at each other? Trust, optimism: economics doesn't have much to say about that. Maybe whole system is too complex to manage. Economics may be most useful about what not to do, providing a language for thinking about complex matters in an organized way. As a science, coming up short these days.
Roberts (and Hanson) on Truth and Economics | EconTalk | Library of Economics and Liberty