Stephen Rees's blog

Thoughts about the relationships between transport and the urban area it serves

Economics 101: Everything you know is wrong

with one comment

Pete McMartin with thge aid of the son of J K Galbraith decides to go after academic economists who failed to predict the size of the crash.

But the he also quotes Alan Greenspan

“I made a mistake,” Greenspan told a congressional committee, “in presuming that the self-interests of organizations, specifically banks and others, were such as that they were best capable of protecting their own shareholders and their equity in the firms.”

I do not see that economics is at fault. I think the problem is, has been and continues to be, the blind pursuit of a political theory that says markets work best when they are deregulated. And that is what Greenspan said too. After the 1931 banking crisis a lot of new regulations were brought in to prevent that sort of thing happening again. The failure of Reagonomics was already apparent in the great Savings and Loan scandal – but exactly the same policy was applied to banking. And it wasn’t just that the academic economists did not understand the extent and complexity of the debt issues – obviously most of the people who were buying and selling them did not understand either. Or, more believably but not yet proven in court, the people who were profiting from this giant Ponzi scheme, knew very well that it was a house of cards and fraudulently went on pumping out worthless financial instruments and vastly enriching themselves.

What I still do not understand is why this behaviour was then rewarded with $700bn of US taxpayers’ money.

In any event, economists in universities were not in charge or even being given much regard in the irrational exuberance of the run up in the bubble. Everybody knows that these things are unsustainable, but cannot resist the opportunity to make a quick killing when it seems that it is easy to buy low and sell high. And the course of economic history is littered with examples of bubbles and what happens when they burst.

And in academia there has long been a debate between “the Chicago boys” and the Keynesians – and it was the latter who have been pointing out that the problem with the right wing policy nostrums was that there was plenty of evidence that they did not work.

By the way, if you did attend Economics 101 and managed to stay awake you would not have heard one word about derivatives. That is study material for graduate students in research programs.

Written by Stephen Rees

November 21, 2008 at 10:09 am

Posted in Economics

One Response

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  1. You know, I’m actually with the “Chicago boys”. Markets do work best when deregulated. The trouble being that the faithful wimp out when the tough times come. The best thing for the market would be to let it crash. No $700 billion bailout. Nothing teaches the the danger of mindless greed than falling flat on your face. You can bet that if there was no bailout, the business community would gain a very full appreciation of the short sightedness of blind greed. Eventually the economy would rebuilt and people would remember next time not to touch the stove when it is red hot.

    In my view, the government should be there to attend to the needs of those who are unable to help themselves. If you fall on hard times, society as a whole should ensure that your basic needs are met (food, shelter, health care and education) …through the government which is theoretically the collective arm of what society as a whole wants to achieve. When you pick yourself up, the sky is the limit. When you go too far however, you are on your own. No corporate bailouts. You don’t get a bailout until you are looking homelessness and hunger square in the face. At that point, society will look after your basic needs and help you get back on track. In short, give help to those who really need it and leave everyone else alone. When the mighty fall however, let them fall. That is the only way many will learn.

    To be on record, I don’t support the libertarian stance as it goes too far. There is a lot to be appreciated from it however. Things like urban planning are just a fact of urban life….something which hard core libertarians chafe against. The government is a reflection of society’s collective interests…in theory, unfortunately not in practice. Our interest is in giving people the freedom to do what they want…unfettered, while providing for those on hard times, demanding sustainable living spaces, and defending the environment which is our collective heritage and responsibility. Its a stance that takes a little bit from every political view and one that nobody thinks would ever work….which is probably why I like it so much.

    John

    November 21, 2008 at 10:01 pm


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