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Totally insane and 100% True!

From Matthew Yglesias via Krugman, Laurence Meyer, a former Fed governor exposes something amazing…

“The content of his assertions sound completely insane, and yet to the best of my knowledge are 100 percent true:

There’s also another tradition that began to build up in the late seventies to early eighties—the real business cycle or neoclassical models. It’s what’s taught in graduate schools. It’s the only kind of paper that can be published in journals. It is called “modern macroeconomics.”

The question is, what’s it good for? Well, it’s good for getting articles published in journals. It’s a good way to apply very sophisticated computational skills. But the question is, do those models have anything to do with reality? Models are always a caricature—but is this a caricature that’s so silly that you wouldn’t want to get close to it if you were a policymaker?

My views would be considered outrageous in the academic community, but I feel very strongly about them. Those models are a diversion. They haven’t been helpful at all at understanding anything that would be relevant to a monetary policymaker or fiscal policymaker.”

I just read an article that was recommended on Linked In as a entailing of the bank cartels.” Turned out to be not so much…the article was by one of the leaders of the Austrian School of Economists, and celebrated the downfall of John Maynard Keynes. Well, the guy who wrote the article died in 1995. “Timothy Leary’s dead….and so is Murray N. Rothbard.” Rothbard should be read, as should Keynes. Schumpeter. Ricardo. Adam Smith. But, read with a grain of salt…things have changed, and when a positivist fanatic like Greenspan confesses that his fundamental assumptions were wrong about regulation and banks and interest rates and human nature, a critical thinker needs to be more critical.

I disagree with the fundamental premise of the article, that Keynes has been proven wrong or irrelevant. So do the current crop of top economists like Paul Krugman.  As I said, the article is actually very dated, since Rothbard died in 1995 as the Austrian School was triumphant and driving Gingrich and the Republican congress.  Keynes was pretty much ignored during the Reagan, Bush I and II and later Clinton administrations due to the influence of the wing-nuts of the Republican party who were advocating oddities like tax cuts during a war. Although in theroy, Keynesian thought has been vindicated in the recovery from the “Great Recession,” it has really only been applied around the edges. The limited successes of the stimulus spending have been due to the timidity of the amount invested. The monetarist versus fiscal divide really has stayed on the side of the Austrians — unless something changes radically with Sumner’s departure, we’ll probably stay stuck.

TARP didn’t do much for troubled assets; the rapid return of most of the money to the federal government is not necessarily something to celebrate. It transferred money to the banks who transferred it amongst themselves and then transferred it back. The troubled assets are still there…the houses that are in danger of foreclosure or incredibly upside down; the businesses that can’t get loans to carry them over. You know what improves stock prices today after 30 years of deregulation? Company performance? Nope — the current stock price. Like it or not, we are a consumer driven economy, and if consumers aren’t working and aren’t able to access money to purchase, then there’s not a lot of space to grow the economy. Which works well, I guess, for social media that depend on out of work and sub-optimally employed folks to read, review and hope as the pieces come in.

I’d love to see an uptick in manufacturing and construction. If there’s a lot of work building infrastructure, then there are going to be a lot of purchase orders for concrete, steel, asphalt, copper wire and heavy equipment. More design work for engineers, more construction work and on and on, down to more sales of roach coach cheeseburgers and coffee to people working by people working. Instead, people are moving from bonds to stocks and commodities. Buy more gold…idiots. The only intrinsic value precious metals have is the belief on the part of someone that they are precious. The only things that are going to have intrinsic value if the various wingnuts have their way are going to be guns, ammunition, food, water and whatever else lies within the Mad Max arsenal.

Banks doing especially well and finance companies doing especially well is a terrible leading indicator. Banks and financial services should, in a healthy and growing economy, probably lag the other sectors. They haven’t and that should be troubling to all of us.

View the original article at Veterans Today

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