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Source link: http://archive.mises.org/8685/cowen-on-all-this/

Cowen on all this

October 3, 2008 by

I puzzled a bit over Tyler Cowen’s “summary statement” of his views on the meltdown, which seems to assert both market and government failure, says the Fed should not worry about inflation, and suggests that the Paulson bailout is better than nothing. Any thoughts on his list?

{ 27 comments }

Richie October 3, 2008 at 9:26 am

His list is nothing profound or original. Sounds like he took a little from each of the left and the right’s talking points. Has he presented his views on the cause? He says that there are complex and many causes, be he does not present any.

Todd October 3, 2008 at 9:29 am

I have Ron Paul to thank for opening my eyes to the erosion of our freedoms and how our government truly works. Before this, I was a dutiful, useful idiot, serving in the military, chasing the almighty Federal Reserve Note, believing that the Republicans stood for freedom and prosperity and not questioning my leaders. While I disagreed with the 2nd invasion of Iraq and even resigned my commission over it, I just knew if felt wrong, but there was no moral or intellectual reasoning behind my resigning. Now with the help of this site and the books in the Mises store, the intellectual reasoning is starting to fill in around those feelings.
My responsibility now lies in teaching my children and wife about liberty and their responsibilities in maintaining it for themselves and their country.

Todd October 3, 2008 at 9:32 am

Whoops, I put my previous entry under the wrong post. It was meant for the “Stop Worrying about the Election” post. Sorry!

Cleric October 3, 2008 at 9:39 am

[Note: the interpretations of Tyler Cowen's Delphic pronouncements are enclosed in brackets and refer back to the immediately preceding unbracketed statement or title.]

My views on the crisis — a summary statement

[The crisis is much too mundane a subject to divert me from serious blogging on quirky topics, so all you get is a summary of the random thoughts that I have already blogged]

A few inattentive malcontents are complaining that I haven’t stated my views. I have, but if you want them, or some of them, in one neat place, devoid of subtlety or explanation, here they are:

[If you have not kept abreast of every single one of my unsystematic musings on the crisis posted on this blog, you are an inattentive malcontent.]

1. Glass-Steagall repeal was not a major cause of the financial crisis, nor was government-induced “minority lending.”

[No one with an IQ above 70 actually believes or ever wrote that either of these factors was a "major" cause of the current financial crisis, therefore I do not lose any credibility with mainstream readers by making such a seemingly bold and unqualified statement. In fact, my bosom buddy, Fed Governor Randy Kroszner actually published an article in the august American Economic Review in which he discussed the shortcomings of Glass-Steagall, so I maintain my street cred even with Fed economists.]

2. We should use regulation to move more of the currently unregulated derivatives markets to the clearinghouse model.

[Since most of you do not know how the clearinghouse model would apply to derivatives, or even what it is exactly, you will puzzle over it and hopefully overlook my blithe endorsement of more government regulation.]

3. The crisis represents a massive conjunction of both market and governmental failure.

[The quirky economic themes I usually think and write about do not include the economics of such mundane matters as financial crises, but I did edit a book about market failure and government failure and I know a conjunction of the two when I see one. I'm Tyler Cowen, dammit!]

4. I would not nationalize banks as ongoing concerns, at least not short of a far more extreme emergency than the current status quo

[Since no one of any stature is yet calling for the complete socialization of the financial system yet, here is another opportunity to boldly state my opinion. Nonetheless, given that I have no systematic theory of what caused the financial crisis, there is a possibility that things may get much worse and respectable opinion may tilt toward full socialization. I am therefore hedging my bets by prudently conceding an exception for the nebulous case of "a far more extreme emergency."]

5. The modified Paulson plan was better than nothing — especially after the market had been scared — but far from my first choice. In any case the plan would have been revised almost immediately. The Paulson and Dodd plans were never that far apart.

[Faintly praising the Paulsoin plan as better than nothing is innocuous enough. After all, EVERYONE, except for crazed laissez-faire ideologues, thinks we should do SOMETHING, right?].

6. My first choice is to induce and if need be to force more information revelation, identify the insolvent banks, close them up, and give the battle-tested FDIC a much greater role in the whole process.

[Greater "transparency” has been the buzzword in mainstream monetary and financial policy, since Nobel Prizewinners George Akerlof and Joseph Stiglitz demonstrated in the 1980s that we do not live in a world of perfect knowledge but in a world of "asymmetric” knowledge. In the latter some guys know more stuff than other guys in particular markets. Therefore it is just common sense to have government force the smarter guys to reveal what they know to the dumber guys. After all, the market cannot handle such a problem; just look at the "opaque” used car market where "dumb” buyers, who know nothing about a particular vehicle, all get stuck with lemons purchased from "smart” sellers, who know everything about the vehicle's accident and repair history.]

7. In the meantime the Fed should not worry much about inflation.

[Keep pumping in that liquidity, Benny--because like me you really do not know what the hell is going on either and monetary inflation is always a good panacea.]

8. The critical deregulatory mistake was allowing excess leverage. Many deregulations get blamed but in fact contributed little to the problem.

[See, I do oppose ineffective and wrong-headed re-regulation. But regulation targeted at an obvious market failure like excess leverage is essential. How do I know what constitutes "excess leverage” and how to quantify it? I know because I'm Tyler Cowen, dammit!]

9. Everyone says that letting Lehman die was a big mistake but I’m not yet convinced. Maybe a bracingly high TED spread is what we need.

[This statement is unexceptionable to anyone who is not blinded by Austro-libertarian ideology and it also reveals how thoughtful and open-minded I am, because it says exactly nothing. It may or may not have been a mistake to let Lehman fail; we may or may not need a high interest spread between three-month interbank loans (LIBOR) and the three-month Treasury Bill rate. Additionally, casually tossing around arcane technical jargon like "TED spread” without explanation diverts attention from the fact that I have no theoretical apparatus for addressing, much less resolving, the two issues I just posed.]

10. Libertarians are overrating the moral hazard argument, as many equity holders have been wiped out.

[I will take a gratuitous shot at nameless libertarians in order to bolster my centrist orientation. Moreover, I will focus only on equity holders because there is a tacit agreement among establishment types that the stockholders are to be the primary scapegoats who take the fall; better ignore debt holders who are subject to essentially the same moral hazard because this would imply that I oppose the bailout, which would undermine my establishment street cred which I have so carefully nurtured.]

11. If someone is pushing conclusions and not identifying the potential weak points in his or her arguments, be suspicious. Also beware of anyone pretending to offer you simple answers.

[Anyone who makes a strong argument about the cause and remedy for the current financial crisis, especially one based on a systematic theory, is to be completely shunned and tuned out. If I, Tyler Cowen, can offer no coherent explanation of the current crisis, then neither can anyone else, because it is unlikely that anyone is half the blogger I am. Trust me on this.]

12. I have a long and complicated view on the relevance of Austrian Business Cycle Theory which resists easy summation, but markets could have and should have been more cautious in response to Greenspan’s easy money policies.

[Despite my ability to summarize my views on the current financial crisis in 15 bullet points, I am unable to concisely state my views on Austrian Business Cycle Theory, although I did write a book on it. It is sufficient for you, my faithful readers, to know only that it was the markets that failed in not being sufficiently cautious in reacting to Greenspan's inflationary monetary policy. Forget the fact that the vast majority of market participants are not cognizant of the Austrian or any other systematic theory of the business cycle; or that I myself foretold on this very blog a few years ago that the precise events constituting the current financial crisis would NOT come to pass because I did not believe in the Austrian theory.].

13. Insolvent hedge funds and the commercial paper market remain outstanding issues which are not easy to address.

[I will reiterate my main theme here that no issue is easy to address without a systematic theory, which I have already ruled out of court as too simpliste (see # 11)]

14. I agree with Arnold Kling about relaxing capital requirements though at this point I don’t expect it to help much.

[Arnold Kling's substantive views do not matter. The facts that he received his Ph.D in economics from MIT, worked as staff economists for the Board of Governors of the Fed, was a senior economist at Freddie Mac, and is associated with the Cato Institute matter very much. He is respectable. All right, if you must know, Arnold says the result of "loosening the capital requirements for banks to hold low-risk mortgages . . . would almost surely be an industry much less concentrated than the current duopoly. A housing finance system that does not rely so heavily on Freddie Mac and Fannie Mae will be more robust.”]

15. The crisis is complex and has many causes; there won’t be a simple or quick solution.

[You will not get any ideas from me on how to resolve this mess or even what caused it, because that would entail serious theoretical and empirical research, rather than clever blog banter.]

If you wish you can google to the details. Also, I don’t believe I had offered #9 before on this blog.

[I cannot be bothered to give you inattentive malcontents references to my more detailed views on this stuff. Anyway you probably wouldn't understand them. However: N. B. Point #9 is a new pearl of wisdom that I have just loosed into the world. Now back to blogging on important topics like the best parenthetical statement I read today. From the fictional character Moll Flanders, wouldn't you know?]

Book 'em Danno October 3, 2008 at 9:42 am

Cowen says beware of anyone selling simple answers because the problem has complex causes. There are, for sure, countless actions that have created complex symptoms.

Yet to advocate for an across-the-board sweeping market solution is not an act of ignorance. It is recognizing, to borrow a phrase from physics, the market principle for what it is….. elegant.

Dennis October 3, 2008 at 10:06 am

I am not surprised by Professor Cowen’s comments. Some years ago did he not publish a book in which he disagreed with Austrian business cycle theory?

Whatever “market” failure there is, and the rating agencies, among others, certainly failed in their evaluation of the risk of the mortgage securities in question, could not have been prevented by more government intervention or better or “tougher” laws. Instead, the institutions that committed the errors should suffer the consequences, and should not be the recipients of bailouts and subsidies.

Also, and I do not mean this in a derogatory sense but only as a statement of fact, given the main source of funding for certain of the organizations that Professor Cowen is associated with, his analysis is not unexpected.

Neal W. October 3, 2008 at 10:31 am

Maybe he’s right? What do I know, I’ve only been studying economics for one year in my spare time.

Richie October 3, 2008 at 10:36 am

Cleric, that was EXCELLENT.

Neal W. October 3, 2008 at 10:42 am

Do you have the link to Cowen saying this would not happen? I believe you, I just want to see it.

Book 'em Danno October 3, 2008 at 10:49 am

I second that. F*****g great, Cleric!

fundamentalist October 3, 2008 at 11:00 am

Cowen: “… but markets could have and should have been more cautious in response to Greenspan’s easy money policies.”
I even heard this from my wife who hates economics. Bankers should have known that the Feds were going to take away the punch bowl before the party was over so they shouldn’t have drunk so much. But people like Cowen and my wife don’t look at the larger picture. Why does the Fed lower interest rates? To persuade people to borrow money. If people don’t borrow, the Feds keep reducing interest rates until someone bites. Those who take the bate and borrow at ridiculously low rates make huge profits while those who didn’t make average profits. How many bank managers can stand up to their stockholders and explain why they aren’t making the huge profits that their competitors are making? So managers rationalize that they are smart guys and can deleverage before the bust.

Inquisitor October 3, 2008 at 11:03 am

All I see is pointless meandering and evasion. Nice expose, Cleric. :)

fundamentalist October 3, 2008 at 11:10 am

I agree! Nice job, Cleric! Cowen has quit being an economist and morphed into a politician.

TDL October 3, 2008 at 11:12 am

Cleric,
Well done.

Regards,
TDL

pussum207 October 3, 2008 at 11:39 am

To me, it is simply nonsense to suggest that the roles of moral hazard (resulting from deposit insurance and implicitly backed government sponsored enterprises) and government-mandated uneconomic loans have been overstated. As other people have expressed it, these factors have socialized the risk and privatized the profit. It is these factors that have turned what would otherwise been poor management practices and made them a) at least temporarily rational or legally required, and b) financially sustainable over a long period. Consequently, these factors encouraged and sustained behaviour on a widespread scale that, had it occurred at all, would have otherwise been an isolated and short-term management issue limited to individual institutions and thus easily addressed by the market, not a system-wide public policy issue of catastrophic proportions.

The crisis is a failure of regulation only in the narrow sense that the regulation (e.g., how to disclose and account for various assets) was necessary in the first place only to make up for the fact that government intervention had eliminated natural market incentives or restraints (on the part of depositors, bank shareholders or banks lending to other banks) necessary to discipline lending practices and ensure prudence.

There is no amount of regulation, no matter how sophisticated or clever its designers, that can replace the discipline of the market, particularly in the financial markets where the incentives to circumvent the spirit of the regulations are huge and the participants very talented. The notion that regulation can fix the problem going-forward (“we just have to be smarter this time”) is the very essence of Hayek’s “fatal conceit”. Some of the ideas being put forward, such as that the crisis is the result of insufficient regulation of compensation for bank executives, are simply pathetic and typical of the micromanagement that seems to have become the economists’ stock-in-trade.

Many economists seem to have forgotten that most basic of economic maxims: there is no free lunch.

snargles October 3, 2008 at 12:53 pm

As a young man, an avid reader of this website, and a ‘bleeding heart’, I have just as much confusion to anything posted in here as to everything else. Some things just feel ‘right’ and others feel ‘wrong’ upon receiving the information. So I was just pondering the Mises article from today, and thinking as usual, trying to make connections from the synapses in my brain of everything I’ve ever read and heard, and I’m at a point of struggling to commesurate exactly what it is I’m trying to say.

I guess I disagree with the methods, and agree with your ideologies. If the Austrians are right, then they need to act like it. You see, I’m a vegetarian, but unlike most of my contemporaries the sentience of food producing animals really doesn’t bother me relatively. The grain subsidy and the intervention of government really does. The massive amount of fecal matter and pesticides flowing out the Mississippi, the dead zone created in the sea, and the disregard and contempt for the property rights and the livelihoods of gulf fisherman sucks. So, as they say, I put my money where my mouth is; I vote with my dollars.

I’ll get to my point a little later on, but I want to tell you guys about my favorite quote of all time. It’s this because of the lesson not only of the words expressed but because of the example it shows. It’s a quote from Mao Tse Dong taken from classical Chinese poetry. Some of you might know it, “Let a thousand schools of thought contend, let a thousand flowers bloom.” He created the thousand flowers movement in 1958 out of this. Intellectuals were quick to criticize the government. Almost as quickly, intellectuals from China were wiped off the face of the planet by way of Communist munitions. Mao, so to speak did not put his money where his mouth was. However, the message and the ideology behind it is brilliant. I will say this, they’re some of the most socially responsible, inspirational, and intelligent words I’ve ever heard.

Don’t get me wrong Austrians, I love the same things that you love. I am moved by nearly everyone of your rants here about freedom, property rights, and happiness. Reading you guys brings me happiness. I get the impression, and I am referring to the qoute above, that this school of thought is not contending. Economics are not studied and not widely known. They are not considered important, and quite simply economists must not be putting their money where their mouth is.

I have many things to add to this. I won’t leave you hanging.

Mises talked about socialism as the abandonment of utilitarian ethics. So, what I want to know is, and in reference to my vegetarianism, is trading with known socialist quantities utilitarianly unethical?

I’m reminded of so many boycotts and embargos, some of you vehemently oppose, but are they really that bad? I hear that a lot of Congalese people die to have their cobalt stripped of them for electronics. I hear lots of crazy things about the power-elite and what they would prefer to do to someone like me. Would it not be true that if free traders only traded with other free traders that while they would take a hit on their current standard of living, it may only be briefly? Eventually it would work out, and it would create a disparity of incomes between those who were and were not free traders. And of course in seeing this more people would become free traders. If a free market was artificially created during a period of socialist and fascist regime, Austrian economics might actually contend.

But here’s the thing, markets require money, and there’s a socialist monopoly on it. Money is essential to the marketplace otherwise there needs to be a coincidence of wants, which is nearly impossible. But is it really?

I was just reading the Mises the other day and talking about the internet, and the freedom that technology gives. Which I don’t entirely agree with. Munitions and ballistics, for example, are technology that foster the opposite. However, in regards to the internet. How far are we from creating a database that can match services and wants automatically, transportation of goods and services included? Is it really that hard to create a network like that? I know it would be impossible to transport on gasoline considering the interests involved, but do any free market economists out there have any means to produce biodiesel, I believe that Koch enterprises has a heavy hand in energy, maybe that’s an option. If not, are there any solar paneled cars out there?

How far against the federal reserve would one have to be to reject USD as a means of payment? How much against intervention would one have to be to stop buying subsidized? How much against socialism would one have to buy capitalism? How much against taxes would one have to be to stop paying them? How much against public works projects would one have to be to stop using them? How much against tyranny does one have to be to buy his freedom? How much murder do you have to buy in the name of peace?

Listen Austrians, I keep telling everyone this, fallacies are known quantities on Earth, and in 2008 the Earth is very old. It’s too late now to consider whether we have a complete grasp on the prevalent social issues of today. We have to act, and act swiftly. Consider my coincidenceofwants.org social networking tool; I think it’s a good idea. I know of a buy local campaign around here, but it’s kind of limited. It might be possible to combine them together if they exist elsewhere. We need a free market stock exchange (no fascists allowed). I’m not trying to wrestle, you know, capital investment from any of you. I’m just saying, you know, I don’t have much capitalist wherewithall. Perhaps I could learn from some of you folks.

I like the freedom as a state of mind thing, I love the thousand flowers thing. I think that the seeds of freedom are sewn when people let their thoughts contend. I don’t hesitate at all putting this out there.
I just want to encourage everyone here to do the same. Maybe putting all of our best ideas on this one webpage is counterproductive. Maybe we need to diversify our freedom-sewing portfolio and post things elsewhere.

Straighten up Austrians, good luck, and don’t forget to put your money where your mouth is.

Mark Thornton October 3, 2008 at 1:57 pm

I always wondered what I was missing and now I know. Maybe cleric could become a full time translator for Tyler’s blog. I can’t count the number of times I’ve heard GMU students and even a few gullible colleagues say “Tyler said this, or Tyler said that.”

Richie October 3, 2008 at 2:31 pm

Mark, in their eyes, what makes Tyler the authority on everything? In your opinion, that is…

fundamentalist October 3, 2008 at 3:08 pm

snargles: “Would it not be true that if free traders only traded with other free traders that while they would take a hit on their current standard of living, it may only be briefly? Eventually it would work out, and it would create a disparity of incomes between those who were and were not free traders.”

You have some interesting ideas, but at this time there are just too few of us Austrians to make much of a difference. We have to convince a much larger audience before the actions you suggest would have any impact. However, we can learn to profit from socialism. That is Hayek’s recommendation.

The very rich already understand this even if they don’t know much about Austrian econ. For example, how did Warren Buffet get the cash to buy the banks he just bought? He had to have sold before the market peaked so that he had cash to buy companies at blue light special prices. The very wealthy know how to read the signs of the economic times. They don’t buy and hold like investing classes teach and they’re not fooled by the efficient market nonsense. Austrian econ teaches which industries to invest in at different parts of the business cycle and when to get out. If all rich people were Austrians, we could buy politicians like rich socialists do and change policy.

Caveman (intellectually-speaking) October 3, 2008 at 3:22 pm

I used to read MR, but I just don’t have the stomach for sycophancy. Why are some persons so enamored with Tyler?

Dirtyrottenvarmint October 3, 2008 at 3:27 pm

Tyler Cowen is now dead to me. As Tabarrok does not post often enough, I have deleted Marginal Revolution, one of the first blogs I began reading, from my RSS feed.

Bail October 3, 2008 at 3:39 pm

Where are you investing, fundamentalist?

Niccolo October 3, 2008 at 4:14 pm

Cleric hit it right on the nose.

Tyler Cowen is about as arrogant as he is gluttonous.

snargles October 3, 2008 at 4:51 pm

I appreciate your response and advice, and as I’ve entered the working class I’ve started an investment account. All I’m saying is that, you know, that you know this debate is kind of elitist…sort of. If Austrians are superior they need to show it. If Fascism is evil, then let the will of the righteous men present itself. There needs to be an alternative and believe me, I understand economies of scale. However, the gov’t meddling is highly inefficient. There’s got to be a way to slide over it.

I’m saying that the time for critiquing this stuff is over. I mean we have the technology, and we have the will, let’s do something about it. Period.

Most people you know acquire these chains all their lives without the realization that they were free to begin with. An alternative has to present itself and state the case for it in terms that a product of public high school education in the United States can understand. All verbiage and all intellectualism, while great, beyond that is practically unviable. The Austrians were always ahead in theory, but the socialists caught up and surpassed them in practice and while all it was was the spreading of rhetoric, propaganda, and theories with holes in them the size of barns. They had lower margins, but they outworked us plain and simple. Gotta take it back, I mean, what the hell is this all about, if nothing can be done about it?

My idea was a social networking website, you enter the services that you are willing to provide for like you know points. Maybe 100 points is an ounce of gold or something like that, it won’t be securitized but it won’t be inflated either. People are able to buy search for items basis and transportation on a competitive for their goods separately on a point system. No bid-ask spreads, any of that. You get what you pay for so to speak. Or maybe, even better, we can securitize it. You need an ounce of gold to start it up, redeemable any time. Once the gold is received people get 100 points and are free to sell and trade their services. It’s like classic american liberal myspace or something real catchy like that.

If we’re all so smart to come up with high ranging theories of prices&production, monetary theory of the business cycle, etc. but we can’t circumvent the ignorant masses and evil few who wish to perpetuate the status quo, then we’re totally screwed. We’re going down with them.

That’s why I just say, put your money where your mouth is. The greatest democracy of all is the free market. Don’t spend your money on no chains. Vote liberty, and buy freedom.

Franklin Harris October 3, 2008 at 5:16 pm

[The crisis is much too mundane a subject to divert me from serious blogging on quirky topics, so all you get is a summary of the random thoughts that I have already blogged]

Actually, this is exactly why I prefer Tyler when he sticks to quirky topics.

Eva Ziessler October 3, 2008 at 6:05 pm

@ Cleric

F***ing brilliant analysis. Who are you?

Bill October 3, 2008 at 11:33 pm

Mr. snargles,

I understand where you’re coming from, and believe me, people have thought a lot about what you desire. But to pull it off, you need to leave Amerika – it would be patently illegal here.

Yes, I know of some small systems where people get away with some barter for some things, but once governments become aware of what you are doing and if it amounts to anything significant, they will come after you for tax evasion.

In every state, you need to file and pay sales tax on trades. Also, if you exchange good and services for gold, you need to report capital gains/losses on all those exchanges to the IRS.

Free banking would accomplish what you want and there is a movement pushing for that. If you want to live in Amerika and just do it, you best be prepared for a protracted legal fight with the government, where you will likely lose.

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