artdiamondblog.com – Page 370 – Art Diamond's web log

Distinguished Macroeconomist Irving Fisher Lost a Lot in the 1929 Crash

Irving Fisher is widely viewed as one of the handful ot top United States economists of the 1920s and 1930s. In addition, he focused on topics that today are considered part of macroeconomics. His not forecasting the economic downturn can be given different interpretations. Some, such as Taleb, would attribute it in part to fundamental uncertainty. Until recently, many economists would have said that Fisher still had a lot to learn, but we are now know more than him.
That may be true, but we still have a lot to learn.

(p. 5) IRRATIONAL exuberance? As the nation entered recession in the summer of 1929, there were still plenty of economists, business leaders and politicians who looked to the future with optimism. And why not? The Dow Jones industrial average was soaring. Then the stock market bubble burst on Oct. 24, which led to several days of panicked selling — an opening bell for the worldwide economic collapse that soon followed. Here’s what some leading politicians, economists and business leaders had to say in the months before and after the crash. Sound familiar?
. . .
Irving Fisher, professor of economics at Yale University, in The New York Times, Sept. 6, 1929. He ended up losing much of his wealth in the crash:
“There may be a recession in stock prices, but not anything in the nature of a crash.”
. . .
The Harvard Economic Society, November 1929:
“A severe depression like that of 1920-21 is outside the range of probability. We are not facing protracted liquidation.”

For the full story, see:
“Word For Word; I’m Having a Flashback; A Storm Unforeseen, Always About to Pass.” The New York Times, Week in Review Section (Sun., October 11, 2008): 5.
(Note: no author is listed.)
(Note: ellipses added.)

Hugh Laurie SNL Protest Song Lyrics

At a “Workshop on Creative Ideas to Teach Principles,” organized by Jim Gwartney at the Stavros Center in Tampa, I presented some brief video clips that I use to make various points in my principles classes. The first was Hugh Laurie’s Protest Song.
After playing the song, I tell my students that to make the world better, you need more than a guitar and good intentions—you also need to know something about how the world works (in particular, you need to know some economics).
After my presentation, one of the participants asked if I knew where he could find the lyrics. In response, I found the lyrics posted online, and re-post them here in case they may be of use to other economic educators.

Hugh Laurie’s Saturday Night Live Protest Song

[ open on Hugh Laurie standing at Home Base strumming a guitar ]
Hugh Laurie: This is a protest song. [ blows on a harmonica attached to his neck ]
[ singing ]
“Well, the poor keep getting hungry, and the rich keep getting fat
Politicians change, but they’re never gonna change that.
Girl, we got the answer, it’s so easy you won’t believe
All we gotta do is.. [ mumbles incoherently ]
Well, the winds of war are blowin’, and the tide is comin’ in
Don’t you be hopin’ for the good times, because the good times have already been.
But, girl, we got the answer, it’s so easy you won’t believe
All we gotta do is.. [ mumbles incoherently ]
It’s so easy, to see
If only they’d listen, to you and me.
We got to.. [ mumbles incoherently ] as fast as we can
We got to.. [ mumbles incoherently ] every woman, every man
We got to.. [ mumbles incoherently ] time after time
We got to.. [ mumbles incoherently ] vodka and lime.
Well, the world is gettin’ weary, and it wants to go to bed
Everybody’s dyin’, except the ones who are already dead.
Girl, we got the answer, starin’ us right in the face
All we gotta do is
All we gotta do is
All we gotta do is.”
[ pauses, then blows on the harmonica and finishes ]
[ the audience cheers wildly ]
Hugh Laurie: Thank you.

Source of lyrics:
http://snltranscripts.jt.org/06/06dprotest.phtml

80% of Officials Base Infrastructure Decisions on Politics

Source of graph: online version of the NYT commentary quoted and cited below.

(p. B1) It’s hard to exaggerate how scattershot the current system is. Government agencies usually don’t even have to do a rigorous analysis of a project or how it would affect traffic and the environment, relative to its cost and to the alternatives — before deciding whether to proceed. In one recent survey of local officials, almost 80 percent said they had based their decisions largely on politics, while fewer than 20 percent cited a project’s potential (p. B6) benefits.

There are monuments to the resulting waste all over the country: the little-traveled Bud Shuster Highway in western Pennsylvania; new highways in suburban St. Louis and suburban Maryland that won’t alleviate traffic; all the fancy government-subsidized sports stadiums that have replaced perfectly good existing stadiums. These are the Bridges to (Almost) Nowhere that actually got built.

For the full commentary, see:
DAVID LEONHARDT. “Economic Scene; Piling Up Monuments of Waste.” The New York Times (Weds., November 18, 2008): B1 & B6.

Larry Moss Made a Difference

Laurence S. Moss

Source of photo: http://www3.babson.edu/academics/faculty/lmoss.cfm

On Sunday (3/8/09) I learned that Larry Moss passed away on February 24, 2009.
Larry was full of the joy of life. He was intense. He was an amateur magician, and a wit, and an energetic conversationalist. I used to run into him once a year at the History of Economics Society meetings, and always enjoyed our conversations.
He was a neo-Austrian, though not “pure” enough for some of the ultra-Rothbardians. I first met him at a long-weekend seminar in Austrian economics when I was a graduate student, and he was a presenter.
I remember that he and I thought that the dialogue would be richer, and the neo-Austrian position ultimately strengthened, if its defenders understood better some of the alternative positions. So we announced a kind of rump session during one of the free-time periods. During this session, Larry gave the attendees a brief summary of what Walras had been up to, and I summarized Becker’s paper on the robustness of the law of demand to various forms of irrational and habitual behavior.
If memory serves, we suffered some mild heckling, and Larry was more severely criticized for disloyalty to the cause. (I cannot prove it, but I believe he paid a price for that in terms of invitations to future similar gatherings.)
I did not follow Larry’s research systematically, but know that he wrote the definitive account of Mountifort Longfield’s economics. He also had a nice, early paper in the JEL on the uses of film in teaching economics.
He took Schumpeter seriously, and wrote the script for the wonderful Schumpeter tapes in the Knowledge Products series on great economists that Kirnzer edited.
A couple of year’s ago, I invited Larry to participate in the Schumpeter session that I organized at George Mason’s Summer Institute for the Preservation of the History of Economic Thought. He initially agreed, but then had to withdraw because of his health.
More recently, I submitted one of my more idiosyncratic efforts (on the career consequences of writing on polywater) to the journal that Larry edited. I received excellent comments, and the editorial process was handled with grace and efficiency.
Larry was one of the “good guys” in many different ways, and the world is worse for his passing.

Here are a couple of Larry’s more obscure writings, that I have found useful:
Moss, Laurence S. “Film and the Transmission of Economic Knowledge: A Report.” Journal of Economic Literature 17, no. 3 (1979): 1005-19.
Moss, Laurence S. “Review: Robert Loring Allen’s Biography of Joseph A. Schumpeter.” American Journal of Economics and Sociology 52, no. 1 (1993): 107-18.

The reference to Larry’s Schumpeter tapes is:
Moss, Laurence S. Joseph Schumpeter & Dynamic Economic Change: Capitalism as “Creative Destruction”. Nashville, TN: Knowledge Products, Inc., 1988. audio.

“Firms that Made Wrong Decisions Should Fail”

Anna J. Schwartz.

Source of image: online version of the WSJ article quoted and cited below.

(p. A11) Most people now living have never seen a credit crunch like the one we are currently enduring. Ms. Schwartz, 92 years old, is one of the exceptions. She’s not only old enough to remember the period from 1929 to 1933, she may know more about monetary history and banking than anyone alive. She co-authored, with Milton Friedman, “A Monetary History of the United States” (1963). It’s the definitive account of how misguided monetary policy turned the stock-market crash of 1929 into the Great Depression.
. . .
These are not, Ms. Schwartz argues, the same thing. In fact, by keeping otherwise insolvent banks afloat, the Federal Reserve and the Treasury have actually prolonged the crisis. “They should not be recapitalizing firms that should be shut down.”
Rather, “firms that made wrong decisions should fail,” she says bluntly. “You shouldn’t rescue them. And once that’s established as a principle, I think the market recognizes that it makes sense. Everything works much better when wrong decisions are punished and good decisions make you rich.” The trouble is, “that’s not the way the world has been going in recent years.”
Instead, we’ve been hearing for most of the past year about “systemic risk” — the notion that allowing one firm to fail will cause a cascade that will take down otherwise healthy companies in its wake.
Ms. Schwartz doesn’t buy it. “It’s very easy when you’re a market participant,” she notes with a smile, “to claim that you shouldn’t shut down a firm that’s in really bad straits because everybody else who has lent to it will be injured. Well, if they lent to a firm that they knew was pretty rocky, that’s their responsibility. And if they have to be denied repayment of their loans, well, they wished it on themselves. The [government] doesn’t have to save them, just as it didn’t save the stockholders and the employees of Bear Stearns. Why should they be worried about the creditors? Creditors are no more worthy of being rescued than ordinary people, who are really innocent of what’s been going on.”

For the full story, see:
BRIAN M. CARNEY. “OPINION: THE WEEKEND INTERVIEW with Anna Schwartz; Bernanke Is Fighting the Last War.” The Wall Street Journal (Weds., OCTOBER 18, 2008): A10.
(Note: ellipsis added.)

FDR’s Treasury Secretary Morgenthau Concluded that Big Spending Stimulus “Does Not Work”

Henry Morgenthau, Jr.

Source of portrait: http://en.wikipedia.org/wiki/Henry_Morgenthau,_Jr.

Henry Morgenthau, Jr. was FDR’s Secretary of the Treasury from 1934-1945. In the following important quote, he admits that the big New Deal stimulus spending programs had failed.

(p. 2) We have tried spending money. We are spending more money than we have ever spent before and it does not work. And I have just none interest, and if I am wrong . . . somebody else can have my job. I want to see this country prosperous. I want to see people get a job, I want to see people get enough to eat. We have never made good on our promises. . . . I say after eight years of this administration we have just as much unemployment as when we started . . . . And an enormous debt to boot!

Source:
Folsom, Burton W., Jr. In New Deal or Raw Deal? How FDR’s Economic Legacy Has Damaged America. 4th ed. New York: Threshold Editions, 2008.
(Note: ellipses in Folsum’s version of the quotation.)

Folsum says that this statement was from testimony before the House Ways and Means Committee in May 1939; and can be found in Morgenthau’s Diary entry for May 9, 1939 at the Roosevelt Presidential Library.

Source of book image: http://www.flickr.com/photos/roscoe/3121498653/

Bailouts Damage “System Based on the Premise that Risk Can Bring Failure, as Well as Rewards”

Source of the cartoon: online version of the WSJ quoted and cited below.

(p. A8) William O. Perkins III says he turned a $1.25 million profit trading Goldman Sachs Group Inc. stock last week.

You would think that would count as a pretty good paycheck for the Houston energy trader. Instead, the experience left him so angry about the demise of capitalism that he says he has decided to spend his profits on advertisements attacking President George W. Bush’s planned $700 billion Wall Street bailout.
. . .
So he says he bought Goldman Sachs at $129 a share. The stock fell, so he bought more at $100 a share. It fell again, and he bought at $90. The next day it rallied and he sold out at an average price of $130 a share, for a net gain of about $1.25 million over three days of trading, he said.
Trouble was, the stock didn’t rally because of the fundamental strength of the company, Mr. Perkins said. It rallied because the federal government announced that it would rescue Wall Street from its own subprime follies, he said.
“The stock did OK because the government came in and said, ‘No one can fail,'” he said. “It’s capitalism on the way up and communism on the way down.”
His success left him furious, and he decided that someone had to speak out about the damage such a plan would cause to a system based on the premise that risk can bring failure, as well as rewards.

For the full story, see:

MICHAEL M. PHILLIPS. “Trader Makes a Quick $1.25 Million on Rescue, Then Slams It.” The Wall Street Journal (Weds., SEPTEMBER 24, 2008): A10.
(Note: ellipsis added.)

Rajan Foresaw Risks of Financial Disaster

“Raghuram Rajan, shown at 2005 symposium, warned of rising risks.” Source of caption and photo: online version of the NYT article quoted and cited below.

I praised Rajan’s analysis in a blog entry back in January 2008. Rajan deserves credit for seeing the situation earlier and more clearly than most other experts:

(p. A7) To outline his fears about the U.S. economy, Raghuram Rajan picked a tough crowd.

It was August 2005, at an annual gathering of high-powered economists at Jackson Hole, Wyo. — and that year they were honoring Alan Greenspan. Mr. Greenspan, a giant of 20th-century economic policy, was about to retire as Federal Reserve chairman after presiding over a historic period of economic growth.
Mr. Rajan, a professor at the University of Chicago’s Booth Graduate School of Business, chose that moment to deliver a paper called “Has Financial Development Made the World Riskier?”
. . .
He says he had planned to write about how financial developments during Mr. Greenspan’s 18-year tenure made the world safer. But the more he looked, the less he believed that. In the end, with Mr. Greenspan watching from the audience, he argued that disaster might loom.
Incentives were horribly skewed in the financial sector, with workers reaping rich rewards for making money, but being only lightly penalized for losses, Mr. Rajan argued. That encouraged financial firms to invest in complex products with potentially big payoffs, which could on occasion fail spectacularly.
. . .
Mr. Rajan is now focused on coming up with ways to avoid a regulatory backlash akin to what happened during the Great Depression, when governments around the world threw up protectionist barriers and clamped down on financial markets.
Instead of heavy regulation, he says, the incentives of Wall Streeters need to change so that punishments for losing money are in line with rewards for earning it.
At the start of 2008, he suggested that bonuses that financial workers make during boom times should be kept in escrow accounts for a period of time. If the firm experienced big losses later, those accounts would be drained.
Facing withering criticism over the bonuses paid out in the boom, financial giant UBS and Wall Street firm Morgan Stanley have recently announced they’re adopting policies along the lines of what Mr. Rajan proposed.
Mr. Rajan also urges other safeguards. Along with Chicago colleagues Anil Kashyap and Harvard economist Jeremy Stein, he’s come up with a plan to create a form of financial-catastrophe insurance that firms would buy into.

For the full story, see:
JUSTIN LAHART. “Mr. Rajan Was Unpopular (But Prescient) at Greenspan Party.” The Wall Street Journal (Fri., JANUARY 2, 2009): A7.
(Note: ellipses added.)

Japan’s Stimulus Package Stimulated Debt, but Not Recovery

Source of graphs: online version of the NYT article quoted and cited below.

(p. A10) In the end, say economists, it was not public works but an expensive cleanup of the debt-ridden banking system, combined with growing exports to China and the United States, that brought a close to Japan’s Lost Decade. This has led many to conclude that spending did little more than sink Japan deeply into debt, leaving an enormous tax burden for future generations.

In the United States, it has also led to calls in Congress, particularly by Republicans, not to repeat the errors of Japan’s failed economic stimulus. They argue that it makes more sense to cut taxes, and let people decide how to spend their own money, than for the government to decide how to invest public funds. Japan put more emphasis on increased spending than tax cuts during its slump, but ultimately did reduce consumption taxes to encourage consumer spending as well.

For the full story, see:
MARTIN FACKLER. “Japan’s Big-Works Stimulus Is Lesson.” The New York Times (Fri., February 5, 2009): A1 & A10.

“The soaring Marine Bridge in Hamada, Japan, built as a public works project, was almost devoid of traffic on a recent morning.” Source of caption and photo: online version of the NYT article quoted and cited above.

Only 24% of Obama’s Campaign Money Came from Small Donors

(p. A16) An analysis of President-elect Barack Obama’s campaign fund-raising punctures one of the most enduring pieces of conventional wisdom from his presidential run: that small donors powered his record-breaking money machine.
. . .
The institute found that while nearly half of Mr. Obama’s donations came in individual contributions of $200 or less, in reality, only 26 percent of the money he collected through Aug. 31 during the primary and 24 percent of his money through Oct. 15 came from contributors whose total donations added up to $200 or less. The data is the most recent available.

For the whole story, see:
MICHAEL LUO. “FUND-RAISING; The Myth of the Small Donor.” The New York Times (Tues., November 25, 2008): A16.
(Note: ellipsis added.)