Macroeconomic Policy for a Stronger Recovery, Part 2

<< Part 1

Argument #4—that the asset purchase, asset guarantee, and bank recapitalization policies are about to have a big effect and boost the recovery—is one that I really wish were true, but I just don’t see evidence of it, at least not right now. Yes, spreads have narrowed. But asset values are still low: the S&P 500 stands about where it did early last October, after Lehman, after AIG. The banking-sector policies were supposed to boost the confidence and the risk tolerance of the private market in order to get the engine of private sector lending and borrowing and spending rolling again. Things are much better than they were at the start of March 2009, it is true. But as measured by the mark of asset prices, they are no better than they were in October 2008.

And it is by asset prices that the banking-sector support policies should be judged. The right way to look at monetary and financial policy is that it has, ever since 1825, been focused on manipulating asset prices: the central bank buys and sells and guarantees and regulates and subsidizes and nationalizes with an eye toward pushing the prices of financial assets to levels where businesses seeking to raise capital to build capacity and households seeking to spend out of wealth together can issue new assets and so access enough money to push their spending to a level that gets the economy to full employment, or at least out of depression. The policies are always sold as opaque technocratic adjustments to the “money stock” or to a “federal funds interest rate” that real people do not see and is of concern only to bankers. But the policies are and always have been truly aimed at manipulating asset prices. We may believe in a market economy. But since 1825 we have also believed that asset prices are too important to be left to the market to determine when their free market levels produced either depression unemployment or runaway inflation.

Thus the thing to focus on is that the prices of risky financial assets are very low—not as low as they were last March, when the S&P 500 kissed a level of 667, but still very low. Why are they so low? The answer is that the risk tolerance of the private market has collapsed. For example, consider what the University of Chicago’s Nobel Prize-winning economist Bob Lucas told Tom Keene of Bloomberg last March 30—that he was 100% in cash:

LUCAS: [T]here is no question that fear is what this liquidity crisis is. I mean the reason I got into money [with my portfolio] is that I got afraid to leave my pension fund in other securities. So I’m sitting there with a portfolio full of zero-yield stuff just because I’m afraid to do anything else. I think there are millions of people like me.

KEENE: What will be the signal for Robert Lucas to go back into the markets...?

LUCAS: I don’t know. Robert Rubin made a joke about that in the first session today. Nobody knows...

Now let’s pick on Lucas because he is not here to defend himself. Earlier in the interview, he had told Tom Keene:

LUCAS: Our economy’s got a remarkable ability to return to its long term growth trend. And for most of the depressions we’ve had or recessions, the return has been quick. Two or three, four years...

Lucas says that it is highly likely that the U.S. economy will be back to normal in three or four years, with a normal level of unemployment, a normal share of profits in national income—and a normal level of dividends and capital gains. This presumably means that stock prices will also be back to a normal multiple of long-run earnings, which means a year-2015 S&P of 2000 or so, compared to its current value of 1044 or its 2009 low of 667. Investing in the S&P 500 for a four-year horizon now is risky, certainly, but the expected return is high: 15% per year, if you believe Lucas’s forecast. And holding your money in cash is not all that safe either: the scenarios I can envision in which the S&P 500 is at a real value in 2015 corresponding to the value that 667 buys today are scenarios in which inflation has eaten away most of the value of cash.

So what is Lucas doing holding his portfolio in cash? Has risk suddenly increased to an extraordinary extent to force the equity share of his portfolio down from 70% to 0% in spite of the huge jump in expected six-year returns? Has his personal tolerance for risk suddenly collapsed? No. He is irrationally panicked. And, as he says, there are millions like him. Until they recover from their panic, even a perfectly constructed banking and financial system will not produce the asset prices needed for private investment spending to drive us to full employment.[3]

Thus the banking-sector support policies have not been a bust—they have surely kept things from getting much worse. But they have not done much if anything that promises to close the output gap.

What Should We Do Now?

The argument that more expansionary fiscal policies should not be tried because it is theoretically impossible for them to work fails. The argument that more expansionary fiscal policies should not be tried because the unstable nature of global imbalances and U.S. long-run fiscal deficits has us teetering on the edge of a Credit Anstalt-like currency crisis disaster fails. The argument that banking policies have been successful enough that we do not need more expansionary fiscal policy fails.

Figure 3: Troika Forecast of the Unemployment Rate as of August 2009

The Congressional Budget Office currently forecasts that the unemployment rate will average 10.2% in 2010, 9.1% in 2011, and 7.7% in 2012 before returning to its normal range with an average of 5.1% in 2013. The administration’s Troika forecast is very similar. Things will almost surely be either significantly better or significantly worse than the forecast—it is a forecast, after all—but the right thing to do is to plan as if the forecast will come true, and then adjust later.

If you are happy with that forecast and think that it is appropriate for the U.S. economy over the next four years, then no further support for the recovery appears needed at this time. If you are unhappy with that forecast, then additional federal government action is definitely advisable.

Figure 4: Past and Projected Employment-Population Ratio

What kind of action, however?

The obvious would be additional short-term deficit spending on the federal level:

1. Triggers to extend the existing expansionary fiscal policy measures should the unemployment rate not decline rapidly: since we remember the history of the 1937-1938 episode, we are hopefully not condemned to repeat it.
2. An expansion not in length but in flow of the current fiscal boost package: last January a number of us were saying that an $800 billion cumulative fiscal boost was OK—but that there also ought to be a trigger in the budget resolution so that if unemployment rose near 10% the fall reconciliation bill could be used to top off the program. That didn’t happen. It ought to have happened. It would be nice to make it happen—and there is a deal to be struck with more deficit spending in the short-term and tax-increase or spending-cut triggers in the long term should the deficit not return to sustainable levels after the recession passes.
3. Less obvious would be measures to aid useful deficit spending in other levels of government. During this recession the states have, as Paul Krugman puts it, turned into fifty little (and not so little) Herbert Hoovers. The obvious policy to enable states that want to avoid counterproductive budget-cutting in this recession to do so is:

• Have the federal government support the prices of deficit-spending bonds issued by state governments that also put credible and automatic amortization plans in place.

This support could be provided either at the level of the Treasury—with the Treasury Department approving state fiscal policies as sustainable in the long term and thus qualifying for loan guarantees—or at the level of the Federal Reserve—with the Federal Reserve offering to support the prices of state deficit-spending bonds that come attached to legislated sustainable state-level fiscal policies.

4. Also a possibility: bringing forward long-term investments that we ought to be making over the next generation. The people I talk to at Berkeley who actually know what they are talking about say that over the past decade and a half since the Senate rejected Al Gore’s BTU tax the 3 degree Fahrenheit warmer world in 2150 has probably slipped out of our grasp, and that the good possibility going forward is a 7 degree Fahrenheit warmer world in 2150. To get there the U.S. has to lead—take the first steps—and then work hard to pull the rest of the world along to an appropriate global warming policy.

The best way to get there would be a carbon tax. A somewhat worse way would be a cap-and-trade system that grandfathers in many current highly inefficient uses of open carbon cycle energy. A still worse way would be for the EPA to start regulating greenhouse gases as pollutants. We would like to use the effective carrot of the market rather than the stick of command-and-control regulation, but the Senate may keep us from doing so.

In that case—if we aren’t providing the incentives for businesses and people to make the investments in closed-carbon cycle and other green energy technologies through a carbon tax or a cap-and-trade system—then the government will need to make those investments or provide separate incentive programs to induce people to make them. How big? $5,000 per household in commercial, industrial, and residential cost-effective energy investments does not seem out of line. (We’ve done $20,000 over the past five years in our house and are getting 6% per year at current PG&E electricity prices.) And that would be $500 billion nationwide.

---

[1] Lawrence Summers (2008), “The Big Freeze, Part IV: A U.S. Recovery,” Financial Times (August 6, 2008).

[2] Note that neither Cochrane nor Fama are the right-wing fringe of the economics profession right now. The right wing fringe is composed of the supporters of Ed Prescott, Ed Prescott who used to teach at the University of Chicago before moving to Arizona State. He says that Fama’s conclusion that monetary policy does not affect output is in fact correct: in his view the Great Depression was not caused, as Milton Friedman thought, by the bank failure-induced collapse of the money stock but by Herbert Hoover’s “anti-market, anti-globalization, anti-immigration, pro- cartelization policies were instituted… [which] created a great depression.” Chicago economists of an earlier generation, like Jacob Viner, had no doubt at all in the correctness of their policy advice: that the Great Depression had been caused by unbalanced monetary deflation and needed to be cured by expansionary monetary and fiscal policy.

[3] An aside. Lucas’s irrational panic—and his observation that there are millions of investors like him—makes the part of his interview with Tom Keene in which he attacks Robert Shiller and George Akerlof and their book Animal Spirits quite puzzling. Here is what Lucas says:

I just don’t get it. I mean look at the Black-Scholes formula. People come up with a formula for pricing options, just out of purely mathematical reasoning, and then it turns out it fits certain data amazingly well. And it’s been incredibly useful to people. Now it’s not useful for everything, but for what it does it’s a huge advance in human knowledge. Now what’s the behavioral finance contribution? They reinforce the idea of skepticism. Well, skepticism, it’s easy to be a skeptic. What’s harder is to tell somebody how to do something they didn’t know how to do yesterday. That’s what Black and Scholes did...

Lucas seems to miss the entire big point. Black-Scholes tells you how to do things only if the trades of the non-von Neumann-Morgenstern agents in the economy—that's him—cancel each other out. If they don't cancel each other out—if there are, as Lucas says, “millions of people like me,” then a whole bunch of banks running off of Black-Scholes and similar models create a lot of systemic risk, and then 10% unemployment. That’s the problem Akerlof and Shiller are trying to grapple with.

Comments

[Kimball Corson:]

The core problems, obvious from your graphs, is (a) that stimulus efforts only provide a temporary bump up which then laspses, as the economy sinks back toward where it otherwise would have been and (b) those stimuluses are very expensive to taxpayers, sooner or later. They are pricey band-aids and cure nothing, a point too many Keynesians do not come to grips with.

Oct 01 03:36 PM

[conceptwizard:]

I agree, we would have ro replace 2 million jobs per year to be where we started in 7 years.


On Oct 01 03:00 PM tunaman4u2 wrote:

> Pertaining to the unemployment chart:
>
> That seems pretty optimistic to recover ALL 7-8 million jobs in 5
> years....

Oct 01 03:42 PM

[Brian27:]

It was called the Great Depression because after 10 years GDP was 85% of the 1929 level. That is why it was called the Great Depression and the unconstitutional policies after 1933 were as much to blame as Hoover's market interference policies.

On Oct 01 12:46 PM chap08 wrote:

> Err, no. The major falls in GDP occurred in the years 30 to 33. After
> that, due to policy changes, real GDP grew by:
> 34: 11%
> 35: 9%
> 36: 13%
>
> Policy was disastrously reversed again in 37 causing the second slump.
>
>
> On Oct 01 12:04 PM Brian27 wrote:

Oct 01 04:43 PM

[djackson:]

Nice Keynesian piece. Some observations.
In response to argument 1 you did not understand why law could not be passed by Senators representing 60% of the people. Well, that is the House of representatives.
Your response to argument 2 appears to be twofold. Foreigners are still content to hold Treasuries plus interest rates are not trending up. As a distinguished professor of economics you obviously don't need tutoring on trade and currencies. Let's keep it simple with a 2 country closed system. If the Chinese want to peg the yuan and export to us, they have to hold dollar assets. They choose to hold treasuries for a variety of reasons. As for current rates are a signal that more Treasuries should be supplied seems to be simplistic and begs a lot of questions. Maybe the reason rates are this low is that the inflation adjusted return is seen as potentially quite high.
Your response to argument 3 is to throw up your hands as if anybody who does not understand is an idiot. Well, I throw up my hands at anybody who truly believes the Keynesian multiplier is greater than one!
Your response to argument 4 is devious in numerous ways. First, the Lucas part. He gave the interview 7 months ago. Yet you present this part of your case in the present tense with "is." Maybe he is no longer in cash and perhaps the other millions you refer to are not either and perhaps that is why the stock market is off its' March lows. As for suggesting the various Fed policies are insufficient because asset prices are too low, may I ask how you know they are too low? And could it be that this wonderful deficit spending is seen as not producing the income to generate the earnings that go into the perceived PE? Why stock and other asset prices are where they are is far to complex to discuss in this space. Suffice it to say, you set up a straw man in order to knock it down and thus justify further fiscal stimulus.

The problems with so many of your school of thought are manifold, but let's try listing two. Your system of thinking does not not take balance sheet issues, government or private, into its calculations. Second, this blunt tool of fiscal stimulus supposedly is the salve for so many complex problems.

I would have liked to keep this nonpolitical, but you started it. If the President was making a good faith attempt for bipartisanship with 1/3 of the ARRA being tax cuts, why weren't the cuts marginal cuts and why was so much of it given to those who don't pay a federal income tax?

Oct 01 04:46 PM

[bob adamson:]

Robert.b.fe…, Whippet, Robert Mart…, Kimball Corson, reveigel@ms.., Djackson et al appear to miss a couple of points:
First, on payroll and similar tax issues:
1. Further tax cuts for small business and other ‘business friendly’ measures of this sort, especially to the exclusion of measures that will encourage employees and other individuals to have more immediate confidence in their own futures, will not lead to more robust business activity by or for those businesses because businesses will not increase such activity unless they see this leading to increased profit (i.e. unless you see greater profits through greater activity, tax cuts are a moot point). This is the classic ‘pushing on a string’ situation.
2. Don’t such tax cuts constitute a form of entitlement which are a long term drag on public revenues and are difficult to reverse when times change?
Second, on the appropriateness of stimulus itself:
1. It is correct that too much inappropriate fiscal and monetary stimulus was injected into the US and global economies when times were good and that large national deficits and accumulated debt therefore resulted before the current banking, credit and deflationary squeeze hit. Are we therefore to compound our current problems by withdrawing appropriate stimulus precisely when it is needed to mitigate the effects of that squeeze, stabilize the economy and limit the damage thereby setting the stage for steps to be taken to rebuild the economy on a sound foundation? Two wrongs don’t make a right (they appear to make a right wing argument though!).

Oct 01 06:29 PM

[CautiousInv...:]

It's a shame Keynes did not live longer as he would have surely developed the notion of a debt trap......a condition in which a nation finds itself after years of irresponsible fiscal policy driven by congressional desire to win votes by confiscating, aggregating and spending public monies under the guise of "enlightened" Keynesian counter-cyclical fiscal policies applied irrespective of the condition of the economy. Once in the trap, there will be a tendency to take ever more from a contracting base of production to feed the insatiable needs of the rapidly expanding parasitic class(es). Investment shrinks, production declines and income and wealth contracts. This, of course, is unsustainable but it can be maintained for some time through increase borrowing and monetization of debt until the currency is totally debauched and/or interest on the national debt equals government revenue.


On Oct 01 12:59 PM Jeff Nielson wrote:

> This is yet another example of purely abstract reasoning being applied
> without any consideration of context.
>
> Ironically, the author originally mentions the most important parameter
> early in Part I: the crushing debt-load which ALREADY drags down
> the U.S. economy.
>
> As Chap08 pointed out, it is the Keynesian stupidity ("deficits don't
> matter") which got the U.S. to where it is today - as advocate by
> charlatans like Larry Summers.
>
> As the author CORRECTLY pointed out at the beginning, increasing
> fiscal stimulus even further could only lead to one of two outcomes:
> rising interest rates which would certainly detonate a debt-implosion
> and/or insane money-creation and monetization of debt - which inevitably
> means hyperinflation.
>
> The authors "recommendation" that the U.S. INCREASE monetization
> of debt (i.e. buying your own bonds with newly-printed money) is
> a complete joke - since there is no follow-up analysis on the enormously
> negative consequences of such policy.
>
> Simply put, ANYONE who is drowning in debt (INCLUDING nations) cannot
> BORROW their way out of their troubles.

Oct 01 06:34 PM

[Moon Kil Woong:]

Black Sholes is not the problem nor the blame. Black Scholes for obvious purposes doesn't include counter party risk or unethical players who have no ability or intention of making good on their bets. In general, those playing such games are crooks. When dealing with them all bets are off the table so you can just suspend all pretenses of a fair or equitable market.

When those criminal organizations and their masters go away we can o back to black Sholes formulas and get good value out of them. The Stock options market is a prime example of how derivatives should work. People pay upfront, maintain proper reserves, and get shut down if they are found to be doing something criminal, negligent, or stupid (note that the market needs not make a distinction between the two. Thus financial institutions should not be able to claim ignorance or negligence as an excuse for derivatives losses).

Don't blame the math. Math doesn't ruin markets, people do.

Oct 01 08:21 PM

[bklyn225:]

Are you a left wing zealot or an economics professor? What a disgrace to tuition paying students at Berkeley. You really are a complete waste of time!

Oct 01 09:12 PM

[Brian27:]

Friedman Schwartz in 1963 presented evidence that declines in money supply preceded declines in nominal GDP. M1 defined as monetary base (M0) and checking accounts declined 30% by 1933 but increased 33% by 1939. Some of the decline in M1 can be explained by reduced checking accounts caused by falling output. The M0 declined 3% by 1933 but had doubled by 1939.

If negative M1 growth caused the depression why didn’t the economy return to normal growth as M1 was expanding during the 1933-39 period. Secondly, the M0 only declined in 1930 and increased thereafter so it was not a negative factor in the depression.

Lastly, it is a generally subscribed theory that money shocks affect the economy through Keynes nominal wage rigidity. However, despite Hoovers 1929 attempt to stop industrial nominal wages from being cut they were actually quite flexible after 1930.

Another problem with rigid wage explanation is that as employees are laid off the remaining employees become more productive. This is counter factual, labour productivity actually fell by 15% form 1930 to 1933 and real wages were below normal.

Banking failures and the M1 contraction had a role in the Great Depression but the explanations of their roles are weak

Oct 01 10:49 PM

[Robert0713:]

The SA loonies are out in force, assuming that their retail trading is the apotheosis of Social Darwinism. Ha.

As the subtitle of my blog says: It's the Distribution, Stupid.

If, and the SA loonies don't, you want a stable growing economy with a measure of democracy then you must have one thing first and foremost, the mass of income in the pockets of the massive middle class. The Bushies, from Reagan, Gingrich, to Poppy and Kiddy have systematically re-distributed the middle class out of existence. Being preternaturally stupid, they know not that they are killing the Golden Goose. While the top 1% taking 22% of national income makes them feel better, or that they will, as exceptional Darwinist examples, become part of the 1% "real soon now"; such a situation is not sustainable in a capitalist system. Read the real Adam Smith, for a change.

The problem was not caused by government trying to do the right thing and failing, but by those (Right Wingnuts, Brownie the archetype stooge) who set out to make government fail, since failing government is a necessary appendage to their zealotry. Remember: government was either 2/3 or 3/3 Right Wingnuts from 1994 to 2009 (save 2 years).

This was done on purpose by evil men.

Oct 01 11:24 PM

[Robert0713:]

> As Cautious Investor describes above, seekingalpha.com/artic...
> we need pro-business policies.

Just a reminder: this mess was caused by pro-business Right Wingnuts government who saw to it that the top 1% went from taking 8% of national income to 22%. Saying that we need more of that is quite the same as medieval physicians insisting on bleeding the patient. You just kill the patient quicker. But they may be what you want; I can't be sure, but if it walks like a duck, etc.

It's the Distribution, Stupid.

And, just to put a cherry on top, the Chinese *have* figured it out, and are taking aggressive steps to bulk up their middle class. Not surprisingly, their economy is doing better.

The moral of the fable is: insisting on taking most of the pie only results in a smaller pie each year, thus leading to macro-depression. At the micro level (that 1%), life looks better. The reason being that if the 99% have progressively less, then those 1%-ers don't need to any more to still be the cherry on top. By the way, it's known as Beggar Thy Neighbor.

Oct 01 11:44 PM

[GotLife:]

After reading half of this article I concluded the effort was to try to stimulate the economy through keyboard activity. I ceased when the author said he felt, "His head was about to explode." I suggest that might be great insight...

Oct 02 08:41 AM

[ebworthen:]

The political angle is the proverbial dog chasing it's tail.

This isn't about politics, it's about morality. An unethical Wall Street isn't moral, and neither is big government (liberal OR "conservative").

Politics is the distraction.

On Oct 01 11:24 PM Robert0713 wrote:

> The SA loonies are out in force, assuming that their retail trading
> is the apotheosis of Social Darwinism. Ha.
>
> As the subtitle of my blog says: It's the Distribution, Stupid.<br/>
>
> If, and the SA loonies don't, you want a stable growing economy with
> a measure of democracy then you must have one thing first and foremost,
> the mass of income in the pockets of the massive middle class. The
> Bushies, from Reagan, Gingrich, to Poppy and Kiddy have systematically
> re-distributed the middle class out of existence. Being preternaturally
> stupid, they know not that they are killing the Golden Goose. While
> the top 1% taking 22% of national income makes them feel better,
> or that they will, as exceptional Darwinist examples, become part
> of the 1% "real soon now"; such a situation is not sustainable in
> a capitalist system. Read the real Adam Smith, for a change.
>
> The problem was not caused by government trying to do the right thing
> and failing, but by those (Right Wingnuts, Brownie the archetype
> stooge) who set out to make government fail, since failing government
> is a necessary appendage to their zealotry. Remember: government
> was either 2/3 or 3/3 Right Wingnuts from 1994 to 2009 (save 2 years).
>
>
> This was done on purpose by evil men.

Oct 02 12:29 PM

[Troy Jensen:]

This article has my rocking and rolling!

I love it. Brad DeLong has just written the best article I have seen in the past two years on the REALITY of what we can do do kill this recession.

Bravo Brad, keep it up! "Just the facts..."

Oct 02 01:35 PM

[Jim P. Smith:]

Really good piece.

Happened to catch a news bit on the Tv the other day mentioning another factor in the reduced spending was the 'higher than expected paydown of consumer debt'

I don't know who else has been impacted by the credit card laws that have been gradually going into effect, but my minimum payments on my borrowings sky-rocketed earlier this year. The interest rate didn't change, but the minimum principal payment jumped.

My payments are all set on auto-pilot, and given I'm sure I'm not the only one who took advantage of the ridiculously low rate environment I imagine I am not the only one who's felt the cash draw-down from the payments change.

I for one am for stimulus when there is a significant gap between capacity and demand. If that makes the gov't the 'consumer of last resort' then so be it. Smoothing out the bumps is good governing. Pretending 'everything will be ok' is a plain ignorance and 'bury your head in the sand' strategy, a.k.a not effective.

Oct 02 04:30 PM

[Living4Divi...:]

Keynesian policies have a tremendous amount of merit. Keynes solution had two steps:
Keynes Step One: Governments should boost spending during a downturn in order to boost the economy. During a downturn, interest rates should be kept ridiculously low, and credit should flow freely while the government takes on massive amounts of debt.
Keynes Step Two: After the recession is over, turn off the credit and money spigot. To prepare to fight the next recession, the excess Federal Debt should be paid down. During good times credit should be tightened in order to sop up the excess.

Over the past three decades, the monetary and fiscal authorities have only followed one half of Keynes solution. The credit spigot has been left on for many decades. Debt levels reached during one recession were never whittled down during the following recovery, it just piled up.

The government merely implemented the most politically popular parts of Keynes' theories (the massive spending part) and neglected to do the clean up work that followed (the saving part). After all, who wants to clean up a mess?

Keynesianism only works when you employ both parts.

Oct 02 05:08 PM

[storm999:]

Thanks for writing this great column Brad. As I commented to one of your critics, the idea that cash for clunkers failed is absurd. It was a success until it was stopped. The Bush tax cuts to the rich were a temporary stimulus, too. Now we are being told they must be made permanent to be successful. Let's get this straight tax cuts to rich should be continued, but tax cuts to the middle class should be stopped, even though only the cash for clunkers program can show a direct stimulus to the economy. That's not sound economics, that's bullsh*t. Keep up the good work.

If we don't get the middle class back to work we are going to end up a third country with an hour glass wealth distribution and revolutionary movements.

Oct 03 04:18 PM

[User 495210:]

Total debt, public plus private, leading up to 1929 was about two and a half times GDP. By the end of WWII, this was down to half of GDP. This is what got us out of the Great Depression. Now, total debt is four times GDP. Rapid painful unwinding of debt would be 8% of GDP per year. Even at this aggressive rate, it will be many decades to unwind this debt. We need to find creative ways to accelerate this unwinding of debt. Convert debt to equity, facilitate debt repudiation through bankruptcy, induce inflation, and consider dollar devaluation. All this combined, plus painful normal de-leveraging are required.and we still will be stuck in pain mode for many years. By all means, stimulate and even monetize, as stated above, but even this is not enough.

Oct 03 05:26 PM

[storm999:]

I love the defense of "animal spirits" research, too. The idea that the herd instinct is always balanced (cancel each other out) just doesn't fit human history.

Great critique of Fama, too. In the real world one wonders how one could have a completely free market, open immigration and yet be anti-cartel. The level of government necessary to investigate and suppress cartels, implies regulated markets and at least some control over population migrations (since Cartels are groups of people, who will simply come and go as they please unless there is immigration control). Fama sound like one of those people who can explain how economics ought to work, if only people didn't screw it up. He is a fantasist not a scientist.

Oct 03 05:35 PM

[VALUEDIV:]

As a former Professor of Economics, I taught my classes back in the seventies that a majority service economy must insure that the services provide true utility (value added form) to goods. Karl Marx spoke of two models of capitalism:

MODEL ONE: {(G)-->(+U) --> ($) -->(UG)}
A worker adds utility value (+U) to raw goods (G) and is paid wages ($) to buy goods he needs (UG) to live on. Pretty simple stuff, for a major n economist!!!

MODEL TWO: {($) ---> (PG) ---> ($$)}

Use money to Protect Goods (PG) and are paid money to provide this service. Insurance and medical services certainly provide and protect. There exists a "fair balance" between the price (premium) of the service and the return. This money- to- money flow is needed to protect goods. Yep, it is ligit Hedging!

However, the system completely breaks down when in Model 2, we have:

($)-->($$)-->($$... to 1 $leverage)!

That is a pure double down PONZI scheme called the Derivatives and Hedging game gone WILD! The banks are starting to increase their Collateralized Debt ratios again from the corrected 10:1 to 20:1 today. NOTHING has changed, but it must change or we will have a financial crash once again. Regulations and job creation are BOTH needed.

Fellow economists, please pardon my KISS approach that lacks any academic rigor; but, perhaps, we make simple concepts of a functioning economy too complex. At the basis of any sound system, there must be fairness, decency, and honesty (yes, laws also) for it to thrive.

Perhaps now, you can see why I was never considered for the Nobel prize in economics, or even Peace...Prof. Dan

Oct 24 05:07 PM