Time to Mark My Beliefs to Market

by: Brad DeLong

There is a danger in this business. If you don't mark your beliefs to market occasionally, and throw out worthless intellectual trash, you ossify--you become one of those demented old coots detached from reality ranting unintelligibly at the moon.

I was reminded of this recently as the intelligent, thoughtful, patient, and polite Nick Rowe suddenly turned... shrill:

Nick Rowe Loses It: Oh Christ. Oh Christ. Oh Christ. SW interprets Kocherlakota the same way I do, and thinks he’s right. Oh Christ. [...] Oh Christ. Central banks can’t keep the price level and inflation rate determinate by pegging the nominal (or even real) rate of interest forever. We’ve known that was wrong at least since Wicksell’s cumulative process. I assumed that everyone (except a few hopeless lefties and funny money guys) knew that was wrong. Nobody’s monetary model tells us that (except a few hopeless Post Keynesian types, who are at least logically consistent, because they assume very sticky prices that don’t respond to AD at all). Oh Christ. [...] This is much worse than Cochrane getting Say’s Law wrong. Say’s Law is very nearly right, and very few people understand precisely why say’s Law is wrong, and that it’s money, and only money, and not any other asset, that makes Say’s Law wrong. I give up. This isn’t New Monetarism. It’s got nothing to do with Monetarism at all. It’s the exact opposite of Monetarism. Somebody resurrect Milton Friedman.

(Not, mind you, that Nick Rowe is demented, old, a coot, detached from reality, unintelligble, and ranting at the moon. It's simply that his--entirely justified--... shrillness... reminded me of the need to mark your beliefs to market periodically.

So what major analytical mistakes--errors of either theoretical analysis, of empirical description of reality, or of applying theory to reality--have I made in the past decade?

I can think of three offhand to start the ball rolling. I erred:

  1. In my belief that central banks had the tools, the skill, and the political will to stabilize economies at high levels of employment and low levels of inflation, and thus that fiscal policy and financial institutions policy no longer had any compelling stabilization policy role to play.

  2. In my belief that large, leveraged financial institutions had sufficient caution and sufficient control over their derivatives books that their derivative positions did not pose major systemic risk.

  3. In my belief that the principal threat to the world economy would come from the fact that in a crisis the shaky long-term finances of the U.S. social insurance state might provoke a collapse of confidence in the long-term value of the dollar.

These were three biggies. But surely there were others. What were they?