The 2008 stock market crash did not only catalyze a deep recession, but also catalyzed the propagation of some economic myths. These myths take on a myriad of forms. From suggesting that Hoover was a non-interventionist, and that the Federal Reserve did not attempt to respond to the 1929 crisis, to the idea that our current crisis (and all crisis) was a result in the drop in aggregate demand. They go from myths that originate from analytical mistakes and poor historicism, to just pure malarkey. One such example is Doctor Jeremy Siegel’s “The Crisis: Keynesians vs. Monetarists“:
Keynesians assert that business cycles are caused by changes in aggregate spending behavior.
To be fair, most Keynesian economists (probably) no longer believe this. It’s hard to reconcile this theory with the fact that both in 1929 and 2007 savings were at all time lows, meaning that aggregate demand (or aggregate spending) were at all time highs. Most Keynesian economists recognize that people were responding beyond their means. Instead, they suggest that aggregate irrationality on part of the businessmen that led them to overinvest caused the recession, and now an increase of aggregate spending must pull the world back out (even though the rate of savings is still extremely low).
But when the increased supply of housing overwhelmed demand, the euphoria broke and home prices fell.
It’s interesting how they shift the blame from loan sharks to an “increased supply” of houses.
But on the subject of the policies to get us out of the crisis, the Monetarists shine much brighter. Milton Friedman’s monumental work, “A Monetary History of the United States”, argued that whatever caused the Great Depression of the 1930s, the downturn was made much worse by the Fed’s failure to aid the credit markets.
Milton Friedman’s book is monumental in many respects, but in this case Friedman got it wrong. Two articles have been written on this site on the topic:
- Hoover’s Response to the October 1929 Crash
- Credit Inflation During the Hoover Administration (Murray Rothbard)
This, however, does not discount Friedman’s A Monetary History of the United States as a poor book. It is one of the best books on the subject. Unfortunately, Friedman did not look at the money supply as objectionally as he could have. In this case, Murray Rothbard’s America’s Great Depression is a superior book (and deals specifically with the Hoover administartion).
This quote is particularly entertaining:
The Fed was indeed hampered by the Keynesian Liquidity Trap when the central bank set the Fed Funds near zero at the end of last year. But Bernanke initiated policies to mitigate this constraint.
But, a liquidity trap supposedly happens when Federal Reserve operations do not catalyze an increase in the volume of loans. So, that sentence does not make much sense. Indeed, the rate of loans continues to fall, despite the Fed’s massive monetary pumping (the real effects of which we will feel very soon).
Finally, Doctor Siegel, don’t kid yourself: fiscal stimuli don’t work.
I found it interesting how respected doctorates in economics are. Yet, doctorates focus mostly on mathematics as opposed to economic theory. Most economic theory is learned during your undergraduate years, and even there it is rather light (basic macroeconomics and then whatever you decide to take as electives). What’s the point? We are graduating a bunch of “economists” who have little idea of what economics actually is and do not have a proper grasp of theory. The less mathematically inclined ones write articles on Yahoo Finance, while the more mathematically inclined ones try to prove their baseless theories by using enough math to confuse those who they are trying to persuade. The economics profession has been politicized, and the majority of economists don’t know what they’re talking about.
If you do not consider yourself part of this group, then perhaps you should take a look at an alternative school of economics: the Austrian school.
