Advocates of Reason: 5 December 2012

Man has only one tool to fight error: reason.

Ludwig von Mises

1. If you’re not interested in shelling out the $40 for Casey Mulligan’s new book on the Great Recession, you can listen to this EconTalk interview with him. I’ve read that the arguments in the book are nuanced and more sophisticated than what you’d expect, but I don’t find the interview all too convincing. To be clear, I agree with a lot of Mulligan’s logic, but I’m not convinced as to the explanatory power of these theories in the context of the Great Recession. If someone has read the book and listened to the interview, I’d be interested in your opinion.

2. Starting 9 January, Joseph Salerno will be teaching a six week online class on Austrian macroeconomics, for $59.

3. Joshua Wojnilower discusses Austrian capital theory in the context of post Keynesianism and Scott Sumner’s recent post on so-called Cantillon effects. Regarding post Keynesianism, I don’t think there’s much controversy about heterogeneity; what they may reject, based on Sraffa’s contributions to the capital debates, is the effect of changes in the interest rate on the average period of production (although many Austrians, including Hayek, had/have abandoned the concept). Joshua quotes Ryan Murphy at length, who illustrates the Austrian argument as one about interest rate sensitivity. I don’t particularly like this way of looking at it — although interest rate sensitivity is relevant —, because it draws attention away from the the role of prices: higher investment in the second stage will increase demand for third stage goods, raising their prices and therefore drawing investment into the third stage (and so on and so forth, until the rate of profit throughout all stages is equal).

4. Fannie and Freddie before and after the crisis in charts; also, some commentary on the same subject by Garret Jones. I’m a vocal skeptic on the role of Fannie and Freddie in being a major cause of the Great Recession, but these charts show that maybe I haven’t considered everything. The graph (reproduced below) showing mortgage backed security issuances is particularly telling, although I have a quibble: GSEs packaged loans into MBS’, but sold some of these to private financial firms (I don’t recall without double checking, but I believe that agency MBS’ were considered of lower risk than alternative MBS’), so the figures on the graph can be misleading depending on how the reader interprets them.

Another thing, I don’t have time to scan it or reproduce it, but if you look at the Case–Shiller housing prices index, you’ll notice that the historically unique (in magnitude) run up in housing prices began somewhere around the mid-90s. Sharp changes in housing prices wasn’t something unique to 2003–06, when the private market began to heavily invest in mortgage-backed assets.