Latest Scholarship

July 22, 2010

Bullet Points on the Late Uproar, Plus a Footnote on Macro

Herewith I reprint the substance of a couple of posts from my own blog (link, link); in one, I try to pull together some thoughts on the late (uproar, meltdown,economic event, clustermuck, whatever we call it); in the other I add a footnote about my own frustration with the economic debate over macro policy.

First--always willing to punch above my weight, I unburdened myself before a bunch of bankruptcy lawyers the other day on the issue of how we got into this economic mess, with a few tentative jabs at the issue of how we might get out.  Always happy to oversimplify, I offered these bullet points:

  • Housing Bubble or--? I think this one almost answers itself. Housing peaked in 2006; banks didn't melt down until 2008. So, a housing bubble that put a spear into a fragile and vulnerable banking system. Note that this is the first financial crisis top metastasize since 1931.
  • Liquidity or balance-sheet? Bankruptcy lawyers grasp this one: "bankruptcy insolvency" v. "equity insolvency." As phrased, the question again probably tips the hand of the answerer. We had the mother of all liquidity crises in 2008, but we've got a balance-sheet problem that looks like it will stick around for years.
  • How did we get where? "Bleeding Gums" Murphy or Banana Republic? The "Bleeding Gums" school holds that it was all the fault of the undeserving poor who wanted to become the undeserving rich and took on loans they could not possibly repay, thereby destroying the world financial infrastructure (they had help from Jimmy Carter, Chris Dodd and Barney Frank). The Banana Republic school holds that we've become a nation where a small and entrenched elite has come to regard the government as its dedicated honey pot. I suspect there is at least enough truth in either of these views to offend those who embrace the opposite.
  • What do we do next? As in: do we slash the budget or turn on the printing press? This is the pairing that I find hardest to reduce to a soundbyte. But it is the utter discontinuity on this issue--the array of respectable professorships on each side of the case--that does most to enhance the suspicion (a suspicion that I do not embrace)--the suspicion that economics has not yet advanced beyond the realm of campfire fairy tale.

I shared the platform with a working bankruptcy judge who described to us in edifying detail how much his life is dominated by the busted-up mortgage and how he doesn't see any end of it in sight. We passed on discussing the Financial Reform Act; I can't speak for my colleague but I figure it will be another year before we know how completely the lobbyists defang it in rule-making. I did hear somewhere, however, that Mary Schapiro has already said she'll need another 500 employees at the SEC. Insert your own stimulus joke here.

--

The next day I added:

I'm still puzzling over the scandal of economic theory that I was mulling over yesterday--the other discontinuity of view between competing schools of macro policy. That would be: the view(s) that (a) we've got to juice more into the system; or (b) we've got to cut, cut, cut. I tend to ally myself with those of my betters who propound the juice theory. And I'd certainly agree that the cut school is heavily populated with the terminally ignorant: people who don't seem to have the most primitive notion of how an economy works, and who are disposed to use government policy of any sort as a focus for their resentment (particularly when propounded by a suspected Kenyan).

But even a blind hog finds a few acorns and an idea has a truth value independent of the person who embraces it. Even if it is not the right remedy for the moment, still the cutter school has defenses or justifications far more sophisticated and plausible than what you are likely to hear on talk radio.

What is lacking, so far as I can tell, is anywhere near enough candid and responsible dialog between grownups who ought to know better. I'm willing to give the yahoos a bye; I'm happy to excuse politicians (at least provisionally) from the class of those who know better. That leaves a tranche--maybe two tranches--of impressively trained professionals who can fashion analytic advocacy of great sophistication, and marshal formidable batteries of data in their support. But they gaze across the void with an attitude of suppressed indignation (the cutters) or ironic indifference (the juicers). On both sides, it is unworthy of them. We the wide-eyed and gap-jawed outsiders deserve better.