Empiricism in financial topics

Economics Economics Questions
1

Over the last two days I’ve had a couple of economics / financial debates with an acquaintance of mine who turned out to be a big-time empiricist. I’ll give you two examples to understand his pattern:

  1. We were talking about currency. He said that central banking and fiat currency were a good thing because in the absence of unlimited credit, there would be only marginal economic growth. He argued that the Middle Ages saw just limited growth and economic expansion in part because there was no central money distributor. When I pointed him to 19th century America and its nearly non-existent inflation due to a gold standard paired with considerable economic growth, he laughed and said that economic growth was ridiculously low at the time. He concluded that indebted economies and debt-based currency turned out “in reality” to be pillars of prosperity.

  2. We tried to analyze the current financial crisis. I blamed central banking, cheap credit policy and banks that competed in becoming “too big to fail” instead of competing to serve the customer. He argued that America’s underregulated markets were the culprit. If America had adopted the Basel II Accord earlier and relied more heavily on monitoring banks, had demanded a higher risk provisioning and, quite generally, had “oriented itself on the German model of social market economies”, no such crisis could have happened. I was pointing out to him that he’s entering the spiral of interventionism where one intervention (central bank etc) make another one necessary which then again makes the next intervention come. He said that’s oversimplified and you can get an almost-equilibrium by regulating properly. He again cited Germany as an example.

I’m always having trouble when people dismiss my deductionist methods as crazy talk and instead begin citing the latest regulatory craze like Basel II which I’d never before heard about to then make my point appear dull.

Basically, I’d be thankful if you could point out in detail where the fallacies in his (or my own) points are since he was just comparing the status quo which doesn’t say much. Thanks in advance.

2

All I see is a plethora of assertions. In future, laugh at him. In particular, anyone who is willing to use the word “underregulated” in connection to the US’ financial markets is, without doubt, an idiot. So his “argument” is worth nothing. As for Germany, where is his proof that government “regulation” can approximate equilibrium? How would he even know this? Sounds like neoclassical garbage.

-Jon

3

If you really want to discuss these topics with him, you’ll have to do some research or you’ll be right back here the next time he brings something up you haven’t heard about.

But the cool thing about knowing what happens to all economies under government control is that you don’t have to do anything. right now. Just sit back, relax, and wait for these “model” countries to start going through problems of their own. Then you can laugh at all the sorry excuses he makes and his new list of model countries.