What’s baffling to me is how deeply Keynesian theory appears to be embedded into mainstream economic thought.
The crisis we are living through now should have thrown up all kinds of warning flags that the theory behind government policies which are creating economic havoc around the world was fatally flawed or at the least may have been, but everyone seems to believe that we just aren’t doing enough Keynesian stimulus to get us back on track. Similarly, Austrian economists and those adhering to Austrian theory are looked at as a curiosity at best, but more often as some sort of nutcase to be feared.
In the comments section of another thread on that site, entitled, “Thinking Like an Economist”, a member wrote:
I guess I don’t think like an economist. My background is science–observe, create a hypothesis, test the hypothesis, observe again, collect data, adjust the hypothesis if necessary…rinse and repeat. Last year, the hypothesis was, “The market will start back up well before the economy does,” based on observations of what the market had done in 8 of theprevious 9 recessions.
I agree with his advocacy of the scientific method, though I think he might be a little short sighted in applying it on the microeconomic level but not on a macroeconomic one.
But it appears to me that virtually no one. at least in “the mainstream” has done that basic analysis of testing the Keynesian hypothesis with regard to this most recent crash. Ben Bernanke was clueless (1) as was Paul Krugman (2), and yet Bernanke was reappointed as the Chairman of the Federal Reserve and named Time’s “Man of the Year”, and Krugman is widely viewed as the wise old Nobel Laureate that is helping to keep a panicking populace on track.
Peter Schiff, on the other hand, was literally laughed at on national TV when he predicted the coming crash (3), and yet, even after the crash occurred almost exactly as he had predicted (4), and yet it still seems to me as if he is often invited to be interviewed as more of a sideshow on most of the mainstream media to help pump up viewership, or for entertainment purposes rather than as a mainstream economic commentator with insightful opinions.
Similarly, our premier universities hire professors like Krugman and DeLong, who is now lamenting that our deficits are just too darned low:
Deficit: This Is Not Good News by Brad DeLong April 13, 2010
“The federal deficit is running significantly lower than it did last year, with the budget gap for the first half of fiscal 2010 down 8 percent over the same period a year ago” … This is bad news: unemployment is higher than it was a year ago, and so the deficit ought to be higher: a lower deficit means that they have gotten fiscal policy off.
It seems to me as if the whole world is going nuts? Does no one actually test hypotheses anymore?
Endnotes:
1). Bernanke: Why are we still listening to this guy?
www.youtube.com/watch?v=HQ79Pt2GNJo&feature=player_embedded
2). How Did Economists Get It So Wrong?
Published: September 2, 2009
By PAUL KRUGMAN
www.nytimes.com/2009/09/06/magazine/06Economic-t.html?_r=1
3).Bernanke was wrong while Peter Schiff was right
www.youtube.com/watch?v=V5sDKwMP6Pc&feature=player_embedded#
4). Bernanke: Denying the Obvious by Peter Schiff
http://seekingalpha.com/article/181514-bernanke-denying-the-obvious
As proof that the Fed caused the housing bubble, I offer a commentary that I wrote in May of 2004 and which was published as an opinion piece in the Orange County Register.
You can read the entire commentary here.
However, let me reproduce some key quotes:
That so many are currently opting for ARMs reflects a level of real estate speculation unparalleled in American history. Homebuyers have been lured into this foolish choice by… a Fed chairman desperate to keep the real estate bubble inflating. Unfortunately, the longer the Fed remains “patient” with regard to raising short-term interest rates to appropriate levels, the more homeowners that will be lured into the ARM time bomb.
The real losers in this whole fiasco are likely to be those who did not even participate in the mania. As over-leveraged borrowers walk away from properties in which they have no equity, the Fed will most likely attempt to bail out both debtors and bank depositors (and the government sponsored enterprises that insured the loans) with the most inflationary monetary policy ever undertaken in the history of central banking. The savings of an entire generation will be wiped out, as it will have been squandered to perpetuate the biggest real estate and consumer debt bubbles of all time.
Now if I could have seen that coming as early as May 2004, why couldn’t the Fed? Even with the full benefit of hindsight, Bernanke still cannot recognize the Fed’s mistakes.