About a year ago, just as the “sub-prime crisis” was starting to make the news, I wrote a note on this blog musing about the economic paradox of “restless capital”. I said that most students in economics classes (and I was once such a student, as I have a masters in economics from Rutgers) are taught that capital is a good thing, a helpful thing, a thing very much needed for a successful economy. The notion that too much capital could be a bad thing was almost unheard of (and besides, free markets would quickly correct any such capital glut — interest rates would go very low and people would cut back on their savings, they would consume more). And yet, despite low interest rates, the Asians and other big players around the world kept on saving money and offering it to America. So America got stupid. Totally against what’s in the economic textbooks.
The main reason why I didn’t go forward with my academic training in economics after getting a masters degree, despite encouragement from various teachers to pursue a PhD, was that advanced economic classes delved deeper and deeper into abstract math and esoteric concepts. I originally thought that the basic microeconomics classes would be followed by detailed studies on how these concepts actually develop and function in the world of trade, industry, finance, government, etc. The macroeconomics classes would, I imagined, segue into a detailed analysis of what has happened over the course of history as nations and central banks sought to administer policies to stabilize prices and employment and output. When I found out that it would just be a lot more technical language and multiple-regression models, I lost interest.
The current economic crash confirms my hunch that the guys who DID stick it out and gain their economics doctorates never did learn all that much about how things really work. This certainly includes all those Chicago-school economists who said that de-regulation was the greatest thing since sliced bread; but it also includes the liberal Paul Krugman, who often opines in the NY Times that big government is the only way to go.
Krugman (who can be a bit too socialist for my tastes, although he is still a talented academic, a smart cookie) had an article the other day discussing the capital glut and how it helped lead to the economic disaster that we are now in. Per Krugman, what happened was that China, Japan, Korea and the other industrializing Asian countries decided in the late 1990s to discourage private consumption, and encourage thrift and savings on the part of their citizenry. All of their saved money could not be put to work in Asia, so much of it flowed into the world credit markets. (Also add in the capital flows from the Middle Eastern oil nations, who don’t have any good ideas on what to do with all the money they earned again as oil prices rose after 2000; Allah forbid that they might actually try to expand their economies and improve the lot of their common folk).
Interest rates went way down, as plenty of money became available for borrowing and investing. And you know what nation took greatest advantage of this — yea, the good old USA. Soon after the start of the century, we Americans had access to all the cheap capital we like. Sure, it could have been better used to help the poor lands of Africa and South America; but the people who were saving all this money felt that the USA was the safest place to put their excess funds. So what was done with this boon? Well, as Krugman explains, our free market economy and conservative politics collectively decided that it should go into a middle-class consumer binge, including access to gas-guzzling SUV’s for most anyone with any sort of job; and to support deceptively easy terms on real estate financing, i.e. sub-prime mortgages. It all helped to fuel a real estate and consumption spending bubble, which finally got too big and burst. And now we’re paying the price. BIG TIME.
So it’s interesting for me to see just how right I was about the unexpected evils of “wrestless capital”, and to have my suspicions confirmed by a professional economist like Krugman. It’s too bad that all that capital didn’t go into hi-speed rail, green industry, biotechnical research, education, sturdy roadways and bridges, and other investments that would make our country better off in the long run. The Obama administration is now trying to direct some of that wrestless capital into such investments through deficit spending financed by greatly expanded government borrowing. If the Chinese decide to keep their huge flow of savings directed towards US Treasury debt, we might be OK. If they start getting a taste for the good life, like us, then interest rates will shoot way up and the Obama plan will die on the vine. If that happens, WE’RE SUNK.
Bottom line here: economics truly cannot be divorced from politics. That’s why the whole topic of money and trade and commerce used to be called “political economy” in the universities. The free market would have matchless advantages for social welfare, in a test-tube situation free of political forces. But the real world is not like that. As such, the academic world needs very badly to get back to studying economics in the context of politics, and society, and government, and history. I.e., the real world. If it had, then perhaps America wouldn’t have given up on governmental economic leadership just when other governments were offering us the huge gift of overly cheap capital. We let our free markets feast on this irresistible gift until they got sick and broke down. (I believe that will be how the Bush-junior years will be remembered fifty years from now). We can’t give up on open markets and capitalism, they do provide a lot of innovation and choice; but we also need a collective mechanism to keep it from getting drunk and stupid. Let’s hope that the economists and the academic institutions that train them start focusing a bit more on the real world and the lessons of history.
Jim,
Your comment on how and why you lost interest in econ makes me think that I have always tho't the econ field has never really understood its underpinings. And I admit to being one of the least educated people in economics, but I have done a lot of thinking about what I did learn in those undergrad classes so long ago and have been what I hope is a keen observer over the years.
Let me explain: I do remember sitting thru undergrad classes–and being impressed with one thing that to this day (some 50 years later) still flows thru my mind each time I hear what I call (with all due respect to your knowledge of econ) the blah, blah, blah of econ.
That is, all one has to do is look around and see that "its" all built on a foundation of sand–to say the least. Specifically, I've been watched for these 50 plus years the stock market indicators–the Dow, the S&P;, Nasdaq, various stocks here and there, etc.–and I have noticed that the basis of whether the market goes up or down has the most intangible of foundations–the psychological mood (the best word I can think of at this moment) of the people involved in the markets.
Another place I see this same psychological factor is at work in whether or not there is a run on banks.
Separate from the psychological factor is all the outright hanky panky that goes on–such as the Madoff Ponzi scheme. In addition there was all the banking hanky panky with the handling of mortgages. Amazing isn't it, that a foreclosure can be stalled for months and in some cases be stopped by a simple "produce the note" request. That tells us there was some serious hanky panky going on in the mortgage business.
Have you noticed that the slightest "good" news of any kind–or thought that there MIGHT BE some good news–can send the market soaring? The slightest "bad" news of any kind sends it plunging. I'm amazed that the soaring/plunging of the market can be affected by pure rumor often, or perhaps better said, the psychology of the individuals operating in the market.
And it is this psychological factor that has such real effects that makes me wonder that all the big minds of economics have not yet considered they must factor in the psychological factor. And there simply is no way to control this factor really.
I find myself beginning to think that Obama needs to hire himself some psychologists who are terrific at making people in the market THINK that all will be OK–and then it will be.
In addition Obama should hire himself some SEC members who would actually be able to SEE economic fraud (ala Madoff) when it comes in front of their face. I recently heard a program (sorry, once again short term memory fails me as to the citation on this) on the fact that the SEC lawyers are untrained in finance. Financial fraud can be right in front of their faces and they do not see it because they don't know the ins and outs of finance and of the financial materials they are reviewing.
So, while I respect the learning of the economists, I find myself thinking as they speak of economic models, serious mathematical models, etc., that all the talk by economists is just so much blah, blah, blah. (And once again, let me respectfully say that my description is not meant to be disrespectful of the learning of economists or crass with regard to the field. Yet, my description is really the only way to express the tho'ts I've had over these many years.
MCS
Comment by MCS — March 8, 2009 @ 8:10 pm
Jim,
Your comment on how and why you lost interest in econ makes me think that I have always tho't the econ field has never really understood its underpinings. And I admit to being one of the least educated people in economics, but I have done a lot of thinking about what I did learn in those undergrad classes so long ago and have been what I hope is a keen observer over the years.
Let me explain: I do remember sitting thru undergrad classes–and being impressed with one thing that to this day (some 50 years later) still flows thru my mind each time I hear what I call (with all due respect to your knowledge of econ) the blah, blah, blah of econ.
That is, all one has to do is look around and see that "its" all built on a foundation of sand–to say the least. Specifically, I've been watched for these 50 plus years the stock market indicators–the Dow, the S&P;, Nasdaq, various stocks here and there, etc.–and I have noticed that the basis of whether the market goes up or down has the most intangible of foundations–the psychological mood (the best word I can think of at this moment) of the people involved in the markets.
Another place I see this same psychological factor is at work in whether or not there is a run on banks.
Separate from the psychological factor is all the outright hanky panky that goes on–such as the Madoff Ponzi scheme. In addition there was all the banking hanky panky with the handling of mortgages. Amazing isn't it, that a foreclosure can be stalled for months and in some cases be stopped by a simple "produce the note" request. That tells us there was some serious hanky panky going on in the mortgage business.
Have you noticed that the slightest "good" news of any kind–or thought that there MIGHT BE some good news–can send the market soaring? The slightest "bad" news of any kind sends it plunging. I'm amazed that the soaring/plunging of the market can be affected by pure rumor often, or perhaps better said, the psychology of the individuals operating in the market.
And it is this psychological factor that has such real effects that makes me wonder that all the big minds of economics have not yet considered they must factor in the psychological factor. And there simply is no way to control this factor really.
I find myself beginning to think that Obama needs to hire himself some psychologists who are terrific at making people in the market THINK that all will be OK–and then it will be.
In addition Obama should hire himself some SEC members who would actually be able to SEE economic fraud (ala Madoff) when it comes in front of their face. I recently heard a program (sorry, once again short term memory fails me as to the citation on this) on the fact that the SEC lawyers are untrained in finance. Financial fraud can be right in front of their faces and they do not see it because they don't know the ins and outs of finance and of the financial materials they are reviewing.
So, while I respect the learning of the economists, I find myself thinking as they speak of economic models, serious mathematical models, etc., that all the talk by economists is just so much blah, blah, blah. (And once again, let me respectfully say that my description is not meant to be disrespectful of the learning of economists or crass with regard to the field. Yet, my description is really the only way to express the tho'ts I've had over these many years.
MCS
Comment by MCS — March 8, 2009 @ 8:10 pm