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Friday, September 19, 2008

Keynesians to Classicals: "Told You So!"

"We're all Keynesians Now."  After the Great Depression, the wave of 'can-help' government took hold.  No longer were economists just bystanders watching the world go by and proclaiming "lookie there, ain't that free market pretty."  Now they were active participants recognizing that free markets can and do fail.

Revisionists from Austrians to New Classicals and Monetarists have gone back and said that if it weren't for the government in the first place, the Great Depression never would have occured.  

What are these same people saying now?  Where was the intervention that caused this huge housing crisis?  Is Greenspan, as part of the "government" - albeit an independent part - to blame for the entire crisis?  Few people put this all on the 1990s Fed, though it seems obvious that that the low real interest rates of the 1990s aided the bubble formation.  

It seems obvious to me that private industry failed:  failed to manage risk, failed to provide full and complete information (and unbiased) to their customers (people that wanted homes that couldn't afford it).  And, on the consumer's side, people you could say got wrapped up in the irrational excitement of home buying - and they made purchases that they never should have - and later came to regret.  Industry failed to oversee itself;  In a word, industry failed.   

Now replace the word "industry" with the word "market," and what you get is the most complete evidence that Keyensianism still has something very useful to teach us about the world.  

5 comments:

Machpelah said...

How an the markets regulate themselves with suh interferene from the government? As I understand it, the gov't. told the banks if they did not seek ustomers who were bad credit risks, and assist them to get credit( mortgages that it would have an adverse affect on their standing with the FDIC. A disincentive to be fiscally prudent in a fiercly competitive industry. Keynsian eonomics is about gov't. intervention in economies. Thank you for having a blog about a subjet that is not as romanti as politics. I expect to learn a lot from you, even if I disagree with some of your perspetive.

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