Monday, 5 January 2009

Brad DeLong on The Financial Crisis

Went to a talk on "The Financial Crisis of 2007-2009: Understanding Its Causes, Consequences—and Its Possible Cures" by Brad DeLong, whose blog I've followed for a while, and was duly impressed by DeLong's broad historical reach and scope in delineating what made this recession different from many previous recessions, and on the huge magnitude of the impact of a sudden change in people's preferences for risky assets (which DeLong estimates led to about $17 trillion of the total decline in asset values) - as opposed to the actual increase in the default discount for mortgage payments (which are relatively small).

Prof DeLong has kindly put his entire script on his blog (see the link above), so I won't go into the contents of the actual speech, but I thought it useful to note his answer to the question I posed, which was on a question of political economy and why the Austrian school of thought had gained so much currency among those on the right. (If he or anyone else reads this, I apologise if the paraphrasing missed something out.) DeLong invoked the name that was clearly in the vanguard of advancing the intellectual ideas associated with so-called laissez-faire free market capitalism, Milton Friedman, and noted something about Friedman's monetarist ideas - that Friedman's monetarism, in calling for the managed growth of the money supply, was actually a means of government intervention, albeit in as minimal a form as possible, and that the act of intervening in the money supply was as much an act of intervention as Keynesian proposals. However, as DeLong noted, Friedman conflated monetarism with a total laissez-faire system and advanced the virtues of both, leaving his acolytes somewhat at a loss when the market system reached its limits.

DeLong also noted the very Christian nature of America in many respects, and the importance of the notion of being punished for sins, which in turn led to a certain feeling that the crisis was a necessary purgative response to the "sins" of excess, even when the importance of punishing the financiers that were held responsible for the crisis could have brought with it the unemployment of millions. This he contrasted with the views of Keynes, who very much viewed these situations as pragmatic ones that can be fixed. I think DeLong is right, and I think to that you can add that very Christian view of sin as falling short regardless of magnitude - i.e. that as long as you have sinned, there is no question of degree - you are in one of the circles of hell, but you are in hell, nonetheless. And when you have such a worldview, implicit or not, it is hard then to deal with questions of degree and magnitude - i.e. to use pragmatic means to say "well, we've made mistakes, but that doesn't mean the punishment is eternal damnation; the fallout can be contained and the pain people feel can be minimised".

I should have followed up with a question on how much these Austrian school ideas appealed not just to the idea of sin, but also to a traditional antipathy towards government, particularly in the way they were packaged. But time was short and DeLong had already obliged with a very thorough response to my question, so I stopped. It was good, however, to indulge my training in economics in thinking about the various issues DeLong raised - been so long since I listened to so much on macroeconomics.

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