Thursday, October 15, 2009

This Man is Insane

This is one of the most ignorant, ill informed speeches on the financial crisis I've ever heard. Why on earth do the Tories worship this man?


Praguetory said...

If Hannan was in charge, the British economy would be back in the box seat. Calling political opponents insane is not an argument.

Doepp Jakab said...

The speech is based on the Austrian School's theory of the business cycle. Andreas seems to be ignorant of this fact, and ill-informed about schools of economics -- unless this is his opinion of the Austrian theory, in which case he must not know much about the theory. Whatever the case may be, I suggest he read Hayek's Prices and Production (or at least read up on the Austrian theory of the business cycle and the Keynes/Hayek debate) before further commenting on a subject about which he seems to know very little.

Andreas Paterson said...

I've gone into more detail on the above post, but.

Even if we were to accept the Austrian view of things (which I certainly don't) it would be foolish to mention interest rates. Much of the rise in money supply was not due to interest rates but due to the rise in popularity (and weakening of regulation) of credit derivatives.

As for Austrian theory more generally, I'm not a big fan. It's a good and elegant explanation how booms occur and why they go wrong, it's not so strong on what to do once things have gone wrong. At this point it takes an anti government intervention line that seems more political than economic in it's reasoning.

Doepp Jakab said...

The question is, would there have been such a dramatic increase in credit derivatives had the central bank's monetary policy had been so loose, and had the interest rate not been kept so low. I would say not: when financial institutions are awash with credit, they must search for borrowers of ever higher risk (particularly dramatic in the mortgage market). The lower quality credits need to be insured, thus giving an increase in credit derivatives. Secondly, low interest rates mean the credit spreads (based on bond yields) have fallen, and bankruptcy rates also being low (businesses can stay in business with lower profits), creating under-valued credit derivatives.

I actually consider the Keynesian view to be the more political of two: Keynes won the Keynes/Hayek debate not for economic reasons, but for political ones: populist politicians need to "do something," even if "in the long run we're all dead".