There must be some dark corner of Hell warming up for modern, mainstream economists. They helped bring on the worst bubble ever, with their theories of efficient markets and modern portfolio management. They failed to see it for what it was. Then, when trouble came, they made it worse.
But instead of atoning in a dank cell, these same economists strut onto the stage to congratulate themselves. “The Greatest Depression that could so easily have happened in 2009 but did not is the tribute that the world owes to economics,” wrote Arvind Subramanian in the FT.
We were lost from the get-go, trying to interpret the sentence. It is as tangled and puerile as the staggering conceit behind it. Then, Mr Subramanian sets up the stage props. “In 2008, as the global financial crisis unfolded, the reputation of economics as a discipline and economists as useful policy practitioners seemed to be irredeemably sunk. Queen Elizabeth captured the mood when she asked pointedly why no one (in particular economists) had spotted the crisis coming. And there is no doubt that, notwithstanding the few Cassandras who had correctly prophesied gloom and doom, the profession had failed colossally…”
He then brushes off the Queen’s sensible query. “But crises will always happen, and even if there is a depressing periodicity to them as Professors Reinhart and Rogoff have catalogued, their timing, form and provenance will elude prognostication.” Of course, the record doesn’t show that the crisis eluded prognostication. Any dope could have seen it coming. But the prognosticators who had contributed so mightily to the crisis had been blinded by their own claptrap. Still, Mr Subramanian figures that they “vindicated” the profession in the way they responded to the crisis.
“On monetary policy, Bernanke was true to the word he gave to Milton Friedman on the occasion of his 90th birthday: ‘Regarding the Great Depression. You’re right, we did it. We’re very sorry. But thanks to you, we won’t do it again.’ Bernanke, the pre-eminent student of the Great Depression, found conventional and some very unconventional ways of not doing ‘it’ again. At the peak of his interventions, the US Fed came to resemble the Soviet Gosbank, more a micro-allocator of credit than a steward of macroeconomic policy.”
It probably wasn’t the point he intended to make, but the Fed does resemble the Soviet era Gosbank – manipulating, meddling and micro-managing the economy towards destruction. Meanwhile, Congress is doing some Soviet-style management too. It is now owner of the nation’s largest automobile company and its largest insurance business: “They took their cue from the writings of the academic scribbler of yore – Lord Keynes – and provided massive public demand for goods and services where private demand had collapsed….”
We were still gasping for air when, on 30 December, columnist Martin Wolf called upon Keynes’s ghost again. He too shuddered to think how horrible things would have been if the financial authorities had not taken resolute action: “We could not in such times, even take the survival of civilisation itself for granted. Never before had I felt more strongly the force of John Maynard Keynes’s toast ‘to the economists – who are the trustees, not of civilisation, but of the possibility of civilisation’.”
Is there any doubt Keynes was a scallywag? Civilisation flourished for thousands of years before anyone made a living as an economist. Crises came and went. In the 19th century, there were panics followed by depressions in 1819, 1837, 1857, 1873, and 1893. Not one of the depressions seemed worthy of the ‘great’ modifier. Hundreds of banks failed. Civilisation didn’t seem to care. The rich and powerful took their lumps along with everyone else. Business went on.
In 1913, on Christmas Eve, Congress passed the Federal Reserve Act, setting up America’s central bank. Only then did economists get their hands on the economy’s throat. The dollar was worth about the same as it had been worth 100 years before. Now, almost 100 years later, it is worth only three cents. And only 16 years after economists took their positions at the Fed came a depression worse than anything the nation had ever seen – at least, it was the worst after government economists finished with it.
The Great Depression may have been an accident, but the debasement of the dollar wasn’t. It was a matter of policy. Economists, led by Keynes, had the idea that they could spur the economy forward by creating phantom demand – in the form of extra units of purchasing power. The gold standard stood in the way; it was abandoned like a bad neighborhood. First, temporarily, then partially, then, in 1971, totally. The first consumer credit boom came in the 1920s, leading to the Great Depression. By the 1980s, 50 years later, Americans had lost their residual fear of debt. Consumer credit boomed again. Then it bubbled. Economists didn’t understand what was going on. They rarely do. But they had created a 100-year flood of consumer debt. Now they congratulate themselves; households sink… but civilisation floats.
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