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Casey Mulligan is now blogging
Here. Casey is a very well-known economist at the University of Chicago and he works on public choice. Here are many of his papers. And here is his post arguing that the real economy is not so closely linked to Wall Street.
Hat tip to Greg Mankiw.
Posted by Tyler Cowen on September 28, 2008 at 02:03 PM in Economics | Permalink
Comments
I don't know Mr. Mulligan, well-known or not, because I'm not in the field.
But a University of Chicago economist whose first post argues that the biggest market failure of recent times is not that bad? I feel I know what he will say on most issues already.
Posted by: tom s. at Sep 28, 2008 2:48:00 PM
As quoted by GM, Casey Mulligan writes
"More important from today’s perspective is that much capital in America continues to be productive, and that this will likely permit Americans to advance their living standards as they have in years past. The non-financial sector today looks nothing like it did in 1930."
Most likely Casey is right. And this is the reason why I think that the financial crisis has been precipitated mainly by some economists and politicians talking the economy down. We all know how they are.
Posted by: E. Barandiaran at Sep 28, 2008 4:25:58 PM
Well, that post on the marginal product of capital is not just absurd, but actually strongly suggests precisely the opposite of what Mulligan's trying to argue. He says that the marginal product of capital in the nonfinancial sector is historically a strong predictor of GDP growth, and that recently business' MPC has been exceptionally strong. The mystery, he writes, is actually that GDP growth in 2007-2008 hasn't been stronger than it actually is.
In other words, he's saying that according to his own model, the economy has done much worse in the past two years than he would have expected. So what else has happened in 2007-2008 that might explain this? Oh, right, massive turmoil on Wall Street and in the credit markets. Not for Mulligan, though -- what happens in asset markets, even when it's the biggest meltdown in seventy years, is basically irrelevant to the real economy. Talk about refusing to face what's staring you right in the face. He's off to a great start as an ivory-tower blogger.
Posted by: K. Williams at Sep 28, 2008 5:21:47 PM
It's reassuring to have a prominent economist like Mulligan tell me that correlation really is causation, while avoiding entirely any discussion of liquidity, lending, and so on. It's almost as convincing as a mortgage banking quantitative model!
I also love how he links to the data series he's discussing. We're left to wonder what happened to MPK prior to the 1973-4, 2000-2001, and other recessions.
Posted by: Greg at Sep 28, 2008 5:44:42 PM
Casey Williams is right.
This statement is wrong:
[...] -- what happens in asset markets, even when it's the biggest meltdown in seventy years, is basically irrelevant to the real economy. Talk about refusing to face what's staring you right in the face. He's off to a great start as an ivory-tower blogger.
Biggest meltdown in seventy years? Not the stock market. Not the bond market. CDS, yes because they didn't exist in previous declines. Their value is tied to the bond market, and won't affect the economy on Main Street.
And not even housing prices, compared to '73-'74.
Main Street will be fine; Wall Street will be restructured, and everyone will be worse off to the extent that (1) more regulations are imposed on banks and capital markets, and (2) the Fed is not put out of the economy's misery and abolished, with a free banking system put in place of the regulated banking system we have now.
The boom and bust cycle will continue, with credit cards, student loans, and other assets the next bubbles waiting to be pricked.
Abolish the Fed, arrest Easy Al, and put him in a nice jail cell, after he disgorges his ill-gotten book profits, the result of criminal money monopolizing and counterfeiting, and interfering with the economic calculations of everyone else.
Posted by: Bill Stepp at Sep 28, 2008 6:00:57 PM
Not so long ago, one might have written an article entitled "Lehman will drown alone". How's that working out so far?
Hindsight is 20/20, but if a plutonium-powered DeLorean was available, Paulson would throw moral hazard under the bus and hop on board.
Posted by: at Sep 28, 2008 6:04:01 PM
Market failure?
So the Community law was made by the market?
the low rates were set by the market?
Freddie mac and Fannie mae were whole private
companies?
Posted by: karl at Sep 28, 2008 6:07:39 PM
karl - I fear that there will never be a market pure enough for some to acknowledge a market failure. I guess I meant market as in "actually existing market".
Posted by: tom s. at Sep 28, 2008 6:44:52 PM
I think "market failure" is the correct term, you just have to keep in mind that much of the market was designed by government.
What I'm wondering is, if the current financial institutions aren't lending to each other, whats to stop new firms from popping up and taking advantage of their liquidity and opaque risk? If I were a financial entrepreneur, I think I'd be waiting for a scenario like this, provided I didn't think congress wouldn't render my business model non-viable in the near future (which I suppose is a very real threat).
Posted by: Grant at Sep 28, 2008 7:25:32 PM
Ivory tower talk: Which market failed? The guys who gambled seemed to be close to bankruptcy, and would have gone out of business if the government had let them--and other businesses were going to buy the non failed parts of those businesses (cf, Lehman and Barclays, Wamu and Morgan, etc). But we did not let all of them fail. Which market failed here? I would say the political market.
But in the real world, we cannot ignore the political market--so institutions should be designed taking into account the political marketplace. In that interpretation, we have a bad market design.
We need to have institutions that tie the hands of the government in these situations (Kydland and Precott argued this many years ago)
Posted by: cynical guy at Sep 28, 2008 8:00:33 PM
Kydland and Prescott not Kydland and Precott. Sorry
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Posted by: go rockets at Sep 28, 2008 9:57:50 PM
Substantial, and unforgiveably stupid, bad investments from private sector actors notwithstanding, I defy anyone who reads this article to claim that massive government failure wasn't at the heart of setting up this mess.
Posted by: happyjuggler0 at Sep 28, 2008 10:01:52 PM
You're right, juggler. This all started back in 1977 -- it just happened to take 25 years for the nefarious effects of those left-wing programs to manifest themselves.
Posted by: K. Williams at Sep 28, 2008 11:17:37 PM
K. Williams,
Dude the Soviet Union survived for 75 years. The presence of a long lag between bad policies and an economic crisis does not remove bad policies as the causal "prime mover."
Posted by: Dan in Euroland at Sep 29, 2008 12:47:16 AM
I defy anyone who reads this article to claim that massive government failure wasn't at the heart of setting up this mess.
Massive government failure isn't at the heart of setting up this mess.
Laws don't force people to commit fraud and over-leverage themselves. What happened to personal responsibility?
Posted by: steak at Sep 29, 2008 1:43:07 AM
Oh Good Lord. That "black homeowners caused the crisis" dumbshit has been debunked 100 times, and it's still being rolled out here? Black homeownership rose by 5%., the same point rate as the US total, except blacks make up only 13% of the population. For every new black homeowner we've had 5 non-black new owners. Also, how does "community pressure caused banks to loosen their standards for home loans" translate into government failure? "[M]ortgage lenders didn't wake up one fine day deciding to junk long-held standards of creditworthiness in order to make ill-advised loans to unqualified borrowers"??? No, they junked long-held standards of creditworthiness because there was a buck to be made that way, and an increasingly permissive government stopped enforcing those standards, until the bubble burst. Amazingly moronic.
Posted by: ogmb at Sep 29, 2008 5:03:13 AM
Sigh. Clearly people either didn't read the article I linked to, or they didn't comprehend it. How can anyone tell me that arm twisting in 1998, not 1977, by the Fed and Barney Frank et al to step up purchases of horrible loans didn't lead to Fannie Mae to do exactly that?
Again, I didn't say that government was the only element and pointed out that private actors royally screwed up. It is just that this massive rewriting of history to claim that it was all about "deregulation" is simply absurd. The somewhat hard to see (thanks to lazy and ideological media) hand of puppet masters Barney Frank and the Boston Fed were at the start of creating this mess.
Posted by: happyjuggler0 at Sep 29, 2008 10:34:01 AM
Very interesting article. I've heard several economists state that this bailout of financial institutions may not be necessary and certainly there is no rush to pass anything in congress because the markets are not going to crash in a day or even in a week or in a month. This is all hogwash from the good ole boys in Washington who steal from the poor and give to the rich. When is enough... enough????
Posted by: EZ Money at Sep 29, 2008 3:05:20 PM
Very interesting article. I've heard several economists state that this bailout of financial institutions may not be necessary and certainly there is no rush to pass anything in congress because the markets are not going to crash in a day or even in a week or in a month. This is all hogwash from the good ole boys in Washington who steal from the poor and give to the rich. When is enough... enough????
Posted by: EZ Money at Sep 29, 2008 3:05:43 PM
How can anyone tell me that arm twisting in 1998, not 1977, by the Fed and Barney Frank et al to step up purchases of horrible loans didn't lead to Fannie Mae to do exactly that?
I can. Look at the CRA itself, look at the provisions quoted in the article. Notice that they are all boilerplate statements of objectives, rather than hard measures. No one is going to go to jail if they stop making subprime loans. No government official is holding a gun to the investment banker's heads and asked them to buy subprime. I believe in personal responsibility. Do you blame the government for the mistakes you've made in your life, happyjuggler0?
Posted by: steak at Sep 30, 2008 12:01:22 AM
If you disagree with Mulligan, write down your own counter argument based on economics, not what the media tells you. What would you think about this whole crisis if you never read the WSJ or watched CNBC? Have your own logic and stop depending on the media to spoon feed you.
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