The pain of the financial crisis has economists striving to understand precisely why it happened and how to prevent a repeat. For that task, John Geanakoplos of Yale University takes inspiration from Shakespeare's "Merchant of Venice." The play's focus is collateral, with the money lender Shylock demanding a particularly onerous form of recompense if his loan wasn't repaid: a pound of flesh. Mr. Geanakoplos, too, finds danger lurking in the assets that back loans. For him, the risk is that investors who can borrow too freely against those assets drive their prices far too high, setting up a bust that reverberates through the economy. Yale economist John Geanakoplos has seen his previously obscure theory about collateral's role in the credit bubble gain currency after it burst. For years, his effort to understand this process didn't draw much interest. Now it does — yet another aftereffect of the brutal deflating of the credit bubble. The crisis exposed the inadequacy of economists' traditional tool kit, forcing them to revisit questions many had long thought answered, such as how to tame disruptive boom-and- bust cycles. Mr. Geanakoplos is among a small band of academics offering new thinking about those cycles. A varied group ranging from finance specialists to abstract theorists, they are moving to economic center stage after years on the margins. The goal: Fix the models that encapsulate economists' understanding of the world and serve as policy-making tools at the world's biggest central banks. It is a task that could require a thorough overhaul of the way those models work. "We could be looking at a paradigm shift," says Frederic Mishkin (pictured left), a former Federal Reserve governor now at Columbia University. That shift could change the way central bankers do their job, possibly leading them to wade more deeply into markets. They could, for example, place greater emphasis on the amount of borrowing in the economy, rather than just the interest rates at which borrowing is done. In boom times, that could lead them to restrict how much money various players, ranging from hedge funds to home buyers, can borrow. – Wall Street Journal
Dominant Social Theme: The crash is complicated?
Free-Market Analysis: Here at the Bell, we believe in civil discourse. Polity is part of civil society and civil discourse is often preferable to invective, all things being equal. And all things being equal, this article in the Wall Street Journal has got to be one of the stupidest, most idiotic, irreparably ignorant and certainly hypocritical economic analyses we have ever read. More on this in a minute. First let us set the stage for why we think this article (actually one of a series of articles) is yet another sign that the monetary elite is absolutely losing it.
Human beings being communicative creatures that think metaphorically, there are certain informational elements that stand out like signposts within a larger, given conversation pointing the way. One signpost we noticed a number of months back was the incompetent testimony of the Federal Reserve's inspector general – promptly posted on YouTube – when she appeared at a Congressional hearing to explain how she was auditing what was apparently, potentially, some US$8 trillion or more that the Fed had decided to dish out to overseas institutions (at least we think that was the case, it's hard to tell with the Fed).
The testimony of this woman was so incoherent, rambling and evasive that we realized at that moment that the world's most powerful central bank had lost control of its message – had basically given up, in other words, and was not going to be able to justify its behavior either now or any time in the near future. This meant that the current version of central banking was basically OVER in the United States and maybe the world (for the near future anyway). (And sure enough, they are trying erect something-or-other with different bells and whistles over at the IMF.)
Why is that? Any dominant social theme of the elite (such as central banking which is indefensible) becomes basically useless if it cannot be justified, defended and carried forth with some level of credibility. By putting this astonishingly defensive and incompetent woman on the stand, so to speak, the Fed provided us with a metaphor for its current institutional state of mind. The inspector general, in other words, was a metaphorical white flag.
And now comes this mess (we will allow, we guess, that it is part of a larger group of weird profiles) in America's most prestigious daily journal. Again it is nearly impossible to overstate the significance of this next signpost as we chart the blithering degeneracy of the monetary elite's shredded messaging in the face of nearly insurmountable problems. Once upon a time, the monetary elite OWNED the media. If the monetary elite wanted to blame one of its fairly-manufactured monetary crises on banking or private industry or greedy accountants, it could do so and there was no one who would demure. There was in fact, no way to provide another opinion short of shooting off intemperate letters to the editor that never got published. But today it is different.
Today, the Internet provides thinking people everywhere in the Western world with a forum for discussion that has led to a rediscovery of age-old ideas about free-markets and freedom generally that had for generations been suppressed by the elite's ironclad control over Western media. And anyone who wishes to can go on line and read thousands, nay, millions of articles about these issues – and most certainly about the economic crisis.
Austrian, free-markets economics has had a resurgence in the past decade that can hardly be described, so explosive has it been. On the Internet, in the so-called alternative electronic press, it is THE dominant economic paradigm. Millions and millions have been educated about REAL economics online – information that they would never have ferreted out at even the finest schools (given that the finest schools receive a good deal of funding from the monetary elite and therefore know which side their metaphorical bread is buttered on).
What does Austrian economic analysis tell us? It informs firmly that central banking monetary stimulation causes first booms and then busts. This is the so-called business cycle and it is incredibly exacerbated by fiat money and the central banking overprinting of currency, which happens on an ongoing basis. It is no secret now! Seventy-five years ago one of the pre-eminent explainers of the business cycle, the Austrian economist FA Hayek even won a Nobel prize for these sorts of insights! This stuff is not hidden. In fact, even a five-year-old could find these articles on Google.
So how come the Wall Street Journal publishes a long analysis of an obscure Yale economist who thinks he has the found the key to understanding the current economic crisis and it is … wait for it … TOO MUCH LEVERAGE. This is some kind of special illumination? This is something new? This is something that the Internet has not yet presented to the world in spades? Here's some more relevant information from this incredible, indescribably strange article:
Now that the financial crisis has exposed flaws in the models central banks use, economists have launched into a flurry of activity that is likely to reshape the field. As they did in the two revolutions in economic thought of the past century, economists are rediscovering relevant work. Mr. Woodford asked Mr. Geanakoplos to present his ideas at an April conference held by the National Bureau of Economic Research.
Mr. Geanakoplos has yet to develop his theory into a comprehensive model. "His work assumes that the leverage cycle is bad, but gives little guidance [about] to what extent regulators should control it," says Markus Brunnermeier, an economist at Princeton who specializes in financial bubbles.
The goal for economists now is a model that takes account of what happens in the financial sector, yet is simple enough to apply in policy making. The quest is bringing financial economists — long viewed by some as a curiosity mostly relevant to Wall Street — together with macroeconomists. Some believe a viable solution will emerge within a couple of years; others say it could take decades.
"Mr. Geanakoplos has yet to develop his theory into a comprehensive model." But Good Lord, he doesn't have to! It's called Austrian free-market economics and THERE ARE THOUSANDS, MAYBE MILLIONS, OF ARTICLES ABOUT IT ON THE NET.
We could go on and on about this sort of weirdness. But our point here is not theoretical. We understand that it is part of a series profiling lesser known academic "economists" – but free-market economics doesn't seem to have made an impact, not on the collective anyway. (And certainly not judging from this article.) Throwing a bunch of nonsense together doesn't make it any less nonsensical than a nonsensical singularity.
The monetary elite simply doesn't know what to do. And neither do the Journal's editors, charged with defending the indefensible. So they have decided to profile a bunch of young mathematicians in the hopes that they will obscure the real issue and confuse people about the facts. Yet any high school student can go online and find plenty of information about what's going on in the economy.
In fact, It would be very easy to write a fairly well-thought out paper on how central banks fool the market into generating the leverage that has so perplexed Geanakoplos. Does he ever read the ‘Net? Does he disagree with Hayek? Does he read at all (outside an eminent bard, anyway)? Or only study numbers? Why is he so puzzled when with the flick of a finger he can find all the answers he needs. Even if he disagrees with them, HOW CAN HE NOT BE AWARE OF THEM?
It is really an incredible piece of journalism, and part of a very weird effort at providing a substrata on which the crackpot theory of central banking can resist the undermining of the ‘Net. The Murdoch owned Wall Street Journal is something of a mouthpiece for the monetary elite and articles like this (and the editorial decisions that spawn them) likely don't happen by accident. The monetary elite is searching for something, anything, that will provide an intellectual justification for a handful of glorified clerics (specially selected for their malleability and mathematical acuity) fixing the price and quantity of money.
Before we rest, we cannot help but commenting on the seeming puzzlement of the collective economic wisdom of the young geniuses at Yale, Harvard, etc. who apparently are so disturbed by the seeming irrationality of the market that they cannot sleep at night. The market folks is RATIONAL. How can it be otherwise? It is the sum of one or more buying decisions that are the product of the best or most information available at the time (that the individual wants to use, anyway).
The seeming IRRATIONALITY of the market stems from the incredible monetary stimulation of central banking. The market simply prices in the crazy monetary inflation of a hundred central banks around the world. It appears irrational because central banking IS irrational.) Now, Lord help us, we will be subject to thousands of articles bemoaning the failure of capitalism and the irrational nature of markets in the face of perfectly good information. We won't read them. We suggest you don't read all of them either, or you will become just as confused as America's young econometric elite (not to mention writers and editors at the Journal).
We await the day that the Journal discovers Austrian economics and realizes that it won't take decades to figure out what just happened. In fact, a private gold- and silver-based money standard would fix the system just fine. (The market would even begin acting "rationally" again.) Go on line and Google "Mises." You'll find at least 100 million cites, or maybe more. How could the Journal and its hotshot editors miss it? Or didn't they bother to look? Or maybe they just didn't want to.