Some have recently suggested that Ted Cruz has been inspired by Market Monetarist thinking. I have no clue about that, but at least it seems like Cruz understands now that the Great Recession – as the Great Depression – was caused by too tight monetary policy.
Listening to this recent question to Janet Yellen from Senator Cruz could make you think that has moved away from his former goldbug thinking. That would certainly be good news.
Watch Ted Cruz question Yellen here.
PS No I am not endorsing any US presidential candidate.
Update: A friend sent me this one.
Jesper Rindboel
/ February 2, 2016I don’t see how too tight monetary policy caused the Great Recession. On the other hand, it seems very clear that the Great Recession was caused by the recklessness surrounding Collateralized Debt Obligations.
Alexander Hamilton
/ February 2, 2016Really? It should be easy for you to explain how then?
Jesper Rindboel
/ February 2, 2016@A Hamilton: Are you replying to my comment?
Alexander Hamilton
/ February 3, 2016Yes
Jesper Rindboel
/ February 3, 2016Just because something is clear, doesn’t make it easy to explain (it’s clear to me that the sky is blue, but I can’t explain why that’s the case).
So instead of me trying to explain it, I will recommend this source http://www.economist.com/news/schoolsbrief/21584534-effects-financial-crisis-are-still-being-felt-five-years-article
which provides a great explanation (and a similar explanation to a multitude of others trying to explain what happened).
If they, and thereby I, am missing something I would appreciate some enlightenment from you or any source you can direct me too.
Two paragraphs sums it up pretty good:
Start with the folly of the financiers. The years before the crisis saw a flood of irresponsible mortgage lending in America. Loans were doled out to “subprime” borrowers with poor credit histories who struggled to repay them. These risky mortgages were passed on to financial engineers at the big banks, who turned them into supposedly low-risk securities by putting large numbers of them together in pools. Pooling works when the risks of each loan are uncorrelated. The big banks argued that the property markets in different American cities would rise and fall independently of one another. But this proved wrong. Starting in 2006, America suffered a nationwide house-price slump.
The pooled mortgages were used to back securities known as collateralised debt obligations (CDOs), which were sliced into tranches by degree of exposure to default. Investors bought the safer tranches because they trusted the triple-A credit ratings assigned by agencies such as Moody’s and Standard & Poor’s. This was another mistake. The agencies were paid by, and so beholden to, the banks that created the CDOs. They were far too generous in their assessments of them.
When America’s housing market turned, a chain reaction exposed fragilities in the financial system. Pooling and other clever financial engineering did not provide investors with the promised protection. Mortgage-backed securities slumped in value, if they could be valued at all. Supposedly safe CDOs turned out to be worthless, despite the ratings agencies’ seal of approval. It became difficult to sell suspect assets at almost any price, or to use them as collateral for the short-term funding that so many banks relied on. Fire-sale prices, in turn, instantly dented banks’ capital thanks to “mark-to-market” accounting rules, which required them to revalue their assets at current prices and thus acknowledge losses on paper that might never actually be incurred.
Alexander Hamilton
/ February 3, 2016Yes that’s a fairly standard explanation of the financial crises. However you said “recklessness surrounding Collateralized Debt Obligations” caused the Great Recession. I just wondered how you could give such a dismissive response to the perfectly cogent tight money explanation by Ponnuru and Beckworth when you’re own explanation is so lacking. What is the process by which “recklessness surrounding Collateralized Debt Obligations” causes unemployment to spike across every other industry?
Jesper Rindboel
/ February 3, 2016My response was to Lars’ comment, not to an explanation given by Ponnuru and Beckworth (or any other individuals not mentioned in Lars’ comment), but I would very muck like to hear their explanation if you can direct me to it.
In regards to “the process by which “recklessness surrounding Collateralized Debt Obligations” causes unemployment to spike across every other industry?” it seems you are already aware of the recklessness I’m referring to (which is mentioned in the article that I linked to), but that you don’t believe it caused the GR. But just in case, the recklessness I’m referring to is the following:
-People that should not have obtained mortgages that they had very little ability to ever pay back.
-Institutions that lent to borrowers that had very little ability to ever pay the money back.
-Rating agencies providing AAA ratings on CMOs.
-Companies (primarily AIG) selling CDSs far beyond their means of paying it back should they actually trigger.
As these borderline fraudulent CMOs collapsed in value, they took down the financial industry with them, and the financial industry took down the rest of the economy with them, and this then let to unemployment to spike across every other industry.
Alexander Hamilton
/ February 4, 2016I’m sorry I thought the Beckworth and Ponnuru article in the New York Times was linked in this post but I was wrong. It’s more of a defense of the idea that money was tight at all. The idea that tight money can cause a recession isn’t exactly controversial, it’s actually quite standard. Tight money causes aggregate income (or expectations of future aggregate income) to fall. This coupled with sticky wages causes firms to shed workers.
I won’t make any subjective claims about recklessness or what may or may not have been fraudulent but to me just saying: “the financial industry took down the rest of the economy with them” is a handwave rather than an explanation.
Jesper Rindboel
/ February 4, 2016It’s not easy to explain, so I didn’t. Instead, I referred to others for the explanation. Regardless, as mentioned before I don’t think I can add anything to the widely accepted (right or wrong) explanation for the GR that you’re not already aware of. What it comes down to is that you (and I guess Lars) believes that the Fed could have saved us all my lowering rates earlier. I read the article in the NYT and was not convinced, and I agree with all the comments to article.
Alexander Hamilton
/ February 9, 2016Unfortunately those others didn’t explain anything.
I had to laugh when you said you agreed with the comments on the article. That particular comments section was filled with a really disappointing level of stupidity. Not entirely surprising given the average New York Times readers idea of economic reasoning is regurgitating the polemics of Paul Krugman. An amusing echo chamber of left wing buzzwords and anecdotes containing enough actual knowledge of economics to fill the back of a stamp.
Anyway we’ll carry on trying to come up with sensible explanations for why millions of people who had no problem finding work before all of a sudden couldn’t. I think falling total aggregate income interacting with wages that are sticky downwards causes unemployment and what we call a recession. You stick to “it was the the bankers wot done it” if that makes you feel better but spare the rest of the us the ordeal of having to read these kind of explanations for the millionth time.
Jesper Rindboel
/ February 10, 2016Stating that you’ll “carry on trying to come up with sensible explanations” is admitting that you have not done so yet, so at least we agree on that. I would also advise that you follow one thought through to the end before you state that you know the reason for the GR (first it was because the Fed was too late to lower rates, now it’s sticky wages).
You requested the explanation, so you need to blame yourself for “having” to read it. I don’t have any feelings involved in this so it doesn’t make me feel better or worse if it was the Fed’s fault or the “banker’s” fault, but as I mentioned in your requested explanation, I do believe that the banks were part of the reason, but certainly not the sole reason.