Epstein and Taylor: Are we all Keynesians now?


Peter: I am Peter Robinson. Be sure to follow
us by the way on Twitter at Twitter.com/uncknowledge. Twitter.com/uncknowledge. Joining us today
on Uncommon Knowledge two guests; a founder of the field of law and economics, Richard
Epstein is the director of the John M. Olin program in Law and Economics at the University
of Chicago and a Fellow at the Hoover Institution. A former Undersecretary of the Treasury for
International Affairs, John Taylor is a Fellow at the Hoover Institution and a Professor
of Economics at Stanford. Our topic “Are We All Keynesian’s Now?” Gentleman, to
get us started, listen to this. “Nobel prize winning economist, Paul Samuelson, last January,
just about a year before his death, ‘We see how utterly mistaken was the Milton Friedman
notion that a market system can regulate itself. The Keynesian idea is once again accepted.
That fiscal policy and deficit spending have a major role to play in guiding a market economy.’
For now just answer true or false. Taylor: False. Epstein: Very false. Excellent. We like the unambiguous here on
Uncommon Knowledge. Segment one, A Tale of Two Decades. Let us begin, John, explain to
me as a layman. As distinctly as possible, the difference between Friedman, Friedman’s
approach and Keynes’ approach, those are the two leading personalities. John: Friedman emphasized uh, the advantages
of the free market, the power of free markets, but also that you can control the ups and
downs in the economy by controlling the money supply. Keynes’ much more interventionist
emphasize the role of government and thought that fiscal policy of interventions were necessary
to stabilize the economy. Peter: So Milton Friedman, whom you both knew
. . . Richard: Yes. Peter: . . . and, Milton Friedman government
keep your hands off, money supply should grow at some reasonable more or less predictable
rate. Both: Yes. Peter: Okay. Richard: But, now the key thing to understand
about Milton see, this is a contribution, which is not talking about how markets operate,
but how governments operate in order to make markets possible. And his basic view was the
less discretion you have in the way that the money supply and governments go, the easier
it is for private actors (00:02:19) to behave because the level of uncertainty, which would
otherwise interfere with private transactions is going to be reduced. So, he is essentially,
in political terms, a classical liberal who tries to find ways to take what might otherwise
be discretionary public functions and turn them into ministerial ones leaving the discretion
on the private side. Peter: Got it. Okay, now to two decades. Decade
number one; unemployment rate at almost 8 percent, inflation at more than 14 percent,
a typical home mortgage running at more than 20 percent, the economy contracting at an
annual rate of more than 7 percent, and the date is late 1979. What caused the stagflation
of the 1970s. John. John: I think monetary policy just got behind
the curve, let inflation pick up, stamped on the brakes, let inflation pick up again,
stamped on the brakes. So, we had a boom-bust cycle repeated several times. Peter: Monetary policy, give me, very briefly
the kind of infrastructure underlying that term monetary policy. The Federal Reserve
in Washington does what? John: It controls the money supply, which
affects interest rates. We now think of the Central Bank is deciding what the interest
rate will be if they hold interest rates to low, inflation picks up, then they have to
raise interest rates and that causes a recession. Peter: Do you want to say exclusively money
supply was out of whack during the 70s or do you want to say the government expanded
too much or tax rates were wrong or . . . John: I would emphasize that monetary policy,
but also the fiscal policy, too much regulation, and those things were there too. Peter: You contend too? Richard: No, I have a slightly different take,
which is I think all of these things are extremely important, but Carter was on all this, sort
of, microeconomic issue something of an interventionist and a meddler. And he was a guy who favored
various kinds of subsidy programs, like, Sinfield’s. What happens is the factors, like, monetary
policy are always active. But, if you mess up these second tier factors what they will
do is they will exacerbate the situation. And that is what is going on today. Peter: We have got a lot, we will get to today.
So, we had the 70s, now our second decade is the 80s. By 1983 the economy begins to
grow, inflation is falling to the low single digits, unemployment is dropping, and for
the rest of the decade the economy grew briskly. Indeed it continued to grow with only a couple
of short, shallow recessions until 2008. So, we see by the early 80s the beginnings of
a quarter of a century of sustained growth, the biggest economic expansion in human history.
What caused that? John: Just the reverse of what caused the
first part. And keeping inflation under control prevented those booms and busts by monetary
policy. We also reduced marginal tax rates significantly. The role of government was
more predictable rather than more interventionist. Those are the things that I would point to. Peter: Okay, so now what John is saying is
what this layman thought, which is to say that the actual lived experience of recent
American history enabled us to get some place. We understood what to do and in the 80s we
did it. Clinton ratified most of it, you keep tax rates relatively low, you keep the money
supply growing at a more or less predictable modest rate and things are fine, right? Richard: Well, you also want to understand
that Reagan was not in favor of new initiatives and regulations. There was also a vast improvement
in anti-trust period in that time when the ability to have private transactions without
government interference started to increase. So, on both of these sides, the micro-regulation
and the macro stuff were in harmony. And Clinton, of course, was also favored by the fact that
he had a Republican Congress so, that when he had the initiatives going through they
were welfare reform and they were open trade with NAFTA and so forth, which tended to push
the pro… Peter: Can I just ask you then? Would the
two of you agree with the simple premise that between the 70s and the 80s and then the continued
growth through the 90s we actually, we got as close to a control experiment as the social
sciences ever can encounter, right? John: I agree, 100 percent. Peter: Got some place, right? Richard: Yes, I mean, look, I think what is
so ironic about the Samuelson quote is that the dangers that took place in the second
Bush administration as we started to unravel some of these things…. Peter: Okay. Richard: Sarbanes-Oxley, for example, is a
classic illustration. Peter: Alright, so, which brings us, of course,
to segment two, what went wrong? Beginning in 2007, you have got housing values are starting
to decline. Then last year 2008, we get waves of defaults on subprime mortgages, which cause
havoc in the financial system, major banks collapse or nearly collapse, and a year later
we are still in a recession with unemployment at more than 10 percent. Well, what happened? Richard: Well. Peter: I do not want your narrative first.
I am going to try out a couple of narratives first that this layman has discovered in the
popular press and have you comment on them. And then I will get to your narrative Richard.
In particular the text for this segment is John Cassidy’s article in the first week
of January 5, as I recall, the edition of The New Yorker where John Cassidy, journalist,
goes to The University of Chicago, Milton Friedman’s intellectual home, and talks
to some economists and a non-economist, a fellow founder with you of the law and economics
field, Judge Richard Posner. And Cassidy sums it up as follows, “Largely as a result of
misguided efforts to extend deregulation to the finance industry, we have experienced
the biggest economic blowup since the 1930s.” Grade that. Richard: About a B-/C+. Uhm, and the explanation
I think would be as follows. I do think that they made one serious mistake. Peter: Who is they? Richard: Uhm, in this case it was Lawrence
Summers and so forth and Robin Rueben. Uh, they got rid of the margin requirements under
Bush with respect to various kinds of shadow banking transactions, and that was probably
too risky. But, the other features, which were much more important, were the way in
which Fannie Mae and Freddie Mac marked to market all, which were governed regulation.
Uh, on the first part what they did they really juiced up the financial markets both on the
private and the public side. Cassidy noted, “Well, private banks are doing this as well,
but they were under tremendous government pressure to make the kinds of loans that made
no sense and then in the end the bubble burst for the traditional reasons.” So, my view
about this period is that it is wrong to say it was a deregulatory period. It was a case
in which Republicans lost faith with their previous views and the Democrats took over
the antecedence. Peter: John, let me stay with Richard one
moment longer. I quote to you your friend, Richard Posner, now a Federal judge who earlier
this year published a book called A Failure of Capitalism, “We are learning that we
need a more active and intelligent government to keep our model of capitalistic economy
from running off the rails” Posner also in an article in The New Republic praised
John Maynard Keynes 1936 book General Theory of Employment, Interest, and Money “Despite
its antiquities it is the best guide we have to the crisis.” Now, you, lawyer that you
are, explicate for me Posner’s position in making the strongest case for his position
that you can. Richard: Well, it goes back to the previous
statement. If you treat the breakdown in the current system as being a failure of private
institutions to equilibrate on matters of risk, and the only choice you have is government,
clearly you do not want to have a dumb government so you might as well have a smart government.
And what Posner said in that article, which I regard as quite bizarre is that the moment
that you engage in the stimulus-type activities that shows that governments care, the way
I look at it is you either have public or private creations of jobs, governments will
create a few jobs and destroy many more. Private people will create jobs that produce benefits.
I mean, you can create jobs digging oil wells with spoons and, you know, that is a job,
but it gets you a higher rate of unemployment. So, the prediction would be the more the stimulus
you have, the higher the rate of unemployment. Peter: John. We, in the first segment we said
that between the 70s and the 80s we actually feel that we are getting some place. We have
this financial crisis and quite a lot of members of your profession, economists, prove to my
mind remarkably willing to toss Milton Friedman and the experience of a quarter of a century
and more overboard. Case in point is Richard Posner who had been a stout Friedmanite and
monetarist before then. So, can you uh, again, I want to get to your views obviously, but
what is going on in their minds? What is the case that they see that causes them to toss
what seems more than a quarter of a century of experience overboard? John: I think that they are not realizing
the big change that happened in policy. Uhm, very low interest rates, for example, by the
Feds didn’t perceived that as early as other people did. They sort of saw this as a big
recession and wanted to do a fiscal policy instead and so, they used that “we need
something special.” But, I think they are wrong. I think, basically the pattern is so
clear, bad policy in the 70s, not good results, good policy in the 80s, 90s, good results.
And then getting off track in the recent period, bad results. Peter: Okay, so give me then as tightly as
you can, your analysis as what caused the financial crisis of ’08 and continues to
cause the recession today. John: It got started with very low interest
rates in 2002, ‘03, ‘04. Much different than the kind of policies in the 80s and 90s.
That stimulated and accelerated this housing booms and other risk taking. And when it crashed
we basically had the defaults and the problems with the banks. It was accentuated by other
government policies in my view. Richard mentioned Fannie and Freddie as part of this encouraging
subprime mortgages, encouraging extra risk taking, but I would go on as when things got
really bad uh, we saw there was a problem with the banks, it was misdiagnosed as a liquidity
problem. Just pump more money into and it would be fine. And then finally in the real
panic of 2008, really a lot of intervention, a lot of uh, attempts to intervene with particular
firms, I think that scared people caused a panic, so, those three things. Peter: Let me see if you would both subscribe
to this simple summary. We have essentially two competing narratives for what happened.
And one narrative to which Judge Posner seems to have subscribed and Lord knows lots of
the other economists have subscribed is that in one way or another the markets failed. John: Let me give you an illustration. Peter: Hold on. And the other narrative is,
as John just suggested is, the government messed it up. At a minimum, the government
created the conditions through loose money that made the financial crisis much more likely
if not any probable. John: Let me just . . . Peter: Go ahead. John: Let me just say on this because I think
you say that most economists, I mean, they just did a survey of economists who they were
asked whether interest rates were too low in this period whether there was too much
ease and monitoring and they concluded that there was. Seventy-five, 80 percent were on
the side that this was too easy of a policy. Richard: It is not clear, which way that profession
goes, but I want to mention one other factor that you have not talked about . . . John: Go ahead Richard. Richard: . . . which is once these mortgages
are under water what do you do with them? And the correct response is to allow the banks
to make the choice between foreclosure on the one hand and renegotiation on the other.
In many cases, the people who bought these premises paid very little down and a foreclosure
is nothing more dramatic than being told that you cannot renew your lease. The moment you
keep these mortgages alive, the property prices cannot go back down to their natural levels,
the properties deteriorate under the management, and banks thinking about future loans will
recognize that if they cannot be sure that they can get their money back on the terms
that they want, they will not lend. So, these policies in effect at the micro level have
made it clear that it is much wiser for a bank, which can borrow very cheaply from the
Fed to lend it back to the Fed at a higher rate. So, you are not going to get any kind
of lending unless until you strengthen the guarantee. So, the market failure I am talking
about is the complete disruption of the mortgage market, which has been done through all sorts
of government regulations, always a failure. Peter: Okay, onto segment three, which is
to take the analysis down to one uh, deeper level of uhm, specificity or granularity.
The Cassidy article quotes Gary Becker who be it noted has not departed from his views
that the free market is a much better force for growth and government intervention as
saying this, “A major cause of the crisis,” Becker, excuse me I am quoting Cassidy, but
he is referring to Becker, “A major cause of the crisis,” Becker said, “Was Wall
Street Financial Engineers devised a series of new instruments that neither they or the
people who traded them fully understood.” Even granting the arguments that the two of
you had made so far, isn’t that, from Gary Becker, friend and apostle of Milton Friedman,
and himself a Nobel Prize winner, is not this a serious problem for free market analysis? Richard: Yes. Peter: But, here you have highly intelligent,
very well paid people doing things that are not in their interest. The entire market on
Wall Street as regarded to these collaterized mortgage obligations and the credit market
all got screwed up. The market did screw up, right? John: I think that you have to think where
the government was going into this. I mentioned Fannie and Freddie as encouraging origination
of such mortgages in the first place. And then you had to think about we had this sense
of what would the government do if there was a problem. And I think the expectation the
government would come in and bail out, as in fact they did, reduce the efforts that
people made, to look at the complexity of these instruments. Plus, we were helping the
rating agencies by giving them specific endorsements on the government side. So, I think it was
a lot of things. I want to say people make mistakes in the private sector everyday. There
are firms in this Silicon Valley where we are sitting, firms fail. It is the nature
of capitalism. It does not always work. But, in this case you had this rather large effort
by the government. Peter: I am this 27-year-old quant jock on
Wall Street getting paid three-quarters of a million dollars a year with a doctorate
from MIT and maybe did a masters at Chicago, and I say, “Wow!” fiddling with my computer,
my Bloomberg, there are ways of slicing and dicing these mortgages, we can create entirely
new products. And then I go to my risk control officer and my risk control officer says to
himself, at some level he either senses this or he understands it explicitly, money is
loose, the government is encouraging Freddie and Fannie to create and sustain a market
in subprime mortgages. Meaning the home mortgage market is going wild, and if we do screw up,
somehow or other the government will save us. John: Well, the implicit . . . Peter: Is that correct? John: That’s correct Peter: And so he says to the 27-year-old quant
jock, “Do it, go ahead, I do not care. The risk is,” right? Richard: I think the implicit guarantee is
one of the issues. I also think there are other issues here. The question is how you
value these things depends not only on the evaluations at the time together, but it is
what happens to these notes after these pools are formed. So, if you change the regulations
that deals with, for example, foreclosure, the properties of the notes six months into
these deals is very different from the ones that they were before. And so, again, it is
a question of anything you do with respect to an underlying interest will work its way
through all of these things. The second problem, which I think is a technical one, which people
will not make again is I think they were implicitly using normal distributions with very low probabilities
and details. And in a world of high degrees of government regulation, essentially, you
have to assume that something, which is four standard and deviations from the median is
going to be more likely to happen than it would have been in an unregulated situation. Peter: So, you got the risk profiles of these
wrong. . . Richard: Or that in part because . . . Peter: Let me return to you though. You said
earlier in our previous segment, you said if the, when the mortgages start to go underwater
the correct response is to leave it to the banks to make the decision to whether to foreclose
or renegotiate. But, that is part of the point. Nobody could figure out who held these mortgages.
Well, these things have been sliced and diced and sold away from your local home savings
and loan to, through some huge instrument, you could end up with Hong Kong, some bank
in Hong Kong, right? So, how do you renegotiate? Richard: No, no. What happens is when they
do these syndications is in the first place, what happens is you create somebody who does
have the powers for renegotiation. But, what they did is they underpowered that process
and they overpowered the rights to this withdraw in effort to induce people to come in. The
next generation of these transactions will cut down on the withdrawal rights and they
will improve the degree of control for renegotiation. John: Yes, yes . . . Richard: Of course. John: . . . on the regulation issue. I mean,
there was lots of regulations out there that were not being enforced out there, think about
the banks, the most heavily regulated part of our financial system. And then you have
this toxic assets or these off-balance sheet vehicles, which the regulators did not bring
attention too. So, it seems to me it is, if the one thing about regulation as a problem
is the laws on the books were not being enforced properly and that is the worse thing you can
do. Peter: So, I see, okay it is the uncertainty
that that introduces into the market place and the bankers do not know what they are
going . . . John: What can they get away with? People
who are investing in the banks thinking they are being regulated and they are not being
regulated properly. I think that is a very serious problem. Richard: And also the rating issues are very
serious. If you have a monopoly rating you can cause these problems. Peter: Okay, one more argument that strikes
me as a layman represents a problem for the free market analysis, is this notion of systemic
risk. Again, Cassidy quotes Gary Becker as saying that “We didn’t, We the university
of Chicago.” Gary says, “I myself, I Gary Becker, did not understand the nature of the
systemic risk.” Richard?: Yes, but that is true. But… Peter: To say the way these instruments got
in everybody’s portfolios so that when one card goes down…one domino goes down, it
knocks down all these institutions at once right? Richard: This is true, yes. But, the problem
about it is the source of end to systemic risk private panic or is it government regulation?
And, the mark to market type features which says that you have to reevaluate your portfolio
and liquidate some portion of it under circumstances where you don’t meet standard requirements.
Both government regulations and on private side, and what it did is it created just that
cascade. Uh… selling to a market only makes sense if it is randomized. The moment the
risks are highly correlated, nobody will buy because they know if you are selling today,
it is going to lower the market, which means that somebody else is going to be default
tomorrow, which means you might as well wait. This cycle has essentially went all the way
down until you got to the last stage where the only person who could buy would be the
government because they didn’t have to mark the market. Peter: Yeah, I think…. John: Yeah. The systemic risk point is ill-defined
and can be used to encourage government intervention when it is not needed. So, I don’t really…I
don’t agree with Gary in this respect. Peter: Give me an example of how it could
be used? John: Financial firm…say Bear Stearns way
back in the spring of …uh… 2008 says you know, we are going to…our creditors are
not going to be …uh… taken care of so they are going to pull their money out of
other banks. We have got to save Bear Stearns, without any evidence. Or take Lehman, you
know, Lehman did go through bankruptcy and it was viewed as one of the sources of the
panic. When I look at the data, that was not really where things got worse. It was later
when the government intervened and I think scared…. Peter: So, a shrewd bank or some big shot
on Wall Street can call Tim Geithner, successor of the New York fed, and scare him to death
using the systemic risk argument? John: We know what fire is. We don’t know
what systemic is…. Richard: Let me give you another illustration.
There is a…. Peter: Quickly on this one Richard. Richard: Uh… something known as the Miller-Moore
amendment which is being proposed, which with respect to the short term repo market, overnight
loans is going to allow the government to give it a haircut. That will wreck that particular
market. It is a classic form of potential systemic risk, but it is through government
regulation which affects all of these bonds. Peter: Okay. Segment four, how did we do?
Let’s grade our leaders. In this case, at the moment in financial…of the credit …uh…
catastrophe. So, we are talking about the bottom of 2008 here. Um… George W. Bush,
before leaving office, he signs into law the $700 billion troubled asset relief program
or TARP. John: The problem…the main problem with
the TARP, in my view, was the clumsy chaotic rollout. Where the chairman of the fed and
the secretary of the treasurer asked for $700…. Peter: Henry Paulson John: Exactly. For $700 billion just to…two
and a half pages of draft legislation. No discussion of oversight. Lots of criticize…um…
…uh… from the congress. That actually, I think, just became…made it clear to people
that there really wasn’t a plan. There wasn’t a way to deal with this. Peter: Can I just…. John: So, for three weeks the SMP 500 nose
dives by 28%. Peter: Were you shocked that at the time of
the crisis, treasury secretary Paulson, and fed chairman Bernanke, seem so obviously to
be improvising? That is to say we…at least I suppose… I like to believe that the Pentagon
has, in filed drawers across the building…war plans for all kinds of contingencies. The
housing market had been sinking for months and Bernanke and Paulson don’t seem to have
considered…am I right about that? John: I am surprised. The more I read about
it and talk to people, I am continued to be surprised because I think really, by the summer
of 2007 it was clear there were problems in these financial institutions. But, here we
are into September of 2008, and… Peter: So you, how….thank you. That satisfies
my curiosity in that point, but you think it was the right thing to do to enact a $700
billion emergency program? It was just clumsily deployed? John: Well, who knows quite frankly. Because
the clumsy…maybe you couldn’t do it without the clumsy deployment? But, the clumsy deployment
to me was really the thing that I saw causing all the damage. Richard: Clumsiness in execution is always
a problem, but compared to what? And, can you actually devise a program of that size
and that magnitude which would be well run? And, I think that the answer really is that
every legislative action that you think about is going to take weeks, perhaps months, to
implement. And, every changes in the financial markets at this point were taking hours in
order to take place. So, you are always chasing your own tail at these time, and you will
never be able to come out correctly. Uh… what made the TARP thing even worse, ironically,
was that it was not a clear financial bill. The first round was a very simple bill. Write
and buy these assets to stabilize it. By the time you got the thing through …um… a
week later, it was several hundred pages, and you were doing multiple things at one
time or another. And, this is going to also detract from market confidence. Peter: Markets are reacting minute, by minute,
by minute. Whereas, the government is moving at the rate of a day at a time, or a week
at a time. So, the correct solution would have been to do nothing? Richard: Well, I don’t know about that. John: I think the correct solution would be
to go back at the time of Bear Stearns and this intervention took place, what is next?
There was no description of what the policy would be in the case of another institution.
So, that would have been the point to lay out…. Peter: So, Dick Fuld, who was running Lehman
had a point when he said, hey wait a minute. You guys saved Bear Stearns, why are you…. John: Absolutely. They all thought they would
be there, the government. That whole weekend needs to be studied. They brought everybody
to the New York Fed, and tried to find a way for the private sector to help them out. Richard: Remember when, Bear Stearns went
down it was very complicated because it’s assets were revalued sharply down by Goldman
Sach’s, which has some sort of proprietary you know, oversight role. So, using banker
against banking. And, one of the things, therefore, that you worry about is if an institution,
at least in the short run, is cash flow positive, they were not actually hemorrhaging cash at
that particular point. Peter: They could have opened for business
on Monday morning. Richard: The real issue is to whether or not…when
these regulations come in, they are stomping what is going to be a disastrous failure two
weeks later when it turns out the cash runs out or whether they are creating that particular
element. Peter: The answer to…from both of these
very sophisticated minds is that we don’t know. Richard: Well, I mean, my guess in Bear Stearns
is that they would have been able to weather the storm if they had gone out there, and
if the government would have sort of pulled back on this stuff, but what happens is…this
is where the private foreclosure stuff takes place. At the same time this is going on,
you get all sorts of efforts to say we have to prevent people from being tossed out of
their homes. That may do wonders on one side of the market, but it is going to roil these
pools on the other. Peter: Ben Bernanke, at the time of the crisis,
the fed chairman at the time of the crisis, floods the system with liquidity. As best
I have been able to tell. You get the biggest, most rapid expansion of the money supply in
American history in the autumn of 2008. Grade that move. That was the right thing to do
or not? John: I think the right thing to do was to
get interest rates down, which they took a while to do, but they did. The extra amount
of provision of liquidity, I don’t see that as necessary, especially since it is still
in the system. Maybe put in a little bit as they did back at the time of 9-11 attacks,
but then pull it out, but now we are stuck with a huge amount of excess liquidity in
the economy which has to be pulled out. Peter: Okay, so tell me…again, here is the
laymen’s understanding. Milton Friedman argued that the approximate cause of the great
depression of the 1930’s was the Federal Reserve. It permitted some rather routine runs on banks
to become a nationwide epidemic because it failed to support the banks by expanding the
money supply. John: He complained, along with Andrew Schwartz,
that the money supply declined. Peter: Actually declined. John: It is a contraction, and we are never
talking about a contraction in this case. Peter: Oh, we are not? John: It was really an expansion. SPEAKER: No. John: So, in all the way, think about just
keep the money supply from declining. Get interest rates down rather than just explode
the money supply. Peter: And, the fed has the tools to do that? John: Absolutely. Peter: Hour by hour and night by night? Richard: And, that you can fine tune. John: So, the counterfactual is suppose money
supply holds constant or not increase so much. Peter: So, what the newspapers would run every
morning was the overnight spread on overnight money. And, that…the libor…that rate expanded
dramatically. The fed could have just closed that right back up. John: That would be at risk to the banks. Richard: This is essentially a measure of
the uncertainty with respect to overnight transactions, and as that number goes up,
it suggests that somebody is going to tank, and so it is a sign of internal instability.
Let me give you the other source. Peter: I just want to understand. So, what
you are talking about is you would keep the fed funds rate level, and you see the way
that banks lend…commercial…you look at the usual, but you don’t look at the overnight
which is banks getting. John: These…longer than three month. A longer
maturity, and those went up starting in 2007. Peter: But, isn’t the overnight spread where
you saw the banks suddenly becoming aware that everybody was holding bad paper? Peter: Oh, I am sorry. 2007 Richard: The spread’s jump is a sign of the
integrity of the system. The question is what happens when you flood the system with money?
Well, you know you are going to have to bail it out or there will be an inflation timing
somewhere there. The question is if these guys are putting it in, in this inept fashion.
How good are they going to be to take it out? So, you run a very odd financial system in
which you have simultaneous risk of deflation and inflation on a timing situation. So, what
do people do? They tend to pull back from long term commercial transactions. That slows
up the new real-estate market. That slows up the hiring market. At the same time, you
get labor regulation and pension regulation and healthcare regulation that is being proposed,
which makes that market more precarious. So, you get major contractions in real-estate,
major contractions in labor. The stimulus program addresses none of the microeconomics
stuff on this, and you see the current situation emerging. I mean, neoclassical theory explains
in very well. Peter: Alright. Segment five, our final segment.
Continue to grade the main actress here. There first year of Obama, and you just raised this…you
gave us the danger of….let me just put this way. Ben Bernanke just discussed how the fed
chairman behaved during the crisis. During the past year, he is keeping interest rates
low and he has purchased about $1.5 trillion in longer term treasury bonds and housing
agency securities, which is, an expansion on the money supply that former OMB director,
David Stockmen called “an unprecedented exercise and market rigging with printing press money,
a truly insane monetary policy. John? John: Keeping interest rates down is fine,
but there interventions into particular markets, whether it is mortgages, whether it is AIG,
that is the troublesome part, and I don’t agree with that. My studies show that it is
really not the right thing to have done. I say, at least now, stop doing that and pledge
not to do it in the future. Peter: And, so, question. Bernanke and the
fed have been arguing in recent weeks that congress is putting them under undo political
pressure. Could it not be argued that Bernanke has made the fed an instrument of fiscal policy
rather than monetary policy? He has become a political act. John: I think by doing fiscal policy or credit
allocation, it has taken the fed into areas where one can question the need for independence.
That is fiscal policy. That is something where you would like to have…. Peter: Last question for John, and then you
Richard. So, the last question is: Can the fed….let’s assume that Ben Bernanke is reconfirmed
by the time this program airs. It is going to be voted on, they say, before the end of
his term on January 31st. So, let’s assume he is going to be reconfirmed. Is he going
to be able to back out the extra money out of the system without an inflationary run? John: I think it is going to be hard. I hope
he does. That is what they say they will do. So, let’s take them at their word but also
watch what happens. Peter: Richard? Richard: I am always a doubter on this stuff.
I don’t think it is just him. I think, in fact, what has happened is the political side
of this has turned worse. After the schlaking that the democrats took in Massachusetts,
many people, myself included, thought they would pull in their horns and move back towards
the median voter. What they have done is they have made themselves sound more populist,
and they way that they express their populism is to go after banker’s salaries. Which if
there ever were a diversion to this larger question, that one turns out to be that is
executive compensation. And, the lead in the stock market decline in the past week was
of course, the banks, because the kinds of regulations and taxes that are going to be
imposed upon them. They are in no relationship, as best I can see, to anything other than
a mode of political vengeance. Um… if you have paid off your loans, don’t treat these
guys as implicit guarantors of the loans that were made by other banks, which have yet to
repay their loans, and yet we see this regimen of high taxation, which has one key consequence.
I will end with that. The more you tax these highly rapid markets, the lower the liquidity,
the less accurate the pricing, the more the instability that will take place on all public
exchanges, both credit and debit. Peter: To president Obama himself Richard. Alright, now to John. Obama, this first year
of Obama, $800 billion so called “stimulus” bill. I am putting stimulus in quotation marks
because so little of it was targeted at anything that as best I can tell, most economists believe
could have stimulated growth. Richard: It was all capital expenditures that
weren’t made. Peter: And, also spread out. After the first
year, only a third of it, at most, has been spent. An increase in the federal debt of
about a trillion dollars, and the congressional budget office projects adding a trillion dollars
a year to the debt for the next decade. The takeover of two of the three biggest American….two
of the big three American car companies, and a direct government role in the biggest banks.
John, grade the chief executive for his first year. John: Not a good record. In fact, it is very
worrisome to me. We are going in the wrong direction. We talked about some of the interventions
at the end of the Bush administration. It is just much more. The stimulus package, I
can’t see that it is doing any good. We are increasing the debt. Intervening more. We
have kind of a bailout mentality that is continuing. So, I hope this …uh… recent …uh… election
in Massachusetts begins to get people thinking,. Peter: Okay. You two are both observers of
the inter…the intersection of politics and economics. And here is what I do not get.
We have, as we began the program by noting, lived experience of recent American history.
The 70’s went badly. The 80’s and 90’s and the first part of the naughts when extremely
well. We know the policy that typified the 70’s. We know the policy of deregulation and
lower taxes and stable, relatively money expansion. So, we know that. We know that. Then you get
this…the public swinging against Obama and the government intervention, and yet…as
Richard pointed out, the president and the democrats who still control both houses of
congress, seem to be doubling down on government intervention. What is going on? And, where
is your profession? John: One, we are going to keep talking. The
more we are out there. Thanks for having us on. Richard: I think amongst the…what has happened
essentially is they don’t believe they will be credible if they move back to the middle.
They have their own constituents like Andy Stern and the labor movements and so forth,
who are pushing them very far. Peter: Andy Stern is? Richard: He is the head of the…the SCI,
the service employees inter nation union, who has been pushing the employee free choice
act, which is another real potential killer with respect to labor markets. Richard: Different shows, different point.
But, what I am saying in effect is …uh… the base to which he is most accountable is
to the left of the center. They regard themselves as going to be completely shut out if he moves
to the center. So, they would rather take the risk of his getting blown out of the water
so long as they have the chance of winning. They know they lose the for certain if he
goes back to the middle. This way, at least they have a fighting chance. Peter: This analysis, this political analysis
strikes you as correct? John: You know, I just want to say this. What
we are seeing in the politics here is a great concern in the American public for the way
the country is going on economic grounds. The debt, and the problems of debt is ranked
higher. Yet, unemployment is still very high. So, people are not happy with these policies.
That I think, is a good sign for our, for our democracy. Regardless of where the economists
are weighing in on various things…remember the Friedman-Schwartz analysis, the great
depression, occurred thirty years after the great depression. In the mean time, there
was lots of thinking that the FDR style policies is what brought us out. So, it takes a while.
That is why I say thanks for having us on. Peter: So, you stand with Thomas Jefferson?
Overtime, place your faith with the American people. John: Absolutely. Richard: Well, I hope that is correct. I certainly
went by faith in the original constitutional design which is small government, limited
powers, relatively strong markets, and flat taxation. Obama, for example, on the tax front.
One of the real cost is, you have tax rates scheduled to go into pipe next year, and efforts
to put surtaxes on part of them. This has tremendous adverse effects on long-term investments. Peter: John, last word. Give me one sentence
of advice that you would offer to the president of the United States if you could. John: Don’t raise taxes this year. Peter: Richard? Richard: Amen. Peter: Richard Epstein Richard: And no new regulatory initiatives,
period. Peter: Richard Epstein, John Taylor, thank
you very much. I am Peter Robinson for uncommon knowledge. Thanks for joining us. Be sure
to take a look at us on Twitter at twitter.com/unacknowledged. For uncommon knowledge, thanks. Epstein and Taylor Page 1 of 16

21 thoughts on “Epstein and Taylor: Are we all Keynesians now?

  • These guys are morons – It wasn't a deregulatory period? The whole situation is very simple, but idiots like these guys simply apply text-book jargon to justify any position they choose.

  • Both Friedman and Keynes focus on dollars and cents. The economy is physical; money is just the means we use to exchange the physical goods or work. If you focus on money, you can't see the actual physical necessities you need to have an economy.

    Ex. Green energy may look good to these types because it creates jobs, people take out loans, and it makes money exchange hands. Yet in reality, solar panels and windmills don't create enough megawatts of electricity to fit in a growing economy.

  • @MattBeckstrom Morons, idiots? So right off the bat we can see you are not speaking from honesty, but emotions from your "team" ideology. "Anybody that disagrees with me is an idiot" when one can clearly see these men are not. The "text-book jargon" these men speak have already included reality situations, which is why those policies worked.

  • @Voy2378

    Yeah, his prediction didn't turn out so well, so now he gravitates toward an equally bankrupt economic theory, Keynesianism. The passage of time will prove him wrong once again.

    Predicting and guiding the market (which is what Keynes' whole economic theory is based on) is like trying to predict and guide the weather. Complex systems are guided by nature, and when left alone they work really well. When arrogant humans try to manipulate these systems, they f*ck everything up.

  • This interviewer is great. I saw him interview Christopher Hitchens and his questions there were really interesting too.

    Who is this interviewer?… it's not in the description.

  • @ghuegel Peter Robinson is the interviewer. The following is his short bio
    Peter is a research fellow at the Hoover Institution, where he writes about business and politics, edits Hoover's quarterly journal, the Hoover Digest, and hosts Hoover's vidcast program, Uncommon Knowledge™.
    Robinson spent six years in the White House, serving from 1982 to 1983 as chief speechwriter to Vice President George Bush and from 1983 to 1988 as special assistant and speechwriter to President Ronald Reagan.

  • Abolish the Fed! In my opinion, if there was no governing bank that acted as a lender of last resort (i.e. the Federal Reserve), I don't think investment banks would even consider engaging in such risky lending practices in the first place, don't you think? Hoover Institution, I would appreciate your response to this, preferably from an academic economist. I seldom get objective responses to queries like this.

  • I believe rather that, investment banks engaged in such risky lending practices precisely because they knew the Fed had a moral obligation to act as lender of last resort. The result is that it creates incentives for banks to transfer their responsibility/risks to someone else. And so, the fundamental premise of Friedman's philosophy, 'Friedmanomics' if you will, still holds, i.e. that no body takes someone else's responsibility as seriously as their own.

  • Man epstein is long winded. That man has a lung capacity on him that would make otters jealous. I like him none the less.

  • I love this. Both these guys say regulation is bad, yet give excellent points on why regulation is needed.

  • In “How to balance inequality” on Youtube, A few calls to a friend in the White House about an inheritance cap to let people redistribute their wealth fairly, realigns man's mission here with his natural, higher purpose.
    How to balance inequality

  • If you abolish the Fed you would have to replace it with something whether that be Gold, Silver or whatever. Today what we are in is a Fiat Currency Economy meaning that money is made out of thin air. The reason why I say that is because if you look on a dollar bill it is basically an IOU because it is a Federal Reserve Bill. The process of government right now is that the Fed create money out of thin air and give it to the government causing the US government to give a bond or an IOU to the Fed which causes a rise in debt. The reason why the US currency stays afloat is because it is the currency of the world in terms of commodities. The TARP or Troubled Asset Relief Program was created in order to have the banking system stay afloat. The reason why the government had to use that was because if the banking system failed even more than a majority of people, jobs, and money would have been redistributed differently. The crisis was caused by first the creation of the Gramm-Bilely-Leahy Act that repealed the Glass-Stegall Act which stated that banks couldn't be investment institutions. Once that happened caused banks to change. As the banking system created the MBS or Mortgage Backed Securities and the SIV or Structured Investment Vehicles allowed for other countries and firms to buy up the MBS. Attached to the MBS was mortgages that were eventually defaulted on which caused the systemic crisis. And then the fall of some of the financial markets.

  • I love the video, but gosh am I tired of old white guys (Taylor) trying to lure you into respecting them with pessimistic rhetoric. Glad the new generations do not do this as much. It may have worked back in the mid-20 the century, but today it just cheapens the total conversation.

  • Yes we are now or should be in post Keynesian economics. Reason: secular stagnation is not solved via supply side and monetarist policies alone, QE2 has been tried over and over without fiscal stimulus and has proven to be insignificant on its own. Keynes creates growth with use of Aggregate Demand MPC and the multiplier especially if potential demand is not fully realized to potential GDP. There can be no doubt that Keynesian multipliers creates growth to realize real GDP of 3+. The TARP should have been larger. Stagflation is created by a combination of factors all of which if we cannot just use monetarist policies on their own to solve; stagflation cannot be managed proactively via the use of monetarist and/or supply-side economic policies alone. Watch Joseph Stieglitz, Paul Krugman or Larry Summers. The moderator needs to learn a bit more about international macroeconomics to get more out of these guys. They are monetarists and supply siders. Productivity gains over last 10 years or more have only seen marginal. A debate with a Keynesian economist and a supply- sider would have proven more analytical. The Posner citation is right on the money. The gutting of Dodd-Frank was also a big reason for the 08 financial crisis. The inability of the big banks not to manage financial risk/return is inexcusable. After all risk determination to manage discounted NPV via financial tools such as Black-Scholes and Modigliani-Miller, Fama, etc. is their core competency. The banks need to manage their own risk not relying on the regulators to manage their risk. The collapse and takeover of Bear Stearns wiped out billions of dollars in shareholder value in a matter of days. The investment bank's employees were some of the biggest losers. Their share price was trading at $2 per share down from $70 per share a week earlier. The problem with the Fed is it is too full of monetarists to solve a much larger problems. The Stockman claim is none sense. Stockman was not a trained economist and graduated in theology. Govts have power to print their own currency to solve problems, via QE2 and bond market. that is the power of owning a sovereign currency, as long as inflation is tempered.

  • Bernstein is brilliant. Taylor is wise. You need a combination of brilliance and wisdom to make an economy hum.

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