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.


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.

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.

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.

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

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).

Kydland and Prescott not Kydland and Precott. Sorry

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.

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."

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.

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????

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?

Is it realistic?

I have worked in a large bank and been active lobbying for the banking industry. I can tell you that regulators often do hold a gun to bank's heads and tell them to do certain things. You will see this at work today in those banks who have been pressured to take TARP money when they did not want to. And the evidence that the gun is real is that the banks did what they were told. For an example of same look into The Northern Trust Co.

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