Archive for September, 2010

Wall Street pauses as financials wilt on Irish downgrade | The National Business Review – New Zealand – business, markets, finance, politics, property, technology and more

September 27, 2010 Leave a comment

Stocks on Wall Street have taken a breather after four straight weeks of gains.

In Europe, financial stocks slipped after Moody’s downgraded the debt of Anglo Irish Bank by three notches. Among Dow stocks, Bank of America fell 1.4%, while J.P. Morgan Chase shed 1.2%..

As we wrote earlier in the year, European debt troubles are far from over and Gold continues to climb.  Read the full article at…

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Another Failed Property Scheme-Grand Albany pipedream in tatters

September 27, 2010 Leave a comment

If only these people had known about the Business Cycle…

Albany City Property Investments, the business which raised $23.5 million in public money for a $500 million North Shore development, owes its creditors $76.2 million.

But it has no assets and not a cent will be repaid.

One of New Zealand’s largest and most speculative property investment visions on leasehold land has come to nothing after being hatched by various ex-Chase and St Laurence bosses.

Liquidator John Cregten of Corporate Finance issued a report this month on the failed business which showed debts to about 350 bondholders of $23,559,000 and a further $52,726,000 owed to closely linked Albany City Development.

Cregten said not a cent would be available for any creditors and NZ Guardian Trust had delivered the bad news to bondholders.

The mainly retired investors stumped up initial funding for the colossal scheme on Auckland’s northernmost outskirts, a mini-city for thousands of Aucklanders on bare leasehold land near Westfield Albany, bringing a new town centre.

In November 2006, Garry Looker, Kevin Podmore and Nick Wevers said plans were for a 200-room hotel, a large-scale apartment project with three towers rising up to 30 levels, 15 office blocks rising 10 levels high, a retirement village for hundreds of people and a new bulk retail centre.  Project Chief Adam Reynolds said the apartments alone could sell for $400,000 to $500,000. The prospectus promised a suburban centre “similar in scale to the Auckland centres of Manukau and Botany Downs or the Sydney centres of Chatswood, Bondi Junction and Parramatta”.

But yesterday, Cregten said the plans never amounted to much and proposals to lease land had been terminated.

“There’s nothing there. There might have been five years ago when it was all set up but our world has changed. People involved are pretty disappointed with where it’s ended up. It’s just one of those things. They have been overtaken by the market,” Cregten said.

Land cannot even be sold because the business never owned any: it only had subleases which have now been terminated.

The Albany business was an amalgamation of interests between St Laurence’s Podmore and Mike O’Sullivan and various Reynolds family members, part of the ex-Chase/Symphony companies, as well as executives they worked with.

Together, they planned the new mega-city but the property slump intervened.

Albany City Property Investments, wholly owned by Albany Partners, was put into liquidation at the behest of the shareholders this month.

Many other companies linked to it are still live.

Albany Partners’ directors are Colin Reynolds of Parnell and his son Damon of Sydney. Companies Office records show Albany Partners is, in turn, owned by Albany City Holdings (2006), whose directors are Remuera’s Looker and Wellington’s O’Sullivan.

Albany City Holdings (2006) is wholly owned by Burtlea Nominees of Viaduct Harbour Ave. Burtlea’s owners are Nigel Burton, Jeremy Carr and Anthony Nicholson.

Albany City Property Investments’ biggest secured creditor is a company linked to people who established it: Albany City Development directors are Mission Bay’s Gary Noland and Colin Reynolds’ son, Adam Reynolds of Grey Lynn.

Albany City Development’s shareholder is Symphony Projects owned by Colin Reynolds, Looker and Noland.

Cregten said his next report on the business in about six months was likely to be the last.


Russell Walls, a Browns Bay retiree, lost $10,000 in the failed Albany scheme and is angry.

Four years ago, he was reassured by St Laurence’s Kevin Podmore, but now the trustee for the scheme, Guardian Trust, has written to him saying his money has been lost.

“Where did our money go? It doesn’t just go poof. Living close to Albany in Browns Bay, I believed this investment had potential.” Walls blamed weak legislation which would mean lost savings for “many elderly, hard working New Zealanders who have built this country by hard work … Many of these people will now be in dire financial strife which, in turn, causes health problems like strokes and heart attacks and undue stress in what should be their happy twilight years.

“As a nation I am disappointed we don’t stand up with government intervention and stop this disgraceful behaviour.” Walls was saving to help his grandchildren buy their own houses. Others to lose money include a retired Hibiscus Coast couple who said they had money with many other failed finance businesses, and an investor based in Japan who said he had lost money with financiers Strategic Finance and Hanover.


Albany City Property Investments’ public offer:

* Prospectus registered November 2006.
* Bond offer opened November 2006.
* Closed oversubscribed, offering 10.5 per cent.
* First interest payment March 2007.
* Bonds due to be repaid December 2009.
* Scheme allowed extension toDecember 2011.
* This month: in liquidation owing $76.2m.
* No prospect of a cent being recovered.

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The Politics of Economics: Property Rights & the Rule of Law

September 26, 2010 Leave a comment

Most economists and economic historians disregard the very political and legal foundations of their subject.

Economic reasoning can be likened to a suspension bridge—you can have all the fancy engineering and analysis you like, but at some point all that fancy talk has to reach down into the solid rock of law and secure political institutions.

Yet most economists take these foundations for granted.  They think of economics only as a discussion of economic data, or mathematical formulae. But those data and those equations—and, more especially, all the assumptions behind them—growth is a function of “capital formation,” for example—are all highly derivative abstractions, mere cables on the suspension bridge.

The solid rock that underpins all the major economic assumptions are the foundations of property rights, enforceable contracts and an independent judicial system—underpinnings that you disregard at your peril

So why does virtually every economist ignore them?

This week, we’ll take a flying visit through some of the major assumptions underpinning all economic reasoning that economists hardly ever discuss.

Date: Tuesday 28th September
Time: 6pm
Room: University of Auckland Business School, Owen G Glenn Building, Room 317 (Level 3)

Look forward to seeing you then

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The Rise and Fall of Glass-Steagall

September 23, 2010 Leave a comment

By Warren C. Gibson and Jeffrey Rogers Hummel

The ongoing financial crisis has pundits, bloggers, academics, and politicians scrambling for explanations. Deregulation gets a major share of their attention, specifically the 1999 repeal of the Glass-Steagall Act of 1933. Just what was Glass-Steagall and how did it come about?

Bank failures were among the most dramatic and devastating aspects of the Great Depression. A wave of failures swept the country in 1930. A second and stronger wave followed in 1933. In all some 9,000 banks failed, taking with them all or part of the savings of millions of individuals and businesses. Perhaps the most significant response to this crisis was the Glass-Steagall Act, officially known as the Banking Act of 1933. (Glass-Steagall originally referred to a measure enacted in 1931 that was concerned mainly with powers of the Federal Reserve System, but that name now generally refers to the 1933 act.)

Glass-Steagall was a far-reaching measure that established federal deposit insurance (see The Freeman, June 2010) as well as separation of investment banking from deposit, or commercial, banking. Although it is rightly classed as one of the New Deal reforms, the bill had been debated before Roosevelt’s assumption of the presidency in March 1933 and the bank holiday the same month. In fact, Senator Carter Glass had long made known his opposition to “universal banking,” in which single firms could conduct deposit banking, investment banking, and other financial activities. Glass had been a sponsor of the Federal Reserve Act of 1913 and by 1933 was without doubt the most respected and powerful politician on matters related to banking.

The Glass-Steagall separation of investment and deposit banking was generally repealed by the Gramm-Leach-Bliley Act of 1999, during the administration of Bill Clinton. However, in response to the financial crisis of 2008, there has been much discussion of whether repeal was a mistake and whether some or all of its restrictions should be reinstated. We can gain valuable perspective on the current situation and calls for reform if we know a little about Glass-Steagall. What problems was it supposed to solve? What political incentives were at work? What new problems might it have caused?

Investment banking seems quite different from commercial banking. We might even wonder why both are called banking. Deposit banks accept deposits and make loans. They provide benefits to savers who couldn’t reasonably find and assess borrowers on their own, and to borrowers who would have a hard time finding lenders. Investment banks underwrite securities, meaning they help companies issue new equity (shares of stock) or debt securities (bonds). They perform similar services for state and local governments that wish to issue bonds. They set an offering price, line up buyers, and sometimes guarantee to absorb the securities themselves should any remain unsold. Unless they keep some of the new securities on their books, their work is finished once the securities are sold.

Some of the skills and practices of investment bankers are quite similar to those of bank-lending officers. Lenders must investigate the creditworthiness of prospective borrowers. Investment bankers must perform the same sort of due diligence in deciding whether to underwrite a proposed security offering and if so, how to price it. Firms that combine commercial and investment banking under one roof thus tend to be more efficient, a situation that economists call “economies of scope.” If they successfully exploit economies of scope, combined firms provide lasting benefits to their corporate clients and indirectly to consumers, as well as higher profits to themselves—at least until competing firms bid away those profits.

Pecora Hearings

The main impetus for the separation aspect of Glass-Steagall was a series of congressional hearings known as the Pecora hearings, named for the chief counsel of the Senate Committee on Banking and Currency. The hearings took place in 1933 and 1934 and generated some 11,000 pages of testimony. Ever since that time the Pecora hearings have been cited as firmly establishing the abuses that can and did arise when a single firm is allowed to engage in both deposit banking and investment banking, and as justifying government intervention to curb those abuses. This belief, by now something of an urban legend in financial and regulatory circles, is summarized in the following congressional testimony given in 1986:

[The Pecora hearings] on the securities practices of banks disclosed that bank affiliates had underwritten and sold unsound and speculative securities, published deliberately misleading prospectuses, manipulated the price of particular securities, misappropriated corporate opportunities to bank officers, engaged in insider lending practices and unsound transactions with affiliates. Evidence also pointed to cases where banks had made unsound loans to assist their affiliates and to protect the securities underwritten by the affiliates. Confusion by the public as to whether they were dealing with a bank or its securities affiliate and loss of confidence were also cited as adverse consequences of the securities affiliate system.

Who said that? None other than Paul Volcker, former chairman of the Federal Reserve System, who was given credit (perhaps exaggerated) for stopping the inflation of the late 1970s and who has reentered public life as an adviser to President Obama. (More about Volcker and the proposed Volcker Rule below.)

For years Glass had been frustrated in his attempts to legislate separation of commercial and investment banking. Revelations of supposed abuses by National City Bank (NCB) of New York and its president, disclosed in the Pecora hearings, provided the spark to ignite the issue and give Glass his victory. Senator Burton Wheeler thundered, “The best way to restore confidence in our banks, is to take these crooked presidents out of the banks and treat them the same as they treated Al Capone when Capone avoided payment of his tax.”

The Witch Hunt

The press got on board to the point where the Literary Digest reported that “Apologies, even resignations, do not satisfy listening editors.” Heywood Broun, a leading columnist and perhaps the Paul Krugman of his day, piled on with, “The only thing that some of our great financial institutions overlooked during the years of boom was the installation of a roulette-wheel for the convenience of depositors.” The hearings and their aftermath, it is fair to say, had become a witch hunt.

NCB was a leading New York bank, restrained by law to operate only within the city. Its subsidiary, National City Company (NCC), had become the largest and most prominent commercial-bank-related securities underwriter, with offices in many cities besides New York. National City and its president, Charles Mitchell, were charged with numerous misdeeds. Mitchell allegedly arranged his affairs so as to avoid income tax. It was also alleged that the bank paid high salaries and bonuses and made special lending facilities available to executives.

These are scarcely criminal offenses. But among the more serious charges, executives allegedly profited from the firm’s own securities underwritings. For example, National City bought a large block of stock in the new Boeing Corporation. Rather than sell this stock to the public, Pecora charged that NCC “retained a large block for itself and allotted the remainder to Mr. Mitchell and a select list of officers, directors, key men, and special friends.” But an internal NCC memorandum concerning this stock says,  “[O]n account of the fact this industry is still somewhat unseasoned, even though we regard this particular company as sound and having a very bright future, we were not quite ready to make a general offering to our customers. It would have been next to impossible to avoid taking orders from the type of investor who should not buy this stock. Therefore, our own family and certain officers and employees of the Boeing Co. and affiliations have taken the entire issue.”

Not only does this not sound improper, but in fact it sounds like just the sort prudent regard for customers’ best interests that was supposed be lacking in combined firms such as NCB/NCC.

The committee produced a Mr. Brown, a witness who claimed to have lost $100,000 as a result of an NCC salesman’s bad advice. Bankrupt and in ill health, Mr. Brown was an ideally sympathetic witness, but it turned out that he had been a successful businessman and not a novice. NCB was forbidden to call rebuttal witnesses.

In his 1990 book, The Separation of Investment and Commercial Banking, Professor George Bentson investigated numerous other charges against NCB and showed that none had any substantial basis in fact. Similar charges were brought against the Chase Bank, its president Alfred Wiggins, and the affiliated Chase Securities Corporation. Bentson also showed that these charges were mostly unsubstantiated—and added a thorough critique of the supposed theoretical problems of universal banks such as conflicts of interest.

Caveat Emptor

But what about conflict of interest? It is certainly possible that a banker in a combined firm might steer customers into ill-suited investments or insurance products. This is a hazard we face whenever we deal with professionals, such as physicians who advise treatments and also provide them, or lawyers who advise lawsuits and offer to file them. Such hazards are manageable: We can always get a second opinion or consult a fee-based financial planner or simply rely on the professional’s incentive to maintain a reputation for ethical service.

Financial institutions have widened their offerings considerably in recent years without any apparent problems. At the website of Wells Fargo Bank, for example, one finds not only traditional deposit and savings accounts and loans of all sorts, but also stock brokerage, mutual funds, automobile insurance, homeowner’s insurance, and even pet insurance. (But the Wells Fargo branch in a nearby Safeway store didn’t catch on and was closed.) Similarly, Charles Schwab, which began as a discount broker, now offers a full range of investment products and advice as well as banking services through its affiliated bank. Customers enjoy expanded services and lower prices as a result of the widening of competition among traditionally distinct firms. There is no sign of significant or widespread problems arising from conflicts of interest in such firms.

Combined firms are not assured success. Sears, Roebuck, for example, once decided to get into financial services. Sears as such couldn’t just start accepting deposits and making loans, nor could any commercial bank start selling underwear. But it formed a holding company, and the combination was effected. For a brief time customers in a nearby Sears, clutching their underwear purchases, could wander across the aisle into an alcove where smiling agents offered banking services through Allstate Savings and Loan, insurance policies from Allstate Insurance, and securities from Dean Witter—Sears subsidiaries all. Customers, not regulators, showed that no economies of scope were to be found in the Sears approach: The alcoves were returned to retail use, and the subsidiaries were sold. By the time Sears recovered from this excursion, Walmart was riding high and Sears was headed for the ropes.

Another failed expansion of scope was Citicorp’s acquisition of The Travelers, a major insurance firm that had previously acquired the Smith Barney brokerage. The resulting combination was christened Citigroup but the hoped-for synergies never appeared and Travelers was sold. This happened long before Citigroup was rescued by a federal bailout. Citigroup, incidentally, is the successor of the National City Bank of Glass-Steagall fame.

The End-Around

Sears and Citigroup aside, some firms achieved a substantial degree of financial integration in the 1980s and ’90s. Banks had figured out how to dodge the Glass-Steagall prohibition on ownership of firms “engaged principally” in underwriting and securities dealings. They simply formed subsidiaries that conducted a large enough volume of other business that they could legitimately claim they escaped the “engaged principally” clause. This avenue was not available to smaller institutions that could not marshal the required volume of business to employ this dodge. Thus by the 1990s Glass-Steagall was fast becoming a dead letter. The Gramm-Leach-Bliley Act of 1999 acknowledged the situation and provided a straightforward path toward financial integration as opposed to the variety of side routes that had been taken.

Incidentally, no other developed country has ever seen fit to separate commercial banking from investment banking. Banks in Germany and Switzerland have always been free to engage in underwriting and securities holding to no obvious harm. British banks are slightly more regulated: They are not allowed to sell insurance.

Backed partly by the reputation and stature of Paul Volcker, the Dodd-Frank act is now law. A provision that at least echoes the Volcker rule prohibits “high risk” proprietary trading by banks (trading for their own account). However, the distinction between proprietary trading and similar but supposedly benign forms of trading is left to regulators. Thus the effects of this and the act’s other loosely related provisions won’t really be known until a passel of regulations are written and implemented. Very likely the full effects of Dodd-Frank won’t be apparent until the next financial crisis. It is disturbing that the urban myths that backed Glass-Stegall have survived like a dormant virus in the person of Mr. Volcker, as his quoted testimony suggests, and have re-emerged in Dodd-Frank.

Glass-Steagall tore investment banks out of the arms of their commercial banking parents. After that they stood alone, first as partnerships and then, starting with Merrill Lynch in 1971, as corporations. More recently they began to convert themselves into bank-holding companies. In September 2008 the last two major stand-alone investment banks, Goldman Sachs and Morgan Stanley, took the plunge. At a stroke these institutions gained certain advantages such as borrowing privileges at the Fed’s Discount Window, while subjecting themselves to stricter regulations on leverage and borrowing. Most important, their explicit status as banks gives them greater assurance of a future bailout should failure loom again.


The timing of the repeal of Glass-Steagall makes this deregulatory move a convenient scapegoat for the financial crisis. But the crisis began with the housing collapse, a result of government encouragement of unsound lending practices. Financial firms took too much risk with mortgage-backed securities, in part because of moral hazard engendered by government guarantees and partly because bond rating firms were not as independent as was once thought. The limited liability that the investment banks gained when they became corporations may also have amplified moral hazard. There is no good reason to believe that Glass-Steagall, had it remained in effect, would have prevented any of these problems.

A panoply of myths grew up around the Great Depression, many of which are only now being debunked. Sadly, the current Great Recession may spawn a new set of myths, among them the supposed role of Glass-Steagall’s repeal. We have seen how 1930s congressional hearings produced scapegoats that led to Glass-Steagall’s separation of investment banking from commercial banking. Is history repeating? Last April the Securities and Exchange Commission filed securities fraud charges against Goldman Sachs. The civil complaint, since settled for $550 million, contended that the firm stacked the deck on billions of dollars worth of mortgage securities in favor of insiders and at the expense of outsiders. At this writing the Manhattan U.S. Attorney’s office is conducting an investigation that could lead to criminal charges. And Goldman executives were subject to some 11 hours of intensive questioning in front of a Senate committee, during which they largely stood their ground.

We do not know whether the charges against Goldman Sachs have merit, but the parallels between that firm and the National City Bank of 1933 are eerie. We may well be seeing the manufacture of another scapegoat.

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The Empirical Case against Government Stimulus – Robert P. Murphy – Mises Daily

September 20, 2010 Leave a comment

The Empirical Case against Government Stimulus – Robert P. Murphy – Mises Daily.

Economists in the Misesian tradition stress the primacy oftheory in the social sciences. When trying to figure out the Great Depression, for example, we can’t approach the topic with a blank slate and let the facts “speak for themselves.” Mises argued that in order for us to even know which facts to consider as relevant, we need to have an antecedent body of deductive insights.

Even so, it’s a good exercise — as well as just plain fun — to look at Keynesian economists trying to reconcile their outlandish policy prescriptions with the historical record. No matter how you slice it, “fiscal austerity” has a track record of success, whereas pump-priming “stimulus” spending has never delivered.

Government Spending Cuts Work in Practice, not Just Theory

Ironically, a recent (empirical) case for fiscal austerity came from the June bulletin of the European Central Bank (ECB).Download PDF In the wake of the Greek debt crisis, European governments are naturally keen on reining in their deficits. The ECB report looked at the historical episodes where Belgium, Ireland, Spain, the Netherlands, and Finland reduced their budget deficits. Three of the countries saw immediate improvements in economic growth, but all benefited in the long run from tightening government finances.

What’s really amazing about the ECB piece is that it stressed that spending cuts were a much better way of closing a budget hole than raising taxes. This is the kind of analysis you expect from a conservative DC think tank, not the European Central Bank!

So how did the prominent Keynesians deal with these apparent successes of anti-Keynesianism? Here’s Paul Krugman’s reaction:

It’s really amazing to see how quickly the notion that contractionary fiscal policy is actually expansionary is spreading. As I noted yesterday, the Panglossian view has now become official doctrine at the ECB.

So what does this view rest on? Partly on vague ideas about credibility and confidence; but largely on the supposed lessons of experience, of countries that saw economic expansion after major austerity programs.

Yet if you look at these cases, every one turns out to involve key elements that make it useless as a precedent for our current situation.

Here’s a list of fiscal turnarounds [a different list from the ECB bulletin], which are supposed to serve as role models. What can we say about them?

Canada 1994–1998: Fiscal contraction took place as a strong recovery was already underway, as exports were booming, and as the Bank of Canada was cutting interest rates. AsStephen Gordon explains, all of this means that the experience offers few lessons for policy when the whole world is depressed and interest rates are already as low as they can go.

Denmark 1982–86: Yes, private spending rose — mainly thanks to a 10 percentage-point drop in long-term interest rates, hard to manage when rates in major economies are currently 2–3 percent.

Finland 1992–2000: Yes, you can have sharp fiscal contraction with an expanding economy if you also see a swing toward current account surplus of more than 12 percent of GDP. So if everyone in the world can move into massive trade surplus, we’ll all be fine.

Ireland, 1987–89: Been there, done that. Let’s all devalue! Also, an interest rate story something like Denmark’s.

Sweden, 1992–2000: Again, a large swing toward trade surplus.

So every one of these stories says that you can have fiscal contraction without depressing the economy IF the depressing effects are offset by huge moves into trade surplus and/or sharp declines in interest rates. Since the world as a whole can’t move into surplus, and since major economies already have very low interest rates, none of this is relevant to our current situation.

It’s not worth commenting on Krugman’s reaction just yet; let’s get some more samples.

Large Government Debt Is Bad in Practice, not Just Theory

We’ve already seen some examples of apparent successes with slashing government spending. But what about the reverse? What do the “raw data” have to say about large government deficits and economic growth?

In a widely cited paper, “Growth in a Time of Debt,” Carmen Reinhart and Kenneth Rogoff

study economic growth and inflation at different levels of government and external debt. Our analysis is based on new data on forty-four countries spanning about two hundred years. The dataset incorporates over 3,700 annual observations covering a wide range of political systems, institutions, exchange rate arrangements, and historic circumstances. Our main findings are: First, the relationship between government debt and real GDP growth is weak for debt/GDP ratios below a threshold of 90 percent of GDP. Above 90 percent, median growth rates fall by one percent, and average growth falls considerably more. We find that the threshold for public debt is similar in advanced and emerging economies.

When the financial pundits began circulating the Reinhart-Rogoff findings, they quickly summarized them like this: if a country’s (government) debt gets above 90 percent of GDP, then it crosses a tipping point and significantly impairs growth.

So what does our resident Keynesian, Paul Krugman, have to say about the Reinhart-Rogoff paper? Let’s quote him:

Continuing the Chatauqua on Reinhart-Rogoff: it’s a pretty devastating observation that the only observations of high debt / low growth for the United States come from the immediate postwar years, when post-war demobilization naturally led to falling real GDP. But what about the broader picture?

R-R haven’t released their full data set. But as best I can tell, all or almost all observations of advanced countries with gross debt over 90 percent of GDP come from four main groupings:

  1. The US and the UK in the immediate aftermath of WWII
  2. Japan after 1995
  3. Canada in the mid ’90s
  4. Belgium and Italy since the late 1980s

We’ve already seen that (1) is a case of spurious correlation. Surely (2) is largely a case of causation running the other way, from Japan’s slide into slow growth and deflation to its rising debt. As for (3), advocates of austerity have been using Canada in the mid-90s as an example of a success story; surely they can’t have it both ways. This leaves (4); but my first take would be that both Belgium and Italy have problems that have both inhibited growth and led to a runup of debt.

I may have missed some small-country examples; but surely they wouldn’t change the picture. There really, truly isn’t anything there.

Now things are already starting to look a little shaky for Dr. Krugman and his Keynesian allies. They have been backed into a corner, having to explain away (at least) nine historical episodes that contradict their theories. Sure, maybe one, two, three, even four of those examples really areirrelevant; but all nine? At what point should we start to question the basic Keynesian premise, namely that having politicians borrow and spend a bunch of money is a way to help the economy?

Most Americans are well aware of what happened with the Obama “stimulus” package. His Keynesian economic team famously predicted that unemployment would not break 8 percent if the package passed. After the fact, of course, the Keynesians simply declared, “Wow, the economy was worse than we thought! Good thing we ran up the deficit as much as we did, though it was too little.” (Incidentally, Krugman himself was off in his predictions, though he likes to constantly tell his readers, “I told you so” regarding the effect of the stimulus.)

But now we see the pattern holds for nine other cases, as well. We can’t run controlled experiments in macroeconomics, so it’s possible (if we just look at history without economic logic) that the Keynesians are right. Yet the contortions begin to pile up.

What’s the Evidence for Fiscal Stimulus?

In the face of all the apparent counterexamples — which must be whisked away with Krugman’s clever arguments — what evidence do the Keynesians have for their policy prescriptions?

Ironically, they point to the 1930s as evidence of how well deficit spending “worked.” For example,Christina Romer points to the 1933–1936 period as a Keynesian success story, which was only thwarted when FDR chickened out and tried to shrink the federal budget deficit in 1937.

And of course, today’s Keynesians point to our current economy as “proof” of how good massive deficits are. Why, this should have been the Second Great Depression, but thanks to Obama’s willingness to spend — in contrast to Herbert Hoover — we are only suffering through the Great Recession. Phew!

Do you notice the pattern? The anti-Keynesians point to actual success stories as evidence of the potency of their policies. The Keynesians, in contrast, point to awful economies and claim thatthey’d be even worse were it not for the Keynesian “medicine.”

As a last point, you might be thinking, “What about World War II? Isn’t that a great example of the Keynesian multiplier at work?”

Well, Robert Barro ran the numbers and said no, it wasn’t. And in his response, did Paul Krugman challenge the math? Nope, Krugman said that only a “bonehead” would have thought World War II would show the power of the multiplier. So we can’t use that as an example to justify the Keynesian models.


Keynesian economics is absurd at its core. It literally claims that the conventional laws of economics go out the window in a “liquidity trap.” (Krugman went so far as to explicitly say that mercantilism works in our current world.)

Because they are based upon a falsehood, Keynesian policies fail empirically, quite obviously to anyone with an open mind. Bright guys like Krugman have to come up with a handful of ad hoc reasons to explain away all of the success stories from his opponents; and he can always point to an unobservable alternate reality to “prove” the efficacy of his own remedies.

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Lessons from the Financial Crisis

September 19, 2010 Leave a comment

Hello Everyone.
At this Tuesday night’s meeting of the UOA Economics Group we will begin looking at the financial crisis and specifically what lessons can be taken from it. In last week’s seminar we concluded looking at the boom-bust cycle, also known as the business cycle. It is not surprising that the current ‘bust’ has resulted in many asking what caused the current downturn. Many theories have been put forward. However, are the real villains in this being placed under the spotlight? Could it be that innocent parties are being blamed?
These are very important questions for the implications of what is currently being decided will impact every single one of us for many years to come.

If you have been unable to join us for a while, you do not need to worry about not following the discussion. Each seminar is somewhat independent of previous seminars. Also, if you will struggle to get there at 6pm, then feel free to join us when you can.

Date: Tuesday 21th September
Time: 6pm
Room: University of Auckland Business School, Owen G Glenn Building, Room 317 (Level 3)

Look forward to seeing you soon

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September 10, 2010 Leave a comment

Hello Everyone.

The UOA Economics Group is back again this Tuesday and we are looking to hold regular meetings each Tuesday from now to the end of the year.  We will be continuing this week from where we left off last time by examining the Business Cycle, something which we are all aware of, especially given the current recession, but of which few really understand.  Why do these boom-bust cycles occur?  What drives them?  Are they becoming more frequent?  And can these damaging cycles be prevented?  This is a very important subject for not just any student of economics, but for everyone as these boom-bust cycles affect us all.  Since university is back in session we will return to the 6pm time.  For others further afield, feel free to join us when you can.

Date: Tuesday 14th September

Time: 6pm

Room: University of Auckland Business School, Owen G Glenn Building, Room 317 (Level 3)

If you haven’t visited the blog lately, there is some background reading on capital theory if anyone is interested and thanks to Rob, we’ve even found some leading economist’s getting caught out by the broken window fallacy.  We have more copies to give away of “Economics in One Lesson” so if you would like to get your hands on one, write in and explain what the economist’s in this article are not seeing.  In Bastiat’s words explain Ce qu’on voit et ce qu’on ne voit pas (That which is seen and that which is unseen).  That’s all for now.

Look forward to seeing you soon

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