Solow on Greenspan's new book and the misrepresentation of the mainstream

Solow's review was published in the New Republic here (h/t Robert Vienneau). Solow has lost nothing of his ironic and acerbic style of criticism. As noted by Vienneau there is a great line at the end about Greenspan's mentor Ayn Rand:

"It is sometimes claimed that Alan Greenspan is a closet follower of Ayn Rand; he certainly had an early association with her circle. I got through maybe half of one of those fat paperbacks when I was young, the one about the architect. Since then I have found it impossible to take Ayn Rand seriously as a novelist or a thinker. In the past I have gone on the assumption that Greenspan’s ideas about economic life are his own, just what is contained in his writings, and the Ayn Rand question does not arise. But now there is this book, with its particular misinterpretation of mainstream economics, which might be thought to reopen the question if anyone is interested."

So basically he says Greenspan might be a crank after all. Yet, Solow has actually a couple of nice things to say about the old 'maestro.' For him, the injection of liquidity after the 1987 crash, and allowing the unemployment rate to fall below 6% or so (what most considered the natural rate) suggest that "it is only fair to say that he was a very good chairman of the Fed."

This in spite of his "two big mistakes." One mistake was allowing (I would say almost promoting) the housing bubble. The other, the relevant one for Solow, was his:

"deep-seated conviction that the unregulated financial system was self-stabilizing, that the self-interest of all those clever and experienced participants with a lot of their wealth at stake would keep the accumulation of risk within tolerable bounds. So he promoted deregulation and financial consolidation (as did others, of course) and, when this simple faith proved wrong, allowed disaster to strike."

If  being a monetary crank that shares responsibility for the deregulation of the financial sector and the current global crisis (let alone his role in the Bush tax cuts, or his promotion of cutting Social Security benefits) does not make him a terrible Fed chairman, I don't know what would.

Also, I think Solow is right, Greenspan does not represent well the more moderate New Keynesian mainstream. Yet, in many respects his sort of fringe radical right wing Ayn Rand version of the mainstream, like supply side and Austrian economics, is also part of the mainstream and shares several crucial elements. I would argue that the problem with Greenspan is NOT that he misrepresents the mainstream, but that his deregulation mantra is perfectly compatible with the mainstream. Lets not forget that Larry Summers (a New Keynesian that favors fiscal expansion and is concerned about the possibility of secular stagnation now) was during the Clinton era presiding over deregulation.

Monetary Cranks

Monetary cranks are an interesting bunch. Contrary to vulgar economists, which produced a defense of the status quo without scientific foundations, cranks tended always to provide a critique of dominant views. Often monetary cranks too lacked (and those around still lack) a solid foundation in theory. However, their critical perspective has always made cranks more interesting that the mere sycophants of the powerful that one associates with vulgar economics.

Dennis Robertson (1928), famous Cambridge economist that even though was close to Keynes (at least before the General Theory) remained thoroughly anti-Keynesian, said regarding cranks that:

"those who have Found the Light about Money take up their pens and write, with a conviction, a persistence and a devotion otherwise only found among the disciples of a new religion. It is easy to scoff at these productions: it is not so easy always to see exactly where they go wrong. It is natural that practical bankers, vaguely conscious that the projects of monetary cranks are dangerous to society, should cling in self-defence to the solid rock, or what they believe to be so, of tradition and accepted practice. But it is not open to the detached student of economics to take refuge from dangerous innovation in blind conservatism."

I have a more sympathetic view than Robertson about the cranks, which tend to provide critiques of the mainstream without being able to build coherent alternatives. Cranks usually liked paper currencies during the Gold Standard (like Silvio Gesell), and were concerned with the practical problems of unemployment (like William Trufant Foster). More often than not they understood that money was both endogenous, and that it had real effects on the economy, something that still puzzles the mainstream.

Keynes (in the GT) was wrong in putting Gesell, and Major Douglas (another monetary cranck) on the same group with Marx. From a history of economic ideas, while Marx is grounded on classical political economy, even if he is critical of several  aspects of Smith and Ricardo, Gesell and Douglas were not grounded on either the surplus approach (of the classicals) or the marginalist approach, even if they both had elements of the latter.

Reference:

Robertson, D. (1928), "Theories of Banking Policy," Economica, No. 23, pp. 131-14.

Hyperinflation in Bitcoinland

There are Gold Bugs and there are Bitcoin Bugs. They all oppose fiat money (hate the Fed and other monetary authorities) and follow some sort of free banking view loosely based on Austrian views. The supply of bitcoins is strictly exogenous controlled by a complex system that cannot be trampled by greedy central bankers and politicians. Wired said in an article last year that:

"Bitcoin required no faith in the politicians or financiers who had wrecked the economy—just in Nakamoto’s elegant algorithms. Not only did bitcoin’s public ledger seem to protect against fraud, but the predetermined release of the digital currency kept the bitcoin money supply growing at a predictable rate, immune to printing-press-happy central bankers and Weimar Republic-style hyperinflation."

A very monetarist view of inflation, as you can see. The problem is that central banks print too much money, and by the way, in the US hyperinflation is around the corner.

The funny thing is that they had hyperinflation in Bitcoinland (a land of people that use this stuff) last year and they didn't understand it. The graph below shows the exchange rate between bitcoins and dollars from inception to the end of last year more or less. As it can be seen (not very well I'm afraid), prices fell from almost US$30 per bitcoin to around US$3 in two months.

Now think about it. If you bought a "I'm Satoshi Nakamoto" T-shirt (the guy that invented bitcoins, and yes they do sell them) say for US$ 30 in mid-June last year it would cost you approximately B$ 1 (B$ is not a bad symbol for them!). By late October, when the exchange rate depreciated brutally, you would have to pay for the same US$ 30 T-shirt around B$ 10. 10 times more. 1000% inflation in two months looks like hyper to me, even though the supply of bitcoins did not increase nearly as much, since it is controlled by a complex computational algorithm.

This should teach these people that hyperinflation is more complicated than just central banks printing money (see this paper). Still Ron Paul may have some support in Iowa, because of popular misperception about the role of money supply and the causes of inflation. Happy New Year!

PS: In my view Nakamoto is the intelligent version of Madoff. He got away with the dollars and dumped the bitcoins.