Greenspan and self-regulation

Those who understand the fragility of the capitalist system (such as the late Hyman Minsky) based on human tendency to follow the leader (even if it leads over a cliff, were not surprised at the current financial collapse. But I do not think anyone understands psychology well enough to predict the exact tipping point (or the exact point of eventual recovery of investor and business confidence).
If Greenspan had had a little behavioral economics in his background, he would have known that if is impossible for the financial sector to police itself. Any financial manager who had seen these new pieces of paper for the casino that it was would have lost customers. They would have been right, but out of a job. Both school districts and so-called sophisticated investors like Swiss Banks can not afford individually to opt out while others are seen as making out like bandits. That is why we have collective institutions like government so that we can be ruled by our cool moments of macro vision and not our emotions in the rough and tumble of the daily market.

Economic Crisis & the War

The economy has pushed the Iraq war off the front pages of our newspapers. But, they are connected. We cannot waste billions in Iraq and expect to have the resources to invest in growing our economy.

Krugman, Institutional Economist

Congratulations to Paul Krugman, another institutional economist to win the Nobel Prize. Why do I say he is an institutionalist? Because his theory is built around economies of scale, that is a key concept in institutional economics.
Standard theory is not comfortable with economies of scale as it conflicts with equilibrium concepts so cherished by the old school. The advantages of countries with econ of scale over smaller economies has no equilibrium, but just evolves.
The information for the public sent out by the Nobel committee tries to soft-pedal the lack of equilibrium by referring to "the basic mechanism specified by Krugman ..." The mechanical metaphor is not apt. At one point the notice states, "Real wages and the supply of goods will then continue to increase even more in that country (the one with econ. of scale), thereby giving rise to further migration, and so on." "and so on" is not an equilibrium concept. You need an evolutionary theory, and that is what institutional economics provides.
Thank you, Paul, there is hope for economics.

Too Liberal?

Since when has the word "liberal" been a take-out label that stops substantive debate? Probably since Reagan and now paraded by McCain. The words "liberal" and "conservative" have become meaningless except in name-calling debate. The present Bush regime is anything but conserving--they would abolish Social Security for example--that is hardly conservative. They have spent and not taxed, raising the national debt beyond recognition--hardly conservative!
I suggest we go "progressive" and "reactionary." Or, maybe, "Real World" and "Imaginary/Mythical."

Financial Crisis Policy & Iraq

There is a connection between the depressed economy and the Iraq War. The best economic policy for the financial crisis is to get out of Iraq as soon as possible. The economy can't recover while we are throwing billions down the bottomless pit of Iraq. The bailouts can't do the job alone. Just think of all the research and development on energy we could be doing with this money. For just one thing, We could build a modern national train system like the Europeans already have.
For those who are still thinking of nothing less than victory in Iraq, my advice is to get over it. It is vainglory at this point. Victory in the usual sense is impossible and even if possible in x years, we can't afford it. Redirecting our economy from war to development is our best road to National Security.

Saving The Fincancial System from Meltdown

There is another way to finance the $700 billion needed to save the country from financial instability. It need not increase the Federal debt that is already astronomical. When our economy is not using all of its resources, it makes no sense to have the government extract capital from the economy and switch it to buy bad mortgages. The Federal Reserve and the Treasury could simply write checks on themselves. They could create new money just as the banking system does when it makes a loan. The problem is that banks don’t want to make new loans in these troubled times, so the government needs to be its own banker and fill in. If banks are empowered to create money, why can’t the government’s own bank do it too?

Tax cuts & other incantations

Political campaigns are like ancient military campaigns. The magic words must be spoken before the battle begins. Once they were words like "Ish-ca-bib-el," but today they are "cut taxes and government waste." No campaign can start without them. Neither the ancient nor the modern incantations have any reference to reality. You do not hear politicians say what specific public services will be cut after cutting taxes This is because you don't hear citizens demanding less highway maintenance, larger class sizes, less medical care for the elderly, and a smaller army. All hail Ish-ca-bib-el" and the Tooth Fairy that brings us good things for free.