Wednesday, July 31, 2013

Brad DeLong — Malinvestment In The Recession?

I think Daniel Kuehn mistakes Evan Soltas's point. Soltas is arguing not against the fundamentalist Austrians and their claims that the depression is caused by previous malinvestment in the boom. Soltas is arguing against the Martin Feldstein's who claim that interest rates need to be high during the bust in order to guard against additional malinvestments committed then.
Grasping Reality
Malinvestment In The Recession?
J. Bradford DeLong | Professor of Economics, UCAL Berkeley


Ralph Musgrave said...

These incompetents – DeLong, Feldstein, Soltas, Austrians etc – are all fumbling their way towards MMT: in particular the idea interest rates should not be adjusted and that if stimulus is needed, that should simply take the form of creating new money and spending it into the economy (and/or cutting taxes).

Warren Mosler advocates leaving interest permanently at zero. I agree.

Moreover, if interest rates ARE ADJUSTED, that skews the economy towards or away from the production of investment goods: a skew that has to be unwound later. You might as well channel stimulus into the economy just via car production, restaurants and massage parlours.

Roger Erickson said...

More payout from reviewing mal-investment in the whole ideology of "economics."

circuit said...

The idea that easy money is somehow to blame for distorting market transactions is rubbish. The only way to make this case is to come up with fancy theoretical arguments.

Thankfully we can rely on Stiglitz to call out the nonsense. Here's JS on low interest rates as the cause of the crisis (note: the same argument can be made for the recovery):

"Let me begin actually with the question about the low interest rate and the extent to which that is to blame. We've had periods in which we've had low interest rates without bubbles when we had good regulation in the years after WWII.

So, low interest rates do not necessarily lead to bubbles. One way I think about it is the following: if a firm came to you and said, "the reason I lost so money and did such a bad job is my workers decided they were willing to work at a low wages and that is why my profits were low and I messed up" what would you to the firm? You would say "what?!, you're complaining about low wages?" Well, what is the major input to banks and the financial system. It's capital. And they are complaining today, they're blaming the Fed because them gave capital at too low a price.

That kind of argument is itself a reason why we should be worried about the financial system. If they had done their job -- and they didn't -- if they had done their job, taken that low cost capital and allocated it well to fabricate factories or go into research, we could have been having a boom now all over the world. The money could have channeled to help developing countries, into high-return investments in developing countries.

So, the fundamental problem was that they allowed the banks to misallocate the capital and to channel it, didn't see the bubble was forming. Because they believed there was no such thing as bubbles. So, it was the failure of the Fed, but in its role as a regulatory authority, not in its role in failing to follow the Taylor rule."

I link the video here: