Learning the wrong lessons

by Russ Roberts on October 3, 2008

in Growth

A nice piece by William Easterly in the WSJ on what poor nations learned from the myth of the Great Depression.

Comments

{ 14 comments }

SteveO October 3, 2008 at 2:07 pm

So, if you look at the stock market as a time machine, we just went back to January 2004.

SteveO October 3, 2008 at 2:20 pm

Correction, we're going to party like it's 1999. The stock market time machine actually went to April of 1999- that was the first 10,480 peak.

"Sherman, set the way-back machine to 1999"
"Gosh Mr. Peabody, are we going to visit Bill Clinton?"
"Pretty much, Sherman, pretty much…"

Per Kurowski October 3, 2008 at 2:54 pm

But what else can the developing countries think when you all keep on insisting that what we had were free markets?

A regulatory system that uses minimum capital requirements for banks based on the risk perceptions of the regulator and empowers some few agencies to measure these risks, is far from a free system, in fact, at its core, never before has the financial world been so regulated. You even set up AAA signs that guided so much capital flow into the lands of good mortgages to the subprime sector so that you completely distorted them into lousy mortgages to the subprime sector.

Are you afraid of telling the regulators they had no idea what they were up to trying to live our their teenage bedroom fantasies of a world without risks and banks never defaulting in their little mutual admiration club headquartered in Basel with the clubhouse of IMF in Washington?

At this moment the most urgent discussion is not about free markets or government interventions. At this moment what most needs to be discussed is transparency, truth and accountability.

In the Financial Times, "Brussels stiffens bank capital requirements", October 2, it is reported that there is legislation coming that will "require credit rating agencies to register and meet standards if they wish to operate in Europe." Does this mean that now, at long last, we will be able to really fully trust the credit rating agencies and follow them anywhere? Come on, are the regulators incapable of learning?

Hammer October 3, 2008 at 3:42 pm

Reasonably they could think "Wow, look at how well the Americans are doing compared to us!"
I mean, how much of a step up is a trailer in a park compared to a house made out of corrugated aluminium without water or HVAC? Fairly huge. It seems to me that most "leaders" of these countries just want an excuse to have more power, or at least are comfortable enough and isolated from their people enough that they really think the difference is not that great.

Crusader October 3, 2008 at 4:19 pm

Hammer – it's hammer time! U Cant touch this!

Martin Brock October 3, 2008 at 4:31 pm

Speaking of the wrong lessons … We saw the stock market tank after the House defeated the first bailout bill, so fearing further diminishment of our rents, we told our Congressmen to pass the second one, while CNN "explained" every market move in terms of the unquestionable assumption that "the market" wanted a bailout.

Now the deal is done, and the market didn't roar back. What's up with that? We didn't buy gains in our 401ks with this trillion bucks? I want my money back!

Oil Shock October 3, 2008 at 5:22 pm

Here is Bill Bonner ( that hilarious, libertarian gloom and doomer, writing about the ghosts of the Great Depression

Word on the street is that the pols are about finished Christmas treeing the bailout bill. The House of Representatives prepares to cast its historic vote today.

Here at The Daily Reckoning…we stand back…aghast…agog…paralyzed by the whole spectacle… from the lunatic assumptions of the credit bubble…to the solemn farce now taking place in the U.S. Congress.

Yes, dear reader, we are suffering from senselessness overload…the absurdities are coming too fast for us now; we can't keep up. We fear we are going into an irony-induced coma.

Could any scriptwriter have come up with such a preposterous story? Could any director have found such a clownish cast of characters?

It was only a few months ago that all the leading men and women of this drama claimed to believe in free enterprise so fervently they were willing to spend hundreds of billions of dollars forcing it on others. It was free enterprise that separated us from the barbarians and made the country rich, they said. But now, they're turning many of these free enterprises over to the bureaucrats to run…and desperately trying to make sure that the others don't go broke. It's capitalism without the creative destruction. Capitalism with seatbelts, helmets, and airbags. Capitalism without bankruptcy. It's like taking the crucifixion out of Christianity. What's left is as empty and foolish as a Congressman's head.

And then, it was only a few months ago that they were telling us that there was nothing to worry about…the subprime problem was contained…property prices had hit bottom…everything was fine. Really.

Then, two weeks ago, Ben Bernanke and Hank Paulson appeared before Congress and warned that if Congress didn't put up $700 billion of taxpayers' money pronto, the whole world economy could meltdown. Ben Bernanke, former head of the economics department at Princeton, and now head of the world's biggest banking cartel – the Fed – told the politicians:

"If we don't do this, we may not have an economy on Monday."

Of course, this alarm turned out to be as silly as his previous assurances. Monday came. The economy still functioned. And Congress got to work – Christmas treeing the bailout bill.

SteveO October 3, 2008 at 5:37 pm

I love the idea of "capitalism with seatbelts, helmets, and airbags".

Reminds me of the Gordon Tullock Airbag ™. A six inch spike coming straight out of the stearing wheel. Everyone would drive REALLY safely then. As it is, airbags and safety features led to an increase in wreckless driving.

Same with the economy, without the role of pain in the market place, we'll keep touching the stove. The worst part is, no one is even mentioning Barney Frank, Christopher Dodd, Maxine Waters, and Franklin Raines going to jail.

Congress will be emboldened to lean on private companies to enforce the next "social good" they get in their heads.

Martin Brock October 3, 2008 at 6:39 pm

As it is, airbags and safety features led to an increase in wreckless driving.

I doubt it, but I love the Gordon Tullock Airbag. Can I get one?

Oil Shock October 3, 2008 at 6:44 pm

Same with the economy, without the role of pain in the market place, we'll keep touching the stove. The worst part is, no one is even mentioning Barney Frank, Christopher Dodd, Maxine Waters, and Franklin Raines going to jail.

that will definitely be a day to celebrate.

SteveO October 4, 2008 at 1:01 am

Martin,

Much like hockey helmets, I don't think anyone individually wants a Tullock airbag. But of course we should mandate EVERYONE has one. =)

The airbag mandate leading to actuarial data on increased damage was mentioned in one of the EconTalk podcasts. I believe they were agnostic about human damage- at the time I found a reference that it had increased, but I cannot remember it.

matty in frankfurt October 4, 2008 at 5:14 am

That WSJ piece is depressing! "Development" is so frustrating. Ethiopia is always on the cusp of famine – hardly surprising when the country has no private sector.

Martin Brock October 4, 2008 at 7:56 am

The airbag mandate leading to actuarial data on increased damage was mentioned in one of the EconTalk podcasts.

Correlation is not causation. What else happened at the same time? The population aged maybe? We started driving more top-heavy SUVs? More cell phones and similar distractions? All of these factors explain a rise in automobile accidents better than "I've got an air bag now, so what the hell. Let's drive into that tree and see what happens."

The theory is laughably implausible on its face. It suggests that nothing ever gets any safer, which clearly isn't true.

It is possible that accidental deployments and similar events could cause accidents, but that's not the same theory.

vidyohs October 4, 2008 at 9:31 am

Thank you Russ Roberts for again pointing out that it is indeed possible for a society to have a majority in opinion and all of those be dead wrong. Once again we see that it is possible for a person to be highly educated and be dead wrong in opinion. It is possible for a person to be filthy rich and be dead wrong. It is possible for a person to have ultimate power and be dead wrong. It is possible for a person to be highly intelligent and be dead wrong.

I am not in the majority, not highly educated, not filthy rich, have no power, but I am intelligent enough to know that I am absolutely correct when I state that "Government is the enemy, always has been the enemy, always will be the enemy, and we do best when we have least."

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