Tuesday, November 20, 2007

Samuelson's Prescription

Paul Samuelson has done more harm to economic literacy through his Keynesian textbooks than even Keynes himself. He provides a textbook example of Keynesian meddling in this article in the IHT. His first mistake and his political affiliation is on display in the first sentence:

All through the years of the Great Depression, Wall Street publicists and President Herbert Hoover would repeatedly declare: "Recovery is just around the corner."

I don't have a problem with the part about Wall Street publicists but I find it interesting that he associates Hoover with the Great Depression rather than Roosevelt. Hoover certainly should share the blame for getting the Great Depression off to a roaring start, but Roosevelt was President during the worst of it and unquestionably prolonged the agony with his intrusive economic policies. I guess Samuelson just couldn't bring himself to criticize the icon of Democratic politics.

I love the hubris in this line:

Today, central bankers and U.S. Treasury cabinet officers cannot know whether current interest rates are too high or too low. This is surprising, but true.

Surprising? This would imply that there was a time when central bankers could know the proper level of interest rates. How exactly were they able to do that? And why can't they do it now?

His prescription for recovery is pure Keynes:

The situation is not hopeless. New, rational regulations that discourage predatory lending and rash borrowing could help a lot. Also, as we learned during the Great Depression, the government's treasury and its central bank must be both the lenders of last resort and the spenders of last resort. Speculative markets will not stabilize themselves.

Ah yes, spenders of last resort. That worked so well during the Depression. For a modern example, see Japan over the last 15 years.

And check this out:

Watch developments closely. If America's Christmas retail sales fail badly - as they could when high energy prices and high mortgage costs pinch consumers' pocket books - then be prepared to accelerate credit infusions by central banks on the three main continents.

Keep in mind threats of excessive inflation. But be aware that the skies will not fall if the price-level indices blip up from 1.9 to 2.6 percent per annum. What worsens the public's expectations about price instability are excessive spikes in the cost of living.

So the solution to a problem that developed because of excessive credit should be solved with -- more credit? And a little inflation never hurt anyone. Well not much anyway.

And on a day when Freddie Mac reports a loss of billions, Mr. Samuelson would have us expand the ability of Fannie and Freddie to lend more:

This suggests expanding in a controlled way the lending powers of quasi-public agencies such as Fannie May and Freddie Mac. Better that they should lose a bit when they help homeowners of modest means fend off foreclosures on their onerous mortgages.

It would seem that Freddie has already lost "a bit" as have the shareholders of these hybrid market/government cesspools of corruption.

How can this man have written the economics textbook used to teach the majority of adults in this country? I think the economic illiteracy of the average American has been explained.

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