A Nobel Rant

A Nobel Prize means that you did something really well appreciated. With hindsight, some of these are found positively harmful (note Edgar Moniz's Nobel for the lobotomy), and many are just irrelevant (what great insights today do we use from, say, Myrdal, Leontief, or Lewis?). Unfortunately, it is the best brand name in academia, so Krugman speaks over at the NYTimes with absolute certainty about what low-minded idiots we are for not agreeing with him:

When I first began writing for The Times, I was naïve about many things. But my biggest misconception was this: I actually believed that influential people could be moved by evidence, that they would change their views if events completely refuted their beliefs.

It couldn't be that he is not correct, or insufficiently persuasive.

America emerged from the Great Depression with a tightly regulated banking system. The regulations worked: the nation was spared major financial crises for almost four decades after World War II.

Post Hoc ergo Propter Hoc is ok if you have a Nobel. A lot of things were unique to that period: Jim Crow laws, the Korean War, fear of nuclear death, Elvis...I suppose they all caused the prosperous 1950s. I'm not sure what, specifically, he thinks was a good policy: the separation of Investment Banking from commercial banking? That has been shown irrelevant looking at cross-country analysis, and even in this latest crisis, it was not investment/commercial bank hybrids that did much different. Perhaps he's talking about the various Securities acts of 1934 and 43, which basically made brokers sign statements with their addresses, and noting they understood parochial laws that forbid stealing and fraud (who knew?).

The first big wave of deregulation took place under Ronald Reagan — and quickly led to disaster, in the form of the savings-and-loan crisis of the 1980s.

The economy is a big, complex thing. To blame the S&L crisis on Reagan is like blaming WW2 on Franklin D. Roosevelt. Its long history, from the Depository Institutions Deregulation and Monetary Control Act of 1980, to the Garn–St. Germain Depository Institutions Act of 1982, to Tax Reform in 1986, created a problem that was not anticipated by either party very well. But they started in the Carter administration.

In a memorable 2003 incident, top bank regulators staged a photo-op in which they used garden shears and a chainsaw to cut up stacks of paper representing regulations.

And the bankers — liberated both by legislation that removed traditional restrictions and by the hands-off attitude of regulators who didn’t believe in regulation — responded by dramatically loosening lending standards.

He seems to forget that the regulators were actually punishing banks that did not lower their standards sufficiently. To meet Community Reinvestment Act goals, and goals set forth at the Justice Department, banks had to get more loans into minority groups, and the easiest way to do that was to lend with no money down based on the incorrect, but widely held assumption that housing prices, in aggregate, would not go down. Regulators were encouraging this, so to the degree there would have been 'more regulation', it would have only been worse.

In part, the prevalence of this narrative reflects the principle enunciated by Upton Sinclair: “It is difficult to get a man to understand something when his salary depends on his not understanding it.”

To Krugman, it's all about good guys and bad guys. He and his ilk are good guys, who are for helping humanity, seek what is true. Those who disagree with him are selfishly motivated (unlike, say, union members or bureaucrats), or plain stupid.

But he's really smart! He has a Nobel prize!