Saturday, December 19, 2009

Paul Samuelson Spoke (Part 1)

On Harvard star professor, Greg Mankiw and Ben Bernanke:

Samuelson: ..."The 1980s trained macroeconomics -- like Greg Mankiw and Ben Bernanke and so forth -- became a very complacent group, very ill adapted to meet with a completely unpredictable and new situation, such as we've had. I looked up -- and by the way, most of these guys are MIT trained; Princeton to MIT or Harvard to MIT -- Mankiw's bestseller, both the macro book and his introductory textbook, I went through the index to look for liquidity trap. It wasn't there!.."

Footnote: [Liquidity Trap is a technical term describing an economy when very low interest rates, like today, do not give the economy the boost it needs to revive from a serious recession. Not even zero rate of interest. It happened in Japan in the 80's and it is happening now in the US today. The "trip" is so identified with John Maynard Keynes who became intellectual poison in the States after the "monetarist revolution" led by Milton Friedman that even Mankiw threw it out from his best selling textbook}

..."And I looked up Bernanke's PhD thesis, which was on the Great Depression, and I realized that when you're writing in the 1980s, and there's a mindset that's almost universal, you miss a lot of the nuances of what actually happened during the depression"...

On Milton Friedman:
Samuelson: ..."Milton Friedman. Friedman had a solid MV = PQ doctrine from which he deviated very little all his life. By the way, he's about as smart a guy as you'll meet. He's as persuasive as you hope not to meet. And to be candid, I should tell you that I stayed on good terms with Milton for more than 60 years. But I didn't do it by telling him exactly everything I thought about him. He was a libertarian to the point of nuttiness. People thought he was joking, but he was against licensing surgeons and so forth. And when I went quarterly to the Federal Reserve meetings, and he was there, we agreed only twice in the course of the business cycle...

...When the economy was going up, we both gave the same advice, and when the economy was going down, we gave the same advice. But in between he didn't change his advice at all. He wanted a machine. He wanted a machine that spit out M0 basic currency at a rate exactly equal to the real rate of growth of the system. And he thought that would stabilize thing"...

Samuelson: ..."Milton Friedman had a big influence on the profession -- much greater than, say, the influence of Friedrich Hayek or Von Mises. Friedman really changed the environment. I don't know whether you read the newspapers, but there's almost an apology from Ben Bernanke that we didn't listen more to Milton Friedman.

But anyway. The craze that really succeeded the Keynesian policy craze was not the monetarist, Friedman view, but the [Robert] Lucas and [Thomas] Sargent new-classical view. And this particular group just said, in effect, that the system will self regulate because the market is all a big rational system.

Those guys were useless at Federal Reserve meetings. Each time stuff broke out, I would take an informal poll of them. If they had wisdom, they were silent. My profession was not well prepared to act"...


Well, it was about the worst form of prediction that various people who ran scores on this -- and I remember a very lengthy Boston Federal Reserve study -- thought possible. Walter Wriston, at that time one of the most respected bankers in the country and in the world fired his whole monetarist, Friedmaniac staff overnight, because they were so off the target....


Footnote: [Rational Expectationistas swept the Nobel Prizes in th 80's: Lucas, Prescott and at least 2-3 others who leveraged off the idea that the "market", meaning you and me and all our uncles and nephews, are so rational that no government actions or temporary anomalies can fool us. Hence, the market quickly if not instantaneous will correct itself requiring no one to set it right. This became a mantra that had real world consequences. Under the last Bush administration, SEC deliberately took its eyes off regulations on the notion that the "market" being rational would police itself to rid off whatever that was needed to be regulated. Self regulation was implicit in a rational market ideology. Christopher Cox, ex Chair at SEC admitted himself that was his belief. Ditto Alan Greenspan]

On Greenspan:

..."And this brings us to Alan Greenspan, whom I've known for over 50 years and who I regarded as one of the best young business economists. Townsend-Greenspan was his company. But the trouble is that he had been an Ayn Rander. You can take the boy out of the cult but you can't take the cult out of the boy. He actually had instruction, probably pinned on the wall: 'Nothing from this office should go forth which discredits the capitalist system. Greed is good"...

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