A Shallow Review of “Meltdown” by Herbert Gintis
On 7/19/2010 Barry Ritholtz, published a scathing review of Tom Woods recent book, Meltdown, by Prof. Prof. Herbert Gintis which briefly details why Austrians predicted the crash and also why the believe they know why it occurred.
Gintis showed utter lack of understanding of Austrian economics and history in general however I don’t really care to waste my time tearing his argument apart. I am sure some of my pales over at the Von Mises Institute will do that for us much better than I can. When they do I will post the link on our blog.
I would like to share his prognosis as to how we can fix economics, which he provides at that the end of the review:
“I think it likely that macroeconomics will not become scientifically presentable until we realize that a market economy is a complex dynamic nonlinear system, and we start to use the techniques of complexity analysis to model it. I present my arguments in Herbert Gintis, “The Dynamics of General Equilibrium”, Economic Journal 117 (2007):1289-1309.”
I get it, the evidence is not presentable because economists do not understand that they need to create dynamic models that are more complex… Whew, now that we know that, we can have all of our economist stop building those “linear” models and get to work creating dynamic super models that will keep the economy in less volatile state. Geez, how come all of you economists didn’t realize the economy dynamic and complex?
Barry claims that Fannie and Freddie were not the cause of the housing crisis because prices rose globally but Barry, didn’t all the countries that had housing booms have similar versions of Fannie and Freddie in some form (tax break’s, FHA loans etc.)? I am not saying that Fannie and Freddie caused the crisis solely but they encouraged malinvestment along with artificially low interest rates.
Gintis claims that there is little evidence out there that the Austrian theory works however I do not concur on that point. There is a ton of evidence out there about GNP growth (or the equivalent there of) under the gold standard going back hundreds of years. See Murray Rothbard’s, “A History of Money and Banking in the US, Part one, pg 159, The Gold Standard Era With the National Banking System. Despite what the history books say, it was one of the most prosperous times for this country. Low unemployment, falling prices, rising real national product (3.7% per annum), and skyrocketing productivity.
Mr. Hickey, please chime in. I think, at least you must have cracked open Economics in One Lesson or The Theory of Money and Credit, or one of my personal favorites, the introduction the American’s Great Depression (written by Joe Salerno).
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I published that because I found the book meltdown filled with squishy thinking and no empirical evidence.
Incidentally, I’ve written extensively about why the Fannie/Freddie argument doesn’t hold water:
Get Me ReWrite!
http://www.ritholtz.com/blog/2010/05/rewriting-the-causes-of-the-credit-crisis/
Fannie Mae/Freddie Mac Thought Experiment II
http://www.ritholtz.com/blog/2010/04/fannie-maefreddie-mac-thought-experiment-ii/
Fannie & Freddie: Chasing Profits, Market Share
http://www.ritholtz.com/blog/2010/06/fannie-freddie-chasing-profits-market-share/
Fannie And Freddie And the Backdoor Bank Bailout
http://www.ritholtz.com/blog/2010/05/fannie-and-freddie-and-the-backdoor-bank-bailout/
@Barry Ritholtz
I have read Bailout Nation, listened to your interview on Econtalk with Russ Roberts and am a frequent reader of the Big Picture Blog. I am aware of your rationale. I just disagee with the way you state your conclusions athough I feel like we probably would agree on most points.
Here is an article from the Von Mises Institute in 2004 essentially agreeing with your point that FNM/FRE did not cause the crisis before it actually happened. http://mises.org/daily/1463 Rather they are symptons of what happens when governments the control money and restrict liberty. So, yes cause is not the correct term.
Get Me ReWrite point one: “Free market absolutism”. The Fed (referring to both the House/Executive branch and the Federal Reserve) controls the money supply, manipulates interest rates, and pushes capital into investments (Fannie Freddie, BABs, Treasury’s, STOCKS because interest rates are at close zero etc). How is this a free market? What you consider a free market, Austrians consider Socialism (or as Ron Paul says..Corporatism….they are one in the same in the end.).
Sure Meltdown was Austrian Economics for beginners but can you provide an expample of what you mean by “squishy”.
Rothbard provides much more conclusive data over and over exhibiting how artificial time preferences for money, low or high (otherwise known as interest rates)cause booms and busts (America’s Great Depression, The History of Money and Banking).
The Constitution as written was an attempt to prevent such restrictions of liberty and ultimately foster true capitalism. I just don’t see how you can say the crisis was based on “unrestricted” capitalism. If you consider the post WWII era to be a period of increasing capitalistism? I see the period as the hallmark of the erosion of capitalism. Since the 1929 we have seen nothing but the government dictating where capital should formed.