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Stiglitz on the Current Crisis December 10, 2008

Posted by A Texan In Grad School in Economic Theories, Friedman.
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Nobel-laureate Joseph Stiglitz gives his account of the financial crisis in Vanity Fair.  He has some interesting ideas, but I think most of them don’t hold up.  His main claim is that markets, especially financial ones, require a lot of regulation.  Stiglitz singles out Greenspan quite a bit for the bubble.  No doubt, the low interest rates that Greenspan presided over were a huge factor in the housing bubble.  As Lawrence White points out at Cato Unbound,

Credit-fueled demand both pushed up the sale prices of existing houses and encouraged the construction of new housing on undeveloped land. Because real estate is an especially long-lived asset, its market value is especially boosted by low interest rates.

But Stiglitz doesn’t see this as an argument for Friedman Monetarism, rather, as is typical of modern liberal thought, Stiglitz believes that if only the right person was in charge.  Stiglitz leaves out any idea that Public Choice Theory may explain that politics doesn’t really do a better job than markets – even market failures.


Milton Friedman and EMH November 19, 2008

Posted by A Texan In Grad School in Economic Theories, Friedman.
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I recently attended a symposium at Chapman University titled “What Would Milton Friedman Do?”  David Friedman was one of the panel members and he relayed a common argument of his father’s regarding efficient markets.  I found a version of the story here at the Philly Fed:

Milton Friedman in comments he made about the Mexican peso market of the early
1970s. At that time, the exchange rate between the U.S. dollar and Mexican peso was fixed, as it had been since 1954. At the same time, the interest rate on Mexican bank deposits exceeded the interest rate on comparable U.S. bank deposits. This situation might seem like a flaw in the financial markets, since investors could borrow at the low interest rate in the United States, convert dollars into pesos, deposit the money in Mexico and earn a higher interest rate, then convert the proceeds back into dollars at the same exchange rate and pay off their borrowings,
making a tidy profit. Friedman noted that the interest rate differential between Mexico and the
United States must have reflected financial market concerns that the peso would be devalued.
Otherwise, the interest-rate differential would soon disappear as investors increasingly took
advantage of it. In August 1976, those concerns were justified when the peso was allowed to float against the dollar and its value fell 46 percent.