Posner becomes a Keynesian

Richard Posner writes in the New Republic about how he became a Keynesian. Worth reading, despite his confusion over the difference between savings and investment. Perhaps the problem is Posner's inability to use the word equilibrium condition. For Keynes point was that savings equals investment in equilibrium and that changes in income bring this about. Without this the article is confusing about passive and active investment and so on.

I need to write more about the contribution of Keynes to understanding this crisis.

Posner on Lucas

Posner has an excellent post rebutting Lucas's article in the Economist. It is particularly interesting for his rebuttal of Lucas's revisionist history.

Lucas says in his article in the Economist that the Federal Reserve saved the day by pumping cash into the banking system and persuading the Treasury Department to do likewise. He does not mention the other measures taken by government. He praises Ben Bernanke, the chairman of the Fed, for having "formulated contingency plans ready for use when unforeseeable shocks occurred." In fact the Fed had no contingency plans for the housing and stock market shocks that rocked the economy. Its response when the shocks hit with full force last September was prompt, but also improvised and spasmodic--hence the failure to bail out Lehman Brothers, a failure that deepened the financial crisis by seizing up the commercial paper market.

The more important criticism that Posner makes is that Lucas, and Fama, so discounted the likelihood of asset bubbles that they ignored the consequences that they could have. The leap from efficient markets to no bubbles is a big leap.

The reason for the surprise was that leading macroeconomists and financial economists had believed until last September that there could never be another depression, that asset bubbles are a myth, that a recession can be more or less effortlessly averted by the Fed's reducing the federal funds rate, that the international banking industry was robust, and that our huge national debt was nothing to worry about, nor our very low personal savings rate. All these beliefs have turned out to be mistaken, along with extreme versions of the rational expectations hypothesis, the efficient-markets theory, and real business cycle theory.

The whole post is worth reading, as is Posner's book, A Failure of Capitalism, which I will comment on soon.

Born Again Keynesians

Posner has an interesting post on his blog criticizing born-again Keynesians, like Paul Krugman for ignoring their Keynes. The point is that uncertainty causes businessmen to hoard, which reduces investment and prevents recovery. His point is that the Obama health care plan, which Krugman, endorses, will create more uncertainty.

Posner quotes Keynes:

Keynes warned President Roosevelt in an open letter of December 31, 1933, about trying to combine far-reaching reform with recovery from an economic depression. He wote that

even wise and necessary Reform may, in some respects, impede and complicate Recovery. For it will upset the confidence of the business world and weaken their existing motives to action, before you have had time to put other motives in their place...And it will confuse the thought and aim of yourself and your administration by giving you too much to think about all at once.

The passage that I have italicized deserves particular emphasis (though Keynes's warning that "it will confuse the thought and aim of yourself and your administration by giving you too much to think about all at once" is equally timely) because of the strange turn that the debate over health reform has taken in recent days.

Posner, if you read his book on Failure of Capitalism, is more of Keynesian than most liberal Keynesians.