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Daily commentary: On teaching economics

There has been a lot of back and forth in the financial and economics blogosphere about the centrality of financial institutions and their facilitation of private debt accumulation leading up to the Great Financial Crisis. Some people like Paul Krugman are apparently still of the view that banks don’t really matter when you model an economy despite the financial crisis. He also says:

So, first of all, my basic reaction to discussions about What Minsky Really Meant — and, similarly, to discussions about What Keynes Really Meant — is, I Don’t Care. I mean, intellectual history is a fine endeavor. But for working economists the reason to read old books is for insight, not authority; if something Keynes or Minsky said helps crystallize an idea in your mind — and there’s a lot of that in both mens’ writing — that’s really good, but if where you take the idea is very different from what the great man said somewhere else in his book, so what? This is economics, not Talmudic scholarship.

I’m not impressed. It seems to me that the economics profession had a hand in this given economists were almost uniformly unable to foresee the crisis. We relied on them for economic counsel and forecasts and they failed. The right approach in dealing with such a fantastic failure would be to re-examine their models. Two years ago, I was saying:

Nobel Prize winning economist Paul Krugman took a stab at explaining why economists didn’t anticipate the worst financial crisis in three-quarters of a century. His was a long piece, taking up eight pages and 6,000 words at the New York Times website…

[…]

Yet, I couldn’t help but notice that Krugman mentioned the word debt only twice in 6,000 words. In fact, it is in the very passage above where Krugman uses the term for the only time in the entire article. And here Krugman refers to government debt; no mention of private sector debt whatsoever.  I have a problem with that.

Now, Krugman is telling us basically the same thing when he says that banks are not in his economic models of the economy. I am blown away.

Anyway, there’s a Room For Debate article at the NT Times where Krugman writes that explores what economics people should be teaching us about the economy. Take a look and see if any of it makes sense.

That’s it. Here are the links.

  • What I Didn’t Learn in Introductory Economics – Room for Debate – NYTimes.com
  • Can the US consumer keep spending? – David Llewellyn-Smith

    I find it hard to believe that the US consumer will give up saving again having been through the GFC but higher consumer confidence on improved employment prospects and an inflating stock market may be enough to keep this trend running.

  • FRB: FOMC Minutes, March 13, 2012

    To support a stronger economic recovery and to help ensure that inflation, over time, is at the rate most consistent with its dual mandate, the Committee expects to maintain a highly accommodative stance for monetary policy. In particular, the Committee decided today to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that economic conditions–including low rates of resource utilization and a subdued outlook for inflation over the medium run–are likely to warrant exceptionally low levels for the federal funds rate at least through late 2014.

  • Paul Krugman vs. MMT: The Great Debate – CNBC

    There’s a tremendously important debate being waged across a bunch of different websites, including Paul Krugman’s at The New York Times, about how banking really works.

  • Why Ngozi Okonjo-Iweala Wants to Run the World Bank – NYTimes.com

    From 2007 to 2011, Ms. Okonjo-Iweala was a managing director of the World Bank, working directly under its current president, Robert B. Zoellick. Earlier, she held a number of leadership positions in the Nigerian government. She has a doctorate in regional economic development from the Massachusetts Institute of Technology.

  • The truth about all those excess reserves | The Economist

    For the Federal Reserve, as with most central banks, reserves ordinarily serve only one purpose: to help it establish a target interest rate. In ordinary times, some banks have more reserves than they need and lend them to those that have too little. The rate on those interbank loans is called the fed funds rate. If the Fed wants a higher fed funds rate, it drains reserves. If it wants a lower one, it adds reserves. The quantity of reserves, per se, is irrelevant to the Fed.

  • Keen, Krugman and National Accounting « Real-World Economics Review Blog

    Steve is right, at least in a technical sense. His concept is entirely consistent with National Accounting which means that Paul Krugmans endeavour to debunk it by using phrases like mysticism is bonkers.

  • The Slack Wire: The Case of Keen

    Honestly, it sometimes feels as though Steve Keen read a bunch of Minsky and Schumpeter and realized that the pace of credit creation plays a big part in the evolution of GDP. So he decided to theorize that relationship by writing, credit squiggly GDP. And when you try to find out what exactly is meant by squiggly, what you get are speeches about how orthodox economics ignores the role of the banking system.

  • The Keen/Krugman Debate: A Summary « Unlearning Economics

    Paul Krugman and Steve Keen have been debating endogenous versus exogenous money – as well as some other issues – for the past few days. The debate appears to have drawn to close, so here I offer a summary for those who can’t see the wood for the trees.

  • Women voters surge to Obama – FT.com

    The gender gap recorded by USA Today mirrors other recent polls and reflects a longstanding Democratic lead with women, who are generally more favourable to an activist government and voted strongly for Mr Obama in the 2008 election.

  • Norway $610 bln wealth fund to cut Europe exposure | Reuters

    Total European investment to be cut to 41 pct from 54 pct

  • SEC Probes Groupon – WSJ.com

    The Securities and Exchange Commission is examining Groupon Inc.’s GRPN -16.89% revision of its first set of financial results as a public company, according to a person familiar with the situation.

  • DAX Beating S&P 500 by Most Since ’06 on Economy Optimism – Bloomberg

    The DAXK Index, a German equities gauge that strips out gains from dividends, has surged 19 percent in 2012 after sinking to the cheapest valuation in at least six years last year. That’s the largest advance since 1998 and 6.3 percentage points more than the Standard & Poor’s 500 Index (SPX)’s increase, data compiled by Bloomberg show.

  • Is Paul Krugman A Verticalist?
  • Spain’s Severity is Not Sustainable « naked capitalism
  • France’s future: A country in denial | The Economist

    By ignoring their country’s economic problems, France’s politicians are making it far harder to tackle them

  • FT Alphaville » Eurozone manufacturing looking glum

    Eurozone manufacturing PMIs were out Monday morning making a sad frowny face, with the earlier flash estimate of 47.7 confirmed for March. The composite output index, that also contains services activity, had a flash estimate of 48.7. Confirmation or revision of the flash composite, and services, will be out on Wednesday.

  • "Rajoy necesita toda la suerte del mundo", según The Wall Street Journal – elEconomista.es

    Por tanto, "demasiadas cosas se acumulan para la capacidad de Rajoy de minimizar el impacto de la austeridad sobre la economía nacional", señala el periódico, que sentencia afirmando que el Presidente "necesitará toda la suerte del mundo".

  • About 

    Edward Harrison is the founder of Credit Writedowns and a former career diplomat, investment banker and technology executive with over twenty years of business experience. He is also a regular economic and financial commentator on BBC World News, CNBC Television, Business News Network, CBC, Fox Television and RT Television. He speaks six languages and reads another five, skills he uses to provide a more global perspective. Edward holds an MBA in Finance from Columbia University and a BA in Economics from Dartmouth College. Edward also writes a premium financial newsletter. Sign up here for a free trial.