If You Laid Every Economist End-To-End...

The title of this blog is the beginning of an old joke that goes: If you laid every economist in the world end-to-end they would still not reach a conclusion. This joke came to mind as I was reading an article in the March 1, 2010 issue of Fortune magazine. It was written by Geoff Colvin and was titled: "Alan Greenspan Fights Back." Mr. Colvin basically wrote up an interview he had with Mr. Greenspan, focusing a lot of the effort on the hard economic times that resulted when the housing bubble burst.

The article refers to work done by John Taylor of Stanford University, a current friend and former co-worker of Greenspan. Taylor's analysis and publications portray the Federal Reserve Board actions under Greenspan's leadership to be misguided and those action created the disastrous housing collapse. Without going into too much detail, Taylor says that the Fed broke from a decades long practice by deviating from a long term economic management formula that was named after Taylor in 1993. The formula's inputs are the inflation rate, the target inflation rate, economic growth, and the economy's production capacity. By deviating from this long established, and highly successful formula, Taylor believes that the Greenspan Fed actually created the real estate boom and bust. His models show that if the Fed had stayed the course and continued utilizing the Taylor formula, housing starts would have stayed at about the late 1990s level and thus, no boom and no bust.

Greenspan, of course, disputes Taylor's work and the negative impact that the Greenspan Fed had on the economic crisis. His view is that the world changed, starting in 2002, where actions taken by the Fed were overwhelmed by the quickly growing economies like China that produced more wealth and savings then ever before.. This wealth had to go somewhere and a lot of it landed in the global real estate market, raising prices and depressing the cost of capital which made money cheaper which raised housing prices, etc.

Taylor comes back and dismisses this point to which Greenspan counters Taylor's counter point. Rather than hash out the details any further, as a layman, I have my observations:

• These are obviously two very smart people, that have dedicated their lives to understanding markets and economies and neither one of them saw this economic crisis ("This is a once-in-a-century event." - Greenspan quote) coming until it hit.
• After the crisis hit and data was available for post mortem analysis, they cannot not come close to agreeing on what the underlying cause was even though they are looking at the exact same data.
• Congress was no better. Congressman Barney Frank and Senator Chris Dodd, Democrats who chaired their respective Congressional committees regarding housing, never saw the crisis coming either until it hit them in the face.
• If two of the smarter economists in the country cannot agree on the root cause of the economic collapse, what chance does Congress have of understanding the root cause and enacting legislation to prevent it in the future? Given the track record of the political class, I would bet that chance is extremely low. Most of them are not trained economists, they are lawyers, so good luck with any productive regarding economic policy coming from them.

Maybe it is time for all of us, but especially the politicians, to admit that we cannot control the world from Washington because the world has gotten just too complex. You cannot have 400-500 lawyers sitting around debating some of these major issues (economic reform, health care overhaul, etc.) that are maybe just to complex to define, understand, or control. If Taylor and Greenspan cannot agree on a root cause of the housing crisis after the fact, then Obama and the rest of the D.C. mob are not going to be any more coherent in their understanding.

Rather than try to control the world, maybe the political class should try to make sure that the basics are in place and let us, the citizens, make our own decisions as we see the world and how the world affects us personally. In order to get the foundation put in place, the government would have to do the following basic but highly important basics:

• Get the national debt and deficit spending under control in order to insure all Americans are working with a fiscally sound currency.
• Get the national debt under control and deficit spending under control so that Americans could keep more and more of their wealth and use that wealth as they see fit, not as the political class sees fit. In this complex world, each of us has differnet needs, risk tolerances, and capabilities, let us decide how to function in the world based on our own points of view. 400-500 lawyers have no chance of getting that right for 300 million Americans.
• Re-instate the concept that this country allows you to be wildly successful and to wildly fail, the amount of wildness being up to the individual. If a company (e.g. Citi Bank, GM, etc.) or a government agency (e.g. Freddie Mac, Fannie Mae, etc.) fails miserably at what they do, there has to be repercussions and not salvation via taxpayer bailouts.

Fiscally sound currency, high retention of our wealth, and the knowledge that we can be as successful as we want individually, regardless of how complex the world is, would make for a better America for the ordinary person. As mentioned many times in "Love My Country, Loathe My Government," if we make the government significantly smaller and give them less to do, then maybe they can finally do some of the basic things right. Heavens knows that that is not the case today. If all of the polticians were laid end-to-end, they also would would not reach a conclusion but in the process they would waste a lot of money, divide the country, and bankrupt the currency. If Greenspan and Taylor cannot agree, the politicians will never agree, let us decide for ourselves.

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