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What Robert Hetzel thinks went wrong and when he thinks it went wrong

One of my understandings of the current financial mess that the world is in concerns when the various contending diagnosticians think that the rot set in. The earlier the more Austrianist, seems to be the rule.

Instapundit recently linked to a piece by James Pethokoukis concerning the diagnosis offered by Robert Hetzel.

Hetzel thinks the problems only got seriously serious around 2008. Until then, it had been a bit up and down, but nothing that bad. But then, in 2008, the Fed, and central banks the world over, adopted money supply policies that were too restrictive. By not creating enough more money at that moment, the Fed turned a little temporary difficulty into a far bigger difficulty.

I’m not an expert on this stuff, but this is similar to what Milton Friedman et al said about what triggered the Great Depression, is it not? Hetzel is, I presume, some kind of Friedmanite Monetarist. He reckons he knows exactly how to skipper the nationalised industrial ship that is money. I reckon he doesn’t.

For if Detlev Schlichter and the other Austrianists are right (I think they are), the rot set in a long, long time before 2008. The idea that, if things had been handled just that little bit more deftly in 2008 all could have been well – bar a slight bump or two – is just wrong. The world by then was full of bad investments, and these investments were – are – going to have to be liquidated if the world economy is ever going to start motoring again. Encouraging even more bad investment, which is what Hetzel is saying should have been done, would only have made the grief still to come that much more grievous.

Whether James Pethokoukis agrees with Hetzel with anything resembling the vehemence with which I disagree with Hetzel, I do not know. Perhaps he just wants an excuse to blame everything on President Obama.

But if the Austrianists are right (they are – reprise), it goes way back, to Nixon and before, to the very creation of central banks as a means of sucking wealth out of economies (traditionally to wage war) without people getting the chance to complain too loudly in some sort of parliament. The idea that Obama, or for that matter George W. Bush, could have entirely solved the world’s present financial problems, i.e. solved them without any political grief, is absurdly mistaken. They could make it worse and they both did, with only a bit less Hetzelism than Hetzel now thinks they should have perpetrated. The idea that, with one Hetzelian bound, they could have freed us all from any grief is crazy.

As is the idea that dumping Obama and replacing him with someone less malevolent, anti-American, socialistic, Christian, atheist, Muslim, environmentalist, Chicagoan, incoherent, lazy, golf-loving, devoted to black magic (take your pick), will fix everything.

In my opinion dumping Obama would be better than not dumping him. But doing this could merely be the difference between jumping off the cliff instead of sliding down it.

30 comments to What Robert Hetzel thinks went wrong and when he thinks it went wrong

  • Laird

    My heart and mind are with Schlichter. But my money is (quite literally, since I really have no other option) is unfortunately with Hetzel and the Keynsians. More monetary expansion and faux stimulus is also the remedy prescribed by Doctor Krugman, by the way. Enough said?

    But as to that cliff, I’d rather take my chances with the slide, thank you.

  • RRS

    It is passing strange that so little notice is given to a major factor in Western (developed) Economies.

    That is, the long-term trend of decline in return on capital – the “ability” of capital to “earn.”

    In large enterprises, the Return on Assets (ROA) and the Return on Invested Capital (ROIC) are now down to around 1.3%, which is about about 25% of the levels of 45 years ago.

    There was an “up-peak” in late 2006-07 to around 3% from a 1.2% level in 2001.

    Still enterprises continue to consolidate (get larger), continue to accrete assets (retained earnings or surplus), despite the effects of declining abilities to increase the rate of earnings from the increased asset bases.

    Those issues are far more fundamental to the expansion of economies than are the monetary issues.

  • Alsadius

    The argument about the Depression is rarely phrased as a money-supply collapse starting the Depression – everyone agrees that the stock-market crash kicked off proceedings(though I’ve heard an interesting argument that the crash was kicked off by Congressional discussions of what eventually became the Smoot-Hawley tariff). The argument about money is that the money supply tanking was a serious aggravating factor, which seems pretty hard to deny, and which is certainly a lot closer to reality than “Capitalism was just rotten and failing”. Tariff wars played their part as well, as did bank collapses.

  • Alsadius

    That said, anyone who claims the problem started in 2008 is crazy. There was too much rot in the system by then – something needed to happen to clean up all the bad loans.

  • John K

    I feel the rot set in the day FDR was elected. Once the virus of socialism is in the system, it never lets go. We now have a situation where 40 million Americans are on food stamps, and the healthcare sector is under effective government control. If that was constitutional, then the US Constitution doesn’t mean a whole lot nowadays.

  • Look at asset prices, and look at ratios comparing the price to earnings of stocks, and the ratio of mortgage sizes to people’s incomes, rental yields of commercial real estate, and stuff like this.

    There was nothing terribly unprecedented about a lot of these prior to the mid 1980s. Some where high at times, but not dramatically so compared to highs of previous cycles. Then we had a bust in the early 1990s, followed by various further asset bubbles after that. You can blame things further back as causes if you want, but in the mid 1980s (and possibly again, briefly, in the early 1990s) if those causes had been reversed and the bubbles that existed then fully deflated, I think we would have been subsequently okay. However, from then until about 2007 (and after, in a different mood perhaps) the response to any kind of downturn was to inflate everything further and cause more and more speculative booms. The proponents of the “Things only went wrong in 2008 because we failed to do this in the way we did in 1993 and 2002” school of thought are in lala land, but they still don’t even seem to realise this.

    Or to put it a different way, a hard landing in 1988 or 2003 might not have been much harder than previous hard landings, rather than the burning up in the atmosphere as we fall from Mars landing we have to have now.

  • RRS

    To amplify MJ:

    Take a look at assets by (at least) two classifications:

    Non-Productive, created for use or consumption, homes, rec vehicles, collectibles, etc.

    Productive created (assembled) to produce additional goods and services (for consumption) or for distribution functions.

    Consider the relative weighting of the increases (decreases) in “costs” (hour s of efforts to obtain) each class during any periods.

    Consider also the “transferability” of the assets (assumed durable) in each classification.

    Much time is given to punditry about “productivity” which is generally limited to output/manhours or output/labor cost.

    No time is given to the productivity of productive assets (capital) output/assets. Until that latter issue is dealt with (not just nattered about) there will be no expansion or growth.

  • PersonFromPorlock

    For those who prescribe for us all, yet get paid whether they’re right or wrong, I suggest the Lord Vetinari approach to failure: upside down in the scorpion pit, facing a sign which reads “Do better.”

  • JohnB

    Do you really have to ask?

    No you don’t, because you, kind of, agree with the Austrian position.

    But forget the labels.

    It is just plain obvious common sense.

    Contravening the simple process of reality (done in order to steal the wealth) has bankrupted the system.

    And the system is now all but global.

    If anyone is seriously confused (which I have to doubt) this is a quite a good recent article that looks at the confusion.

  • Snorri Godhi

    I had a cursory glance at the Pethokoukis piece and was wondering what an Austerian more knowledgeable than myself would make of it. I am glad to see this blog post. (Confirmation bias.)

    However there is one issue that needs to be addressed: supposing that you get to power in a 2008-type situation, controlling both monetary and fiscal policy, what should you do to minimize the damage?
    Saying: it’s all Nixon’s and FDR’s fault, doesn’t even begin to address this issue.

    Perhaps [Pethokoukis] just wants an excuse to blame everything on President Obama.

    Actually Pethokoukis blames Bernanke, not Obama.

  • Alisa

    ‘Austerian’? Typo or not – I’m stealing it:-)

  • Tedd

    …what should you do to minimize the damage?

    That’s an interesting question. But it reminds me of what happened all too often in my consulting business. “Okay, we did all the things you said we shouldn’t do, and now we’re in the bind you said we’d be in if we did. What should we do?” Believe it or not, you can actually lose credibility in someone’s eyes when they ask you that and you don’t have the solution to their problem.

  • Alisa

    Well, you could tell them to begin by stopping doing the thongs that got them into the bind in the first place, and instead doing the things they should have been doing long ago. It will not solve the problem, but it just may keep it from getting worse.

    Of course, in this case no one is *really* asking.

  • PeterT

    facing a sign which reads “Do better.”

    I would prefer “Don’t do”

  • Snorri Godhi

    Alisa: I myself “stole” it from Krugman. I dislike “Austrianist” because I don’t want to be ruled from Vienna, and I am not “Austrian” because, like Obama, I don’t speak Austrian.

    Tedd: if they paid for your advice BEFORE doing all the things that you said they shouldn’t do, then they are the people losing credibility; if they hire you now, then you have to deal with their current problem, not with their previous problems.
    The same with US voters: they voted Keynesians into office, now if Austerians want to replace them, then they have to offer solutions to the current problems, instead of just saying “you shouldn’t have done that”.

  • Alisa

    Well, I’m sure Mr. Krugman will be happy to know that he is not a totally useless idiot after all.

  • Laird

    Snorri, that’s all well and good, but the problem is that you can’t get there from here; there is no solution now, at least not one that doesn’t involve significant pain. And that’s never acceptable to the electorate.

    If the doctor tells you that you have terminal and incurable cancer, (a) you can’t reasonably expect to be able to demand a cure from him, and (b) you will probably run in desperation to a series of quacks who purport to offer you a cure, even if it’s nothing more than snake oil. Hence the popularity of such as Krugman.

  • Snorri Godhi

    Laird: but there is a solution. The solution is that adopted by my adoptive home, Estonia; and not just in 2009, but more importantly in 1992. (Significantly, a solution that Krugman found necessary to ignorantly dismiss.)

    You are correct that it is “not one that doesn’t involve significant pain”; but then, when Churchill came to power, there were no solutions which did not involve toil and sweat, blood and tears, were there? We have it easy by comparison.

    To continue the consultant analogy, if someone asks a consultant to solve an insoluble problem, surely an honest consultant will turn down the job. If there is no solution to California’s problems, then a realist Californian will emigrate to Texas or North Dakota (or Estonia) rather than run for office.
    But surely there is a least-bad solution to the US problems; though it’s unlikely that Romney will choose it, still Romney would seem to be (and I make no promises here) the least bad option which is actually on the table.

  • Lucklucky

    It is simple.
    Governments needed 4% growth and around max of 6% unemployment to get easily reelected.
    And they were set to achieve that at any cost.
    This meant putting the credit “printers” at full speed ahead – which btw shows us the failure of 80’s Central Banks that no one talks about – if you want a simple phrase: the policy is stimulate everything with credit.

    The Central Bank, i mean the 80’s era one was designed to combat inflation and the shenanigans of the 70’s printing. It could not print. But since the nature of the things is always stronger it could print via credit. And it did and continues to do today.

  • Alisa

    I think that Lucklucky nails the whole historical picture in those few lines.

  • Snorri Godhi

    Laird: OK, let’s take your incurable cancer analogy.
    If a doctor finds out that a patient has incurable lung cancer, surely the first thing to do is inform the patient of this fact.
    What some Austerians seem to be doing instead is the equivalent of a doctor who starts off with a long lecture on the evil of smoking, and only when the patient asks what can be done, informs the patient that there is nothing that can be done anymore.

    If you really think that there is nothing that can be done which is acceptable to the electorate in your country, then you have to emigrate. (I did.)
    If you say there is nothing that can be done, but stay put, then you lose credibility.

  • Snorri Godhi

    Sorry, I thought yesterday’s reply to Laird was lost forever.
    Anyway I did add a new angle today, if I may say so myself.

  • Tedd

    Snorri:

    Tedd: if they paid for your advice BEFORE doing all the things that you said they shouldn’t do, then they are the people losing credibility; if they hire you now, then you have to deal with their current problem, not with their previous problems.

    I’m sorry, I guess I didn’t explain my point very well. When I prefaced my final remark with “Believe or not” I was attempting to imply that, yes, one would think that they if they did not follow advice that they had paid me for it would be they who lost credibility (even in their own eyes), but that, no, that is sometimes not what happened. Sometimes, what happened was that, after not following the advice they had hired me to give them, they then expected me to be able to extract them from their self-imposed problems, and I lost credibility in their eyes when I could not. (By which I mean they spoke less well of me when talking to other people in the industry.)

    The parallel to Austrianism, in case I still haven’t been clear enough, is that some people seem to think that it reflects badly on Austrian economics when it’s advocates don’t have a magic solution to the problems that result from not following its principles.

  • Snorri Godhi

    Thank you Tedd, that’s pretty amusing though i expect you did not find it funny at the time.
    I’d have turned down their money if i were you, assuming that i could afford to do so.
    I note that i did not ask for a “magic solution”, only what is the lest bad solution.

  • If you want some amusement go over to Libertarian Republican and watch the cheer leading of former Libertarian Dondero.

    He has nothing but high praise for the Rs.

  • The problem of “stimulate everything with credit” is that at this point no one wants the credit. I have heard stories of banks willing to lend but no one willing to borrow.

    The banks/FED are pushing on a string.

  • So the answer “do nothing” is exactly what is being done in the private sector.

  • Paul Marks

    I think I will restrict myself to say that I do not agree with Robert Hetzel.

  • Alisa

    You are tired of typing, aren’t you:-)

  • Paul Marks

    Yes.

    But there is also the point of saying the same things again and again (and again and again).

    Remember the George Selgin thing.

    Talk to a man over months (comments on many posts) and then he comes out with…..

    It makes one less confident of the power of the words.