First and foremost I just want to offer a disclaimer regarding Stefan himself. I have a great deal of respect for Stefan in the way he collates and presents information, even if I don't agree with his conclusions. It's fairly obvious that he has an appreciation of empirical evidence, so if he ever watches this video I hope he's able to appreciate the information I'm going to put forward and try to reconcile it with  his own conclusions—even if he disagrees with me in the end. I also consider myself sympathetic to 'free banking' (that is, the abolition of the central bank), especially the work of George Selgin, but still find fault with Stefan's analysis.

One of the first problems I have with Stefan's analysis is his description of the “Greenspan Put”, which he claims stops the economy from slowing down and restructuring as capital is re-allocated into different kinds of economic activity. This is false, monetary policy only has control over nominal variables. The allocation of capital and investment in an economy is primarily a real—not nominal—factor and therefore largely non-monetary. The point of the so-called “Greenspan Put” was to stabilise the growth of aggregate nominal income (aggregate demand) in  an economy, which is a solely nominal variable. How capital reallocates itself, and the growth rate of rGDP, wasn't significantly restricted under Greenspan's chairmanship.

Moving on to the crux of Stefan's claims, however, it's quite clear that there is a confusion of causality in his thinking. Stefan seems to be positing the idea that there was a severe housing bubble, which crashed and led to a severe financial crisis which then in turn led to a severe recession. This isn't, true. Looking at starts per million U.S. citizens (http://www.data360.org/temp/dsg1397_850_450.jpg) we can see that there is a quite clear moderation in the previously cyclical nature of housing starts, and—if anything—a moderation. Indeed, just looking at house starts in pure numbers, it's actually somewhat commensurate with the population growth (https://thefaintofheart.files.wordpress.com/2012/10/house-boom_1.png?w=436&h=294). So, first of all, it's not obvious that there was any significant mal-investment to begin with. The idea that the Federal Reserve kept interest rates 'too low for too long' with an expansionary monetary policy—which seems to be the consensus—isn't very solid, as the data seems to show wild divergences about how house prices in different states reacted during the same period (https://thefaintofheart.files.wordpress.com/2012/10/house-boom_8.png) which suggests a primarily structural or supply-side issue with the housing market, such as zoning laws.

Stefan, however, doesn't seem to think that interest rates were kept excessively low in the 2002-2004 period, and actually acknowledges that the 'bubble' began in the late 1990s, which doesn't alter during the period of a low federal funds rate. (https://thefaintofheart.files.wordpress.com/2011/02/conundrum_4.jpg?w=750). However, even acknowledging this doesn't make it clear that the Federal Reserve is directly responsible in the creation of a bubble, as the steady decline in long-term interest rates—which engendered the bubble—was clearly caused by non-monetary factors, as post-1990, the federal funds rate was decoupled from long-term interest rates (http://research.stlouisfed.org/fred2/graph/fredgraph.png?g=Yce) for a number of potential reasons.

Despite all of this, however, the housing bubble really is irrelevant. Unemployment didn't alter when the house prices peaked in 2006 and began a steady decline throughout 2007 (http://research.stlouisfed.org/fred2/graph/fredgraph.png?g=VLt) suggesting a sort of non-effect on the U.S. economy, unemployment only really kicked off in mid-2008 (http://research.stlouisfed.org/fred2/graph/fredgraph.png?g=Yci) when nominal income sharply declined as a result of tight money (https://thefaintofheart.files.wordpress.com/2011/02/conundrum_7.jpg?w=750). The Financial Crisis (marked by the failure of Lehman Brothers) began a few months after the decline of nominal income

Stefan is correct in the assertion that the Federal Reserve is primarily responsible for the Great Depression—it isn't a case of 'animal spirits' or the stock market crash of 1929, as seems to be the consensus among non-economists (http://research.stlouisfed.org/fred2/graph/fredgraph.png?g=Ycs). However, unlike Stefan's assertion, Milton Friedman showed that monetary policy was too tight during the late 1920s to early 1930s, not inflationary or expansionary as seems to be the underlying theme of Stefan's hypothesis.

Also, there is a more underlying problem with how Stefan views monetary policy in the first instance. Stefan seems to take a Wicksellian view of monetary policy in that he focuses intensely on interest rates (this was later taken to something of an extreme by Keynes). Interest rates are, largely a poor way of viewing monetary policy; Milton Friedman (who Stefan referenced earlier) noticed this and recognised how rates are usually depressed during times of deflation and very high during times of inflation or hyper-inflation. The central bank has an imperfect control of monetary policy primarily via the liquidity effect—which is short-term—whereas interest rates are also influenced by things like inflation expectations and the Fisher effect. And remarks by Ben Bernanke in 2003, no less, points to inflation and nominal income as being the best determinants for the stance of monetary policy (http://federalreserve.gov/boarddocs/speeches/2003/20031024/default.htm).

I've also seen a few videos by Stefan where he talks about the level of household debt in the economy, relative to GDP. This is actually a fairly mainstream idea which has been propagated across the political spectrum from the likes of Paul Krugman to Ben Bernanke; it dates back to Irving Fisher's theory of debt deflation, which claims that over-indebtedness in the economy leads to fluctuations in the business cycle. It's an intuitive idea—it essentially states that over-indebtedness can lead to a contraction of inter-bank activities and a slowing down of money velocity, which leads to real higher debt burdens and higher cases of insolvency, essentially fuelling a bubble resulting in a restriction of credit. This is, however, incorrect provided aggregate demand is maintained.

This has been demonstrated throughout history—notable in 1987 when the single-biggest drop in stock prices occurred, even bigger than the crash of 1929. Even the crash of 1929, as I mentioned earlier, occurred after certain factors like industrial production were indicating economic weakness. Not only this, however, but the crash of 1929 didn't even cause a financial crisis. . . the 40pc declination in the amount of banks in the economy was due to small banks and mergers, meaning there couldn't have been much disintermediation (http://pubs.aeaweb.org/doi/pdfplus/10.1257/jep.24.4.45). In fact, the largest and most efficacious banking crises occurred in 1933, wherein 11pc of all deposits were effected, the first proper year of recovery; until that was choked off by poor fiscal policy.  (http://research.stlouisfed.org/fred2/graph/fredgraph.png?g=YcK) The same study also goes on to note how, by the end of 2008, the availability of bank credit to GDP was at an all-time high, and we can also see that represented here on this graph (http://research.stlouisfed.org/fred2/graph/fredgraph.png?g=YcA).

 
In the end, the housing bubble and the financial crisis were not causes in themselves of the Recession. The housing bubble is largely irrelevant to the discussion, and confusing, as house prices declined with the global drop in nominal income around 2008. The financial crisis too, is more of an indication of underlying economic weakness, as the failure of Lehman Brothers in Sept. 2008 occurred a few months after nominal income went into free-fall.

please continue posting shit like this, it's helpful when i'm writing research papers in my econ class

Quote from: RC on January 24, 2015, 10:42:53 AM

please continue posting shit like this, it's helpful when i'm writing research papers in my econ class

>browing sep7agon for research material

10/10 - flawless strategy