Subject to last minute revisions; important parts are underlined. Tell me if you think something needs changing or ought to be worded differently.

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. And just to help you visualise this, I want to separate three distinct events: the housing bubble, which is a depreciation in the price of housing following the peak in 2006; the financial crisis which involves stress placed on banks and subsequently their failure; and the Great Recession, which is the slow-down in economic activity for whatever reason. Stefan seems to be positing the idea that there was a severe housing bubble, which he refers to as a “ten-year malinvestment”. This bubble, according to Stefan, crashed and led to a severe financial crisis which then in turn led to a severe recession. This isn't true. Looking at the number of housing starts[1] we can see that there is a quite clear moderation in their previously cyclical nature, and that’s interesting. However, just looking at house starts in pure numbers, it's actually somewhat commensurate with the population growth.[2] So first of all, it's not obvious that there was any significant mal-investment to begin with. The usual idea is that the Federal Reserve kept interest rates 'too low for too long' over the course of 2002-2004 with an expansionary monetary policy which encouraged housing construction. But this isn't very solid, as the data seems to show wild divergences about how house prices in different states reacted during the same period[3] 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.[4] I can’t stress how much he’s also correct in placing emphasis on the Federal Reserve, and I agree that anybody who doesn’t consider it important isn’t being serious. 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[5] for a number of potential reasons. Stefan’s analysis of monetary policy is also a bit confusing—at one point he acknowledges the four-fold increase in real interest rates immediately prior to the Recession, and yet doesn’t seem to correlate this with a tight money policy, instead presenting a general atmosphere on inflationary policy.

Despite all of this, however, the housing bubble really is irrelevant. Stefan notes how houses don’t create jobs following their construction, in the same way a factory or other kinds of physical capital might, and how a housing bubble popping would necessarily leave thousands of people out of work. Unemployment, however, didn't alter when the house prices peaked in 2006 and began a steady decline throughout 2007[6] suggesting a sort of non-effect on the U.S. economy, unemployment only really kicked off in mid-2008[7] when nominal income sharply declined as a result of tight money[8:2] and by this time, the amount of housing construction had declined to match the nadir during the early-90s Recession[1], so it’s quite clear that the decline of the bubble had no appreciable impact on the rest of the economy. We don’t necessarily just need to look at the stance of nominal income, either, to diagnose tight money as the problem; the real interest rates on 5-year TBs appreciated sharply beginning in July 2008[15] and Alan Greenspan himself had presciently predicted a Recession by the end of 2007—which is exactly when it began—citing stabilising profit margins, which are partly indicative of monetary policy[16]. The Financial Crisis (marked by the failure of Lehman Brothers) began a few months after the decline of nominal income[17], and a Richmond Fed insider named Robert Hetzel has explicitly blamed the Recession on a tight monetary policy.[18]

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; we can clearly see other indicators like industrial production beginning to decline in June-July prior to any stock market crash, but we’ll come onto this later.[9] 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.

Stefan then goes on to talk about interest rates and their importance; they are indeed important, but it also exposes a flaw in Stefan’s view of monetary policy and how the Fed operates. Stefan seems to take a Wicksellian view of monetary policy in that he focuses intensely on interest rates. 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 interest rates, primarily via the short-term liquidity effect whereas interest rates are also influenced by things like inflation expectations and the long-term Fisher effect. 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.[10] Stefan even goes on to mention interest rates in relation to inverted yield curves, and how they’re predictive of future Recessions; what he misses however is the fact that markets often believe inflation will be low when these inverted yield curves present themselves, which is, of course, further indicative of tight money.

Stefan then goes on to talk about how capital reserve requirements encouraged the holding of risky mortgage debt, and Jeffrey Friedman has a brilliant paper on how asset requirements like the Basel Accords also contributed to the problem of banks holding toxic debt[19]. We would certainly have had a financial crisis regardless of whether or not monetary policy had been excessively tight just prior to the downturn. However, the financial crisis was definitely worsened by the Recession, and made to be much more stressful than it would’ve otherwise been in a stable macroeconomic environment. It’s not fair to say that the Recession caused the financial crisis, but it certainly triggered it—I mentioned earlier how Lehman failed months after the economy was showing all the warning signs, and history has typically shown how credit crunches are either largely irrelevant to the business cycle or the real economy, or indicative of prior weaknesses.

This has been demonstrated throughout history—notably 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. A paper by the American Enterprise Institute shows the 40pc declination on the number of banks in the economy was due to small banks failing—as they had consistently done through the booming 1920s—and mergers, meaning there wasn’t much disintermediation and thus no credit crunch[11]. 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.[12] The same study also goes on to note how the 2008 Recession is similar in its lack of significant bank disintermediation; the availability of bank credit to GDP was at an all-time high, and we can also see that represented here on this graph.[13] On top of this, and again similarly to the Great Depression, industrial production had also fallen off the cliff a few months prior to the Financial Crisis[14], indicating some sort of weakness which was exogenous to the banks.

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.

NOTE: Inverted yield curve! Tight money signal???

Quote

1.   http://research.stlouisfed.org/fred2/graph/fredgraph.png?g=Z7q
2.   http://research.stlouisfed.org/fred2/graph/fredgraph.png?g=Z7B
3.   http://research.stlouisfed.org/fred2/graph/fredgraph.png?g=Ydb
4.   http://research.stlouisfed.org/fred2/graph/fredgraph.png?g=Z7r
5.   http://research.stlouisfed.org/fred2/graph/fredgraph.png?g=Yce
6.   http://research.stlouisfed.org/fred2/graph/fredgraph.png?g=VLt
7.   http://research.stlouisfed.org/fred2/graph/fredgraph.png?g=Z7G
8.   https://marketmonetarist.files.wordpress.com/2012/06/ngdp-usa.png; http://static1.squarespace.com/static/52cdc300e4b012a81d31c03d/t/53a2cfc3e4b017961ee4df6b/1403178971061/
9.   http://research.stlouisfed.org/fred2/graph/fredgraph.png?g=Z8g
10.   http://federalreserve.gov/boarddocs/speeches/2003/20031024/default.htm
11.   http://pubs.aeaweb.org/doi/pdfplus/10.1257/jep.24.4.45
12.   http://research.stlouisfed.org/fred2/graph/fredgraph.png?g=YcK
13.   http://research.stlouisfed.org/fred2/graph/fredgraph.png?g=YcA
14.   http://research.stlouisfed.org/fred2/graph/fredgraph.png?g=Z7u
15.   http://research.stlouisfed.org/fred2/graph/fredgraph.png?g=Z7z
16.   http://www.nbcnews.com/id/17343814/#.VM5hup2sWYI
17.   http://angrybearblog.com/wp-content/oldimages/angrybear/2/-Q-wQYvGTzPM/TjaddweGX7I/AAAAAAAAAq0/oUn6SqqAXwk/s1600/gdp_chart.JPG
18.   http://www.richmondfed.org/publications/research/economic_quarterly/2009/spring/pdf/hetzel2.pdf
19.   http://www.criticalreview.com/crf/pdfs/Friedman_intro21_23.pdf

Read it you twats.

Quote

In the end, the housing bubble and the financial crisis were not causes in themselves of the Recession.

I still can't bring myself to agree with this. You simply can't look at such a drastic credit bubble and say it had nothing to do with the subsequent recession.

It's certainly obvious that the financial crisis worsened the Recession (much like a vicious cycle) by further depressing aggregate demand, but it's nothing monetary policy couldn't have handled and, like the AEI paper states, intermediation between financial institutions had returned to regular levels shortly after the crash.

Not to mention, in both the instances of the Depression and the Recession, the economy was showing clear signs of weakness prior to the ensuing banking crises. If you can't accept that a credit crisis that big couldn't have caused the Recession, I'd be interested to know how you explain the crash of 1987 and the success of monetary policy immediately following.

Quote from: HurtfulTurkey on February 02, 2015, 11:20:10 AM

Quote

In the end, the housing bubble and the financial crisis were not causes in themselves of the Recession.

I still can't bring myself to agree with this. You simply can't look at such a drastic credit bubble and say it had nothing to do with the subsequent recession.

It's certainly obvious that the financial crisis worsened the Recession (much like a vicious cycle) by further depressing aggregate demand, but it's nothing monetary policy couldn't have handled and, like the AEI paper states, intermediation between financial institutions had returned to regular levels shortly after the crash.

Not to mention, in both the instances of the Depression and the Recession, the economy was showing clear signs of weakness prior to the ensuing banking crises. If you can't accept that a credit crisis that big couldn't have caused the Recession, I'd be interested to know how you explain the crash of 1987 and the success of monetary policy immediately following.

It's not about assigning a sole cause; recessions can happen independently of a credit bubble, but to say it's irrelevant just doesn't make sense. I think metaphors are condescending and I try to avoid using them, but this is like stabbing a guy three times and saying his bleeding to death was contingent only on the first stab.

Quote from: Meta Cognition on February 02, 2015, 11:26:31 AM

Quote from: HurtfulTurkey on February 02, 2015, 11:20:10 AM

Quote

In the end, the housing bubble and the financial crisis were not causes in themselves of the Recession.

I still can't bring myself to agree with this. You simply can't look at such a drastic credit bubble and say it had nothing to do with the subsequent recession.

It's certainly obvious that the financial crisis worsened the Recession (much like a vicious cycle) by further depressing aggregate demand, but it's nothing monetary policy couldn't have handled and, like the AEI paper states, intermediation between financial institutions had returned to regular levels shortly after the crash.

Not to mention, in both the instances of the Depression and the Recession, the economy was showing clear signs of weakness prior to the ensuing banking crises. If you can't accept that a credit crisis that big couldn't have caused the Recession, I'd be interested to know how you explain the crash of 1987 and the success of monetary policy immediately following.

It's not about assigning a sole cause; recessions can happen independently of a credit bubble, but to say it's irrelevant just doesn't make sense. I think metaphors are condescending and I try to avoid using them, but this is like stabbing a guy three times and saying his bleeding to death was contingent only on the first stab.

I'm not denying the role the financial crisis had in the Recession--after the Recession began, I really should stress--I'm saying the primary cause was tight monetary policy, which has historically proven itself to be a great way of completely fucking up your economy. The financial system was thrown into turmoil because of these underlying macroeconomic weaknesses in the economy. Again, the most effective reference point is with the Great Depression--the strongest year of growth was right after the beginning of currency devaluation and during the worst year for the financial system. During the Recession, lending had pretty much restored itself by 2008 and by late 2009 (according to the economists who wrote the book House of Debt, which also criticised the lending-driven narrative) the financial system was fully repaired, and yet growth has been disastrous since and, when comparing different economies, suitably correspondent to accommodative monetary policy.

Post the video you cunt muffin

I'll get round to it in a couple of weeks.