The Financial Crisis and the “Chicago School of Economics”

On, John Lippert presents an interesting and extremely well-reported article on the financial crisis’s impact on the thinking of Chicago economists. It does a nice job of capturing the multifaceted nature of the institution, with people on all sides of the issues.

I absolutely love the following excerpt, which better captures what it is like to hang around with Chicago economists than just about any quote I have ever seen:

“We should have a recession,” [John] Cochrane said in November, speaking to students and investors in a conference room that looks out on Lake Michigan. “People who spend their lives pounding nails in Nevada need something else to do.”


What does that quote even mean? Who are the "people pounding nails in Nevada"? And who says they need something else to do?

Eric M. Jones

When the Wall Street bailout sailed through the Congress I was mortified that few really took any notice of what had been done. That $700 billion is the approximate amount it would take to build every single structure (and its infrastructure) in the entire state of Massachusetts—Every private home, public building, road, bridge, courthouse, street, waterline, electrical line, sewer, power generating plant, gas station, highway, overpass, playground, airport, dam, farmhouse, cell tower, prison, library, school, museum, dock, hotel, firehouse, store, sidewalk, tunnel, waste treatment facility, railroad, light pole, traffic signal, police station, restaurant, warehouse, lumber yard, grocery store, hair salon, bar, manufacturing plant, parking lot….all of it. And you could throw in the most expensive public works project in the history of the US…the Big Dig, which cost as much as seven Panama Canals.

Spent another way, $700 billion would pave the entire state of Massachusetts in concrete, 12” thick (including steel reinforcement bar). Some think this would be a better use of the money.


Douglas Karr

More than any other explanation, I love Fred Thompson's:


On a related note, China has financed over a trillion dollars of US debt, which has lowered interest rates and kept their exchange rate low. You'd think we'd have already found the cure for cancer with all that money. Debt should be used for investments, after all: so it is for corporations, and so it is for government.

I think the Chicago economist is on the right track: maybe there is a better way for them to make their lot than putting up neon signs and building water fountains in a desert. However, a recession BY ITSELF is a bad thing. It is only from a strategic POV that something painful like this can have an upside, and that upside is...well, infrastructural investment.

There better be an upside, or this'll all be for naught.


You know, this whole economic crisis we are in would have been lessened greatly if government didn't muck around so much in the business sector. We do need this bubble to burst before we can put it all back together again, but inevitably there will be some regulatory or governmental measure taken that will cause a bigger problem down the road. My money is on the FDIC increasing their coverage on deposits from $100,000 to $250,000 (at the behest of Obama; see A big component of the S & L crisis of the '80's was that lenders knew they had $100k worth of risk covered out of someone else's pocket. Now, that risk is reduced even more. Just a matter of time.

Scott Supak

First, hardly anyone pounds nails anymore. They have nail guns.

Second, if they'd been building super-efficient, solar-powered, eco-homes in the desert instead of cracker box McMansions, I'd have a lot less problem with it.

Finally, an entire economy built around gambling seems so silly. What, does Nevada think it's Wall Street?

Avi Rappoport

That quote is a little divorced from reality. What should construction workers in Nevada do instead of pounding nails?

My guess is that they'll mostly do odd jobs and barely get by on credit cards and payday loans with outrageous interest. Some will go bankrupt. Some will get hired by the Obama Infrastructure Projects.

For the moment, at least, middle-class people tha tI know do not feel secure enough to be big consumers and therefore are not buying as much STUFF and therefore the whole economy is creaking to a halt.

It would be nice if some of the Chicago school, would follow Alan Greenspan in admitting that they were wrongly overestimating the rationality of the whole banking sector.


Can someone please explain what the quote means?


Somebody who says "We should have a recession" is somebody who's convinced it won't affect him personally very much.

Jim Satterfield

The Chicago School claims that rationality will win out over greed. What planet are these people from and where do they think they are living?

Combine this with the reactions of the hard core Chicago School true believers. Once they've settled on their belief in the efficacy of markets in everything all true rational thought and ability for self-reflection is abandoned and all of their intellectual prowess is focused purely on defending their chosen partisan, virtually religious, beliefs. It's the First Church of Free Market, boys and girls.

I came up with terms for these people that some find insulting but I just consider accurate. They are the ideologically lobotomized and the ideologically induced sociopaths. They don't really think outside the strict limitations imposed by their belief system and they don't really care what happens to human beings so long as their suffering comes about from following their ideology. The belief system justifies and defines everything. This is true of fundamentalist religionists of every faith, including Free Marketeers.



After reading the Shock Doctrine, I am not surprised at this quote.


That is a wonderful quote. The hedge fund trader, the overpaid CEO, the member of the board of directors of Fannie Mae making 160 thousand per year for a week´s worth of wee- these, of course, don´t need something other to do. The Chicago Economist writing the op ed praising the wonders of deregulated markets doesn´t need something other to do. The laborer who actually makes something of use, however, does. An excellent example of why the school is so incredibly pernicious, and is represented in the media far beyond any constituency it could have - after all, an elite that lives on predation and fraud always has need of theologians to provide the rationalization.
We definitely need many, many fewer economists.


does that mean prof. Cochrane plan to go to Nevada and open a MBA school for the people who pounding nails for living? That's a wonderful idea! (ask 20,000 nails/year for attending)...


Sounds like Chicago economists need something else to do besides pounding self-righteous do-nothingism into the heads of undergrads.

steve long

I used to think that Steve Levitt was a pretty smart guy and that this column was worth reading.

I don't know about the guys pounding nails in Nevada.

But if there's any reason we need a recession, it would be so that Levitt and Cochrane would have "something else to do" besides economics.

If a real free market can't supply that "something else," perhaps a government job program might help them out.

Douglas C Johnson

I would like to believe that Professor Cochrane was refering to a misuse of resources such as energy and water[ the Colorado River] to create the fastest growing city in the U.S. which produces nothing materially except diversion from reality. Perhaps he is pointing out that free markets respond to the desires of those who have above the needs of those who do not. But, I doubt it.



Could you elucidate a bit? At first blush, the quote sounds a bit inane, if not outright elitist, classist, and out of touch. And I like Chicago-school analysis!

Mort Dubois

“We should have a recession . . . . People who spend their lives pounding nails in Nevada need something else to do.”

Yes, perfect Chicago school: an intellectually defensible position coated with a stinking layer of arrogance. No wonder these people inspire such revulsion.



A U of Chicago economist is someone who sees farmland producing food for the hungry masses and convinces the owners to grow export crops instead. The masses move to the slums, become very hungry and are soon forgotten. Meanwhile, it doesn`t take long before the land owners have all the latest appliances and 2 Mercedes in their new garages. The U of Chicago economist pats himself on the back for creating a middle class in the Third World.

Some U of Chicago economists find work in the CIA or as Pentagon consultants. These are now brought in to keep a lid on the hungry masses. They identify closely with the land owners because they are the only ones with refrigerators to keep their beer cold. Eventually, they recommend military intervention from the US to keep their friends supplying them with cold beer.

T.C. Moore

Since no one seemed to bother answering anonymous' question all day. What the quote means:

The housing bubble was particularly bad in Nevada near Las Vegas. There were a lot of workers "pounding nails" and building houses for a flood of new residents.

With a recession and the housing bust, there won't be a need for so many new houses in NV. So the workers that were building houses will need to find another line of work, or move to where houses are still being built. [And that redistribution of labor is good since resources were being unsustainably sucked by the bubble into house building.]

In even shorter form: "We need a recession to correct the [labor] imbalances that the housing bubble caused."