The Financial Crisis and the "Chicago School of Economics"

On Bloomberg.com, 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.”

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  1. BSK says:

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

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  2. Eric M. Jones says:

    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.

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  3. Douglas Karr says:

    More than any other explanation, I love Fred Thompson’s: http://blip.tv/file/1528079

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  4. Corban says:

    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.

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  5. DaveyNC says:

    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 http://thecaucus.blogs.nytimes.com/2008/09/30/mccain-and-obama-call-for-increase-in-deposit-insurance/). 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.

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  6. Scott Supak says:

    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?

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  7. Avi Rappoport says:

    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.

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  8. anonymous says:

    Can someone please explain what the quote means?

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