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What Has Happened to MiltonFriedmanʼs Chicago School?:

Reactions to the Financial Crisis of 2007-2009

J. Bradford DeLong

University of California at Berkeley and NBERbrad.delong@gmail.com

http://delong.typepad.com+1 925 708 0467

MTI-CSC Economics Speaker Series LectureCivil Service College Auditorium

31 North Buona Vista Rd.Singapore

http://www.cscollege.gov.sg/cpe/events.html#topJanuary 7, 2009 6 PM

We stand here in the midst of what consensus regards as the worst episodeof financial distress since the Great Depression of the 1930s itself, and in themidst of what current forecasts project will be either the second-worst or theworst global economic downturn since World War II. In the United Statesthe fall in the civilian employment-to-population ratio in this recession isalready greater than in three of the other eight post-World War II economicrecessions, and another quarter of economic performance as bad as thefourth quarter of 2008 will make this recession the worst as measured by thepercentage of the U.S. adult working-age population rendered jobless of the

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post-World War II era. This is a bad time to be entering the labor market orlosing your job in the United States. And this is a bad time to be entering thelabor market or losing your job outside the United States as well: as demandin the United States falls, its role as the global economy’s importer of lastresort and safe haven for finance means that its recessions carry the globaleconomy as a whole down with it.

Unlike most post-World War II recessions—the red arrows in the figureabove—the current recession was not caused or courted or triggered bycentral banks that have shifted state and decided that fulfilling their missionas guarantors of rough price stability is job number one. The currentrecession has come about because of (a) unexpected losses and defaults inthe housing market produced by unwise loans made during a period of

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irrational exuberance, and (b) a collapse in the risk tolerance of the privatesector. These have pushed asset values down, and it is falling asset valuesthat have triggered this global recession.

There are four factors that can drive the prices of financial assets down:default, duration, risk, and information. Asset prices can fall if projecteddefaults rise—if people believe that the counterparties that have promised topay them money in the future simply will not be there when the time to paycomes, and so the expected future cash payment associated with the asset islower. Asset prices can fall if the price of duration—the safe real interestrate—rises so that even safe and certain cash to be paid sometime down theroad is worth less in terms of cash in hand today. Asset prices can fall, evenif expected values remain unchanged, because of risk—because somethinghappens to make your marginal utility of wealth lower in those states of thefuture world in which the asset’s payoff is high and higher in those states ofthe future world in which the asset’s payoff is low. Fourth and last, assetprices can fall because you no longer trust the market to convey accurateinformation: because buyers become suspicious that the fact that sellerswant to sell assets means that there is something wrong with the asset thatthe seller knows and the buyer does not.

A few very rough numbers: A year and a half ago, the world had someUS$80 trillion of global marketable financial assets. Today the world hasonly US60 trillion. Of this US$20 trillion in losses, roughly US$1 trillioncomes from expected housing-related defaults. Another roughly US$3trillion comes from other non-housing defaults to be triggered by therecession—but these would not be there were we not in a recession. Theseare counterbalanced by a US$-3 trillion term, a US$3 trillion fall in durationdiscounts as central banks have flooded the world with liquidity over thepast fifteen months and flattened the safe intertemporal price structure. Sowe have roughly US$19 trillion in losses to be accounted for by rises in therisk and information discounts—by the facts that the risk tolerance of theprivate sector has collapsed and the confidence necessary for liquid marketsthat the assets on offer are not heavily adversely selected has collapsed aswell. This means that a focus on housing is misplaced. Housing finance is5% of the problem. It is the collapse of risk tolerance and the impaction of

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information that are 95% of the problem in financial markets that hastriggered our current global recession.

The collapse in asset values brings on recession because the businesses thatcurrently ought to be growing have to compete for financing against assetsissued in the past. When financial asset prices are low, firms that ought toexpand must underbid them in order to raise capital, and that makes itimpossible for them to raise capital on terms that make expansion profitable:Hence they are not expanding. But the businesses that should be shrinkingare still shrinking—and shrinking rapidly. Hence recession: fallingproduction, falling employment, rising unemployment, losses, andbankruptcies. And this recession which threatens to become a depression hasno fundamental cause: collectively, the 6.2 billion of us on the globe are noless skilled and no less productive than we were two years ago; thecommodities we make are no less useful than they were two years ago; ourutility functions have not become more steeply curved to make us moreaverse to systematic risk than we were two years ago; and the world has notbecome a much riskier place than it was two years ago.

This kind of a financial crisis—unexpected losses feeding into a collapse inrisk tolerance which sends asset prices down and cuts firm expansion off atthe knees—has happened irregularly for at least 180 years since the world’stransformation from a mercantile-commercial to an industrial-technologicaleconomy. And for at least 165 of those years—ever since the 1844 debate inthe Palace of Westminster on the renewal of the charter of the Bank ofEngland—central banks and governments have had a standard response tothis: prop up asset prices, head off mass bankruptcies, guarantee liquidity,and so try to keep the economy within hailing distance of full employmentbecause there are some market prices that are too important to the people’slivelihood to be left to the play of free market forces when free marketforces say that they must collapse rapidly. This is to a great extent aprofoundly conservative policy in a Burkean sense: it has evolved graduallyand it seems to work less badly than alternative policies we can reliablyenvision and forecast—certainly the one big episode in which the world’seconomic policymakers did not attempt to support asset prices in a financialclash is now called the Great Depression.

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This is the policy road that we have been walking down for the past eighteenmonths now. The high politicians of the globe have been taking the adviceof their economic advisers—the Bernankes and the Paulsons and theTrichets and the Kings and now the Summerses and the Geithners and theRomers and all the rest—that this is indeed one of those times when theprices of financial assets are prices too important for the people’s livelihoodto be left right now to the play of free-market forces. Since the late summerof 2007 the assembled central banks and governments of the globe havebeen attempting to keep the global economy near full employment and avoidthe collapse of asset prices without forcing the globe’s taxpayers to pay forthe losses and enlarge the fortunes of financiers who ought to have knownmore and better about the risks that they were bearing and assuming in themid-2000s. The task is, to repeat what Charlie Kindleberger said, one that is:

riddled with... ambiguity, verging on duplicity. One mustpromise not to rescue banks and merchant houses that getinto trouble, in order to force them to take responsibility fortheir behavior, and then rescue them when, and if, they doget into trouble for otherwise trouble might spread...

The task is to undertake the minimal intervention that will keep the globenear full employment—for a larger than necessary intervention enrichesthose who ought not to be enriched, assures those who will participate in thenext wave of speculation that they too will be made whole by globalgovernments, and creates the possibility of another inflationary episode thatwill in turn have to be curbed by another global recession as painful as 1982.But in the end the financial rescues and the market support ought—ormust—be undertaken, for the worries about “moral hazard” and “unjustenrichment” are only a very small part of what has been going on since thecollapse of the risk tolerance of the financial sector.

This advice that the globe’s economic policymakers are taking has a longheritage: it was the conclusion of Sir Robert Peel who as First Lord of theTreasury managed the renewal of the Bank of England’s charter in 1844; itwas the conclusion of John Maynard Keynes who ranted in the 1930s

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against those who believed the Great Depression had to be suffered when itcould be cured as easily as you can cure a dead battery in your car somemorning; it was the conclusion of Milton Friedman whose big book onmonetary history in the 1960s argued that the Great Depression could havebeen cured with even smaller interventions in prices than those advocated byKeynes—that all that would have had to happen would have been propersupport of asset prices via much larger open market operations by theFederal Reserve and bank creditor guarantees to prevent the collapse of themoney multiplier and the hoarding of cash in the 1930s. If you had asked metwo or years ago what economists would have advised in big financial crisislike the current one, I would have said that of course economists wouldconverge on a consensus that now was a time to follow the line of the Peel-Keynes-Bernanke axis—that these issues had been settled as a matter ofpractice if still debated as matters of theory since 1844; that all agreed thatthis was one of the times when Say’s Law was not true in theory and thus itwas the business of the central banks and the governments to make it true inpractice.

And I would have been wrong. For right now there are a substantial numberof economists—most but not all of them associated with Milton Friedman’sUniversity of Chicago and his Chicago School—who are deviating fromwhat I call the Peel-Keynes-Friedman axis and saying that the world’scentral banks and governments should not be taking action to support globalasset prices right now and should not be worried about heading off orreducing the current rise in global unemployment. I think that theseeconomists are wrong—Martin Wolf of the Financial Times put the caseagainst them best and shortest just before Christmas, writing:

Austrians… argued [in the Great Depression] that a purgingof… [speculative] excesses… was required. Socialistsargued that socialism needed to replace failed capitalism…This same moralistic debate is with us, once again.Contemporary “liquidationists” insist that a collapse wouldlead to rebirth of a purified economy. Their leftwingopponents argue that the era of markets is over. And even Iwish to see the punishment of financial alchemists…

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Dismissing the advocates of sitting-on-our-collective-hands as engaged inthe wrong project:

Keynes’s genius—a very English one—was to insist weshould approach an economic system not as a morality playbut as a technical challenge…. Keynes would have insistedthat such approaches are foolish…

And summing up:

[O]ne should not treat the economy as a morality tale….Markets are neither infallible nor dispensable. They areindeed the underpinnings of a productive economy andindividual freedom. But they can also go seriously awryand so must be managed with care…

Let me give some examples of economists who think that governmentsshould do nothing or perhaps nothing further about the crisis—that therecession is more to be welcomed than fought—who are opposed to thePeel-Keynes-Friedman axis and instead allies of what I will call the Marx-Hoover-Hayek axis:

The first example is John Cochrane of the University of Chicago, who is avery smart man—the author of what I think are the best papers on the topicthat is called either mean reversion in stock prices or time-varying expectedreturns. Yet John Lippert of Bloomberg News reports that John Cochraneand his colleagues at the University of Chicago could not see any logic inthe U.S. Treasury’s financial-support policies:

John Cochrane was steaming as word of U.S. TreasurySecretary Henry Paulson’s plan to buy $700 billion introubled mortgage assets rippled across the University ofChicago in September…. “We all wandered the hallwaythinking, How could this possibly make sense?” saysCochrane, 51, recalling his incredulity at Paulson’s attempt

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to prop up the mortgage industry and the banks that hadprecipitated the housing market’s boom and bust…

The response, of course, is that the logic is the same Burkean logic thatunderpins the policy recommendations of the Peel-Keynes-Friedman axis.Times of falling asset prices (relative to consumer-good prices) are followedby times of high unemployment and low incomes. Workers are thrown outof capital goods-producing industries and have no alternative opportunitiesfor employment—and then their cutback of their own spending magnifiesthe problem. By contrast, times of falling consumer-good prices (relative toasset prices) are not followed by periods of high unemployment and lowincomes. Workers are not pushed out of consumer goods production intounemployment, but are pulled out of consumer goods production intocapital-producing industries. This asymmetry means that all of us care muchmore about falling than about rising asset prices—and creates a strong casefor global governments and central banks to do something to keep assetprices from collapsing and unemployment from rising. That was what wassettled by First Lord of the Treasury Sir Robert Peel back in 1844.

V.V. Chari, Larry Christiano, and Pat Kehoe—also of the ChicagoSchool—wrote a Minneapolis Federal Reserve working paper in which theychallenged the belief that the financial crisis was going to lead to significantfalls in unemployment and output because they did not believe that fallingfinancial asset prices made it difficult for firms that ought to expand toacquire funding. They wrote:

One view of the current situation that might justify[government] intervention is that projects that are wellunderstood not to be risky cannot get funding… becausethe weak balance sheets of the bank force them to pass onwhat otherwise would be very profitable loans….[D]ocumenting this view will be an uphill battle becausemany versions of this view would imply large profitopportunities for the subset of banks with relatively healthybalance sheets…

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With a fourth quarter of 2008 that looks as though it is coming in withoutput falling at a 5.5% annual rate and a 3.5% forecast annual rate ofoutput decline for the first quarter of 2009, it looks as though output thisquarter in the U.S. will be 2.25% lower than it was last fall—and thus we nolonger have to deal with the argument that financial distress is a ripple in theveil that will not affect real resource allocation and employment.

A third example is Casey Mulligan, also from the University of Chicago,also a very intelligent man, who argues that the rise in unemploymentshould not be a matter of concern because it is what workers want to do: thisyear some workers who wanted to work two years ago are unwilling to doso. In a New York Times article titled, “Are Employers Unwilling to Hire, orAre Some Workers Unwilling to Work?” he writes that:

Employment has been falling over the past year.... [Todays]ome employees face financial incentives that encouragethem not to work.... [T]he decreased employment isexplained more by reductions in the supply of labor (thewillingness of people to work) and less by the demand forlabor (the number of workers that employers need to hire)...

He does not say why workers are all of a sudden unwilling to work whenthere has been no significant change in taxes, technologies, or resourceconstraints, or why this outbreak of work aversion just happens to come atthe same time as an unconnected financial crisis. But he is joined in hisbelief that governments should welcome rather than try to head off risingunemployment, by John Cochrane, who says:

We should have a recession. People who spend their livespounding nails in Nevada need something else to do.

He doesn’t explain why the process of moving them out of construction inNevada into other industries in other places requires that they be renderedunemployed for months or years when the process of moving them intoconstruction in Nevada from other industries in other places did not sorequire.

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All of these people are very clever. All of these people regard themselves astrue believers in the Chicago School. And if Chicago School founder MiltonFriedman were alive today Friedman would be spinning in his grave. MiltonFriedman did not believe that unemployment after a boom had to be high aspart of the process of transferring resources out of capital goodsproduction—Friedrich Hayek, who did think so, “was a great man, a greatmoral philosopher, and a great economist,” Friedman liked to say, “but notfor his contributions to business cycle theory.” Milton Friedman did notbelieve that high unemployment after a financial crisis was a benignphenomenon driven by changes in workers’ preferences: the condemnationof Depression-era monetary policy in Friedman and Schwartz’s MonetaryHistory of the United States for the unemployment it caused is one of themost severe judgments ever made by an economist on economicpolicymakers. Milton Friedman did not believe that the monetary economywas a veil whose ripples should be presumed to be decoupled fromfluctuations in output, employment, and prices. And Milton Friedman didnot believe did believe that there were some prices that were too importantto be left to the play of free market forces—that when the money stock andthe flow of aggregate demand started down, it was the business of thegovernment to boost asset prices via open market operations and bankrescues until they were once again stable. Friedman’s disagreements withPeel and Keynes were, I think, technical ones: which asset prices tointervene to boost, how much, under what conditions, and how cautious oneneeded to be in extending its powers given the long and variable lagsbetween government policy moves and their effects on employment, output,and prices.

And now I have finally arrived at my three questions for the evening:

• Why aren’t the members of the Chicago School today—Kehoe,Chari, Christiano, Cochrane, Mulligan, and many many others—thedisciples of Milton Friedman as far as stabilization policy isconcerned?

• Whose disciples are they, instead?

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• And why?

Let me see if I can come up with some tentative answers.

The intellectual issue is important because those who want governments tosit on their hands have influence, and may block or delay the actions thateconomists from the Peel-Keynes-Friedman axis are recommending to try tokeep the global economy near full employment. I believe that this crisis isalmost surely going to be resolved without a full depression. The “surely” isbecause we do not face any insurmountable technocratic problems of policydesign—we know how to conduct monetary policy to reduce safe interestrates and to banish any fear of large-scale deflation; we know how tonationalize and then reprivatize banking systems; we know how to usetemporary albeit large-scale government spending programs to put people towork and boost demand. But the “almost” is because we do face politicaland intellectual problems of goodwill and of comprehension of oureconomic situation instead. Without intellectual support, however, thepolitical problems would be minor. Without political allies, the intellectualand ideological difficulties would be a mere curiosity. As it is they are more.

The political problems come from the government of Germany—unwillingto tolerate any increase in the total governmental debt of the EuropeanUnion, even an increase that is highly beneficial to the economy as awhole—and the Republican Party in the United States—unwilling to doanything other than to try to block the Obama-Biden administration inwhatever it attempts. In Germany, the historical memory of the budgetdeficits of the early 1920s and their end in hyperinflation is still remarkablystrong. In the United States, the Republicans remember that blocking theinitiatives of the last Democratic President, Clinton, in 1993 and 1994 led toa drumbeat of press stories claiming that Clinton’s presidency was a failurein 1994—and to massive Republican election victories at the end of 1994.But without intellectual and ideological backing the German ChristianDemocratic and American Republican parties would be silent, for theywould focus on how blocking the macroeconomic stabilization policies of

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governments as the world economy edges closer to depression is to acceptblame for whatever increases in unemployment do occur.

The principle that there are some prices that are too important to be left tothe free play of market forces was challenged in the 1930s, when Britain’seconomy had become too small for the Bank of England to be the centralbank for Europe and when the administration of U.S. President HerbertHoover was bespelled by his Treasury Secretary, Andrew Mellon, who hada moral objection to market intervention and thought that “even a panicwould be not altogether a bad thing.”1 Friedrich Hayek and JosephSchumpeter led those “Austrian” economists who tried to build theories inwhich government attempts to cure recession caused more harm than good.Behind Hoover and Hayek stands the figure of Karl Marx, who critiqued thecoming of modern central banking at its origin in the 1840s and thus standsat the head of the Marx-Hoover-Hayek axis.

The policies recommended did not turn out well. We can dispute whatshould have been done in the Great Depression, but hands-off was thewrong policy. This lesson of the Great Depression was reinforced by theexperience of Japan in the 1990s, where governmental hesitancy in takingaction in the hope that the market system would soon cure its own diseaseswas not rewarded.

The Marx-Hoover-Hayek Axis

1 J. Bradford DeLong (1990), “’Liquidation’ Cycles: Old-Fashioned RealBusiness Cycle Theory and the Great Depression” (Cambridge, MA:Harvard University Department of Economics)http://tinyurl.com/dl20090105.

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Nevertheless the Marx-Hoover-Hayek axis has adherents today: Kehoe,Chari, Christiano, Cochrane, Mulligan , to name five. And I think that thebest way to understand what they do think is to go back in history, back tothe 1844 founding of central banking. Marx’s critique back in 1844 at thefounding of central banking was that it was fruitless to seek throughfinancial manipulation to cure the disease because it was not a financialmalady in the first place. As Marx wrote,2 financial crises were: “the greatstorms of the world market in which the conflict of all the elements of thecapitalist process of production discharge themselves” and yet for Peel andhis allies the “origin and remedy were sought in the most superficial andabstract sphere of this process, the sphere of money-circulation.” That, Marxthought, could not have been right—and Peel was a fraud: “Peel himself hasbeen apotheosized in the most exaggerated fashion... his speeches consist ofa massive accumulation of commonplaces, skillfully interspersed with alarge amount of statistical data…”

The critique in the 1930s from Herbert Hoover and Friedrich Hayek wasonce again that the malady was not a financial one. The fundamentalproblem was overinvestment. Something—irrational exuberance orfractional reserve banking or loose monetary policy—had pushed themarket’s tolerance for risk above “sustainable” levels, the economy hadresponded by “overinvesting” in capital, and no cure was possible that didnot involve a recognition that capital had been overinvested and wasted andthat the economy’s capital stock needed to shrink. It was Herbert Hoover’sTreasury Secretary Andrew Mellon who argued most vociferously thatgovernment must keep its hands off and let the slump liquidate itself. InHoover’s words:

“Liquidate labor, liquidate stocks, liquidate the farmers,liquidate real estate”… Even a panic was not altogether a badthing. [Mellon] said: “It will purge the rottenness out of thesystem. High costs of living and high living will come down.

2 Karl Marx (1894), Capital vol. 3 http://tinyurl.com/dl20090105f.

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People will work harder, live a more moral life. Values willbe adjusted, and enterprising people will pick up the wrecksfrom less competent people”…

Marx’s solution was full communism: the overthrow of the capitalist modeof production, the abolition of private property, and the replacement of ourcurrent social system with a utopian free society of associated producers.Hoover’s and Hayeks solution was that we had to wait it out; the capitalstock of the global economy has to fall, and anything that interferes withthat fall simply makes matters worse--worse in the long run, if not in theshort run.

The underlying logic being adopted by the Marx-Hoover-Hayek axis isrelatively simple. It is:

• The market’s price signals are right.

• The market’s price signals are saying that the economy has “toomuch” capital.

• Something must have gone wrong in the past to create this “toomuch” capital.

For Marx the “something” is increasing returns to scale as the fact thatthe biggest producers are the most efficient leads all businesses toexpand even though demand will then allow only a few to survive; forHayek it is usually fractional-reserve banking and the government’sprinting press backed up by the legal restrictions that support fiat moneythat creates excessive credit and the fiction that the economy can have alarger-than-sustainable capital stock; for Hoover and Mellon it is the sinsof feckless and un-Calvinist speculators who want to get something fornothing. For all there is nothing—within the current mode of productionat least—that can be done except to suffer until the economy’s capitalstock has once again fallen back to its sustainable value.

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As a matter of empirical reality, this story is false as applied to our financialcrisis today. Losses due to “overinvestment” are a very small fraction of theglobal financial losses. Had we suffered three times as much in real housingoverinvestment and mortgage security losses but had these losses beenbroadly distributed rather than concentrated in those who sought to makemoney by wittingly or unwittingly bearing tail risk, we would not now havea serious global crisis. We can see this by looking back eight years: in 2001we did have three times the losses in proportion to the financial economy inthe computer and the telecom sectors, but nobody in 2001 was worriedabout depression or speaking of the worst financial crisis in seventy-fiveyears.

So why then are people attracted to it? The American Republican andGerman Christian Democratic parties are attracted to it because it givesthem an intellectual and ideological excuse to be in opposition to the

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Obama-Biden administration and to the French-led European near-consensus, but why on an intellectual and ideological level are peopleattracted to these doctrines? Here I am out of my depth. But I do have twoideas, which I put forward tentatively and cautiously—two sets of factors toblame.

The first factor I want to blame is the late Milton Friedman. As I read him,Friedman was a leader of the Peel-Keynes-Friedman axis—a believer thatSay’s Law was not true in theory but that through limited and tacticalinterventions government could make it true in practice. Milton Friedmanwas a great economist, but also a great debater and a great rhetorician. Andhe did not especially like being a member in good standing of the Peel-Keynes-Friedman axis. You see, he believed that almost all governmentinterventions in the economy were doomed to be destructive: only thoseinterventions in the banking sector needed to keep the economy’s stock ofliquidity and flow of aggregate demand on an even keel were on averagewelfare-improving. But asserting those beliefs was rhetorically difficult: canyou say that laissez-faire is the general rule but that there is one industry inwhich the government must be constantly intervening and one product—theeconomy’s supply of liquidity, the output of the retail bankingsector—where the government must be acting so as to make sure that theright quantity is supplied whether the free market wants to or not? To try tomake that argument is to expose that it is rhetorically weak, even if it is true.Better, Friedman thought, to take a different rhetorical tack: to say thatlaissez-faire is the rule, and that as far as the banking industry is concernedthe laissez-faire policy is the one that makes the money stock of currencyplus checking account deposits grow at a constant nominal rate of k% peryear. But, of course, this really isn’t a laissez-faire policy if there are shocksto the risk tolerance and liquidity preference of the private financial market,and I think that the past eighteen months show us that there are.

So I think that a big part of the problem is that Milton Friedman did notteach his disciples—that they repeat the mantra that the right monetarypolicy is a free-market laissez-faire monetary policy by which the centralbank sets the growth rate of the nominal money stock at k% per year and

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they never did inquire as to what that really meant or how it was to beaccomplished in the world in which we live.

The second factor that I want to blame is the second-century A.D. John ofPatmos, author of the last book of the Christian Bible, the Revelation ofSaint John the Divine. That book deeply inscribed in western culture thebeliefs that transgression is sin, that sin is judged, that the outcome ofjudgment is punishment, and that punishment is inescapable—that the orderof the universe is such that those who transgress cannot escape the dueconsequences of their transgression. Those who thought that financialengineering had allowed them to successfully lay off risk or that houseprices would rise forever transgressed, and the rest of us transgressed withthem and must suffer punishment with them. This is, as Martin Wolf says,the wrong mode with which to approach the problem:

Austrians… argued [in the Great Depression] that a purgingof… [speculative] excesses… was required. Socialistsargued that socialism needed to replace failed capitalism…both views… [are] grounded in alternative secularreligions…. [E]ven I wish to see the punishment offinancial alchemists…. [But] we should approach aneconomic system not as a morality play but as a technicalchallenge…. [O]ne should not treat the economy as amorality tale…. Markets are neither infallible nordispensable. They are indeed the underpinnings of aproductive economy and individual freedom. But they canalso go seriously awry and so must be managed with care…

I think Martin Wolf is right. From my vantage point, at least, the causes ofpotential cures of our current financial malady are clear, And theconsequences of failing to take the appropriate action are also clear. Butthere is no reason for us as a globe to fail—if we do fail, it will only bebecause we have ourselves forgotten things about the limits of the marketsystem that the rulers of the British empire understood very well 164 yearsago. Economic policy knowledge will have to have gone that far

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backwards—and economics will have to have become a branch not of moralphilosophy but of moral theology.

References

J. Bradford DeLong (1990), “’Liquidation’ Cycles: Old-Fashioned RealBusiness Cycle Theory and the Great Depression” (Cambridge, MA:Harvard University Department of Economics)http://tinyurl.com/dl20090105.

Economagic Data Website http://economagic.com/.

Charles Kindleberger (1978), Manias, Panics, and Crashes: A History ofFinancial Crises (New York: Basic Books: 0471467146).

Charles P. Kindleberger (1984), A Financial History of Western Europe(London: Allen and Unwin: 0195077385).

Paul Krugman (2008), The Return of Depression Economics and the Crisisof 2008 (New York: W.W. Norton: 0393071014).

Steven Levitt (2008), “The Financial Crisis and the ‘Chicago School’,”Freakonomics (December 26) http://tinyurl.com/dl20090105d.

N. Gregory Mankiw (2007), “How to Avoid Recession? Let the Fed Work,”New York Times (December 23) http://tinyurl.com/dl200890103.

Karl Marx (1894), Capital vol. 3 http://tinyurl.com/dl20090105f.

Robert Peel (1847), “Letter on Suspension,” British Parliamentary Papers2, p. xxix.

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Christina D. Romer and David Romer (2004), “A New Measure ofMonetary Shocks: Derivation and Implications,” American Econmic Review94:4 (September), pp. 1055-84 http://tinyurl.com/dl20090103b.

Andrei Shleifer and Robert Vishny (1997), “The Limits of Arbitrage,”Journal of Finance 52:1 (March), pp. 35-55http://tinyurl.com/dl20090105c.

Lawrence White (2008), “What Really Happened?” Cato Unbound(December 2) http://tinyurl.com/dl20090105b.

Martin Wolf (2008), “Keynes Offers Us the Best Way to Think About theFinancial Crisis,” Financial Times (December 23)http://tinyurl.com/dl20090105e.