Wednesday, December 2, 2009

Did Stiglitz agree with Prescott?

When Marginal Revolution reported this I thought so. If this is the case then it must be the strangest pairing - perhaps they should be partners in Dancing with the Stars.

Here is Nobel prize-winner Joseph Stiglitz quoted by Free Exchange:

We’ve really extended the safety net beyond to big to fail, and my view is that there’s been no convincing argument that any of this was ever needed. It was based on the notion of fear — that if you didn’t do it, the whole financial set of markets would fail. Economics would have suggested that if you did a debt to equity conversion, converting long-term debt into equity, the financial institution would be well capitalized, there would be no reason to panic, and there would be more confidence in the market. But those who saw an opportunity to use scare tactics to get what they wanted did use those scare tactics, and it worked.

Here is Nobel prize-winner Ed Prescott quoted by Brad DeLong:

[P]eople got scared.... The press scared people. People running for office scared people. Bernanke scared people; Paulson scared people.... [P]eople began not to know what was going to happen. Then they stopped investing--by investing, I mean getting a new car or fixing up your house. And that led to the economy--it was depressed a bit that fourth quarter of last year... [With] benign neglect the economy would have come roaring back quite quickly...

Free Exchange says that Joseph Stiglitz's views are "insane" and Brad DeLong says that Prescott "does not live in the consensus reality with the rest of us." I am not sure why they are so confident.

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