The Manne meltdown

“I must admit to having no compence in economics whatsoever” wrote Robert Manne in the Introduction to The New Conservatism in Australia (1982). He proceeded to demonstrate the truth of that admission by turning his face against economic reform and advocating the kind of policies that locked Japan into recession for more than a decade. There were some signs that he learned something over the years but it is apparent from his introduction to the “Is Rudd Right” series of essays in the May Monthly that he has reverted to his natural state.

The five contributors are Eric Hobsbawn, Charles Morris, John Gray, Dean Baker and David Hale.

Manne describes Hobsbawn as “unquestionably the most formidable interpreter of the patterns of world history from the French Revolution to the present day”. He is also described as a former communist but this conflicts with reports that his recent autobiography reveals that at 85 he remained an ‘unrepentant communist’. He is clearly a living relict from the time when the hard left looked to Russia and then the Soviet Union as the hope of the world. Let Kolakowski’s essay “My correct views on everything” stand as the appropriate rejoinder to Hobsbawn. It was written in response to Edward Thompson, another fellow traveller.

David Hale, head of the US consultancy Global Economics, provides the best contribution of the five. He wrote that the crisis did not arise from systemic failure or false ideas about liberal economcs, but from some relatively easily avoidable factors, especially three factors which drove the American property boom. First, excess global liquidity from current account surpluses of developing countries, second the government push to provide home loans to people who could not afford to service them and third the securatisation of loans and their endorsement as secure by incompetent rating agencies. Hale identified Rudd’s main error in failing to understand the role of the GSEs (government sponsored enterprises), Fannie and Freddie, in fanning the flames for the meltdown. He could have added the low interest rates and loose monetary policy of the Fed. He concluded that the challenge for governments is not so much to increase regulation but to eliminate the perverse incentives that undermine prudent lending practices.

Manne described Dean Baker of the democratic-progressive Centre for Economic and Policy Research as alone among economists in 2002 in describing the housing market as an accident waiting to happen. This claim is nonsense. An article in the New York Times in 1999 pointed out that the push to hugely increase the subprime lending backed by Fannie and Freddie would generate a bubble that would collapse as soon as house prices (inevitably) tanked. The article predicted that this would call for a bailout that would dwaft the previous Savings and Loans bailout (180 Billion).

Charles R Morris, banker and lawyer, is billed as the author of the first serious history of the current economic crisis. It seems that Manne has not heard of Meltdown by Thomas Woods. (Reviewed here). But then it seems that Morris had not heard about Woods or the Austrians either. Woods shows how the meltdown yields to Austrian analysis, while Morris casts doubt on the rigor and predictive capacity of the economics profession at large.

John Gray has embraced the Rudd thesis that the meltdown spells the end of an era and the final collapse of “the great neo-liberal experiment”. This analysis fails to note the role of non-liberal fingers in the pie (the policy of the Fed, the role of Fannie and Freddie, the moral hazard of anticipating a bailout) and the fact that wherever in the world there is a move in the direction of the classical liberal/free trade agenda, things are getting better (notably the rise of the middle class in India and China as they open their economies a little). In addition, the neo-liberal moves in Australia, palid as they are by rigorous standards, and the relatively sound interest rate policy of our Reserve, put us in a better position than most places in the world to weather the storm.

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9 Responses to The Manne meltdown

  1. Butterfield, Bloomfield & Bishop says:

    Rafe,

    it would be nice if you could try to be accurate.

    neither Freddie nor Fannie could be said to be pursuing sub-prime loans.
    In the period concerned it was the private investment banks who did hence their market share grew enormously.

    the market share of GSE’s dropped like a stone.

    Where the GSEs had considerable regulation the private investment banks had much less.

    ( did you ever compare foreclosures between the two?)
    It was the private investment banks that drove sub-prime loans because like the totally discredited rating agencies they saw no problem as housing prices always rose.

    When they didn’t and this was combined with lack of recourse we suddenly found out those brilliant geniuses on Wall Street were actually very stupid.

    you appear to be joining Manne’s economic class!

  2. pedro says:

    Homer, you should go work for the Washington Post, those dummies need your help to get the subprime story correct:

    “Discussing the company’s successes, Mudd said one of Fannie Mae’s achievements in 2006 was expanding its involvement in the market for subprime and other nontraditional mortgages. He called it a step “toward optimizing our business.”

    http://www.washingtonpost.com/wp-dyn/content/article/2008/08/18/AR2008081802111.html

  3. pbrosnan says:

    Ah, so the most accurate pundit is the one who is most closely ideologically aligned with the author. Nice to see some objectivity. And I would add that shadow of Hobsawms’ lenghty academic career would tend to adumbrate the author’s rather ill tempered rant. Vive l’revolution!

  4. Patrick says:

    Who had bigger losses, the GSE’s or the private banks?

    Where the GSEs had considerable regulation the private investment banks had much less.

    Funny you should note that Homer. In fact they had a $200m a year 65 staff regulatory agency devoted to them alone. What conclusions do we draw from that?

    (That the boss of the regulatory agency should not sleep with the CEO of the regulated entreprise?)

    Pbrosnan(?!), if there is a sentence hiding between your second and third full stops, we’d love to see it. And as for the French…

  5. Butterfield, Bloomfield & Bishop says:

    Pedro,

    The horse had bolted then.

    They were attempting unsuccessfully to play catch up.

    This was merely a reaction to the major loss of market share.

    They actually got into the Alt A market rather than sub-prime which is why they are in their predicament today.

  6. Having read Manne’s introduction to the essays, I agree with you to a certain extent Rafe. Manne adds completely unneccesary opinion (you call it idealogical – I think it’s more self-aggrandising), to his introduction which adds nothing of value other than a theatrical build-up to the pieces.

  7. Butterfield, Bloomfield & Bishop says:

    I might just add there has been a fair bit of academic research into securitisation and whether fee generation ahead of due diligence and the prevailing view is that they did.

    Again it isn’t the GSE’s leading the pack in this!

  8. Patrick says:

    I’m sure that collection of words was intended to mean something, but I can’t quite guess what.

    So I’ll hang out for an answer to my original question – but to make it more fun it now has two parts.

    1 How much have the GSE’s lost as against the less-regulated ordinary banking sector?
    2 How much did that ordinary sector lose as against the slightly-less-regulated investment banking sector?

    (of course, all these institutions were regulated to buggery and beyond, but as long as this is the angle you want, let’s see where it leads)

  9. Rafe Champion says:

    Some progress. US Treasury Secretary admits that loose monetary policy contributed to the meltdown.

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