Romney’s Lead Economist Urges Policies that will Cause the Next Financial Crisis

Mankiw was Chairman of Bush’s Council of Economic Advisors during the worst excesses of the federal agencies efforts to prevent the states from regulating entities (e.g., bank holding company affiliates not subject to federal regulation) that spread the green slime through the financial system. He did not oppose preemption. Mankiw and his political patrons do not favor competition in financial regulation – they favor regulation so weak that it will be ineffective. They hate financial regulations that are successful because such regulations challenge their world view that denigrates democratic government and government regulators.

Romney’s choice of Mankiw, one of the leading architects of and apologists for the crisis, as his leading economic advisor would be a superb issue for Obama to use in his reelection campaign but for one tiny problem. The Obama administration’s policies on financial regulation are created by the likes of Rubin, Summers, Geithner, and Bernanke. They differ only on the margins from Mankiw. The entire crew of leading economists for the last three Presidents and Romney has proven catastrophically wrong about financial regulation. The remarkable thing is that they do not drop their dogmas even after they engineer multiple crises over the course of three decades. We will soon experience the 30th anniversary of the Garn-St Germain Act of 1982, which set off a renewed “competition in laxity” among the States (principally California and Texas; whose S&Ls, collectively, caused roughly two-thirds of all S&L losses) and produced the criminogenic environment that led to the second phase of the S&L debacle.
http://www.ritholtz.com/blog/2012/0...ampaign=Feed:+TheBigPicture+(The+Big+Picture)

 

Anyone who has studied econ at a major university knows Mankiw. He wrote the most popular textbooks. We all know and understand his ideas.

I actually have a different theory. I think the crises are actually cause by the fighting of two opposing ideas.

Adam Smith -- mostly correct and the most efficient system. One simply must accept the collateral damage for the greater good. The question is not one of efficiency, but rather morality. The rich will get even more rich, but in absolute terms so will the poor. However, in relative terms, the gap widens.

Keynes -- also mostly correct. Less efficient system with slower growth. The relative wealth gap doesn't widen as quickly, but mainly because the system cannot expand indefinitely under this system. Growth stagnation is the certain outcome.

Either system will prevent crises on its own, but if you switch every 4-10 years, you get the worst of both. The end result must be a crisis.

 

Keynesian economics actually increases the the wealth gap, The feds endless pursuit of inflation, and the idea that you can inflate your way out of any economic contraction, benefits people who own assets, and people with access to leverage, that is beneficial to the rich, and poor/middle class wages never keep up to inflation.