Look everyone is bored with this but I promised an e-mail correspondent that I would write about it. I can’t force myself to read Cochrane, but I obviously just read Fox’s quotes of Cochrane. I think I have something new to add to the pointless discussion of professor Cochrane.
Warning: I go too far after the jump.
I think he isn’t just ignorant, I think he is dishonest.
According to Fox, he wrote
“The centerpiece of our crash was not the relatively free stock or real estate markets, it was the highly regulated commercial banks.”
Now he can’t believe that the commercial banks were more central than investment banks. No one could be that ignorant. He also can’t fail to have noticed that commercial banks are more tightly regulated than investment banks (especially recently after capital requirements for investment banks were massively relaxed). Writing “commercial banks” when everyone knows that “investment banks” would be closer to the truth is not plausible ignorance.
Cochrane may be completely ignorant about the macro literature except for that recently written somewhere near a great lake, but he must know that investment banks suffered more dramatically than commercial banks. I’m not sure he has noticed that there are no longer any investment banks — that is all banks in the US are now parts of partly FED regulated firms, but I am sure that he knows that Bear Sterns, Lehman, and Merrill Lynch are not commercial banks.
One more thing about Fox, he concedes that Krugman’s arguments are not based on formal models, he fails to note that the arguments made by the Fresh water economists aren’t based on any models at all.
I’d be the first to agree with Cochrane that Krugman’s vigorous pro-stimulus arguments are based more on hunches and guesswork and politics and history than on any kind of rigorous economic model. I’ve been even less impressed, though, with anti-stimulus arguments that claim to be based on rigorous models but are utterly devoid of historical perspective, curiosity and common sense.
They have models in which the labor market clears, they are not quite crazy enough to argue that there is no unemployment right now. They make arguments which don’t make sense and which certainly are less based on any formal model than Krugman’s arguments. Fox clearly knows this. That’s why he puts in the disclaimer “claim to be based”. However, he is a journalist so he can’t note that the arguments are definitely not based on formal models. This is he says she says journalism. I’m sure Fox has read Krugman and DeLong on the lack of a model behind the arguments. It is easy to see if there is a model or there isn’t (hint there are models on Krugman’s blog — Fox can check if Fama or Cochrane have presented a model which supports their conclusions. He can ask them to send him their model. He should be able to tell if there is a model of if there isn’t and if the model leads to the conclusion.