Only a bunch of PhD Economists could have managed to take a bad, but contained problem (aka, the Great Financial Crisis) and made it worse*.  Unfortunately, this was completely predictable.

In fact, it was predicted by a world famous PhD macroeconomist, Anna Schwartz.  In a series of interviews in October 2008 (see here and here), she openly criticized PhD Economists for using monetary accommodation and fiscal stimulus to address what was an opacity problem.

The Fed has gone about as if the problem is a shortage of liquidity. That is not the basic problem. The basic problem for the markets is that [uncertainty] that the balance sheets of financial firms are credible.”

She made the point of saying how hard it would be to stop these macroeconomists from supporting and pursing endless rounds of monetary accommodation and fiscal stimulus rather than admit their theories were wrong and they had no idea what they were doing.

If I regret one thing, it’s that Milton Friedman isn’t alive to see what’s happening today. It’s like the only lesson the Federal Reserve took from the Great Depression was to flood the market with liquidity. Well, it isn’t working. Professor Friedman would have enough stature to get them to listen.

Please stop and consider when Anna Schwartz made her observation about needing someone of her co-author’s stature she was considered by most macroeconomists to be THE Great Depression scholar.  Who better to comment on what should be the appropriate policy response to the Great Financial Crisis?

Ms. Schwartz was right about the need for Milton Friedman’s stature.  She was ignored by the cult of the PhD macroeconomists.

Keep in mind, these are the same macroeconomists who over the last decade have subsequently pushed yields into negative territory and have ignored the Information Matrix too.

*I probably should explain how the Great Financial Crisis was made worse.  When the crisis struck on August 9, 2007, it was contained to the financial system.  And fortunately for all of us, the financial system was designed to absorb losses and protect the real economy.

Unfortunately, PhD macroeconomists were and still are not familiar with this fact.

They are familiar with the idea fiscal stimulus and/or monetary accommodation are the solution to any recession/depression.  So naturally, they pursued monetary accommodation at the central banks these PhD macroeconomists lead and called for fiscal stimulus.

Of course, this didn’t address the problem of opacity and the losses on the debt that could never be repaid hiding in the global financial system.  In fact, it put the burden of this debt onto the real economy where it slowly strangled economic growth.

In order to escape the clutches of this debt burden, the PhD macroeconomist lead central banks did just what Anna Schwartz predicted.  They kept pursuing greater and greater levels of the same policies that hadn’t worked.  In this case, they cut interest rates until such time as we had $17+ trillion in negative yielding debt.

Yes, the whole idea of paying someone to borrow money from you undermines all of global finance.

Why?

Because not only are you guaranteeing yourself a loss by paying someone to borrow from you, but you are also taking on the risk they won’t repay at all.  Finance doesn’t work when there is no compensation for taking risk.