Do Tyler Cowen and Fischer Black really have a useful explanation for the financial crisis?

Shite certainly happens. However --and this is a serious question -- if that is the best Tyler Coewn can do, why does one need economists?

I mean --it's like a doctor telling me that sometimes people get sick and die.

Well, OK. And exactly WHY did I need him for that?

By the way, I bought your book after reading an excerpt. I look forward to its arrival from Amazon.

Ok, I'll bite. I think the current financial crisis is ENTIRELY a result of a rational market.
-
Interest rates were kept artificially low in America for pretty much all eight years of Bush II's presidency. This made it really cheap to borrow money and dramatically increased the amount of capital available to do "work".
-
Over the same period of time, some foreign governments also kept interest rates artificially low for extended periods of time, giving rise to things like the "yen carry trade" in Japan. This made it really cheap to borrow money and dramatically increased the amount of capital available to do "work".
-
Also over the same period of time, commodity prices rose significantly. This created a cash surplus in many commodity producing countries. These countries pushed this money back into the world market in order to make it worth more. This made it really cheap to borrow money and dramatically increased the amount of capital available to do "work".
-
Finally, also over this same period of time, several countries with high savings rates lived entirely on export-based growth while buying up lots and lots of bonds and debt issues of the countries they were buying from (germany, china, I'm looking at you here). This made it really cheap to borrow money and dramatically increased the amount of capital available to do "work".
-
So basically you had a perfect storm of events that all made it really, really easy to borrow large amounts of money for almost no cost. In this situation a rational actor would borrow the money and try to earn more with it than they were paying in interest. But with too much money chasing too few opportunities, the prices/returns rates got out of whack fast and could only be sustained by ever increasing selling prices. A rational person might try to continue flipping assets and turning a profit until the market gets too far out of alignment, at which point they'd sell at the closest to high water mark they could. But with everyone being rational and realizing that they're upside down on their investments and trying to sell all at once, the artificially high prices drop nearly instantaneously.
-
Thus you have a whole bunch of people behaving rationally individually and get and entirely irrational result.
-
Just imagine how much worse it would have been if all the traders hadn't decided to chase oil futures and there hand't been a commodity shock to cause an early systemic reset. We probably could have coasted along for another full year or two of asset flipping and price hikes without it.

[...] “The Fischer Blackian business-cycle theory that Cowen describes in his paper, for example, can be summarized in two words: s&*t happens.”  (Curious Capitalist) [...]

@SeanDecoursey - agree, with everything you've said. But have a slightly different standpoint on the issue. There's a difference between capricious short-term self-interest and rationality. I might realize that it's cheap and easy for me to personally leverage myself to the gills, but if I were an economically rational guy, I would admit that my amount of leverage would leave me pretty open to horrible systemic market crashes.
-
This whole rational market myth infuriates me. The only way to believe it is to ignore all historic evidence. Look at Justin's articles on credit cards, where consumers will take cards with lower, shorter introductory interest rates, even though they're mathematically less advantageous to them. Or people who leave their money in inefficient, poorly run retirement vehicles, because they can't overcome the force of intertia.
-
Proponents of market rationality make HUGE assumptions in the even distribution in human action, education, and most importantly, market knowledge. Then they build faulty models out of a faultier premise. It drives me CRAZY.

Another thought. Black argues for allowing a great amplitude in business cycles. Does he also argue for a restriction on the size and leverage of investing institutions?
-
Because you can't have one without the other. If you're going to say 'the market is at it's own mercy', than you have to provide some limit to the institutional scope. Otherwise companies like Lehmann and LCTM are going to collapse with frightening regularity, taking the world economy with it.
-
I mean, if propping up to-big-to-fail banks is morally hazardous, then letting them leverage themselves and fail is morally preposterous. It's economic suicide.
-
And that first bit really was a question. I'm going to look like much more an idiot than usual if he's actually addressed things like that.

Sweet fancy Moses. Along with being a pretty useless, I'm also apparently a hideous closet mysoginist - that credit card article was Barbara's, not Justin's. Da*n you, capricious God's of Blogging! DA*N YOU!

"In the latter case, entrepreneurial errors magnify one another rather than cancel one another out."
-
Wow, just 100 years later and economists are already on their way to independently rediscovere laws of positive feedback systems. I am in shock, I just could not believe that it is happening so fast and in front of my very own eyes.
-
Lee De Forest's electronic oscillator patent was filed in 1906
http://www.google.com/patents?id=LWJeAAAAEBAJ&printsec=abstract&zoom=4

[...] “The Fischer Blackian business-cycle theory that Cowen describes in his paper, for example, can be summarized in two words: s&*t happens.”  (Curious Capitalist) [...]