Background for the non economists. In 1976 Robert Hall christened the central schism in macroeconomic thought as being between the freshwater and saltwater schools. The division was picked by their location (on the Great Lakes and Rivers versus the coastal schools). The division exists today – and indeed is being played out in Krugman’s (saltwater) blog and by the Chicago economists who think he is a bozo idiot.
Having got through the background here is the post
Does everyone agree that Greenspan kept monetary policy too loose for too long?
I thought so!
When I did economics at University (admittedly at that Freshwater school on the Molongolo River called the Australian National University) that was meant to end in inflation – not deflation.
I like my theory to accord at least loosely with reality. Especially if I am going to bet real money on the outcome – rather than pontificate in papers from the ivory tower of academia.
More to the point – I thought (in true Freshwater style) that sustained low interest rates were a sign that monetary policy had been tight and that sustained high interest rates were a sign that monetary policy had been loose.
Given that basic understanding of macroeconomics I thought that regional banks that made more than half their profits out of carrying the yield curve would be carted out when loose monetary policy did eventually lead to higher long term interest rates. I was short a lot of banks – and whilst that was good – I spent a long time being short interest rate plays. I have detailed that mistake here. Bill Gross made a similar mistake declaring the 25 year bull market in long dated treasuries over – so despite Bill Gross’s saltwater location at Newport Beach I was in good company.
Now the subject of freshwater, salterwater and other macroeconomic elixirs is the thing in the subject de-jour amongst economic bloggers – but I have conducted the experiment – with real money – and I can confidently say (brutally backed by less-than-ideal-financial outcomes) that the saltwater guys were right.