Jeff  Carter

It’s sometimes actually worth your time to pay some attention to debates that happen within academic circles. Not the debates in the philosophy departments, those are so Left Bank. The debates in scientific and economic circles though have real world consequences because politicians listen to them and then twist their findings for their own means.

Lately, the sparring between John Cochrane and Paul Krugman has gotten pointed. Cochrane is a classical, Chicago School economist. Krugman is a Tobin trained, Keynesian economist.

Others have pointed out the story of the year for 2011 was debt. They are right. When one looks at microeconomics and sees MF Global, debt was the problem. Europe, debt. The state of State finances, debt. The US budget battle, debt. How one treats and views that debt makes a huge difference on what happens in the future.

Keynesians treat debt as manna from heaven. There are no costs to debt. There are also no opportunity costs to debt either. The money appears, and then costs and opportunity costs are totaled up to figure out the best way to spend it. However, we are finding out that this line of reasoning is incorrect and the market is starting to force them to pay for their errors.

In MF Global‘s case, Keynesian believer Jon Corzine thought that he could “hypothecate” funds and increase leverage over and over without any costs. Instead, what he learned is that there is a cost to carrying too much leverage and the lessons he should have mastered while he was in MBA school really do mean something. He then stole money from his clients to pay for his misjudgement. Not a lot different than a powerful government official raising taxes on taxpayers after they blow a bunch of money on government programs.


Jeff Carter

Jeffrey Carter is an independent speculator. He has been trading since 1988. His blog site, Points and Figures was named by Minyanville as one of The 20 Most Influential Blogs in Financial Media.