Duh, University of Chicago Economist Has Never Heard of the Frinancial Crisis

The Economix column at NYT gets dumber and dumber by the week.

Today, Casey B. Mulligan, an economics professor at the University of Chicago, writes:

Short-term interest rates have an obvious effect on the housing market, but not the rest of the economy.

Federal Reserve policy affects short-term interest rates, bank regulation and eventually inflation...

The Federal Reserve, especially its New York branch, is actively engaged in buying and selling Treasury securities, and it lends money to banks on an overnight basis. As a result, it is widely thought that the Federal Reserve is an important determinant of the rate of interest paid on short-term Treasury securities.

By reducing the supply of Treasury securities and overnight loans, so-called “tight” monetary policy raises short-term interest rates. High short-term interest rates are said to discourage borrowing, and thereby curtail private sector investment projects. The idea is that private sector projects are undertaken only when their expected return exceeds the cost of borrowing.

In theory, high short-term interest rates result in relatively few capital projects, with high expected returns, and low short-term rates result in more capital projects, including those with lower expected returns.

But the effect of high short-term interest rates on Main Street’s economy has been exaggerated. Although it is commonly assumed that today’s rock-bottom rates should help strengthen a business recovery, it appears that business conditions actually have little to do with short-term money markets.

Many important private sector investment projects are relatively long term — it most likely takes a year or more for a project to be completed and deliver a positive cash flow to investors. As a result, many capital projects are financed through long-term borrowing, with equity financing, or out of corporate retained earnings, rather than borrowing in the short-term market where the Fed’s fingerprints are so obvious.

Does this guy have any clue why Lehman and Bear Stearns went down?

Lehman and Bear borrowed short-term money and lent it long. The Fed pushing short-term rates down played a major role in the arbitrage that Lehman, Bear Stearns, and the like,conducted between the short-term part of the yield curve and the long-term.

To this day, most banks continue to borrow on the short end of the yield curve and lend longer term. In other words, the level of short term rates has a very direct impact on what kind of lending goes on long-term.

It is amazing Mulligan deosn't appear to understand this. He has no idea as to what goes on in the real world. Naturally, he has a bunch of equations which prove his point, based on holding many things constant, but if I held the world constant when he was in the bathroom, I could prove he is always on the can.