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Do Chicago Economics Nobel-Prize Winners Live in the Consensus Reality?

Something old. On March 30, 2009 Tom Keene of Bloomberg's "On the Economy" interviewed Robert Lucas and Edward Prescott.

Ed Prescott's part of the interview is much, much stranger than Robert Lucas.

In the part I want to highlight, Prescott starts out with an apparent belief that after 1984 the Federal Reserve stopped trying to stabilize the economy:

PRESCOTT: I don’t see the mechanism for money [to affect the economy].... [O]nce the Fed stopped trying to stabilize the economy, the economy got a lot more stable...

Where this comes from I cannot imagine. It certainly doesn't describe anything the Federal Reserve has done over the past quarter century.

And it gets more bizarre.

Prescott says that the financial crisis did not affect the economy:

PRESCOTT: I think the financial crisis has been greatly overstated as a problem... [it] has had virtually no consequences for the real economy...

What did affect the economy was big bad government scaring people for no reason:

PRESCOTT: [P]eople got scared.... The press scared people. People running for office scared people. Bernanke scared people; Paulson scared people.... [P]eople began not to know what was going to happen. Then they stopped investing--by investing, I mean getting a new car or fixing up your house. And that led to the economy--it was depressed a bit that fourth quarter of last year...

Depressed "a bit"? Yes, a bit--and only a bit:

PRESCOTT: The growth rate from 4th quarter 2007 to 4th quarter of 2008, that includes that bad quarter, was 1%.... And if that fourth quarter was a normal quarter, it would have been almost up to trend...

If only the Federal Reserve and the Treasury had let the economy alone maybe the fourth quarter would have been a normal quarter, Prescott says:

[With] benign neglect the economy would have come roaring back quite quickly...

And if the economy does not come roaring back with a very strong recovery now, Prescott knows what to blame: big government scaring people again.

He simply does not live in the consensus reality with the rest of us.

Ah, well: at least the reality he lives in is a happier place then this one.

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