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The Bond Market

When Allan Meltzer Ceased Being a Real Economist...

Those of us who liked Allan Meltzer's history of the Federal Reserve were shocked when he showed up this summer as a Republican hack, writing: There is no greater recognition of the failure of the stimulus program to create jobs than the efforts to mislead the public into believing the program had saved thousands, or millions, of jobs. One can search economic textbooks forever without finding a concept called “jobs saved.” It doesn’t exist for good reason: how can anyone know that his or her job has been saved? The Administration can make up any number it pleases. The number has no meaning...

As I wrote at the time:

If the concept of "jobs saved" does not exist, how come [in his Monetary History of the United States] Milton Friedman says that an extra $1 billion of open market operations in late 1931 would have stopped the Great Depression in its tracks?...

It has now been pointed out to me that the rot is at least a decade old: Allan Meltzer gave a truly remarkable blurb to Kevin Hassett and James Glassman's Dow 36,000 a decade ago:

As you will all recall, there are three big things very wrong with Dow 36,000:

  • It's arithmetic is simply wrong: they use the earnings yield where the valuation formulas say to use the dividend yield.

  • It is extremely hazardous to confidently predict the complete evaporation over the next three-to-five years of a market phenomenon--the equity return premium--that has been around for more than a hundred.

  • Should the equity return premium ever collapse, it will collapse not with a fall in the required return on stocks to the current real Treasury bond required return, but by a convergence of both stock and bond returns to some intermediate value.

Allan Meltzer should have known better. Indeed, I suspect that at the time he did know better.