Niall Ferguson’s Latest Gay Bashing is the Least of His Problems

By William K. Black
(Cross posted at

It is always a disaster when devotees of theoclassical economists speak their minds in front of what they think are friendly audiences.  Mitt Romney’s attack on 47% of Americans as leeches that it was his job not to represent were he elected President was the final nail in his self-constructed electoral coffin.  We now have Niall Ferguson, a history professor at Harvard and Hoover fellow whose theoclassical views have proven so influential with Prime Minister Cameron’s government’s adoption of austerity policies that have killed the UK recovery.

Ferguson has had a terrible last 10 years.  He was a strong proponent of invading Iraq and pines for us to stay indefinitely in Afghanistan.  He was a Romney supporter who wrote an anti-Obama screed in Newsweek that demonstrated his contempt for facts.  He was an advisor to Senator McCain’s campaign for the presidency.  Because of his record of getting every important policy issue wrong he was paid a great deal of money to speak to an “alternative investment” conference that began, with no small irony, on May Day.  Ferguson was presenting his thesis that the West has become “degenerate.”  He certainly proved that point about himself.

Krugman v. Ferguson (2009) (TKO for Krugman in the First Round)

Ferguson has been spinning out of control in recent weeks.  In 2009, he made the mistake of trying to debate a Nobel Laureate in Economics (Paul Krugman) about  Krugman’s specialty.    If it had been a fight the ref would have stopped it in the first round and awarded a TKO.  Ferguson did his ode to austerity as a response to the Great Recession and claimed that the stimulus program was causing, and would continue to cause, interest rates to soar and prevent a recovery.

Austerity created the gratuitous überDepression in the Eurozone’s periphery.  U.S. interest rates have fallen to record lows.  Ferguson admitted recently that stimulus had not produced his predicted surge in interest rates and that austerity in response to the Great Recession proved self-destructive.  That was fine, but Ferguson could not leave it there.  He added three points got him trouble – and those three points prompted Ferguson’s latest and greatest of own goals.  First, Ferguson tried to reinvent the history of the position he took during the 2009 debates with Krugman.

Second, having agreed that Keynes had proven correct and Ferguson had again been proven incorrect in his predictions, Ferguson proceeded to continue to demonize Keynes as the cause of much of the West’s supposed degeneration.  This is more than passing strange because it is Ferguson’s policies that have proved disastrous and Keynes’ policies that have proven correct.

Third, Ferguson responded furiously on March 6, 2013 to Krugman’s article pointing out Ferguson’s effort to air brush out of history Ferguson’s history of predictive failure.  Ferguson’s cri de cœur is so delectable because it sends a frisson through one’s body to see such naked hypocrisy and whining in print from the self-proclaimed champion of American military adventure designed to create and expand a new American empire and a writer whose works are now redolent of innuendo.

“In my view Paul Krugman has done fundamental damage to the quality of public discourse on economics. He can be forgiven for being wrong, as he frequently is–though he never admits it. He can be forgiven for relentlessly and monotonously politicizing every issue. What is unforgivable is the total absence of civility that characterizes his writing. His inability to debate a question without insulting his opponent suggests some kind of deep insecurity perhaps the result of a childhood trauma. It is a pity that a once talented scholar should demean himself in this way.”

Ferguson, trained as a historian, uses innuendo to make up a (self) “suggest[ed]” history to smear a critic who (1) proved correct, (2) proved Ferguson incorrect, and (3) correctly called out Ferguson’s effort to change history to mislead readers about point #2.  But what sends the frisson through your body when you read Ferguson’s effort to smear Krugman is Ferguson’s naked hypocrisy – and his blindness to it.  As with his repeated efforts to smear Keynes, Ferguson’s attempt to smear Krugman reveals everything important and true about Ferguson and nothing important or true about Keynes or Krugman.  The nice thing about Ferguson is that despite the adage that “practice makes perfect” he is getting ever cruder and more self-destructive in his efforts to smear those with whom he disagrees.

Ferguson, of course, has no proof of any childhood trauma and makes no pretense that he conducted any research before unleashing his triple innuendo (Krugman must have suffered a childhood trauma that must have caused some “deep insecurity” and that must have left him unable to “debate a question without insulting his opponent.”  Feguson simply used innuendo to make up as an ad hominem smear of someone who crushed him in a debate through superior logic and expertise.  Ferguson, having failed as an arm chair economist in his debate with Krugman, now appoints himself an arm chair psychoanalyst of Krugman and proceeds without interviewing Krugman to declare him deranged.  That’s the only way Ferguson could “win” a debate he lost.

May 2, 2013: Ferguson’s Epic Fail

All of this provides the essential setting for understanding Ferguson’s latest epic fail.  Here is Ferguson’s explanation of what happened when a member of the audience at the investor conference asked him a question on May 2, 2013.

“In his apology Ferguson explained: ‘I had been asked to comment on Keynes’s famous observation ‘In the long run we are all dead.’ The point I had made in my presentation was that in the long run our children, grandchildren and great-grandchildren are alive and will have to deal with the consequences of our economic actions.’

He added: ‘I should not have suggested – in an off-the-cuff response that was not part of my presentation – that Keynes was indifferent to the long run because he had no children, nor that he had no children because he was gay. This was doubly stupid. First, it is obvious that people who do not have children also care about future generations. Second, I had forgotten that Keynes’s wife Lydia miscarried.’”

So, we have Ferguson apologizing for making a claim that he knew to be the “obvious[ly]” false.  Ferguson claimed that gay people who have no children did not “care about future generations.”  Ferguson calls his statement “doubly stupid” because “I had forgotten that Keynes’s wife Lydia miscarried.”  The second aspect of that self-described “stupidity” is an allusion to the fact that Ferguson did not make a single quip bashing gays as indifferent to future generations.  Ferguson went on an entire, snide riff mocking Keynes and his marriage.  It is this aspect of Ferguson’s ad hominem attack on Keynes that prompted the portion of Ferguson’s apology that termed his assault “insensitive”:  “I made comments about John Maynard Keynes that were as stupid as they were insensitive.”  One reporter at the event, Tom Kostigen, reported extensively on Ferguson’s gay bashing and made clear his disapproval.  He reported what Ferguson said in his extended his attacks on Keynes’ sexual orientation.

“Ferguson asked the audience how many children Keynes had. He explained that Keynes had none because he was a homosexual and was married to a ballerina, with whom he likely talked of ‘poetry’ rather than procreated. The audience went quiet at the remark. Some attendees later said they found the remarks offensive.

It gets worse.

Ferguson, who is the Laurence A. Tisch Professor of History at Harvard University, and author of The Great Degeneration: How Institutions Decay and Economies Die, says it’s only logical that Keynes would take this selfish worldview because he was an ‘effete’ member of society.’”

We have just witnessed a variant of what economists call “revealed preferences.”  Economists are skeptical of what people tell pollsters they would do in terms of economic actions in response to hypothetical financial incentives.  We teach that it was people actually do in response to the incentives that reveals their true preferences.  Ferguson’s great problem is that he spoke what he believed – and what he believes is false and bigoted.  Begin with what should have been the most obvious point that Ferguson’s apology ignores.  If Ferguson’s “obvious[ly]” incorrect claim was based on the “stupid” premise that adults who do not have children do not care about future generations – why did he raise Keynes’ sexuality?  It would have sufficed for Ferguson to simply make the “obvious” and “stupid” claim that because Keynes had no children he did not care about future generations.  Keynes’ sexuality is irrelevant and gratuitous to Ferguson’s obvious and stupid claim about the purported reason that Keynes was childless.

Ferguson brought up multiple homophobic tropes about gay males in his recent speech.  They are “effete,” even when they marry women they are so effete that they read their wives “poetry” rather than have sex, which is why they do not reproduce even if they are bisexuals, closeted gays who marry women, or men who identify as heterosexuals though they had homosexual relationships when they were younger.  This last absurdity, belied by millions of children fathered by closeted gay or bisexual American males over the history of this Nation even before gay couples could produce children through surrogacy or via adoption, is what prompted Ferguson’s apology for forgetting that Keynes’s wife suffered a miscarriage.

I presume that Ferguson is aware that men who identify as gay, bisexual, and heterosexual males who had gay sexual experiences in their youth have fathered children.  Indeed, Ferguson brought up his views about Keynes’ sexuality after he brought up the fact that Keynes did not have children.  That makes Ferguson’s gay bashing even more gratuitous.

Ferguson loves counterfactuals, so let’s try this counterfactual.  What if Ferguson had made the obvious, stupid claim that people who are childless do not carry about future generations?  We know that he despises Keynes and Krugman (in the same talk he archly referred to Krugman as his “arch-enemy”) and that both are childless.  Ferguson could have claimed that Keynes and Krugman were indifferent to the lives of future generations because they were childless.  How would the audience have reacted to such a claim?

The perhaps 25% of the audience who were childless would have stared at him like he was an idiot who had gone out of his way to insult them.  The Americans in the audience would have thought first of themselves if they were childless, then of their relatives and close friends who were childless, then of George Washington, and finally of Jesus.  Any of them with friends or relatives serving in the U.S. or U.K. military in Afghanistan who are childless would have felt a special rage for Ferguson’s obvious, stupid insult.  Ferguson would have lost the crowd instantly.  An angry buzz – “did he really say that?” – would have spread throughout the room.

Ferguson changed that dynamic by inventing a trait (unconcern for future generations) that he falsely ascribed to Keynes by willfully misinterpreting Keynes’ words, blaming that trait on Keynes’ sexuality, mocking Keynes’ sexuality at some length, claiming that Keynes’ fictional unconcern for future generations was a trait characteristic of homosexuals, and falsely conflating gays with childlessness.  It was a full-fledged smear not only of Keynes but all homosexuals that Ferguson developed not in a single quip, but in an extended, purportedly logical analysis that was stitched together from an extended series of “obvious[ly]” “stupid” statements.

Here’s the key – by gay bashing Keynes and homosexuals Ferguson was almost able to (again) get away with a smear that would have failed instantly had Ferguson not gratuitously brought up homosexuality and instead had rested his attack on Keynes on his not having children.  Some members of the audience were reported to be upset by Ferguson’s gay bashing, but apparently no one said anything out loud at the conference to call Ferguson on his gay bashing.  The first web account reported some of Ferguson’s words when he engaged in gay bashing Keynes – but made not a word of comment, much less a complaint or response.

It was not until Kostigen made public what Ferguson said and expressed his disgust at Ferguson’s gay bashing that things changed.  (Kostigen’s column immediately drew a comment wanting to know whether he was a homosexual.)  It was only at this juncture that Ferguson realized that he could no longer get away with gay bashing in public.  Back in the “good old days” when he was a darling of the Thatcherites his smears of Keynes would have been won Ferguson praise for his wit and erudition.  Today, bigotry is (albeit with a lag) seen as bigotry and instead of wit and erudition the Fergusons of the world are forced to admit that their smears were “obvious[ly]” “stupid.”  Of course, the point is that Ferguson’s homophobic innuendo was always obviously stupid and vicious.  The fact that it was treated as respectable and even brought him praise from his ultra-conservative colleagues shows how intellectually dishonest and bigoted the portion of the world Ferguson inhabited in his formative years was.

As I will explain, Ferguson has a long, sad history of gay bashing Keynes using a whole series of homophobic tropes and crude insults based on innuendo that began in print at least 18 years ago.  As Brad DeLong and others have pointed out, Ferguson was also mining a rich vein of homophobic attacks on Keynes by other theoclassical critics of Keynes.  Ferguson’s mistake was in forgetting how much the world had changed in such a relatively short time when it comes to gay bashing.

The Conservative Roots of Gay Bashing Keynes

Brad DeLong provides the nasty source of the river of bile that led to Ferguson’s extended rant about Keynes and homosexuality.

“The source appears to be a rather remarkable screed by Gertrude Himmelfarb in a rather McCarthyite vein, that manages to get a lot about Keynes’s economics and his family life substantially wrong in a very short space, which in turn appears to be based on the views of Joseph Schumpeter.  Gertrude Himmelfarb [wrote]:”

From Clapham to Bloomsbury: a genealogy of morals: In one sense Keynes is the most interesting of the [Bloomsbury] group, because he defied at least one of its precepts. He not only lived a ‘life of action’; he did so in the most bourgeois and materialistic of professions. If it was partly accident that originally drew him to economics, it was talent and ambition that kept him there. Yet even while pursuing that sordid occupation, at Cambridge and at the Treasury, he made it clear that he regarded economics as a separate and altogether inferior sphere of life and that he personally deplored any emphasis on economic motives or criteria. Bertrand Russell recalled that while Keynes “escaped into the great world,” he did so with the air of a ‘bishop in partibus’; when he ventured forth into the mundane world of economics or politics, “he left his soul at home.”

In fact, something of the “soul” of Bloomsbury penetrated even into Keynes’s economic theories. There is a discernible affinity between the Bloomsbury ethos, which put a premium on immediate and present satisfactions, and Keynesian economics, which is based entirely on the short run and precludes any long-term judgments. (Keynes’s famous remark. ‘In the long run we are all dead,’ also has an obvious connection with his homosexuality – what Schumpeter delicately referred to as his ‘childless vision.’) The same ethos is reflected in the Keynesian doctrine that consumption rather than saving is the source of economic growth – indeed, that thrift is economically and socially harmful. In The Economic Consequences of the Peace, written long before The General Theory, Keynes ridiculed the “virtue” of saving. The capitalists, he said, deluded the working classes into thinking that their interests were best served by saving rather than consuming. This delusion was part of the age-old Puritan fallacy… “

Ferguson’s 1999 Gay Bashing of Keynes

This is not the first time that Ferguson has gone out of his way to emphasize Keynes’ sexual orientation in a manner designed to raise animus against Keynes through a smear comprised entirely of innuendo (note Ferguson’s use of “perhaps”).

“Thursday’s remarks were not Ferguson’s first comments on Keynes’ sexuality. In his 1999 book ‘The Pity of War,’ Ferguson wrote that World War I ‘made Keynes deeply unhappy. Even his sex life went into a decline, perhaps because the boys he liked to pick up in London all joined up.’”

Right, because an Englishman couldn’t be “deeply unhappy” at the massive loss of life and limb caused by World War I – at least if he were gay.  A gay Englishman would “perhaps” be “deeply unhappy” because the war interfered with his sex life.  (Note that Ferguson adds the homophobic trope that gays are out to recruit our young “boys.”)

Ferguson’s 1995 Gay Bashing of Keynes

In a similar smear four years earlier, Ferguson raised the possibility in an article entitled “Keynes and the German Inflation” that Keynes sympathized with Germany’s position on paying reparations because perhaps he was a lover of one of the German negotiators (Ferguson 1995: 369-370.)

Ferguson adds the homophobic trope that gays are a security risk and potential traitors.  Ferguson’s 1995 smear is a classic.  He begins with an innocuous phrase (essentially, “I love that guy”) by Keynes that virtually every male of any sexual orientation has likely said many times.  Keynes said that “he got to love” Carl Melchior, who he worked with in the course of his negotiations with the Germans about reparations.  Given the widespread homophobia in Keynes’ era in England and the widespread hate for Germans there is no chance that he would make such a remark if he felt there was any risk that it could be read as an admission of a traitorous, gay affair with a German negotiator.  (Ferguson also adds gratuitously that Melchior was Jewish.)  But at this juncture Ferguson is feeling very clever about his smear.  He begins by claiming, falsely, that there is “no question” but that there was an “emotional dimension to Keynes’s position” on German reparations because of the single innocuous comment about Melchior.  You know gays, all emotion; no ability to be logical.  Ferguson has a low threshold for rocketing from wild speculation prompted by a single statement to unquestionable fact (“no question”).  Ferguson realizes this is nonsense, so after creating a purported excuse for bringing up Keynes sexuality, and planting the innuendo that that, at best, Keynes’ position was compromised by his “emotional” connection with a German negotiator, Ferguson drops another innuendo – Keynes “may” have been referencing a “sexual attraction” towards Melchior.

All of this would be disgraceful for any writer, but for a historian it is beyond the pale.  It is revealing how Ferguson next tries to remove his fingerprints from his quadruple effort to smear Keynes (gay, emotional, swayed by his sexual attraction, for a representative of the enemy).  Ferguson now declares that it “seems more probable” that Keynes was “captivated” by his post-war “pessimism.”  Ferguson is trying to position himself as the one who put in writing his belief that the “more probable” explanation for Keynes’ behavior was that he was not a traitorous homosexual – that was the less probable explanation. See?  Ferguson, cast some doubt on the smear he invented and spread through innuendo about Keynes.  Ferguson is Keynes’ defender!

The Immoral Effort to Moralize Economics

DeLong is correct that Himmelfarb manages to pack a large number of errors about Keynes and about economics into three paragraphs.  I will return briefly to some of those economic errors later in this article.  First, I want to note that Himmelfarb’s screed is like Ferguson’s screed in another way – it attempts to moralize economics.  Himmelfarb is explicit about making that effort even in the title of her work.  People who challenged the conservative English social order were pathetic, child-like creatures who “put a premium on immediate and present satisfactions.”  Homosexuals are immoral (because they are assumed not to have children) – the “connection between lack of concern for future generations and homosexuality is “obvious.”  Homosexuals like Keynes drag the world into degeneracy by impugning the ‘virtue’ of saving.”

When Keynes was alive and could defend himself directly against the moralizers he skewered them so successfully that he dominated the field.  James Galbraith’s article chiding Paul Krugman for ignoring the economists who got the ongoing crisis right (“Who Were These Economists, Anyway?”) contains Keynes’ devastating retort in 1936 to the immoral moralizers.  Sadly, the same retort applies today to theoclassical economics.

“It must have been due to a complex of suitabilities in the doctrine to the environment into which it was projected. That it reached conclusions quite different from what the ordinary uninstructed person would expect added, I suppose, to its intellectual prestige. That its teaching, translated into practice, was austere and often unpalatable, lent it virtue. That it was adapted to carry a vast and logical superstructure, gave it beauty. That it could explain much social injustice and apparent cruelty as an inevitable incident in the scheme of progress, and the attempt to change such things as likely on the whole to do more harm than good, commended it to authority. That it afforded a measure of justification to the free activities of the individual capitalist, attracted to it the support of the dominant social force behind authority.

“But although the doctrine itself has remained unquestioned by orthodox economists up to a late date, its signal failure for purposes of scientific prediction has greatly impaired, in the course of time, the prestige of its practitioners. For professional economists…were apparently unmoved by the lack of correspondence between the results of their theory and the facts of observation; – a discrepancy which the ordinary man has not failed to observe…”

Keynes’ remarks stress three points.  First, he knew that the “austerians” claim that inflicting additional pain on households in response to a recession represents “virtue” found a responsive chord in many politicians.  President Obama and the very serious people that live within the beltway genuflect whenever the mantra “shared sacrifice” is chanted.  What Keynes pointed out, and what the overwhelming majority of economists believe, is the fallacy of thrift during an economic contraction.  Keynes explained that it was rational for households to respond to a recession or depression by cutting their spending, and that their collective action could deepen the recession or depression by further depressing already grossly inadequate demand.  This could cause severe, long-run suffering.  The austerians frame this long-run suffering as a virtue.  Keynes saw it as self-destructive.  Austerity in response to a recession or a depression is akin to bleeding a patient to heal him.  A nation with a sovereign currency is not “just like” a household.  It can, and should, step forward and supply the lost demand to speed the recovery and reduce suffering.  This is helpful in all time perspectives (short-to-long).  The claim that Keynes did not care about longer-term effects is a fiction.

Second, Keynes did not simply point out that what we would call today “automatic stabilizers” and “stimulus” programs were not “immoral.”  In the quoted passage his primary message was that the moralizers’ embrace of thoeoclassical economic dogmas was profoundly immoral.  Keynes exposed these economists as shills for the plutocrats who became the most notorious apologists for those who became wealthy by inflicting “social injustice” and even “cruelty.”  Part of the plutocrats’ cruelty was telling those that were not wealthy that their path to morality was to suffer stoically these self-destructive, gratuitous double-dip recessions caused by austerity.

Ferguson does not understand the irony of decrying an invented lack of altruism by Keynes to a group of investors who disproportionately studied economics, finance, and business and who are generally exceptionally wealthy and include a disproportionate number of CEOs.  These are the three groups in America we know of that rank at the bottom in altruism (or exceptionally high in narcissism) and many aspects of care for the future generations, e.g., climate change.  (It would be interesting to explore whether there is an interaction effect that makes wealthy CEOs from an economics or finance background rank even lower on altruism.  In addition to putting the lowest weight on the importance of climate change (the quintessential burden we are placing on our children), the wealthy were found in a recent study to have the opposite priorities from the general public on a series of issues critical to future generations.  The wealthy want cuts to Social Security, government health care programs, and food stamps (SNAP).

University students who study economics self-select when they enter our programs and display significantly lower altruism on most tests.  Research shows if they major in our programs the study of economics and their peers’ views combine to produce even lower altruism scores.  This article by a student pulls together some of the research citations.

CEOs rank exceptionally high in psychological tests measuring narcissism.  One of the factors positively associated with CEO narcissism is financial fraud.

What all of this means is that if Ferguson was really concerned that too many Americans are becoming “degenerate” because they lack sufficient concern for the plight of other less fortunate Americans and future generations then he was speaking to the right audience.  Statistically speaking, his audience was unusually likely to be weak in altruism.  Of course, that speech would not have gone down to well with a group that is paying his speaker’s fee.

Third, Keynes pointed out the consistent predictive failures of theoclassical economists.  Ferguson tried his hand at economic predictions in his debate with Krugman in 2009.  Ferguson claimed that the fact that the stimulus program was pushing up interest rates, which he predicted would surge and cause a severe crisis.  Krugman explained why Ferguson was wrong.  If it were a fight, it would have been ended by the ref as a TKO after Krugman’s response.  The facts proved Krugman correct, so Ferguson responded by changing his position – retroactively!  He now claims that he did not say what he actually said in 2009.  Sadly for Ferguson, there are records of what he said and Krugman was happy, in his February 19, 2013 column, to compare and contrast Ferguson’s statements in 2013 about what he (didn’t) say in 2009 with what Ferguson actually said and predicted in 2009.

In the Long Run Ferguson’s Dishonesty about Keynes’ Quotation Will be an Epic Fail

Himmelfarb and Ferguson cite Keynes’ famous observation (“in the long run, we are all dead”) as proof that his economics, warped by his homosexuality, were concerned only with the short-run.  This is particularly disturbing for those who write history because, in context, that interpretation of what Keynes was actually saying is impossible for any honest historian to hold.

Krugman has just written a column explaining this point.

“One dead giveaway that someone pretending to be an authority on economics is in fact faking it is misuse of the famous Keynes line about the long run. Here’s the actual quote:

‘But this long run is a misleading guide to current affairs. In the long run we are all dead. Economists set themselves too easy, too useless a task if in tempestuous seasons they can only tell us that when the storm is long past the ocean is flat again.’

As I’ve written before, Keynes’s point here is that economic models are incomplete, suspect, and not much use if they can’t explain what happens year to year, but can only tell you where things will supposedly end up after a lot of time has passed. It’s an appeal for better analysis, not for ignoring the future; and anyone who tries to make it into some kind of moral indictment of Keynesian thought has forfeited any right to be taken seriously.

And there’s an important corollary: how you should go about getting to some desired long-run outcome may depend a lot on how you think the economy works in the short run.”

Ferguson’s Apology is Also an Epic Fail

Ferguson’s “unreserved” apology is nothing of the kind.  He does not apologize for his past efforts to smear Keynes.  He tries to make it appear that the latest smear was a one-off, unthinking quip.  It was neither.  He apologizes for being “insensitive.”  What could that mean in this context where he is supposedly agreeing that what he said was false – not true but “insensitive?”  Ferguson simply made up the part about Keynes and “poetry.”  Ferguson’s spreading of homophobic tropes isn’t “insensitive” in this context – it’s false and it is nasty.

Ferguson apologizes for forgetting that Keynes’ wife suffered a miscarriage.  But what is the relevance of that fact to Ferguson’s smear or apology?  Is he saying that the pregnancy falsifies his implicit smear that Keynes wasn’t “man enough” to have sex with a woman?  Did he think gay or bisexual males were sterile or impotent?  Why did he emphasize his claim that Keynes married “a ballerina?”

Why didn’t Ferguson apologize for his substantive misstatements?  As a historian who has read Keynes he knows that Keynes’ quip about “in the long run we are all dead” had absolutely nothing to do with claiming that the longer-term health of the economy was unimportant or a matter in which Keynes was uninterested.

Here’s the portion of the initial news report (which expressed no criticism at Ferguson’s gay bashing) that shows the context of Ferguson’s attack on Keynes’ sexuality.  The questioner, Paul McCulley (a famous, wealthy financial guru) asks a serious macroeconomics question.  I’ve been on panels together with him in Ireland at the Kilkenomics Economics Festival.  He is someone who was asking a question like this to smoke out Ferguson’s knowledge and beliefs about one of the most important macroeconomic questions.

Note that McCulley understands the context of Keynes’ famous quip about the long run – and the important substantive point that Keynes was making, which is why McCulley premised his question by quoting a longer excerpt from Keynes’ statement about the long run.  Keynes was making the point that economic policies that might make sense in a context of an economy that was performing well at or near full employment would be nonsensical in a very different (“current”) economic context.  One of the prime examples of where this would be true is if the economy were in a liquidity trap.

The reporter’s notes of Ferguson’s response to McCulley follow:

Paul McCulley

“‘The long run is a misleading guide to current affairs…in the long run we are all dead.’

Are we in a liquidity trap, are we at a zero bound of interest rates and stuck at 8% unemployment?”

“Keynes was a homosexual and had no intention of having children. We are NOT dead in the long run…our children are our progeny. It is the economic ideals of Keynes that have gotten us into the problems of today. Short term fixes, with a neglect of the long run, leads to the continuous cycles of booms and busts. Economies that pursue such short term solutions have always suffered not only decline, but destruction, in the long run.”

Notice that Ferguson not only does not answer McCulley’s question – he does not even address the question.  Answering McCulley’s question correctly is critical to determining how we should respond to the ongoing crisis.  It is also a tough question.  If Ferguson agrees we are in a liquidity trap then his pleas for austerity are even more self-destructive.  The notes show that Ferguson had earlier opined that monetary policy offered no real hope for recovery, which would suggest that he believed we were in a liquidity trap.

Ferguson’s response to a difficult question was to ignore the substance of the question and launch a diversionary strike on Keynes’ sexuality and to invent “ideals” that Keynes never held in order to blame him for “the problems of today.”  Ferguson’s disingenuous apology only addresses one of these three wrongs.  Indeed, it actually renews the other wrongs.

McCulley’s quotation of an excerpt from Keynes shows that McCulley understood that Keynes was not dismissing the importance of the long run.  His quotation, while only a brief and partial excerpt, contains part of Keynes’ critical language: “Th[is] long run is a misleading guide to current affairs.”  This makes Ferguson’s non-response to McCulley’s question, his willful distortion of Keynes’ quotation, his complete invention of a “ideal” (screw future generations) that he falsely assigns to Keynes, and his gratuitous, extended homophobic smear of Keynes that was designed to buttress Ferguson’s invention of a Keynesian “ideal” of screwing future generations and induce the audience to hold Keynes in contempt as “effete” even sadder.

Recall that reporter’s notes I have been citing about McCulley’s question and Ferguson’s non-answer are those of the reporter who expressed no criticism of Ferguson’s attacks on Keynes.  If that reporter’s notes are accurate, then Ferguson’s apology is untruthful.  Recall the key language I quoted above:

“In his apology Ferguson explained: ‘I had been asked to comment on Keynes’s famous observation ‘In the long run we are all dead.’ The point I had made in my presentation was that in the long run our children, grandchildren and great-grandchildren are alive and will have to deal with the consequences of our economic actions.’”

If the notes are correct, then Ferguson’s apology is doubly dishonest.  He was not asked to comment on Keynes’ quotation about the long run.  He was asked to comment on a liquidity trap.  In fuller context, he was being asked whether we needed to adopt fiscal stimulus because we were in a liquidity trap that made monetary stimulus ineffective.  The second dishonesty is the one I have explained, Keynes’ observation about the long run is in fact “famous” and a British-educated Scot historian of economics who has written repeatedly about Keynes knows full well that Keynes did not support any “ideal” of indifference to the welfare of future generations and that Keynes’ quotation has nothing to do with Ferguson’s invented “ideal.”  If anything, Keynes’ quotation shows his concern that we not screw up the future.  Ferguson, however, used his nominal apology as a springboard to re-launch his primary falsehood – the claim that Keynes or Keynesian economics did not care about future generations.

Had Ferguson not ducked McCulley’s question he also would have been forced to discuss the harm his austerity principles did by leading to severe unemployment.  McCulley’s question asked explicitly about the link between a liquidity trap and high, persistent unemployment.  Ferguson’s claim that he is the one worried about our children and that Keynes is the author of all our problems today reverses the situation.  It is those who have ignored Keynes and inflicted self-destructive austerity who have caused such devastating harm to the next generation in the Eurozone’s periphery.  In Greece and Spain, youth and young adult unemployment is well in excess of 50% and in Italy it exceeds 36%.  In much of the periphery university graduates feel they must emigrate.  The people who are fighting to protect the next generation from the austerians are economists who learned from Keynes and thousands of later scholars that it is in fact insane to respond to a Great Recession or Great Depression with policies that make it worse.

Ferguson’s Policies are the Problem

The rest of Ferguson’s speech was actually worse and more dangerous than his effort to smear Keynes.  In the rest of his speech he urged the resumption of the regulatory race to the bottom that produced the three “de’s” (deregulation, desupervision, and de facto decriminalization) that in conjunction with modern executive compensation produce the increasingly criminogenic environments that produce the recurrent, intensifying epidemics of accounting control fraud that drive our recurrent, intensifying financial crises.  Ferguson rightly warns that crony capitalism now characterizes the U.S. and much of Europe, but fails to see that it is his favored policies that have created that scourge.

Here are the key portions of the reporter’s notes on Ferguson’s discussion of regulation and supervision.  Again, the notes are from the reporter who expressed no criticism of Ferguson.

Regulatory Excess

“One of the major constraints to economic growth and the second pillar of the degeneration of our institutions is excessive regulation.

‘Unlike my arch enemy Paul Krugman’….who believes that the financial crisis was not caused by deregulation – the reality that there was plenty of regulation over the financial institutions. (Enforcement of those regulations is another issue entirely) that ultimately were at the epicenter of the crisis.”

Given Ferguson’s disdain for one Nobel Laureate I will cite the findings of another about a different crisis.  George Akerlof and Paul Romer chose this paragraph to end their article (“Looting: The Economic Underworld of Bankruptcy for Profit”) in order to emphasize these points.

“Neither the public nor economists foresaw that [S&L deregulation was] bound to produce looting.  Nor, unaware of the concept, could they have known how serious it would be.  Thus the regulators in the field who understood what was happening from the beginning found lukewarm support, at best, for their cause. Now we know better.  If we learn from experience, history need not repeat itself” (George Akerlof & Paul Romer.1993: 60).

Note the strength of their conclusion – deregulation was “bound to produce looting.”  Thanks to those who shared Ferguson’s animus towards regulations and effective regulators we failed to “learn from experience.”  Instead, we made the three “de’s” (deregulation, desupervision, and de facto decriminalization far worse) by generating a global regulatory “competition in laxity” compounded by a “race to the bottom” among U.S. federal regulators and the creation of massive regulatory “black holes” (mortgage banking, the shadow financial sector, credit default swaps, etc.).  As a result, history did not merely “repeat itself” – we made the environment so much more criminogenic that we produced the recurrent, intensifying epidemics of accounting control fraud that drove our recurrent, intensifying financial crises.

The Financial Crisis Inquiry Commission (FCIC) agreed with Akerlof & Romer’s unheeded warnings.

“We conclude widespread failures in financial regulation and supervision proved devastating to the stability of the nation’s financial markets. The sentries were not at their posts …due to the widely accepted faith in the self-correcting nature of the markets and the ability of financial institutions to effectively police themselves (FCIC 2011:

“This approach had opened up gaps in oversight of critical areas with trillions of dollars at risk….

In addition, the government permitted financial firms to pick their preferred regulators in what became a race to the weakest supervisor” (FCIC 2011:xviii).”

“This [regulatory] failure was caused by many factors, including beliefs that regulation was unduly burdensome, that financial institutions were capable of self-regulation, and that regulators should not interfere with activities reported as profitable” (FCIC 2011: 308).

Federal examiners were ordered not to take action on the basis of undue risk.

“The OCC Large Bank Supervision Handbook published in January 2010 explains, “Under this approach, examiners do not attempt to restrict risk-taking but rather determine whether banks identify, understand, and control the risks they assume” (FCIC 2011: 307).

This (anti) supervisory philosophy called itself “risk-focused” examination and supervision – an oxymoron developed by regular morons that “focused” on “risk” by ordering federal regulators “not [to] attempt to restrict risk-taking.”  Yes, I have been a member of a credit committee at a major bank.

Yes, I know that risk is an inherent component of life and lending.  But not all risks are acceptable.  Creating adverse selection as a home lender is never acceptable because it makes lending a negative expected value transaction.  Bank examiners knew that a bank inherently cannot “identify, understand, and control the risks” when it does not underwrite loans prudently because underwriting is the essential process that allows a lender to “identify, understand, and control the risks.”  Liar’s loans, therefore, were inherently imprudent and suicidal – to the lender.  Liar’s loans, however, were ideal for accounting control fraud (what Akerlof and Romer termed “looting”).  Their article explicitly discusses in detail why loans with a negative expected value optimize looting and describes the adverse selection that led to the negative expected value (Akerlof & Romer 1993: 2-3, 10-11, 16-18).

The FCIC dissent disagreed with these conclusions, but the logic of the dissent adds to the strength of the FCIC’s conclusion.

“The majority says the crisis was avoidable if only the [U.S.] had adopted … more restrictive regulations [and] more aggressive regulators…. This conclusion … ignores the global nature of the crisis. For example:

A credit bubble appeared in both the United States and Europe” (FCIC dissent 2011: 414).

But the crisis was not truly global, it was concentrated in the U.S. and Europe and the competition in regulatory laxity was most severe where the crisis was most severe initially.  (Subsequently, austerity, the inherently flawed euro that exposes nations to the “bond vigilantes,” and the reluctance of the ECB to transform the euro into a quasi-sovereign currency combined to become the primary driver of the gratuitous überDepression in the Eurozone’s periphery.)

The Nation that “won” the global race to the bottom was the U.K., so it is no surprise that banks and bank operations based in the City of London have had the most shameful record for fraud for over a decade.  An investigation of the Irish financial crisis noted endemic weak regulation in Europe.

Ireland Report 2010:

“Four main failings of supervision: (i) Supervisory culture was insufficiently intrusive, and staff resources were seriously inadequate ….”

“On-site inspections were infrequent.  Supervisors … imposed no penalties on banks at all.”

“Ireland’s mounting financial vulnerabilities meant that strong action was called for to over-ride the prevalent light-touch and market-driven fashions of supervision: to call a spade a spade….”

“failure to identify, recognise the gravity of, and take tough remedial action to correct such serious governance breaches was a cardinal error of supervision….”

“Light touch” financial regulation became infamous in the U.S., U.K., Ireland, Germany, Greece, Italy, and Iceland.  The reports on the Irish crisis explicitly conclude that Ireland’s “light touch” regulation was characteristic of “generic weaknesses in [EU] regulation and supervision.” Spanish financial regulation initially got a far better press, but over time it has become clear that the initial media praise was based on the fiction that Spain was a tough financial regulator.

Every nation loses when there is a regulatory Gresham’s dynamic in which weak regulation drives good regulation from the marketplace.

Ferguson is one of the Drivers of the Regulatory Race to the Bottom

Ferguson’s speech decried U.S. deterioration in the World Economic Forum’s (WEF) measures of global competitiveness and urged the U.S. to reverse its falling rankings.  Many of the WEF scales, however, give high ratings to nations who are inhumane and who weaken vital regulations.  I have explained this in Davos while awarding the annual “shame prize” last year to Goldman Sachs and in a paper, so I will not repeat the arguments here, beyond noting that WEF explicitly urges businesses to use their WEF ratings to lobby their governments to weaken regulation and job protections under the extortionate threat that if the businesses do not get what they want they can always move to a nation with weaker protections for workers.  This is another variant of a Gresham’s dynamic that puts every nation on the “Road to Bangladesh.”

In U.S. terms, WEF acts like a global ALEC to degrade the safety net and workers’ protections and rights.  The recent mass murder of Bangladeshi workers in the collapse of their factory should remind us that we are often talking about protections that save many thousands of lives.

Ferguson does not Understand the Interaction of the Three “De’s”

According to the reporter’s notes, Ferguson made two primary claims about financial regulation.  First, the crisis occurred where regulation was heaviest.  Second, if there was a problem involving regulation, it was that violations of rules did not lead to effective enforcement.  The crisis occurred where regulation was weakest – in the regulatory black holes that bankers’ political power (with the aid and comfort of ideologues like Ferguson) created.  Control frauds seek out weakness and they found it in the shadow financial system, in mortgage banking, in mortgage brokerage, in CDS and CDOs, in investment banks, in S&Ls regulated by OTS (the weakest federal regulators – of Countrywide, WaMu, IndyMac, and AIG.  They found it in the generic weakness of Europe and the overly friendly confines of the City of London.

Ferguson is on to something important when he speaks of the failure of enforcement (and should of spoken of “too big to prosecute”) the second (and third) of the “three de’s.”  Yes, one can have good rules and if the regulators leaders are chosen by cronies of the banks there will be no effective regulation.  Again, it is the Fergusons of the world who encourage the three “de’s.”  But Ferguson misses the more subtle, critical part.  Regulators self-select as well as bankers.  When you have a regulatory race to the bottom that creates massive black holes and makes effective regulation impossible the causality runs in both directions.  The political allies of the control frauds will not appoint or hire people like me who have records of regulatory effectiveness.

People like me and my colleagues who contained the S&L debacle and prevented the first wave of “liar’s loans” from causing a crisis in 1990-1991 also will not stay in an organization in which we are ordered to refer the banks as our “customers” or “clients” and to treat them as our “customers” or “clients.”  I happily led and participated in a great deal of intelligent deregulation (there are always some stupid rules).  The deregulation led by the like of Alan Greenspan, Al Gore (“reinventing government” was premised on the advice not to “waste one second … worrying about fraud”), Bob Rubin, Larry Summers, Timothy Geithner, Jacob Lew, Hank Paulson, “Chainsaw” Gilleran (OTS), D. Dochow (who reprised his disaster at Lincoln Savings with his disasters at Countrywide, WaMu, and IndyMac), is designed by the worst elements in banking to destroy effective regulation and supervision.  People who are effective regulators will leave the regulatory ranks in disgust when regulatory policy is set by anti-regulators with track records of failure and sleaze.  You cannot have a regulatory race to the bottom without also producing a race to the bottom in the quality of supervision, enforcement, and prosecution.

There is an academic literature on effective financial regulation written by public administration scholars that transcends the concept of “regulatory capture,” but I doubt that one economist in five thousand who writes about financial regulation has read it.  Because hope springs eternal I will provide these references.

See: Chapter 2 of Professor Riccucci’s book Unsung Heroes (Georgetown U. Press: 1995), Chapter 4 (“The Consummate Professional: Creating Leadership”) of Professor Bowman, et al’s book The Professional Edge (M.E. Sharpe 2004), and Joseph M. Tonon’s article:  “The Costs of Speaking Truth to Power: How Professionalism Facilitates Credible Communication” Journal of Public Administration Research and Theory 2008 18(2):275-295.  (And you could read my book, which is in part an analysis of the regulatory history of the S&L debacle.  I taught Public Administration at the University of Texas’ LBJ School of Public Affairs before joining UMKC.)

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