Chicago

There are more things in heaven and earth, Horatio,
Than are dreamt of in your philosophy.

Chicago is, or at least until very recently was, the most prestigious address in economics. The University of Chicago has accumulated ten of the economics "Nobels" and has had unmatched influence on recent Republican policies. It also played the central role in our current financial debacle. Both deregulation and the explosion in the financial derivative markets trace their roots to Chicago.

John Lippert, writing for Bloomberg.com, has a great article on the reaction in Chicago to our current crisis: Friedman Would Be Roiled as Chicago Disciples Rue Repudiation. It is a stellar article, and I recommend it to anyone who is interested in the range of current economic thought, and especially to Krugmanites like myself who need to be reminded of the others.

The hard core efficient marketeers resisted the bailout and still swear allegiance to Saint Friedman, but others have seen their faith shaken. John Cochrane and father-in-law Eugene Fama head the Holy Inquisition.

Fama says he never denied the possibility of unexpected events even though he’d spent a lifetime showing that markets effectively digest information. He was stunned that American International Group Inc., once the world’s largest insurer, sold $441 billion in unhedged and undercapitalized insurance on securitized debt, much of it tied to mortgage values.

“No one expected a player like AIG to take a long position and not hedge themselves,” Fama says. He says the government may have been able to stabilize the U.S. financial system at a lower cost by letting AIG collapse.

Ah yes, the unexpected. No one could have expected that al Quaeda would attack us with airliners. Even if they had been explicitly briefed on the prospect. If it's not in the theory, it doesn't exist.

In their defense, the Chicagoans point out the successes of free market ideas in Chile, China, and other places. Those successes are undeniable, but it should give theorists a pause that their poster boys for free markets were statist dictatorships where the government was deeply enmeshed in the economy.

Paul Krugman has an acerbic commentary (Hangover Theorists) on John Cochrane's let them eat cake observation:

“We should have a recession,” Cochrane said in November, speaking to students and investors in a conference room that looks out on Lake Michigan. “People who spend their lives pounding nails in Nevada need something else to do.”

Andrew W. Mellon lives!

UPDATE: Read the article, but I should have mentioned that Obama has ties to U of C, having been on its law faculty, and also has links to the economics faculty. He is a free marketer, but probably not as much as George "I had to destroy free markets to save them" Bush.