The economist's new clothes
Economists, at least the macro variety, didn't have a good financial crisis. And they're not having much of a recovery either. Much like the UK.
You may remember that I wrote about the dismal state of the dismal science back in the summer. There's been a lot of talk about economists' role in causing the financial crisis, and it's an interesting debate. But not nearly as interesting, to me, as the question of where economics goes from here.
Somehow, somewhere, large parts of the profession seem to have lost their way - or at least lost their connection to the world as it is.
I've been talking to some heavy hitters inside and outside the profession to find out what economics needs to find its way back. You can hear the results of those conversations in a Radio 4 Analysis programme that first airs on 2 November.
I spoke to Professor Myron Scholes. He was pretty unrepentant, even though he won his Nobel Prize for helping to make modern financial derivatives possible. He also started a hedge fund, Long-Term Capital Management which created a mini credit crunch of its own, running up losses of more than $4.5bn in just four months in the summer of 1998.
But Charlie Bean has had to experience the gaps in modern economic thinking first-hand over the past few years, first as chief economist, now deputy governor of the Bank of England. He says you don't need to devise a lot of fancy new economic theories to explain what went wrong. But he does think that economists need a greater understanding of history - and their own limitations.
For Lord Robert Skidelsky, Keynes' biographer, it's all been further proof that economists lost their way when they departed from the master. Keynes understood uncertainty. If economists want to catch up with the way the world works, he thinks they're going to need to find a way to incorporate it too.
Large chunks of economic life could not be reduced to a set of probabilities. That, in turn, means they can only imperfectly translate into mathematical models.
"...in order to get determinate results, you can't have unknowns. And therefore to make the maths possible ...you have to theorise on the basis of perfect information and prices always being correct and so on. Now just... reduce the amount of maths in the subject and you get closer to real life."
In other words, the stuff you can count isn't necessarily the stuff that counts.
But for me, the most interesting contributions came from Richard Thaler, the leading behavioural economist, and Michael Sandel, a distinguished political philosopher at Harvard who taught me many years ago.
Thaler and his fellow travellers have had a good crisis. Ever since he co-wrote Nudge, politicians and policy wonks have been rushing to incorporate Thaler's ideas into policy - for example, we've had more discussion today of forcing people to decide whether or not to be organ donors. That's the fruit of experiments showing that we make different decisions when we are forced to choose, than if we can simply follow the path of least resistance.
Thaler had a good take on the failings of mainstream economics going into the crisis, particularly financial market economics. He said it partly grew out of a failure to distinguish between easy problems and difficult problems:
"We have the idea that people optimise, and they optimise regardless of how hard the problem is. So let's contrast two problems. One is figuring out how much milk to buy when you go to the grocery store. Now you know that's an inventory problem, we could write down the mathematics of it, but most families pretty much know how to do it and they do it through trial and error. So that's an easy problem in part because there's lots of opportunities for learning. Now compare that with, say, playing chess. No-one plays chess perfectly, even Gary Kasparov - otherwise the game wouldn't be interesting, it would be solved - and most of us play horribly. Now a theory that says we buy milk and play chess equally well is just preposterous. We need to accommodate degree of difficulty.
Now the way this relates to the banking crisis is that being a banker has just gotten a lot harder. If you go back to the world of the banker in that Christmas movie... It's A Wonderful Life, you know that guy was making loans to people he knew in his town. And you know that's a pretty easy problem. Now if, if you're buying and selling mortgage-backed securities, that's pretty hard. And if you're running a bank that has a hundred divisions, each of which are engaged in highly complicated transactions, the job of being a CEO has become immensely difficult..."
On this view, it's not just that the financial deals themselves were getting more complex - it's also that the economic models were assuming they had gotten easier.
"The models kept assuming people were smarter and smarter, but the world was getting harder and harder and so the models were getting further away from reality. So if banking was like in It's A Wonderful Life, then the old models might be fine. But when you have Citibank selling liquidity puts and the vice chairman of Citibank admitting later that he had never heard the term 'liquidity put', then you know you're dealing in a completely new world."
It's a great critique - but, as Thaler would be the first to admit, it is more a critique than a competing theory.
Useful though it is, you're not going to be able to base the future of economics on behavioural economics alone. Why? Well, for one thing, it doesn't lend itself very readily to concrete advice. Politicians like their economists to tell them what to do, even if they ignore them afterwards.
Behavioural economics isn't like that: it shows you that it matters how, exactly, a policy is designed - what the default options are, or how medical evidence is presented. We'll opt for an operation if it has a 90% success rate, for example, but not if the chance of dying on the table is 1 in 10. But it doesn't tell you which to choose. Economists who like to draw a sharp line between objective economic analysis and subjective value judgments think that's a big problem.
Funnily enough, outsiders like Professor Sandel thinks that's the great strength of that kind of economics (he's not a big fan of the other types). It brings the value judgements to the surface, rather than burying them deep in the assumptions of the models.
For similar reasons, Sandel has clearly enjoyed the recent popular uproar over bank bailouts and bankers' bonuses:
"I was interested in the economists [in the Obama Administration] who were making this critique. They said it's terribly greedy. What I wish the journalists had asked them was is there a distinction between greed and self-interest, do you think?
Strictly speaking, no mainstream economist would recognise any such distinction, and yet for political purposes they attack greed as if it's a thing independent of self-interest... Citizens generally who looked at this - at the bailouts and the bonuses and been outraged - they believe there is a difference between greed and self-interest. But there's no way of capturing that intuition in economic analysis because, according to economic analysis, in any case one is deploying self-interest or greed, which is simply self-interest squared, to serve a social purpose. That's what the economic model says. And you have to introduce some normative assumption about what is excessive pursuit of gain in order to make sense of greed as a vice independent of the self-interest that all of the economic models presuppose. So I think there are intuitions in everyday life that people have that the economic models simply don't capture, and greed is one of them."
I suspect that it will take more than a financial crisis to make Wall Street economists want to think about the quest for justice as well. But the economics being taught at universities around the world this autumn has already been changed by the events of the past few years.
It will change even more in the years to come, though don't expect it to happen quickly.
Professor Thaler reminded me of an old line: that "science marches on funeral by funeral". Most economists don't like admitting they've changed their mind about anything.
I'm 
© MMIX~RS~q~RS~~RS~z~RS~34~RS~)
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Actually the "Green Shoots" brigade don't need economists. For example, it was reported last week that the American economy emerged from recession in the third quarter of the year, growing at a better-than-expected "annualised pace of 3.6%." So no doubt all the spivs in the New York Stock Exchange and the City of London will be awarding themselves fat bonuses while unemployment, repossessions and company liquidations continue to rise. But what's all this nonsense about an "annualised pace of 3.6%" ? In reality, the US economy grew by 0.9% over 3 months, staring from a low base. Yet all of a sudden, by transposing that rate for a further 9 months ahead, we're told growth is at 3.6%. What a load of nonsensical sophistry, spread by greedy people who can't wait to get their noses back in the trough - or rather, keep their noses in the trough even more than they do already - at the expense of the rest of us. Hard nosed economists, whatever they're wearing, are the last thing these City opportunists want. Caledonian Comment
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Stephanie wrote:
" Somehow, somewhere, large parts of the profession seem to have lost their way - or at least lost their connection to the world as it is. "
Can they find the job centre?
Economists seems to know what was going on twenty years ago. They seemed to understand a bit about how the system worked.
My opinion is that the city has been funding economists in a rather similar way as Alan Johnson looks upon scientific advisers. The city only wanted economists that told it that maximising greed was the best of all things in the best of all possible Worlds. This led to manipulating public perception so that the public would take on unsustainable levels of debt - this led directly to what I call the mortgage/house affordability trap. This was always a perversion of the 'science'.
We must also blame the economics schools and colleges (e.g. Harvard, Balliol etc. etc.) These educational institutions all took the money to produce these fake economists who have no, or at least very little, clue. These poor mis-educate individuals are now floundering. I would put the start of the problem way back to Milton Friedman's time. It will take a couple of generation fro economics to correct itself - in the meantime my best advise is that the current crop best look for a new job.
[This whole business looks a bit like the IPCC - twenty years ago they though they knew what they were doing and blamed CO2 - now that the politicians have at long last started taking notice they seem not to be so sure about the culpability of CO2, but as politicians (just like Alan Johnson) stick to their prejudices so the scientists are stuck with it!]
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Honesty, or integrity might be a place for economist to start. Crunching all the numbers from a point of view to maximize returns without any calculations related to possible soical outcomes is a cycnical game. This has never been about the numbers. Certainly the manipulation of numbers but not about numbers. You make this sound like the financial crisis was a misclculation in math. It was a conceived strategy by banks and financial institutions based on insuring loans without collateral. Like buying ancient Chinese relics on e-bay, thinking the buyer should know better so the deception is somehow justified. The system failed, you really don't need to know much more. The academics failed to point out the falacy of the system, the elected officials failed to provide proper over-sight, the bankers failed to tell the truth and the economist justified it all to sell books and obtain conference fees. Academics and economist are such poor thieves and took cumbs to justify the stealing of billions, they were simply look-outs for drug dealers. This was not some academic exercise, it was the failure of the fundementals of captialism. It was simply about ethical behavior at many levels and all failed. Math doesn't make one honest. It's not the model, it's the people. But we are in an age of no personal responsbility, except for the petty criminal. Rather than recognize the reality, the old system is being shored up until it fails again and everyone will shake their collective heads and wonder why while the next generation of bankers makes off with the money. Nothing has really changed.
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" In other words, the stuff you can count isn't necessarily the stuff that counts. "
Not quite, Lady Flanders.
As Dirk Bezemer noted in several papers, the macro economic models that did get it right are the stock-flow conditioned models. ( On the net, try www.levy.org ; in book form "Monetary Economics" by Godley and Lavoie is the leading text.) These models count carefully and all their figures are held in an accounting framework which has to balance. Counting works. The trouble with mainstream macro-economic models is/was two fold: they fitted an equilbrium which was not necessarily there, and they did not require that the figures balanced.
Young economists seem to be picking up Wynne Godley's conceptual model as soon as they get to hear of it. Their seniors, mostly, are indeed more reluctant to learn from failure.
"We'll opt for an operation if it has a 90% success rate, say, but not if the chance of dying on the table is 1 in 10."
And while we are at it, doesn't this behavioural economics finding simply prove, as the bookies know, that most of us are much more at home with statements of odds than percentages? And don't most statements about where the economy is now and where it is going need to have odds attached to them if people are going to act rationally on the statements?
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Mainstream economics offered descriptive, predictive ability largely because it's models were commonly agreed on. Dissent was in the small minority. It was prescriptive. People adhered to it's descriptions. If it said the markets would rise, so they would as people jumped onto the bandwagon of investment in that direction.
Now it fails because people do not trust it. People do not invest where it tells them to invest. People are paying down debt, the money supply is contracting, businesses and consumers do not believe that it is safe to take on more debt, so banks simply hoard what new money the governments produce. Sometimes there is loss of faith in the currency being held, and as a consequence we have a blip in the market, a blip in commodities, before currency rises and markets fall back to where they were.
Mainstream economics failed to describe and predict because it was never any good at really describing (as opposed to prescribing). In order to generalise over individuals and produce a descriptive model of social behaviour (macroeconomics), the only real way is to have three things:
a) good descriptions of individual behaviour
b) agent based models that apply those descriptions effectively
c) heavy use of supercomputers
Economics of ye olde simply did not have these things available.
There is one more problem. By the time model is operational, the effects of the model must be incorporated in the model. This is the only real way of avoiding the problem of reflexivity, where the predictions may become self-fulfilling again.
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As an addendum, one thing is for certain: the prevailing system is dying and the core of that system is the USD.
Two large dollar cycles are the main cogs of the global economy - the OPEC oil/USD cycle and the Asian export cycles. Both result in huge current account surpluses in dollars, which are reinvested largely in the US or in USD instruments.
No party is interested in a rapid undermining of the dollar, either by dumping t-bills or uncoupling the USD from oil. All parties are interested in a smooth, slow undermining of the dollar.
This is where it is going - away from the petrodollar. What will take THAT's place is the real question.
I believe we will see the emergence of either
a) an enhanced IMF/World Bank institution that has the responsibility of maintaining a global base exchange currency with disincentives against trade imbalances
b) two or three (eg: Asian, American, European) type IMF/WorldBanks dealing with regional reserve currencies (eg: Yuan for Asean+N economic trade zone)
but along with that will emerge new energy infrastructure and technology, as oil dies with the petrodollar, and environmental impact will become costed more accurately as renewables become more the norm.
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We are talking macroeconomics and not the invisible guiding hand et al. The current crisis resulted from a failure of governments to plan the development of the economy at the very top level and to exercise any effective regulation. Left to itself capitalism will periodically lurch towards self destruction. It is the job of governments to anticipate the tipping point and go for prevention. The almost total reliance on the geeks in the MPC to manage the economy is hopefully now seen as largely illusory even naive.
The problem of economists as indicated by an earlier contributor is that the theories quickly become out of date because of major changes to economic and political structures and to technologies including the economies of global production. For the next ten to fifteen years factor in climate change 'distorting' growth but also think of the consequences of the inevitable climate catastrophes on the insurance and related industries.
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#7. watriler wrote:
"For the next ten to fifteen years factor in climate change 'distorting' growth but also think of the consequences of the inevitable climate catastrophes on the insurance and related industries."
I've been thinking about the economic impacts of policy and realistic expectations of actions related to 'climate change'. My conclusions are that although expenditure will be (erroneously, in my view see other blogs - Earth Watch etc.) directed at carbon reduction and not taking ameliorating actions in the end the consequence on energy efficiency which are a by-product will be probably beneficial anyway. Catastrophe avoidance will still take place - that is my guess. So I don't entirely agree that climate change economic policy redirection will be bad at all.
In essence economically the effect of climate change policy redirection may be beneficial due to efficiency gains although the effect on the climate will be zero. (CO2 does not drive the climate! The evidence is that the climate drives CO2, but not the other way round - they have messed up the causality!)
There will be efficiency losses too such as not using inexpensive coal etc, but my guess is that reducing pollution may offset the extra costs. (I haven't the numbers yet to do the sums, but I am working on it - a thesis in development! The sums are very hard as the data sources are absolute rubbish and full of error both structural and systemic - economic asymptotics!)
#4. Diversities wrote:
"...behavioural economics..."
seems to be for the innumerate according to your examples of application. It is really sad that economists can't do sums (or keep accounts) any longer! I blame their education.. They got an 'ology' I an afraid and all it is good for is shelf stacking! Behavioural economics - pseudo economics for the terminally numerically challenged!
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'I suspect that it will take more than a financial crisis to make Wall Street economists want to think about the quest for justice as well.' On that note l offer an interesring snippet - sorry for the inherent poor language which may offend but...... business is the business. This is pretty cool.
http://www.thefirstpost.co.uk/55378
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10 - The debt/affordability trap, is what happened. It was and is a sustainable proposition. Like everything that works well, it became popular, profitable and fashionable in the sense that it attracted every facet of society. It came to be dominated as everything wealth is, the prurient minds went to work and fear - fear that fortunes would be lost got to work and a set of rules were dreamt up. Those rules remain, they are pure poison. GAAP is poison. Economics was sound, the implementation brought about a feeding frenzy and wealth protection that was worse than immature. The interest rates were the problem, the cost of finance. Had people paid down debt rather than the gravy train of revenue from interest that was allowed, things would still be rolling along. The basic economics were good. Those putting it into practice and making fortunes will blame everyone else but themselves. Interest rates were to high, finance is too expensive and some real nut jobs are on the policy and accounting aspect of things. Honestly, look some time at the wonder that is GAAP.
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Bernard Madoff operated a Bank but was not subject to banking regulation. Study the total losses from his venture, the total exposure and the sum recovered so far. Also where the sums recovered came from. That is the real world problem and it has absolutely nothing to do with economists. You are not to blame but truly must find a way to incorporate mechanisms of control that are fundemental to process. You did not fail, you were abused, just like the rest of us.
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Truly, my finale. It's a powerplay going on, dwarf's and gnomes messing about in complicated complicatedness that they believe requires their very specialised expertise, insight and weirdness. The accounting rules morph, responsibility for them is pass the parcel, they are gods who indulge our leaders, know not what they do and quite frankly are not. Frank that is. Well folks, tata, or DA Ta! :) You've been wonderful allowing my foibles, watch out for those li'l guys - they are determined in their cause and are changing the world. They are highly error prone and incredibly secretive. I realise fully my rant is ultimately at the gnomes and this is not their home. My axe is blunt, you all keep those swords shapened and your shields handy.
Here is some of what the future holds - nb - he didn't know the CC was coming, ok. He didn't know.
http://www.cnbc.com/id/15840232?video=603204058
http://www.jrdeputyaccountant.com/2009/06/alls-fair-in-love-and-value-when-it.html
http://video.google.co.uk/videosearch?client=opera&rls=en&q=%22world%20economic%20forum%22&sourceid=opera&oe=utf-8&um=1&ie=UTF-8&sa=N&hl=en&tab=wv#client=opera&rls=en&q=%22world+economic+forum%22&sourceid=opera&oe=utf-8&um=1&ie=UTF-8&sa=N&hl=en&tab=wv&start=20
Groan......... http://www.youtube.com/watch?gl=GB&v=6ZlVYQuVVWE
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The only school that is prevailing throughout all of this is the Austrian school, particularly as the resource shortages are starting to become apparent. However, as a people, we have been conditioned to believe that the fundamental economic problem of scarce resources and infinite wants is solvable by 'money'. Until that changes, then economists will continue to misrepresent the dismal science.
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Can I mention Evan Davis on this blog, Ms Flanders. It was that series of BBC TV programmes that my poor wits could encompass. I honestly am not up to you posts - understanding wise but hey.
Those mentioned above be they all everso distinguished and winners of Nobels - i wished I got the feeling a few more would learn from the mistake made all over the world in the financial arena. Us down here feel I think that "they" are in the most part unrepentent and the fault lies elsewhere - NOT collectively.
Thought of the Moment:
At bottom, every man knows perfectly well that he is a unique being, only once on this earth; and by no extraordinary chance will such a marvelously picturesque piece of diversity in unity as he is, ever be put together a second time. -Friedrich Nietzsche, philosopher (1844-1900)
Yeah, Nietzsche - that too is misunderstood by "they" too!
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#14
"At bottom, every man knows perfectly well that he is a unique being, only once on this earth; and by no extraordinary chance will such a marvelously picturesque piece of diversity in unity as he is, ever be put together a second time. "
I no longer agree with this. Unique in what regard and for what aim? People are remarkably similar, behave similarly, and ought to be fairly predictable (at least at group levels). We are spoonfed lies such as "choice" and "freedom", but they are just illusions. Some think we have choices, yet most of us ending up following the same old patterns... Do we really have control over ourselves? Not really.
This is why there is still scope for predictive economics.
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Does society mirror economics?
In the news is the 'shocking' story that parents are willing to be selfish, tell lies and cheat for the sake of their children. Why the shock, this is the precise process that has been so praised by economists (who are financed by the city etc.)!
This societal hypocrisy stinks - these people are only following Mrs Thatcher's dictum that there is no such thing as society (and the common good).
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The problem in simple terms is that being an economist is more respectable in the prevailing culture than seeking a real job in industry and commerce. Let's face it, an academic discipline which involves books and stuff is far less vulgar than adding value to the economy.
The great difficulty with this view is that what is needed in the economy is value rather than a load of blokes and blokesses reading books and stuff.
There is no rationale in having a point of view if you are not prepared to go out into the cruel world and test it under harsh conditions. I can assure all these academic folk that to put your views to the test, measure the outputs and know that your opinion is both successful and right is very satisifying indeed. If you have also in the process added value to others in both quantitave and qualitative ways then all the better. There is no fault in being generous.
What has been missing the past twenty years or more has been any knowledge of history and perhaps more significantly; historiography. I suspect there has been much reading about the Great Depression and the causes of the Second World War but nothing else. There was a world before the Thirties and much like today it was a muddle with no real idea as to how things work. We had the Whig Interpretation of History and the Idea of Progress but no real understanding that these were only intellectual constructs to interpret past events: they did not predicate the future.
We like to think these days that with our huge computer processing capability we are so much more brainy than our forebears, but it is not the size of the processing unit which matters but the criteria used in creating and defining the parameters of the programme. Without a deeper cultural understanding of our predicament the programmer and the system output will remain constrained.
My suggestion to the economists is to study economic history (Nial Ferguson is a good starting point), examine the harsh morality of the early puritan capitalists (RH Tawney is another good starting point) and above all else; keep it simple. I appreciate that the Devil is in the detail but the Devil created complexity in order to trap the foolish.
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"Professor Thaler reminded me of an old line: that "science marches on funeral by funeral". Most economists don't like admitting they've changed their mind about anything."
And doctors can bury there mistakes.
What can bankers do?
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Stephanie,
I would be ffascinated to know how modern Economists readilly dismiss or ignore Marx's critique.
It seems there is a big leap from the theories of Dialectical Materialism and the modern day Economics - without there being a track to follow.
The ideas of the marginalists are as strange as the 'invisible hand' to which Adam Smith referred to.
It seems clear to me that the only source of profit is from the worker, and as a result the Capitalist system is prone to chasing a diminishing profit - hence boom and bust.
The idea that central banks or floating exchange rates are controlling this surely must be consigned to the dustbin. The tampering with interest rates merely blunts the force of Capitalism, it doesn't stop it - and in today's case it seems to have 'saved up' to make it worse.
Just because everyone is afraid to face the fundamental change that would be required to rid ourselves of capitalism, it doesn't mean ignoring it is correct.
If the argument was 'ah well, the pain is worth the gain' then I could understand, but it's not - the claim is (every time) - oh we've fixed it this time - honest.
.....and yet once again the 'bad builder' attitude of the Government is shown to be wanting. The Tories thought they solved the problem in the 80's with less regulation of the markets and Gormless Brown though he solved the problem with his 'Golden rule' - but the contradictions of Capitalism never left us.
Talk about groundhog day - Capitalism overshoots, Governments meddles to make amends, worker is expected to pay - and therefore strikes.
It could be 1974 all over again.
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I think that there is an undiscovered economic cycle here. I recently got hold of a book published in 1981 - The Crises in Economic Theory - (it was in fact a special edition of The Public Interest - edited by Daniel Bell and Irving Kristol ( in their pre neo con days) Part of the blurb on the cover is worth quoting " ....Today, the failure of economics to provide either reliable guides to policy or a credible picture of reality is painfully clear. The result has been ......-crises in economic theory as economists have been forced to reexamine their basic assumptions......." Contributors by the way included Ken Arrow and Frank Hahn as well as business academics like Peter Drucker.
Plus ca change
A good analogy drawn at the time and still relevant is that economists are like fire fighters who, when a fire breaks out are too busy fighting fires in the fire-station (alliterates nicely) to attend to the blaze.
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Reset the hefalump traps -the search continues for the meta-logic of deterministic behaviour.
Globalization as Evolutionary Process ( Modelski, Devezas,2008 )
ISBN 978-0-415-77361-4
Read alongside Stiegler for the full strength, class A, Pynchonesque mind trip .
http://www.arsindustrialis.org/node/2928
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12. herosrest
i chuckled at the title of the story about Paulson and Darling.
dont know where the author has been but his assertion that Paulson was "grinned at" could not be further from the truth it is spin.
Lehmans was in trouble and it was shorted and bet against into extinction speeding up the inevitable crash it would have had, Paulson being the ex Goldman Sachs man he was , wasnt exactly sorry to see them go. besides all his money was in Goldmans who was he going to save ? no he let AIG get bailed out so the money could go to Goldmans to save them from their hideous hedge bets
Darling and Barclays did the right thing in walking away , by the morning they would have had more toxic waste in their hands than they already did, and because the Fed provided guarantees for Bear Stearns to be bought by JP Morgan and refusing to do so for Barclays to buy Lehmans.
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....and while I'm on the subject of 'bad Economics'.....
How come that the US (and others) inject huge sums of money into their Economy - and when their GDP (measure of the countries wealth) rises they claim that they are 'out of recession'.
They get the media (like you Steph.) to talk endlessley about a 'double dip recession' when in fact the reality is very simple. They never actually came out of recession
The US injected 5.6% of it's GDP into the Economy, it then lauds about it's 3.3% growth in GDP for a single quarter - well duh?
So when the money runs out they can claim it's a 'double dip' because you media monkeys have already coined the phrase in preparation for the eventual failure of policy - so the public can believe it's not their fault - just like the 'financial headwinds' we encountered last year - which nice weather association implies
a) We could not predict it
b) It was a natural phenomenon.
Joker Economics like this might fool GCSE maths 'George Osbourne' or the ubiquitous "Darling Alistair" (I used to be transport secretary you know) - but it really shouldn't be fooling the highly educated Economic journalists of the BBC.
It's just like the Professor Nutt - if you don't follow the party line then you will be discredited and promptly fired. If we're going to be totalitarian then lets at least be honest about it!
Why is the media protecting the Governments of the world in this way? I thought you're always banging on about free speech and the need for an intrusive questioning press - and yet you tow the line like any civil servant would.
You freedom of speech is pointless if you're going to act in this subservient manner.
"You cannot lie your way out of recession" - I'm going to get that put on my headstone as a reminder to all the fools who thought you could and make sure I'm buried in the street outside the BBC White City as a reminder to future journalists.
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"And while we are at it, doesn't this behavioural economics finding simply prove, as the bookies know, that most of us are much more at home with statements of odds than percentages? And don't most statements about where the economy is now and where it is going need to have odds attached to them if people are going to act rationally on the statements?"
Not quite, Diversities. Research actually shows that it is how the 'risky gamble' is framed that makes the difference. One classic example is having to decide between 'lives lost' with a certain percentage and 'lives saved' with a different percentage. The point of the exercise is that the expected value of both scenarios is the same, but people systematically choose one over the other (normally 'lives saved') even though the outcome is likely to be the same in both scenarios, on average.
The issue of odds v percentages is a complex one, and certainly not as simple as you have made out. You would need to read the current research on response modes and scale compatibility...
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the sooner it is made clear that all that happened was the financial institutions were allowed to run riot by the rules that were supposed to keep firms in check being changed , the very same people who dived in and filled their boots where supposed to be keeping an eye on things the better.
All that has happened is that the poor and the middle classes and some well off people have been shafted and some very very well off people and now very very very well off, and the poor and the middle classes get to pick up the tab
I have an idea, let them have a run on the banks, let it crash, because the little people have less to lose
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There are a whole bunch of sciences, from quantum mechanics to structural reliability analysis, that successfully deal with probability and uncertainty. In many ways they are far more difficult than economics. However, they have one huge advantage over economics: they can go a long way without accounting for the influence of human intervention. And human sadly includes all of the idiots, liars, conmen, politicians, bankers, estate agents and self-centred individuals, who generated the economic crisis.
To quote Bill Jamieson from the Scotsman, 'Economics is not an exact science... it's not even science.' If it were science, it would be one where Maxwell's demon is operating his flap and Schrödinger's cat is suffering in its box.
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#24. BehaviouralEconomist2009 wrote:
"The issue of odds v percentages is a complex one, and certainly not as simple as you have made out"
It is all about innumeracy that highly valued position where all commentators and celebrities are proud they can't do sums!
I recall (an ex-spouse) graduate social scientist who managed to get a reasonable degree but could not do percentages at all! I also recall trainee maths teachers who were unable to understand proportions (i.e here is a cake recipe for a tin this size what ingredients would you use if you wanted to make a cake in a different sized tin!)
Don't be shy - these people can't do sums! (and that includes very many 'ology' graduate qualified economists - and quite a lot of those who peer-review papers for publication too, this extends to proper science too - as well as the vast majority of the media!) Our Nation's maths education is now absolutely abysmal and getting worse!
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One of the frustrating things about economists and statiticians is their tendency to use subjective mathmatical formulas to arrive at certain conclusions and as a result the information they provide is like an abstract painting for people to view and interperate in whatever way they wish. Quite often that information is used by devious people to suit their own hidden agenda and might go some way toward explaining how the bankers are able to use such information to award themselves with huge bonuses and why the financial markets are in such a mess.
Economists must now learn to adopt a more pragmatic approach towards problem solving in much the same way that people who run successful small businesses do. Likewise the (clever) people who head up large organisations must learn that there is no magic formula that will provide them with the same knowledge and experience that small businessmen have when it comes to understanding how bussinesses really operate.
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Great article Stephanie.
two things -
1) What ever happened to monetarism - quantitive easing equals inflation down the line for those guys.
2) Does anybody question whether the whole basis of growth continuing is wrong? How about a plan for zero or negative growth which seems to be the only sustainable answer if we can't find a spare planet?
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@Behaviouraleconomist2009
Yeah, I have read a good deal of that, and still agree with the bookies. Positive versus negative presentations is another issue; one that has long been familiar from survey and focus group reserch for advertisers.
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It seems from the sensible and insightful comments made here that the wrong people are advising the Government!
Stephanie - why are these fundamental questions not being asked of Government by the media?
We all know they're lying - or sorely mistaken - so why play along?
I can't wait until the Tories get in - they will make Brown's Economic nightmare seem like a walk in the park.
I suggest we re-organise our Economy through lottery - that way we can at least apply some 'real maths' to the situation.
This current bastardised meritocracy is smply not working as all the lightweights are floating to the top!
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A doting feline tonal of our time enjoys the feeling between her toes.
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We'll opt for an operation if it has a 90% success rate, for example, but not if the chance of dying on the table is 1 in 10. But it doesn't tell you which to choose.
Really? So we are all thick then, basically.
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Sorry Steph but your getting blinded by the terminology.
It's all very simple there is
Fractional Reserve Banking
and
The casino.
What you describe as 'liquidity put' or derivative or some other stupid name is equivalent to Horse or Dogs or IN-Play betting. It is just a poker game for those who can bluff the best or take an ill informed punt.
That why we need to separate the two. Let these institutions gamble as much as they want but not with money from people who have not invested in their game.
Here is a good economic theory.
Don't spend more than you earn.
Don't borrow more than you can service for your earnings.
It can be summed up by 'Live within your means'.
Everything else is just window dressing to pull in the suckers.
I would like to put to you the most important question on my mind.
As a tax payer how much do I owe and how long will it take me to pay off?
Is there one of your economists that can tell me?
I bet you that you cannot find one that can give me a correct answer.
And if they can't even answer that simple question how can I trust them with anything else?
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Well said Diversities. Excellent book by Wynne Godley and Marc Lavoie. I hope people pick it up a lot.
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Isn't a large part of the problem that the "economics" of the past few decades has been designed around how to make money for financial institutions rather than how to run a national economy? i.e lots of theories to predict short term changes in prices, but not a lot of thought as to how the processes for running an economy need to evolve.
Running an economy doesn't have to be about predicting short-term prices. We don't need these complex mathematical formulae to know that something in the economy is out of balance and will eventually have to be corrected.
- We know when the balance of payments is in persistant deficit.
- We know when house prices have become unaffordable.
- We know when personal and business debt has got out of hand.
- We know when the gap between rich and poor has got too high.
- etc
Without the complex mathematical models (which it turns out don't work all that well anyway) we may not know when these imbalances will be corrected. But we know that they will have to be corrected eventually and that the longer it takes the more painful it will be.
So the economics we need is one that tells us what processes to set up to allow these imbalances to be corrected as swiftly as possible. A system design for running the economy rather than simply a means of predicting how things will happen.
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34. At 12:30pm on 03 Nov 2009, PortcullisGate wrote:
"It can be summed up by 'Live within your means'."
Agreed - so why is it, from the age of 2 are we bombarded with 'buy this' and 'you NEED this' and 'buying this will make you happy / successful / bright / better' - to the point where a generation has grown up thinking it NEEDS and Ipod - but doesn't NEED and education?
It seems that the desire to 'make profit' comes above all else - especially before the remit of 'living within your means'.
As someone pointed out above - why are we obsessed with 'growth'? I mean we've just proven that 'Big isn't better' - and yet we're trying to do it on an Economic scale - not just at a corporate level.
Interesting dilema - don't you think?
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As an aside from the discussion on economics...
John_from_Hendon you don't appear to have any understanding of climate science, CO2 is a greenhouse gas, it acts as an insulator, the science of this is well understood. The better 'insulated' the earths atmosphere is the more of the suns energy is retained in the climate system in the same way adding extra glass to your greenhouse would make your greenhouse retain more heat.
Without CO2 in the atmosphere, we would be freezing.
The degree of warming that the extra CO2 we are putting into the atmosphere has is the important question.
Obviously the climate system is very complex and no climate scientist would claim that CO2 is the only variable and of course all the different systems are interlinked (thats feedback not causality) but it always acts as an insulator so more CO2 more retained energy/heat. Simple physics.
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The new clothes didn't exist did they? The emperor was naked.
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'The only function of economic forecasting is to make astrology look respectable'
JK Galbraith
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a better solution maybe for economist would be to go do something that adds value, like maufacturing etc.
The credit crunch was caused by human traits such as assuming you are lucky, greed, ego and envy.
The whole banking industry was based on the casino philosophy that you will be one of the winners, the losers are soon forgotten. The twist with banking is that the gamble was on such complex commodities that the winners and a lot of other people convinced themselves that the large winings was down to some skill the winners held rather than chance, so they gambled with higher and higher stakes and followed these people into hedge funds etc.
Most people employed in the banking world were pawns, looking at average people earning zillions, thinking well if they can do it so can i one day.
There you go problem explained, no economics needed
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:) Astrology is Castor's dichotomy - Pollux.
Finance operates as a black hole - this is a simple and correct concept.
http://news.bbc.co.uk/1/hi/sci/tech/8334369.stm
These black holes exists to grow, they grow wealth from an expanding mass of profit, Hail Mary!. It is incredibly inefficient and functions on a probability and applied (arbitrary) percentages. The banking probability = insurance / security.
Remove, stunt or reverse growth(mass) and the process flips, it contracts. Achieve that by significant proportion and you have our current prospect. 30% or so should be irrecoverable, a fatal error. Both sides of the equation amplify their effects upon mass (it is critical) - its a myriad of pin-ball interactions inflicted on credit. Credit has a dependency which has been drastically re-proportioned at this time - collateral. Credit is a function of time, it has velocity.
A simple control exists - it is mass. Every so often a dabbling genius simply goes for the negative effect. If that is understood it is prevented. I await the alarm call this time around.
Borrowing from a respected and lofty Phsycononomist of our time 'Klaus Wef' - 'How can we integrate all this'. My feeling about the proposition lies in the field of lowest common denominator, right alongside the turnips - the answer will be some form of negative critical mass held at the Temple of Lucre where the High Priests practice a dichotomy of thee and me. Jesus died for his sins against the money lenders, that lesson underlies our religion. Don't do that do this. Black holes exist, they make finance work, a few do very well out of it but it should be the other way around.
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One of the issues surely is that we live in an increasingly mechanised, digital, and even virtualised world. The decline of manufacturing, and the proliferation of globalised service industries, has led to a situation where the attempt to connect subjects with objects, places to people, jobs to places, money to its rightful owners, seems to be well-nigh impossible. Does six degrees of separation still apply? I sometimes wonder...To our so-called "economy", I wonder if that phrase could ever be applied?
And given that degree of complexity and distancing, it is little wonder that people might prefer resorting to mythology and make-believe when trying to explain economic circumstances. The real hard, material facts are probably there, somewhere, but as Stephanie implies, where?
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So what is the new theory?
How do you or anyone else explain economic crises?
The Keynesians still resort to 'animal spirits' - human behaviour in a capitalist system means markets fail and state intervention is required to save the system.
The Austrian School seems to blame central banks' monetary policy and since the US dollar decoupled from gold, the resulting fiat monetary regime.
What are the other explanations?
Why is it that capitalism is the only historical economic system that reduces production without there being a supply side crisis?
Feudalism produced less when harvests failed or wars took away labour.
Capitalism produces less (goes into recession) when the rate of profit falls; it only produces for profit.
What is profit?
How is it produced?
Capitalists own capital, i.e. money with which they can purchase labour power, machines and materials.
The money capital becomes productive capital.
The goods that are produced become commodity capital.
When purchased the capitalist once again has money capital.
If the money capital at the end of this process is greater than what he started with, then he has a profit.
So we can see there is a circuit of capital.
But how exactly is the original capital increased to a larger capital?
This takes place in production.
The value created by labour is greater than the cost of the labour power.
And because all machines and other fixed capital are the product labour, it follows that all profits originate from labour.
And what factors therefore influence the rate of profit?
Essentially, the rate of circulation of capital, the rate of exploitation (difference between what goes to labourand what goes to the owners of capital), and the organic composition of capital (basically, capital accumulation itself can depress the rate of profit and cause crises).
An economic theory that has been around 150 years!
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There is no crisis - there was a frustration amongst a sect of covetous purists. You can swap 'ile' into the synonym. Collateral (value) was destroyed. People at the time it began raised alarm - they were squashed under foot and lies became the truth. That's it...... it is not difficult to research or fathom. Cold blooded cynicism from the island Moronia - which will be amongst the last to sink, floating in its sea of liquidity. A totally negative effect is underway. It was induced, it is the anti-economy.
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Influential activists forgot that the credit and not liquidity, produces the wealth. The wealth is produced by paying down debt. Remove that from the fact of life and, i'm afraid, everything falls apart. Destroy value(collateral) and you have applied the tin lid, locking credit into its contract duration and that asset hole is a conveyer belt to ................... let's run that as a quiz. The birthing conundrum. How fast do you have to expand to not to contract?
Is it all just a matter of time?
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The 'interested' have some new toys - http://financialdatalink.sharepointsite.net/default.aspx
Website of the Inter-Agency Group on Economic and Financial Statistics
The website presents data for the Group of 20 (G-20) to facilitate the monitoring of economic and financial developments for these systemically important economies. Launched in response to the on-going financial and economic crisis, it is hosted by the IMF, and is a joint undertaking of the Inter-Agency Group on Economic and Financial Statistics (Inter-Agency Group): Bank for International Settlements (BIS), European Central Bank (ECB), Eurostat, the International Monetary Fund (IMF), the Organization for Economic Co-operation and Development (OECD), the United Nations (UN), and the World Bank (WB).
The Inter-Agency Group intends to further develop the site, enhancing the range of relevant indicators available and broadening the country coverage. In this vein, feedback and comments are welcome.
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Now that the e[MPerrror] connermists [FOGGYTYPES] are down to their PriMall birthday suits, their associated for Keynes silly QE'rs will be working behind the scenes on Brow Near0'sinurgies ,using their dydle doe poker game till the AAAyes are no more[ having played their laaast hand] and the securitAAAyesed pot at the end of the rAAAinbow is gone back to Vaaalhaaallaaa.
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Let's face it, none of these fancy theories offer any advance in understanding over the time-honoured rule of thumb "if it sounds too good to be true then it IS too good to be true."
Maths-based economists can write down some fine-looking equations on paper but when you unpick them, you tend to find that they are based on a whole web of underlying assumptions, some or many of which turn out to be rather shaky in various real-life situations.
If you want to make money out of money then I guess you are better off following the Warren Buffett school of investment, which to my limited understanding of such things seems to consist of asking three central questions:
1) Does the company I want to invest in have good products?
2) Is there a healthy market for these products?
3) Is the company run by sensible, capable people?
As far as I can see, no amount of mathematical jiggery-pokery will help you to answer any of the above, you'd be better off with a shrewd understanding of character and plenty of time reading quality newspapers/blogs etc and talking to people in the business community, much like Mr Buffett seems to do.
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Two economists go hill walking in the Lakes. A fog comes down but they keep walking and when the fog lifts they look at the map to get their bearings. After a few minutes trying to make sense of the map, one economist turns to the other and, pointing into the distance, says:
"Aah! According to the map we are on top of that hill over there!"
Boom, boom :)
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38. At 12:48pm on 03 Nov 2009, andrew9999 wrote:
"John_from_Hendon you don't appear to have any understanding of climate science, CO2 is a greenhouse gas"
Oh yes I do... It is you that will not read the scientific papers, attend the conferences etc. and look critically at the data.
1. Tell me how the 29 Giga Tonnes of CO2 that has been produced since industrialisation can effect the 7000 Giga Tonnes of CO2 on the planet.
2. The measured mean time of re-adsorption of a CO2 molecule is about 5 years NOT 250 years.
3. Why does all of the IPCC data show CO2 rising AFTER Temperature rise. (and not always then!) How come the effect happens BEFORE the cause?
4. Why was CO2 up to ten times higher than it is now in the historical record and life still existed throughout the period - your theory would have the place fried and extinguished all life.
I could go on but instead I would urge you to actually read the papers.
Oh and by the way without CO2 life would not exist.
Please do some reading before you spout the received wisdom. CO2 is not the problem - Warming is the problem (and while we are at it explain why none of the Global Warming/Climate Change models that are predicting the warming actually predicted the cooling we have had since 1990?
I short CO2 is not the problem - warming may be - BUT we have now really conclusive solid evidence about what causes planetary warming or cooling, but it is not CO2. It might be something we are doing that is contributing - for example creating far more mist in the upper atmosphere due to aircraft con trails and water vapour (also see the Solar wind /lunar and solar position and obliquity changes arguments in the literature - they at least predicted the recent cooling.)
Spouting one liners about global warming is of dubious merit!
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The key problem behind all macro-economic theories, and one which doesn't appear to have been widely understood, is that the economic system operates according to the beliefs of the economic units in it (people), and that as a consequence of this the operation of the economy depends on how people THINK it operates. This is true both of 'ordinary' people and those who make more far-reaching decisions. Their views affect their actions.
It is therefore impossible to get a reliable model of the economy unless this takes into account the model's own existance and also the other (possible oudated or fallacious) economic models which key players have.
This should have become very clear lately, when the beliefs of the bankers (eg about whom ultimately carried risk) had a major effect on both thier own actions and the behaviour of the whole world's financial system.
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Today, where I am, it stopped raining at the precise time the BBC's weather forecast said it would. This miracle of science was in part achieved by using a supercomputer to run billions of computer simulations to arrive at the most likely outcome based on readings and dynamics of the weather system around Britain. That's very impressive.
Ironically many of those now involved in pricing contracts such as derivatives come from backgrounds in theoretical physics which uses techniques not entirely dissimilar to those used by the Met Office. the Met Office forecast the weather very accurately for just about every square inch of the country. How come other professions can't forecast their particular futures so well?
The difference is that the Met Office looks at the weather system holisitically; economists, banks and hedge funds and others see things in much more isolation.
Surely its time the economy was modelled in just the same way our weather system is; modelling every aspect of the system holistically on a single super computer, using constantly updated readings from the economy with that model open to peer review; just the same way the weather is forecast - or any other chaotic system is forecast such as the formation of galaxies and even the universe.
This system of economic foreasting would provide the opportunity to test new financial innovations for their effect on the economy.
Before chemical, pharmaceutical and cosmetics companies are allowed to launch new products on to the market they are required test their drugs for safety - to ensure they don't harm or even kill those using them.
If I had my way financial institutions would be required to use a supercomputer model to generate simulations to test their new product for safety, to ensure that in reality should they introduce the product we won't get a repeat of crises like 1929 or 2008.
The top people working in finance and banking spend much of their time on planes or being driven around in limosines and of course demand that the planes and cars they use to have been tested thoroughly and awarded safety certificates.
Surely its time their own products were required to undergo similar safety testing to ensure their products never endanger the economy (again).
Ironcially Mark Twain once said "A banker is a person who will lend you an umbrella on a sunny day, and take it back when it rains."
I think he was on to something.
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44. At 2:15pm on 03 Nov 2009, duvinrouge wrote:
Hear hear!
"An economic theory that has been around 150 years!"
Ssshhh - don't mention it's name - for it will be associated with the 'C' word switftly followed by the 'S' word.
Unfortunately Economics suffers the same plight as all things in today's frivolous society - it's not new and flashy and pantsy - so people are not interested. Economists want to talk about surreal things like 'money supply' and 'marginal utility' - neither of which are relevant to the crisis we're in now.
There is no alternative explanation - merely theories which have all proven to be wrong.
The characters have changed, but the play remains the same. Just because the theory relates to 'industrial production' does not mean it's not relevant today (the means of production have shifted - less obvious to see, clouded by shareholders and joint stock companies)
My favourite is the old tired Capitalist reasoning that without Capitalism we would still be in the dark ages with regards to technology (conveniently forgetting all inventions from the wheel - up to the end of Feudalism)
Once again these theorists have all gone quiet - I went to an LSE lecture on the crisis and I was (less than) surprised to hear that not one of the Economists present (which included an ex-MPC member) had any answers for how, why and what to do next.
If these are the brains of our country - then we are truly doomed.
"Never have so many been fooled by so few"
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Just as an addendum to my earlier post (53) it strikes me that we can spend billions of pounds on the Large Hadron Collider creating mini-black holes to find the Higgs Boson (and other such ultra-expensive experiments that absorb the world's greatest minds) but it seems somehow that nobody ever thought to invest in forecasting the economy the way I've proposed.
You have to wonder if this is just ineptitude on the part of economists or wilfil neglect on the part of certain shadowy vested interests.
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I'd like to see more coverage of the predictions, explanations and models made by Steve Keen.
www.debtdeflation.com/blogs
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Just as another addendum to my earlier post (53)it strikes me that the baks, hedge funds etc have actually been using you, me and everyone else in the economy as crash test dummies - that has got to stop.
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No 8 "They got an 'ology' I an afraid and all it is good for is shelf stacking! Behavioural economics - pseudo economics for the terminally numerically challenged!"
Now, now !! Be kind !! They can still count on their fingers and toes !! :-)
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"After the financial crisis, where now for economics? "
The fact that you think the financial crisis is over says it all.
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No 18 "What can bankers do?"
Repackage them and flog them to the unwary by marking them as AAA++ assets !! QED (Quod Erat Demonstrantum or Quite Easily Done, as we used to say in school) :-)
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No 23 "I'm going to get that put on my headstone as a reminder to all the fools who thought you could and make sure I'm buried in the street outside the BBC White City as a reminder to future journalists."
I'm not sure that's a very good idea !! Considering the number of pubs within staggering range of that vicinity, it's very possible that it will be used "for other purposes" at closing times !! Then again, it could keep your daisies watered !! :-)
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No 27 "Our Nation's maths education is now absolutely abysmal and getting worse!"
Maths ?? What's that ?? :-)
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#59
Good point.
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No 31 "It seems from the sensible and insightful comments made here that the wrong people are advising the Government!"
Are you sure about this ?? I thought the "right" people are advising the government !! After all, the "wrong" people, like Prof Nutt, have already been fired !!
It's a time honoured tradition to kill the bearer of bad news !!
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An ODe to economists - - Modern economics is a spectacular success, so robust and productive that those responsible for protecting society and the economy were able to relax and stepped off the front foot. Economists today have a rival wearing jackboots, pinstripe suit and weilding the axe. Accountancy has established its micro practice as a dominant economic policy. That is what GAAP is, economic policy, control of wealth. It is utterly biased, it is destructive, it is junk.
FASB have developed (codified) a set of accounting rules which are accepted and practiced worldwide. The finale to this process was FAS166, 167 & 168 which went live this September. When you have time look them over, they are the new economics. There is a good history to them, worthy of serious research and a block buster film. Michael Stone, where are you now?
They are as biased and poisonous as the Nazi party was. The work is now completed, various tweaking and amendments are being produced at the moment. FAS157, introduced from the beginning of 2006 brought about the credit crunch, it destroyed value, reduced collateral and that is why the Credit Crunch was called the Credit Crunch by those few who really understood it and what it meant. It is not over yet and the problems to come are larger than those now or past. FAS157 no longer exists, really, it no longer exists and is renamed TOPIC 820 an ongoing workshop of revisions.
Beyond all this, realise that accountants work numbers, their best are the measure of the finest mathematical and economic geniuses. They are true rivals and they stole the economists playing field, after they devalued your science. Huge damage was done, related problems continue and are just surfacing and a further very nasty egg is hatching just over the next hill.
FASB developed the global GAAP and will at some stage, already under planning and implementation hand them to IASB, the international comptroller of your bottom line. There are disagreements as to certain detail and practice. FAS157/Topic 820 is going to be amended YET again............. how much more of this has got to go on before people see things for the truth. Accountants are small minded, they fiddle with numbers, they are biased, corrupt by profession and would not address either of the problems which haunt them and our world. Accountants sign off the fraudulent business practice that haunts our wrecked economies. To solve that problem they were handed control of the world economy.
They are independent, unanswerable and know not what they do, micro playing the macro. Li'l guy trying to grow up. Had they been honest, 'Insurance rebuild' valuations would now be the method of valuing property assets and the derivative markets would have been made transparent and valued properly. The world was DEVALUED by accountants, it is an trick every national chancellor understands. At some time to come, l guarantee that the IASB, once it is sat on its throne will revalue everything again, probably just after the wave of asset stripping that is about to occur, completes. Devalue again, or....... add value. Nice work if you can get it. They play the game.
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Cheap Finance caused a boom, expensive interest rates then prevented the miracle that would have been increasing general wealth as people paid down on principal. The grifters drifted in, high, low and anywhere they could squeeze the last penny as interest payments for a revenue stream to finance the joke that is secondary banking. It's nought to do with the economic theory. It's practice was flawed, not the theory or people who believe in it. Corruption and largesse, that is what happened, it would have occured to any system in place that produced even a modicum of wealth. We have had an avalanche of the stuff.
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Hi Stephanie,
Good post. The Bank of England in October 2008 listed the key issues / lessons to be learnt to increase resilience to systemic shocks :-
• Macroprudential tools are needed to guard against systemic risk and to ensure banks
are in a stronger position ahead of the next downturn.
• Capital levels have been too low and need to rise; and capital needs to be of sufficient
quality to deliver higher levels of resilience.
• Liquidity standards have been inadequate and should be strengthened to ensure that
firms are sufficiently resilient to a range of shocks.
• The current UK legal framework for depositor protection and dealing with institutions
in difficulties needs to be strengthened.
• International arrangements for managing crises at cross-border financial institutions
should be developed further.
• Transparency should be improved through more informative disclosure, including the
provision of more information on potential future balance sheet volatility, to
strengthen market discipline.
• The scope for — and potential benefits of — developing centralised infrastructures for
a broad array of over-the-counter instruments should be assessed.
How do you stop financial firms competing with each other to expand their balance sheets in lax policy environments and then collectively running over the edge of the cliff. First, dont have a lax policy environment. Second, have proper regulation of markets and firms. Is it such a difficult matter for economists to grasp? These are age-old principles which were understood, then set aside. Bad policy. Bad regulation. What really can economists say about the herd or the missing cowboys?
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No 40 "'The only function of economic forecasting is to make astrology look respectable'"
Of course, I'm respectable !!
- Mystic Ishkandar,
Fortunes told for a "modest" fee !!
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No 43 "The decline of manufacturing, and the proliferation of globalised service industries, has led to a situation where the attempt to connect subjects with objects, places to people, jobs to places, money to its rightful owners, seems to be well-nigh impossible."
Decline in manufacturing ?? Hello ?? Have you had a look at China lately ??
"The real hard, material facts are probably there, somewhere, but as Stephanie implies, where?"
Well, they bought passage from the Owl and the Pussycat in their pea-green boat and sailed off East !!
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No 51 "...for example creating far more mist in the upper atmosphere due to aircraft con trails and water vapour (also see the Solar wind /lunar and solar position and obliquity changes arguments in the literature - they at least predicted the recent cooling.)"
And, lest we forget, cattle flatulence !! :-)
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I graduated in economics in the 60s. I was told at the time that economics is the science of analysing man's interaction with money. That statement may need updating for political correctness, but the gist is there. I have watched in horror over time as economics has become more and more complex as larger and larger tin openers are assumed.
I became ashamed of my degree in the early 80s when over 300 economists wrote that infamous letter and were hopelessly wrong. My degree title is bachelor of science. This is pretentious as a description of economics. It is a black art.
Stephanie, you know far more about the black art of economics than I do. I cheered to myself as you demolished your profession. At last some sense. Nobody at the sharp end making decisions that add together to be what Samuelson called "dollar votes" has a clue about economics. They do what they think best. Assuming tin openers to summarise what they do and formulating complicated equations may land Nobel prizes, but these are irrelevant to peasants like me trying to make up their minds how to spend their money.
Good on you Stephannie for your sheer honesty. Rejection of economics as a profession may yet come about.
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No 53 "How come other professions can't forecast their particular futures so well?"
Because nature is not as fractious or frivolous as people !!
"Surely its time the economy was modelled in just the same way our weather system is; modelling every aspect of the system holistically on a single super computer, using constantly updated readings from the economy with that model open to peer review; just the same way the weather is forecast - or any other chaotic system is forecast such as the formation of galaxies and even the universe."
Until we can model *TRUE* AI, we will never be able to model any individual's behavior accurately all the time !! And it's the holistic modeling of the economies that have failed because they have not taken into consideration human behavior and thinking.
For example, holistically, we should have let the bad banks go bust and let the other banks pick their bones clean. Instead, we've thrown billions and trillions at them trying to fix the unfixable !!
As Mr. Spock is alleged to have said, "It does not compute, Captain !!"
"If I had my way financial institutions would be required to use a supercomputer model to generate simulations to test their new product for safety, to ensure that in reality should they introduce the product we won't get a repeat of crises like 1929 or 2008."
But first, we have to put your theory to safety testing by asking how you would produce the program to model and test those products. You are making just the same assumptions as those bankers, you accuse, have !!
Quis custodiet ipsos custodes?
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Another thought on the economics has gone pear-shaped theme.
Up until 'recently' the "means of production" was the means of consumption and vice versa. "Say's law" was merely the observation that when entrepeneurs complained that people were short of money and couldn't consume they were unfairly blaming money when they should have been blaming production.
"The economy" was synonymous with the supply chain really.
Nowadays this does not have to be the case. The supply chain can be fully or largely automated. The supply chain can be, and in parts actually is, a pretty well integrated machine. As time goes by, as automation proceeds, human production is less and less the source of consumption.
What about the "real" jobs then involved in production? Well there is maintenance and extension of the supply chain, sure, but increasingly productivity, or contributing to the "real economy", is about decision making and invention; steering the machines and steering the direction of machine development. Now with a single thought a person can make a thousand things. This is exaggerated even further if we are talking about things that can be represented digitally these days.
Some of the real limiting factors include mainstream economics itself. Technology really can lead to abundances, or "gluts" in the language of Say and the free-marketeers, but if those who operate and steer the machines are motivated only by return on investment, and abundance only dilutes those returns, what would ever motivate them to do so?
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No 73 "Some of the real limiting factors include mainstream economics itself. Technology really can lead to abundances, or "gluts" in the language of Say and the free-marketeers, but if those who operate and steer the machines are motivated only by return on investment, and abundance only dilutes those returns, what would ever motivate them to do so?"
Sheer self-interest or FUJIA !! So long the steerers can gain relative to the rest, they will carry on being motivated !! It doesn't matter what the price of beans is, if someone has more beans than someone else, he is relatively wealthier !!
It's all relative, as Einstein was alleged to have said !! :-)
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IMHO traditional 'economics' is 'too narrow' in scope and also 'out-of-date'. It has also 'failed' hard-working people and is now effectively 'dead'.
But attempts to improve it, change it or widen it, will always be resisted. Dr W Edwards Deming, a creative outsider and a real 'leader', uncovered the "System of Profound Knowledge" and referred to the need for a "New Economics" (over 20 years ago) ... but, when terms are so out of date new words/definitions are needed, and for that reason, and for those interested, I am continuing his work ... using the definitions below:
* Leanomics = People taking responsibility for adding value and continuously improving the situation for others (e.g. customers, communities, overall environment), based upon fundamental values such as trust, honor, responsibility and respect.
* Ignoromics = People are either effectively ignorant of the situation (e.g. the overall environment) or not prepared to take responsibility to make sure it changes for the better.
* Poweromics = People using position and power for their own personal gain, based on poor moral values, self interest and greed.
It is worth noting virtually everything fundamentally centres around 'people' and the 'values' they uphold. It is also worth noting that Ignoromics is what allows Poweromics to flourish, and in my view this summarises the current (and widened) definition of 'economics' that prevails today.
Why not take a look at what 'leaders' everywhere are doing (e.g. your boss, company, service provider, government, politicians, media ...) and look at how many people understand this and/or prepared to do something about it ... I think you'll find its small ... albeit steadily growing (helped by the internet, and recent activities of banks/MP's etc).
IMHO the battle of the future is really one of values, and given the above definitions, can be simply summarised as ...
Leanomics v Poweromics & Ignoromics
For those interested I hope this is helpful ... and I would certainly recommend the work of Dr. W. Edwards Deming ( as well as http://poweromics.blogspot.com ) as a good starting point for looking into this further ... people are still amazed (and learning) how profound his insight actually was ... e.g. he told us far more about the future of economics than Richard Thaler in his lectures and book (I went to one of his lectures in London around the time of release of Nudge). I think you'll find people are still flocking to the latest incremental ideas, not more revolutionary ideas, yet only the economies moving rapidly to the latter will survive and prosper e.g. Singapore's turn-around - http://poweromics.blogspot.com/2009/10/asking-questions-doing-things.html
Whether people like it or not, the clock is ticking away and time is rapidly running out for most economies.
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#74
It is not accurate to say that people are motivated in general to outdo their neighbour. I do not agree even that people are motivated by, or even see things in terms of "wealth". "Wealth" and greed are, in my experience, the concern of a relative few.
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Post 74 said - "Sheer self-interest or FUJIA !! So long the steerers can gain relative to the rest, they will carry on being motivated !! It doesn't matter what the price of beans is, if someone has more beans than someone else, he is relatively wealthier !! ... It's all relative, as Einstein was alleged to have said !! :-)
I couldn't agree more - one of the main drivers of "poor moral values, self-interest and greed" (see post 75) is ENVY ... which drives/motivates people to want more than someone else, particularly those they compare themselves with, hence the term 'keeping up with the Jones's' - it's not absolute wealth that bothers most people, but relative wealth to those they continually compare themselves with, which drives poor moral values, self-interest and greed.
IMHO only a return of 'fundamental values' (e.g. trust, honor, responsibility, respect) will turn around 'economies' in a sustainable way now, and time is on no-one's side.
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It would be nice if economists could understand, and predict economic behaviour, but it is naive I think, to proclaim the qualities of theories which are built on assumptions like:
- People always act in self interest
- People always know what their self interest is
People don't act like robots (at least most of the people I know don't). As human beings, we sometimes act rationally, and in our own interest. Sometimes we make decisions based on faulty reasoning, and misunderstanding, and sometimes we make mathematical judgements. Sometimes we are stupid, and sometimes we are smart. Economics provides poor estimations of human behaviour, and although some newer models which attempt to understand this like behavioural economics are useful, they don't seem to make much use of psychological and sociological research, to understand people. The trouble is, economics doesn't understand people very well. People aren't numbers.
I'd disagree with the statements about being presented with a choice. I'd say the reason people agree to an operation with a 90% success rate, over a 1 in 10 chance of dying is because the first one is presented primarily in a positive light, whilst the second presents the risk, rather than the positive return. The psychological studies regarding rules of primacy are also important here. People don't always make rational choices either. Even stockbrokers, even economists.
The economic crisis wasn't caused by people acting rationally inside a broken model, it was caused by people acting with too little information, emotionally and irresponsibly. It was caused by normal human weakness, greed, and a lack of concern for the wider effects of people's actions. The idea that all the stockbrokers, private investors and analysts who try to make money on the markets every day are somehow all geniuses is absurd. They have human failings, and make mistakes, just like everyone else. The markets are imperfect, and greedy, impulsive and act like sheep. Just like people do. People don't make sound economic judgement in general, they just do what everyone else is doing, and assume because everyone else is doing it, it must be the right thing to do.
For some reason, another spurious idea seems to have emerged, that saving money will somehow help us out of recession. How on earth will spending less, cause the economy to grow I wonder? I'm not sure a single economist has been asked that. Economics is widely put on TV channels, with little explanation as to the meanings of terms like derivatives, liquidity, and so on. How are the public expected to make rational economic decisions, if no-one makes any effort to explain economic theory? The trouble is, explaining this theory would show what a ridiculous house-of-cards list of assumptions it was based on.
With such a large system, all that matters is how the masses act, the workers, the managers, the people who flip burgers for a living, the people who make cars, the 'real' economy as it's called. Unless people buy stuff, produce stuff, and want stuff, the economy won't grow. People don't borrow money if they don't want to buy things. The public sector spending decreases make things even worse - less spending means job cuts, and lower salaries, which means less consumer spending. People spend less and less, causing the cycle to continue.
The only way out of this is public investment into the real economy. Lending to banks when people are out of work isn't altogether helpful - how about loaning directly to small business and people who actually need it? Why trust the banks to create economic stimulation when they caused the problems in the first place? They are hoarding cash, just like everyone else.
What really matters in growing the economy, is that people who actually do things, which are actually useful (i.e. not investment bankers) are allowed to continue to do useful things, and continue to keep their jobs. Our economy is far too reliant on service industries, and bean counting. If people were allowed to actually do things, instead of constantly keep servicing the economic system, then the economy would grow sustainably, and in line with actual living conditions and advances in technology. The reason we have an economic problem, is because we spend so much time talking about markets, economic conditions, derivatives, and ways to make money without actually doing anything. Why not try actually basing our economic stability on the realities of day to day life, instead of the out-of-touch, virtual worlds of highly paid bankers and economists? What is the point in making money through investment, if none of that money goes back into the real economy?
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#71. Henry_Quimper wrote:
"Rejection of economics as a profession may yet come about"
Perhaps we need "Economists Anonymous" - rather like AA where economists come to confess their error and addiction and then fight it together. Certainly some from of re-education is needed as the 'education' they have had has been in error.
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Sorry economists back to the climate science debate or lack of science.
John from Hebdon, trying to dismiss 30 years of climate science with the expression 'the perceived wisdom' shows a certain level of ignorance of science, this isn't economics. I was attending lectures on climate change at imperial college back in 1988 as part of an atmospheric physics course when the climate change deniers where trying to prove the world wasn't in fact warming, do you remember, you cant argue with thermometers as they say but they tried to, but why would they want to, hmmmm, hard one that, not self interest it couldn't be!
Now the climate change deniers have now accepted the climate is warming 30 years after nasa scientists first realised it. 30 YEARS!!!
Since then the evidence and science that it is co2 has grown and grown.
Why are you desperate to come up with any other theory, WHY?
Why are you always 20 years behind the science???
All people like Nigel Lawson and you are trying to do is name call scientists and muddy the waters and slow down any action because of self interest. There was plenty of money available during the 90's to research that it wasn't co2 before you go on about research grants, unfortunately they couldn't prove that.
Why did that man who made that stupid documentary have to mis represent what the scientist involved said, if this was the truth? Why?
Back to the science, co2 IS a greenhouse gas, methane also is a greenhouse gas, it holds heat from the sun in the climate system a small percentage extra co2 will trap a small extra percentage of the suns heat in the atmosphere. The power of the sun is of course the main driver of the temperature of the climate as cloud cover effects how much energy is reflected back into space, but a climate with lower co2 will be cooler, more warmer they for the same power of the sun, back to the analogy of your greenhouse, a double glazed one will always be warmer than a single glazed one no matter how strong the sun is shining.
The warming now is caused by man made co2 other warm periods weren't the other factors have been taken into account.
The ice cores and co2 and temperature is what i think you must be refering to they aren't proof that co2 causes all warming, what they prove is that a warmer climate creates higher levels of co2 in the atmosphere this is a positive feedback loop, can you understand that and why that is very scary.
You say there has been cooling since 1990 where do you get this from?
The artic ice sheet was at its lowest ever level this summer was this caused by your cooling effect????? Why are you ignoring this fact?
This isn't a conspiracy or the 'perceived wisdom' its just real science.
Models are worked on and get refined as the understanding improves, the evidence mounts and you choose to ignore it.
Most scientists are interested in the truth the same can't be said for politicians, don't allow your scientific understanding to be informed by Nigel Lawson et al.
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#78. Chris Gilbert wrote:
"
- People always act in self interest
- People always know what their self interest is
"
Ah yes, the old certainties - let me add two ideas
1. That the decline in mathematical standards and the consequent reduction in the ability to make rational choices mat relate to the decline in these ideas. Indeed conversely the fact that these ideas seem to be less useful than they used to in understanding the way markets work may also reflect the increase in innumeracy.
2. Business schools have developed Confusion Marketing and multiple tariffing to such a high degree so as to make any notion of a market vanish as they actively set out to prevent price comparison.
We could solve the second problem with legislation, but it will take a generation to improve numeracy to the level it was in the sixties and before.
Without a sound basic ability to do sums almost all logical argument is just a mystery and I am afraid that this is now the condition of the vast majority of the population. They are no more stupid than they used to be but the perceived importance of being able to do sums has diminished so people just don't bother! (And anyway that got a GCSE/A-level so they must be able to do sums - oh were it so!)
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"Economists, at least the macro variety, didn't have a good financial crisis. And they're not having much of a recovery either. Much like the UK."
There we go! It is spin time again! What does the UK not have? A financial crisis? Well, it depends how you define financial crisis, I suppose. The UK has created the biggest personal debt and house price bubble on earth, through a joint effort of bankers, estate agents, journalists, homeowners and Gordon Brown over years. This bubble is still there because the government has stuffed our tax money in any developing holes. This is the continuation of the financial madness of the last decade by new, even more lunatic means. It is an act of desperation, it is part of the crisis and it will make this an unforgettable crisis. We are still very much at the beginning!
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#80. andrew9999 wrote:
Continuing an arguement about Climate Change with me...
This really isn't the blog - have you read the Earth Watch: Richard Black blog and the now published papers (see the blog for all the references) given at the seminar (which I attended at Imperial last week) so don't accuse me of being twenty years behind the science!
Please pay particular attention the the experimental methods to measure temperature and the concerns about the ice core and isotopic methods of historic CO2 and temperature estimation.
This is not the place to have the argument: But what I will say is that your argument about feedback and CO2 does not hold water at all for if there was continuous positive feedback temperature would have never gone down nor would have CO2 and both of these thing have (probably - given my concerns about the methodologies of measurement) happened in history. (The data about temperature and ice ages is better as it that about warm periods, but CO2 estimation is basically full of unacknowledged systemic and experimental error.)
Tell me why none of the IPCC models predicted the decline in temperatures since 1999 combined with a continued increase in CO2? The historic ice code data shows higher CO2 in some periods of higher temperature however there are so many errors in the experimental methodology the unacknowledged uncertainties are enormous. But let us accept the data. I cannot overcome the light switch logic. If CO2 drives temperature change why does the temperature change occur before the CO2 changes? (And not always in the same direction!) This is a central causality problem. Please read the papers associated with the seminar at Imperial last week. There is no point in us slanging each other off so please read the latest papers.
I am quite concerned about Climate Change and a little concerned about methane, but not CO2 and I am not saying things are getting warmer at the poles and higher latitudes but the IPCC's published underlying data does not match their report. CO2 is not in my view, and from the published evidence, the culprit.
To appease those who want to talk about economics here - consider the economic effects of CO2 being responsible or not and the likelihood of being able to modify the CO2 levels and all the other consequences! I'll stop now as this is really the wrong place for this argument.
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To everyone who thinks that all economists are in the dark it might be worth reading this book:
Boom Bust: House Prices, Banking and the Depression of 2010 by Fred Harrison (Author)
Its basic thesis is that the anglo-saxon method of using houses as future equity and speculation inevitably creates bubbles with an approximate 18 year cycle.
The solution?
Tax capital gains on ALL houses even your own house. This will take the steam out of the housing market and people will move as a matter of neccessity rather than speculating. This will take us to a more European approach to housing - ie it should be somewhere to live rather than a pot of future gains.
The problem?
Which political party would be brave (or dumb?) enough to propose this and how many people would vote for it? You see the problem.
My approach will be to try and exploit the cycle to increase individual wealth (greed or self-interest?) in the recognition that I really dont think our system will change.
Still recommend reading the book though even if it is a bit dry.
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Everybody knows what everybody knows.....the problem hasn't been the changes in society or business...or whatever...it's almost always the velocity of the change.
A lot of economic theorising and discussion (and general history ) for that matter seems to just ignore, or miss, the significance of the velocity when discussing change.
Most of the people alive in London in 1909 are now dead.
Most of the people alive right now will be dead by 2109.
Neither of these facts are causes for worry, tragedy or even much comment.
But if the prediction is altered to one that half the same number of deaths mentioned above will actually take place in the period 2015 to 2020 with the rest then occur over the remaining 90 years ...not only would it indeed be a subject of worry, tragedy and comment----but the end result by 2010 would also be different.
The velocity of this change would in itself alter many factual outcomes (lots of people dying in a very short time would dislocate the economy massively and possibly thereby cause even more deaths --- the overall population would be smaller because, of course, so many possible members would never be born as their forebearers were never themselves born)------
I think it's this accelerating avalanche of events that has left the 'system' almost paralysed and meant the levers pulled simply wobble unconnected to anything that can affect the real world.
This isn't only a problem of 'economic theory' or analysis, it's a problem of, for instance, 'managing immigration' as well; where 600,000 Eastern European economic migrants isn't of itself a bad things, and may be a very good thing; or, to give another instance, the problem of moving from a society based on the 'conventional family' (I know.... define that term) to one where that is no longer the basis of society.
In these, as in the basic topic on this discussion board; Economics ---- it isn't the change itself that's ever the problem---- it's the velocity, stupid!
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The reason our problems are problems is because the cause is not understood. The symptoms present a standard and expected scenario. That is.......... people are seeing what they expect to see, so they know what they are doing. Ho hum............ in the midst of the fiercest battle, the craziest game, you step back and you check it out. One must always doubt the obvious, study the raw data over a coffee and forget it. You will be surprised what pops out from the idle side up top when you least expect it. Nothing is ever quite, what it seems. Curiosity did not kill the cat, it taught survival.
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#78 Chris Gilbert
Well put, and I fully agree.
I would also add, as I mentioned in an earlier post, that public spending is an ongoing increasing necessity because, contrary to what 'the market' is supposed to offer, automation is increasingly pushing people into 'non-jobs' or out of the 'means of production' altogether.
Without elaborating too much, the automated supply chain needs to be regulated according to energy efficiency. What people should be 'paying' for is the energy required to produce the product or service, thus putting further incentive on energy efficiency and energy source stability and sustainability. Where market-based rationing could come in is in the decision making ability to the current and future choice of products/services that is given.
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"He also started a hedge fund, Long-Term Capital Management which created a mini credit crunch of its own, running up losses of more than $4.5bn in just four months in the summer of 1998."
The economics is all about utility and value. Remember? I'd think of the financial assets (FA) as of those bearing the most questionable value. We've got huge funds directly or indirectly invested in FA like bonds, shares, derivatives. Utility of each of these instruments, after all, is based on its ability to produce interest-type income to the holder. But rather than doing so, they(1) became the subject of vast speculation and (2) price ("present value")of these instruments is based upon the expectations (future, promices).
A substantial part of economic professionals became involved in calculating this PV, lots had a job of selling this PV (or rather FV?) of these FA to the others.
Efficiency of financial markets (read "fair valuation of FA") is questionable because FA do not bear their utility by themselves, but their utility is 'sold' to the buyers by investment brokers, analysts, management, auditors - and those tend to lie about the real-life situations in the issuer companies and true performance.
There is no crisis, it's an ordinary case of revaluation (devaluation) of assets and liabilities. It's just a bit hard to accept. But in the end we'll re-start with a rather "modest" balance sheet. That's it.
The issue is that financial markets fail because information gets greatly distorted in the chain: management, auditors, brokers, analysts. And this is about corporate law, securities law, practices etc.
It's questionable that Enron-like or Lehman-like cases are avoidable now. The governments seem to be financing those lossy balance sheets rather than facing the truth, writing off the losses and changing the regulatory environment.
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The devaluation/revaluation that occured was a spook157, people looked at their revalued balances for 07 and realised their trouser legs were wet. The valuations are out of whack and it has got to be fixed.
Here is an unusuality, this not being a trading place only adds sum. This is a rare thing & free. http://bsym.bloomberg.com/sym/ might come in handy one day.
Digestive break - answer by noon eft to the North Pole - How large a valuation adjustment to derivative portfolios would be required to undermine their underlying assets.
Is life a dichotomy?
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No 87 "Where market-based rationing could come in is in the decision making ability to the current and future choice of products/services that is given."
We could extend it one step further and suggest that "international credit" be limited to those who can actually have the means to repay the loans !!
E.g. The US government debt is already several multiples of the entire GDP and the government deficit is making it grow at an unsustainable rate. Add in the amount of "private" debts and the picture is definitely *NOT* rosy !! This should make the US a bad risk (sub-prime !!) Similarly for the UK.
This will force the "future choice of products/services that is given" !! Governments that try to buy votes with borrowed money will be forced to raise taxes enormously or face starvation and bankruptcy as their credit is withdrawn !! That will certainly not win them any more votes for quite some time to come !!
Of course, this situation will cause a short term contraction in world trade but that will soon pick up as the more viable countries take up the strain and, soon, it will be back to "business as usual" but without the massively over-hanging debts !!
The *REAL* economic problem is that most economists are still very West-centric !! Take a look at the postings in the last 50 or so blogs on this and other English language sites !! Quite aside from those postings that ride a personal hobby horse (and I've been guilty of a few of those :-) ) most of the postings seem not to distinguish between local or Western occurrences and global occurrences !!
For instance, an earlier post bemoaned the massive decline on manufacturing. This might be true for UK but certainly not true for Germany or the US and definitely not true for the likes of China or India !! Therefore, economic models that might map to a decline in manufacturing may work for Britain but will not work for Germany or China !! (See the "Why them and not us" blog). Similarly, debt-driven models may describe the Western economies but certainly not the Middle-Eastern oil economies or the "Tiger" economies of Asia !!
Japan survived a decade or more of low to zero interest rates because its population (collectively) had massive savings !! In Britain, savings ?? What's that ??
After more than 2 decades of wandering around East Asia, I've come to appreciate some of their good values. As such, I, too, have some savings; mostly stashed out East in "boring" but safe accounts !! Therefore, in the recent 20 months or so and without lifting so much as my little finger, my savings have appreciated by at least 12% excluding any interest/dividends earned, simply because the £ and the $ nose-dived !!
This is now a new socio-economic dawn and the sooner that people and, especially economists, realise that, the sooner that plans can be made for recovery and possible future growth !! All else is spin and bovine manure !!
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No, life is a dialectic :)
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Accountants signed off the dodgy Enron, Lehman, Madoff, etc. stuff. Madoffs guy is in court now, oooh l was naughty but didn't know about the big scam. His motor cars no. Plate was 'F Troop' :) Really, it really was.
Accountants were in a rock type hard place with the conflicts of interest and worry for their health. They are though trusted professionals of stature who would not, could not and still will not do their job which includes blowing whistles and/or refusing to sign of accounts. It can be difficult to pick up deceits from the receipts but that is their job/conflict of interest and what did the holiest of holy US SEC do - give the accountants GAAP to design and install and they wrecked the world. That is what happened. It is no good crying over it but they cannot be left to carry on the GAAP - utter folly and we are all signed up to its international incarnation. There are basic and very serious problems with this accounting approach to policing business. We live with its fallout now and more of both are headed our way.
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No 88 "We've got huge funds directly or indirectly invested in FA.."
You forgot about some other "financial assets" !! Pensions, life and other insurances, trusts, for instance !!
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#92. herosrest had a pop at Accountants...
You are quite right that Accountants need to take some of the blame.
Auditing is the aspect of their work that is there to protect the investor and shareholder against outright lying and falsehood in the preparation of a company's accounts. Auditors give an opinion that the accounts are a true and fair view of the results for the period being reported and of the balances at the end of the period - however they only do so by interpreting the laws of the land - and under most circumstances this is the limit of their opinion - indeed they limit this by various statements about representations given by the directors.
The conflict of interest 'problem' has for thirty or more years been denied by the small and smaller number of accounting firms. It has always caused me to be far more concerned than the market's perception. The argument for big firms of accountants is that as there are big companies the firms of accounts need to be big to handle the international aspects of the businesses.
So I suggest that not only are 'banks too big to fail' many large companies (including banks) are also 'too big to audit'.
The obvious (to my mind's) conclusion is that the competition authorities around the World have not done their job properly in breaking up these companies and that includes, but is not limited to banks. So it comes back to a failure of regulation and the absence of anything like a 'free market' or anything like a 'market discipline' so a failure in capitalism (inevitable? - see K. Marx)
(I tend to agree with your views of the supine and compliant nature of the SEC, FSA/Bank of England and GAAP and reporting standards in general.)
Solutions ?....
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Can economics deal with opportunism? Daft or frivolous products and services become huge global businesses when someone "spots the opportunity"; popcorn, the hugely profitable cinema staple food, and some financial "derivatives" are examples, of which popcorn is not the baneful one and is said to be the most profitable consumer product (who would have thought it?). There is always chanciness in an economy and economists pore over the smoking entrails, the historic data produced by past business activity. Economies are always going to be vulnerable to the "next big thing" being the next big crash.
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53. At 5:07pm on 03 Nov 2009, factgasm wrote:
"If I had my way financial institutions would be required to use a supercomputer model to generate simulations to test their new product for safety, to ensure that in reality should they introduce the product we won't get a repeat of crises like 1929 or 2008"
Prediction is only half the story, once you know the crash is coming there's nothing you can do about it - the contradictions of capitalism cannot be resolved by a computer.
(and besides, the computer will make the logical decision that the extended commodities (workforce) can be disposed of to rebalance the Economy - not very humanitarian!)
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This comment was removed because the moderators found it broke the House Rules.
@John_from_Hendon
some good points, but...
"It will take a couple of generation fro economics to correct itself "(sic)
surely you mean reach equilibrium?
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67. At 7:08pm on 03 Nov 2009, shireblogger
Nice post - but the same old problem rises.
The solution of 'tighter regulation' just means the regulator gets bigger and bigger - requiring more and more laws passed to control the new ways found to circumvent them.
This leads to a maasive bill for the taxpayer to run it all - eventually as big as the bailout itself - as well as a raft of rules and regulations which can be handled by huge corporations and their legal department - but which totally floor SME's.
This is why even tighter regulation will still encourage companies to grow to huge sizes - because once you're big enough you can start to lobby (or threaten) Government with wails of 'job losses if you don't'
Sadly less regulation and more regulation generally end in similar ways - huge cost to the taxpayer.
The underlying problem is competition itself - hailed as being effective and efficient - this is only a short term benefit hiding a much bigger long term problem.
As I mentioned yesterday - why do we need a choice of 30 banks in our high street - we only need 1 which works properly and not 30 competing with each other and none doing the job well.
The only way to achieve that is to take the profit motive out of development. That upsets a lot of people because they actually believe their ability to make money is a worthy one - whereas for society as a whole - it isn't. Only their individual wants are fulfilled by the motivation of profit.
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#44
Beyond blaming individuals, e.g. bankers, regulators, politicans, accountants, etc, I don't see any economic theories explaining the crisis on this blog.
What makes the rate of profit fall so that capitalists reduce production?
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@ 53. At 5:07pm on 03 Nov 2009, factgasm wrote:
"Today, where I am, it stopped raining at the precise time the BBC's weather forecast said it would."
I read your first line and felt sure it would be swiftly followed by some wry irony and some observations about chance and randomness, but no, you appear to literally (rather touchingly) believe that the Met Office forecasts the weather infallibly, as you then go on to say:
... "The Met Office forecasts the weather very accurately for just about every square inch of the country."
If you have not yourself ever encountered any evidence that the Met Office is not in fact infallible, here is some reading for you -
http://www.guardian.co.uk/uk/2009/may/28/bournemouth-met-office
"Storms ahead: Bournemouth anger over Met Office's bank holiday forecast
Tourism bosses say inaccurate forecast of thundery weather on Monday cost Dorset resort millions of pounds in lost revenue."
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@ 94. At 09:34am on 04 Nov 2009, John_from_Hendon wrote:
... "I tend to agree with your views of the supine and compliant nature of the SEC, FSA/Bank of England and GAAP and reporting standards in general.
Solutions ?...."
We need to elect governments that are not in awe of big business - simple isn't it?
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Back in the 70s when financial crises were two a penny, a top industrialist (that's what they were called then) stated that he'd fired all the economists in his company because, on investigation, they had discovered that all the economists did all day was to speak to other economists.
There must be some kind of law that states there is a maximum efficient dilution of economists in a population mix and after that dilution is exceeded the economy goes straight to pot.
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No 94 "So I suggest that not only are 'banks too big to fail' many large companies (including banks) are also 'too big to audit'. "
This is not quite strictly true at all. What is needed is that Auditors should *NOT* be allowed to take on any other accounting and advisory work from the companies they audit. This is similar to retail and casino banking. There *MUST* be a separation of functions to limit or totally remove any conflicts of interests !!
In the case of ENRON, not only were the Androids the auditors, but they were also their advisers in many matters as well as doing the due diligence on the companies that ENRON swallowed up or created out of thin air !! Therefore, justice was done when the Androids were broken up and their firm/company was "sown with salt" to prevent them from ever rising again !!
However, if a firm were to audit a company that is advised by their rivals, they will take more care in their audit, if for no other reason than to ensure that the advisers were keeping to the "straight and narrow" !!
This was what had been missing and some attempt was made to address this in the Sarbane-Oxley Act of 2002. Like many great Acts, this is of the "shutting of barn door" variety !!
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76. At 10:06pm on 03 Nov 2009, FrankSz wrote:
"It is not accurate to say that people are motivated in general to outdo their neighbour. I do not agree even that people are motivated by, or even see things in terms of "wealth". "Wealth" and greed are, in my experience, the concern of a relative few."
I agree - but unfortunately due the the system we participate in - those who are greediest and most motivated by wealth and profit end up becoming the most powerful and steer us all in their direction.
This is why the system will always spiral towards greed - in a true meritocracy we would have those who consume, waste least and who benefit society at all levels rising to the top. I mean take the house of Lords - not a worthy one amongst them - either appointed for their failure in Parliment or inherited through birthright. I mean you only have to look at Lord Sugar to see what I'm talking about - what contribution to society did he make - it seems his contribution was simply to make himself incredibely rich - and before the new marketeers talk about 'job creation' - that was merely a side effect of the original goal.
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With reference to the comments on accountants, i have long been critical on how large firms opperate, however comparing them to Nazi's is unecessary and more than a "pop", i do wish everyone stops using war references in support of their own ideas.
The problem with large accountancy firms are that they are focused on either expoloiting loopholes which many would not see as "fair" or planning on covering the backs of the management of their clients with a "show me the rule which says that wasn't allowed " attitued.
I highlighted the delicious irony of the Rover situation before. £16m was paid to BDO by the government for a report which put little blame on them or another large firm of accountants Deloitte, who received £1.9 million in Audit fees, £3m in other fees between 2000 and 2003 and £9 million in fees relating to three specific transactions at Rover.
I run a small accounting firm and am not afraid to report frankly, lose a client or whistleblow if i feel it my duty to do so. Even if this does mean my firm remains small.
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77. At 10:21pm on 03 Nov 2009, leanomist wrote:
I am interested by what you say - and I agree it's relative wealth not absolute wealth (otherwise millionaires would all retire once they made a million)
So that seems to be a very good reason why total equality should be the target of Government. Only tose who 'think' they are better than others will be put out - and if you think your better than others in this Capitalist system - then the chances are you're not.
Total equality also solves the environmental problem - the reason the west wastes so much is due to the inequality we preside over. Solar power has been around for years in Africa - through necessity - whereas in the unbalanced west there is no need for it.
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#78 Gilbert
some good points...however
"how about loaning directly to small business and people who actually need it?"
Lord Sugar has something to say on this - credit has been too easy and many are hooked on it so they expect that the banks (i.e. our deposits)are used to fund their flights of ego - small businesses manfacturing cushions or nuclear free vegetarian peace windmills. The thought of government rationing finance to the needy is only one step worse than the banks doing so.
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81. At 10:59pm on 03 Nov 2009, John_from_Hendon
I very much agree with point 2 - it's no coincidence that most people don't understand what a derivative is - and that includes people who trade them.
The financial 'wizards' come up with ever complicated ways of making pricing difficult and complicated - in order to make a profit. Unfortunately this profit must be a loss by another - hence the bailout.
What most derivative traders don't realise is that they are in fact betting on the future - just like a gambler - and their win is the bookies loss - sadly that bookie is us (and them to be fair) making the whole system prone to booming and busting. Derivatives merely make the traditional boom and bust bigger and more damaging.
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re 104#
read your comments after i posted mine and no doubt we are going to agree on a lot of things.
I my opinion yes the requirement to used Sarbane-Oxley was far to late, the other (where we may disagree) is that it means more revenue to accounting firms.
Maybe a way to make auditors truely independent would be for them not to rely on revenue from their clients, or possibly madatory changing of auditors every few years
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87. At 05:03am on 04 Nov 2009, FrankSz
Nice post and I agree the supply chain needs to be based on the cost of energy to produce it.
However markets can only work on today's information, and not tomorrow. Therefore the cost of energy is skewed to be cheaper than it is - the cost of digging coal out the ground and burning it is cheap - but the consequences are dire (think Victorian London)
We have outgrown the market forces which dictated our lives for so long. If we continue with them they will lead us to doom as they are reactive to events, not proactive.
For example, oil prices will stay relatively low until we know exactly how much is left. At the moment the oil price is based on 'how quick I can dig it up' and not 'how much is left'.
This is why one day there will be an uncontrollable rise in oil prices that will bring civilisation to a halt.
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100. At 10:19am on 04 Nov 2009, duvinrouge wrote:
"What makes the rate of profit fall so that capitalists reduce production?"
The people are like bad Doctors - all arguing about the symptoms and not getting to the cause of the problem. Whilst it's fascinating how Capitalism has developed - it's still Capitalism
The silence about explaining crises is deafening. Not one journalist (mainstream) or one politician ever dare mention the true cause of our ups and downs.
One day people will look back on today and say 'you fools - the answer was there all along but you were all too afraid to confront it'
Monetarism was designed to deal with the symptoms of Capitalism - and it's failed
Central banks were designed to contain the beast - and they have failed too.
Successive Governments have claimed to have fixed it - they have all failed.
The Marginalists thought they could theorise their way around it - they too have failed.
In a list of failures only 1 man ever got it right - and he is conveniently ignored by most - partially because they do not read his work and choose to take other's word on the matter.
Education is the basis for progress and in this country we are slowly destroying all chances we have of real progress.
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The old theories are surely outmoded when half the world has a fridge, TV, mobile phone, car, more t-shirts than they will ever wear, the opportunity to watch the equivalent of bear baiting on the TV and weekly access to multiple magazines describing the latest nonsense from Jordan and Peter or Jon and Kate make Eight.
Each household only needs so many glasses and saucepans and curtains and coats and shoes and screwdrivers or scissors.
So, apart from reductions in VAT, what might happen, if we collectively decided we didn't want any more however cheap and we only bought what we needed, when we needed it?
Is there a model for this?
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....just to illustrate my point (will all SME's please cover their ears)
http://business.timesonline.co.uk/tol/business/industry_sectors/banking_and_finance/article6902320.ece
So Lord Sugar thinks you're all moaners - maybe it's because despite all his rhetoric about being an 'East end Barrow boy' - he has already forgotten what it's like to be at the bottom.
It's much easier when your friends are bankers, you are already a Lord and you can simply 'pick and choose' which businesses you want to buy before getting the axe out in the name of 'making savings'.
I used to own an Amstrad - I know exactly what I'm talking about!
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I concluded long ago that economists do not understand, or take into account, the relevance of social behaviour and I have not found an economist who will disagree. Same applies to accounts. I have not found an accountant who can incorporate stakeholder morale into a balance sheet, yet we are all taught that our staff are our most important asset.
We are already in a period of serious and deepening social stress, both in workplaces and beyond. This will damage most statistical forecasts because they cannot take stress into account. What is now important is to find a way of maintaining our essential structures and services. Failure to do so will be frightening. Think the unthinkable for a moment and imagine what would happen, for example, if we lost our electricity supply and computers and air conditioning stopped working, or the Rule of Law by which I mean the right to walk home without being mugged! Where's Plan B?
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Economics appeared as a science about distribution of scarce resources. Scarcity was based on the fact that everything was produced using human energy, by applying human, or at its best, horsepower to the nature. Be it agriculture, pottery or masonry. Thus there was a clear relation between labour applied (power spent) and value.
As we progressed with technology the manpower was replaced manpower with electric one, crude oil etc. most Material items "inflated" and became cheap. Actually the material thinks involve either cheap labour of the third world, or little labour replaced by machines & energy.
In case of services, those of "immediate utility" like transportation, healthcare remain valuable. Not so in case of financial services: those refer to very unhealthy pert of the economy. I'd even think in terms of
Economics (goods and "immediate utility" services) vs Financial Markets
as of 'opposite camps'.
In case of Economics we still have good old economics with supply and demand effectively regulated by 'invisible hand'.
In case of Financial Markets we have inflation of financial assets, fraud and havoc.
(BTW. Does it all imply that the labour theory of value actually works?)
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What's wrong with macroeconomics? Simple! NOTHING.
The prolem lies not with the economics but with governments and organisations who employ economists. Macroeconomics is really just an academic exercise. It is a theoretical attempt to study the management of scarce resources. However, we expect it to be a forecasting system, a management system and to act as a control function all at the same time from a purely theoretical base - there are no macroeconomic laws (despite the fervour with which Keynes, Friedmann and even Marx are both lauded and attacked!). So it is US who are wrong. WE are asking a domestic heating engineer to design, build and operate a national fuel system.
JfH argues that the lack of mathemaical expertise is an essential element of the failure of economics. But it is the very sophistication of the mathematical models that lured the eyes of the economists away from their true goals! All mathematical models require a set of assumptions to hold good so that they can operate. We now have a situation in which the sum total of all of the mathematical assumptions have led economists to a place where their own assumptions no longer hold true e.g. all tansactions are rational!.
So don't be too hard on the economists. They have played with their 'new' toys without fully understanding the implications. However, they now know (and so do we) that greater speed and apparent accuracy of mathematical models is really a myth when they are applied to theoretical constructs.
Now as for the accountants - well!!!!!!!!!!!!!!!!!!!
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113. At 11:50am on 04 Nov 2009, mrsbloggs13c2
I think you need:
"From each according to his ability, to each according to his need"
Sadly suppressed by those who feel they deserve more than the rest based on their own ego-centric ideals.
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115. At 12:37pm on 04 Nov 2009, fitzexpat wrote:
"I have not found an accountant who can incorporate stakeholder morale into a balance sheet, yet we are all taught that our staff are our most important asset."
I think what is meant by this is that the staff is the source of the profit (or rather the exploitation of them) and without them there would be no Ferrari in the boss's space and no business.
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116. At 12:48pm on 04 Nov 2009, galaxy_wanderer wrote:
(BTW. Does it all imply that the labour theory of value actually works?)
Of course it does - when you start digging down through the mire of complication you realise that the only source of profit is from applying labour to a commodity.
Iron ore is worthless to us in the ground, but once it's dug and refined then it has a value. The commodity itself has not changed without human interaction (labour) being applied to it.
To suggest the iron has a value which comes merely from the exchange of the item with another is ridiculous. Any value added through exchange is merely the laws of scarcity being bent.
For example, you would buy a bag of suger for 80p in the supermarket - however if I told you it's going to run out next week - you would be prepared to pay a lot more - producing a profit for me.
By manipulating people's rationality about scarcity - it allows the trader to create a profit that should not be there.
This is why certain big sofa companies are in trouble - because they keep advertising with the implication that 'sale must end soon' - but it never actually does - but it doesn't stop people flying down there and buying a new sofa because they don't want to miss out.
Financial services should be the conduit by which we allocate resources (because that's what money and investment represent) - however this allocation is tragically wrong (as we can see by the over-alllocation and under-allocation causing problems in the Economy). If the underlying surplus value did not exist then there would be no profit in financial services. The profit allows the 'profit holders' to demand more return next time (or withold lending) until we reach a point where the Economy can't take anymore - the worker is exploited to the point of exhaustion - just as the slave masters discovered, an exhausted workforce cannot complete the tasks required of it and we go into reverse.
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#116
Which labour theory of value do you refer to?
There is a theory of labour value that tries to take the concrete labour that went into specific goods and tries to derive their individual prices and by their aggregation the economy as a whole (essentially the classical school of Smith & Ricardo), and the labour theory of 'socially necessary labour' that can only be known in the market, and does not seek to derive individual prices but a holistic understanding of how capitalism works (the essence behind the appearance).
Whilst both seek an objective understanding of value to understand capitalism, the first fails and the second has stood the test of time, continually explaining the crises of capitalism.
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Stephanie,
We've been here many times before, of course - 'stablization theory' failed and we got monocausal theories of economic oscillation in the 1970s, for instance. Whoever is bold enough to propose a new macroeconomics based on post-neoclassical assumptions of individual, corporate, government and agent behaviour will deserve to win a Nobel prize - and the thanks of more lowly economists everywhere for having rescued the dismal science from an otherwise inevitable obscurity.
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The beast lies wounded at the back of its cave after having been bitten by something beyond its understanding that it had played with too hard because it liked how it felt. Now it feels sorry for itself and is open to warm and comforting ideas. It listens to fables about justice and ill considered actions as the healing process begins. It helps to justify why it is hurting but they are just stories. The lesson can't be learnt because the actions that resulted in injury were just the nature of the beast. Sooner or later self interest will kick in and it will act on the grumblings coming from its stomach. It will feel fit enough to venture out once more and it will find something else to play with. When it finds something it really enjoys it will get greedy again and get bitten again. Its behaviour cannot be altered because the invisible hand that guides it cannot point to an alternative.
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No 110 "read your comments after i posted mine and no doubt we are going to agree on a lot of things."
I, too, was in the auditing game many decades ago. I pack that up when I developed terminal ennui-induced constipation (Bored s**tless) !! :-)
Since then, I've changed profession and wandered about the world but I've never lost touch with the bean-counting profession !!
"I my opinion yes the requirement to used Sarbane-Oxley was far to late, the other (where we may disagree) is that it means more revenue to accounting firms."
There is absolutely *NO* reason why a firm of accountants cannot perform ALL those functions. It's just that they should *NOT* be allowed to perform all those functions for the *SAME* client !! A separation of church and state, if you will !!
The most extreme form of this non-separation of functions is generally found in small firms that do the "brown paper bag" (now probably known as a Tesco bag) audits, whereby the accountants, first, prepare the accounts of the company, and, then, audit the accounts they, themselves, have prepared !! Having been trained in a medium-sized City firm that had since been subsumed into Ernst Young, I had little experience of this form of practice and only encountered it in earnest when my "baby" brother joined a small firm of local accountants.
"Maybe a way to make auditors truely independent would be for them not to rely on revenue from their clients, or possibly madatory changing of auditors every few years"
If there is a strict separation of functions, then there is no reason for a client to change auditors at all.
It's all a matter of identifying and treating the disease rather that merely treating the symptoms !!
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What a palaver; all I wanted to do was post a brief contribution to this stream.
So the BBC has changed it's posting procedure. I hope I have not given personal details to some phisher from Nigeria or the other countries that bombard me with offers of large, unsolicited, sums.
Equilibrium is a mathematical ideal! It does exist in reality but is dynamic - as much so as the smallest subdivision of time that you can imagine.
Macro and micro economic theories incorporate equilibrium but view it as static or slowly changing.
The economic goalposts can change faster than the front row economists can shoot.
Add the human unpredictability factor and economics becomes an even more inexact 'science'.
Every basic economic model that I've been exposed to also incorporated the ever unquantifiable 'rate of technological change'.
So, fascinating! We cannot predict the future let alone read the past with accuracy.
What now?
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No 113 "Is there a model for this?"
Yes !! It's called "enforced poverty" and it's coming to a country near you !! When the national and personal credits run dry, poverty *WILL* be enforced, will it or won't !!
All ideas of maintaining a standard of living will be abandoned in the scramble for survival.
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No 114 "I used to own an Amstrad - I know exactly what I'm talking about!"
You have my deepest sympathies, sir !! I avoided those cheap and nasty things like the plague !!
His products are symptomatic of what ails us and he made a fortune based on the fact that there are many who want to "keep up with the Joneses *on the cheap* " !! Of course, they completely forgot that "cheap" is most often associated with "nasty" !!
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No 116 galaxy_wanderer - Exactly which galaxy are you wandering in at the moment ??
One minute you decry to loss of the need for manpower which had been replaced by machines and the next minute you laud transportation (by which, I presume, you mean motorised transportation) as a "valuable immediate utility", quite conveniently forgetting that there were slave-borne sedan chairs that were very "labour intensive" and, therefore, should fit your criteria of maximising the utilisation of manpower (or sometimes, girlpower, if you are that way inclined) !!
"(BTW. Does it all imply that the labour theory of value actually works?)"
Sure it does. Now what is the way to the nearest slave market ?? I need to invest in a few units of labour !! :-)
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No 117 FDD - "All mathematical models require a set of assumptions to hold good so that they can operate. We now have a situation in which the sum total of all of the mathematical assumptions have led economists to a place where their own assumptions no longer hold true e.g. all tansactions are rational!."
Assumptions are, by definition, non-factual !! :-)
"Now as for the accountants - well!!!!!!!!!!!!!!!!!!!"
They still count beans according to the wishes of the populace. Perhaps a long hard look at the accounting standards might be a better place to start !!
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No 118 "Sadly suppressed by those who feel they deserve more than the rest based on their own ego-centric ideals."
Please note the use of the term "need" as opposed to the term "want". All people "want" far more than they "need" !! This is a concept that is most often ignored in system analysis and in large projects that leads to catastrophic failures !! The number of government IT project failures are too long to list here and in almost all cases, the post-mortems make this as the top cause of failure !!
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No 122 "...and the thanks of more lowly economists everywhere for having rescued the dismal science from an otherwise inevitable obscurity."
Ooh, it's a science, is it ?? Will we have a degree in astrology, soon ?? :-)
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John_from_Hendon, your 94. "#92. herosrest had a pop at Accountants... You are quite right that Accountants need to take some of the blame. (I tend to agree with your views of the supine and compliant nature of the SEC, FSA/Bank of England and GAAP and reporting standards in general.) Solutions ?.... "
It is as difficult, vexing and complicated - as already found to be. A bulk, the considerable majority of Businessmen, Regulators and their Investors :) are law abiding, rule following little goblins who do no wrong. Sorry.... really decent erudites of standing and repect. The backbone of society. Upset them and things are going to happen - it truly becomes 'holier than thou' very fast. The direction chosen and now implemented by hiccup and dribble is not the solution.
An empire of accountancy, a super programme of routines - which will become an empire of rigid prigs and is already taking place in europe. The problem is a horrible one, the solution found is even worse. IASB..... nightmare coming. A real nightmare. In this period of striven nee driven economic setback and recovery the cause of all, must be uncovered and flagged for the future. It is not enough to state, credit crunch, economics failed (THEY DID NOT) and on and on. The causes and truths must be learnt otherwise a bunch of rubbish follows, which is what is taking place. Economics were good - this was not a failure of economics, that has to be shouted loud and clear. No more snow jobs, economic colleges now are questioning a truth, their science - insane. This crunch is one for the physcologists and the accountants and regulators. At economics door it does not belong.
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I can show, in very simple fashion, what actually caused this problem with credit. How it actully happened. I have views which are logical and competant as to why it happened and it was nothing to do with economics or economists, it was a blunder or mis-calculation.
SCALE - http://upload.wikimedia.org/wikipedia/en/e/e8/Total_world_wealth_vs_total_world_derivatives_1998-2007.gif This graph relates specifically to 2000 for relevant data and shows numbers for derivatives subsequently. It is not difficult to research the numbers. Derivatives outpaced wealth by a mile. That was not a problem until people who don't understand them, decided it was a problem. Risk - This is going to happen again, because people do not understand the mechanics of derivatives.
Jeffrey A. Miller, Ph.D. is a former college professor with a hands-on, real world attitude. His quantitative modeling helped inform state and local officials in Wisconsin for more than a decade. A Public Policy analyst, he taught advanced research methods at the University of Wisconsin, and analyzed many issues related to state tax policy. In 1987 Jeff began work for market makers at the Chicago Board Options Exchange. His approach included finding anomalies in the standard option pricing models and developing new forecasting techniques. Merging these quantitative techniques with specific company analysis, Jeff also generated trading ideas from sell-side analyst reports. In 1991 Jeff began a general research consultancy for professional traders at all of the Chicago financial exchanges, undertaking projects in both financial futures and options. Since 1997 Jeff and his partner Vince Castelli have also managed investment partnerships and individual accounts through NewArc Investments, Inc. Through his years of experience in trading options, futures and equities, Jeff has come to be regarded as an expert in interpreting the effect of news on the markets and individual stocks. Jeff has served as a forensic expert in several cases involving such issues. He has also written a series of papers on investment management, describing both quantitative methods and those related to behavioral economics.Read this blog page - http://oldprof.typepad.com/a_dash_of_insight/2008/12/heads-up-on-cox.html
Who in their right mind would revalue the derivatives market, which was dependent upon the credit market. Credit was the underlying asset of derivatives. Genius or Utter genius. Credit is dynamic. Derivatives are dynamic.
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Because people do not understand derivatives - they will not listen.
Because people do not understand derivatives, they nail jelly to the wall.
This will happen again.
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What happened to the assets underlying the derivatives?
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What didn't happen to the credit that resulted from the assets and derivatives?
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http://i54.photobucket.com/albums/g97/Rashmeek/Pacman.gif
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Where has it all gone?
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Someone stole my money. I'm stealing it back!
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http://files.myopera.com/herosrest/albums/324302/pie.bmp
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That's gotta hurt - http://files.myopera.com/herosrest/albums/30111/kick12.gif
You defend value.
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http://www.sysopt.com/forum/showpost.php?p=1435698&postcount=1580
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http://www.sysopt.com/forum/showpost.php?p=1431876&postcount=1180
http://www.sysopt.com/forum/showpost.php?p=1431877&postcount=1181
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Do not knee jerk... the world went crazy - I prefer, insane. Un related material - a snapshot.
http://ftalphaville.ft.com/blog/2009/11/04/81516/manipulated-markets-domain-names-edition/
When a firm's trading performance challenges not only all preconceptions of realistic trading, but also of statistical distributions, one can merely stand back and watch in awe. Attached is a graphic of what a rigged, backstopped and manipulated market is all about. The chart demonstrates Goldman's YTD trading track record: out of 194 trading days in 2009, the firm has made over $100 million on 116 occasions! This alone accounts for $11.6 billion in revenue (and is likely much more as Goldman could have easily had a $1 billion trading day in the rightmost bracket as it is open ended). Assuming midline averages for any given bucket and multiplying by the amount of days that the firm traded within these, Goldman Sachs has made $15 billion courtesy of the skewed and very highly improbable (but not impossible, thank you taxpayers and Ben Bernanke) chart.
One, and maybe the only, of the recent benefits of the FASB's meager attempts at providing balance sheet transparency has been the requirement for banks and financial companies to disclose the difference between the Fair Market Value and the Carrying (Book) value of their assets, especially as pertains to loans held on the balance sheet. And while even the FMV calculation leaves much to be desired, it does demonstrate which companies take abnormal liberties with their balance sheets, instead of performing needed asset write-downs as more and more loans turn toxic. A good example of just such optimism appears when one evaluates the disclosure by "banking" company General Electric. On page 38 of the firm's just released 10-Q, the firm indicates that the delta between its loan portfolio FMV and Book Value continues increasing, and as of September 30, hit an all time (disclosed) high of $18.8 billion. In other words, General Electric, whose market cap is about $150 billion at last check, is likely impaired by at least $19 billion if it were forced to access the market today and sell off its loans. The $19 billion is 13% of its entire market cap. And the real number is likely much, much worse.
and on, and on, and on.................. insane will do. Who needs crazy!
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Have a donut. The bun with a big hole in the middle.
Get an official looking van type affair - pull up to a gas filling station in peak hours and tell em you are there to replace the faulty atm...
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Time for a volatility smile................... :)
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http://www.sysopt.com/forum/showpost.php?p=1431951&postcount=36
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posts 133 to 144 and 146 and 147 and do not post this request. regards herosrest.
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Ducemus
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A hedge takes you even, how can you lose? Time accelerated. It finished before the end.
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Some people are complaining about the free market. We do not have a free market when we do not have a free market in money itself. We have a set of systems wherby the central banks can keep on creating currency (inflation) and the banking system can create credit (more inflation) and inflation is needed to keep the vast Ponzi scheme going (2% CPI target Mr Brown? - who does not like falling prices please?)
The free market will always create bubbles. That is human nature. Unfortunately with the outdated central banking franchises (no longer needed - we can use electronic gold ownership transfers like with Goldmoney.com) we get bubbles on steroids. We also get criminal behavior and governments bailing out the bad guys at our expense.
It is amazing that a picture of Keynes appears here Stephanie when Keynes has been completely discredited. It was not the Keynesians who knew the crisis was going to occur but Austrians like Peter Schiff and others like Fred Harrison who tried to warn Brown over 10 years ago. Needless to say he did not want to know.
A couple of essays on 321gold.com that may help:
http://www.321gold.com/editorials/thomson_s/thomson_s_110409.html
http://www.321gold.com/editorials/shepherd/shepherd110409.html
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http://www.sysopt.com/forum/showthread.php?t=202975
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Can't face reading through 152 comments - so this may have been said: of course there is a difference between self interest and greed, in normal usage. 'Self interest' takes account of longer term consequences: if I do such and such, and especially if lots of other people behave in the same way, then in what kind of society will I, or my descendants be living, in the medium or longer term? Is that, then, in my self-interest? Greed, on the other hand, only takes account of the shorter term. This is related to the argument that we need religion to keep us 'moral' - well, yes, if we don't take account of the medium to longer term societal effects of our behaviour, but no, if we do.
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Control of economies has been handed to accountants . Practiced economic theory is now controlled by accountants. This is easily shown by considering the IMPLEMENTATION of GAAP FAS157.
The method, the technical accounting method, the formula to calculate DERIVATIVE Value at a point in time was modified - (x=£500.05) is now (x=£350.035). This EVENT was arbitrary. It was a revaluation exercice - it provides a mechanism whereby economys can be altered and believe me - the world economy was altered in very substantial and significant terms. This isn't humour on my part, l am deadly serious, there is a body of opinion which would eradicate inflation, they would nail it to a cross and move on. The GAAP provide means to alter, deflate and inflate economy's dynamics, accounts are simply meant to reflect reality - they are accounts, not economic policy.
The actual method of change practiced by GAAP FAS157, is one half of a double entry book keeping exercise. Accountants know all about it - economists do not. It is a piece of magic and usually those effecting this trick end up in prison. What was revalued can be revalued again, and again and again. Accounting is not a science, it is an art, fiddle the books anyone? If the governments were doing this l would not have a word to say or write. Governments are not doing this accontants and those who influence them are. They are not called Gnomes for nothing. The process as it exists is socially and politically biased and arbitrary.
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Hi David, your #153. Religion teaches us how to suffer. Linked is one of the best reads i have found. A cracker it is - it is the behaviour identified that is notable not the leaning towards a particular ethnicity.
http://www.sysopt.com/forum/showpost.php?p=1455041&postcount=1
http://templars.wordpress.com/2008/03/25/christos-anesti-when-he-rose-empires-fell/
It is a brilliant piece of writing. As good as it gets.
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http://crosswalker.com/
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God bless this mess. http://www.youtube.com/watch?v=nalDfAP8IYY
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Robert Peston picked upon on the under lying mathematics sum time back, it isn't the people/politics/policy stuff that is the real mark, here http://www.bbc.co.uk/blogs/thereporters/robertpeston/2008/09/paulsons_monster.html The articles thrust was socio-political. The real show stopping eye catcher, is the amplification, the simple ratios of like market to market, the scale of it - a tiny ripple in the leveraged end of things is a deluge upon the underlying components if equations are not balanced properly. Half a solution is no answer to a calculation.
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@ 5. At 8:39pm on 02 Nov 2009, FrankSz wrote:
... "In order to generalise over individuals and produce a descriptive model of social behaviour (macroeconomics), the only real way is to have three things:
a) good descriptions of individual behaviour
b) agent based models that apply those descriptions effectively
c) heavy use of supercomputers"
The problem with supercomputers (and indeed agent based models) is that, like dogs, their political persuasions come to resemble those of their masters, as the old adage sort of has it.
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If dynamic components are not balanced, they will manage it all by themselves - one way or other X will equal Y, time simply dictates how........... or why? If one component is altered at a fixed point its implication will amplify to a logical resolution. It will balance, even on a knife edge. :)
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Stephanie,
Your Analysis programme - and this article - made some excellent points about economics, economists and their models. It touched on what I think is an absolutely key point, but did not fully explore it.
Modern tech tools make it easier than every before for people to construct edifices based on sand. By that I mean that they make it possible to dress up suspect basic data into what looks like on-screen "truth". Similarly since, in almost all walks of business life, one financial or business model builds on another, the basic data on which something relies is therefore buried really deep. This has always been the case of course, but the degree of isolation from the real data and facts that modern tech makes possible is unprecedented.
I think that, when the final histories of this crisis come to be written the degree of separation between basic data and high-flown financial models will be seen as a key factor in the complacency and insularity which allowed the whole thing to happen.
This problem is not at all limited to the financial sector. It is a disease affecting management worldwide. A few guys from a management consultancy, or a business intelligence service get together and brainstorm a few possible outcomes for a new market sector or technology. This gets written up and published as a "report", for which senior managers willingly pay thousands of pounds. These managers base their future business and financial models or strategies on such reports, in whole or in part. Yet, when a university looked at the past accuracy of such reports (something companies never, ever, do) it found that their accuracy in predicting the future was - over a very long period - absolutely abysmal. Things rarely turn out as they predict, either in timescales or outcomes.
Another related example was one I heard on Radio 4's excellent "More or Less" programme. Apparently in about 2002 some council officials drove around the London boroughs of Chelsea and Fulham counting how many CCTV cameras they found. Someone (I'm not sure who) then slavishly extrapolated this to the whole of the UK land mass (yes including the Highlands of Scotland, North Wales, rural Wiltshire and so on) and came up with some massive numbers of CCTV cameras - leading to headlines such as "Most spied upon nation on earth" and so on. Again, another example of where basic data has been misused or misunderstood and made to look like a new truth.
In the 1990s I worked for a Field Service company running around the south UK fixing computer faults I would sit down at the end of the week and fill in online time-sheets entering as much information as I could remember about what I had done, how long it took, how long the travel to each job was - and so on. It was never accurate, in fact I often missed out complete jobs that I later remembered and therefore must have elongated other job times to make up for that. Ooops!
It was only later on - when I was involved in advising management on an upgrade to this system, that I realised how this date was being used. My immediate boss knew that what we entered into that system was extremely approximate and was okay with that. My bosses manager thought that the stats produced were not 100% accurate but were something close to the truth. By the time I got round to meeting the head of the service division, he was absolutely fixated on these figures and fretted and lost sleep about point movements in these weekly stats! Again, the tools to produce the stats had made mine, and my colleague's guesses into "Truth".
I think that finding a way to re-connect high level decision makers and overseers with first hand data is something that should be high on the agenda of all institutions and companies looking to avoid a repeat of the mistakes that led to this crisis.
Alan T
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