Why idionomics has the answers
Have you noticed how all the world's most learned economists so accurately predicted the current financial melt-down? How they warned that Iceland was about to teeter on the edge of insolvency? That after the US Congress passed the bank bail-out plan last Friday, share prices in New York and London would plunge on Monday?
You haven't? No, nor have I. That's because the study of economics is no use at all in the current climate. What you need is idionomics. Don't worry, I'm an expert.
The starting point in the study of idionomics is a simple principle: No one understands anything. From this it follows that any pundit pretending to understand isn't worth listening to. (I naturally exempt all BBC colleagues, who seem uniquely able to explain what is happening, even if, like everyone else, they find it more difficult to predict what will happen an hour from now.)
Which brings us to the second fundamental principle of idionomics: Never predict the future; always confine yourself to explaining the past. (Many economists observe this principle even without acknowledging their debt to idionomics.)
The third principle combines two, apparently contradictory maxims: however bad it is today, it may well be worse tomorrow - but never assume that because it's bad today, it will be worse tomorrow. This is sometimes called the "random unpredictability factor", and only very rich people fully understand it.
By the way, if you ever make it through to advanced idionomics, you will find yourself grappling with the difficult concept of "rich does not equal clever". This can be summarised (and simplified) by stating that very rich people should not be regarded as very clever. They are simply very rich.
I risked the scorn of my peers the other day by writing here: "I hope I'm not being a total simpleton if I suggest that some of the coverage of recent events risks losing a sense of proportion." And well, well, if I didn't read in the Wall Street Journal today:
"The magnitude of this financial disturbance should be placed in perspective. Although it is the most severe financial crisis since the Great Depression of the 1930s, it is a far smaller crisis, especially in terms of the effects on output and employment. The United States had about 25% unemployment during most of the decade from 1931 until 1941, and sharp falls in GDP. Other countries experienced economic difficulties of a similar magnitude. So far, American GDP has not yet fallen, and unemployment has reached only a little over 6%. Both figures are likely to get quite a bit worse, but they will nowhere approach those of the 1930s."
The author was Gary Becker, who won the 1992 Nobel prize for economics. And he's clearly studied idionomics as well, because he also writes: "The main problem with the modern financial system based on widespread use of derivatives and securitization is that while financial specialists understand how individual assets function, even they have limited understanding of the aggregate risks created by the system. That is, insufficient appreciation of how the whole incredibly complex financial system operates when exposed to various types of stress."
Which is an uncannily accurate paraphrase of the first principle of idionomics: No one understands anything.
© MMIX~RS~q~RS~~RS~z~RS~28~RS~)
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Oh come on!
The BBC Radio 4 reporter Jonny Dymond asked, Sir Howard Davies, former chairman of the FSA why the FSA hadn't controlled the markets some 5 years ago when these worthless trades began to appear.
Does anyone remember any BBC financial correspondent reporting any concerns at all at the time?
There were a few financial analysts, like Max Keiser and Danny Schechter who had predicted what would happen.
Two possible reasons why the BBC suppressed stories about subprime and the Yen carry trade:
1. The BBC is pedantic and detached from the public they are paid to serve.
2. The BBC are constrained by liable laws in the UK, that according to the UN, violate human rights.
http://www.guardian.co.uk/uk/2008/aug/14/law.unitednations
FT titbits:
“It’s like in the war – ‘dangerous talk costs lives’,” says Don McCarthy, chairman of House of Fraser and an investor in Baugur. “I really, really believe that there is no fire sale. We don’t view Baugur as a risk to our business.”
http://www.ft.com/cms/s/0/2eaa2464-9183-11dd-b5cd-0000779fd18c.html?nclick_check=1
In the context of suppressing "dangerous talk" by the UK media in the past, I think that's a bit rich...
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Robin by the way,
I have given links to Max Keiser in the past, your post shows that you don't take our comments seriously.
Why do you invite us to debate?
So that we can bang our heads against pixels and pretend that we make a difference?
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I know who "conquered" idionomics : in 1997 the PM of Malaysia Dr. Mahathir.
The Malaysian PM ignored advices from the "dismal scientists" of IMF and the World Bank, and Malaysia did not borrow a single cent from these "friendly" global banks. Now I see every Western countries follow Dr. Mahathir : de-facto nationalisation of troubled firms and reducing interest rates.
Wisemen do come from the East.
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Surprised you didn't post a link to the 'Becker-Posner' blog, which is surprisingly readable, although a bit too 'sunny' for my liking, and somewhat 'right-wing'.
But as part of a 'balanced blog diet', is very diverting...
One should always be very very suspicious when anyone suggests that something is so complex that it cannot be explained to the layman..
They might very well be right - but if it is that tricky, then how difficult can it be to make it 'foolproof' ??
Even the jet designers at Boeing [if not necessarily 'rocket scientists'] adhere to the adage KISS - Keep it simple, stupid !
How urgently do we need to learn that lesson now !!
Well done, Mr Lustig, another insightful post..
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Robin,
Economics is not mathematics or physics. It is not absolute and is intermingled with a whole lot of politics. So, it is necessary to view all proclamations by economists through a political filter.
And not necessarily a ‘left wing’ filter either. Take a look at the writings of right wing economist Peter Schiff. He got it right several years ago. The science of economics may not be perfect but it isn’t meaningless either.
The situation is more understandable if you recognise that the so called ‘economists’ who have been busy pontificating on TV, in recent years, are by and large, employed by the banks, hedge funds, real estate, the financial sector generally and their supporters in the media.
At the first signs of looming trouble these guys will try to minimise it. How many times have we heard the phrase ’soft landing’? When that starts to sound unlikely we hear about necessary ‘market corrections’. In Australia , right up until the last few weeks, these 'economists' pushed the line of how Australia’s economy was ‘decoupled’ from the US, and in so much better shape. As if!
Micheal Hudson, another economist who predicted the crash, describes the FIRE economy. Finance, Insurance and Real Estate. This sector of the economy produces nothing of any value, yet its inhabitants blather on endlessly about ‘wealth creation’. Do these people really believe that wealth is created when peoples' homes double in price? If you already have a house it makes little difference. Except, for those of us who have children who can’t afford anything for themselves, it makes the situation worse.
Roll on the crash! It is time to get back to real economics.
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I can hardly believe people didn't see this train wreck coming. It was as plain as the nose on an economist's face. Too many followers of that one false economist Rosy Scenario. To those who have cash, this will be the buying opportunity of a lifetime. To those who put their trust in "professional investors"....sayonara. Why pay good money for bad advice when I can pick losers on the stock market with the best of them for free.
Funny how so many people have 20-20 vision...when looking in a rear view mirror.
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Mr Becker is being rather disingenuous: the parallel to the current situation isn't the 1930's depression, but the 1929 Wall Street Crash that led to it.
In many ways today's scenario is also different from that crash, and the proposed responses are different to those of 1929/1930. Nevertheless, given that (a) there is no clear agreement among economists as to why that crash turned into the depression, and (b) nobody knows just how bad the current debt situation is, nor how much of our financial sector is based on very insecure foundations, I do suspect Gary Becker is expressing a general 'don't rock the boat' optimism rather than giving an economic analysis.
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BBC World News Head of Programmes, Paul Gibbs, says: "If Max (Keiser) had been on our screens a year ago the current global financial crisis would not have been a surprise. It might not even have happened."
http://maxkeiser.net/oracle-pressrelease.html
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This week (10/7-10/10) the NY Stock Market collapsed a record 20%, the third largest drop in history. The heads of state and their finance ministers have been meeting all week to come up with some measures to stem a possible collapse of the financial system and a worldwide depression. Economists have been warning that unless the weekend meetings of financial authorities at the IMF-WB semi-annual meeting in Washington is able to come up with a plan to stem a looming collapse, the world will face dire times. How did this happen? It is not true that this was unanticipated. Many experts have been warning about the growth of "casino capitalism" around the world for decades and during the nineties we had near disasters like the Mexican peso devaluation, the Asian financial crisis, the Russian ruble collapse and the LTCM rescue by the Federal Reserve. But none of these events can compare to the current severe world financial crisis. Still voices like Lyndon Larouche and more recently Warren Buffett have warned about the danger of the explosion of the derivatives market which some incredibly estimate at $400 trillion. Others have warned about the subprime mortgage market long before Congress or the Bush administration were aware of the phenomenon. John Maynard Keynes famously warned during the Great Depression about the dangers of allowing the real economy from becoming froth on the top of the financial system rather than the more normal reverse situation. Ultimately this is what has really been the cause of the dire circumstances overhanging the world economy today.
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BlackPhi #7
I would like to know why you think the current stock market crash is fundimentally different than the one in 1929. As I pointed out in an earlier thread, the parallels seem to me to be uncanny.
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Looks like a champion of idionomics just won the Nobel Prize for economics. He explained to the world why we trade with each other when we don't have to. Now isn't that a revelation. I wonder with his 1.4 million dollar prize if he will continue his professorship at Princeton University or writing his political column bashing President Bush every time in the New York Times. If he's so smart, why isn't he already rich and retired playing golf in some tropical resort island instead of suffering the cold weather of the NY Metro area?
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Robin, this is a somewhat late entry on this important topic of idionomics but considering its importance I wanted to bring this piece of information to your readers. As I stated in my previous comment #9, though you are right that most economists and other experts did not correctly assess or suspect that the world of high finance was about to enter a catastrophic stage. But at the Financial Times which is read the world over, journalist Gillian Tett (now Assistant Editor) was investigating and writing about the strange world of CDOs, SIVs, MBSs and other complex financial instruments and in 2007 in a series of articles she warned what was about to happen to the the world of finance from the widespread investment in these "dangerous" instruments which very few financial experts understood. Tett had during the nineties been reporting from Tokyo about the banking crisis that had brought Japan's economy to a standstill for close to a decade. She credits this experience and oddly enough her PhD degree in social anthropology from Cambridge with giving her the insight into what could go wrong in the esoteric world of high finance for her ability to decipher how these complex financial instruments were about to explode in the face of Wall Street and the City of London. She said social anthropology is an ideal training for understanding the "tribal" nature of high finance society with its strange gibberish and highly structured but difficult to decipher language and mores. You can read a short article on Gillian Tett at the Guardian online website. The author of the article is Laura Barton and the date of the article is October 31. In addition to Tett, reporters Robert Peston of BBC news and Paul Mason of BBC Newsnight are mentioned as the top reporters on the subject of the financial crisis.
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