Just a quick post for CT readers who don’t also subscribe to John’s blog: he’s on the road and many miles from Brisbane at the moment (and so not flooded) and his family are OK, but apparently there’s property damage and flood damage is in my experience a real bugger to sort out, so probably not much blogging for a while. In the interim and because he hasn’t apparently posted about here (I found out when we met up for a pint on the Zombie Economics book tour), I will boast on his behalf that John has been elected a Fellow of the Econometric Society. That is a big deal. If you are not impressed by this, take my word for it that if you knew more about the professional structure of the economics profession you would be. Best of luck John.
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Another year over, and what have we done? Once more, I muse philosophically on matters of risk and return, at annoying length (at least I cut out the footnotes this year). But first, perhaps, a little quasi-seasonal story:
The Great Homeopathic Cocktail Bar
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As the US goes to the polls, there is not exactly a shortage of commentary telling people how important it is that they vote, and so it’s been almost traditional (by which I mean, I did it at least once) for me to provide a small voice for the forces of apathy. This year, though, I want to address a particular and in my view rather pernicious species of electoral wowserism – the belief on the part of the Democratic Party that it has something approaching property rights over the vote of anyone to the left of, say, the New York Times opinion page.
The argument I want to establish here is that the decision about whether or not to vote Demcrat (versus the alternative of abstaining or voting for a minor party) is a serious one, which is up to the conscience of the individual voter to make, and which deserves respect from other people whether they agree with it or not. Obviously in making that argument, I’m going to have to venture into a number of unpalatable home truths about the Democrats as they are currently organised (abstract: ineffectual, cowardly, surprisingly warlike, soft-right, generally an obstacle to the development of social democratic politics), but let’s get this clear right up front – voting Democrat might often be the right thing to do in any given case, depending on local conditions; it might even usually be the right thing to do. What I’m not going to accept, however, is that it is always or definitionally the right thing to do.
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Via Andrew Anthony, some collateral damage from the Times paywall:
Oliver Kamm has commented that his blog at The Times will also be behind the pay wall. The comments section to his post on the matter is full of those who have said that this decision means that they will no longer read his blog, and these comments include those made by many long term readers. His blog will also not be read by the majority of users of the Internet around the world, even for those using Google to search for information. If they have to pay, they will not bother and try and read something else. […]
No doubt Oliver will continue writing his blog, and the next time Noam Chomsky writes something silly, he will expose him. But this will not assist an average Internet user around the world confronted with a Chomsky argument in an on line debate. For them, the day that The Times starts charging for content will be the day that Oliver Kamm ceases to exist.
Oliver Kamm’s bit of the blogosphere conversation, RIP. If only someone were able to write a suitable obituary.
Further thoughts on “Ship of Fools” by Fintan O’Toole …
In so far as these things matter, I totes claim bragging rights over calling the end of the bubble in Ireland, in writing in October 2006 and my only regret is that I changed jobs and started doing something else before I had time to milk it. My basic point at the time was that the rental yield on Irish property at the time was estimated at 3.25% (Daft.ie had begun to calculate a rental yield index, tragically too late – I believe unless someone knows different that at the time I was in possession of the only even acceptably accurate time series of data on Irish rental yields), and that with the most recent ECB rate rise to 3.75%, the logic of the myopic-expectations buy-or-rent model was about to start working in reverse. As it did. I’ve mentioned on a number of occasions that in actual fact, this was a policy-caused bubble, and that’s true in Ireland as well. But of course, the actual mechanisms by which a bubble is inflated, since they are based on a combination of the winner’s curse and limited liability, tend to involve the sorts of tales of sharp elbows, social capital and low risk aversion which can be made to look absolutely awful with the benefit of hindsight and/or in a court of law. So let the games begin …
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In the immortal words of Sir Alex Ferguson, the Premier League is reaching the crucial last two weeks. Manchester United and Chelsea are separated by a single point – Chelski have the advantage, but have a tougher game against Liverpool tomorrow, while Man U face Sunderland. Arsenal lost hope last week, but Fulham are going to appear in the Europa League final after thrilling wins against Juventus and Hamburg. Meanwhile, having beaten one of the most astonishing teams in history with a virtuoso tactical display, Jose Mourhino’s Inter Milan face Bayern Munich in the Bernabeu for the Champions’ League.
Of course, any passing Americans are welcome to explain why this is all terribly boring because Everton never really had a chance.
Making a change from the usual run of the genre (ie, books about the “financial crisis” by people who didn’t tell you that there was a bubble while it was going on, but who nevertheless expect you to be interested in what they have to say about it now that it’s been and gone). A book about the bubble in the US, written by someone who was absolutely right about it, provably, ahead of time and in writing, and who is a lot more angry about the whole mess than those authors who just regard it as a great big game in which some entertaining characters made money at the expense of their dumb counterparties. Despite the comparatively microscopic size of his promotional budgets, I think Baker might have caught the spirit of the times a bit better than Andrew Ross Sorkin or Michael Lewis.
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I find myself disagreeing with Paul Krugman, though not about anything important.
” I’m reading Gary Gorton’s Slapped by the Invisible Hand, which tells us that there were bank panics — systemic crises — in 1873, 1884, 1890, 1893, 1896, 1907, and 1914.
On the other hand, there were no systemic crises from 1934 to 2007.
The problem, as Gorton makes clear, is that the Quiet Period reflected a combination of deposit insurance and strong regulation — undermined by the rise of shadow banking.
I don’t think this is right. If we’re going to include things like the First Baring Crisis and the Panic of 1893 (which were big news at the time, but by no means earth-shattering), then I can give you a list. Even using a selective criterion of only crises with significant US involvement (ruling out the Nordic, French, Spanish and Japanese banking crises), we have the following list …
2007 – current crisis
2002 – Enron/Worldcom/Global Crossing crises
2000 – dot com bust
1998 – Asia/Russia/LTCM crisis
1994 – Tequila crisis
1991 – commercial real estate crisis
1987 – Black Wednesday
1985 – Savings & Loans crisis
1982 – LDC debt crisis
1975 – New York City bankruptcy
1971 – Collapse of Bretton Woods
1970 – Penn Central commercial paper crisis
As far as I can see, things were pretty stable between 1934 and 1970 (give or take the odd war), but that in the era of floating exchange rates it’s been very unusual to go seven years without a crisis and the modal gap looks closer to three years than four.
Iceland has a population of about 300,000 , about 140,000 taxpayers and pre-crisis GDP of about $12bn. The Royal Bank of Scotland has about 140,000 employees and pre-crisis net profit of about £8.5bn – they’re about the same size as entities. Iceland, like RBS, did very well out of the debt bubble and picked up assets all over the world in an impressive but ultimately unsustainable spending spree. And in a final point of similarity, Iceland, like RBS, owes the British government a hell of a lot of money as a result of the bursting of the bubble.
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In a really quite lovely essay, James Galbraith names some of the people who got it right (or at least, less drastically wrong), while pointing out that in many ways, the much-vaunted “freshwater/saltwater” divide is a dialogue between Tweedledum and Tweedledee. I don’t think that’s entirely fair, as with regard to stimulus policy there are clear differences between the New Classicals and the New Keynesians, and it’s clear that Tweedledee is right and Tweddledum is making obviously mathematically inconsistent statements. But the central point is exactly right that an important practical consequence of shutting out heterodoxy was that rather than having a few people to point to who predicted the crisis, the economic profession was left claiming that its true triumph was to be able to explain exactly why economists had been unable to predict it.
And of course, the old Peter Cook line has never been so relevant as it is to the economics profession now (“Sir Arthur, do you feel you have learned from your mistakes?” “Yes, and I’m confident that I could repeat them exactly”). All the people cited in James’ essay are exactly as far away from the mainstream of economics as they were three years ago, and field reports from the American Economic Association meetings suggest that it’s back to business as usual. I asked a while ago in comments to this post whether ” after this experience, can the Berkeley/Princeton/Obama economists ever really go back to a state of polite terms with the people who have done this to them?”, but apparently they can.
As I said in that linked post, the production of more or less mendacious intellectual smokescreens for policies which favour the interests of rich and powerful men isn’t a sort of industrial pollution from the modern economics profession – it’s the product. James finds a quotation from Keynes saying more or less the same thing much more eloquently and explains why it is that “zombie” economic ideas, in the sense of John’s book title, are so difficult to kill:
It must have been due to a complex of suitabilities in the doctrine to the environment into which it was projected. That it reached conclusions quite different from what the ordinary uninstructed person would expect added, I suppose, to its intellectual prestige. That its teaching, translated into practice, was austere and often unpalatable, lent it virtue. That it was adapted to carry a vast and logical superstructure, gave it beauty. That it could explain much social injustice and apparent cruelty as an inevitable incident in the scheme of progress, and the attempt to change such things as likely on the whole to do more harm than good, commended it to authority. That it afforded a measure of justification to the free activities of the individual capitalist, attracted to it the support of the dominant social force behind authority.
Anyway, read the whole thing. Happy New Year.
Let’s try and put ourselves in the shoes of a member of the John Birch Society, circa 1968. What would the basis of such a person’s political worldview be? Basically, that the USA was ruled by a small cabal of educated elites, who were systematically undermining the USA’s advantages against Soviet Russia, and sabotaging the efforts of the military to protect the USA from the danger of Soviet attack. This person might also believe that the truth about the Kennedy assassination was covered up by this same elite cabal.
And such a person would be correct, of course.
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Wow, I’d certainly like to know the name of the PR agency employed by Trafigura. It couldn’t have been easy to turn a fairly obscure oil trading company into the number one trending topic on Twitter. How do you manage to create that kind of buzz? I certainly hope that the people responsible will be appropriately rewarded.
In general, I have got quite a lot to say in favour of English libel law, and perhaps will for a future “contrarian Wednesday” post. But the current trend toward aggressive use of preliminary injunctions seems to me to be clearly abusive, particularly when (as alleged by Private Eye) some law firms attempt to file for injunctions as late as possible in the hope of getting an inexperienced judge out-of-hours and putting him under pressure. Anyway, this attempt to gag the press has backfired spectacularly, which will hopefully (viz, the McLibel case) make any future would-be muzzlers of the press think twice before pushing too hard.