Those stupid bankers and their stupid stupidity

Perhaps so, but the “rational people facing perverse incentives” line is really just a species of the “stupid” line isn’t it? It’s still a theory based on bank behaviour as if it was an exogenous factor.

Ah, I thought it was because they were greedy, rather than stupid. They can’t have been stupid, because they didn’t lose out when it all went the shape of a pear. But greed…

…you’re not saying they weren’t greedy?

That Melanie Phillips piece is a gem. Thanks.

My stupid picture of this, being dumb and all, is that X loan turns into X*Y worth of magic money. Isn’t there some smart person at a bank who is supposed to keep an eye on Y so that the value of it isn’t too excessively super ultramagical? Am I allowed to smush a pie in that person’s face?

I suggest there’s a difference between a “bubble” and “international credit crisis / global meltdown”.

Some hotly contested policy produced a “bubble”.

But “international credit crisis / global meltdown” seems to have been, yes, “stupid” bankers – well, “stupid” is perhaps the wrong word – “irresponsibly and recklessly profit maximizing” seems more the correct concept. The factors that amped the “bubble” into “crisis” seemed to have been some frankly shady financial risk modeling, combined with high leverage – an absolutely toxic combination. Thus, regulation is arguably an appropriate fix.

1) The crisis appears to arise from lenders making money available to borrowers whose ability to pay did not justifiy the loans, and then selling the loans to third parties who did not understand the risk they were assuming. The lenders made the loans because the inability of the borrowers to pay was disguised from them sufficiently either to fool them, or to allow them to pretend that they had been fooled. The third parties did not understand the risk because it had been disguised sufficiently either to fool them, or to allow them to pretend that they had been fooled.

You can call all this lying and self-delusion stupid; you can call it reckless self-dealing; but whatever it is, it arises from masses of individual actors acting in ways that benefited themselves personally while exposing their institutions, their clients, and their investors to high and undisclosed risks. When those risks resulted in actual losses, the institutions that assumed them could not bear them.

Now perhaps you are arguing that even if there had been no such thing as liar loans at the bottom and under-capitalized credit default swaps at the top, we would still be in the midst of a crisis due to unresolved structural defects hanging over us from the 1990’s. Is that what you’re arguing? Really?

2) Nobody cares that you don’t care that it’s actually the Sveriges Riksbank Prize in Honour Of Alfred Nobel. It’s just one more thing that you’re wrong about.

Seth is absolutely correct in comment 9, and D-sq seems unusually squirrely about this. Conventional wisdom 18 months ago was that the housing bubble could be managed with, say, no more than $150 billion in writeoffs, and would not spread much outside of the relevant sectors. The widespread collapse in financial markets due to deleveraging and balance sheet contagion was not anticipated. And it was driven by the fundamentally stupid decision not to adequately regulate risk in financial markets.

But the bankers themselves were of course not stupid, they got huge bonuses and they’re keeping them. The rest of us were stupid to trust them.

This is really good. Thanks for writing it. I do like people bringing up normal distribution stuff (Mandelbrot!) as if this hasn’t been known for decades; Taleb’s critique is way overrated.

==
But the bankers themselves were of course not stupid, they got huge bonuses and they’re keeping them. The rest of us were stupid to trust them.
==

Mortgage-Backed CDOs had a very high return, especially for a AAA-bond – take my word for it, if your fund carried them, you could post higher, and safer, returns than other funds that did not, and it was very noticeable by investors and management. And of course, with those new numbers, you could steal money away from that other fund not carrying them. (Or alternately, the promotions and bonsues your boss gives from another banker from your boss). Now of course, that othre fund knows that AND can also trade them.

Isn’t the Nash Equilibrium that everyone holds them? Maybe I’m missing something, but that’s hardly stupid.

(And that doesn’t even get into staying solvent now and dealing with risks later vs. raising taxes / funding that pensions and municipalities had to get into.)

mpowell > ”…but it seems to me that it is not right to ask, “what caused this bubble?”. Asset bubbles will happen.”

Why is it wrong to ask?

Judging from their yachts I’d say bankers aren’t stupid. Investors, probably yes. Isn’t the classic principal-agent problem?

I don’t have an intuitive grasp of trade identities, but it seems to me that if China, Japan, e and other nations want to hold a bunch of dollars (for their own good reasons) then the US is just going to run deficits.

Old Time Christian-wise, prosperity theology Christians like Sarah Palin make the Dow 32,000 guys look restrained and sensible.

Re: fn [6]: Two words: Amity Shales. Well, 7 words: Amity Shales is nuttier than Edward Prescott.

20: I think the reason is that it is just unavoidable that you will have asset bubbles in a capitalist economy. Maybe in any economy. I think Marx argued that these cycles were a problem with capitalism and that he knew how to avoid them. History would suggest that they’re difficult if not impossible to avoid, but that they don’t have lead to deep financial recessions. So if you have a phenomenon that is inevitable, but doesn’t have to lead to a disastrous result, when you get the disastrous result, isn’t it just a distraction to try to inquire as to the source of the bubble when the real curiosity is why a perfectly normal bubble led to a disastrous financial result?

The bankers were mostly greedy.

The politicians were mostly corrupt.

And the rest of us were mostly stupid.

Mistakes were made, blahblah…

I hate to sound repetitive, but honestly, Lemuel, is there anything mutually exclusive about dsquared’s statement and the argument in your link?

mpowell-

Yes. In fact, the *entire point* of this post, as I read it, is to dispute arguments like Crotty’s. Crotty focuses on specific financial practice that he beleives caused the bubble and crisis. Dsquared’s argument is that expansionary monetary policy + global savings glut = bubble, followed by crisis. In this version, stuff like “originate and distribute” or the behavior of the bond rating agencies just doesn’t matter at all.

28:Hyman Minsky had a program to avoid financial disturbances that mainstream economics has ignored with all its might for about thirty years.

Since I think Minsky might have said it is the same program as Keynes/Kalecki/Galbraith/etc et al, maybe 70 years.

Fun Post, d`. I think it needs to be read exoterically or sumpin. Like, what happened in 1995?

37: What if I were to argue that preventing liar loans would have limited the further expansion of the current accounts deficit? And that better regulation of the financial sector would have prevented these liar loans from being sold in the form that they were?

It is very confusing to me that people are now apparently arguing that regulatory structure cannot have macroeconomic effects. Only monetary policy determines these things? Why did we even bother inventing the FDIC then? What the heck is being argued here?

I would have thought NINJA loans are stupid, objectively stupid. Selling debt based on these is crafty, I suppose, provided people are stupid enough to buy it. But there has to be some stupid involved in this.

[7] deedle deedle deedle.

See, this is where your whole analysis falls apart.

FWIW, I think this particular financial crisis has been building for about thirty years, as the GD I built for 50 years, and that this is only the penultimate stage before the real SHTF. You think this is a meltdown? You ain’t seen nothing yet.

The bubble in treasuries followed by default, now that will be a global meltdown.

However, here we are and a load of people are going to lose their jobs. And if you lose your job, you really need to know why

I think that the explanation given by George Orwell fifty years ago is the only sensible one (from memory) “If two million people are out of work, then a logical consequence of this is that George Jones will be out of work. But while nobody sensible would think to suggest that two million people being out of work is George Jones’s fault, everyone tends to assume that George Jones being out of work is George Jones’s fault. They are wrong”

I really don’t know who to blame, since “whatever caused the big OECD current account deficits” is clearly an empty placeholder. John Hempton thinks (see link) that the ultimate cause is the Chinese one-child policy (which was the cause of the global savings glut and so forth). Personally, I’m more inclined to believe that Keynes/Marx was right, and that the actual cause is “the tendency of complicated and unstable systems to have complicated and unstable dynamics”.

Suppose the savings glut was in the U.S. and somebody else had the trade deficit.

I’m gonna follow my own advice on “how to debate Milton Friedman” here and thus my response will be “no, don’t suppose that”. It is not a random coincidence that this crisis happened in a capitalist system rather than a socialist one. It’s a property of capitalist economic systems that they’re vulnerable to crises.

You could have just posted “Shit happens.”

The bankers stupidity is not the cause of the collapse of the bubble and of the defaults, but it is the bankers stupidity that the bankers they took the risk they did on these loans.

Furthermore, why isn’t it stupid for the banking system to be more than the intermediary? Wasn’t the whole idea of asset-backed securities for banking intermediaries not to take default risk? Why is a fractional reserve banking system with government insurance not now obsolete and therefore stupid?

“It strikes me that Daniel has sort of defined any problems like this as being the governments fault.”

Last week’s Economist tried a similar trick. Every article on the crisis focussed on goverments, what they had failed to do and what they should now be doing. It was a craven cop out, that left me wondering why I bother subscribing.

The US has had large current account deficits before but it hasn’t always been the bankers that came off looking stupid.

This may be a non-economist’s dumb question, but I’ll ask it anyway.
The post says, under point 3: “if you have a current account deficit, then domestic consumption exceeds domestic saving.”
Why is this necessarily true? At least in theory, why couldn’t a country import more than it exports and also have a relatively high savings rate? The statement seems to assume that a high volume of imports relative to exports means a high volume of overall consumption relative to saving; this indeed is (or was until very recently) the situation in the U.S., but I don’t see why the equation must always hold.

I’m not following you with your #48. Could you please describe, in detail, where something like what is happening right now is the fault of business and business practices, but not the fault of ‘government interference’.

Daniel, let me try again: could you give me a hypothetical market melt-down, or an economic slow-down or recession that was solely the fault of business/private enterprise/what have you, and not the fault of government?

Because right now, it looks to me as if you’re more than happy to name government actions as the root cause of our current financial problems.

I don’t think that what I have written is hard to understand, and I don’t think my request an unreasonable one.

So it’s not anyone’s fault except the system’s, and system, while regrettably prone to instability, is the best one that we know how to make and this re-regulation business wouldn’t have stopped the problem. Amazing! I never could have predicted that that particular answer would just happen to turn out to be the one that Daniel didn’t write about this crisis.

I wouldn’t exactly call the bankers “stupid”: the top dogs are now sitting in their mansions, bitterly bitterly unemployed, with $100 million in t-bills (or perhaps their German equivalent) in their accounts. As long as the US/European economy doesn’t totally collapse they can ride out any recession/depression in comfort and style then start again on the upswing. Even the midlevel guys should have $2-$3 million stashed away if they have any brainpower at all. It is only we peons who will pay the price. So who’s stupid?

Cranky

OK its not the stupid bankers being stupid it just had to happen “at least, … exists in Anglosphere (plus Spain, for some reason) markets, where housing behaves like an investment good, due to the existence of a large enough privately owned rental housing sector, plus easily available mortgage finance.” For what reason is Spain like the Anglosphere ? Been to Spain lately ? Go there and look at the names of banks on branch offices. I would guess many are very familiar.

When I was last in Spain, a Spanish economist told me how wonderful it is that the Spanish government had stopped protecting the greedy thieving Spanish banks from competition by the wonderful English banks which don’t charge you absurd fees for everything and have a low spread between the mortgage and deposit rates.

Get it. There must must must be a housing bubble in countries with banks with headquarters in the US or the UK, because said bankers are generous with the mortgages. Some might say that a crucial cause of the automatic link between interest rates and house prices is stupid stupid bankers who sign mortgage contracts that only make sense if one is not in the middle of a housing bubble.

Also I note that I didn’t note the acronym CDS in your post. It has nothing to do with monetary policy or housing prices. Has a good bit to do with Paulson and Bernanke suddenly deciding that something huge had to be done. Now technically AIG was brought down by stupid stupid ex bankers now working for a stupid stupid stupid insurance company, but it sure wasn’t brought down by the US current account deficit or low interest rates. What if the problem is mostly credit default swaps and not house prices, mortgage contracts, or the particular horrors of mortgage backed securities ? You’re sure it isn’t ? Why not ?

It would be nice if those of you who are arguing about macro versus micro effects would take a moment to address the non-economists here, who are foursquare for the “no-one who got personally rich — which is all the high-up bankers — was stupid” approach.

The bankers (et al) socialized risk and privatized returns because they *could*. Why did anyone expect otherwise? I know of no evidence that the bankers — including the CxOs of all the major financial institutions — acted to do anything other than maximizing their *personal* gain, and they succeeded. The FIs were not “institutions”, they were collections of self-serving individuals, and the individuals at the top served themselves extremely well. That is hardly stupid behavior on their part.

Is a plutocratic culture a macro failure or micro? And do the plutocrats even see it as a failure?

That is hardly stupid behavior on their part.

See, attacking the notion that bankers were stupid across the board is setting up a strawman designed to deflect from a discussion about business ethics. Some were stupid, some greedy, some were both, some neither, some got rich, some didn’t. To really discuss this in a serious manner, one would have to analyze the key players and what they did in detail.

The bankers (et al) socialized risk and privatized returns because they could. Why did anyone expect otherwise?

Because finance, business and law aren’t solely about what you can get away with, and the people working in those fields are not all greedy and ruthless by default, nor do they have to be to succeed.

Personally, I’m more inclined to believe that Keynes/Marx was right, and that the actual cause is “the tendency of complicated and unstable systems to have complicated and unstable dynamics”.

Well yeah, but that doesn’t make it unreasonable to blame those who were the biggest proponents of that system, those who were least inclined to agree that it was unstable, those who did most to ensure it was unstable and those who benefitted most from that instability while receiving the most consideration when it all went wrong?

Which is not a policy, of course, but on the level of policy surely it should be addressed by putting some serious clamps on these people’s power to screw things up, and that is so regardless of the fact that of course there are other causes to the crisis? And returning, perhaps, to Marx, isn’t it a problem that everything that could seriously be done both in that line, and in the line of preventing future house price bubbles, would be opposed by almost everybody with enough clout to prevent the policy happening?

So I’m not pretending that this consists of any more than sitting in a bar saying “fuck the bankers”, but I think this is, possibly, reasonable on an intellectual as well as an emotional level.

THANKS FOR THE MENTION!

COMMENTS BELOW:

It appears to be a commonplace gaining ground every day that the main reason we have a credit crisis (about which I am not writing; this is an essay in recent monetary history) is that bankers created it, and specifically that they created it because they are stupid.

LENDER FRAUD DROVE THE LAST HOUSING PUSH. FRAUDULENT APPLICATIONS WITH FRAUDULENT APPRAISERS AND FRAUDULENT INCOME STATEMENTS. PARTLY BECAUSE INCENTIVES WERE IN THE WRONG PLACE- BROKERS AND LOAN OFFICERS PAID ON VOLUME, ETC.

NicDon’t we need a blue-ribbon commission to make sure that such stupids never have the chance to do so much damage again? YES, REGULATION AND LIFE IN GENERAL IS A WORK IN PROGRESS. LENDING HAS ALREADY BEEN MODIFIED
AND SUBSEQUENT LOANS ARE DOING REASONABLY WELL.

Remember yer Keynes. Macroeconomic events have macroeconomic explanations, not micro ones. Let us consider the following statements:

YES, THE MACRO PROBLEM IS THE FEDERAL DEFICIT IS TOO SMALL GIVEN CURRENT ‘SAVING DESIRES’ (GOING INTO DEBT LESS IS SAVING MORE FOR PURPOSES OF THIS ANALYSIS).

THE SOLUTION IS QUITE SIMPLE- A LARGER FEDERAL DEFICIT.

I SUGGEST AN IMMEDIATE PAYROLL TAX HOLIDAY- HAVE THE TSY MAKE ALL THE PAYROLL TAX CONTRIBUTIONS FOR US (SOC SEC AND MEDICARE) AT LEAST UNTIL THE ECONOMY RECOVERS.

THIS WOULD ALLOW WORKERS TO MAKE THEIR MTG PAYMENTS AND PAY THEIR BILLS, AS WELL AS SUPPORT AGG DEMAND IN GENERAL. IT’S ALSO A HIGHLY REGRESSIVE TAX, WHICH MATTERS A LOT TO MOST POLITICIANS.

THE DEFICIT WAS INCREASED SUBSTANTIALLY IN 03 WITH A FISCAL PACKAGE THAT RESULTED IN ABOUT AN 8% OF GDP ANNUALIZED DEFICIT IN THE THIRD QUARTER OF 03, SPURRING OUTPUT AND EMPLOYMENT.

IT ALSO DROVE THE HOUSING EXPANSION- NOT INTEREST RATES. THIS WAS HELPED BY THE ABOVE DESCRIBED LENDER FRAUD.

HOWEVER, BY 2006 THE ‘AUTOMATIC STABILIZERS’ DID THEIR WORK AND THE DEFICIT WAS BACK DOWN TO TOO LOW LEVELS. AT THE SAME TIME THE LENDER FRAUD WAS DISCOVERED AND THOSE LOANS STOPPED, ALSO SUBTRACTING FROM DEMAND. HOWEVER, EXPORTS PICKED UP THE SLACK AND INCREASING GOVT SPENDING HELPED AS WELL.

1) This was a policy-caused bubble. As I wrote last week, I noted in 2002 that the Federal Reserve, among others, was attempting to engineer a housing bubble in order to soften the landing post the internet bubble.
YES, BUT I DON’T GIVE THEM THE CREDIT/BLAME. IN FACT, MTG RATES DIDN’T COME DOWN ALL THAT MUCH. YES, THERE WERE LOW TEASER RATES, BUT THOSE HAPPEN ANYWAY, AND THE BORROWER IS REQUIRED TO QUALIFY AT THE HIGHER, 30 YEAR RATE TO GET A TEASER RATE. THE PROBLEM WAS FRAUDULENT INCOME STATEMENTS AND APPRAISELS

This was not, I perhaps should have emphasised, a brilliant piece of iconoclastic contrarianism on my part. The jokes were quite original, and the Beanie Babies idea was all my own, but that actual analysis was totally commonplace at the time; I can’t remember if the Fed actually said this was what it was doing and suspect it didn’t, but it was generally and tacitly understood throughout the economic policy community that rising real estate prices were a goal of policy. Oliver Kamm remembers it this way too[1].

2) It was not even really a bubble, in much of the world. As Brad DeLong was writing in 2005 (as I say, this one really has to fall into the category of “mistakes we knew we were making”), there’s a more or less direct linkage between interest rates and house prices, via quasi-arbitrage between the rental yield and the bond yield, combined with downward-sticky nominal rents[2]. In some parts of the world, the rental yield/bond yield spread got way out of equilibrium, but not in all of them; in Ireland, for example, house prices simply tracked the local government bond market all the way up, and then back down again.

HOUSING TRACKS THE FISCAL CYCLES AS WELL. AND THE FED USUALLY SETS RATES BASED ON THE FISCAL CYCLES.

From these two things, I conclude that a house price bubble was more or less unavoidable. YES, BUT FOR FISCAL REASONS. AND WITH FISCAL SUPPORT HOUSING COULD HAVE BEEN SUPPORTED FROM THE ‘BOTTOM UP’ BY SUSTAINING INCOMES.

3) The other element of the crisis was “an excessive dependence on wholesale funding”. Again, at the level of the whole system, it could not have been otherwise. It can’t be put better than in John Hempton’s perfect phrase – “The banking system intermediates the current account deficit”.

THE CAUSATION IS ‘LOANS CREATE DEPOSITS’ WHICH MEANS ALL LENDING IS ‘SELF FUNDED’ -NOTE THE RELATIVELY SMALL AMOUNTS OF NET LENDING BY THE FED AT ANY GIVEN TIME. THE PROBLEM CAN BE THAT ONE BANK GETS EXCESS DEPOSITS AND ANOTHER IS SHORT, AND THEY WON’T LEND TO EACH OTHER. THAT’S WHERE THE FED IS DESIGNED TO COME IN, THOUGH OVER THE LAST YEAR THE FED HAS SHOWN A LACK OF UNDERSTANDING OF IT’S OWN MONETARY OPERATIONS AS WELL

Which is to say, that if you have a current account deficit, then domestic consumption exceeds domestic saving.

YES, BY IDENTITY, WHICH I PREFER TO STATE:

GOV DEFICIT = DOMESTIC + NON RESIDENT SAVINGS OF FINANCIAL ASSETS.

Unless one’s prepared to assume unlikely things about the financial system, this means that the outstanding lending of the domestic banking system will grow faster than the outstanding deposits of the domestic banking system.

NO, AGAIN, LOANS CREATE DEPOSITS. WHAT HAPPENS IS DOMESTIC CREDIT EXPANSION FUNDS FOREIGN SAVINGS OF DOLLAR FINANCIAL ASSETS. THAT IS, THEY SELL US STUFF IN ORDER TO ACCUMULATE DOLLAR FINANCIAL ASSETS. WE BUY IT VIA DOMESTIC CREDIT EXPANSION.

If this continues for a long time, and in size, then the loans will exceed deposits, and this means that the domestic banking system, as a whole, will be reliant on wholesale market funding.

NO, AS ABOVE. WHOLESALE FUNDING COMES IN WHERE SOME BANKS HAVE EXCESS DEPOSITS AND SOME DON’T.

4) The reasons why the Anglosphere countries ran such large current account deficits over the last ten years are, frankly, not very well understood.
QUITE SIMPLY BECAUSE NON RESIDENTS- MAINLY FOREIGN CENTRAL BANKS AND MONETARY AUTHORITIES- HAVE DECIDED TO ACCUMULATE DOLLAR FINANCIAL ASSETS. THEREFORE MARKET FORCES ACT SUCH THAT THEY NET SELL STUFF HERE TO GET THOSE DOLLAR ASSETS.

YES, THEY SUBSEQUENTLY REARRANGE THOSE FINANCIAL ASSETS THAT START OUT AS BANK BALANCES, SWAPING THEM FOR OTHER DOLLAR FINANCIAL ASSETS.

NOTE THAT WHEN PAULSON SUCCESSFULLY TALKED FOREIGN CB’S OUT OF BUYING $ TO WEAKEN THEIR CURRENCIES THE DOLLAR STARTED FALLING HARD.

AND NOW, WITH OIL PRICES DOWN 50%, DOLLARS ARE ‘TOUGHER TO GET’ OVER SEAS AND THE $ HAS RECOVERED SOME.

There’s a variety of theories – the Ben Bernanke “global savings glut”,
WRONG

Melanie Phillips theory of “a crisis of morality and buy-it-now culture caused by Richard Dawkins” (what do you think I’m lying or something, the intentional undervaluation of Asian currencies, lots and lots of them.
WRONG

But nobody, so far, has come up with a theory under which the entire driving force of the world economy has been the stupidity of stupid bankers[3].

I’D CALL THEM NARROW MINDED…

5) It is just about theoretically possible to imagine a world in which the banking system refused to intermediate the current account deficit,
DOESN’T MATTER, AS ABOVE

and did not respond to looser monetary policy by extending loans.
MONETARY POLICY NEVER DOES ‘WORK’ AS EVEN THE FED’S ECONOMETRICS SHOW.

But let’s get this straight – do you really want to go there? What we would be talking about here would be a world in which monetary policy did not work at all.
WELCOME TO THE REAL WORLD! IT’S ALL ABOUT FISCAL POLICY, INCLUDING ‘QUANTITY THEORY.’

If we lived in a world in which these far-sighted paragons of the imagination ran the banks, rather than the stupid stupids we have now, we would have smarted our way into constant recession[5].

WHEN FISCAL GETS TOO TIGHT, GOVT REVENUES FALL OFF DUE TO THE SLOWDOWN, AND TRANSFER PAYMENTS RISE DUE TO UNEMPLOYMENT ETC.
THIS MAKES THE DEFICIT GO UP UNTIL IT’S HIGH ENOUGH TO KICK OFF THE NEXT CYCLE. REMEMBER THE 90’S??? THE 5% OF GDP DEFICITS OF THE EARLY 90’S KICKED OFF THE BOOM OF THE LATE 90’S, AND THE SURPLUSES DUE TO THE SAME ‘AUTOMATIC STABILIZERS/COUNTER CYCLICAL TAX POLICY’ DRAINED THAT MUCH NOMINAL WEALTH AND CAUSED THE SUBSEQUENT CRASH.

THE ONLY 6 US DEPRESSIONS WERE CAUSED BY THE FIRST 6 BUDGET SURPLUSES. THE 7TH SURPLUS IS CRUSHING US NOW, BUT, UNLIKE BEFORE, WE ARE NOT ON THE GOLD STANDARD AND CAN RUN DEFICITS AS LARGE AS NEEDED. THAT’S WHY THERE HAVEN’T BEEN ANY DEPRESSIONS SINCE THE 30’S AND THE RECESSIONS HAVE BEEN RELATIVELY MILD.

Look, my basic point here is not to exonerate anyone or vice versa (apart from anything, that would stray into writing about the crisis itself, which I’m still not going to do). I am sure that at the levels of individual institutions, stupid things were done and irresponsible risks were taken. But likewise, I would also dare say that during the Great Depression, a lot of the workers who were made redundant were probably a little bit lazier and not quite as skilled or conscientious as the ones who kept their jobs. But if you were going to have your main comment about the Great Depression that it was the time when lots of lazy shirkers got the sackings they deserved, then I think everyone[6] would agree that you’d kind of missed the big picture.
AGREED! IT WAS A CLASSIC GOLD STANDARD COLLAPSE OF AGG DEMAND, WITH EVEN THE TSY UNABLE TO SUFFICIENTLY DEFICIT SPEND WITHOUT RISKING THE GOLD RESERVES.

The analysis that blames it on stupid bankers, is of a piece with the kind of analysis that regards the 1930s as being the decade when the working class of the world took it upon itself to have a great big shirk.

[1] I might actually be moved to argue that the internet bubble itself was at least partly a result of a soft-money policy aimed at smoothing the landing post the Asia/Russia crisis of 1998. There’s a real sense in which we’re still trying to complete the 1991-1995 monetary policy cycle, having had it interrupted three times already for the Mexico, Asia and dot com bailouts. Note also that Alan Greenspan’s “irrational exuberance” speech was made in 1996!

[2] Or at least, this linkage exists in Anglosphere (plus Spain, for some reason) markets, where housing behaves like an investment good, due to the existence of a large enough privately owned rental housing sector, plus easily available mortgage finance. In markets where housing behaves more like a consumption good it doesn’t. Commercial real estate behaves like this everywhere.

[3] I can sort of see how you might make a model of the economy which closed so that the exogenous factor was the desire of bank executives to get big bonuses and everything else followed from that. But it would be a very weird bass-ackwards post-Keynesian model, and I really don’t think anyone actually believes that this would be a good description of the world. Maybe I missed the memo and we all believe in endogenous money these days, but I have scoured the Nobel Laureates list[4] up and down and Warren Mosler’s name is not on it, so I conclude otherwise.

THANKS, AFTER THIS MONTH I COULD USE THE MONEY!!!

[4] Can you hear that sound? Just faintly in the distance? It’s the sound of the tiniest violin in the world being played by someone who doesn’t care that it’s actually the Sveriges Riksbank Prize in Honour Of Alfred Nobel.

[5] This might actually be the kind of economy that Taleb would prefer, as it would afford limitless opportunities to sit at home, stroke our beards and sagely note that nobody really knew the nature of the risks one takes by getting out of bed. In a very dignified, aesthetic way.

[6] Except Nobel Laureate[7] Edward Prescott, who actually does believe that the Great Depression was basically a decade-long shirk.

Daniel, the problem with your post re: Taleb’s theories is that it seems to mix apples and oranges; namely, confusing the macroeconomic explanations ( bubbles and how they are formed) with Taleb’s point that bankers specifically are in trouble because their risk management models were predicated on such events not happening.

Speculative bubbles don’t always lead to financial crises: after all, the tech bubble formed and passed without causing great distress on the Wall Street. The difference, of course, is that tech stocks weren’t mostly bought using leverage, based on models that said double digit declines couldn’t happen, and then insured with credit default swaps from people (Bear, AIG) using equally flawed risk models.

”that human beings do, requires some baseline assumptions about how the world’s going to go on working, and the nature of the world is that sometimes these assumptions are going to be wrong.”

The one area that hasn’t been “wrong” is the to date well proven assumption that ‘justice’ is sensitive to monetary stimulation and in financial/white collar/corporate crime risk and punishment are mo well distributed than the potential rewards.

Adopting Brad Delong’s proposed definition of Greenspanism, roughly keep the engine running at all costs, the central bank can sort out any problems it might cause, you can say it was just putting off the inevitable or you can ask why it worked before but didn’t this time.
Even accepting the first point I think asking what went wrong this time is still interesting and the banks don’t come out of it very well. They pushed for relaxation of capital requirements, abolition of dividing lines between different types of business and toleration of businesses that were too big to fail and too complicated to understand form the outside. Whether that counts as stupid or not I’m not sure but it seems pretty damaging. If the US banking system had the structure it did leading up to the savings and loan crisis, wouldn’t we just have had another savings and loan crisis?

Even within institutions the investment banks seem to have performed a medley of greatest hits from the annals of banking disaster. There’s Barings (We don’t know anything about this lending lark but it seems to be making lots of money so lets not worry thhat our balance sheet is en times the size it used to be), there’s LTCM (We don’t need capital, we have these excellent models) and there’s split cap trusts (The market seems slow to understand the true value of this tranche but maybe if we stuff it in this other one over here no-one will notice. If that doesn’t work we’ll keep it ourselves). However since banks get into trouble so often perhaps we should just accept that regular screwups are to be expected and that giving a banks cheap money is like feeding a Mogwai after midnight.

Point 2 only makes sense if you think that ordinary people don’t realise that a fixed payment in a low inflation environment is more onerous than in a high inflation one.

If housebuyers are paying as much as they can afford you would expect exactly the relation between house prices and interest rates noted here and also a bubble. Such behaviour might well be motivated by unrealistic expectations of future house prices. After all nobody seemed very scared by yet another year of house prices rising by percentages in the double digits.

In favour of the macro case however is a look at what a bank is supposed to do if it thinks there is a bubble. If it is the first to put on the brakes it will lose business instantly while if it does nothing there will be no immediate price to pay. Throw a significant amount of uncertainty into the mix and what’s a bank to do?

The distinction being that under some conditions of regulation controlling the evil and stupidity of bankers, there would have been some other asset bubble anyhow

That’s my take on it. We would have had another bubble. Or we would have had a severe recession, which could have been postponed if only we had managed an adequate bubble.

Or perhaps there was a way to invest in something really worthwhile. I figure we desperately need to invest in alternate energy. There’s the technical question whether we should do that *yet*. We could sink a lot of money into a particular alternate-energy technology and next year we get something so much better that all that early development was wasted.

But if we’re going to waste a lot of investment money, I’d rather waste it on alternate energy with the hope we get something even better, than something we don’t actually need.

Well, Rich, if you constantly reinterpret everything you read to fit in with your preconceived idea, then you will never be surprised by anything. Happy trails.

92:Good grief, Rich, of course there is lots of stuff you can do about Capitalism. Bombs, guillotines, firing squads, barricades, really big puppets, etc.

You just can’t attempt to reform Capitalism or make it work well for anybody but the bosses.

I am sure that’s what dsquared meant.

Heavens. “Does Taleb “no” favours at all.” Obviously.

#94-“…the legislation itself created the atmosphere and mindset within the banking/mortgage industry that allowed the expansion of these loans…”

Well of course it did. We all know how susceptible those banking/mortgage executives, and their mindsets, and their corporate atmospheres are to the pernicious influence of legislation. Especially even legislation originally conceived as helping the (unfairly) disenfranchised get a little house to live in and call their very own.
It’s important to keep accurate track of exactly where on the timeline that influence began, too.
It wasn’t until the legislation was passed right? Not until it became law, and began to seep into those corporate boardrooms with its toxic fumes of anarchy and laissez-faire etc.
Not like anybody tracked it through the House or anything, from conception. Bumping Congressman This and Senator That toward small but significantly amenable addenda.
Not like the pandemic greed that ate the American future was a pre-existing condition or anything.
Our system may have its flaws and its faults, but it does safeguard us against unethical behavior on the part of the powerful. So that didn’t happen.
Couldn’t have.
No greedheads drooling as the covers came off the chafing dishes.
Just a seductive climate of anything goes, caused created and enabled by bleeding heart liberals trying to give away to their pet miserables what should have been just as hard-earned by them as it was by the rest of us.
There were obviously some bad judgment calls. And yes, some chicanery, on the part of a few rogues. Who were not in any way typical of the industry as a whole. Who have since been banished to somewhere, and will remain in anonymous obscurity, as is only fitting.

Roy Belmont: I’m trying to decide which of two mental pictures of you that I’m forming in my head are correct; the one in which you are drooling and foaming at the mouth, or the one in which your sarcastic tongue is so firmly planted in your cheek that it would take a plastic surgeon to remove it.

the majority of the growth in house prices was attributable to the reduction in bond yields

I don’t believe this was true for the U.S. — well, maybe the *majority* of the growth but very far from all of it. Real bond yields were historically low but just eyeballing the historical relationship between drops in bond yields and growth in housing prices, you still don’t see a runup like this.

One way to think about this is that DD is saying the bubble was inevitably inflated by the central banks pumping a ton of new money into the system, which the banks just mediated. But financial institutions were also directly increasing the money supply by increasing total leverage in the system, even faster than the central banks were pumping resources in. Ummm, I can’t prove this, but I suspect it’s true.

Roy Belmont: LOL If you really knew me you would know that I’m the LAST person to worship at the alter of the Gods of Money or the Lords of the Economy. In fact, by utter disdain comes for having worked for a number of years as an ex-academic in the “Belly of the Beast” in several major brokerage houses and insurance companies, finally leaving after coming to the conclusion that I was ultimately unhappy for the same reason I chose not to attend Law School,i.e., I didn’t think I had enough larceny in my soul to be truly successful. In fact I once “endeared” myself (much to the chagrin and mortification of my wife) at a cocktail party in a major city with many of the prime “movers and shakers” present by saying that there was nothing that would improve the city’s economy so much as taking the stodgy head of every financial institution out into the nearest open field and shot “pour l’encourager les autres.” (And I DO have witnesses to confirm this)

My only point that I wished to make was that the old “give em an inch and they’ll take a mile” applies here–as well as “the road to hell is paved with good intentions.” I, like I am sure you, have read the studies upon which the CRA was based which showed that many of the traditional metrics did not adequately capture the ability and motivation to pay amongst large segments of “the poor” and upon which the legislation was based; my point was that the very institutions that fought it like Dracula avoiding the Cross, the program being enacted they became like Dr. Strangelove and “learned to love the bomb” in that they realized they could extend this concept to the entire population and make oodles more scheckles/moola/dineros-whatever. As that great psychologist and philosopher Lilly Tomlin once said: “Don’t worry in the middle of the night that in your soul you have become too cynical–you can never match the real world.”

This hedge fund manager thinks the bankers are stupid:

Recently, on the front page of Section C of the Wall Street Journal, a hedge fund manager who was also closing up shop (a $300 million fund), was quoted as saying, “What I have learned about the hedge fund business is that I hate it.” I could not agree more with that statement. I was in this game for the money. The low hanging fruit, i.e. idiots whose parents paid for prep school, Yale, and then the Harvard MBA, was there for the taking. These people who were (often) truly not worthy of the education they received (or supposedly received) rose to the top of companies such as AIG, Bear Stearns and Lehman Brothers and all levels of our government. All of this behavior supporting the Aristocracy, only ended up making it easier for me to find people stupid enough to take the other side of my trades. God bless America.

http://www.portfolio.com/views/blogs/daily-brief/2008/10/17/hedge-fund-manager-goodbye-and-f-you

Dsquared said:

Taleb’s point about risk models is really beginning to irritate me…It’s just not true that bankers thought that there couldn’t be a real estate crisis; they assessed the risks and made the loans accordingly. Some people got their risk assessment wrong, but the optimal frequency of crises is not zero.

If some people got their risk assessments wrong then surely you’d expect only a few institutions to be in trouble: the ones (like Northern Rock) that took particularly risky decisions, while the more sensible ones would be fine. If large numbers of a class of institutions are in trouble (almost all the UK banks, all the US investment banks, lots of hedge funds etc) that suggests something more systematically wrong with the risk models of the whole sector. And what specific government legislation forced financial institutions to make bad decisions? Lax regulation make permit risky decisions, but it doesn’t require them. Can you explain either of these points to a non-economist?

Because finance, business and law aren’t solely about what you can get away with, and the people working in those fields are not all greedy and ruthless by default, nor do they have to be to succeed.

Maybe not, but that’s the way to bet.

Also, the whole argumentum ex Taleb, indeed the whole of the guy’s intellectual reputation, is based on the idea that the crisis wasn’t predicted. It was predicted. Repeatedly. With numerical detail. By authoritative voices (Setser, Roubini, Hamilton, Krugman…) And by not so authoritative ones. I remember random bloggers talking about the coming reset of the Option ARMs as early as 2004; the Bretton Woods II paper came out around then; Calculated Risk started in 2005, I think; Ed Hugh at AFOE was predicting an epic housing crash with banking sequelae back to 2004, though for different reasons. Mark Kleiman of the RBC not only called the top in 2006 but sold his house in LA and rented.

It was blindingly obvious something like this would happen; in fact it was possible to predict with some accuracy when it would happen on the basis of the publicly available mortgage data, which is what Tanta and Co did. Hey, I was well aware of the bubble and the inevitable crash and I spent quite a lot of 2005-2006 discouraging my partner from trying to buy property through doom-mongering.

Actually, if you’d been reading good econ blogs you’d have been out of the market by early 2007 at the latest and you’d now be laughing. Quite simply, the price-rent and price-salary ratios were insane and had been insane for some considerable time; and quite simply, when it all came crashing down, whoever bought all those MBS was going to get killed.

> While subprime mortgages made to minorities as a result of the
> anti-red-lining were admittedly a small part of the bubble, the
> legislation itself created the atmosphere and mindset within the
> banking/mortgage industry that allowed the expansion of these
> loans into the general population.

Before Talman Savings & Loan in Chicago was forced to merge with a bank due to Senator McCain and Mr. Keating’s little event, it made quite a nice living for itself and its stockholders by writing mortgages in the areas that the banks redlined (and having lived in a redlined area I can assure you that CRA or no CRA redlining continues full force to this day). They were just very careful and very prudent about what mortgages they wrote and on what terms. But anyone who was realistically qualified – meaning a 10% cash down payment and enough regular income to cover the payments – could get a mortgage from them no matter how “bad” the neighborhood. At one point half my lower-working-class neighborhood had mortgages with Talman. So I have a hard time buying this business about the CRA being in any way involved in the collapse of derivatives of based on jumbo mortgages; a typical mortgage in a Talman neighborhood was about $30,000 in 1990 dollars and didn’t qualify for packaging in those day.

Cranky

My nihilistic side is cheered by Dsquared’s revelation that what just happened is just an inevitably emergent glitch in a complex system, but I find the idea that no one is to blame highly offensive. It seems to me that inevitably emergent glitches come from God, and that they’re His ways of telling us to scapegoat some horrible people on the lynch mob’s “maybe he wasn’t guilty of this, but he’s guilty of lots of other stuff” principle.

I feel confident that, with individual exceptions, the people who profited most from the up side of the glitch will very successfully transfer the costs of its crash to those below them on the food chain. For all I know, that’s inevitable too, and also for all I know, it might have been done already.

As for me, I’m with Keynes:

“The cover of Time magazine in December 1965 quoted Milton Friedman saying: ‘We are all Keynesians now.’ Friedman later said he had been misrepresented by selective quotation, but the point held good. Charles L. Schultze, then US budget director, felt able to tell Time: ‘We can’t prevent every little wiggle in the economic cycle, but we now can prevent a major slide.’”
http://www.ft.com/cms/s/0/a754a046-9c79-11dd-a42e-000077b07658.html?nclick_check=1

So who is “Nicholas” Taleb?

Watch this delicious sketch to learn what you need to know about how the financial markets really work:
http://uk.youtube.com/watch?v=mzJmTCYmo9g

There is no such thing as “macroeconomics”—“macroeconomics” is the most disreputable part of economics, and economics doesn’t have much to write home about to begin with. And there are no macroeconomic phenomena that are not fundamentally microeconomic ones.

yes there is, no it isn’t, yes it does, yes there are.

The most disreputable part of economics is surely Econ 101, which teaches naive business majors that unregulated free markets are the only effective way to allocate resources because they always reach the correct equilibrium while no other system reaches any equilibrium at all much less a self-correcting one.

Econ 101 teaches naive business majors that unregulated free trade always produces the most product, that every nation is better off not to impose any regulation on foreign trade even if all other nations do so, that the value of “better off” for which this is true is the only correct value.

Econ 101 teaches naive business majors that any government action distorts the economy into something that produces less stuff and produces the wrong stuff. This is true of all government action including taxing, spending, deficit spending, environmental regulation, pollution control, veterans’ pensions, etc.

Maybe macroeconomics is the worst part of economics, but Econ 101 macroeconomics is the worst part of macroeconomics.

“It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so.”

And there are no macroeconomic phenomena that are not fundamentally microeconomic ones.

There’s some truth to that. Like, you have no brain activity except for the activity of brain cells. And you have no brain cell activity except for the activity of organelles in the brain cell. And you have no organelle activity apart from individual chemical reactions. And your chemical reactions all involve individual electrons.

So maybe to understand what you’re thinking we ought to look at what the electrons do because really that’s all that’s going on.

On the other hand, maybe sometimes the electrons behave in ways that are more predictable in the mass than from the individual transactions. Any ideas about the details of how that happens would have to be tested, but it seems pretty likely to me that something like that might be going on.

I suspect they bet more specifically that when the housing bubble inevitably popped, the “Greenspan/Bernanke put” would intervene to save the day, minimizing investors’ losses—just as it had in the case of the umpteen previous bubbles to burst on Greenspan’s watch.

People mostly don’t keep chickens any more. My grandmother lived through the Depression, and she had chickens. Every day she’d throw around a pile of chicken feed and the chickens would run up and peck away at it. On rare occasions she would grab one of the chickens and wring its neck. This did not keep the other chickens from running up for their chicken feed the next day. A chicken who stayed away wouldn’t get its share of the chicken feed.

Did the chickens even think that sometime she might kill off the whole flock? What good would it have done them to think about that chance? A wary paranoid chicken might run away and take its chances in the wild. Chickens don’t generally have great success that way. Or it might stay away from the chicken feed, at least. But scrawny chickens who didn’t produce their share of eggs were likely to be eaten first.

It just doesn’t pay to think about the long run when you’re a chicken.

He was told ‘Sonny, my long-run is the next ten minutes.’

Daniel: Funnily enough, I was going to accuse you of succumbing to believing in rational expectations, but I figured that that wasn’t the kind of accusation you made in polite company.

I’m not expecting bankers to have perfect foresight; I’m expecting them to have as much foresight as I do. I knew that the housing bubble was going to burst and that the banks were lending at interest rates that were too low. Honestly, I thought the reason why banks were so eager to bundle mortages was so that they could lay off the risk of the inevitable bubble bursting on gullible pension fund and hedge fund managers.

“yes there is, no it isn’t, yes it does, yes there are.”

No there isn’t, yes it is, no it doesn’t, no there are not.

What’s good for the goose…

“yes there is, no it isn’t, yes it does, yes there are.”

No there isn’t, yes it is, no it doesn’t, no there are not.

http://www.unco.edu/PHILOSOPHY/python.html

Agree with Daniel in 127 100%.

“Alex, microeconomists sometimes have useful strategies that business owners can use. But how do their predictions come out, hmm?”

They can avoid that problem by not making many predictions about the entire economy.

More seriously, solid economics is difficult business — but I don’t see why so many people are so fascinated by the barbaric simplifications and aggregations in macroeconomics. At least in microeconomics you can tell yourself that you are trying understand what is going on in terms of entities that actually exist, even if exact predictions may be hard to come by. I have yet to understand what “total factor productivity” stands for in the real world.

They can avoid that problem by not making many predictions about the entire economy.

OK, let them predict an individual business. Predict its sales, its costs, its profit. How much money will it invest in new capital equipment? Surely a good microeconomic model should be able to predict that for a single business, right?

No? Well, how about telling the business owner how much money he *ought to* invest in new capital equipment, and which equipment. What kind of microeconomics do you have if you can’t give definitive results for a little problem like that?

Perhaps we need a way to inject anaerobic bacteria in to microecon bubbles to gobble up the various bits of methane and sulfur so that when they combine in a macroecon bubble they have less capacity for catastrophic harm, further a filter screen series layered with self releasing fullerenes could be deployed to prevent the aggregation of large bubbles w/o balls.

But you miss my point, which is that if you want to understand the economy, by thinking in microeconomic terms you can at least tell plausible stories. A lot of macroeconomics consists in working with “estimates of nothing.”

I see. Well, if a lot of macroeconomics is being done badly, that would indicate a market opportunity for somebody who can do it better.

Basically, I’m taking Kevin Hoover’s position here (I think):
http://bshapiro.umwblogs.org/2008/04/08/a-response-to-hoovers-is-macroeconomics-for-real/
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=932945

Oh, here’s the original:
http://users.umw.edu/~sgreenla/e488/Macreal.htm

Virgil X:
My mental picture of you appears to have been at least somewhat inaccurate, and is acknowledged so here.
Though you do cling to that “good intentions” bit.
Whereas what happened had almost nothing to do with the inappropriateness of the original intent, and virtually everything to do with the blood-locating abilities of the horde of parasites that then dominated economic affairs.
And dominates them yet, whereas programs and legislation that might enable things like home ownership in the (unfairly) disenfranchised are becoming galactically remote.

J Thomas #131:
That view of a flock of chickens, as a collection of self-interested individuals making decisions whether or not to compromise immediate safety for longer-term survivability, maps pretty well onto a lot of people’s views of human society, not least economists’.

But it doesn’t consider the flock as a thing with survival parameters of its own that don’t rely on the survival of individual chickens any more than individuals chickens rely on the survival of individual feathers, or eggs for that matter.

Getting a sense of the flock itself as a living organism whose needs aren’t necessarily aggregates of individual members’ needs, and analogously humans-as-species as a living organism whose needs etc., may be kind of important.
It does seem to have had some influence on moral thought over the years.

Some notes on the K. Hoover paper:

Hoover talks about how macroeconomic variables “supervene” microeconomic variables and how one macroeconomic value can correspond to many underlying microeconomic realities. What Hoover doesn’t talk about is the “macroeconomic variables” for which it is in general logically impossible to find a microeconomic reality, for instance, the macroeconomic production functions. Hoover doesn’t have anything to say about such commonly used “macroeconomic variables.”

Secondly, he argues that “if you can manipulate them, they exist” is a principle that can be used to show that macroeconomic variables are ontologically real. I don’t know much about ontology, but this doesn’t contradict the principle that you should be able to find microeconomic explanations for the results of your manipulations, if those results are not spurious.

Thirdly, he argues that microeconomic actors use macroeconomic theories and indexes in making predictions. But if you can provide an explanation which has the individual economic actors’ theories as data then you have a microeconomic explanation.

In conclusion, I am not sure what K. Hoover’s argument achieves. If he wants us to concede that price indexes are ontologically real, then fine, they’re real. He doesn’t show in what sense other macroeconomic constructs, like production function parameters, are real, nor does he show why we should expect future such macroeconomic theories to have better results than previous ones.

“The cover of Time magazine in December 1965 quoted Milton Friedman saying: ‘We are all Keynesians now.’ Friedman later said he had been misrepresented by selective quotation, but the point held good. Charles L. Schultze, then US budget director, felt able to tell Time: ‘We can’t prevent every little wiggle in the economic cycle, but we now can prevent a major slide.’”

You know, I had always heard that “Keynesians now” quote attributed to Nixon: I guess it’s one of those “Rich Dad/Poor Dad” deficits of information on a topic that Internet resources are generally clearing up.

Alex,
We might wanna leave production functions out of this since this is a bit of the red herring in this context. Hoover’s talking about things like the consumption function, investment function etc.
But yeah, this is also generally why I think models with production functions are fine, on the same grounds as ad hoc relationships in the IS/LM model are.
And yeah, if you can tell a good micro story to back up your macro story that’s fine. Great even. But usually those stories are gonna have problems too, once scrutinized sufficiently. Basically a macro model needs more than just a claim of microfoundations.

Roy Belmont: Perhaps you didn’t read me closely enough. The “good intentions” I spoke of were those of Congress, not of the Bankers.

ahhh, the famous CT strikethrough feature, catches all of us sometimes.

“What are the chances that this was a deliberate John Galt ratfuck by Greenspan?”

Slightly greater than the chances that it’s all Richard Dawkins’ fault. What might be the reasoning worked out by the Collect, under that holographic projection that shields those more-evolved-than-thou utopians nestled in the Rockies in a hidden vale atop Mount Improbable. It might go something like this:

(1) “Starve the Beast” is still the last best hope of beating creeping S*cialism,
(2) What better way to Starve the Beast than to trash the economy, thus reducing tax revenues?
(3) What better instrument for trashing the economy than the apostasy of fiat money? (Remember: Greenspan was a major gold bug as a Randite.) Use it to inflate catastrophic bubbles, one after the other, if not two at a time.

Then, either you get Communist U.S. government in the backlash, which causes the collapse of society globally, the tabula rasa needed by Galt et al. to remake the world in their own image, or — everybody digs out Atlas Shrugged, (re-)reads it, and sees the light in time to prevent the collapse of society.

Risky, risky. Greenspan is, inconveniently, a wrinkled old Jew banker, not a tall blond engineering genius. So what happens if the masses seize upon a certain tried and true explanation, instead of Atlas Shrugged, for why the world’s fucked? Read my 1000+ page novel (“At Lash, Rugged!”) to find out the answer. Buy it now, off Amazon. I need cash to finance my purchases of gold.

i’ve been rackin my pore tired brains these last few days tryin to recall what mad mel’s rants are remindin me of: after a proper sleep (first in days) i realise it is ezra pound’s Canto LXV, “WITH USURA”

<a href=”http://www.spectator.co.uk/melaniephillips/2447021/the-culture-war-for-the-white-house.thtmlMelanie Phillips

i’ve been rackin my pore tired brains these last few days tryin to recall what mad mel’s rants are remindin me of: after a proper sleep (first in days) i realise it is ezra pound’s Canto LXV, “WITH USURA”
Belle, whatever the state of Idaho Ez’s mind (a friend of mine who met him twice during hs incarceration reckoned he really was more than a little touched . . .) you would surely concede his style ( both poetry & prose) is rather more pleasurable than Mad Mel’s?

I don’t see why the claim above can not be formulated microeconomically, without the logically problematic aggregate production functions. The only aggregated concept that is a necessity here is the GDP.

your last sentence is a whopper. You can’t get the aggregate impact on GDP without a general equilibrium analysis, since in partial equilibrium it is unclear whether the new women entering the labor force simply displaced existing men or actually increased production, etc. You could do it without an aggregate production function if you had confidence in your complete general equilibrium model of the entire open economy of Ireland and the other countries it dealt with. Such a complete GE model based on firm microfoundations would be the biggest breakthrough in the history of the social sciences.

P.S. I don’t think much of aggregate production functions either, but then I have my doubts about econ in general.

See, for example, JM Keynes on “The Economic Consequences of The Peace”, for a wonderful piece of back-of-the-envelope macroeconomics which, if you had to unpack it into a model, would have to contain an utterly indefensible aggregate production function which was linear in all inputs.

Didn’t the main prediction of “Economic Consequences of the Peace” turn out to be wrong?

Didn’t the main prediction of “Economic Consequences of the Peace” turn out to be wrong?

The main prediction was that Germany would go into economic collapse with horrible political consequences, so no.

I think that’s cause the amount of reparations got marked down as the realization that Germany wouldn’t be able to pay became obvious. Sort of like modern day bail outs and such.

Here was the final axe
http://en.wikipedia.org/wiki/Lausanne_Conference_of_1932

but they got rescheduled and the like even before that. Basically France couldn’t scrap the agreement wo loosing face but for all practical purposes, Germany WAS unable to pay up.

I think that’s cause the amount of reparations got marked down as the realization that Germany wouldn’t be able to pay became obvious. Sort of like modern day bail outs and such.

I heard stories about hyperinflation and people dying on the street of starvation. Did the bailouts come quickly enough or strongly enough? I think if we got enough inflation that peoples yearly social security payments would buy them a loaf of bread, and we got significant numbers of people starving on the sidewalks, we might get some horrible political consequences even if there were some bailouts.

It was a bad analogy. Just give up.

But economics with ecology is a good analogy.

I can’t decide if it’s cute or creepy, that J Thomas thinks he can reinvent economics from scratch in a blog comments section.

” Sort of like modern day bail outs and such.

I heard stories about hyperinflation and people dying on the street of starvation.”

At least now the Banksters have a pool of some 70 billion for bonus payments to go along with the bail… Rescue monies. Starvation will be curtailed.

Dsquared-

It’s a while since I read it, but as I recall the “economic consequences” in question more or less all flow from the persistent current account surpluses Germany would be reuqired to run to pay reparations. No surplus and the argument is irrelevant.

Of course it’s true that even as a dead letter, the reparations did stoke German resentment. But so did lots of other things, and anyway that’s not an economic consequence.

As a matter of fact, the main economic effect of reparations was to raise the volume of US government loans to Europe through the Dawes and Young plans — notionally loans to Germany, in practice to England and France. Since Europe needed to finance a current account deficit with the US, just like after WWII, but unlike after WWII there was no political consensus in the US to finance European reconstruction, it’s hard not to see the strictly *economic* consequences of Versailles as positive.

It’s not enough to say that Keynes was right to expect trouble; there has to be some correspondence between how he thought it would come, and how it actually did.

(I believe he himself acknowledged later that ECotP basically got it wrong, but I could be mistaken.)

Re: 193 (not sure which Alex this is)
In “normal times” macroeconomic models do pretty well at predicting the direction of change if not the magnitude. When Volcker raised interest rates everybody knew – based on a fairly simple macro model – that recession was in the cards and that inflation would be brought down, the only questions where how long would it take and how deep the recession (in fact the micro-founded macro models predicted a much shorter adjustment process than the clunky IS/LM style ones which got it more right). When Germany reunified, converted the marks at 1:1, fiscally expanded and monetarily contracted and so on, everyone knew – based on a simple Mundell-Fleming macro model – that I’d be hard for Britain to stay committed to the ERM, though not many saw Soros coming with his billions. And so on.

Also, as an aside, Krugman gives Alwyn Young a lot of credit for the underlying analysis for his article on the Asian Miracle (or lack of it), so he wasn’t the only one. And Young’s is basically a growth accounting excercise based on measuring macro inputs. This is also where he got the mis-focus on Singapore since Singapore comes out worst in that paper out of all the Asian Tigers.