naked capitalism

ndk says:

Ahem. I still think the stimulus is not remotely responsible for any improvement, but that instead, asset(equity & junk bond) prices recovering for their inimitable reasons has caused a bit of restocking and end demand, but I see very little in the way of sustainable recovery, and nothing to justify any belief that stimulus is the driver.

I should always finish my paragraphs before

Hugh says:

Like many here, I agree with Stiglitz’s doubts about all the greenshoots PR. I still see the likelihood of depression in 2011 as high. I see what Stiglitz calls malaise and the rest of us would probably call Japanification as possible but less likely. I think his kick about replacement of the dollar as the world’s reserve currency continues to miss the politics and agendas of all parties to such a move. It is sad that only a few economists at even this late date are as tethered to reality as he is.

This brings me to a long article by Paul Krugman in the NYT “How did economists get it so wrong?: http://www.nytimes.com/2009/09/06/magazine/06Economic-t.html?_r=1&hp

It is a brief precis of economic thought and concentrates on developments in 20th century economics. I found it really frustrating. He says that economists were enamoured with the math, which is actually fairly funny when you consider that it was their failure to do even simple arithmetic that led to disaster. Krugman does touch on equilibria and rationality in his criticism. He even brings up irrationality but can bring himself to invoke the Austrian school, instead referencing “behavioral finance”. But what really irked me was his framing of a lot of his discussion in terms of salt and fresh water economists. He naturally puts himself with the saltwater economists that he thinks got it mostly right. How silly this dichotomy is is that he places his mentor Bernanke in this group as well. There are also lacunae. He doesn’t mention the growth of the paper economy, fraud, or financial innovation, all subjects that economists mostly missed.

The problem as I see it is that economics has been a charlatan field for the last 40 years. It is still dominated by charlatans but Krugman continues to accord their quackery a certain degree of respect and this includes Bernanke and Fed policy in response to the meltdown:

“a focus on the depleted capital of financial institutions helped guide policy actions taken after the fall of Lehman, and it looks (cross your fingers) as if these actions successfully headed off an even bigger financial collapse”

This kind of thinking, especially in so far as it continues to ignore the really frightening fundamentals of the economy will lead to another surprised “No one could have predicted” down the road.

Richard Kline says:

Stiglitz was actually on good ground with Clinton’s actions: it _should_ have led to a slowdown. But we had easy Al Greenspan giving him cover and the country disaster with excessively low rates producing an incipient housing bubble and an actual equities bubble through most of the Nineties. Clinton was gifted with soaring tax revenue from capital gains, for example, and in much the same way domestic hot money papered over what should have been contraction-inducing conditions.

This situation only speaks more loudly to the ‘failure of economics’ narrative, however. Really the biggest failure of economics is a failure to engage with reality. The reality of the Nineties was too low rates and markets blowing gaskets thereby. But the models of the mandarins just couldn’t get their figures around that, and came up with different readings. So economists scratched their heads and said, “Why doesn’t the headless chicken croak?” It is the unwillingness of the discipline to actually bring the realities of market behavior into their prognostications which leads to the loopy scenarios they generate far from the world we live in. Stiglitz checks in with reality more than most, and I listen to him more than most therefore.

Siggy says:

The current PR needs a realty check.

Unemployment is still growing, albeit at a moderating rate. Personal Income is soft to moderately declining. Production is stabilizing at a very low level relative to earlier performance and retail sales continue soft. Add to this the lost wealth effect of house price declines and stagnation coupled with a stock market that is moving up but nonetheless substantially below the highs of three years ago.

At the core of these circumstances is the fact that there remain substantial losses to be realized in the banking system.

This isn’t the early stage of a recovery, this is the early stage of a bottom that may prove to be a plateau that preceeds a further collapse of economic activity.

The deleveraging that appears to be in progress is being impaired by all of the ’stimulus’ efforts that do little more than displace purchases and distort price signals.

In this environment, it is questionable as to whether Mr. Stiglitz will be entirely forthright in his comments because, I fear, he recognizes that the public and his peers are as yet unwilling to face up to the fact that as a nation we have been profligate spenders enabled by easy credit and a fiat currency. This is a mess that did not spring up overnight like field of mushrooms. This is a mess that has been 40 plus years in its creation.

Anything that now comes down the road purporting to be a recovery will be little more than theater empty of any substance.

DownSouth says:

@Siggy says: “…he recognizes that the public and his peers are as yet unwilling to face up to the fact that as a nation we have been profligate spenders enabled by easy credit and a fiat currency. This is a mess that did not spring up overnight like field of mushrooms. This is a mess that has been 40 plus years in its creation.”

I’d say more like 2400 years in its creation. As Hannah Arendt observes in “On Revolution”: “If one wishes to blame any single author for the so-called materialistic view of history, one must go as far back as Aristotle, who was the first to claim that interest…should rule supreme in political matters.” The historical view proselytized by Adam Smith, Marx, Mises, Friedman and many others was therefore not at all original to them.

Arendt goes on to point out that the American Revolution did provide a short respite from the materialistic view of history:

“The social question interfered with the course of the American Revolution no less sharply, though far less dramatically, than it did with the course of the French Revolution. Yet the difference is still profound. Since the country was never overwhelmed by poverty, it was ‘the fatal passion for sudden riches’ rather than necessity that stood in the way of the founders of the republic. And this particular pursuit of happiness which, in the words of Judge Pendleton, has always tended ‘to extinguish every sentiment of political and moral duty’, could be held in abeyance at least long enough to throw the foundations and to erect the new building–though not long enough to change the minds of those who were to inhabit it. The result…has been that the revolutionary notions of public happiness and political freedom have never altogether vanished from the American scene; they have become part and parcel of the very structure of the political body of the republic. Whether this structure has a granite groundwork capable of withstanding the futile antics of a society intent upon affluence and consumption…only the future can tell.”

Though it took it 240 years to get there, it currently appears that America is following in the footsteps of the French Revolution, where, as Arendt explains:

“Freedom…has shifted places; it resides no longer in the public realm but in the private life of the citizen and so must be defended against the public and its power. Freedom and power have parted company, and the fateful equating of power with violence, of the political with government, and of government with a necessary evil has begun.”

Arendt concludes on a rather pessimistic note:

“In conclusion, one can hardly deny that Crevecceur was right when he predicted…those who in all earnestness say, ‘The happiness of my family is the only object of my wishes’, will be applauded by nearly everyone when, in the name of democracy, they vent their rage against the ‘great personages who are so far elevated above the common rank of man’ that their actions transcend their private happiness, or when, in the name of the ‘common man’ and some confused notion of liberalism, they denounce public virtue… On a more sophisticated level, we may consider this disappearance of the ‘taste for political freedom’ as the withdrawl of the individual into an ‘inward domain of consciousness’ where it finds the only ‘appropriate region of human liberty’; from this region, as though from a crumbling fortress, the individual, having got the better of the citizen, will then defend himself against a society which in its turn gets ‘the better of individuality’.”