By Satyajit Das, a risk consultant and author of Traders, Guns & Money: Knowns and Unknowns in the Dazzling World of Derivatives – Revised Edition (2010, FT-Prentice Hall).
Carmen M. Reinhart & Kenneth Rogoff (2009) This Time is Different: Eight Centuries of Financial Folly; Princeton University Press, London
Raghuram G. Rajan (2010) Fault Lines: How Hidden Fractures Still Threaten the World Economy Princeton University Press, London
Simon Johnson and James Kwak (2010) 13 Bankers: The Wall Street Takeover and the Next Financial Meltdown; Pantheon Books, New York
Nouriel Roubini and Stephen Mihm (2010) Crisis Economics: A Crash Course in the Future of Finance; Penguin
Joseph Stiglitz (2010) Freefall: Free Markets and the Sinking of the Global Economy; Allen Lane, London
Robert Pozen (2010) Too Big To Save: How to Fix the U.S. Financial System; John Wiley, New Jersey
Yves Smith (2010) ECONned: How Unenlightened Self Interest Undermined Democracy and Corrupted Capitalism; MacMillan
Thomas Carlyle, the Victorian historian, christened economics the “dismal science“. In Eat The Rich, P.J.O’Rourke described economics as “an entire scientific discipline of not knowing what you’re talking about.” One can only quibble with the word “scientific”.
The publisher led recovery – “crunch porn” or, more kindly, “crash lit” – in the global economy has entered a new and more dangerous stage. Economists have begun to hold forth on the problems. Keynesians, Monetarists, Cavaliers, Roundheads and Vegetarians are stirring to give their own views of reality and putative solutions. Worryingly, at least two of the books are now in the Best Seller lists for Business Books.
A key characteristic of the emerging tidal wave of books is the fact that almost everyone saw the writing on the wall, predicted the crisis and now moreover have solutions that can ensure that this was the crisis to end all crises. Unfortunately in the prediction stakes no economist can claim the prescience of Pope Benedict XVI. According to Italian Finance Minister Giulio Tremonti (as reported on Bloomberg News (20 November 2008)), the Pope, then merely Cardinal Joseph Ratzinger, in an article written in 1985 predicted that “an undisciplined economy would collapse by its own rules“. It is unclear which crisis the Holy Father was predicting, but given papal infallibility, probably all of them.
In the wonderfully titled “This Time is Different“, Carmen Reinhart and Kenneth Rogoff expand on their recent academic papers and empirical work on “eight hundred years” of financial crises. Marshalling a mind numbing array of statistics and data, the authors find similarities between financial crises. Their conclusion is that the cause is excessive debt accumulation by government, banks, corporations or consumers. The combination of excessive leverage and short-term debt lies at the heart of the problem.
If you are unsurprised at the predictable conclusions, “This Time is Different” provides solid empirical support for the intuitions. The book misses an essential point “This Time is Different” depends on identifying the correct base precedent that is being used for the economic state being studied.
The interesting part of the book is the evidence of what happens after a financial crisis. The authors show that severe financial crises share the following characteristics:
1. Declines in real housing prices averaging 35% over six years.
2. Equity prices fall an average 56% over 3.5 years.
3. Unemployment rises an average of 7% during the down phase with average length of four years.
4. Output falls more than 9% over a two-year period.
5. Government debt increases an average 86% in real terms, as a result of the collapse in tax revenues, counter-cyclical fiscal policy efforts and spiking interest rates.
So much for a ‘V’ shaped recovery! But “this time is different“.
To prevent future crisis, Mrs Reinhart and Mr Rogoff propose a new global financial regulator and improving the IMF (Mr Rogoff’s former alma mater where he was once chief economist). Puzzlingly, they are not optimistic about their reforms: “The persistent and recurrent nature of the ‘this-time-is-different’ syndrome is itself suggestive that we are not dealing with a challenge that can be overcome in a straightforward way.”
Raghuram Rajan, Professor of Finance at the University of Chicago Booth School of Business and former chief economist at the IMF (there seem to be a lot of those going around!), did warn about the risk of the global financial crisis. His early warnings led to the economist’s version of a duel at dawn (only with irony and sarcastic epigrams) at a conference held at Jackson Hole.
In “Fault Lines” Professor Rajan’s focus is on deep-seated problems in the global economy, including the absence of income growth, employment, health care and the problems of global capital and trade imbalances. Bravely, he argues that the over borrowing that caused the problems was an entirely ‘rational’ response to a deeply flawed economic and financial system. He also identifies growing inequality as a theme in the problems. He argues that these “fault lines” are the real problems rather than a group of greedy bankers taking irrational risks.
The “Fault Lines” position on bankers is at odds with “13 Bankers“, co-written by Professor Simon Johnson and James Kwak, a former McKinsey consultant. Expanding on their earlier Atlantic Monthly piece “The Quiet Coup“, the authors outline the thesis that big banks, especially in America, have used their economic power to gain political power.
The economic power of the banks derives from their growing importance in the broader economy as measured by share of corporate earnings and stock market capitalisation. This economic strength is then leveraged using lobbying, campaign contributions and the transition of staff between Washington and Wall Street.
“13 Bankers” sees a conspiracy in this arrangement and also considerable danger. Like all good conspiracy theories there is some validity in the argument.
Suggestions of political influence and a palpable lack of transparency in recent government actions to bail out banks have emerged. There are allegations that the Henry Paulson, the previous U.S. Treasury Secretary, may have “pushed” Bank of America to consummate its controversial acquisition of Merrill Lynch when it sought to withdraw after additional losses came to light. The “closeness” between banks and government officials and regulators that has been exposed is increasingly part of the problem in dealing with the real issues.
The thesis in “13 Bankers” is similar to the work of Mancur Olson, the American economist. In his books (“The Logic of Collective Action” and “The Rise and Decline of Nations“), Olson speculated that small distributional coalitions tend to form over time in developed nations and influence policies in their favor through intensive, well funded lobbying. The policies result in benefits for the coalitions and its members but large costs borne by the rest of population.
Over time, the incentive structure means that more distributional coalitions accumulate burdening and ultimately paralysing the economic system causing inevitable and irretrievable economic decline. Government attempts to deal with the problems of the financial system, especially in the U.S.A., Great Britain and other countries, may illustrate Olson’s thesis. Active well funded lobbying efforts and “regulatory capture” is impeding necessary actions to make needed changes in the financial system.
“13 Bankers” is grounded in a traditional American fear of a financial oligarchy, dating back to the fights between Thomas Jefferson and Alexander Hamilton over the “Bank of the United States” and Franklin Roosevelt’s Depression-era regulation of finance. While American banks may certainly be powerful and highly influential, the case for a conspiracy is not entirely convincing.
Bankers are keen to pick the pockets of anybody including each other. The highly nuanced differences in the positions of individual banks are unlikely to be consistent. Bankers agree and disagree with each other on about the same number of issues. One online commentator noted the intersection between Wall Street, Constitution Avenue and Main Street was best named: “Confusion Corner”.
In addition, the potential risks of such a powerful clique are not fully explained. Large banking and other industrial complex dominate many nations and economies with not always negative consequences.
The authors’ remedy is to cap the size of banks as a percentage of the economy. This may not be effective without reform of campaign finance rules, restrictions on political appointees to many positions, reform of the central banking system and other measures.
Nouriel Roubini (who had inherited the mantle of “Dr Doom” from Henry Kaufman) also predicted the global financial crisis. In case you didn’t know this, statements like the following ensure you are left in no doubt: “Roubini’s prescience was as singular as it was remarkable: no other economist in the world foresaw the recent crisis with nearly the same level of clarity and specificity.” The problems of joint authorship and reference to only one of them presents challenges within the English language.
In “Crisis Economics“, Professor Roubini with co-author Stephen Mihm take a distinctly Minsky line in analysing the global financial crisis. They argue that financial crises are the result of a confluence of historical and economic factors. Building on Hyman Minsky’s “stability is itself destabilising” hypotheses, “Crisis Economics” blends economy theory, behavioural economics and agency theory to try to explain the present crisis. The authors conclude that financial systems are inherently fragile and prone to collapse. Interestingly, while it is wary about the value of theories, statistics and mathematical economics and finance, “Crisis Economics” argues that crises are not only predictable, preventable and, with the Roubini/ Mihm brand medicine, curable.
Professor Joseph Stiglitz’s “Freefall: Free Markets and the Sinking of the Global Economy” and Robert Pozen’s “Too Big To Save: How to Fix the U.S. Financial System” focus less on the cause of the crisis than on solutions.
Professor Stiglitz believes that the origins of the present crisis lie in neo-liberalism and its fascination with free markets and de-regulation. Correcting these problems, Professor Stiglitz produces an extensive list of policy reforms. On the way, the author launches into often abrasive attacks of the government actions to date.
The analysis of the causes of the crisis is not original. His criticisms of policy actions range from insightful to assertions that need supporting facts. “Freefall’s” call to action disappointingly ends rather tamely in a serious of well-worn prescriptions for stronger regulation (by the same apparatus that caused the problems) to correct market failures. Somewhere, Professor Stiglitz finds the time to argue for a less materialistic society and adoption of something akin to Bhutan’s measure of Gross Domestic Happiness (“GDH”).
“Too Big To Save” is light on causes (thankfully) and long on lengthy lists of proposals. The proposals themselves focus on analysing alternative models for government stakes in banks, new board structure for large financial institutions, jurisdictional issues over systemic risks and the securitisation of loans. None of the proposals are startling or differ much from that offered by others. Some are in the process of being implemented.
Both “Freefall” and “Too Big To Save” tend to telesis ascribing events to innate, inexorable facts. Reality is far more nuanced than such a simple view of history. Perhaps this why economists generally tell you tomorrow why what they forecast yesterday didn’t happen today.
Both books also embrace regulation and regulators freely whilst being critical of regulators as lacking in skills and beholden to special interests. The faith in government activism is perverse. It fails to consider why a new set of rules will necessarily be more effective and existing regulators will be able to deal with complex issues well above their pay grades. This is particularly the case when the same regulators failed in the very same tasks in the lead up to this crisis. This dissonance is striking.
In “ECONned: How Unenlightened Self Interest Undermined Democracy and Corrupted Capitalism” Yves Smith, the creator of the Naked Capitalism website, provides an edgy and interesting antidote to the other books on offer. It is an anti-economics economics book that explores the failures of the discipline itself as revealed by the global financial crisis.
Ms Smith argues, consistent with Professor Rajan, that the proximate causes (excessive leverage, global imbalances and model failures) are symptomatic of deeper financial problems. “ECONned” focuses on a central issue – the role of economists as policy-makers and the weaknesses of economic thought. The thesis is that economists, some in key policy making roles, relied on dogma ignoring the dangers that eventually led to the financial crisis. The book’s coverage of the sequence of errors, misrepresentations and rationalisations of poor outcomes and instability is revealing.
“ECONned” is strongest in its coverage of the role played by economists in the crisis and the flaws in the widely used financial models and concepts that created the conditions for the crisis.
The books, with the exception of “This Time is Different” which lurches around a space time continuum that would have made Dr. Who giddy, are primarily American in focus. For the main part, the world ends appears to end at the Atlantic and Pacific Oceans (Mexico and Canada are American off-shoots in any case). American exceptionalism extends to financial crises or it must seem to the reader.
The style of these books varies. The tone is mostly the desiccated drone (reminiscent of John Cage’s experimental work from the 1960s). Some are deliberately academic in tone to achieve the correct type of unreadability. One assumes that they are weapons deployed in the dawn duels between economic scholars.
“This Time is Different” is not wholly successful in condensing its stupefying density of data and facts into an accessible tract. The book favours the repetition of minimalist music. Aaron Brown (who authored a less than complimentary review in the Wilmott Magazine) noted that the book uses the word “inflation” 154 times, “default” 220 times and “crisis” 253 times. It also repeats the title phrase “This Time is Different” from time to time in a form of economic incantation.
“Freefall” reads like a 19th century pamphlet with equal measures of vitriol, self-righteousness and broad prescriptions. “13 Bankers” and “ECONned” are written intelligently with the non-technical layman, rather than the “econo-wonk”, in mind.
It seems that the global financial crisis is the economist’s moment in the sun. They are busily “solving” the problem, sometime with pet theories or, more often, rehashing old ones. Unsurprisingly, there have been spats between economists with allegiances to different camps. Most notable fights include Paul Krugman versus Stephen Roach, Martin Wolf versus Niall Ferguson etc. If Friedman had been alive, then it would have been Milton versus all comers. If Keynes had been alive, then the jousts would have at least been witty and cultured. No modern economist can touch Keynes and John Kenneth Galbraith for pungent wit.
Most economists, it seems, believe strongly in their own superior intelligence and take themselves far too seriously. In his open letter of 22 July 2001 to Joseph Stiglitz, Kenneth Rogoff identified this problem: “One of my favourite stories from that era is a lunch with you and our former colleague, Carl Shapiro, at which the two of you started discussing whether Paul Volcker merited your vote for a tenured appointment at Princeton. At one point, you turned to me and said, “Ken, you used to work for Volcker at the Fed. Tell me, is he really smart?” I responded something to the effect of “Well, he was arguably the greatest Federal Reserve Chairman of the twentieth century” To which you replied, “But is he smart like us?” Economists have delusions of adequacy and a related assured self-confidence that they bring to any problem.
Rogoff went on note that in one of Stiglitz’s books – “Globalisation and its Discontents“: “… I failed to detect a single instance where you, Joe Stiglitz, admit to having been even slightly wrong about a major real world problem. When the U.S. economy booms in the 1990s, you take some credit. But when anything goes wrong, it is because lesser mortals like Federal Reserve Chairman Greenspan or then-Treasury Secretary Rubin did not listen to your advice.” Rogoff concluded that Stiglitz was “… a towering genius. Like your fellow Nobel Prize winner, John Nash, you have a “beautiful mind.” As a policymaker, however, you were just a bit less impressive.”
Writing in his preface to Benjamin Graham’s “Intelligent Investor”, Warren Buffet observed that: “…not only does a sky-high IQ not guarantee success but it could also pose a danger…I therefore urge the relevant regulatory bodies of the United Studies and Canada to incorporate an IQ test into their securities licensing exams. … nobody would be allowed to work in the financial markets in any capacity with a score of 115 or higher. Finance is too important to be left to smart people.” One could add economics should definitely never be left to economists.
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“The authors’ remedy is to cap the size of banks as a percentage of the economy. This may not be effective without reform of campaign finance rules, restrictions on political appointees to many positions, reform of the central banking system and other measures.”
This statement is a bit vague. Do Kwak/Johnson say ‘this may not be effective without…’? Or does Das? Because if it’s the latter, it’s a bit odd how he went from ‘it’s a bit conspiracist’ to ‘this isn’t going to prevent them from capturing’. Also, it has been reported by others already how the big 5 lobbied in (iirc) 2004 for leverage cap removal for them alone, etc. (I think by Elizabeth Warren, among others).
There is no dichotomy between working together while lobbying and competing on other days; this is the essence of politics. (See Policy Paradox by D. Stone for a nice intro.)
And while the banks may not have been able to create such a big mess if there hadn’t been other problems as well, they certainly exacerbated the problem, and still are, by not lending to SMEs with their free money.
In summary, the tone of the article is a bit odd, or off, in a way I can’t quite put my finger on, but it feels unbalanced.
Wasn’t the big five banks, it was the five biggest investment banks (proving differences between players, at least then). And it’s been missed that the SEC really had no regulatory authority for regulating investment bank holding companies. So it allowed them higher leverage in return for somewhat more cooperation on holding company oversight. This may be bad negotiating as much as lobbying.
And I liked the writing style, it’s typically British/Commonwealth, wry and ironic.
Too bad Mr Das didn’t include Steve Keen’s “Debunking economics”.
Aww, that was harsh. BTW nice to know I wasn’t so mistaken years ago when I thought Yves was female, apparently some readers thought to set me right by saying that Yves was male. So females are allowed to be smart? then again, after reading Warren’s foreword…
re the Pope:
I remember driving around in the back areas of Pennsylvania around 1986 and listening to Larry Burkett’s “Your Money Matters” warn about the debt we were piling up as a culture, and that at some point there would be a day of reckoning.
At first I listened because it was the only station I could get, but his advice struck me as fairly sensible: work very hard to get out of debt.
It has been pretty sensible advice for some time.
http://www.christianitytoday.com/ct/2000/june12/2.44.html
My lesson learned from current debacle:
1. Economy is only slightly more advance than numerology and palm reading. Nothing more than keen human observation covered in mumbo jumbo and pretentious math. It works great until it doesn’t. They can’t even predict the price of basic supply or systemic budget collapse let alone able to tell the world quantitative direction of transaction and activities over time. Or if the model itself is accurate or dangerously wrong over time. Most are just self serving a-hole peddling nonsense. Pundits.
2. I want to see chinese style state capitalism vs wall st. duking it out. I got the feeling, free market dogma is about to be trashed permanently.
3. all over the world current form of economic activity leads to political corruption and market manipulation. No amount of “check and balance”, human discipline, justice system can stop corrosive human behavior of accumulating power at the expense of other. Not mention environmental destruction.
4. current form of so called “free market” is simply pointless endeavor of shuffling around largely fictive wealth. A scam. It doesn’t add or improve anything in meaningful way.
5. People are still hungry, insecure, prone to go to war, uncertain about future, … no global peace and prosperity, let alone progress. Very small number of people ends up doing what they really want.
I guess we’ll have to wait until dollar collapse or government default to see what will happen next. Maybe we’ll go medieval on each other while marveling how the system rebuild and repeat itself. Then go on pretending like it’s all suppose to work that way.
Re: free market dogma
Perhaps the free market has been trashed, but the dogma is what keeps the American peasants so happy.
I’d hope the dogma sticks around for awhile.
The IMF can’t ‘fix’ it, neither can any tweak. And conspiracies do happen. Adam Smith was very honest on that front, so is Norman Davies in his “History of Europe.” The fact the the mere word “conspiracy” is enough to render an argument supposedly ignorant and fantastical strongly suggests conspiring is rifer today than ever before.
This is a systemic issue. The system’s lubricant is money. Currently, money is created exclusively as debt, which means logically it is always scarce. This perpetual scarcity functions as the system’s heating or powering mechanism, which over time speeds the system up, resulting ultimately in rampant and pointless consumerism. In the heat of competition generated by this debt-created scarcity and in the economic battle over presumed scarce resources, the debt-to-wealth ratio steadily increases until the lubricant can no longer function. At some point the system breaks down. In the firesales that follow, the well-positioned – both politically and economically – do very well thank you very much, while the rest do very badly. That’s why the system isn’t getting changed at its roots. The elite love it. It keeps them elite.
We therefore have a lubricant with a finite and destructive lifespan, and which by design over-excites consumption, and necessitates perpetual growth. The way out of this is to redesign money from the ground up, and, once that is done, have a very close look at those old chestnuts ‘work’ and ‘value’, because, as I keep on saying, technological unemployment is going to present us with enormous challenges. And of course keep the planet’s ecosystems front and center. Should they change to the point humans can no longer thrive, no amount of money will be of any help.
Of the list, Professor Rajan and Yves seem closest to the truth to me. I must buy Rajan’s book (and recommend Econned heartily, by the way).
Toby,
I highly recommend adding Robert L. Heilbroner’s Behind the Veil of Economics to your reading list.
“Free market” is just the latest and most innovative tool of social domination and control. Humans moved from Traditional (primitive) to Command (Imperial) to Market (Capitalist) regimes as the preferred mechanisms for enforcing, as Heilbroner puts it, “the obedience or acquiescence necessary for the subordination of the individual to the social will.”
“Free market” or capitalist ideology is predicated on several assumptions, including:
1) The exchange relationship, which in “free market” mythology is touted as being “natural” and free of coercion
2) The “legitimation of acquisitive behavior as the social norm”
3) The promotion by the ruling class of conspicuous consumption, or what Robert Frank dubbed “Luxury Fever,” as the be all and end all of happiness and personal fulfillment.
4) The abrogation of morality.
I have had the privilege of living in Mexico and seeing it transition from more of a traditional-command society to more of a capitalist-consumerist society (the transition began before I arrived, and is still not complete as we speak). And I have also seen, with the help of social and cultural critics like Carlos Monsiváis, that the “free market” Utopia is a complete and total lie. The problem seems to be that “Luxury Fever” and the debt that comes hand and glove with it share a common trait with recreational drugs—-they are addictive.
I’ve come to two conclusions:
1) Too much consumerism = spiritual death
2) Too much debt = spiritual death
Das says of Rajan:
Bravely, he argues that the over borrowing that caused the problems was an entirely ‘rational’ response to a deeply flawed economic and financial system. He also identifies growing inequality as a theme in the problems. He argues that these “fault lines” are the real problems rather than a group of greedy bankers taking irrational risks.
Rajan’s use of the word “rational” immediately throws red flags up everywhere—-an indication that he is a victim of “free market” indoctrination, not surprising considering his former life as an IMF economist.
As Heilbroner points out:
[I]t is useful to recall that for all its historical association with freedom, market society—-i.e., capitalism—-does not appear as the spontaneous upwelling of a drive for individuation, but is at first imposed over earlier forms of social orchestration…. No one, reading of the manner in which dispossessed agricultural labor was forced into early English mills, would describe this as a manifestation of freedom working its way in history.
[….]
Since we have seen that the exchange system does not spring up spontaneously in human society, we cannot assert that the instinct for self-preservation, disguised as Smith’s drive to “better our condition,” is the direct cause of the market’s appearance. Rather, it seems more reasonable to accord to that instinct the energy needed to adapt ourselves to the psychological experiences and difficulties of the exchange confrontation, once it arises to accommodate the demands of the capitalist order. The same seems to be the case with rationality. We have no evidence from the long premarket history of mankind of any drive to express the particular kind of rationality expressed in the exchange of “equivalents.” As before, it seems more plausible that rational calculation becomes a mode of interaction in which we are driven after a market system has been established.
Modern-day economists are like the high priests of the medieval Church, a Church that held that the Earth is flat, that the sun revolves around Earth, and that the Earth was created by God only 5000 years ago. My hope is that modern neuroscience and some of the new instruments it employs will have the same effect on the discipline of economics as the telescope and the new theories advocated by the likes of Copernicus and Galileo had on the dogmas of the Church of the Dark Ages.
Das says of Rajan:
He argues that these “fault lines” are the real problems rather than a group of greedy bankers taking irrational risks.
The bankers are the ones who created the “fault lines” to begin with. Rajan seems to be sympathetic to the child who murders his parents and then complains he has no parents.
Modern-day economists also serve the same function as Medieval priests, which is to give moral and intellectual justification to the existing social order.
Nicely done, full marks, especially this last bit.
It has been my business experience that in leading people it is necessary to ask them to join with you in the accomplishment of your business goal. You must tell them in great detail what is that is desired and why it is desired.
You do not tell them how the desired result is to be achieved. If they join with you, it is the how that they bring to the enterprise. By granting them the autonomy in how the goals are achieved you establish a basis for accomplishment upon which can be rendered regconition in the form of money and status. As a leader it is extremely important to monitor how goals are being achieved. The first obligation is to ensure that the methods of how are moral and of the highest integrity.
People are driven to aglomeration into groups by a survival instinct. Their individual happiness and contentment is predicated on the satisfaction of their need for automomy, accomplishment and recognition.
Baseball is marvelous example of a game constructed to provide aglomeration (a team), autonomy (individual action and skill sets), accomplishment (in making the play); and recognition in winning. It taught me how to function in the business world. My father taught me how to view society and my fellow man. His over arching view was that literature of philosophy, sociology and especially political economy was a dialogue made from varying points of view wherein each point of view had certain merits and failings and that as yet, there had been no ultimate determination as to what construct worked the best. I was also taught that there is more to conduct that the letter of the law, there is that grey area of the spirit of the law. Just what does the law intend to proscribe.
If you are known to be an ethical businessman you will be able hold the loyality of customers and clients. If you are too smart by half you will ultimately come to grief.
This stream should have spent more time with ECONNED, it’s well written and very much to the point of what has gone wrong.
Siggy,
You might enjoy reading Jonathan Haidt’s The Happiness Hypothesis. You and he seem to very much be on the same page in many regards. He believes the key to happiness is to be found through love and work.
Fulfilling work is a function of “vital engagement,” he claims, which exists in the space between a person and his environment.
Getting the right relationship between you and your work is not exactly up to you, he claims, and he gives as an example a couple of occupations, one which provides vital engagement and another that doesn’t.
When doing good (doing high-quality work that produces something of use to others) matches up with doing well (achieving wealth and professional advancement), a field is healthy. Genetics, for example, is a healthy field because all parties involved respect and reward the very best science. Even though pharmaceutical companies and market forces were beginning to inject vast amounts of money into university research labs in the 1990s, the scientist whom Csikszentmihalyi, Gardner, and Damon interviewed did not believe they were being asked to lower their standards, cheat, lie, or sell their souls. Geneticists believed that their field was in a golden age in which excellent work brought great benefits to the general public, the pharmaceutical companies, the universities, and the scientists themselves.
Journalists, on the other hand, were in trouble. Most of them had gone into journalism with high ideals—-respect for the truth, a desire to make a difference in the world, and a firm belief that a free press is a crucial support of democracy. But by the 1990s, the decline of family-run newspapers and the rise of corporate media empires had converted American journalism into just another profit center where the only thing that mattered was will it sell, and will it outsell our competitors? Good journalism was sometimes bad for business. Scare stories, exaggeration, trumped up conflict, and sexual scandal, all cut up into tiny digestible pieces, were often more profitable. Many journalists who worked for these empires confessed to having a sense of being forced to sell out and violate their own moral standards. The world was unaligned, and they could not become vitally engaged in the larger but ignoble mission of gaining market share at any cost.
DS, thanks for more revelations from (and for the pursuit of) “Happiness”. Poor retention means I’ll have to read it again (ditto with ECONned).
The part about journalists’ dissatisfaction (many imperial cogs more deserving of empathy than anger), is also currently proving Siggy’s point: “If you are known to be an ethical businessman you will be able hold the loyality of customers and clients. If you are too smart by half you will ultimately come to grief.” Serving as stenographers for TPTB, cheerleaders for violent faux patriotism, and peddlers of distracting salacious trivia is proving a sandy foundation now crumbling for MSM, print at least.
I experienced similar demoralization in praticing landscape architecture the last decade for rapacious speculative developers (some mere “slumdividers”). During the feeding frenzy, even mediocre LAs or urbanists had to turn work away, and even quality projects were often compromised, ill-concieved, disjointed and wasteful, driven as they were by investor pressure fed by brokers and WS. Development has now completely crashed here, but doing garden design and small scale houses for inventive green builders, though not as billable, is a far more satisfying niche and better for the portfolio. The global finacial crisis will ultimately be better for all of us(I hope)
Down South
You are a bit harsh on the medieval church. As someone who was long ago a medievalist, I am confident it taught that the world was round (this had been known since Classical times):viz Dante’s journey where he goes in on one side of the world and out the other. And Copernicus was a priest!
Also your comments on its role as being to prop up the existing order is an over-simplication. Look at the conflicts between Church and State (the Popes and the Emperors, Becket and Henry II of England), and the teachings of St Francis of Asissi. One of the leaders of the Peasants Revolt was a priest. Also it was the Church which set up the universities.
As Oscar Wilde said, the truth is never simple and rarely pure!
It was most definitely not my intention to cast my lot with the New Atheists. I’m as critical of them as I am the radical religious right, as the two are merely the mirror image of each other.
But why do you deny the Church’s role in the Dark Ages “to prop up the existing order”? You cite the “conflicts between Church and State” as evidence. With this statement you simply brush aside 1500 years of European history, and toss American history into the trash heap as well. What do you believe the Enlightenment was, other than a battle against entrenched inherited privilege embodied in the church and in most branches of European royalty in collusion with each other? Need I mention anything more than “divine right” to debunk your denial?
The book The Virginia Statute for Religious Freedom: Its Evolution and Consequences in American History is a good starting point to correct your butchering of history. Have you ever heard of something called “separation of Church and State?”
James Madison posed the rhetorical question in his “Memorial”: What were the fruits of nearly fifteen centuries of collusion between state and religion? His Answer:
More or less, in all places, pride and indolence in the clergy, ignorance and servility in the laity, in both, superstition, bigotry, and persecution.
William C,
You also say: “And Copernicus was a priest!”
So what? Luther was too.
There are dissident economists today who are every bit as willing to defy the Vatican (Chicago School of Economics) as what Copernicus and Galileo were. And the current penalties are great, though not as great as heretics faced in the 16th and 17th centuries (the Chicago School of Economics doesn’t burn people at the stake, probably for no other reason than it lacks the power to do so).
Nicolaus Copernicus did not publish De revolutionibus orbium coelestium (On the Revolutions of the Celestial Spheres) near his death in 1543.
http://www.famous-scientists.net/Nicolaus-Copernicus.htm
And you seem to gloss over the fact that the Church censored Copernicus’ writings and prosecuted Galileo:
Galileo was found guilty, and the sentence of the Inquisition was in three essential parts:
• Galileo was found “vehemently suspect of heresy,” namely of having held the opinions that the Sun lies motionless at the centre of the universe, that the Earth is not at its centre and moves, and that one may hold and defend an opinion as probable after it has been declared contrary to Holy Scripture. He was required to “abjure, curse, and detest” those opinioion.
• He was originally ordered to be imprisoned, however, due to his advanced age (70 at the time of the trial), the sentence was later commuted to house arrest for the rest of his life.
• His offending Dialogue was banned; and in an action not announced at the trial, publication of any of his works was forbidden, including any he might write in the future.
http://www.infidels.org/library/historical/andrew_white/Chapter3.html
http://en.wikipedia.org/wiki/Galileo_affair
I dunno ….Galileo was, despite his science, a real jerk: quite rude to other people.
He may have been prosecuted in part for his attitude, not his science.
Down South
I did not deny it. I said it was an over-simplification
We are in close agreement DownSouth, and good catch on Rajan’s use of “rational.” However, within the framework, I welcome the observation. Were we to replace “rational” with “to be expected” or “predictable” we would be close to the mark.
I believe that too much debt and too much consumerism both arise from too much scarcity. Going forward we are going to have a problem dealing with the abundance/scarcity dichotomy, because capitalism thrives in conditions of scarcity (which inspires greed), while our technological and productive prowess, plus our new abilities in renewable energies, are offering us more and more abundance. We quickly have to learn how to deal with this maturely; right now we are children in a sweet shop. The tools and technical know-how for a very different social arrangement are there, only the wisdom and will are very sorely lacking.
I shall look into Heilbroner (I’ve been meaning to anyway). Just have to work through my current list first…
Interesting, but intellectuals are like economists, they seldom account for the average and below-average people.
It doesn’t much matter what the future economic system is IF it can’t keep the majority of the population “busy”.
As a non-fundamentalist athiest, there’s much to be said for the phrase: An idle mind is the devel’s workshop.
Agreed, and that’s one of the major challenges of the coming and present changes. I believe humanity can meet them, but it will require, particularly with regards to keeping people “busy” (I prefer to say teaching them — or us all — to have fulfilling lives) a deep revolution in education. Sir Ken Robinson is currently making waves in that department, as is John Taylor Gatto. Check them out.
The way I see it, we don’t need a 9-5 job to feel useful. Mostly those jobs are crap anyway. Schools batch-produce humans for factory work by design, drilling obedience into us via mindless rote learning. That shit has to go, if we are to cope with what’s coming down the pipe.
The paradigm change we are going through will change everything, not just the excuse for economics we suffer from today. I believe ultimately the nation state will go too, though that will take a very long time indeed. (I don’t want a monolith world-government by the way. More a “governmentless” world, but space does not permit me to expand on that here. Besides, that possible outcome is also way in the future.)
Hi Toby,
I nearly chocked on my pecan danish when I read ‘That shit has to go, if we are to cope with what’s coming down the pipe.’ Lucky for me I have a working gag reflex!
I’ll call 2nite, are you about?
A comprehension of “Extraordinary Popular Delusions and the Madness of Crowds” by Charles Mackay & “Confusion de Confusiones” by Joseph de la Vega will give all an excellent insight to economics and economists and those foolish enough to follow their advice. “In economics the majority is always wrong” JK Galbraith.
Many economists forecast upcoming events…so do weather commentators on upcoming weather
Many economists hold forth on daily economic activity…so do weather commentators on current conditions
Many economists discuss what has happend after the fact…so do weather commentators after the weather event
Dr Gray (or is it Grey?) famously predicts the intensity and number of hurricanes that will be produced by the next hurricane season. He has the best data available and an army of pros and undergrads to crunch the numbers. Dr Gray has been correct in his forecasts about 50% of the time…anyone tossing a coin could equal his record.
As Taleb points out in ‘The Black Swan’, when any pro in any field guesses correctly it is a flocking miracle…but in hindsight it appears to all that the outcome was obvious. The contradiction is because of our bias when examining past events. Read the book.
One more from John Kenneth Galbraith: “In economics, hope and faith coexist with great scientific pretension and also a deep desire for respectability.”
Beyond the wonderful certainly that mathematics hold exists as Darwin noticed a great scramble that produces a diversity beyond what our human minds cannot comprehend. Economists and the rest of the financial engineering crowd are definitely part of the great scramble and no government or elite social appointment will ever change that status.
Re: The contradiction is because of our bias when examining past events
and the human desire to worship our/any glorious leaders.
Dude, I knew that guy, dude. Dude, no way?! Dude, like me-n-him, way back dude. Dude…
The real problem with all of these books is that they were written by economists, which is to say people trained in the belief that economics is in some respect an internally coherent, logical discipline instead of what it is, which is basically a cargo cult (or a number of different cargo cults, if you want to be picky).
Outside economics, other disciplines have ben writing about the basic instability of globalizing capitalism for some time – have you read Geographer Adam Tickell’s (2000) Dangerous derivatives: controlling and creating risks in international money, Geoforum 31: 87 –99, for instance? No? Then you should, but if you’re an economist you probably won’t because you think that the other social sciences are inferior to your ‘product’ and you look down on them.
The fact of the matter is that all bar a few economists are geographically, sociologically, historically and anthropologically ignorant to a quite shameful degree, and economics as a discipline has locked itself into a sealed chamber (intellectually speaking) from which it has neither the tools or the humility to escape. Plus there’s a lot of money to be made developing a career peddling Friedman’s meretricious trash as if it were ‘science’…
I suggest you take care with your accuracy. Pozen is not an economist, and neither am I.
Jon, Das does leave that impression:
“Economists have begun to hold forth on the problems…A key characteristic of the emerging tidal wave of books is the fact that almost everyone saw the writing on the wall, predicted the crisis and now moreover have solutions that can ensure that this was the crisis to end all crises.”
…and he makes your point about ivory-tower economists, “Most economists, it seems, believe strongly in their own superior intelligence and take themselves far too seriously.” As you note, rather than their time in the sun, most of them ought to be wishing the Earth to swallow them to cover their nakedness.
Perhaps because she is not an economist (maybe an anti-economist?), Yves’ “ECONNED” is at least one exception. There is no hindsight boasting and little in the way of doctrinaire prescriptions. My impression is that it suggests that rather than the thoroughly-discredited pseudo-science calculus of the current rigged market (neoclassical ideology), economics is best approached as a social science (which you reference) using purposeful, measured experimentation.
IMO, we need exactly that kind of approach now, like FDR’s “persistent experimentation” —always with healthy society and broadly-shared commonwealth as the yardstick goals.
Most of the criticism of economists of late seems far too focused on the delusional notion that the role of economists has something to do with serving those who provide no demand whatsoever for economics. The investment-class provides the only significant demand for economics. So if economists are perceived as being providers of a service, much the same as any other vocation that provides a service to a consumer sect, such as a yacht builders for example, economists are far, far, more proficient than they have been getting credit for being. The investment-class has suffered very little compared to those who have no influence regarding the prominence and success of economists, and, considering culpability, it is a remarkable achievement that those who caused the recent crisis have remained relatively unscathed… while those who provide no demand for economics have, innocently, been punished the most. So… when it comes to providing a service to those who are willing to provide rewards for that service, a problematic sect too with a pattern for irresponsible behavior, it seems that economists have been too critical of each-other. Perhaps humility has obscured honesty.
Has anyone found books or articles that detail the european angle? I’m thinking on Hype RE in Germany, as well as the Landesbanks and their SIVs, perhaps the ABN Ambro deal, and the problems at Dexia and Fortis?
And what of the Japanese angle? Why are there no references to Japanese economists that have dissected their meltdown and lost decade – which we may now be emulating?
There have been some references, most notably probably Richard Koo’s “Balance Sheet Recession: Japan’s Struggle with Uncharted Economics and its Global Implications”
Das is reviewing new books (if you’ve been reading here, he’s been reviewing them for quite a while). Koo’s book, IIRC, was published in 2004. Debunking Economics is 2002. I do make mention of the Japanese bubble (and the fact that the authorities deliberately chose to stoke it, trying to create a wealth effect to boost consumption, a fact not appreciated sufficiently) and its aftermath.
Too bad the British Empire fell, the British Commonwealth of Nations offers little more substance that the hair club for men, and unfortunately, with our Air Craft Carrier fleets spread around all of the oceans of the world, along with our Marines, US Infantry and assorted AF satellites, the world does not end at the Atlantic and Pacific shore lines, but American Civilization shines like the sun on a clear day and like the stars on a clear night. Pray for rain. And fewer Brit reviews. I mean, really, they still bow to Queens there.
Not that I disagree, but perhaps prudence would remind that pride goeth before a fall: and boasting ill becomes the virtuous.
It seems to me that it is the political and regulatory system that is broken. Yet, as Das points out many economists focus on regulatory reform without tackling political reform. Maybe they don’t feel qualified to do so, but as citizens, shouldn’t we all consider ourselves so qualified?
This is how the oligarchs have won – they have marginalized and sidelined everyone that seeks any real change. So much so that many good and reasonable people(TM) will not even bring up the question of a political reform for fear of being seen as “radical” or “extremist.” Naturally, the unwillingness of “experts” to seek political change inherently supports the current system and helps to marginalize ordinary people that believe that they system is unfair.
The knee-jerk “government is bad” meme is the most asinine thing fostered on the people. Responsive government and prudent regulation is supposed to protect us. But the oligarchs have “ECONNED” many into believing that government is inherently bad as a means of short-circuiting reform of a political system that actually works for the oligarchs.
Re: many into believing that government is inherently bad as a means of short-circuiting reform of a political system that actually works for the oligarchs
Assuming that the really smart amoral scumbags will ALWAYS sniff out the largest pile of loot to steal, that means – once government becomes itself the largest pile of loot then all the smart amoral scumbags will be IN government.
This means all large organizations will work for the benefit of the smartest amoral scumbag and can only be “changed for the better” if they happen to collaspe.
Hasn’t the government already become the the largest pile of loot? They give tobacco companies a license to kill, bailout bankers, direct lucrative defense contracts to favored contracts (look what’s happening with the tanker contract), limit oil spill liabilities, complain of not having resources to tackle fraudulent activities like medicaid and mortgage fraud, etc.
I’m not advocating that government be any bigger than it needs to be, but it should be a check against the amoral scumbags and it is NOT.
The problems that allowed the financial system to nearly melt down are not very different from that which allowed tobacco companies to kill, BP to get around regulations and ignore possible safeguards, and many other lapses. Industry and industry executives play fast and loose with our well being every day but many who *could* speak out are too cowered or complicit to draw the parallels.
I applaud those who push for sensible reform. But every reform issue is seen as isolated, instead of symptomatic of a larger issue. Every few years we learn of a new disaster of political scandal, regulatory failure, and greed. So NOW people are angry and they want to vote the bums out. Thats great, but it doesn’t change the political system that allows for bad behavior. We’ll get some good/better politicians for a short time, we’ll return to “business as usual” just as soon as people stop paying attention.
FYI
I have previously suggested the following reforms:
1. Reduce the advantage of money in elections
Distribute 25% of all money raised to other candidates. This probably requires a 2-step process to weed out weak candidates. This would mean both more choice and a better airing of issues during elections.
2. Reduce the power of senior Congressman
Make seniority only one of several factors that qualify a candidate for a leadership position. Rotate positions (as randomly as possible). This would reduce the ability of senior Congressmen to ensure their election by raising gobs of money by catering to corporations and other wealthy interests
I’m sure there are many other possible ways to reduce the hold of “special interests.” But these seem more sensible than repealing direct election of Senators and less radical than some other suggestions.
Oh, and one more thing…
The smart amoral scumbags are really good at taking the public anger and dissatisfaction and turning it to their advantage. Consider:
Irag
Tax cuts
The economy’s doing well? Lets return $ to people with a tax cut. The economy’s doing poorly: we need a tax cut to spur investment.
Financial regulatory reform
The implicit role of government to bailout big banks to safeguard the economy will now become explicit policy.
Proposed repeal of direct election of Senators
That will only make the matter worse. Better to abolish the Senate as recently proposed by The Onion. Yes we are back to court jesters (The Onion, Jon Stewart) as agents of change.
“But is he smart like us?” Smart people are so easily manipulated by appealing to their pride in being smart. They sometimes end up being most stupid of all.
““But is he smart like us?” Smart people are so easily manipulated by appealing to their pride in being smart. They sometimes end up being most stupid of all.”
You are close… They are not ‘stupid’. They are simply not ‘street smart’ so they easily fall for compliments and hollow awards.
For instance; the first thing a competent salesman attempts with a new potential customer is a series of innocent sounding queries which 99.9% of customers will agree to. The object is to get the customer agreeing or saying ‘yes’ to the series of queries. Mixed in with the queries the salesman adds a dash of compliments. Voila! Salesman nears the closing because the unwary customer now perceives the salesman as ‘being on my side’. Economists are as prone to fall to these tactics as an unwary customer. Being intelligent is not enough to avoid pitfalls…a dash of street smart is necessary. Answer NO to some of the salesman’s queries even if you believe really believe YES is a more accurate response. Never be predictable unless you want to be an easy mark.
The smarter ain’t necessarily the wiser.
Never did like the word “smart”. All the liberals complaining about Bush not being “smart”. Perhaps not all that intellegent, but he was definately smart.
You don’t get the top of the largest organized scam in the world being stupid.
Can Mr Das or anyone who is dismissing the bankers as the cause of this crisis/making politicians theur puppets, care to name the stockholders of federal reserve bank of US? Are they not the beneficiaries of the TARP? There were billions created out of thin air and went to ” capitalize” these bankers ( fancy term for covering their bets gone wrong) and also them reaping enormous personal profits. This of course will be paid for by each and every person ( and their kid and grandkid)on this planet in form of inflation ( which by the way we can debate till we get blue in the face vs deflation )
I am bitterly amused at the terms capital injection/TARP/PDCFF etcetera ( all jargon for PRINT MO MONEY)
“One could add economics should definitely never be left to economists.”
I’m willing to let economists have economics. Policy-making and policy advice, not so much.
Saty Das, or Gupta, or whatever, sounds like a complete and total twit.
So, the twit believes everyone is spouting conspiracy theories and no one is ever convicted of criminal conspiracies??
Knows as much about law and legal history as twit does about economics.
With the one exception of ECONNED, none of the books he reviews are really worth reviewing: e.g., 13 Bankers, where Simon Johnson — the clown from IMF — and Kwak — the clown from McKinsey — seek to reinvent themselves and hope that you, dear reader, ignore that they are writing about a very stale subject which they aided in bringing about.
Now, if Goldman Sachs, Morgan Stanley and the oil cartel (as in BP, Royal Dutch/Shell, Total, etc.) own all the climate exchanges (not to mention ICE, ICE Futures, ICE Europe, etc.), then I would begin to wonder about those carbon derivatives Blythe Masters is slaving away upon (remember her credit default swap concept???).
Yup, no criminal conspiracies out there (except in a multitude of court and criminal records) just them there conspiracy theorists.
Say, is Saty Das Gupta still under British rule.
be honest the whole thing is a bit risky – you got £10, i’ll lend you a £1000 based on that. How about you spend that £1000 on some gilts, you can have a £100,000. Great now you’ve got £100,000 how about you buy some ADR’s and a bit of a loan, pay back a £10 a month and hope no one figures it out, i.e. the bloke working at the bank of england, happy as larry, sold all the gilts (!) The chap at the big bank, over the moon, huge balance sheet. Happy investors, lots of tax, great house prices
Don’t know about conspiracys, but if someone lent you £100,000 for a tenner a month are you really going to say no.
The whole thing works perfectly on paper.