By Cathy O’Neil, a data scientist who lives in New York City and writes at mathbabe.org
A bit more than a week ago I went to a panel discussion at the Met about the global financial crisis. The panel consisted of Paul Krugman, Edmund Phelps, Jeffrey Sachs, and George Soros. They were each given 15 minutes to talk about what they thought about the Eurocrisis, especially Greece, the U.S., and whatever else they felt like.
It was well worth the $25 admission fee, but maybe not for the reason I would have thought when I went. I ended up deciding something I’ve suspected before. Namely, economists don’t understand the financial system, and moreover they don’t get that they don’t get it. Let me explain my reasoning.
The panelists all were pretty left-leaning guys, and each of them talked about how the U.S. government should stimulate the economy in one way or another. Krugman kept saying that hey, this isn’t too hard, we’ve seen financial crises before, and this is no different: we should immediately pass a massive stimulus package, that’s the one and only thing that we should be discussing. Sachs was very consistently saying we should do something else: namely, start planning long-term for the future. He focused on the percent of tax dollars going into infrastructure and basic education and research. Phelps also wanted stimulus, but he consistently referred to his own economic models in how exactly it should work. I didn’t completely follow his train of thought.
Soros was the most interesting of the four, in my opinion. He started by saying that we should all acknowledge that, as nice as it would be to think we can model the economy and feel control over the situation, this is a pipe dream and we should get used to not really knowing what will happen when we do one thing versus another. He suggested that we should instead work together to develop a theory, or perhaps even an philosophy, that assumes uncertainty itself. He ended by saying that, even with the three colleagues on the panel with him, who are essentially all united in thinking we need to be proactive, his ideas are essentially being ignored.
The rest of the evening essentially consisted of everyone ignoring Soros and arguing about how Keynesian they all were and how exactly different kinds of stimulus would work and which way they should use 2% of GDP to jumpstart the world’s economy. So basically exactly what Soros said would happen.
It got me more and more riled up. Here are these expert economists, two of whom have Nobel Prizes and the third who runs the Earth Institute at Columbia and is considered a huge swinging dick in his own right, and they don’t seem to acknowledge how much power they actually have over the situation (specifically, not much). For that matter, they clearly don’t know the nitty gritty of the financial system. To listen to them, all you need to do is spread a thick paste of money on the system and it would revive whole cloth. Soros is the exception, probably for the reason that he actually traded and made money inside the system.
At the end I asked a question, since they allowed a few questions, and as you know I’m not shy. I asked how we are going to make the system simple enough to actually make it possible to regulate it. Krugman basically said that Dodd-Frank is going to do it. My conclusion from that is that Krugman must really have only an outline in his head of how this stuff works- the devil, as we know, is really in the detail, and I’m too acquainted with the Volcker Rule’s list of exemptions to have a lot of hope on this score. To be fair, Phelps mentioned Amar Bhide’s book A Call for Judgment, which I’m reading and seems pretty good and at least addresses this exact issue head-on.
Overall, the evening brought me back to the credit crisis, and working at D.E. Shaw, when Larry Summers was consistently quoted at the firm as saying that the “magical liquidity fairy” needed to come and “spread some magical liquidity dust” in the markets to make everything better. No, I’m not kidding.
What I felt then and what I still feel is that these super influential economists are so high on their clean, simple economic models of the world (about the only variables of which are GDP, stimulus, and tax rates) that they focus on the model to the exclusion of the secondary issues. Sometimes you get important results this way: simplifying models can be really useful. But sometimes it’s really truly misleading to do so, and I believe this is one of those cases.
I’m left thinking that they (the economists) are so entranced with their simplified world view that still don’t understand what actually fucked up the world in 2007 and 2008, namely the CDO market’s implosion. Message to Krugman: this is not exactly like other financial crises, because it’s partly caused by complexity, and nobody seems to have the balls to fix it. The problem is that the financial system has been allowed to get so complicated and so rigged in favor of the people with information, that normal people, including homeowners, credit card users, politicians, and regulators have been left in the dark, and many of the little guys are still stuck in ludicrous contracts left over from the outrageous securitizations that took place in the CDO market.
What is especially enraging is how these same economists are still the experts that people turn to to help figure out how to get out of this mess, when they don’t actually understand the mess itself. Why else would a large audience be willing to pay $25 a piece to hear them talk about this? Why else would Obama be considering Larry Summers to lead the World Bank?
As an aside: please, Mr. President, do not let Summers lead the World Bank. He does not understand the system well enough to lead it. And he is too arrogant to admit what he doesn’t know. I can introduce you to a bunch of people that may be less imposing but are more informed, more ethical, and wiser. Give me a call any time and we can chat and form a short list of candidates.
By the way, I’m not saying we shouldn’t have a major stimulus, or that we shouldn’t do longer term planning and invest more in infrastructure. I think we should do both. But I also think those efforts will be futile unless we enforce a basic system that is simple enough to be regulated. Otherwise we will be reliving this entire ordeal in another 15 years.
excellent post, one of the best ever on this site. nice to see someone put
krugman in perspective.
Why are we bogged down with these theoretical economists instead of looking at the ACTUAL problem: looters of our economy (bankers, speculators, hedge fund managers) paying off — read that, political bribes — the politicians who write the laws (or FAIL to write the laws) and fail to push for jail time for the offenders. (Aside from the fact that THEY are part of the offenders!)
Political corruption will bury us if we don’t force public funding of campaigns. I want these jokers working for ME, not them.
Agreed. Top Notch.
Funny that you, and Ms. O’Neil, think you’re telling Krugman off. Krugman said ‘make banking boring again’ a long time ago http://www.nytimes.com/2009/04/10/opinion/10krugman.html
So all Ms. O’Neil is saying is Krugman is correct. And, of course, her statement “Message to Krugman: this is not exactly like other financial crises, because it’s partly caused by complexity, and nobody seems to have the balls to fix it.”
Well, sorry, Krugman was there years ago.
Coming out in 2009 and making a statement re faulty bank regulation isn’t exactly prescient.
..the “Dune”-Frank Herbert chaos theory espoused by Soros….Krugman’s book
discussed how Soros played the British Pound to his wealth…
but I find Soros’ concept relevant. However, “chaos” is indeed manipulated by “HFT”=high frequency trading, computer generated…at the top, of course, where “control” is SUPPOSED to exist..
One importand thing to understand is that in this very sophisticated electronic age the financial parasites are highly adaptable. If you change the rules they will mutate like a virus and still take advantage of the system. As long as they are allowed to keep what they kill there will be a slaughter. Adversely low tax rates give way to unbridled greed. Adversely low interest rates give way to speculative bubbles and military expansion. In the end though it’s all about the love of money. The root of all evil. Some things never change.
Very good. Yes, good to see Krugman put in the perspective that he should be put in. It runs quite deep if you read his work on how debt is generated in the economy. He really does have a nice, clean, self-equilibrating view of how the capitalist system works. To say that he ‘doesn’t get it’, while it may be heresy on the left, is completely true.
As for this:
“He suggested that we should instead work together to develop a theory, or perhaps even an philosophy, that assumes uncertainty itself. He ended by saying that, even with the three colleagues on the panel with him, who are essentially all united in thinking we need to be proactive, his ideas are essentially being ignored.”
I think this is largely the nub of the issue. If they took Soros seriously they’d begin to see the system for what it is. And that would make them very disoriented altogether.
Uncertainty is unnerving, and it’s the rare person who can tolerate very much of it. And the anxiety it produces makes people prey to false ideologies (like neoclassical economics).
Which makes it all the more frustrating when economists fail to admit they don’t actually understand the system they’re supposed to manage.
It’s notable that Soros, a trader, is the one who sees the problems most clearly and speaks most eloquently. And he poses the most interesting question: what would happen if we were humble enough to actually admit how little we know? For some people, that’s scarier than being wrong.
Uncertainty is truly the key to wisdom. I began to learn this, and to love Prof Richard Feynman, when I heard his famous quote:
“I would rather live with uncertainty than with answers that are wrong.”
It applies everywhere — if you are on the path of searching for the truth.
“I would rather live with uncertainty than with answers that are wrong.” JurisV
Even God does not claim to have all the answers and He should know!
A bit of humility does us all good…
“What gets us into trouble is not what we don’t know. It’s what we know for sure that just ain’t so.”…Mark Twain
The key word in your comment is “manage”. That’s what Krugman, Sachs, Summers, Obama, Democrats et. al. are doing with their “theories” and “policies”. They are attempting to manage the problem, not fix it. Fixing it would begin by acknowledging that grand theft is taking place, pure and simple. Yes, crooks, crooks, and more crooks which as Hugh says, is a feature, not a bug. Until lots of people go to jail, nothing much will happen nationally. And a bunch of people need to acknowledge that capitalism sucks.
So all we can do is try devolution or working locally as Occupy is doing with foreclosed homes, etc. Of course, even that is backfiring as witnessed by the Supreme Court probably going to put the kabash on Montana in its attempt to take care of its own corruption problems. We have a very high voter turnout here in Montana. In my county alone, usually almost 90% turnout. But that will change when the corporations once more will dominate. From the NY Times Opinion page today:
“In states where a corporate spending ban is in place, contributions from individuals represent about half of funds raised by candidates. In states that permit unlimited corporate spending, contributions from individuals are about a quarter of the funds raised. ” http://www.nytimes.com/2012/02/29/opinion/undermining-state-campaign-laws.html?ref=opinion
Not that voting and the whole electoral process isn’t one big kabuki piece. I’m not sure if election reform is even the answer if we are still stuck with this really bad way of organizing our lives with its emphasis on making stuff over emphasizing nurturing humans and their environs.
Practice “confusion”…operating in a confused state…possible in real world…
certain sort of “education”…
The human mind is the freely roaming ghost in the economic model machine.
Cathy and Philip, thank you very much for beginning this dialogue.
I have been reading political economy and writing about it for four years now, getting up to 1,000 pages, and pay attention to what Soros has written, among many others. Here are a few thoughts:
The left in economics, and it is true of the broader left in politics, don’t have their “texts” and by that I mean don’t have a coherent explanation of the poltical economy. The Right in economics has its Hayek, and the popular version is Ayn Rand’s work. As Thomas Frank has pointed out, the most remarkable thing about the impact of the financial crisis has been the ability of the broad Right to evade the implications for their economic world view – and to maintain Hayek’s market centric dominance despite its obvious disastrous collapse – and to shift gears smoothly into balanced budget austerity and the furtherance, esp. in Europe, of the neoliberal project of dismantling what remains of the welfare state and “social democracy.” (And that is the way Mitt Romney frames it up too.)
On the left, we have had no one work to match the diagnosis offered by Kenyes’ “General Theory.” Government intervention in the form of “stimulus” was taken off the shelf as a form of “emergency room” treatment, to be put aside just as soon as the patient was breathing more regularly; it was not re-invented or re-invigorated in any meaningful sense to serve as a new guide for a revitilzed philosophy of Social Democracy, despite the broad and beckoning vista to do so offered by a new alternative energy economy and infrastructure, esp. including energy efficiency measures for tens of millions of homes, businesses and apartment buildings. Naomi Klein rightly saw, weighed the promise – and the threat- this direction posed to the Right – in her essay “Capitalism vs the Climate.”
What’s fascinating about Soros is that his theory of reflexivity is really centered upon the central fact of “uncertainty” in financial markets (all markets?) – but this was also a crucial term and concept for both Hayek and Keynes in facing the choices when markets broadly collapsed, and Nicholas Wapshott has done a pretty good job for the general reader in framing this up in his latest book, subtilted “The Clash That Defined Modern Economics.”
Let’s put that term to work in the current political economy debate. No one proclaims “uncertainty” more loudly that the business community lobbyists in Washington, and the Republican Party, who say its the gov’t created “uncertainty” that is preventing there future investments. The left says its the absence of demand and its future prospect at the core of the problem. Yet that “uncertainty” has a deeper philosophical meaning for the Right, based on Hayeks views of markets and the inability for any type of Keynesian planning or intervention to successfully plumb all the uncertainty. Business commentators in Washington have almost proudly said, no New Deal, green New Deal, we don’t know where the “free markets” will take us, nobody does, and that’s preferable to any conscious new social democratic direction that the “left” (hah!) might come up with.
So in that sense, Soros is echoing Hayek and reinforcing one of the major premises of neoliberal economics, whether he intends it or not. I have written that the best we can hope for is that this uncertainty worshipping remainder of the “market fundamentalist” view would concede their troubles based on the disaster, and allow a New Deal experimental period to put people back to work on a large scale to proceed…and the outlines,with more complexity of course were given by Roubini et al in “The Way Forward…”
But the Right is not going to allow this to happen, and the centrists like Obama aren’t pushing for a robust enough version to make a difference. Too much of the Center shares the view of the Right on the “self-healing” qualities of even badly damaged market systems.
No wonder we don’t have a concensus.
Keynes got this exactly right eighty odd years ago. Uncertainty means the “private sector” cannot be trusted to maintain full employment, and without full employment social relations degerate and debt slavery provides the only equilibrium. Of course, government cannot be trusted either, because those in charge are nearly as preoccupied with their own aggrandizement and looting strategies as todays CEOs and hedgies. But this is just another way of saying that no “economic” solution is reliable. The devil is always in the details. The one group who absolutely cannot be trusted is academic economists all of whom have proved themselves a toadying class. Why are we still hearing from the same id**ots who created this mess? Because none of them has lost an iota of power.
Has anyone else had posts including the word id**ts consistently rejected? When did this become a more objectionalbe word than f**k?
It’s a tragedy for the American people, and Europe, that Keynes emphasis on putting people back to work, on solving the unemployment crisis has been lost, both in the economics profession, but also, most tragically, within the Democratic Party itself (and notice the intellectual bankruptcy in alternatives on the European left too). It’s a long story, but that approach was lost during the 1970s…and the Clinton era gave the illusion that other levers of economic direction, esp. deregulation of finance, could be substituted to do the job of more direct and robust employment policies. I like the work being done by Randall Wray, Marshall Auerback and others for a public employment program; they are winning arguments at the technical objection levels inside academe, and deserve more public coverage…and they’re getting some here at Yves site.
Important as the focus on unemployment it is, as the paper “The Way Forward” makes clear, we have other deep problems as well, the nature and power of the financial system centered around the giant banks is a political problem as well as an economic one, and the illusions of “free trade” under globalization have led to the German and Chinese centered difficulties.
The nature of our new financial instruments is a problem in itself: too abstract, too opaque and too willing to disguise gambling under all the various ruses called “hedging” ( Frank Partnoy did a wondeful job of exposing this tendency in “Infectious Greed” way back in 2003 and updated in 2009.) Even very bright economists who saw troubles in the housing bubble early – I’m thinking of Robert Shiller and Dean Baker – deny that the nature of the derivatives world is part of the problem, and Shiller is trying to come up with new complexities for a futures market in housing prices! I find that incredible, but it’s an indication of the tenacity of the faith in market instruments, which do have more than a touch of religious fervor, still, about them.
Consider that the lack of consensus is a consequence of the debate surrounding the theory of rapid global climate change. Everybody is standing on the sidelines waiting for the game to begin. If we believe the climate change theory, and listen to Bill McKibben and Lester Brown and all, we should undertake a Manhattan Project to transform the global economy as rapidly as possible, to use clean energy, and to consume natural resources as sparingly as possible. But if we decide, as a matter of public policy, that we don’t believe the climate change theorists, then we can burn coal and oil as fast as we can extract it from the ground, and let the incumbent smoke-belching industrial economy play itself out.
In today’s links there is a link to an interview with Lester Brown. He said “…I’m really bullish on the potential for cutting carbon emissions, and I don’t think the analysts have picked up on this yet, partly because they deal with economic models — so they miss some social trends…” It seems that many, if not most, economic models these days fail to adquately internalize environmental costs.
The economic models can’t anticipate the future accurately because we humans are free agents, and we act unpredictably. And a whole bunch of us want to avoid wrecking the planet with our current economy’s need to consume and grow. So perhaps the answer is to establish a goal, through public policy, toward which we can strive, as we did for President Kennedy’s space program. The economics would fall into place as we begin to work toward that goal.
For example, currently our economic decisions for generating electricity are based on the lowest cost fuel, which is coal. But if our criterion were to change, so that we choose the cleanest method, despite the higher cost, we would begin to move in the desired direction, and work out the economic consequences as we go. If we believe the climate change theory and science, we can’t wait for a theoretical invisible hand to deliver the solutions we need. We need to deliberately engineer the solutions, including the financial aspects of the problem.
Instead of trying to decide what to do, like solving the existential dilemma for one’s personal life, we seem to only tweak the current system, to try to coax new jobs into existence, regardless of what type of jobs they may be. With strong leadership, perhaps we could arrive at a consensus about what we should be doing. After we decide what we’re going to do, everybody can get off the sidelines and get onto the playing field and go to work.
“…currently our economic decisions for generating electricity are based on the lowest cost fuel, which is coal. But if our criterion were to change, so that we choose the cleanest method, despite the higher cost, we would begin to move in the desired direction..”
Alas, Citizen, neo-classical economists will never be able to help us find “the cleanest methods” of producing energy (or anything else) as long as they ignore the real costs of production to the eco-system. They don’t even acknowledge that the economy is a sub-system within the ecology.
Coal is NOT the lowest cost fuel if its environmental externalities are factored in. A recent study by Muller, Mendelsohn and Nordhaus attempts to assess the cost-benefit of all industrial sectors by constructing a framework to include environmental externalities in national system of accounts. Their conclusion:
“The largest contributor to external costs is coal-fired electric generation, whose damages range from 0.8 to 5.6 times value added.”
— Environmental Accounting for Pollution in the United States Economy.
American Economic Review, August 2011
That’s what I’m talking about, Justicia. If the externalities were factored into present costs, various renewable technologies would rapidly emerge as far more sustainable and cost-effective for the long term. (I know of a retailer selling photovoltaic modules for less than $1 per watt, before shipping and installation. I bought one less than four years ago at over $4 per watt.)
I’m reading a good treatment of the subject of externalities, and other planet-friendly aspects of economics, in “What’s the Economy For, Anyway?”, by John de Graaf and David Batker. From the dustjacket: “…De Graaf and Batker …offer ideas for capitalism with a human face — a new economic paradigm that meets the real needs of people and the planet…”
I don’t expect the utility companies to change the way they do things. But there is a better way, and there is a market for a better way, and as the new way gains market dominance, the old way will disappear. The question is: will it be soon enough?
Dave, u say:
“For example, currently our economic decisions for generating electricity are based on the lowest cost fuel, which is coal. But if our criterion were to change, so that we choose the cleanest method, despite the higher cost, we would begin to move in the desired direction, and work out the economic consequences as we go.”
Tell me please how long will it take to get used to using power only when the wind blows or the sun shines? Might get pretty tough in the winter months anyway. And don’t tell me natural gas is any less harmful to the environment than coal.
Utility scale solar thermal plants are using molten salt to extend generating capacity into the evening through peak demand time. There is at least one such plant in Europe, and one planned for construction in California. Various storage options have been in development, including capacitors and flywheels (the new Porsche 911 uses a flywheel instead of a battery). We will continue to use coal and gas and nuclear until we don’t need them anymore. If it were your job to make it happen, you’d find a way to make it happen, right?
one month ago or so, right here on Yves’ “links”, was a story describing Germany having gone over to 30% new tech-renewable energy. Housing-building energy demands are first culprit, and a whole host of new tech exists
to the better…
meat production is second energy demand…when including related ag…
third is transportation…again, which can be accomplished without fossil fuel burning.
When asked how Germany has come so far, so fast, compared to U.S., the spokesman interviewed answered, “German political campaigns are publicly financed..”
As one who saw through the b.s. of economics many years ago and got a productive job as an engineer, citizendave is wrong on coal being the cheapest way to generate electricity. Natural gas is causing many coal plants to become uneconomic (without considering externalities). Coal will still be mined but not used in the US; much coal will be shipped to India and China.
At $3.50/mmbtu for natural gas (projections are for under $5/mmbtu for 10 years), a combined cycle plant (ccp) can generate at about $35/MWH which is on a par with coal. Adding in capital costs of about $20/MWH for natural gas plant, coal will be/is more expensive after the capital costs for required pollution controls are factored in.
Natural gas ccp plants have a huge plus that coal plants do not – they can load follow. A coal plant runs only in base load mode while ccp plant can follow load fluctuations and fill in generation holes that wind and solar create. The best load following is hydro but that resource has been almost 100% developed in the US.
As the subsidies for renewable disappear (the only good thing Republicans have done), renewables will be priced closer to cost and not what the market will bear. E.G. the same wind energy that we purchased in 2003 is going for double today (subsidies included then and now) even though costs have not greatly increased.
As an aside, electricity projects should be measured in energy (MWH) and not in capacity (MW). A 1000 MW wind project will generate the same amount of electricity as a 250-300 MW combined cycle plant.
Heresy, thanks for the update. I was paying close attention until about two years ago, when my employment situation changed. Domestic coal in the US has been cheap and plentiful for a long time. But we’ve been hearing a lot about new sources of natural gas, particularly from fracking.
Another thing that bothers me is that all three major fuels (coal, natural gas, and nuclear) used for utility-scale power plants discard two thirds of the heat generated. Like there is no tomorrow. Two new coal plants in these parts discard their heat into a big lake, returning 2 billion gallons per day, ten to fifteen degrees warmer than it was at the intake port. That’s a city’s worth of BTU’s wasted every day. There should be a cost for that. Finding cooling water is becoming problematic for new generating stations. We have a small-ish gas-fired peak load plant nearby that apparently doesn’t require water for cooling, judging by the appearance.
Gas would be a better fuel than coal for the short term — less particulate pollution, IIRC. But it will still contribute to net carbon loading of the atmosphere. And there’s the whole hydraulic fracturing mess.
Distributed generation, with maximum utilization of renewables, makes much more sense than what we are doing now. But massive deployment of solar electric and solar thermal at the residential scale would be economically disruptive for the incumbent utilties, as their rate-payer base would be significantly diminished. They would need to raise the rates for the heavy industrial users — if any remain.
Right direction, CD, but the concept needs to be expanded beyond the portion of the ecosystem problem identified as “Climate Change” – it has to embrace all the dimensions of how we are going to get 7 billion (then 8, then 9…) from 2012 to 2050 without killing the oceans, for instance, which is where today’s trajectory fails us worst – we are killing the greatest support and generator of life on the planet. Between that and decimating forests, soils, innumerable species, our own agriculture and more, the urgency of the situation cannot be understated. And the scope of the job is dauntingly huge.
It requires a global effort of the first order. I fear what we’ll get though, is a far less ambitious attempt to go “green” that is aimed far more at generating big $$ than providing real solutions, or even a boom-bust that consumes many years that puts any more serious effort into jeopardy politically. Can’t let the $$ predators anywhere near it.
Fiver, thanks, I’m with you, there is much work to be done beyond modernizing the energy infrastructure. I think the crux of what I’ve been trying to say is that most economic modeling I’ve heard about is completely inadequate to describe the magnitude of what needs to happen to preserve Nature and our life support system, and preserve Earth for many thousand generations into the distant future. We’ve only recently crawled out of the primordial ooze and learned how to walk and talk. But we haven’t quite yet learned that it’s important to live in harmony with Nature. A comprehensive economic model would consider future value of natural resources. I read a wikipedia article about a project in Britain to address that point, but I can’t find it at the moment. Current modeling doesn’t seem to be concerned about the future beyond the lives of current denizens of the world. I contend that much economic activity is not necessary, and serves only to generate wealth. To take the pressure off what’s left of the planet’s natural resources, we should re-value the worth of labor, and the worth of natural resources, so that we can live comfortably without digging up the planet, and without poisoning the environment. Use government-created money to give a newborn baby an endowment sufficient to pay for life’s necessities for life: food, shelter, clothing. If they want to work they can work, but there won’t be as much extraction as there is now. Right now our system doesn’t care about the value of Nature. In the future our system will put a very high value on Nature.
Soros addresses uncertainty as a scarcity among contemporary economists.
Seeing what that stance says about the political economy, divining its perceived meaning along partisan lines or how it has been used within the business community – while interesting in its own right – serves only to divert the reader from his point.
One might as easily say he addresses the regulatory function. You’d be correct, if a bit shy of Soros’s full intent.
Fill us in further on where you think Soros plans to take his reforms for the financial markets. My sense, from his book “The New Paradigm for Financial Markets,” which is not his latest word, was that the prominence of “uncertainty” comes from his theory of reflextivity…that “market prices can influence the fundamentals. The illusion that markets manage to be always right is caused by their ability to affect the fundamentals that they are supposed to reflect.” Now if this is correct, it stands much of classical theory about prices and market clearing on its head, and a good practical illustration, which several commentators,including just now Yves herself, have presented in her arguments with Krugman, concern the level of pure speculation in the great rise in oil prices in 2008 and their tremendous plunge…was it a case of price driven by supply and demand fundamentals…or, as Soros might suggest by his theory here, a speculative bubble in futures markets driving up the price to consumers and thus having an important negative effect on fundamentals – shifting consumer spending away from other products to meet this speculative/hallucinatory price…in a product they couldn’t escape having to buy…
Perhaps I’ve missed some Soros pieces lately, but I’m not sure how far he would go to dismantle the casino aspects of the contemporary financial markets. I side with Simon Johnson and others; we would be better off without many of the inventions (Volkers sarcastic comment that not much of worth since automated tellers…)…
reading Geissts’ book, “Wall Street-A History” we see how “speculators” have acted when deregulated, (monopoly-collusion) since 1800’s…
Soros wants “perhaps even an philosophy, that assumes uncertainty itself”. I agree there are too many constraints in most models that bind an idea or model like a person to a post.
What if we built models based on distributions where there is heavy uncertainty, like the Cauchy Distribution? It can be relatively bell-shaped, has a mean, but has no defined variance.
Wasn’t there an NC article published last year about Mandelbrot essentially stating something similar to Soros’s comments–there is no good way to model stock price movements. I think the gist was there was variability beyond almost all current assumptions in these price movements.
Depends on who is using what models. With the evolution of various forms of highly leveraged computerized trading of all manner of financial “products” and overt, essentially official alignment of Federal Reserve and Wall Street interests, “markets” in any mainstream sense of the word have not existed since late 2008. Stocks in particular are quite obviously manipulated via futures trading overnight, and every attempt by the market to correct and recover normally from credible levels (40% lower from here would be generous )has run into a wall of artificial “support” money, then huge moves up floating on nothing but air.
If they all use the same models, a few very powerful players can drive the entire system draped in the “in the interests of ‘the economy'” BS rationale – and do.
As far as I can tell, economics is a religion. No amount of fact, or evidence presented contrary to the economic theory, can change their minds.
These are people who seriously believe that “every debt is somebody’s asset” so what could go wrong?
And as a libertarian, I have had to make some painful reevaluations of my own world view. The economists mentioned seem incapable of re-evaluating their own premises.
We are basically in the situation we are in because of corruption (of the government) and incompetence in the government (I take for granted that capitalism is a shark infested pool, designed to make an efficient eating machine, sharks – but that is why humanity institutes safeguards against sharks – we have the government “lifeguard” – but now the lifegurard is pushing people to the sharks, apparently because the sharks have promised the lifeguards future million dollar salaries). Capitalists have no right to profits by corruption than sharks to swimmers based on bribery.
When he government takes taxes, the vast majority of which come from poor and middle class people, and transfers TRILLONS to demonstratably incompetent, and criminal persons and institutions, the problem is not “stimulas” per se – it is corruption.
Giving these people more money in the hope of solving the problem is like feeding more people to sharks!!! All you get is fatter sharks with bigger appetites…
It is a system that demonstratably incapable of making economically viable loans and assessing and pricing risk. Our Fed believes that this system should be preserved, and Congress, in reappointing Bernanke, believes the same. I believe in profit and LOSS wing of capitalism. The CEO’s of banks that got government bailouts should be selling pencils and apples on streetcorners.
The problem with the libertarian rhetoric lately is that, although the pundits rightly decry bailing out companies that should be failing, they incorrectly hew to the line that the banks didn’t do anything illegal.
As far as I’m concerned, prosecution of fraud and the voiding of contracts predicated on fraud are basic libertarian principles. Libertarians can support free markets without turing a blind eye to liars and cheats.
Fresno Dan, your comment is spot on. As the son of a WWII veteran who did not trust the government, I am teaching my daughters to do the same.
“[Soros] suggested that we should instead work together to develop a theory, or perhaps even an philosophy, that assumes uncertainty itself.”
Right, so his kind can make money off speculation, as
though that has ever built one hospital, one school or one house. Yeah, yeah, I know he takes his billions and donates them to his favorite charities, that’s not the same.
Soros is a small player, in “speculation”….you need to look at Goldman-Sachs, Wells Fargo, Citibank, JP Morgan, etc-the “investment banks” who destroyed the world’s $16.5 trillion per year economy for over 3 years already, on the way to 10-20 more..
this will all take on a more perverse view, when Chris Christie wins presidency
The problem with being half right is that you don’t address the roots of the problem:
The drive toward dominance is characteristic of human behavior in almost all historical societies. Whether it is based upon testosterone or social relations, men seek out more sex and women stronger and higher prestige mates. Along the way this becomes magnified into Spanish galleons hauling cargoes of gold mined by slaves back to the mother country, or Banksters on Wall Street manufacturing phony derivatives to inflate price bubbles and steal wealth from the lower classes.
Wealth confers power upon those who accumulate it. In the era where mass media is in the hands of an elite, they are able to manufacture ideological belief systems that support their self interest, even though those belief systems have no grounding in fact or in the objective reality of those inoculated with them. Control over access to capital allows the institution of debt slavery to grow, and those captured within its web have little intellectual energy or capacity to see beyond the daily struggle to keep their heads above water.
It does little good to bemoan the extent of corruption or lack of rule of law unless one addresses how the 99.9% are to capture the political and economic power necessary to create a system based upon law and justice instead of greed and exploitation.
The metaphor of Capitalism as a feeding frenzy of sharks does have relevance. And what happens when the bait fish are all devoured? The sharks then turn on each other– Goldman Sachs eats Lehman Bros. with a little help from its agent Timmy Geithner. But this is just normal behavior defined by the rules of Capitalism. Capitalism is a system of exploitation whose logical conclusion is the conversion of all natural resources into capital assets, the elimination of all non-domesticated planetary species, and centralization of all control and power into the hands of a single alpha shark.
Maybe these people were onto something:
As far as I can tell you’ve never studied economics. Basing your opinion of a discipline off of blogs – nice. By the way, if you want to come down on mainstream macro-economics, then say that. Economics itself is a really broad field and many economists go their entire lives without trying to predict interest rates or any other such thing.
Actually, I have taken college level economic classes.
I have read many texts as well.
Keynes General theory of money, interest rates, and employment
Perhaps I misses it and you can give me the reference where these people discuss corruption.
“The problem is that the financial system has been allowed to get so complicated and so rigged in favor of the people with information…”
A small point. They didn’t have information, and didn’t want it, they had BUYERS. You don’t need any information if you have a buyer waiting.
That lack of information also, when TSHTF, allows you to come back into the picutre as a highly priced “consultant”. Recommending, after 2 years of making sure to NOT actually do ANY information gathering, that the best course of action is another bailout. It’s all just too complicated, and costly. Now pay me, bitch.
When I was young and in trouble, I tried my hand at selling encyclopedias. It was the Encyclopedia Americana, which we had at home when I was a kid and which I knew was a good product. It turned out I was not meant to be a salesman, and over six weeks I only sold one set, the guy who opened the door said, “You know, we were just talking about buying a set.” But it was a valuable experience because I met some real salesmen. These were the kind of guys who work in bucket shops. They were only interested in making the sale so they could get their commission, and they were pretty good at saying the things that would hook the customers. Later, many years later, in Bangkok, I actually met some people who worked in a bucket shop, peddling phony stocks over the phone to people who lived in Australia and Singapore and Malaysia, and I think even some in England. This is the kind of person who succeeds in our current “financialized” world. Utterly amoral, incapable of seeing other human beings as people, concerned only for themselves.
Yeah. I’m coming from _Liar’s Poker_. I really suspect that the quants real value was not that they provided information, but that they provided impenetrable cover stories for the salesmen. “Mathematics may be defined as the subject where we never know what we are talking about, nor whether what we are saying is true.” Bertrand Russell knew this, but it seems nobody else does.
As I remember Economics 101, incentives are key. The incentive for these guys is academic standing (branding) with credentials and awards as spokesmen for the status quo -as long as they can keep it up.
That is, with the obvious exception of Soros, of course, whom they pride themselves in excluding -for his ‘worldliness’ I suppose.
The work of Outis Philalithopoulos on “academic choice theory” is relevant in this regard.
Nice post, particularly when you link the economists’ simplified view of the world with the cause of the financial crisis was complexity (opacity?).
Economists assume that everyone has perfect information — otherwise their models do not work.
This happens to explain why they did not predict the crisis and why their solution to the crisis does not work.
Not to plug my own work, but I have been writing posts on this issue (see: the Queen’s Question) for quite some time. As you can imagine, it really bothers the Larry Summers and Paul Krugmans of the world to point out that their belief system is based on transparency and they do not even acknowledge it.
One of my favorite lines from Yves, and she has written some doozies over the years, is no one on Wall Street got paid for creating low margin, transparent products.
You would think this line is less that subtle and should direct our regulators where they should start to clean up the mess that has been created.
Brilliant! She hits the nail on the head. I am an unabashed Krugmanite but let me say that till Ms.Neil pointed it out it never struck me how ignorant Krugman seems to be about the whole Banking/Finance imbroglio. I have read most of Michael Lewis’s books and also Econned etc etc and I have a keen understanding of the role Banksters played in the last two decades in driving the system into the ditch and I must say that Krugman should read and educate himself a bit more. Saying that Dodd-Frank was going to do the trick is appalling, its flabbergasting to say the least to hear this from someone like Krugman. All I can say in his defense is, one man can’t do everything. His forte is economics and maybe he should do well to stick with it and refrain from endorsing slap in the face insults like Dodd-Frank.
And most philosophers don’t understand psychiatry. Where or why the surprise? Does this person not read these individuals?
They should. And many did (Jaspers, Sartre, Merleau-Ponty etc.). Just the same many economists do have a good grasp of the financial system. But they’re sidelined because it messes with the conceptions of the mainstream — just like psychiatry messes with mainstream philosophy.
Reading this post, I can’t help but recall Roubini and Setser. Their blog writing was a must read in 2007 and 2008. Roubini used to write such basic stuff about how the consumer is tapped out, that housing is not a good investment and that banks were bankrupt. Roubini was for a time considered to have near supernatural powers. I suspect he had a good colleague in Setser and some street smarts (not Wall Street smarts, but actual streets).
It is a bit of a contradiction that we want economists to look beyond their models into the world of observation and perhaps subjectivity. I can’t stand David Brooks, because he can go to a Starbucks and draw conclusions about everything that is happening in America. He may stand at one extreme, and the economist married to his models may stand at the other. Somewhere in between is where we need at least a few policy leaders.
Both Brooks and the economist are doing the same thing; they are trying to preserve a system that is based on gross inequality of power. Few people are willing to admit their most cherished beliefs are false, especially if those beliefs are to their advantage. To maintain this willful blindness they must refuse to consider anything that threatens their beliefs, using denial and rationalization.
And anyone who does not spend his time trying to actively avoid unpleasant realities seens like a precient genius.
You are so correct, Susan of T.
“Uncertainty” hasn’t returned just to get lost in a chalk fight over models. It’s the result of an object lesson in the deliberate destruction of citizenship virtually unopposed by the citizens, an all-too-real proof of what happens if you don’t curb the influence of those with power/acquiring power like your very life depended on it – at some point, it will.
Sustainable Land Development Newsletter
October 2008 – http://www.triplepundit.com/2010/09/land-developers-sustainable-economics/
Land Developers & Sustainable Economics
As previously forecast in this column, a series of financial “Black Swans” is now upon us. These major disruptive events, which by definition were unpredicted by the establishment experts, now include the failures of Bear Stearns, Lehman Brothers, Fannie Mae, Freddie Mac, AIG, Merrill Lynch, Wachovia, and Washington Mutual, with more surprises undoubtedly on the way.
While there have been numerous authorities working day and night to solve the problem, it is important to note that these same people were the ones that were managing the financial system in the first place. According to Professor Nouriel Roubini, no professional independent economist was consulted by Congress or invited to present his/her views at the Congressional hearings on the Treasury Department’s rescue plan. This brings to mind some words of wisdom from Albert Einstein – “We can’t solve problems by using the same kind of thinking we used when we created them”…
Robert Johnson, designated Senate Banking Committee Chairman was brought
before Congress to explain…but he was cut off minutes in…the amerikan people cannot know this…
follow the $$$$…where did enough go, to destroy a U.S. $6.5 trillion per year,
World $16.5 trillion per year economies for over 3 years already, on the way to 10-20 more? Fanni-freddi’s $3-4 trillion=half of “securitized mortgages”, aren’t enough…are they? Robert Johnson points out $600 trillion in derivatives
by 2007, up from $880 billion, 2001, 95% controlled by 6 U.S. “investment banks”…
Economists often don’t understand risk & fraud and there economic opinions are often influenced by their political leanings. You rarely hear economists worry about the effect of systemic risk by having too large to fail banks or a country’s debt level being too high relative to GDP.
Nice job creating a straw man.
You’re clearly seeing what you want to see. First, the triggers of the 1929 crash would not be that easy for a “layman” or the average economist to explain, either. The world was already pretty complex back then, and the extra dimension of complexity now is in some sense just fractal complexity – just the same basic stories of market rigging by greedy people, regulatory capture, and excessive leverage carried into a wider range of “markets” with lots of extra zeros in the trading volumes and total money sloshing around.
Second, I’ve read Krugman’s blog since it started, and he clearly gets the scope and mechanics of what has gone wrong (CDOs, Credit Default Swaps, in the US context the collapse of the SEC, CFTC, and Justice Department). Focusing on Europe, he regularly mocks people who don’t get that the Greek “bailouts” are just a money cycling scheme really designed to keep French and German banks solvent and strip Greek assets.
Sachs was naive back in the 1980s, but the disasters in Eastern European countries that resulted from his privatization advice clearly gave him a deep education, too.
Krugman and Soros were remarkably aligned in their writings last year about how to save the Euro.
I worked on Wall Street, too, and could give you a tour of a dozen corners of corruption and rigged markets ripping “investors” off under the awning of intentionally shattered regulatory frameworks. That these specific problems exist and are important to solve doesn’t invalidate the larger insight that government stimulus – Krugman would say, echoing Sachs, pumping money into states and localities to rehire teachers and healthcare workers would be a great measure – is the best tool we have to give millions of people a shot to get back on their feet in the short term.
That said, the way the Congress and Obama botched financial sector reform during their window of opportunity does guarantee another meltdown in the near future.
Sorry – I meant to say Krugman and Soros were aligned on how to save the Eurozone – from a string of government defaults.
The real value these economists have offered is to paint a counter-narrative to the one that dominates in Washington and among the hair-gel bobbleheads on TV. That false narrative runs as follows: 1) unleashing “the free market” is the best way to fix everything; 2) Bankers are the best proxy for “the free market” (Since its hard to get the free market to return phone calls); 3) So leave the bankers alone and in charge and they’ll fix everything. That narrative is surely a path to greater ruin.
See, I’m a big believer in the free market. But that has nothing to do with Wall Street and the banks, who came running to the public coffers when they got into trouble.
A free market depends on a framework of laws, especially laws against fraud, and consequences that serve as proper disincentives to those who commit fraud. And enforcement, as in bankers in handcuffs.
Krugman does not understand the money system in the least. He assumes a loanable funds model where none exists. See Steve Keen’s critique which is 110% correct.
To be absolutely frank, I think Krugman is a charlatan when he actually steps into the real world financial system. He doesn’t understand it’s mechanics and generally regurgitates conventional wisdom about debt instruments that have no place in his actual understanding of how economies function.
This leads people to think that he has it all figured out, but anyone who tears the curtain aside and has a look at his academic work on the matter sees that he doesn’t have a clue. He’s just ripping off other peoples’ ideas, mashing them up so they don’t look anything like what they started off as and then jamming them into his own framework.
While I am frequently disappointed with Krugman, especially, his analysis of Oligopoly (oil markets and gas prices), regulatory capture and greasing of the economy with “cheap” money (as with liquidity trap, zero interest rates, etc.), I think you do great injustice to him when you suggest that he is a charlatan who copies other people’s ideas.
Contra your argument, I have frequently found that he is very ingenious in coming up with data to back up his arguments and refute, ridiculous, if not stupid right-wing arguments. And he is committed to a progressive agenda.
He is a smart guy, but generally a one-trick pony, who endlessly beats his own chest to tell you how smart he is, a tad infantile.
Shocking. PP responds to the idea that this was a cheap shot by labeling PK a “charlatan” and offering no compelling evidence of this designation. Never saw that coming [/sarcasm].
See, I think PK is wrong about having it “all figured out” because I think no one has it “all figured out.”
The arrogant twit thinks PK is wrong about having it “all figured out” because the arrogant twit thinks *he* has it “all figured out.”
And by the by, we’re all mostly ripping off others’ ideas. To think we’re not is to seriously misunderstand knowledge and the cognitive process. This is the same old specious charge Hazlitt spewed against Keynes, “what is original in the book is not true; and what is true is not original,” the same tired empty accusation that all critics of all stripes and persuasions level at their opponents…lots of sound and fury signifying nothing.
Utter fail, yet again.
“Shocking. PP responds to the idea that this was a cheap shot by labeling PK a “charlatan” and offering no compelling evidence of this designation.”
Did you bother clicking on the Steve Keen? Christ, Jones. Nes low.
I read it, and if Keen is so much smarter than Krugman then why does he find it necessary to compare Krugman to a poodle walking on its hind legs ?
Lots of people on this site seem to have a real serious problem with Krugman which I really don’t understand, but it always seems to result in a lot of name-calling.
makes it hard to take them seriously, especially since most of the name callers don’t have a whole lot of well reasoned arguments to go along with their loathing.
sometimes this place attracts a few too many zero hedge afficionados.
I suspect the problem is that your own certainty is showing.
He assumes a loanable funds model where none exists. Philip Pilkington
Makes one think that economists are funded by the counterfeiting cartel, the banks. Or more likely, it is that alternatives to usury for money loaned into existence is unthinkable. Even Steve Keen is not willing to abolish the counterfeiting cartel, at least not yet.
I think Adrian has it about right, the post is a bit of cheap shot and complexity has been around for awhile and we have some better tools for dealing with it now both practically (read computers) and theoretically (read Mandelbrot). I don’t think that any of these guys is completely knowledgeable about financial stuff but they totally ignorant either.
However, i do think that reminding economists, even ones with whom i agree, of the fundamental limits of their models is a good idea.
I’d like you to point me on Krugman’s blog to evidence that he understands CDOs. I’ve written about them extensively and have a very pretty good understanding of the role they played in the crisis. I’ve documented in ECONNED that they are FAR more central than any academic economist seems to understand even remotely. If you have not read ECONNED (Ch. 9 and Appendix II) you aren’t qualified to comment because you don’t understand CDOs or the mechanisms by which they turned what would otherwise have been a contained subprime bubble into a global financial crisis. (And don’t tell me “I worked on Wall Street, therefore I understand CDOs” The expertise in that product is very limited. Fewer than 100 people in the world were on dealer desks putting them together and maybe another 300 people at the very outside really understand them. For instance, I’ve seen obvious errors in SEC suits involving CDOs. If you haven’t debriefed any of the insiders EXTENSIVELY, I guarantee you don’t understand the product or the market. I’m not fully down the curve, but I do know enough to put together the mechanisms by how they impacted the subprime market and the dealer banks and quantify that impact on a rough basis, which is all a non regulator can do in an OTC market).
I did a search of Krugman’s blog, and in the overwhelming majority of cases, the reference to CDOs came in the comments section, not the Krugman post, AND when it was a Krugman post, it seemed to be an approving link to other material that similarly might have been useful but really didn’t get it either.
This is the search string:
Similarly, he refused to consider that speculation could influence oil prices in early 2008, even though the Saudis had moved to use pricing based on an index of futures called BWAVE precisely because speculation in spot had distorted prices in the past and they didn’t want to be subject to that.
Similarly, Krugman and I argued for months in 2008 about oil prices. He kept insisting, even in op-eds, that there was no bubble, and kept pointing to a remarkably simple minded model. that if the price was “too high” you’d see excess inventories. I explained that oil pricing didn’t fit his model (OPEC oil, and with the Saudis supplying swing capacity and being the heavyweights in the light sweet crude that is particularly prized, has disproportionate impact on pricing) is based on an average of futures prices called BWAVE. The “futures converge to spot” is NOT operative in oil. Similarly, above ground storage for oil is limited and costly. It is simple to cut production and inventory oil in the ground.
You need to provide real examples rather than just bluster. Cathy did. Krugman’s response on Dodd Frank is awfully damning. What exactly do you have to prove that he understands finance?
The housing market was a bubble. After years it still struggles to find the bottom. The oil market broke down for about twelve seconds, then popped right back up near 80-90-100. Gives the impression that high prices are for real. Meanwhile, that much vaunted swing producer fails to swing produce like the old days.
No, go back and look at the price histories and don’t make stuff up. It cracked in July of 2008, fell below $100 in September, and got to under $40 a barrel, and it was most certainly not there “twelve seconds”. Oil did not get back to $90 until Feb 2011. It was again below $90 from August to the end of October 2011, and the current pricing has an attack on Iran premium built in.
As I said in my argument with Krugman, all oil majors and OPEC were saying that oil prices in early 2008 should be $90 a barrel (the CEO of Shell said $60-$70).
And in 2009, Krugman changed his mind, and said “now I think it’s speculation.” One nice thing about Krugman– he remains open to learning. Also, contrary to some apparently popular beliefs, imho he tries to be transparent (his blog is sometimes a running commentary of his attempts to come to grips with an issue or theory), and in fact he does publicly admit mistakes. Agree with him or not, we’d all be better off if those qualities were more widely shared. Even by some people on this blog!
In support of Yves’ statements on Krugman not understanding energy-oil speculation, in 2004, Gretchen Morgenson pointed out that largest U.S. “investment banks” controlled nearly 50% of world energy-oil “futures”…and had been selling them back and forth to one another, to create rising prices..
just as Geisst shows in “Wall $treet-A History”, perpetrated since 1800’s…
Reminds me of the Stiglitz Hendry exchange on Greece. Stiglitz opined that everything is fine in Greece and they just need an interest rate reduction on the debt, to which Hugh Hendry did one of his famous, “what planet are you on” responses. Economists way too often live in an ivory tower and don’t get the real world, and as William K Black points out arent’ versed in all the disciplines they need to.
How about this: let’s talk about people, not the economy. If a bread winner is unemployed, especially if supporting a family, do we want to (1) let him or her and his/her family starve? (2) give him/her a hand-out with no strings attached, or (3) give him/her workfare that establishes that one doesn’t get something for nothing and preserves a modicum of pride? FDR understood this, because the false god of Econ had not permeated everyone’s thinking in his day as it has today. We’re one of the richest countries on Earth, surely we can afford this. We’ve got plenty of infrastructure projects that need workers.
However, when the distribution is fundamentally broken and the political process fundamentally corrupt, as ours are, fiscal stimulus can be like supercharging a gas engine that’s only running on one or two cylinders. The money goes to the usual cronies.
Only with a complete renegotiation of our social contract do we get through this without descending into neo-feudalism. Overturning Citizens United is a good starting place.
Great post. As an outsider to economics (I’m a philosopher) I’m often amazed by the confidence with with economists theorize and make decisions based on models they must know are simplifications and idealizations in the highest degree.
There’s nothing wrong with idealizing and simplifying to make useful models — every science does this. But when you know that your model is inaccurate in important ways, and you suspect that the model is inaccurate in deeper ways you don’t understand, you should use your theory tentatively and with care. But economists are so often full of bluster and confidence. I can’t understand it.
It’s like planning to send a rocket ship to Mars when you haven’t even worked out how friction affects the motion of objects.
I agree with Benign’s comment above — with the focus at least partly on individual people and their needs, there’s less chance of going wrong in spectacular ways that cause enormous harm.
I’ve thought for some time now (about six months) that a serious dose of modern philosophy’s conversation on the inextricability of analytic and synthetic truths might be one of the best purgatives for the catastrophe that is modern economics. I’m surprised that professional philosophers haven’t taken a swing at what passes for epistemology among economists. Maybe the pitch is just too fat.
“The problem is that the financial system has been allowed to get so complicated …”
I want to pull my hair out when people in the business claim this. Oh, they work in a world that transcends mere mortal intelligence … (which of course justifies their HUGE salaries!) Bull!
What is complicated is the math which underlies these products; not the products themselves. Making this above claim is like saying that none of us can successfully purchase insurance because we’re not all actuaries. Nonsense.
Which brings us to Part Two:
“The problem is that the financial system has been allowed to get … so rigged in favor of the people with information, …”
Wait a minute! People selling financial products have material information potential buyers need to make informed decisions, and the sellers are not disclosing it? When did that law change? Oh, it hasn’t?
And that’s it in a nutshell. Nothing to do with complexity or asymmetric information flows. It’s CROOKS. From the phone solicitors to the appraisers to the lenders to the securitizers to the raters. Crooks. Nothing but crooks.
You don’t need Dodd-Frank. You don’t need systemic risk czars. You don’t need new Basel accords, and all the stimulus in the world won’t mean crap if the crooks are still there to suck it all up.
What you need is law enforcement. Because without law enforcement, all you have is meaningless hand wavers. And crooks. Lots of crooks.
No, you don’t get what Cathty is saying. A system being unduly complex is a completely separate matter from a product being unduly complex.
As we discussed at some length in the runup to and immediately after the crisis, the financial system is tightly coupled, which is an extremely bad feature from a systems design standpoint. It means processes move through the system rapidly and can’t be interrupted. If your body was badly design, an example of tight coupling would be that breaking your toe would cause a heart attack. Biological systems and well designed artificial systems have firewalls and localization. That’s more costly but it is pro-safety.
Here is a simply example of how the financial SYSTEM, not products, are too complex. There has been big time resistance to letting Greece default because it would trigger CDS payouts. No one knows what the impact would be. The authorities have at best only a dim idea of who is on the other side and whether they can handle the losses.
And this post illustrates how one when one counterparty can’t honor its contracts, hedged position across a whole bunch of other players become unhedged.
You were saying?
But I think his “crooks” is broadly defined. For example, there is no good reason why every nickel of Greek debt and CDS/counterparty risk are not accounted for and the impacts known to key decision-makers. Personally, I believe they are known well enough by both the banksters and “authorities” for a Greek default now (as opposed to early 2010) to be a whole lot less than a world-breaker, but the point is, only a collection of crud (aka “crooks”) would’ve OK’d such a bogus process to begin with.
You need to bone up on harmonic energy distribution.
Skippy… Debt (sub prime et al) is like the spent fuel rods at fookmeshima, CDOs were mechanism (harmonic energy conduit) that transferred it through out the entire building structure, in damn near real time.
uhhhh…HFT=high frequency trading=computer driven…
do you have one?
I’m mildly surprized that readers of this site don’t already know that economists (mainstream ones) don’t understand the economy or the US/UK financial systems. Read “Debunking Economics by S. Keen for a good run down of the disreputable state of economics. Cathy’s comments are as I expected, the 3 mainstreamers showing absolutely no clue on how financial systems work and Soros, complaining that no one understands him, both manages to pretend to be an economist while raking in billions by gaming the system he pretends is ungameable.
If it only took $25 to learn of the terrible state of economic advice and leadership going on, well, welcome to my world. Ask those with (former) pensions how much did it cost them…
What don’t you know that modeling nifty data is more fun and produces more interesting results than modeling messy reality! Goodness you people.
“Otherwise we will be reliving this entire ordeal in another 15 years.” –
Let’s split the estimates, yours and Kyle Bass (who has Washington’s ear, but politicians don’t listen), and call it in 8-10 years of complete meltdown destruction:
I’m guessing seven years. No economics background, at all, so I’m picking myself as best prognosticator. That and the fact that I’ve been lower class all my adult life and we see things from the canary in the coal mine perspective. It is sometimes amusing, in a skewed view kind of way, to watch the middle class of a sudden confront what we’ve been living with for decades.
living aboard sailboat is nice…
But I also think those efforts will be futile unless we enforce a basic system that is simple enough to be regulated. Cathy O’Neil
How about a system that is ethical enough that it needs little regulation? One cannot start with a system that is fundamentally dishonest and then expect good to come from it, can one?
It is well enough that people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning. Henry Ford from http://www.brainyquote.com/quotes/quotes/h/henryford136294.html#ixzz1nmX94SAA
All discussions of theories should be prohibited.
Just look at what succeeds and what fails.
Successful countries MAKE THINGS.
Collapsed countries PLAY WITH NUMBERS.
I agree, partially, but I think there’s a broader problem. (Here’s my Carthago delenda est.) Since the Club of Rome report, _Limits to Growth_, from around 1972, there’s a strong argument that the earth doesn’t provide enough stuff to MAKE all the THINGS we want, or perhaps even need. The Euro-American economies have reacted by redefining making. They attempt to claim that saying, thinking, or supposing are economically valuable things, and are going to be the bases for being paid. The whole Intellectual Property industry is a land-grab on this fresh new frontier. (Need a capping line to sum up. Don’t have one. Damn! Oh! here’s one..)
All the creativity that isn’t being shown in sorting out the financial implosion is a drop in the ocean compared to what we’ll need to create a new small-footprint civilization that’s worthy of the name.
there’s a strong argument that the earth doesn’t provide enough stuff to MAKE all the THINGS we want, or perhaps even need. Mel
Baloney. Technology is constantly finding ways to do more and more with less and less. Look at your computer. Is it made of expensive, power hungry vacuum tubes or is it mostly made of inexpensive materials like sand (silicon)?
Lack of resources is not the problem; lack of wisdom is.
But I don’t just have a computer. In fact, I never had a computer before, but I still have a car, and a stove, and a refrigerator, and a television, and a stereo, and two guitar amplifiers, and a bathtub. AND I have a computer.
I think we agree, though, about the creativity thing.
and don’t forget that there are 250k+ new people being born EACH DAY who want those things. AND something to eat, AND a place to sleep, AND a place to shit… etc.
A few months ago, Potash Company (POT) in Saskatchewan was
the object of a (possibly hostile) takeover bid by
(maybe) BHP Billiton. In the end, the offer was turned down
by a Minister in PM Harper’s Cabinet.
I figure this gives a clue that the “limited natural resources” meme/idea has quite a bit of merit (but for what
resources is another matter: dirty coal? probably not
scarce, imo). Energy is really important in industry.
With less energy per capita, life would be different …
Energy is really important in industry. ajax
Energy is FUNDAMENTAL. We should be VERY careful to always have an abundant supply.
Yes, FB, let it be decided that our energy supply shall be abundant…
Remember when atomic energy was going to make electricity too cheap to meter or have I slipped into a parallel universe?
The bankers screw up the economy but no the real problem is peak oil or Iran or illegal immigrants or the social safety net or CO2 or overpopulation or ANYTHING BUT THE FREAKING BANKING SYSTEM.
You need to study dust to dust issues with human activity’s.
Skippy… gross generalizations like technology always wins, makes like better, is a mixed bag at best.
Your computer, smart phone, et al, require rare earths (which are just that, rare) as well as other minerals (gold), petroleum for plastics, etc. These are finite natural resources — finite in the sense that, even if there’s “plenty of oil” under the oceans, or coal in the hills how much of the resource is Economically Recoverable?
Once we’ve exhausted the easy-to-get, cheap resources then what? Yes, technology may provide substitutes but that technology itself will require some natural resource to manifest in the material world and it will, very likely, have externality costs to the environment (and possibly, human health) that will create new problems.
Matter is indestructible wrt non-nuclear reactions. Thus it can be endlessly recycled IF adequate energy is available.
Of course waste and environmental destruction are bad but how much of that is a result of a fundamentally dishonest and unstable money system? Think of the environmental destruction in WW II, for example. The Great Depression was a major cause of WWII and the money system was THE cause of the Great Depression as Ben Bernanke admits.
The first step towards modeling uncertainty is to generate a close-to-reality population of the agents making decisions within that system. First we must disaggregate to describe reality, then aggregate to understand it. Being capable of doing this on many different levels (urban, district, regional, national etc…) within the context of many different types of institutional and governmental environments is the key to modeling and predicting the likelihood of a possible scenario becoming reality.
Nice point. Any model that leaves out any detail means the modeler does not understand the subject. Economics has a billion+ agents acting more often than not irrationally which is a computationally hard problem. Ssooo any model proves the modeler does not understand anything! QED! Brilliant!
my model, that I thought of yesterday while riding the subway, is
E = MC-squared.
That looks familiar, I know, which is why I was so surprised.
Economic Reality = Money X Cooperation (squared);
where cooperation is wilingness of people to do things for each other, which requires social structures that allow for the navigation of pyschic energies. And money is the trust mechanism that allows cooperation to manifest. clearly money and cooperation are two manifestations of more or less the same underlying instinct, but are separate enough to be used in the formula. qed
It’s not surprising this is the same as energy and mass and light. for obvious reasons that don’t require a long-winded explanation. So you have to start with cooperation potential and then have it catalyzed by money.
This is much simpler than the DSGE nonsense. The lecture sounds amusing, but so are all the Greek statues down on floor 1 and the cafeteria is pretty good! Not sure about the $25. It sounds like a 1% sort of price. I’d pay $5 but that would be tops. nOT SURE what that says about the demand curve for this event. but it is probably downward sloping from left to right
I completely disagree. It is not complexity, but financial deregulation what brougth us all to this mess. Complexity is just a selling strategy of the investment banks. They want to look sophisticated and innovative but everybody knew that behind those CDOs the underlying asset was housing or office space.
Thus, I align with Krugman on this.
Complexity is not only a selling strategy, it’s the modus operandi for avoiding prosecution for accounting control fraud.
UPDATE The 1% are as good at stacking functions as the permaculturalists, really.
OK but that is a problem that arised AFTER the crisis, not the origin.
Soros idea is on the right track, but since he acknowledges that we can’t be certain, we should experiment and see what works, a la FDR and the New Deal. Of course the only experimenting going on now is how to most effectively strip people of the little they still own.
It did not take long for the mortgage industry to realize that any piece of paper, however fraudulent, would be funded.
It is not complicated. Some fool was buying paper regardless of what it said, altering the paper and selling it to a bigger fool. They were lawless. When some of the “paper” started going into state courts, they “faked it” and the courts gave them a “get out of jail” card. We could give a group of 5 year-old children a Monopoly game and they could figure out how much fun this could be before it all crashed into either chaos or a fight. Thanks for this great article.
And unfortunately, the greatest fools were in charge of managing our pension funds. Corruption definitely played a part, but so did “colonization of the mind.” If the smartest guys in the room said this merde smells like roses, the fund managers were ready to wear it like perfume.
This is an informative post because a sharp mind looks at “experts” and asks questions these experts are proscribed from seeing by virtue of their theoretical commitments. What’s missing, for me, is an appreciation that we cannot pull the right policy levers (print, borrow, lend and spend) into existence natural resources –some are finite (oil) and some are renewable (but over-consumed or laid to waste). Until we realize that trying to restart economic growth is now a massive cost with no benefits our problems will mount and no solutions will work. The meta-policy question for a world at the limits to growth is, “How to make ecologically sustainable, egalitarian social policy in a contracting economy?”
It is as if we have chosen complexity at the expense of diversity. The complexity we have created is not adaptable because it is way too specialized and fudged. But it was apex-predator successful for a long time. When Cathy O’Neil asks how we make the system simple enough to regulate it, I would say that we replace complexity with diversity. And do it for real. Beginning at the local level.
And when Soros says we need to acknowledge uncertainty, I think that he almost missed the point because the economy has been acknowledging uncertainty with all sorts of credit default instruments and securitized bonds with diluted (complex) risk protection forever. So it’s this acknowledgement of uncertainty that created the complexity. And it’s a real dinosaur.
This is not your historical uncertainty we are talking here. It is systemic and it is both a sign of turmoil and potential health. Systemic uncertainty means the rest of us actually have a chance. What we have now is certain enviro- and econo-suicide.
Uncertainty to the status quo is equivalent to a breakdown of their pathological advantage, their ability to stack the deck and guarantee profits for themselves and guarantee liabilities are borne by someone else.
“Complexity” to the status quo is simply their own obfuscation and complication covering up outright fraud and abuse of principles of functioning capitalism in addition to fairness and justice.
So it will be a breath of fresh air to have the real complexity and uncertainty of an organic system that refuses to kowtow to conventional industrial distorted and imposed visions of predictability and power.
None of these panelists is capable of seeing emerging possibilities because they were forged in and benefited immensely from the status quo, and even if Soros’s instincts are correct he too was made by the system he helped make and profit from. He does not know what the alternative looks like. The center will not have the vision because it turns its sight always toward itself, and itself does not work anymore.
It’s up to the rest of us.
This is a good analysis, but it ignores a critic aspect of when things go badly wrong. Who do you blame?
That is THE critical question of the political equation. Nothing can be changed that would amount to an admission of error. Politicians don’t make errors. It is a firm custom with more power than law. Speaking of law – we are so far from the rule of law that it would not just be a career ending admission of error – but an admission of criminal culpability. That is not going to happen.
What we will get is a crash that will make the Great depression look like an ice cream social.
It may take longer than 15 years to recover from it. It may take until all the people directly responsible for it are dead before it is politically possible to address any of the underlying issues.
To think they could communicate to you that they have a very detailed understanding of any topic in 15 minutes in a talk geared to a general audience seems foolish.
Soros should be ignored IMHO. What kinda of decision making process would you have if you go about thinking, “I’m going to do X, but I have no idea whats going to happen when I do it but thats ok because nobody could predict what will happen”. That maybe a good way to navigate through life to deal with its up and downs, but its no way to conduct an endevour.
Point to me where anyone show a better understanding of the financial system in their writings. They don’t. As I’ve discussed at length in ECONNED, the financial system is not part of any macro models.
You have, for instance, Stiglitz repeatedly saying the abolition of Glass Steagall in 1999 caused the crisis. That’s just embarrassing. Glass Steagall was IRRELEVANT by 1999. Banks were already deeply into investment banking in the mid 1990s thank to all the regulatory waivers that had been given. The ONLY reason Glass Steagall was dismantled formally was to allow Citibank and Travellers to merge. This naive commentary on Glass Steagall shows that academic economists haven’t done basic homework.
“Glass Steagall was IRRELEVANT by 1999. Banks were already deeply into investment banking in the mid 1990s thanks to all the regulatory waivers that had been given. The ONLY reason Glass Steagall was dismantled formally was to allow Citibank and Travellers to merge. This naive commentary on Glass Steagall shows that academic economists haven’t done basic homework.”
The merger was indeed too illegal to be hand-waivered away, the lawyers wanted it gone. The law could have been enforced if the bribe-money wasn’t so huge giving Congresspersons insider-info for retirement bundles and cushy consultancies. It took many years to subvert Glass-Steagall into de facto “irrelevance” — de jurist enforcement would have been painful, but the only thing that could have prevented the ongoing disaster of 2007,’08,’09,’10,’11,’12, …, now being set up for a curl-your-hair Black Swan by the Dodd-Frank farce that will make 2008 a fond memory.
I am amazed at what passes for “insight” and sharp analysis. Cathy O’Neil presents neither. She castigates economists and their models and simply states that “they don’t get it.” And, as the commenters have characterized it, she “puts Krugman in his place.”
What a farce.
May I suggest a more enlightened view? Perhaps, the issue of the models is not a matter of name-calling. Perhaps the issue is: what is the empirical evidence for the models? When we just look at the data and let data tell us how well models fit, then perhaps we can get off the high horse that gives us the power to decide who “gets it” and who doesn’t. And one of the voices screaming in the dark about how the IS-LM model fits recent data compellingly was, well, Paul Krugman.
When you have a model that fits the data of a natural experiment that we have just had, then perhaps we can generate hypotheses about how to intervene to make things better, based on such models.
Models are – in case everyone has missed this – a way to conceptualize what has happened. This conceptualization must be critically examined to see if it fits the data. In her post Cathy O’Neil has her own model, a kind of transactional chaos model, but it is not formulated to generate testable hypotheses. She just blames it all on CDOs and CDSs. There is probably much merit to that view – I would not want to try to dispute it.
But economists are economists and not law enforcement officers or regulators. I have a state trooper friend whose solution is to throw them all in jail. Economists are going to search for solutions by rigorously examining their models to see if they have the right conceptualization of the events of recent years. And there is absolutely nothing wrong with that.
If Cathy O’Neil wanted to say: “Nothing will change until we outlaw CDOs and CDSs” then I would respect that. Cathy O’Neil, how would you feel if I attacked all mathematicians for their “silly little proofs” and theorems that have nothing to do with reality and represent little but self-satisfying mental masturbation? If I did that, I would just be revealing my own ignorance.
This reminds of of an article by Henry Mintzberg on strategic planning. He wrote, IIRC, that strategic planning was useless for planning, since by the time the process had emitted a plan, the strategic situation has changed. Strategic planning was, however, useful as documentation of past beliefs. It’s a rearview mirror on the past, and not a window into the future.
Similarly with models. Otto (modulo the name calling) writes that modelling is “a way to conceptualize what happened” [emphasis mine]. A rear-view mirror, in other words. And a fine academic speciality!
Reminds me of the parable of the glass:
The pessimist says: “The glass is half empty.”
The optimist says: “The glass is half full.”
The opportunist says: “Hey, I drank the water in your glass.”
These economists are either optimists or pessimists. But the banksters are opportunists.
Straw man. Mathematicians don’t make claims for the real world applicability of their models. Economists do.
mathematicians don’t make real world claims for the applicability of their models ?
kind of depends on what kind of mathematicians. and do you count engineers as mathematicians, because communications theory is almost pure mathematics and it does, in fact, have some applicability in the real world that is easily tested.
I’m obviously missing your point.
Engineers are not mathematicians. I have engineers on both sides of my family, and they know they aren’t mathematicians even if you don’t get the difference.
PhDs in math are a completely different breed than engineers, not even remotely in the same league. I was at a dinner with some mathematicians and they don’t consider Taleb to be any good at math, which might surprise some readers here.
PhDs in math are a completely different breed than engineers, not even remotely in the same league. Yves Smith
They are a different breed so comparisons are not appropriate. But if they were, I would say a good engineer has a better chance at becoming a good mathematician than vice versa.
Cathy and a few others know enough about math, modeling, and Popper to know that ANY data set can be made to agree with a theory based on a disguised polynomial with a high enough degree (powers of exponents) to make ex-post facto agreement impressive.
But such pretense at sophistication has NOTHING to do with reality or a Popperian falsifiable attempt at a “predictive” scientific theory using powerful tools applicable only to highly simplifying assumptions within the hard sciences.
The one word Krugman won’t say: “Fraud.”
I suppose that would show lack of transparency….
Yeah, the criticism of Krugman, Sachs, Stiglitz is really off base. While it’s true that we need to fix the financial system, all of them agree on this. A much stronger critique would be that they’re neoclassical saltwater economists who have delusions about supply and demand curves.
If they don’t understand the financial system, it is highly unlikely that they will propose sound remedies or recognize the difference between adequate and inadequate reforms. Krugman saying Dodd Frank has done the trick is proof.
Apart from Cathy’s semi-sort-of-summation/quote, is there any indication that this is what PK said? I mean, she also says this event was about “the global financial crisis,” which it wasn’t, per se (at least that’s not how it was advertised or titled), and she has PK saying, “we’ve seen financial crises before,” and therefore we know how to deal with them, when I strongly suspect he was saying “we’ve seen *recessions* before,” and therefore we know how to deal with them (since that’s what he always says…). Doesn’t really matter, but I think this post is a little misrepresentative of the form and substance of the whole event, from what I’ve heard of it.
This is actually a very poor rant.
Interesting post, as it mirrors what many feel.
It puzzled me for a while, say 15 years ago, that the experts were stupid. Nobel Prize Krugman blathers (but hey, Obama got the peace prize. So did Henry the K..) Soros is a little more substantial (not better) as he is more egocentric and narcissistic, and likes to imagine himself somewhat the cream of the cream.
This muddled – but mostly very partial ‘economics’ – exists to befuddle the masses and protect the rich (Corporations, the Gvmt-Corp nexus, Finance, etc.) As long as the discourse appears to make some kind of sense, with a lot of argument and different view-points colliding, no solid conclusions can be made, and no actions taken. And that is the whole point.
Some are paid handsomely to take on that narrowly argumentative role.
It is like studying agriculture while leaving out fossil fuel energy, seeds, and *overall* water. Just a lot of stuff about yields (mathematically modeled!), machines, rainfall/sunlight, and ‘best practices’ that are ill defined.
This post fails to make its point. Saying that economists don’t understand the economy sounds provocative, but we need proof. Just because Soros is a lefty zillioner does make what he says true or important. Do we listen to the Koch brothers?
Since Obama didn’t ask and therefore didn’t get a two trillion $ stimulus, we don’t know that it wouldn’t work. It seems to me, not an economist or a finance guy, that it should have helped a lot.
Wow, don’t you have even the foggiest idea of how Soros made his money? Go Google his name, then we might have an intelligent discussion.
“But I also think those efforts will be futile unless we enforce a basic system that is simple enough to be regulated. Otherwise we will be reliving this entire ordeal in another 15 years.”
Obviously I agree, this is another way of saying what I have stood for since 1999.
What I do not quite like is the bashing of Sachs and Krugman, who while perhaps mistaken are certainly not the primary culprits in the problems we have today, compared to the supply side propagandists.
The problem is opacity, overleverage, lack of enforcement, and all the other things that many people have laid out. It is not in complex economics. It is simple corruption and theft.
It seems to be that the salt- and freshwater economists between them define the boundaries of acceptable discourse in the sphere of “Economics,” exactly as the Ds and Rs do in “electoral” politics. The contending parties, through their contention, actually form a single and self-reinforcing closed system. So I don’t think it’s an issue of “culprits,” really.
Well Wynne Godley who spent virtually the whole of a lifetime trying to create a model recognised that economies were dynamically complex and you shouldn’t get too hung up on model perfectionism. He believed developing some kind of theoretical understanding to support your modelling was important but unlike the 18th century Deductive Neo-Liberals he recognised you need to balance deductive and inductive reasoning so that your model was empirically and repeatedly tested by the streaming economic data constantly coming in. Godley had good cause to recognise this truth, Milton Friedman’s Monetarist supporters in government and the academic world contrived to lose him his modelling research funding only for real events to show up Monetarism as “religious” dogma.
In consequence it could be argued that “religious” Neo-Liberalism lasted far longer than it needed to before it has begun to collapse under the empirical (inductive) autopsy now taking place after the onset of the Great Global Recession. If you want to boil Godley’s work down to a central “religious” maxim deriving from his Three Balances Model it would be “demand must balance supply and assets liabilities.” But Godley would still support the rider that society should maintain its wariness that this essentially MMT maxim may not be the end of the story.
We didn’t even need to bail out Wall Street. We saved those bastards and they’ll just do their damage again in about 15 years, as you say.
For proof that we didn’t need to bail out the banks, go here: http://www.alternet.org/module/printversion/154229
Apropos an earlier comment. Of course, it is possible to claim that God has put a system in place to discover all the answers ;)
Apropos or perhaps not…
The conjecture about answers is interesting, but the tricky part is figuring out the Questions ! h/t Hitchhikers Guide to the Galaxy by Douglas Adams
And it’s a lot more entertaining than dancing with economists (and their critics) on that old pinhead.
My usual thinking is that neither tax cuts nor further stimulus will really help the economy until the financial side is stopped from sucking off any surplus and then some. You seem to be saying the same thing.
I can see how you come to the conclusions that you did and I partially agree with your statements but I think you are being somewhat unfair to these guys. They’re mostly simplifying things as a form of political messaging the same way any politician will discuss any economic plan in broad strokes. They’re just simplifying a position so it can be understood by a wide audience that includes people who don’t visit this blog and may have a limited understanding of the problems involved.
If you take Ross Perot’s presidential campaign as an example you can see how he relied heavily on details, graphs, and data. Because of this, he was too boring to garner any attention. I know I couldn’t sit through his hour-long presentations. At the same time I often lament the current state of politics and the lack of any real meat behind the rhetoric on both sides of the aisle.
Another approach I would suggest is to consider that “Macro” Economics is pretty much defined by generalized theory. To complain about a lack of specifics in a field of generalized theory doesn’t really seem appropriate. Krugman in particular has been so successful for the very reason that he’s able to simplify things in very clear and understandable terms.
I’m not sure where to best find the specifics you desire but by very definition you shouldn’t be looking for it in ‘Macro’ theory.
Krugman is used to be confronted by bloggers.
I more concerned with what they didn’t say. Because they did not publicly brought something up does not mean they do not understand it. I do not see how and why the old good stimulus in US would or should help to cure global economy.
$25 dollars it is.
Useful comment from Dirk Bezemer under “Paradigm change” re modelling:-
His original paper on successfully predicting the Great Recession through modelling is excellent too:-
“My usual thinking is that neither tax cuts nor further stimulus will really help the economy until the financial side is stopped from sucking off any surplus and then some.”
Yep. As fast as you pump in the tax cuts the Banksters are there to undo it by reinstating taxation without representation (blowing asset bubbles).
Would love your feedback on an article I’m writing that I will be turning into a comic about banking/monetary reform. It is based on the ideas of Arthur Kitson. A simple solution to banking. Feel free to edit it with your thoughts. Any help would be appreciated. Thanks.
Cathy is referencing micro externalities. Adding government redemable, hard money, to the economy requires consideration of externalities such as liquidity preference. Soft money, debt, is short term and is repaid. Hard money is controlled with taxes. Hence two systems of money made necessary by the limitations of a gold standard.
Krugman is arguing macro before establishing micro conditions like workfare as a stimulus. T
You get a bunch of Establishment liberals together and, of course, they are going to blow smoke. Same thing will happen if you get a group of their conservative couterparts together.
I can’t imagine spending $25 on such an exercise of the obvious unless you just want to see what color of smoke is being blown.
However, I would disagree sharply with mathbabe. The economy is large but it isn’t all that complicated. I do agree that we need to look at it, our political system, indeed our society in general to really understand what is going on and what we need to do. Nor would I give Soros a pass. His uncertainty spiel sounds like a cop out: Don’t hold financial pirates like him accountable because hey, it’s complicated and none of us really understand the consequences of our actions, blah, blah, blah.
I say this all the time, but the three great issues of our times are kleptocracy, wealth inequality, and class war. You can add the military imperialism of our military industrial complex as a fourth if you want, but these are the issues. So if you get a panel of experts together to talk about the great issues of the day, and they are not talking about these things, then they are blowing smoke. To use an example that I have used before, it is as if a group of military experts got together to discuss the military history of the period 1939-1945 and yet made no mention of or allusion to the Second World War.
The problem is liberals, conservatives, MMTers, what have you by refusing to grapple with these central issues promote a false picture of the current system, and that is that it is reformable. In this context, you can take Soros’ uncertainty principle as his bias for relatively light reforms.
In all these is the idea that the current system is fundamentally sound, but this is belied by the 2008 meltdown, the massive and growing wealth inequality, and a thoroughly corrupt political process that is at once abject and supine before monied interests and on the other capricious and violent in its military adventures.
So why do these people not talk about these things? Because they are a part, a very comfortable part, of the same system that has made these disasters for the rest of us. Their allegiance is to that system and the elites (to which they belong) who run it, not to us. If you want simple, it is that simple.
She’s talking about the complexity of the financial system, not the economy. And the financial system DOES impact the economy, as we are witnessing now, and economists don’t understand it. Go look at this paper:
It’s the best job I’ve seen so far, by a considerable margin. It debunks a ton of conventional thinking among economists. And it has been pretty much ignored.
I don’t think O’Neil is completely clear and consistent in differentiating between the economy and the financial sphere.
The current financial sector has endless surface complexity but underlying it all is simple theft, and its consequence wealth inequality. I would agree that finance should be boring, plain vanilla, and pretty much run as a utility. But keying in just on that is insufficient. No real change will happen under our current elite driven system and the thoroughly corrupt political and judicial processes it controls, nor its propagandizing media and academia.
We need to move simultaneously on all fronts. Not to do so would be do precisely what O’Neil accuses Krugman et al of doing.
“and many of the little guys are still stuck in ludicrous contracts left over from the outrageous securitizations that took place in the CDO market.”
We can tell the scope of the problem by the extent of the populace adversely materially affected by what ever the precise trigger mechanism. CDOs may be material cause, but now that the conditions of the world have dramatically, and disastrously changed, the stranded assets from the financial innovation of securitization, have to function in a world they are not capable of adapting to. And because the individuals who have attached themselves in a binding way to the mortgages, car loans, credit cards, student debt and the communities as well with municipal bonds, etc, this relationship to debt instruments that made sense in the pre-financial collapse era, have yoked us each and all, stranded us each and all, in a new era of debt that can not perform because the social, political and economic conditions of day to day life have changed.
Like the S&Ls stuck with low interest rate mortgages they held on their books, and the high interest rates they had to pay out to keep deposits from migrating to Wall St, we have high interest rate, high cost debt supported by suppressed wages, fewer jobs, political pressure to reduce taxation for the corporations and 1%, coming together to squeeze us into political submission.
The contracts from the securitization era all still allowed to function in an era that simply can not sustain them by any measure socially, politically or economically, yet they still persists as 1st class property rights superior to the health of the social order. Once again, the simple solution is on every front to put the the interests of private capital in a subservient position to the the public interests of the social order.
The hallmarks of the mixed economic solution to the death of capitalism and the ruin of WWII were massive state infrastructure and universal higher education. Like agriculture and industrialization, economic democracy in the form of the New Deal, the Great Society and Civil Rights propelled humanity to the greatest level of progress to date. The three pillars of American Civilization, Economic in the New Deal, Political in the Great Society and Societal with the Civil Rights Movement provided for the world closer to ideal than any before. The attacks on Social Security and Medicare/aid, the attacks on unions and citizens electoral power and the attacks on Gays, Women’s sexual activity and ethnic minority advances are a 3 pronged reactionary war against economic, political and social change to the benefit of each and all, as private individuals and public citizens.
The Financialized Economy is Weaponized money in the form of debt, stranding us in a social limbo of uncertainty, anxiety and fear. To not know who fired the shot on Wall Street that started the collapse that we now must all endure, is to not face the problem. This was a man made mess. Individuals acting separately but within the market mechanism are to blame. Some criminally, but even if not illegally, the consequences are a crime that can not be allowed to be committed ever again. In addition to any prosecution that can be extracted from the current political conditions, the need for stimulus with real consequences, such as the resurrection of GM and Chrysler and preventing even Ford certain death in the wake of its competitors demise is paramount. Health Care Reform was the first step, now, economic restructuring is the next step.
Gril geeks generally and mathbabe specifically ROCK. Much follder here to encourage further debate and exploration, as this thread well demonstrates.
A well deserved well done.
Really fine post – clear, comprehensible. Thanks!
I agree that the derivatives market was to a considerable extent directly responsible for the 2008 collapse, but the problem seems to me to go deeper – traditionally, capitalism was based on return on investment in production of goods, on manufacture. As capital became increasing global (with the freeing of restrictions on its “movement”), it inevitably went in search of the cheapest possible production venues, which in turn meant the loss of jobs in costlier venues. How could (Western, first-world) consumption be buttressed in the face of the loss of middle-class (unionized, manufacturing)jobs in the West? Credit! And how could credit be spun into capitalist profits by investors, based as it was increasingly on dubious grounds? Derivatives! I dunno, somehow there seems to me an inherent contradiction in the system itself as it has evolved over the last 30 years, though I can’t quite define that contradiction. Maybe it’s time for a genuine paradigm shift – from “profitability” to “sustainability”, perhaps?
Why Does Economic Yada Yada Never Make Sense?
A Theoretical inquiry into mutual inconsistent optimization methodologies.
by PRofesser D. Tremens, NFL, GED;, Chairman of the Economics Faculty at University of Magnia, Director of the Institute for Contemporary Analysis
Here is the Economic Theory Impossibility Theorem (ETIT) or “The Eat-it Theorem”
I + I + I + I . . . + I(n) will never equal “We”; where I = single individual and We = social unit singularity.
Notice how everyone talks about “our” economy and “our” system and what should “we” do?
That form of language has no inherent logical meaning because of the Eat-it Theorem.
The Eat-It Theorem can also be expressed as follows:
“For any given number of I, such that the number of I = I(n), there will always be a We < I(n) such that the utility maximazation function for We does not equal the summation of all unitary utility maximzation functions for I over all I(n).
I love it when people who don’t understand economists accuse economists of not understanding whatever they think they’re an expert in. There are manyof good critiques of Krugman’s positions. This “the real world is complicated so your models are useless” nonsense is not one of them. A lot of people who “really understand the financial system” screamed about how inflation was always just around the corner as interest rates stayed very low. These economists (who don’t understand anything apparently) correctly predicted that interest rates would stay low even as the monetary base was greatly increased.
We had a global financial crisis which has destroyed wealth on a massive scale and left lots of people unemployed. And THAT resulted directly from implementing the advice of economists to make the real world look more like what their theories said was best (I discuss this long form in ECONNED, with lots of footnotes, so I have the goods).
In other words, the economics profession has just done massive harm, and not only do the incumbents show a remarkable lack of humility, but people like you defend them.
This comment is much closer to the mark than you are:
Economists refuse to consider instability in their modeling (I discuss this also in ECONNED, the “ergodic assumption”). It’s central to their scientific pretension. The problems with the intellectual honesty of the discipline are far more deep seated than you seem prepared to recognize. Defending a meal ticket, perhaps?
Oh, and yours truly did say interest rates would stay low, as did quite a few others. The inflationistas got more media access because that falls in line with mainstream economic thinking (Bernanke and even Krugman keep making reference to a loanable funds model even though that has been debunked).
Godley and McCarthy in 1998 predicting the 2008 Great Economic Recession because the Congressional Budget Office is using a non-MMT model:-
? on NC, a site rich in understanding the calamity of debt based money, scarcely a hint of the remedies we know. Neither the post nor the comments expand on MMT, Kucinich/NEED, Graeber/Occupy, Ellen Brown/PBI. To break the banks’monopoly on creating debt based money – that where we all have to begin. Come on guys! Let’s get serious about this, it’s eating us alive. Go team!
Agree. If you use stimulus without significant structural reform the largest amount of the benefits of the stimulus will flow to the upper 1% just as it has for the last three decades. Why would it not? Deregulation, lax regulatory enforcement, tax loopholes and a tax structure that allows those with highest income to pay a much lower rate than average income earners will continue to provide the same distorted results, that means more upward redistribution. If the bottom 90% have litle or no discretionary income to spend then demand and investment will remain slack and the economy cannot prosper.
Most people can’t make their marriage work. That’s only 1 single person to manage and they can’t get it right.
And for some weird reason, most people seem to think there exists a white knight in golden armour somewhere out there who knows how to fix our system.
My brother used to pretend to study. He’d open his book but spend all his study time making faces in the mirror. His marks left much to be desired and my mom probably thought he had trouble learning…. imagine spending so much time reading but getting mediocre results.
There is a big difference between what those at the top think is happening and what is truly happening in the trenches.
We think change comes form the top but in reality a lot of it comes from the bottom.
white knight in golden armour
LOL! Shining and not golden!!!
Nobody turns to Krugman for policy, this is one of his continual beefs – they don’t listen to him.
Krugman doesn’t ever really write about the graft and the fraud, that’s correct. Probably he assumes that law enforcement is not his area. But hey, nobody who controls the levers of power listens to Bill Black anymore either.
“[Soros] suggested that we should instead work together to develop a theory, or perhaps even a philosophy, that assumes uncertainty itself.”
The mathematical root of ignorance of ANY discussion – much less modeling – of “uncertainty” is the nearly universal assumption that the normal-gaussian-bell-maxwellian curve and all of its handy-dandy linearized “hard-science” solvability has anything whatsoever to do with financial transactions (beyond an extremely superficial vagueness of similarity). The dominant characteristic of political economy, to anyone informed and honest enough to see the obvious, is that it is nonlinearly fat-tailed, analytically non-amenable to closed-form solutions, and prone to Black-Swan bubble-crash behavioral psychopathology.
Severely enforced regulation is herein as necessary (and inevitable in any stable form) as it is in rugby, football, hockey or any other form of testosterone-controlled chaos.
How about major infrastructure spending + simplifying financial structures + debt cancellation, this last item being the most important since most of the debt piled on the world over the past decade or more is fanciful.
For instance, imagine the magnificent stimulus that would ensue from relieving every U.S. homeowner of half his monthly mortgage payment — or more! And, it’s the only right and moral thing to do. Part of this financial cornucopia could be taxed away to make good the pension funds that would be hit by such a move.
While we’re at it, by the way, we need a one-time cancellation of all credit card debt (the “Fight Club” solution) and student loans. Again, these measures only makes sense and are a prerequisite to any kind of recovery.
Mathies created this ‘complexity’. Perhaps they should be made to take the equivalent of the Hippocratic Oath before they are unleashed from the chains of academia.
Throwing more money at a broken financial system will not work. It has not worked in the past and will not work in the future. Fixing the economic system and restoring trust requires neutering the banks and their hold on the political process. This is step one. Once this is accomplished, we can move on to step two. Structural reform, starting with unwinding the $707 trillion OTC derivatives market and debt forgiveness.
Yep, everything else is just various grades of lube to the upper echelons, extracted from below.
Skippy… CDO = financial quark, and yes it make you / me feel grey too.
Bankers and mainstream economists got us into this credit crisis. They are not going to get us out. It is beyond me why anyone takes bankers and mainstream economists seriously.
“I’m left thinking that they (the economists) are so entranced with their simplified world view that still don’t understand what actually fucked up the world in 2007 and 2008, namely the CDO market’s implosion.”
I cannot help but regard this assertion as itself an untenable simplification, especially when the question remains whether the current situation facing global society constitutes a more fundamentally economic rather than simply a financial crisis.
No one in his or her right mind argues that the Great Depression was caused (as opposed to triggered by) the stock market crash of 1929; likewise, I do not believe that a more fundamentally sound and noncontradictory socioeconomic system would have proved so vulnerable to so-called financial innovations. This level of understanding is as missing from O’Neil’s analysis as from that of Soros and the rest.
Very true. The financial crisis was/is really just a foreshock of what the much, much larger juggernaut of aggressive, values/culture-pulverising, complex systems ruptures is going to unleash – change which by design generates opportunities for increasingly asymmetric knowledge/power/wealth accumulation – be it individual, corporate, governmental, international. It was possible to know not 1 thing about the intricacies of finance to know there were huge troubles brewing long before the ’80’s (See, for example, Global Rift by L.S. Stavrianos). No serious opposition to full absorption into the globalized system would be tolerated, nor any real reform contemplated, as only actions on issues the power elites agree upon can ever be realized. The “engineered” finance emerged after gaping holes had already been blown in independent, sovereign nations’ ability to control their own affairs. These exotic financial bombs would not have made it out of the lab absent a Swiss cheese of global governance, the comfortable lie that risk had disappeared through “innovation” – a miracle of pure thought. At the same time the myth was assiduously cultivated that the “burgeoning global middle class” was more than happy to work their asses off to fund then stock the material dreams of American, Canadian, Australian, British, Spanish, Irish and so many more “post-modern” publics and Governments that had no intention of pursuing a more healthy creation and distribution of wealth and power in their domicile, so just put it All on the Card for someone else to sort out – we’ve left generations of humanity in the worst lurch since the Ice Age and STILL we lie to ourselves.
I don’t follow the argument :
0) Nobel Prize winning economists differ in their prescriptions, based on their too-simple-to-believe models.
1) The one guy with system-level understanding says “we can’t ever know enough to intervene in the economy”.
So the author concludes “we should enforce a system simple enough to understand” and “we should do a stimulus”?
It is beyond me why anyone takes economics writers seriously. NC’s links page is very good. I rarely find much intelligence in NC’s True Believer writers here.
Also, no author tries to deal with any fundamental criticism, e.g. “If you can’t predict any economic future, how can you prescribe a course to a desired future?”
Clearly, none of them can predict any economic future, or they would be multi-billionaires investing in Goldman-Sachs.
I am an economist and I understand how this stuff works.
And so do all four of these commentators.
What you need to realize, however, is that people like Krugman don’t get to have the influence they have by spruiking the truth or, even scarier, telling people what they actually believe.
I’m much happier being a pleb down here, just watching the biggest heist of the Millenium…
“The rest of the evening essentially consisted of everyone ignoring Soros and arguing about how Keynesian they all were and how exactly different kinds of stimulus would work and which way they should use 2% of GDP to jumpstart the world’s economy.”
Yeah, I don’t find it too convincing either.
“Look forward, not back.”
It seems to me that economists can always find data and time frames to fit their models. Moreover, there is probably an infinite number of (fragmentary) models that can be constructed to fit specific, temporal data sequences, much like molecular probes used for gene sequencing. A good model, IMO, should have both wide explanatory and predictive power. The key to good modeling is good abstraction, to render complex situations more tractable, but one needs to extract, metaphorically speaking, the right ‘principal components’.
I might disagree with the author on what contributed to/or caused the crisis, but I concur with her assessment of the economists. Thus, sadly, my reading of the situation is that economics *still* “consists of theoretical laws that nobody has verified and empirical laws that nobody can explain” (except in the context of a carefully chosen data sequence perhaps).
Having said that, I sense that there is increasing discomfort amongst economists, judging from what appears to be an emerging defensiveness. Perhaps this means that a paradigm shit (t-in-c) may occur at some point. This may upset meal tickets, but from a scientific point of view, is fascinating!
You’ve suggested a source of “what actually fucked up the world in 2007 and 2008, namely the CDO market’s implosion” but didn’t really elaborate on what it would take to correct this problem. Are you any better at offering advice and criticizing the panel’s economist while still leaving us in the dark with nothing more than our economic problems are “partly caused by complexity”. Could you not have at least offered to write a follow up commentary on what the process would look like in simplifying this complexity?
Phelps – left leaning? WOW!
I don’t think you are right by the way. I don’t think it matters if you understand the CDOs or not. You don’t necessarily have to fully understand the initial cause of problem to be able to solve it (in fact it is not possible to simply undo the past – you don’t unbreak a glass bottle when it breaks – you clean up the mess it makes).
Great to see so many comments and perspectives.
That Summers is some kinda knob, ain’t he? Yeesh…
I can’t really see any of these people as “left-leaning” except in the current political universe defined as per Overton.
Summers – for all the known reasons. He rideth a wave of slick more than a cubit deep.
Krugman – has absolutely refused to call for serious criminal charges against a raft of high-level, revolving-door types and other occupiers of key chairs, including the likes of Bernanke, Geithner, Paulson, Bush, Obama and dozens of others, along with the senior officers in scores of financial institutions big and biggest. The “it was all legal” or the “beyond the Law” rationales are pathetic. At minimum a goodly number of the most senior asses in New York and Washington ought to be in a sling. Oh, and it has never, ever entered Krugman’s head that a $15 trillion economy (a huge slice of global GDP for only 5% of the global population) doesn’t need to get any “bigger”. What it needs is to do is get a whole lot fairer.
Sachs – Mr. Shock Doctrine Himself
Soros – a billionaire financial shark that year after year after year after year sucks enormous glops of money out of the rank stream that provides it while making various noises about the signage.
But it was the comments on this aspect that twigged me:
“He suggested that we should instead work together to develop a theory, or perhaps even an philosophy, that assumes uncertainty itself.”
You could take that statement just about anywhere and then some. Here’s just a couple:
a) Why assume it’s economic theory that imbues the elite with “certainty”. How “certain” would they be of their economic prescriptions if they had been native to any of the countries Sachs helped with “shock therapy”? Consider the difference in backgrounds/world-view/perspective between Summers, Sachs and Krugman vs Soros. Just maybe having the power of the US backing the prevailing (Fed) elite “theory”, on whichever side post-WWII, is the source of “certainty” rather than any particular quality of the model(s).
b) There are a set of enormous, visible, delineated, inter-related systemic crises all coming to a head at roughly the same time over the course of the next couple of decades. What passes for “leadership” does nothing to address any of those in any positive fashion, but seems quite happy to take care of its “uncertainty” problem the old-fashioned way – protecting power by feeding it generously.
c) Peoples globally are going to have to be prepared to take some very big risks if they wish to regain control of their futures – if we (ruling generation broadly speaking) balk at this, we consign the kids and grandkids to a very bleak prospect.
Drat. Left out Phelps. Slot him in with Krugman et al as opposed to Soros in the sense of a faith in capitalism that cannot be separated from faith in “America”, but he is anything but “left-leaning” in the traditional sense.
Check out this linked piece. A quaint, mild-mannered cousin of Ayn Rand with a fairy-tale ending if we “just get back to capitalism” with the Internet as exemplar. Good grief:
This was an excellent glimpse into the other half of the ‘stablishment priests of refit theories. More!
One addition: Neither of these luminaries – maybe not even Soros – seems to believe, or acknowledge, that the rule of law itself, and the notion of property owned by individual citizens, has been taking a beating in the systemic government-abetted control fraud since 2008 (and the tacit collusion since 2002). An open society might run out of money and survive, but if the government is handing out indulgences along with digital dollars, not one pillar will be left standing. This game is 1920’s dangerous in the extreme.
The thing is – Economists, like all professionals, need to be assertive and affirmative whether it is just by appearance or they really have some in depth knowledge into working of the things they specialize in. Another such professionals are medical doctors, they might not know exactly how human body works and how it reacts to drug/treatment/operations but they still treat patients as if they do. (Not suggesting that they know little but only a fraction of how human body works is well understood while unanimously agreed by everyone in the field as truth.)
From another angle, does the author suggest having a panel of 4 economists all admitting they do not have a clue what all these proposed measure would work will make the situation better?
Modern economics is built upon the premise of scientific reasoning – that is, theory can only be proven wrong. And the only way to bring a theory to “near-correctness” is by performing as many experiments as possible which are never easy (if possible at all) to be done in the realm of Economics out of economical, humanitarian, or various other reasons. (try split USA into 2 and do QE3 on one but not the other part So while the mainstream economicists might not know what they are doing/advocating, it might still be a better alternative than having a bunch of Mr Soros working on “building a theory based on the assumption that we know nothing about how the market works”. At least there are different view to choose from!
Science is based on testing theories, show me the economic tests. No science, all austerity. To reason is treason.
When I read that Soros was shutting down his hedge fund of other investors other than himself and his brothers, and kids I said uh oh. Then the Newsweek, Daily Beast article was not warm and fuzzy in the least. I couldn’t find a angle for him even though the conspiracy theorists insist he works night and day to force everyone to take drugs and become gay.
I understand he is the bet noire of the right wing and that he obviously is very complex and varied like most humans but he has also survived things that most Americans only see in Hollywood movies. So what I am saying he has acute survival instincts and he is old enough to care that what he says rings true, if only for his own legacy. Plus survival tends to make you a realist or very, very religous.
He did say regarding Obama “there is no economic policy”, or they don’t have one awhile back on CNN. He has been talking about the inherent uncertainty of markets for quite awhile also. Personally I’m listening but I don’t think DC is. It will really be up to China/Russia/and others as to how the new system works. Looking at debt levels from the CIA Factbook is truly instructive for a peasant like me. Perhaps that is why Putin is getting the “condom” white revolution, some people see a new feast, but I think the people behind Putin are truly not so humored and this could end very badly. China really has also had a lot of patience and understanding but for how long? Like the long suffering girlfriend she may walk out at the worst time. I personally think the American Establishment currently in charge are about as sane as cuckoo birds on LSD. I also think younger leaders of rival powers may have more unforgiving memories and may not really be there when boyfriend gets kicked to the curb.
It is truly horrifying to read comments on Zero Hedge about Greece and yet they seem to think that is over there….
I’m sorry, I don’t see the genius of this post. Despite her fulminations against the speakers’ proposals, O’Neill hasn’t evidently offered any contradictory, superior solutions. She believes in ongoing fiscal stimulus and considers current legislation inadequate- which brings her into accord with the entire panel.
That is, unless you grant the, ahem, apochryphal suggestion that Krugman considers Dodd-Frank a long-term, comprehensive solution to complexity in financial markets. Or that Phelps excludes any consideration of business dynamics, regulatory capture, complexity, or imperfect information from his analysis of the economy. I’m sorry, but no. These aren’t dullards. Nor is complexity a novel development in financial markets.
Her entire discussion deliberately elides the context in which this discussion is taking place- namely, what actions are politically feasible and can be implemented in the relatively near term. I think we all share O’Neill’s frustrationbecause they aren’t proposing idealized solutions, but I think it’s quite a bit more likely that it’s because they’re a waste of breath.
Rather than project a really astounding measure of ignorance on the panel and economists writ large, maybe she could condescend to the muck of political reality and propose viable, imperfect solutions that could benefit the financial system as it currently exists.
Or maybe another raging epistle to cyberspace where she calls someone else stupid. It would receive a warmer reception…
I don’t think Krugman actually disagrees with Soros; he’s just obsessed with fixing what he’s called the “short term problem” (called “short term” based on Keynes’s “in the long run we are all dead”). He really hasn’t been looking further.
If you *ask* him to look further he will pay a little attention to the criminality and the complexity and then say “but we need to deal with the short term problem first!!!!”