How did economists get it so wrong?

Discussion in 'Politics, Religion, Social Issues' started by Ugg, Sep 3, 2009.

  1. Ugg macrumors 68000

    Ugg

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    #1
    Paul Krugman, a Nobel prize winning American economist has been writing a column for the New York Times. He's an unapologetic Keynesian.

    Here are a few excerpts from an 8 page article he wrote.

    Although SydneyDev has been arguing in the health care thread, if I didn't know any better, I would think that Paul is pointing his finger at him. Sydney's contorted logic exemplifies the failure of the markets.

    The Chicago School has clearly been discredited as Krugman so clearly points out. Krugman is less a prophet than a seeker. I honestly don't know where US Economists led so blindly to the cliff by the likes of Milton Friedman will go from here, but their failure is clear for all to see.
     
  2. Raid macrumors 68020

    Raid

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    #2
    Well I don't know of any one who believes that the current markets are perfectly efficient and consumer behaviour is perfectly rational, but I know many rely on that assumption to make economic models simpler.

    I'm quite certain that this changes very little in regards to the basic principals of the contributions Keynes and Friedman made to economics, so the attacks on their contributions is just juvenile.

    To me it seems there was no shattering of economic theory but a new era of 'gaming' the market arose. Like the great depression before this new market manipulation went relatively unnoticed, unchecked, and unregulated. Now we live in an era of corporate bailouts, deep diving recessions, and increasing debt because real risk modelling went out the window and the big money in the market is in making stock prices move and not on properly evaluating the worth of stock.

    Mathematically we should abandon the assumption of rational and efficient markets but mathematically we can't afford to either, and rationally the concept should not be abandoned. Untill we get to a rational and efficient market place we really need to spend more time figuring out why we aren't there yet. ... and who's making money off of it.
     
  3. bobber205 macrumors 68020

    bobber205

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  4. Zombie Acorn macrumors 65816

    Zombie Acorn

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    #4
    I believe that if the government would have kept their hands out of the housing market we truly wouldn't be in a recession today.
     
  5. rhsgolfer33 macrumors 6502a

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    In answer to the question in this threads title: because economists cannot predict the future. The fact is, no matter whether we choose to believe Keynesian or Classical theories, there are going to be recessions and most people, economists (both Classical and Keynesian) included, will always fail to see those recessions coming.

    Keynesian and Classical will still probably continue to be debated, both will still probably fail to see recessions coming, and people will still feel slighted by economists when the fail to predict future market events.
     
  6. Raid macrumors 68020

    Raid

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    That's kind of a simplistic viewpoint; FI's took advantage of a boom trying to make all the money they could (nothing wrong with capitalism) even selling mortgages to the bottom-of-the-barrel risk profiles. In a purely capitalistic market, the interest rates would have changed with the increased demand for cash but it didn't quite clear due in part to monetary policy.

    However that low rate just kept the good times rollin'. The FI's really did themselves in when they tried to dilute their risk by selling those risky loans to other FI's who were diluting their own risk by selling their loans ... and so on. There should have been a (rational, modeled) point at which the default risk was unacceptable for the FI. Yet even risky loans were still pumping out a profit at the time and since they didn't 'really know' what kind of risk they had in their portfolio, it was risky business as usual.
     
  7. Zombie Acorn macrumors 65816

    Zombie Acorn

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    #7
    The government propelled the selling to the bottom-of-the-barrel risk profiles, its what they wanted, the corporations didn't mind because they were making money for a time. All of these loans were perceived to be "guaranteed" by the US government. If the government would have just stayed out of the housing industry completely we probably would have been fine. I don't think that these corps would have entered into the risk taking maneuvers they did if they didn't assume the government was going to jump in to save the day if anything went wrong.
     
  8. zap2 macrumors 604

    zap2

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    #8
    :rolleyes::rolleyes:


    No, whiles its true the government did increase loans to people previously unable to get them, they were mostly people who could actually pay, but then corporations got greedy, they started increasing leading to even more people. I'm assuming you're talking about the Community Reinvestment Act, right? Problem is,

    Basically, what that is saying, is of the subprime mortgage crisis, only 6% were based on those "government suggested loans"

    (Source http://blogs.wsj.com/economics/2008/12/03/feds-kroszner-defends-community-reinvestment-act/ )



    You're argument is based on "I don't think" and "we probably"...don't take this the wrong way, but that doesn't seem like you've looked into it....or at least based on any hard numbers.
     
  9. Zombie Acorn macrumors 65816

    Zombie Acorn

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    #9
    No one said anything about CRA. The government has been pushing the "every family must own a house" ideal for a long time. There is no reason the government needed to be involved with F&F.
     
  10. Desertrat macrumors newbie

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    From what I've seen, these last forty or so years, the behavior of Keynesians is a rather religious style of thought: Faith, regardless of factual outcomes. A fundamental part, begun in the FDR era, is to inflate the money supply some two to three percent per year in order to maximize employment. The problem here is that the buying power of the currency declines by at least that amount--and commonly more. That, class, is why there has been the loss of buying power by the economic middle class since the 1970s.

    The Austrian school's notions fit reality much better.

    As far as the CRA, it and some ensuing legislation previously discussed here enabled and encouraged the growth of the various manipulations by Lehman, et al, and the fantastic increase in derivatives. As always, this sort of thing when coupled with easy credit and artificially low interest rates led to the boom and bust cycles we've seen with the dot-com mess and then this present recession/depression.

    Previous efforts by first Greenspan and now Bernanke to have the "soft landings" during recessions--engendered by the hard landing of 1980-1983--merely deferred market corrections until this current debacle. Unfortunately, the monetary policies are continuing the malaise, preventing market corrections.

    It's gonna get worse. If you look at the numbers for commercial real estate, it's in the trillions. And we still haven't bottomed in the residential markets, with these ARMs and AltA loans still in play. Those are just part of the problem, however. This insane spending level by Congress, with the trillion-dollar deficits foreseen for several more years, means that just the interest on the ever-growing national debt will amount to some half-trillion per year. A side effect is the ongoing decrease in the buying power of the dollar.

    Odds are that this winter or next spring will see a dramatic increase in consumer price inflation...

    So: I don't have a clue as to whether or not you'd call them economists, but numerous investment newsletter people foresaw this current state of affairs and were in print with their predictions in at least 2005 for several. Those at the Agora group; the Doug Casey folks, among others. And Roubini, IIRC, called it back in 2001.

    The federal government has hundreds of economists on the payroll. None of them saw it coming or commented. So, given that a duty of the feds is to protect you guys, why aren't you hollering for them to be fired? :D They flunked "Financial Protection 101".

    Actually, failure is being rewarded. Paulson, Geithner, Greenspan, Bernanke: They're among those responsible for past and present monetary policy. For all that they have contributed greatly to your troubles, they're still treated as though their ideas had merit. Overseas it's the same: Gordon Brown, while Chancellor of the Exchequer, sold hundreds of tonnes of England's gold at the bottom of the market: $264 per ounce. Where is he now? Hmmm?

    Bush's advisors led him and the Democratic Congress to initiate the foolishness of Stimulus and TARP. Obama and the Congress are continuing this same financial devastation. IOW, no change, there. Same old, same old. Ron White was right.

    Hope y'all bought a bunch of gold back when it was below $400. There were 23 million ounces in short contracts, a few weeks back; now it's down to 20 million and falling. At some point, particularly now with central banks becoming net purchasers, the shorts are gonna lose out and it's gonna get really, really interesting. Chinese curse interesting...

    'Rat
     
  11. Shivetya macrumors 65816

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    It could have only occurred with the Federal government tacitly agreeing to backing the loans which is what they did through interference in FreddieMac and FannieMae. Throw in the coercive crap from certain Congressmen, many of which got their own sweetheart deals, and accusations of red lining what did people honestly expect? Good lending? Get real. Of course after seeing where it was all going we were bound to get the pond scum in there trying to make a buck, those who figured they could hide under the umbrellas of larger groups.

    Unrelenting government spending, heavy taxation, and interference in the housing market (and health care market as well) is why we are in the situation we have now. The "capitalistic market" didn't have the ability to do it on its own.
     
  12. Raid macrumors 68020

    Raid

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    #12
    Well as one who has studied Keynesian economics and it's evolution I've seen economists endeavor to rationally quantify, model and explain factual outcomes in an increasingly complex world of regulation, exploits, and financial mechanisms. In doing so I've also learned a few things, like how inflation is not a necessary condition for growth, but a by-product of a booming and resource limited economy.

    While the "Austrian school" of economic thought is seemingly gaining momentum, but it is simply an idealistic model of pure capitalistic "laissez faire" economics and the same starting point as Keynesian economics. The "Keynesian school", given the same conditions of a pure capitalistic economy would not only follow the same "Austrian" process of consumer action but would at least be able to estimate results based on known parameters. The Austrian school has this wonderful problem of never being wrong because they never put forward a quantifiable guess at the outcome.

    You are right that failure has been rewarded and I'm angry at that too. However monetary policy did not cause defaulting loans and the resulting credit crunch. I also agree that the debt America is alarming but all the partisan bickering seems to be gleefully ignoring the fact that the debt is due to decades of wanton government spending and an unwillingness to increase taxes to pay it off.
     
  13. Desertrat macrumors newbie

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    #13
    Shivetya, the increased rate of government interference with the marketplace which arose in the LBJ era strongly inhibited the productivity of the freer times, even after FDR's meddling. Very little of today's economic "hickeys" stemmed from the capitalistic marketplace itself. Doesn't matter if you're talking "sending jobs overseas" or flipping houses, it stemmed from government interference.

    'Rat
     
  14. Eraserhead macrumors G4

    Eraserhead

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    #14
    Those poor, poor companies, doing what the government asked of them even when it wasn't a good idea for them.

    Sounds like they were poorly run to me.

    Source?
     
  15. BoyBach macrumors 68040

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    #15
    As JK Galbraith so succinctly put it:

    "The only function of economic forecasting is to make astrology look respectable."
     
  16. Desertrat macrumors newbie

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    #16
    Eraserhead: The source is easy. EPA, OSHA, minimum wage, etc, etc. Not that these are "bad", but they do indeed have negative impacts on doing business--by raising overhead. Add in the tax costs of the HEW and that's less money for investment in the marketplace.

    Raid, I don't pretend to be any kind of economist. But I damned sure understand money. Late-'80s, I started wondering, "How long can this go on?" By the later stages of the dot-com bubble I was seriously nervous and started coppering all my bets. E.g., bought gold below $400. Cleared out all debt. Came the housing bubble and I knew we were headed for a world of hurt. By 2005 I was grumping right here on this forum.

    As near as I can tell, the Austrians said that more spending will hurt, and extend the financial miseries; Keynesians are favoring the present monetary policy which is merely a continuation of what Bush started--and it's merely a reprise of Hoover and FDR. ("Where's the change?")

    And those who did the accurate predicting are of the Austrian school. Our glorious government folks, SFAIK, are Keynesian--and they oughta get fired. They failed at their jobs.

    'Rat
     
  17. Eraserhead macrumors G4

    Eraserhead

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    #17
    Environmental standards and health and safety have to be obeyed in every developed country - and even countries like China are improving their standards as well, and we're all doing just fine with those regulations.

    And the minimum wage in the US of $5.15/hour is disgustingly low, in the UK our minimum wage hasn't really caused jobs to be lost even though it has risen by 60% since 1999 when we introduced it and is now $9.40/hour.

    And none of those things caused the housing crisis, and they aren't big factors in moving jobs overseas - the fact that people are prepared to work for $4/day is - and noone could ever be expected to work and live for anything like that kind of money in the US.
     
  18. Ugg thread starter macrumors 68000

    Ugg

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    #18
    I would argue otherwise. EPA means fewer lawsuits for environmental dumping, OSHA means more productive and happier workers, and the minimum wage ensures that your employees won't steal from you because you pay them so little that they can't afford to buy food.

    We're all in it together 'Rat, business isn't a bubble that exists outside of normal life, it's a bubble contained in a larger bubble.

    it's getting really old having "business" and the "free market" bandied about as though they're non-human, emotionless entities when nothing is further from the truth.
     
  19. Iscariot macrumors 68030

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    #19
    As evidenced by the fact that Wal-Mart and Target got married and Walgreens is totally jealous and is only with JCPenny to get back at Sears.
     
  20. bobber205 macrumors 68020

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    #20

    You know the best way to get rid of overhead?

    Slaves.

    There. I said it. ;)
     
  21. Eraserhead macrumors G4

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    #21
    Adam Smith was actually of the view that slavery was less efficient than free labour ;).
     
  22. Desertrat macrumors newbie

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    #22
    You're taking my comment about EPA et al out of context. All I said was that they are government interference which reduces the productivity of a given industry. Period. I'll happily go on and point out that EPA mandates give rise to other industrial efforts which are profitable--but that doesn't necessarily help those employees who get laid off from the impaired industries.

    No different from the UAW warfare against robotics, even though the production of roboticized equipment created a net increase in economic activity. Fewer UAW jobs, however.

    Anybody who thinks that any increase in the minimum wage doesn't result in layoffs has never owned/operated a small business with some dozen employees. If a product's pricing is inelastic, there is no choice but to control overhead. When labor costs are all that are subject to control, somebody loses their job. I guess I can either believe learned discussions or my own lying eyes, and I bet on my eyes and decades of direct observation.

    Ugg, regardless of how one "feels" about anything, money doesn't care how it's made or who spends it. Economics 101 rules. I can be compassionate and strive to treat employees and customers fairly, but I'm still stuck with the costs of doing business and the market prices for my products. Those two factors absolutely control me.

    'Rat
     
  23. Eraserhead macrumors G4

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    #23
    Except that those exact arguments were made in the UK before we implemented the minimum wage and jobs weren't lost, and that lack of effect has continued even though the minimum wage has increased significantly more than wages have increased since it was introduced.
     
  24. Desertrat macrumors newbie

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    #24
    Eraserhead, I'm merely commenting on what I've seen. Again, if you haven't been involved in business from a hire'em/fire'em standpoint, you're relying on somebody's study. I'm going by what I've seen in friends' businesses, my businesses, my wife's business, and not by anybody's study. Forty-plus years of consistent anecdotes is pretty damned good data. :)
     
  25. SactoGuy18 macrumors 68020

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    #25
    I think Krugman is forgetting one big issue: it's almost by definition that income taxes in the long run discourages personal savings and capital investment in the country because you lose a large fraction of your hard-earned income to the government. And you wonder why places like the Bahamas, Bermuda, British Virgin Islands, Cayman Islands, and so on have so many "corporate headquarter" operations and banks--they're used to shelter American- and European-owned liquid assets from the IRS and European tax authorities.

    This recession points out the need for MASSIVE taxation reform so our tax laws encourage keeping personal savings and capital investment staying in the country, not leaving the country for income tax avoidance purposes.
     

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