There's a little fellow named Peter Schiff who was "more right" (if you include investors in addition to economists). Roubini has been revising his predictions the entire time, his only claim to fame is that he's one step ahead of the pack in terms of his bearishness. And his solution--more bailouts and other Keynesian nonsense--is also way off. This shows that he doesn't fully understand the problem.
Schiff has been consistent in his predictions for the last few years. His solution to this government-created mess is to let the market fix it, an infinitely sounder approach than the government intervention that Roubini and others advocate.
And high on the list has got to be: "I forgot we were fudging the numbers. I mean, I was there when we decided to downplay the bad news by re-interpretation of inconvenient factors, but I forgot not to use them in my own calculations."
i have been seeding that conversation too. google my moniker plus derivatives plus haloscan.
lots of the derivatives, like options, will expire worthless, maybe most.
the dearth of straight information makes it only guesswork. like for example wasn't there a dtcc report that while full of mind boggling numbers still was reported the next day to be incomplete.
the problem is even fractions of the admitted numbers are bigger than USS gdp.
so what gives with people avoiding the subject. it's not like there is a conspiracy here. there are big facts here that are too too too too freeegin big NOT to enter into the discussion.
i am amazed by the thought barriers people will defend to keep their minds within the proscribed lines.
Rob Dawg, I think micro economics works great - it really helps with setting prices and I believe it helped my company maximize profits. I think Macro predictions are far more difficult - although the housing bubble / bust was easy to call (IMO).
Traunche Coat Mafia understands, Nuke is stuck on stupid.
What we are going to see is monetization, then high real interest rates to check the inflation, and thus slow growth for a decade or more as high real interest rates stifle investment. Bad for living standards, bad for stocks, bad for long treasuries, okay for cash.
Krugman does well to post his sycophantic congratulations now, before any of these people become responsible for events in the real world. This may well be his last chance to do so without getting laughed off even the pages of the New York Times.
This was for the last post but you got this one up fast.
My wife works for the largest ceramic electronic equipment manufacturer in the world. Panasonic formerly known as Matsushita is one of their larger customers (Toyota, Apple, Motorola, Nokia, etc. are just a few of their other customers). This company will be closing their factory for several days. This company has been around over six decades. This is the first time this has ever happened. Shes been with the company more than 15 years and told me things are going to get very ugly. My response was havent you been listening to me? I had lunch with my wife the president and a few retired executives of the North America operations about six months ago and we discussed the economy and exchanged our views about what was coming. He thought I was overly pessimistic (crazy). I spoke with him recently and he admitted he was shocked how fast things went down hill. They are just now getting around to forecasting their future sales growth downward. Seems to me this is how most of the corporate world works. He was curious how I knew so much about what I believed was coming. I told him I have been studying about past recessions for three years as part of my work (stock trading). I suggested he read CR and Nouriel Roubinis sites along with a few others. I believe he and many others have taken my advice now.
CR,
My apologies. You are correct. I was only referring to macroeconomics. The parallel is in the urban planning community where you need to know how many parking spaces but planners can't be trusted to design a traffic model.
Wrong, bgates. We're not going to see high inflation. From each mistake we learn one and only one lesson. We learned that deflation is bad in the 1930's. We learned that CPI inflation is bad in the 1970's. We learned that asset bubbles are bad in the 1990's and 2000's. Put these together and you get the recipe for big budget deficits, high real interest rates and low inflation, which result in low growth. What will we learn next? That we need some way to control big budget deficits. That is, someone other than Congress needs to be able to raise taxes or cut spending, because these are two things politicans hate to do. It will take another decade to learn this though.
I find it extremely amusing Mankiw ranks himself so highly on the basis of citation counts.
He must be oblivious to the recent paper that exposed the promotion and citation of fraudulent or misleading work versus the competition.
It really doesn't matter though. He takes public positions using his background as a credential, but when his public positions are consistently garbage one should not listen to him regardless of background.
In any event, he could use some instruction on the modern history of economists. Some of the most heavily promoted pieces, have been the most destructive only because their authors could not conceive they were a means to an end.
If he happens to come across this comment, I suggest he put his money where his mouth is. His textbook(s) refer to Laffer in a reverential way, so he should leave his tenured position and make some money at Laffer's new fund with his deep knowledge and understanding.
Careful CR, Mankiw was right about home prices very, very (very) early, and for a reason that has yet to hit the market: Boomer demographics. From The baby boom, the baby bust, and the housing market (Regional Science and Urban Economics, 19(2):235258, May 1989) by Mankiw and Well:
If the historical relation between housing demand and housing prices continues into the future, real housing prices will fall substantially over the next two decades.
Krugman will be joining 'economists' in the ash heap of history as the final attempt at Keynesianism, now underway with Bush and to be continued under Obama, proves a miserable failure.
Easy to see this a priori.
Just as it is easy to see that we are barreling into the Greater Depression, and not just a deep recession.
As Jas says, 'It's the debt, stupid.'
You still have time to get on the right side, CR! Don't be a Mankiw!
CR, they much rather move on to the next topic. The fact that they were unabashed cheer leaders of the ownership society will not deter them.
Also remember that both were major supporters of personal accounts in Bush's social security plan. I am sure Mankiw is trying to paint over that fact as well at the moment.
Economists or not, who in the media dared stick out their necks 3-4 years ago on pointing out the growing systemic risks? Bill Fleckenstein is one who comes to mind. I'm sure there must be others.
Stratonovich calculus ,
That must have taken some digging. However that quote is about something much milder and we have not come across it yet. I think much more relevant were his illogical vehement denials since he has been a Bush advisor.
Comrade-Dope jg,
I see Krugman as an editorial personality. I'm ambivalent to him, just as much as I am towards the women in The View. I'm much more forgiving of someone that argues in support of their proposal transparently, than one who acts and later tries to suppress their failure
Not so, Irving: shocking statistic was that Japan's economy peaked with household debt/real disposable income of ~130%, which was nearly exactly the ratio when the U.S. train first came off the rails (Q4 '06).
"Wrong, bgates. We're not going to see high inflation."
at the bottom in 1974, gold and oil were dead right along with equities.
i really think that everyone's certainty that commodities are dead forever is a bit much. $300 oil is just as likely to eventually happen as it was when oil was $140. maybe moreso.
That's a misrepresentation. Economics has evolved a long way from old fashioned Keynes.
If anything, the mistake being made currently is not allowing the system to purge the itself of the poison.
Policy should NOT be aimed at saving insolvent companies and banks run by morons. If anything, the government should accelerate the process of disclosure and bankruptcy so we can move on as soon as possible.
If there is going to be a fiscal response, let it be aimed at helping the poor and middle class people who lose their jobs so they can bridge the gap while they move on to something sustainable and productive.
So as long as our creditors allow us to sell our debt in dollars only, we'll be fine. What keeps our creditors from forcing us to denominate our bonds in something other than dollars? This scenario doesn;t seem outlandish to me.
If there is going to be a fiscal response, let it be aimed at helping the poor and middle class people who lose their jobs so they can bridge the gap while they move on to something sustainable and productive.
Patrick | 11.28.08 - 1:28 am | #
while they move on to something sustainable and productive.
Oh Im sure their working feverishly on a new bubble!
$300 oil is just as likely to eventually happen as it was when oil was $140.
And? High oil prices act as a TAX on Americans. You're telling me taxes are inflationary?
Poor nuke is still stuck on stupid. The only thing foreigners can do is let their currencies rise, in which case we just export our deflation to them. Maybe this will happen in the long run but it sure won't happen in the next few years. China and Japan do NOT need more cooling down of their economies, quite the contrary.
No doubt many economists, especially those on the right, have some explaining to do, and some have basically issued mea culpas. Last month, I listened to M. Feldstein on NPR; he was basically dumbfounded that none of his policies worked. Methinks Mankiw needs to take a cue from his mentor.
That being said, when I first read PK's post last week, the first thought through my mind was "not good. This is not the change you can believe in." If the goal is not to be red and blue, but purple, then perhaps stating that now "grown ups" were in charge was probably not the best of ideas. PK's post did not have the same tenor as CR's post; it basically evoked the image of a sixth grader sticking out his tongue and saying "Nah, Nah, I'm better than you."
But I think Mankiw's main beef was whether many of Obama's primary economic advisers (Romer, Summers, Goolsbee, and Furman -- PK's post was pre-Volcker) deserved such pre-mature adulation. Thus, while the Stiglitzes, Bakers, and Krugmans did get many things right (Krugman's quixotic quest to dispel the lack of oil speculation notwithstanding), they aren't exactly in the inner circle. In many ways, Obama's economic "czar" hasn't had a stellar record either, for which Baker has been extremely critical.
If there is going to be a fiscal response, let it be aimed at helping the poor and middle class people who lose their jobs so theyaren't sitting around plotting revolution.
One last post.
Mankiw does seem capable in his work (inflation targeting, stickiness). However he advises and advocates a lot outside beyond his capabilities. So good guy, if he could learn from his failures
For fun, here is the opening of his congratulations to Bernanke Dear Ben,
Congratulations on your appointment to become new Chairman of the Federal
Reserve. I am delighted both for you and for the nation. President Bush could not have
made a better choice.
Of course, you have big shoes to fill. Alan Greenspan is widely acknowledged to
have been a superb Fed chairman. Alan Blinder and Ricardo Reis (2005) may even prove
right in their judgment of Greenspan as the greatest central banker who ever lived. His
tenure exhibited low and stable inflation, as well as robust and stable growth in
production and employment. There is little more that we could ask of a Fed chairman.
But there is little point now to you or I heaping praise on Greenspan. Most
activities run into diminishing returns. Given all the praise that Greenspans been getting
lately, the marginal utility of one more accolade must be close to zero.
He only sees what he wants to. To that end, he did not see the housing bust coming. He name called a lot of people who did though
Bgates, are you trying to compete with nuke for stupid? High commodities prices by themselves are simply taxes, hence deflationary unless this "tax" is fully spent by the commodities producer, and it seldom is.
Pavel Chichikov writes:
"Rupert, this post isn't about solutions - but about who saw it coming. Schiff, Roubini, Krugman, Baker, Kasriel and many others did. Most didn't."
Stephen Roach?
Pavel Chichikov | 11.28.08 - 1:40 am | #
Gary Shilling not merely predicted everything, he also gave the perfect investment advice for profiting from the crisis, and he still is giving sound advice. Like don't rush into stocks too soon. Buffett, Grantham, Huffman and host of other investment pros also predicted the crisis. And what about Shiller? The list is endless.
I have been a long time reader of both Mankiw & Krugman... They both very intelligent economists, and I personally enjoy reading differing political stances...
A pissing match about who was more right, who saw it first, and who is to blame is irrelevant. It doesn't appear to me that anyone was able to effectively do anything about it...
I prefer Mr. Lahde's approach...
Obviously many mistakes were made, and I can assure you that mistakes will still be made with the "grownups" at the helm.
I just hope these economists can stay out of the politically driven mudslinging before remove them both from my RSS feeds...
Krugman saw this coming? He thought housing was in a bubble, but so did millions of other people who didn't win the Nobel prize in Economics. But he was cheering on the low interest rates for an indefinite period in 2003-4 and in fact agreed with Kudlow in 2004 that interest rates should not be going up so soon, because the economy was still weak.
Right now, Krugman wants the mother of all bailouts, big spending. This downturn isn't over until neo-Keynesians like Krugman lose all credibility.
On top of that, even a year ago, Krugman was hedging his bets. He thought it could be serious, or it could blow over (Google his NY Times articles as of Aug 2007).
"High commodities prices by themselves are simply taxes, hence deflationary unless this "tax" is fully spent by the commodities producer, and it seldom is."
45% (or more) of americans believe humanity is less than 10000 years old. they also believe that FRNs are money. yet, oddly, they can differentiate between crappy purchasing power and withheld taxes.
Nov. 13 (Bloomberg) -- The acting chairman of the Commodity Futures Trading Commission is among U.S. officials now seeking regulation of private derivative contracts, echoing an unheeded warning a decade ago by a predecessor, Brooksley Born.
While leading the CFTC in 1998, Born declared that the unregulated contracts could ``pose grave dangers to our economy.'' Born, a lawyer who according to futures attorney Dan Roth battled fellow regulators with the ferocity of a courtroom litigator, lost a turf fight with Alan Greenspan and Robert Rubin over policing the deals.
After Congress exempted the contracts from U.S. oversight in 2000, the market swelled from about $100 trillion to $684 trillion by June 30. The growth included credit-default swaps and collateralized debt obligations, custom-made products barely in use under Born's reign. They played a part in almost $1 trillion of global bank losses and are prompting lawmakers to seek controls on the complex deals.
Brooksley has been vindicated,'' said John Tull, a CFTC commissioner from 1993 to 1999.Had they listened to her, I think this catastrophe could have been averted.''
Now retired in Washington, Born, 68, declined to be interviewed for this story.
Not a single economist managed to affect/halt the rent/price ratio stupidity, so I'd say congratulatory activity is entirely without merit....as a profession, economists have been shown to be practically ineffective as a source of governmental guidance, and more than a little self-absorbed with being proven right over righting the ship.
It is not enough to warn, and then be vindicated, when the consequences are this great.
The real test of the prophets Roubini and Krugman begins today. My bet is that the two, who achieved their current fame by predicting (until it came true) that the near future would look pretty much like the recent past, will be thought to have had no more foresight than Jeane Dixon once another 20 years have passed.
Economists don't work in a vacuum. Why shoot the guy who always says "on the one hand...on the other..."
We need to put the blame on the right people:
The regulatory agencies - let's have a perp walk for each reg agency and everyone in it at key levels no matter if they are democrat or republican.
The congressional oversight committees - let's have a perp walk for everyone who received money from Fannie and Freddie to keep the gravy train rolling as well as those that looked the other way and did nothing.
From the regulators giving bad information to the congressional oversight committees who have constituents they need to please, the recommendations went up the food chain to the President.
In this case it was President Bush who bought the BS his cabinet members and economic team were giving him.
I hope that President Elect Obama, who is touted as being very smart, goes out during these last few weeks, dons a McDonald's uniform and sees how business works and then rapidly move him to management to see how labor interrelates, to regional manager to see how it interconnects.
Lawyers who have not run a business for themselves, should not be allowed to run for office.
The main problem is that all these people in places of power are academics and don't live in the real world of supply and demand. They live in a world where they use predictions, like the local psychic who gives readings for $10, about the future.
Even a lemonade stand would teach these yahoos input pricing/ supply/ demand/ etc.
I think it's troubling, particularly in the case with Detroit, that everyone single politician imaginable is involved except for the Secretaries of Labor and Commerce. What again do those posts do?
Once again, it's simply a reflection of our emphasis on finance and not productivity.
A pissing match about who was more right, who saw it first, and who is to blame is irrelevant. It doesn't appear to me that anyone was able to effectively do anything about it...
Excuse me, but the express purpose of government is to "do something".
Greenspan and the Bush Administration and the Republican Congress most certainly were in a position to do something, and didn't.
"With great power comes great responsibility" - Spiderman.
@ Rob Dawg(Good) writes:
Science is to economics as astronomy is to astrology.
Rob Dawg | Homepage | 11.28.08 - 12:58 am | #
I vehemently disagree with you on this one. From Economics we should take what doesn't work, not was does work... because that is an ex post conclusion. Alchemists paved the way for our current world but you don't see any alchemists walking down the street.
"But I think Mankiw's main beef was whether many of Obama's primary economic advisers (Romer, Summers, Goolsbee, and Furman -- PK's post was pre-Volcker) deserved such pre-mature adulation."
My emphasis - is that intentional word play? Absolutely hilarious. My head is in the gutter.
Yea, yea... dead thread at 4AM what's the point of talking to yourself? Trying to catch up with A LOT after Turkey Day Good night!
Here down under economists put their money where their mouth is:
"An academic predicting a collapse in house prices has made a bet with Macquarie Group economist Rory Robertson that commits the loser to walk from Canberra to the top of Australia's highest mountain.
A forecast by University of Western Sydney associate professor Steve Keen that house prices will collapse by 40%, double the current plunge in the US, has a 1% chance of being correct, Mr Robertson said today.
If house prices fall by less than 20% he will embark on the 230 km hike from Canberra to 2228-metre high Mount Kosciuszko.
"Moreover, the loser must wear a tee-shirt saying: "I was hopelessly wrong on home prices! Ask me how,'' said Mr Robertson, dubbed "Rate cut Rory'' after accurately forecasting the central bank would cut rates in 1996, betting against the market. "
Martin Wolfe:
All gods fail, if one believes too much. Keynes said, of course, that practical men are usually the slaves of some defunct economist. So, of course, are economists, even if the defunct economists are sometimes still alive.
These might seem idle thoughts: these errors are now bygones. But what if we are now making new and even bigger errors in rushing back to Keynes? The thought worries me. What if now that households in the US and UK are no longer able, or willing, to borrow any more, we are set on breaking the back of taxpayers, instead? Is the end of this crisis the destruction of the credit of some of the worlds most creditworthy governments? It is a thought I would like to suppress. But it haunts me. It should haunt you, too
Mish - that really you? See my China musings in previous thread. There are some serious omissions in the Ch story, not only in a macro sense but a geoeconomic sense, which actually Setser rather surprisingly is not across.
You should be including Richard Duncan among the economists whose predictions have been coming true. As I wrote in my Oct. 7 blog entry ("A Worldwide Depression Started this Week"):
"Roubini is not the only one whose predictions are coming true at the moment. Richard Duncans predictions from his 2003 book (which he revised in 2005), The Dollar Crisis: Causes Consequences and Cures warned that the global imbalances would cause a great depression that would be the biggest economic story of the 21st century.
"He argued that global aggregate supply is beginning to outrun global aggregate demand as the countries pursuing export-oriented growth are producing more and more goods without a corresponding increase in income among worldwide consumers. In other words, the excess of savings over investment in the export-oriented countries will drive the world economy into a depression. Eventually, he predicted, US consumers will not be able to borrow more for consumption. Like other debtors they will be forced to pullback, causing the depression.
"Roubinis ideas and Duncans ideas do not conflict. In fact they coallesce around the same idea: the American consumer can no longer afford to pile on debt."
Late to the party, I know, but here is my two cents:
Kling insisted that Roubini's analysis was politically motivated. I'm sure nobody needs to be reminded of the cabal of Krugman bashers. This, I think, is a big hurdle to reading what Roubini had to say objectively. I don't know whether Mankiw woke up one day and said to himself "I will be as dishonest about economics as my political masters need me to be". It is entirely possible that he has simply fallen into the entirely human trap of allowing affiliation to distort his view of the world. I think it is even less likely that Kling knowingly sold his intellect out for politics, but his starting point is faith, not reason.
Anyhow, my point is that there is a serious bit of projection going on. Roubini has not, for the most part, taken the same approach as Krugman, in holding particular politicians accountable for their policies. Even so, Kling insisted on seeing analysis that didn't fit his politico-emotional needs as politically motivated. By refusing to admit that those who disagree with him might be less biased than he is himself, Kling has made himself an utterly unreliable critic. Mankiw suffers the same problem, in spades.
There was the lower tier of obviously intentional dishonesty about economic policy and analysis from whatsisname, DeLong's "stupidest man alive" Krigman stalker, Kudlow, Heritage, AEI and so on. That seems mostly an effort to get the less aware audience to doubt reality when they hear it. Sort of like Big Tobacco's "junk science" program.
There is one purely technical problem with getting timing and depth right in this cycle. A very large part of the bad financial news was intentionally hidden. You could infer that the housing bubble and shoddy mortgage underwriting would lead to tears, you could watch Citi create a garbage dump and call it a structured investment vehicle and know that was not a good sign, but the interconnections and the magnitudes were intentionally veiled. That makes using analytic tools problematic. Economists working by the seat of their pants aren't working very much as economists. Their experience and thinking discipline come into play, but their tools don't. A craftsman is a craftsman mostly through the use of his tools.
That said, Roubini, Setzer, Krugman and our own CR did use the tools of their trade, and they did get the big picture right. Depth and timing were problematic, but that seems no great sin in the absence of good inputs to analysis on the financial side.
There is nothing that could be done. For all of us realists, it was like standing in front of a moving train.
I went to all the Goldamn Sachs conferences where bank CEOs were standing on the podium telling us that mortgage loans were the best invention since sliced bread. "Look at historical data", they would say,"homeowners have always done everything to save their homes". And my thought was: "Yes but you are using data from a time when 20% down was a rule. You are comparing apples to oranges"
Once I was so disgusted, I decided to walk out of a presentation to go get a snack. While I was choosing my cookies, a group of PMs were gloating about how great they were for having overweighted Sallie Mae. The stock was shooting up of course. Then I asked myself: "How long can it go on until people understand that it does not make sense financially to get an education. When you work for 40K, have a student loan of 50K and a 500K mortgage, how can you ever get ahead?"
Then were the asset sales that did not appear on anyone's books. Shadow banking?
Then it was the overparenting. As if, music, dancing, swimming, soccer, hockey, tutoring, all on debt of course, will help your kids get ahead. Family dinners (healthy and together) and decent sleep are more important than most of these activities (you try to learn when you are tired!) lumped together.
No matter where I went, I felt I was the only one who could put all the pieces together.
The list goes on and on and on...
I told everyone about this but why would they listen to me? I was just a frustrated average loser driving an average car, paying down my mortgage on my average house and living way within my means (Scottish mom). Not the kind of person an ambitious person would want to associate with.
They were probably feeling sorry for me, thinking I was jealous because I felt I could not keep up!
I've been getting all kind of emails and calls from people lower on the hierarchy congratulating me on my vision and begging me to manage their portfolios. Do you think I've gotten any kind words from the top dogs? Heck no. Most still think it's the best time ever in history to buy stocks. I was just talking to my ex-boss mentor and obviously it has not even crossed his mind once that I might have been right. He does not remember a word I said, all he remembers is that I'm not optimistic enough for my own good, a risk-o-phobe.
What about the corrupting influence of money in our political process as a major contributing cause of our economic malaise? It's interesting how this topic is left completely out of the discussion. IMO, there is no greater negative influence driving the policy (or lack of policy) decision making process in Washington than political contributions.
"I believe the time has come for Mankiw, Kling and many other economists to write a post titled "Why I was wrong"."
CR, I couldn't agree more. Lazear and Hubbard, too. The whole lot of them have been so astoundingly wrong, while so many of we amateurs here have been so amazingly right, that either a) They're irredeemingly incompetent, or b) they've been lying through their teeth. Since I find it hard to believe that they could have been so stupid, I'll opt for (b), which is more consistent with the Bush administration, anyhow.
I've been getting all kind of emails and calls from people lower on the hierarchy congratulating me on my vision and begging me to manage their portfolios. Do you think I've gotten any kind words from the top dogs? Heck no. Most still think it's the best time ever in history to buy stocks. I was just talking to my ex-boss mentor and obviously it has not even crossed his mind once that I might have been right. He does not remember a word I said, all he remembers is that I'm not optimistic enough for my own good, a risk-o-phobe.
What I forgot to say was that these top dog PMs couldn't care less if the average Joe's pension fund just lost bundles. Most of them have already cashed out (banks buying them out at the peak or just having more money than knowing what to do with it). They were probably out of equities before the market tank. They don't care whether we realists are right or wrong. They don't care about the masses, they only care about their pocket. As a Portfolio Manager, the expression I've heard the most over the last 15 years is: "Think about number 1, nobody else will". Interestingly, that has NOT been my experience in other walks of life. Many people out there are ready to lend you a hand. But that's the ethos up the ladder.
Personally, it's Hubbard I'd like to see tar and feathered - and he's still out there, tossing out little pro-deregulation commentaries and cheerleading for more of the same.
Shamelessly intellectual dishonesty is what comes to mind. The blending of a little fact with a lot of wishful thinking in order to arrive at desired foregone conclusions is pretty much the sine qua non of the technocrats of the right-wing establishment.
Of course, I take some real comfort about having attended a non-Ivy league school from Mankiw's status at Harvard - it's clear that the quality of undergraduate instruction isn't a linear function with prestige.
You may want to note that EVERY analyst schooled in Austrian Economics had this one nailed well ahead of Roubini and other left leaning (solution wise) pop-economists. Read Rotbhard's America's Great Depression (written many decades ago) and you can see this whole scenario described as the Fed and Treasury (and the entire banking system / economy) stumbled into it blindly with it's Keynesian noose firmly around the neck. Read Rotbhard's Man Economy State or Mises many works on Credit and business cycles, and it's plain as day: The Austrian School had this pegged in the 1920s let alone a few years back like Roubini and Krugman. Only the latter two propose solutions that are nothing more than the very poison that got the economy into this severe plight in the first place.
Hence, all devotees of the Austrian view take umbrage with the Buscho econ comment that it's only lefties who called this out. It was the classical economists / Austrians who warned about it amid the initial bailout of the last bubble and every bubble fight against recession before it.
Good luck getting those pseudo-intellectuals to admit their idiocy.
Time to put down the nice talk and call a spade a spade.
Those pseudo-economists should have their degrees revoked and jobs removed, and the professors who advised these MORONS should have their degrees removed and those colleges should be placed on probation for accreditation, or have it removed completely.
Unless we get tough with BS education in the this world, these same crony scumbags will re-write history again and again.
I love the quote on his blog on a book he is trying to promote: "As I post this, the book is number 41,218 in the Amazon sales ranking. I hope a little free advertising on this blog manages to improve that a bit."
lot of them have been so astoundingly wrong, while so many of we amateurs here have been so amazingly right,
The size of the set of those correctly calling the bubble is not as small as you may think. After all, 133 Representatives voted against the AUMF. The good news here is that being right saved a lot of money.
DAMN's comments hit close to home. I have a very close friend who has been in mortgage bank for almost 30 years, and he called this nearly a decade ago. Being a collections manager, he got to see the sharp end of the business and the final product of the abdication of all responsibility in underwriting loans. As long as 7 years ago he was dealing with an incredible number first payment and multi-loan defaults. He also found pretty strong of evidence of out-and-out fraud by some lender. For example, there was the loan that cam across his desk at 3 months past due - exactly 3 months after the firm had purchased it as part of a portfolio. After an up-and-down payment record for the first 4 months, the loan paid exactly on the 15th on the month until the lender sold the note. My friend's firm never received a payment after purchasing the loan. It was clear to him that the borrower had defaulted sometime after three or four months, so the lender bundled the loan with a bunch of others to sell to a secondary servicer and made the payments until the sale was complete.
In the many, many conversations we've had about the subject, he's always laid the blame for the problem squarely at the feet of the lenders. They knowingly and willingly made bad loans because they had set up a system that enabled them to maximize their profit and quickly shift the risk onto another party. Everyone involved in setting these policies - and most of those involved in implementing them - knew damned well what they were doing. They were simply hoping that no large portion of the loans would fail at the same time, based on historical assumptions about the housing market without considering (or, more likely, ignoring) the fact that their lending practices had completely undermined those assumptions.
The scary part is that, like DAMN's ex-boss, most of my friend's colleagues still don't get it, either. There seems to be an institutional mindset that states that the bold investor never loses - every setback is a "buying opportunity." That mindset works if you have lots of disposable income to put into the market and you can still live comfortably if your investment portfolio declines precipitously. Few people enjoy that luxury, yet an amazing number of middle-class folks have brought themselves to the brink of financial ruin by living as if they could. Perhaps in the coming years, living within one's means will come back in vogue, but I don't expect anyone in the financial industry to encourage or embrace that ethos.
I have to agree on the Austrian school. Mainstream economists are very resistant to Austrian ideas, and often mainstream is right, but it's time for them to admit the Austrians nailed the credit cycle. Every Austrian in the world was screaming that the easy credit and asset bubble of the 2000's would lead to tears. And this isn't new, either - von Mises famously predicted the Great Depression, too, back in 1929. The evidence is in, and isn't economics supposed to be scientific?
Confusing the wall street "right" with the right is deeply unfair. The Bush economists, in public, were positive because high profile incumbent economists are always positive through very rapid natural selection. Wall street shills like Kudlow are just that.
The real story here, the credit crisis, was bi-partisan (and, in fact, international): greenspan going negative with real rates (to the cheers of nearly all keynesians) in reaction to the cratering of the previous bubble, a housing mania (cheered by nearly everyone, period) with all sorts of enablers (among them, the GSE's at the start, Wallstreet at the end), a huge appetite for strategic debt by the worlds largest producer and everyone getting into the leverage game after the .com fallout.
J.C. Ernharth writes: "Hence, all devotees of the Austrian view take umbrage with the Buscho econ comment that it's only lefties who called this out."
The Austrian devotees should relax: anyone who disagreed with the Republican "conservatives" were labeled as "lefties". And they still are doing the mis-labeling, but the rhetoric has gotten pale and squeaky so it's not really heard. It's a right-wing tactic (see how well it works?). It won't ever stop, you just have to be smart or experienced enough to see through it. We used to hope that a liberal education would inoculate against these sorts of tactics, but everything corrupts. What to try next, eh?
Not saying you, Ernharth, but it is interesting how many are desperately trying to make this financial (& military, etc.) disaster something that "both sides of the aisle" are responsible for. It's like their souls are worth nothing to them, nothing, so much that they will even lie for the devil when the devil is gone, baby, gone.
As a Portfolio Manager I can let you on little well kept secret. Most people don't get rich with their investment portfolios. They get rich by creating their own firm or rising to the top and getting options.
The BEST strategy for Portfolio Managers to get rich in the last 2 decades was to create their own firm, find charismatic salespeople, become closet indexers, GROW the assets and sell themselves to the banks which were being bubble mode valuated.
Finance people didn't get rich by making good recommendation, they got rich by taking a cut in every financial transaction generated by the ever growing layers of debt!
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Ah, but they're never wrong. Remember: conservatism never fails, it can only BE failed. If something went wrong, it means they did not deregulate ENOUGH....
I think this cuts to the heart of the current crisis. This is not an economic crisis, it is a policy crisis. Or rather, it is now an economic crisis because the policy apparatus undermined the real economy.
Anyone could have seen this coming. Everyone except a handful ignored the signs. The people who stuck to honesty were sidetracked and maligned.
This is about a duration mismatch in the macro-analytic community -- rewards are paid for analysis suited to the moment, not to the results timeframe of the analysis.
Analysts work for people to justify their policy choices. Cheerleaders win because risk-takers outperform, even if the risks they take are ultimately fatal, and people who help risk-takers justify their actions reap both survival and outsize rewards.
This peculiar plasticity of fact is a key lesson of our times. The ability to produce analysis that is objectively rooted and not beholden is one of the key challenges.
"Micro" answers to this can never be anything more than stopgaps because the problem is in the roots of intellectual congress as of our society practices it.
Sure Roubini was early (I thought so at the time), but show me someone who has been more right!
-CR Michael Hudson and Henry C.K Liu are just two for starters.
Stratonovich calculus-
I read the link you posted to Bush's "prediction" of housing price increases. It was the same kind of "prediction" I made today when I told my friend that if it rains tomorrow, we'll go to the movies instead of having a picnic. According to your standards, that makes me prescient!
Not only Mankiw has quite a bit of explaining to do, but he's got to grow a pair asap.
He writes on his blog but won't let anyone comment: Wazup Greg? Scared of reality-based feedback? Is your ego so fragile that you can't stand the truth or even just a contrary opinion. Of course, the man can do whatever he wish with his blog, but just don't be a coward attacking someone without giving a chance to directly answer.
BTW, has anyone ever heard of this IDEAS "objective rankings" alluded to be Greg-O?
"Instead of leaving it to us to guess why their analysis was so flawed, I believe the time has come for Mankiw, Kling and many other economists to write a post titled "Why I was wrong"
For many economists, that wouldn't be the appropriate title to their posts. Other appropriate titles could be "Why I'm retiring from economics", "Why no one ever asked for my opinions on these topics", "Why the Bush administration only hired people who agreed with them".
I would of course be very impressed with anyone who could make a good case with post titled "Why most economists are wrong NOW, and this will be a shallow recession with a strong recovery". I would like to see such a post for the same reason I sought out Nouriel Roublini's stuff a couple of years ago. When everyone has similar opinions, an articulate opposing voice with some real data is very interesting. They don't even have to be right to be valuable. All they have to do is alert people to issues which they haven't been thinking about.
Search Mankiw's blog for 'housing bubble' and you get only one substantive post Greg Mankiw's Blog: Housing Bubble?
with the conclusion
"Okay, so the housing market has "reached what looks like a permanently high plateau." Now that's reassuring."
Economists can be plenty good academically but of no use to the real world. Obviously it can't be retroactively avoided but those saying there was a housing bubble deserve credit over those who ignored or profited from it.
Better question ought to be -- why, since there's more than a century of history about the kind of behavior to prohibit, was the law changed in 1999 to allow it and prevent the states' laws from being used to stop it state by state?
Eight years is all it took, this time. But there's plenty of history to read. Just one example, but a thorough one, Google will find you much more. Duke Law Journal: Lynn A. Stout, Why The Law Hates Speculators: Regulation And Private Ordering In The Market For OTC Derivatives, 48 Duke L. J. 701 (1999)
This was written in 1999, just before it changed:
Cited: 48 Duke L. J. 701 [*pg 701]
WHY THE LAW HATES SPECULATORS: REGULATION AND PRIVATE ORDERING IN THE MARKET FOR OTC DERIVATIVES -- LYNN A. STOUT
I. ANTISPECULATION RULES IN AMERICAN LAW
A. The Common Law Rule Against Difference Contracts
B. Codifying the Common Law: Antibucketshop Statutes and the Commodity Exchange Act
C. Antispeculation Rules in Insurance Law: The Doctrines of Indemnity and Insurable Interest
D. The Securities Exchange Act of 1934
E. Summary: The Prevalence of Antispeculation Law
II. CONVENTIONAL ECONOMIC THEORIES OF SPECULATION: THE RISK HEDGING AND INFORMATION ARBITRAGE MODELS
A. Risk Hedging
B. Information Arbitrage
C. Summary: Normative Implications of Conventional Theories
III. THE HETEROGENEOUS EXPECTATIONS THEORY OF SPECULATION
A. The Heterogeneous Expectations Approach
B. Normative Implications of the HE Model
C. Summary: The HE Model and the Common Law Conception of Speculation
IV. HE SPECULATION AND THE MARKET FOR OTC DERIVATIVES
A. OTC Derivatives as Off-Exchange Futures and Options
B. The Controversy over Applying the CEA to Derivatives
C. HE Theory and the Economic Consequences of Derivatives Speculation
D. Discouraging HE Trading in Derivatives: Lessons from the CEA
E. Discouraging HE Trading in Derivatives: Lessons from the Common Law
F. Summary: Regulation and Private Ordering in the Market for OTC Derivatives
CONCLUSION
ABSTRACT
A wide variety of statutory and common law doctrines in American law evidence hostility towards speculation. Conventional economic theory, however, generally views speculation as an efficient form of trading that shifts risk to those who can bear it most easily and improves the accuracy of market prices. This Article reconciles the apparent conflict between legal tradition and economic theory by explaining why some forms of speculative trading may be inefficient. It presents a heterogeneous expectations model of speculative trading that offers important insights into antispeculation laws in general, and the ongoing debate concerning over-the-counter (OTC) derivatives in particular.
Although trading in OTC derivatives is presently largely unregulated, the Commodity Futures Trading Commission recently announced its intention to consider substantively regulating OTC derivatives under the Commodity Exchange Act (CEA). ....
[*pg 703]
INTRODUCTION
The public disapproves of speculators.1 So, traditionally, does the law. Although hostility towards speculators is so deeply woven into our nation's legal fabric that it often goes unnoticed, a remarkable variety of laws discourages people from trying to profit from short-term price changes. ....
In 2000 Mankiw had an article in Fortune explaining who he was voting for and why: Bush, because he would let "the invisible hand" have free reign. Seriously, he said: "Gore relies more on the intrusive hand of government, while Bush trusts the invisible hand of the market." Doh!
Recently Mankiw said that if Obama raises his taxes he's going to have less incentive to work, and so will work less... hey, by all means take it easy, Prof... I mean, it's not like your "work" as a right-wing propagandist is really helping any of us at this point...
CR,
I am disappointed in you. As a conservative, I have enjoyed your subtle digs, but appreciated the professional tone. The gloating is unbecoming. Greg Mankiw, Arnold Kling, and others have highly praised your work and contributions. They have highly praised the economic contributions of Paul Krugman. Please stay positive. The facts alone are enough to vindidate and validate your views.
PRINCETON, New Jersey: Some skeptics are calling Henry Paulson's $700 billion rescue plan for the U.S. financial system "cash for trash." Others are calling the proposed legislation the Authorization for Use of Financial Force, after the Authorization for Use of Military Force, the infamous bill that gave the Bush administration the green light to invade Iraq.
There's justice in the gibes. Everyone agrees that something major must be done. But Paulson is demanding extraordinary power for himself - and for his successor - to deploy taxpayers' money on behalf of a plan that, as far as I can see, doesn't make sense.
Some are saying that we Americans should simply trust Paulson, because he's a smart guy who knows what he's doing. But that's only half true: He is a smart guy, but what, exactly, in the experience of the past year and a half - a period during which Paulson repeatedly declared the financial crisis "contained," and then offered a series of unsuccessful fixes - justifies the belief that he knows what he's doing? He's making it up as he goes along, just like the rest of us.
Good macroeconomics is simply microeconomics extended to the time structure of the economy.
The macroeconomics of the top 20 schools is utterly brain dead because by assumption it forbids relative price microeconomics across the time structure of the economy -- most significantly in the time structure of production.
There have been books written on this, e.g. by Roger Garrison, Gerald O'Driscoll, Jr. and Friedrich Hayek. I'd recommend that folks read one.
"Rob Dawg, I think micro economics works great - it really helps with setting prices and I believe it helped my company maximize profits. I think Macro predictions are far more difficult - although the housing bubble / bust was easy to call (IMO).
the man asked for names. next to no names here because the focus is on economists. read people like bill fleckenstein, jim grant, fred hickey, jim rogers, marc faber (i'm naming just the first to come to mind)--investors all--and you read people who got it really right years ago. put beside these guys, krugman's few warnings were tepid. if krugman had seen what they saw, he would have been hammering it weekly. he would have sounded really really shrill! brad delong (lauding greenspan through last year) is a joke. from what i've just witnessed, i'm inclined to dismiss all economists.
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By Krugman advocating financial reform is he recommending that we finally do away with all federal housing and lending mandates?
Does he propose the full and final privatization of Fannie and Freddie once the housing market stabilizes and it if can fetch a price north of ZERO?
Does he propose the implementation of a clearinghouse for CDS instruments as was long ago called for in 2000, but never chartered by the Clinton Administration?
That would be real reform. The kind that prevents future distortion of our asset markets for political gain.
Krugman is the perpetual doomsayer. Eventually you get to be right...about every 6-8 years.
I still recall suffering through his "Age of Diminished Expectations" back in Intro Econ in 1992.
Talk about a book that could not have been more wrong if you tried.
When Krugman gets an Al Gore Prize for political hackery, you know there is hope for anyone with the courage to be a loudmouth.
...first
Yes, I could respect an economist who pointed out clearly and succinctly why he was in error. Unless it's a litany of hoocoodanode talking points.
This is the internet era, and all published idiocies are easily googled.
Accountability now!
I'm only halfway through the last comment thread!
The "smartest men in the room" somehow always end up being the dumbest.
There's a little fellow named Peter Schiff who was "more right" (if you include investors in addition to economists). Roubini has been revising his predictions the entire time, his only claim to fame is that he's one step ahead of the pack in terms of his bearishness. And his solution--more bailouts and other Keynesian nonsense--is also way off. This shows that he doesn't fully understand the problem.
Schiff has been consistent in his predictions for the last few years. His solution to this government-created mess is to let the market fix it, an infinitely sounder approach than the government intervention that Roubini and others advocate.
I have a feeling that if a true "Why I was Wrong" post ever came out, the moral would be something about being indebted to their masters.
1 currency soon [yogi], I think this would be an interesting exercise - unless it's a bunch of lame excuses or misdirected blame.
best to all.
And high on the list has got to be: "I forgot we were fudging the numbers. I mean, I was there when we decided to downplay the bad news by re-interpretation of inconvenient factors, but I forgot not to use them in my own calculations."
1 currency soon,
i have been seeding that conversation too. google my moniker plus derivatives plus haloscan.
lots of the derivatives, like options, will expire worthless, maybe most.
the dearth of straight information makes it only guesswork. like for example wasn't there a dtcc report that while full of mind boggling numbers still was reported the next day to be incomplete.
the problem is even fractions of the admitted numbers are bigger than USS gdp.
so what gives with people avoiding the subject. it's not like there is a conspiracy here. there are big facts here that are too too too too freeegin big NOT to enter into the discussion.
i am amazed by the thought barriers people will defend to keep their minds within the proscribed lines.
Science is to economics as astronomy is to astrology.
Jerry, I have my suspicions too ...
Rupert, this post isn't about solutions - but about who saw it coming. Schiff, Roubini, Krugman, Baker, Kasriel and many others did. Most didn't.
Best Wishes.
The next crisis will (in my opinion) be a funding crisis for the Federal government. Which mainstream economists are talking about this?
Nuke writes:
The next crisis will (in my opinion) be a funding crisis for the Federal government. Which mainstream economists are talking about this?
How can there be a funding crisis when the Fed can monetize as much Treasury debt as necessary?
Nuke writes:
The next crisis will (in my opinion) be a funding crisis for the Federal government.
No, that crisis is contained to a few bad sub-prime municipalities and states.
Rob Dawg, I think micro economics works great - it really helps with setting prices and I believe it helped my company maximize profits. I think Macro predictions are far more difficult - although the housing bubble / bust was easy to call (IMO).
Best Wishes
"Science is to economics as astronomy is to astrology."
That's deeply offensive to astrologists.
Traunche Coat Mafia understands, Nuke is stuck on stupid.
What we are going to see is monetization, then high real interest rates to check the inflation, and thus slow growth for a decade or more as high real interest rates stifle investment. Bad for living standards, bad for stocks, bad for long treasuries, okay for cash.
@ CR
thats like asking homeowners to admit they bit off more than they could chew...(house atm, credit cards,cars,etc) most are still in denial
"Bad for living standards, bad for stocks, bad for long treasuries, okay for cash."
and great for DISCO! but this is all true, 1979 necessarily follows 1974 at some point.
Power is blinding. I suspect the same will occur with team Obama... creeps in over a few years.
Krugman does well to post his sycophantic congratulations now, before any of these people become responsible for events in the real world. This may well be his last chance to do so without getting laughed off even the pages of the New York Times.
This was for the last post but you got this one up fast.
My wife works for the largest ceramic electronic equipment manufacturer in the world. Panasonic formerly known as Matsushita is one of their larger customers (Toyota, Apple, Motorola, Nokia, etc. are just a few of their other customers). This company will be closing their factory for several days. This company has been around over six decades. This is the first time this has ever happened. Shes been with the company more than 15 years and told me things are going to get very ugly. My response was havent you been listening to me? I had lunch with my wife the president and a few retired executives of the North America operations about six months ago and we discussed the economy and exchanged our views about what was coming. He thought I was overly pessimistic (crazy). I spoke with him recently and he admitted he was shocked how fast things went down hill. They are just now getting around to forecasting their future sales growth downward. Seems to me this is how most of the corporate world works. He was curious how I knew so much about what I believed was coming. I told him I have been studying about past recessions for three years as part of my work (stock trading). I suggested he read CR and Nouriel Roubinis sites along with a few others. I believe he and many others have taken my advice now.
you want me to blog why i was wrong
ok , simple
i was not wrong
and heres 10 reasons why i wasnt
more deregulation is always more better
the market knows best
its clintons fault
a bunch of deadbeat immigrants buying hosuses they couldnt afford brought down the economy
a bunch of deadbeat, white trailer trash buying houses they could not afford brought down the eeconomy
a bunch of deadbeat house flippers brought down the economy
the democrats did it because they have been in control of the house of representatives by 15 votes out of 435 for almost 2 years
the democrats did it because they have been in control of the senate by one vote (joe lieberman) for almost two years
the CRA (community re-investment act of 1974 did it , but took more than 30 years to have an effect
saddam did it
CR,
My apologies. You are correct. I was only referring to macroeconomics. The parallel is in the urban planning community where you need to know how many parking spaces but planners can't be trusted to design a traffic model.
ZF writes:
Krugman does well to post his sycophantic congratulations now, before any of these people become responsible for events in the real world.
So true. I try not to be too hard on Krugman. I think his heart is in the right place, he is just drunk on the Keynesian Koolaid (R).
Wrong, bgates. We're not going to see high inflation. From each mistake we learn one and only one lesson. We learned that deflation is bad in the 1930's. We learned that CPI inflation is bad in the 1970's. We learned that asset bubbles are bad in the 1990's and 2000's. Put these together and you get the recipe for big budget deficits, high real interest rates and low inflation, which result in low growth. What will we learn next? That we need some way to control big budget deficits. That is, someone other than Congress needs to be able to raise taxes or cut spending, because these are two things politicans hate to do. It will take another decade to learn this though.
Nuke... How can you have a funding crisis when your debt sold in your own currency.
We will not default. Other problematic situations may occur.
... constant crisis scenario?
It wasn't only liberal and progressive economists who saw the trouble coming. Many libertarians saw it coming too.
It was only the Fox News Republicans who where too busy drinking the kool-aid to see the trouble coming.
I find it extremely amusing Mankiw ranks himself so highly on the basis of citation counts.
He must be oblivious to the recent paper that exposed the promotion and citation of fraudulent or misleading work versus the competition.
It really doesn't matter though. He takes public positions using his background as a credential, but when his public positions are consistently garbage one should not listen to him regardless of background.
In any event, he could use some instruction on the modern history of economists. Some of the most heavily promoted pieces, have been the most destructive only because their authors could not conceive they were a means to an end.
If he happens to come across this comment, I suggest he put his money where his mouth is. His textbook(s) refer to Laffer in a reverential way, so he should leave his tenured position and make some money at Laffer's new fund with his deep knowledge and understanding.
"Science is to economics as astronomy is to astrology."
...as investment banksters are to snake oil salesme
Careful CR, Mankiw was right about home prices very, very (very) early, and for a reason that has yet to hit the market: Boomer demographics. From The baby boom, the baby bust, and the housing market (Regional Science and Urban Economics, 19(2):235258, May 1989) by Mankiw and Well:
If the historical relation between housing demand and housing prices continues into the future, real housing prices will fall substantially over the next two decades.
George Bush also correctly predicted the housing crisis and recession. From a 2006 White House Press release:
If houses get too expensive, people will stop buying them. Economies should cycle. George W. Bush, 2006
I began aggressively shorting the market after reading Bush's prescient warning.
Krugman will be joining 'economists' in the ash heap of history as the final attempt at Keynesianism, now underway with Bush and to be continued under Obama, proves a miserable failure.
Easy to see this a priori.
Just as it is easy to see that we are barreling into the Greater Depression, and not just a deep recession.
As Jas says, 'It's the debt, stupid.'
You still have time to get on the right side, CR! Don't be a Mankiw!
CR, they much rather move on to the next topic. The fact that they were unabashed cheer leaders of the ownership society will not deter them.
Also remember that both were major supporters of personal accounts in Bush's social security plan. I am sure Mankiw is trying to paint over that fact as well at the moment.
Brad DeLong's Website: Mankiw 0, Liberals 3
Patrick writes:
It wasn't only liberal and progressive economists who saw the trouble coming. Many libertarians saw it coming too.
It was only the Fox News Republicans who where too busy drinking the kool-aid to see the trouble coming.
Patrick | 11.28.08 - 1:14 am | #
Really??? By blaming a single party you show your ignorance.
Patrick writes:
It wasn't only liberal and progressive economists who saw the trouble coming. Many libertarians saw it coming too.
It was only the Fox News Republicans who where too busy drinking the kool-aid to see the trouble coming.
Patrick | 11.28.08 - 1:14 am | #
You are a funny one. I didnt hear any of the MSM talking about this too much.
They were all drinking the Kool-Aid. Your only fooling yourself!
The Austrians didn't see this coming.
Hey! Krugman reads CR! Hoocoodanode?
Economists or not, who in the media dared stick out their necks 3-4 years ago on pointing out the growing systemic risks? Bill Fleckenstein is one who comes to mind. I'm sure there must be others.
you want me to blog i was wrong
wrong about what
every things fine
going according to plan
our cash position will allow us to pick your bones and consolidate our ownership of everything before this is done
weeee doggie
Dope.. Japanese debt to GDP ratio is (at least was) much higher than USA... its not that simple.
Stratonovich calculus ,
That must have taken some digging. However that quote is about something much milder and we have not come across it yet. I think much more relevant were his illogical vehement denials since he has been a Bush advisor.
Comrade-Dope jg,
I see Krugman as an editorial personality. I'm ambivalent to him, just as much as I am towards the women in The View. I'm much more forgiving of someone that argues in support of their proposal transparently, than one who acts and later tries to suppress their failure
Not so, Irving: shocking statistic was that Japan's economy peaked with household debt/real disposable income of ~130%, which was nearly exactly the ratio when the U.S. train first came off the rails (Q4 '06).
"Wrong, bgates. We're not going to see high inflation."
at the bottom in 1974, gold and oil were dead right along with equities.
i really think that everyone's certainty that commodities are dead forever is a bit much. $300 oil is just as likely to eventually happen as it was when oil was $140. maybe moreso.
"ash heap ... the final attempt at Keynesianism"
That's a misrepresentation. Economics has evolved a long way from old fashioned Keynes.
If anything, the mistake being made currently is not allowing the system to purge the itself of the poison.
Policy should NOT be aimed at saving insolvent companies and banks run by morons. If anything, the government should accelerate the process of disclosure and bankruptcy so we can move on as soon as possible.
If there is going to be a fiscal response, let it be aimed at helping the poor and middle class people who lose their jobs so they can bridge the gap while they move on to something sustainable and productive.
So as long as our creditors allow us to sell our debt in dollars only, we'll be fine. What keeps our creditors from forcing us to denominate our bonds in something other than dollars? This scenario doesn;t seem outlandish to me.
EHP, I'm with you on 'honest but wrong'; I, too, can live with that.
Kind of how I felt about Hillary; wrong on the issues, but she was a straight shooter.
"Really??? By blaming a single party you show your ignorance."
Sorry, but that's a bullshit remark.
This thing happened on the Republicans' watch. In my world, that makes them responsible. They were holding the levers. They could have averted it.
If, they had shown leadership, which is something that neither party seems capable of doing.
We'll see what happens over the next four years.
FD: The last ballot I punched was in 1964, for Barry Goldwater.
Hey! Krugman reads CR! Hoocoodanode?
Stratonovich calculus | 11.28.08 - 1:22 am | #
He's been a Tanta (and CR fan) from way back.
You have had a jaundiced eye for that long, mp? You've thought the system a failure for that long?
"let it be aimed at helping the poor and middle class people"
that's peronism in a nutshell.
new thread!
If there is going to be a fiscal response, let it be aimed at helping the poor and middle class people who lose their jobs so they can bridge the gap while they move on to something sustainable and productive.
Patrick | 11.28.08 - 1:28 am | #
while they move on to something sustainable and productive.
Oh Im sure their working feverishly on a new bubble!
$300 oil is just as likely to eventually happen as it was when oil was $140.
And? High oil prices act as a TAX on Americans. You're telling me taxes are inflationary?
Poor nuke is still stuck on stupid. The only thing foreigners can do is let their currencies rise, in which case we just export our deflation to them. Maybe this will happen in the long run but it sure won't happen in the next few years. China and Japan do NOT need more cooling down of their economies, quite the contrary.
No doubt many economists, especially those on the right, have some explaining to do, and some have basically issued mea culpas. Last month, I listened to M. Feldstein on NPR; he was basically dumbfounded that none of his policies worked. Methinks Mankiw needs to take a cue from his mentor.
That being said, when I first read PK's post last week, the first thought through my mind was "not good. This is not the change you can believe in." If the goal is not to be red and blue, but purple, then perhaps stating that now "grown ups" were in charge was probably not the best of ideas. PK's post did not have the same tenor as CR's post; it basically evoked the image of a sixth grader sticking out his tongue and saying "Nah, Nah, I'm better than you."
But I think Mankiw's main beef was whether many of Obama's primary economic advisers (Romer, Summers, Goolsbee, and Furman -- PK's post was pre-Volcker) deserved such pre-mature adulation. Thus, while the Stiglitzes, Bakers, and Krugmans did get many things right (Krugman's quixotic quest to dispel the lack of oil speculation notwithstanding), they aren't exactly in the inner circle. In many ways, Obama's economic "czar" hasn't had a stellar record either, for which Baker has been extremely critical.
If there is going to be a fiscal response, let it be aimed at helping the poor and middle class people who lose their jobs so they aren't sitting around plotting revolution.
Oh Im sure their working feverishly on a new bubble!
Topher
Treasuries.
"that's peronism in a nutshell."
Sorry, but there's yet another bullshit remark.
"You're telling me taxes are inflationary?"
the global appetite for commodities may revive just as the thirst for dollars weakens. stranger things have happened.
you've probably never even listened to a whole carlos gardel album!
"You have had a jaundiced eye for that long, mp?"
I've been jaundiced from birth. My vote in 1964 was completely out of character.
One last post.
Mankiw does seem capable in his work (inflation targeting, stickiness). However he advises and advocates a lot outside beyond his capabilities. So good guy, if he could learn from his failures
For fun, here is the opening of his congratulations to Bernanke
Dear Ben,
Congratulations on your appointment to become new Chairman of the Federal
Reserve. I am delighted both for you and for the nation. President Bush could not have
made a better choice.
Of course, you have big shoes to fill. Alan Greenspan is widely acknowledged to
have been a superb Fed chairman. Alan Blinder and Ricardo Reis (2005) may even prove
right in their judgment of Greenspan as the greatest central banker who ever lived. His
tenure exhibited low and stable inflation, as well as robust and stable growth in
production and employment. There is little more that we could ask of a Fed chairman.
But there is little point now to you or I heaping praise on Greenspan. Most
activities run into diminishing returns. Given all the praise that Greenspans been getting
lately, the marginal utility of one more accolade must be close to zero.
He only sees what he wants to. To that end, he did not see the housing bust coming. He name called a lot of people who did though
Bgates, are you trying to compete with nuke for stupid? High commodities prices by themselves are simply taxes, hence deflationary unless this "tax" is fully spent by the commodities producer, and it seldom is.
"Rupert, this post isn't about solutions - but about who saw it coming. Schiff, Roubini, Krugman, Baker, Kasriel and many others did. Most didn't."
Stephen Roach?
Pavel Chichikov writes:
"Rupert, this post isn't about solutions - but about who saw it coming. Schiff, Roubini, Krugman, Baker, Kasriel and many others did. Most didn't."
Stephen Roach?
Pavel Chichikov | 11.28.08 - 1:40 am | #
You got that right. Good night.
Gary Shilling not merely predicted everything, he also gave the perfect investment advice for profiting from the crisis, and he still is giving sound advice. Like don't rush into stocks too soon. Buffett, Grantham, Huffman and host of other investment pros also predicted the crisis. And what about Shiller? The list is endless.
I have been a long time reader of both Mankiw & Krugman... They both very intelligent economists, and I personally enjoy reading differing political stances...
A pissing match about who was more right, who saw it first, and who is to blame is irrelevant. It doesn't appear to me that anyone was able to effectively do anything about it...
I prefer Mr. Lahde's approach...
Obviously many mistakes were made, and I can assure you that mistakes will still be made with the "grownups" at the helm.
I just hope these economists can stay out of the politically driven mudslinging before remove them both from my RSS feeds...
Stratonovich calculus wrote:
George Bush also correctly predicted the housing crisis and recession. From a 2006 White House Press release:
"If houses get too expensive, people will stop buying them. Economies should cycle. George W. Bush, 2006
I began aggressively shorting the market after reading Bush's prescient warning.
Stratonovich calculus | 11.28.08 - 1:15 am | #
sir you are either a fool or a jester
i read the entire transcript from the link you posted
bush didnt predict dididley squat
who do you think you are
more importantly
where you think you are
here at CR bogus claims with bogus links aint gonna wash
bush isnt smart enuf to predict tuesday on monday afternoo
Krugman saw this coming? He thought housing was in a bubble, but so did millions of other people who didn't win the Nobel prize in Economics. But he was cheering on the low interest rates for an indefinite period in 2003-4 and in fact agreed with Kudlow in 2004 that interest rates should not be going up so soon, because the economy was still weak.
Right now, Krugman wants the mother of all bailouts, big spending. This downturn isn't over until neo-Keynesians like Krugman lose all credibility.
On top of that, even a year ago, Krugman was hedging his bets. He thought it could be serious, or it could blow over (Google his NY Times articles as of Aug 2007).
So what's your proposed solution renter? Another debt deflation like we had in the 1930's?
The stupids are coming out of the woodwork tonight, it seems...
bush isnt smart enuf to predict tuesday on monday afternoon
mock lazear | 11.28.08 - 1:43 am | #
Not so. I fully expect his "This sucker's goin' down." to be in the history books a hundred years from now as the defining phrase of his presidency.
Bush had the highest popularity at one point of any President in history. The American people got what they deserved.
"High commodities prices by themselves are simply taxes, hence deflationary unless this "tax" is fully spent by the commodities producer, and it seldom is."
i'm sure most zimbabwean consumers would agree.
on september 26 bush "predicted" that without the 700 billion bailout "this sucker's going down"
ok
ok
i take it back
bush could predict monday afternoon at 11:59 am monday morning
45% (or more) of americans believe humanity is less than 10000 years old. they also believe that FRNs are money. yet, oddly, they can differentiate between crappy purchasing power and withheld taxes.
The situation in China at Shedlock's site now.
Did somebody actually imply that we are not in a debt deflation? What the hell do you call it if not deflation?
Credit is contracting and prices on pretty much everything are falling.
If that is not deflation in action, then what is?
you want prediction
i'll give you prediction
Brooksley Born `Vindicated',,,
By Matthew Leising and Roger Runningen
Nov. 13 (Bloomberg) -- The acting chairman of the Commodity Futures Trading Commission is among U.S. officials now seeking regulation of private derivative contracts, echoing an unheeded warning a decade ago by a predecessor, Brooksley Born.
While leading the CFTC in 1998, Born declared that the unregulated contracts could ``pose grave dangers to our economy.'' Born, a lawyer who according to futures attorney Dan Roth battled fellow regulators with the ferocity of a courtroom litigator, lost a turf fight with Alan Greenspan and Robert Rubin over policing the deals.
After Congress exempted the contracts from U.S. oversight in 2000, the market swelled from about $100 trillion to $684 trillion by June 30. The growth included credit-default swaps and collateralized debt obligations, custom-made products barely in use under Born's reign. They played a part in almost $1 trillion of global bank losses and are prompting lawmakers to seek controls on the complex deals.
Brooksley has been vindicated,'' said John Tull, a CFTC commissioner from 1993 to 1999.Had they listened to her, I think this catastrophe could have been averted.''
Now retired in Washington, Born, 68, declined to be interviewed for this story.
who is CR? is he an economist?
Not a single economist managed to affect/halt the rent/price ratio stupidity, so I'd say congratulatory activity is entirely without merit....as a profession, economists have been shown to be practically ineffective as a source of governmental guidance, and more than a little self-absorbed with being proven right over righting the ship.
It is not enough to warn, and then be vindicated, when the consequences are this great.
The real test of the prophets Roubini and Krugman begins today. My bet is that the two, who achieved their current fame by predicting (until it came true) that the near future would look pretty much like the recent past, will be thought to have had no more foresight than Jeane Dixon once another 20 years have passed.
Economists don't work in a vacuum. Why shoot the guy who always says "on the one hand...on the other..."
We need to put the blame on the right people:
The regulatory agencies - let's have a perp walk for each reg agency and everyone in it at key levels no matter if they are democrat or republican.
The congressional oversight committees - let's have a perp walk for everyone who received money from Fannie and Freddie to keep the gravy train rolling as well as those that looked the other way and did nothing.
From the regulators giving bad information to the congressional oversight committees who have constituents they need to please, the recommendations went up the food chain to the President.
In this case it was President Bush who bought the BS his cabinet members and economic team were giving him.
I hope that President Elect Obama, who is touted as being very smart, goes out during these last few weeks, dons a McDonald's uniform and sees how business works and then rapidly move him to management to see how labor interrelates, to regional manager to see how it interconnects.
Lawyers who have not run a business for themselves, should not be allowed to run for office.
The main problem is that all these people in places of power are academics and don't live in the real world of supply and demand. They live in a world where they use predictions, like the local psychic who gives readings for $10, about the future.
Even a lemonade stand would teach these yahoos input pricing/ supply/ demand/ etc.
to see how labor interrelates
I think it's troubling, particularly in the case with Detroit, that everyone single politician imaginable is involved except for the Secretaries of Labor and Commerce. What again do those posts do?
Once again, it's simply a reflection of our emphasis on finance and not productivity.
Even Mankiw is sensible enough not to defend Gonzales, Rumsfeld, Ashcroft, etc...
Minkiw's surely a bright guy. He should know that when you associate with pigs, even a good name will be tarnished..
A pissing match about who was more right, who saw it first, and who is to blame is irrelevant. It doesn't appear to me that anyone was able to effectively do anything about it...
Excuse me, but the express purpose of government is to "do something".
Greenspan and the Bush Administration and the Republican Congress most certainly were in a position to do something, and didn't.
"With great power comes great responsibility" - Spiderman.
I would not give too much credit to Schiff. He was far more wring that right.
Peter Schiff Hugely Right, Enormously Wrong as Hard Landing Hits China
Mish's Global Economic Trend Analysis: Peter Schiff Hugely Right, Enormously Wrong as Hard Landing Hits China
Mish
I vehemently disagree with you on this one. From Economics we should take what doesn't work, not was does work... because that is an ex post conclusion. Alchemists paved the way for our current world but you don't see any alchemists walking down the street.
Cheers!
@ Basel Too 1:33 am
"But I think Mankiw's main beef was whether many of Obama's primary economic advisers (Romer, Summers, Goolsbee, and Furman -- PK's post was pre-Volcker) deserved such pre-mature adulation."
My emphasis - is that intentional word play? Absolutely hilarious. My head is in the gutter.
Yea, yea... dead thread at 4AM what's the point of talking to yourself? Trying to catch up with A LOT after Turkey Day Good night!
Here down under economists put their money where their mouth is:
"An academic predicting a collapse in house prices has made a bet with Macquarie Group economist Rory Robertson that commits the loser to walk from Canberra to the top of Australia's highest mountain.
A forecast by University of Western Sydney associate professor Steve Keen that house prices will collapse by 40%, double the current plunge in the US, has a 1% chance of being correct, Mr Robertson said today.
If house prices fall by less than 20% he will embark on the 230 km hike from Canberra to 2228-metre high Mount Kosciuszko.
"Moreover, the loser must wear a tee-shirt saying: "I was hopelessly wrong on home prices! Ask me how,'' said Mr Robertson, dubbed "Rate cut Rory'' after accurately forecasting the central bank would cut rates in 1996, betting against the market. "
'Rate cut Rory' bets his boots on house prices
Summary of unconvenient truths of this crisis
CR
You are generous. Some economists should be writing posts entitled "Why I should seek new challenges in a different field".
Like humanitarian relief in the Congo, or Darfur.
C
Martin Wolfe:
All gods fail, if one believes too much. Keynes said, of course, that practical men are usually the slaves of some defunct economist. So, of course, are economists, even if the defunct economists are sometimes still alive.
These might seem idle thoughts: these errors are now bygones. But what if we are now making new and even bigger errors in rushing back to Keynes? The thought worries me. What if now that households in the US and UK are no longer able, or willing, to borrow any more, we are set on breaking the back of taxpayers, instead? Is the end of this crisis the destruction of the credit of some of the worlds most creditworthy governments? It is a thought I would like to suppress. But it haunts me. It should haunt you, too
Mish - that really you? See my China musings in previous thread. There are some serious omissions in the Ch story, not only in a macro sense but a geoeconomic sense, which actually Setser rather surprisingly is not across.
C
Strong words, CR, and perfectly correct!
In 1998 Fred E Foldvary correctly predicted 2008!
Here's the link to his prediction from 1998.
Foldvary on economic trends, macroeconomics, forecast land price inflation money supply tax reform Henry George
You should be including Richard Duncan among the economists whose predictions have been coming true. As I wrote in my Oct. 7 blog entry ("A Worldwide Depression Started this Week"):
"Roubini is not the only one whose predictions are coming true at the moment. Richard Duncans predictions from his 2003 book (which he revised in 2005), The Dollar Crisis: Causes Consequences and Cures warned that the global imbalances would cause a great depression that would be the biggest economic story of the 21st century.
"He argued that global aggregate supply is beginning to outrun global aggregate demand as the countries pursuing export-oriented growth are producing more and more goods without a corresponding increase in income among worldwide consumers. In other words, the excess of savings over investment in the export-oriented countries will drive the world economy into a depression. Eventually, he predicted, US consumers will not be able to borrow more for consumption. Like other debtors they will be forced to pullback, causing the depression.
"Roubinis ideas and Duncans ideas do not conflict. In fact they coallesce around the same idea: the American consumer can no longer afford to pile on debt."
Howard Richman
Trade And Taxes
Of course Mish would want to read THIS thread. He wants to see if anyone mentioned him!
You're so vain Mish.
...but you did see this coming.
Late to the party, I know, but here is my two cents:
Kling insisted that Roubini's analysis was politically motivated. I'm sure nobody needs to be reminded of the cabal of Krugman bashers. This, I think, is a big hurdle to reading what Roubini had to say objectively. I don't know whether Mankiw woke up one day and said to himself "I will be as dishonest about economics as my political masters need me to be". It is entirely possible that he has simply fallen into the entirely human trap of allowing affiliation to distort his view of the world. I think it is even less likely that Kling knowingly sold his intellect out for politics, but his starting point is faith, not reason.
Anyhow, my point is that there is a serious bit of projection going on. Roubini has not, for the most part, taken the same approach as Krugman, in holding particular politicians accountable for their policies. Even so, Kling insisted on seeing analysis that didn't fit his politico-emotional needs as politically motivated. By refusing to admit that those who disagree with him might be less biased than he is himself, Kling has made himself an utterly unreliable critic. Mankiw suffers the same problem, in spades.
There was the lower tier of obviously intentional dishonesty about economic policy and analysis from whatsisname, DeLong's "stupidest man alive" Krigman stalker, Kudlow, Heritage, AEI and so on. That seems mostly an effort to get the less aware audience to doubt reality when they hear it. Sort of like Big Tobacco's "junk science" program.
There is one purely technical problem with getting timing and depth right in this cycle. A very large part of the bad financial news was intentionally hidden. You could infer that the housing bubble and shoddy mortgage underwriting would lead to tears, you could watch Citi create a garbage dump and call it a structured investment vehicle and know that was not a good sign, but the interconnections and the magnitudes were intentionally veiled. That makes using analytic tools problematic. Economists working by the seat of their pants aren't working very much as economists. Their experience and thinking discipline come into play, but their tools don't. A craftsman is a craftsman mostly through the use of his tools.
That said, Roubini, Setzer, Krugman and our own CR did use the tools of their trade, and they did get the big picture right. Depth and timing were problematic, but that seems no great sin in the absence of good inputs to analysis on the financial side.
There is nothing that could be done. For all of us realists, it was like standing in front of a moving train.
I went to all the Goldamn Sachs conferences where bank CEOs were standing on the podium telling us that mortgage loans were the best invention since sliced bread. "Look at historical data", they would say,"homeowners have always done everything to save their homes". And my thought was: "Yes but you are using data from a time when 20% down was a rule. You are comparing apples to oranges"
Once I was so disgusted, I decided to walk out of a presentation to go get a snack. While I was choosing my cookies, a group of PMs were gloating about how great they were for having overweighted Sallie Mae. The stock was shooting up of course. Then I asked myself: "How long can it go on until people understand that it does not make sense financially to get an education. When you work for 40K, have a student loan of 50K and a 500K mortgage, how can you ever get ahead?"
Then were the asset sales that did not appear on anyone's books. Shadow banking?
Then it was the overparenting. As if, music, dancing, swimming, soccer, hockey, tutoring, all on debt of course, will help your kids get ahead. Family dinners (healthy and together) and decent sleep are more important than most of these activities (you try to learn when you are tired!) lumped together.
No matter where I went, I felt I was the only one who could put all the pieces together.
The list goes on and on and on...
I told everyone about this but why would they listen to me? I was just a frustrated average loser driving an average car, paying down my mortgage on my average house and living way within my means (Scottish mom). Not the kind of person an ambitious person would want to associate with.
They were probably feeling sorry for me, thinking I was jealous because I felt I could not keep up!
I've been getting all kind of emails and calls from people lower on the hierarchy congratulating me on my vision and begging me to manage their portfolios. Do you think I've gotten any kind words from the top dogs? Heck no. Most still think it's the best time ever in history to buy stocks. I was just talking to my ex-boss mentor and obviously it has not even crossed his mind once that I might have been right. He does not remember a word I said, all he remembers is that I'm not optimistic enough for my own good, a risk-o-phobe.
Greg has all the successful attributes of a Harvard economist who sucked up to power.
Nice job, and hey, look at how much I got paid for my cover of stupid policies.
But hey, tenure at Harvard!!!
Teaching EC10- I guess we see the ultimate reward.
The profession of economics needs to come out of the shelter of academia and practice in the real world.
After a while, most of the stupid stupid stupid theory driven constructs and logical conundra would be naturally dead.
When you yoke a political agenda to economics, you get theory that doesn't work.
There is a reason why I don't work in academia, and the Greg Mankiw's of the world are a big part of it.
Someday this war's gonna end...
Amen.
What's the next crisis?
The US consumer can't recover, no matter how hard it tries. This will cement the race to the bottom.
What about the corrupting influence of money in our political process as a major contributing cause of our economic malaise? It's interesting how this topic is left completely out of the discussion. IMO, there is no greater negative influence driving the policy (or lack of policy) decision making process in Washington than political contributions.
"I believe the time has come for Mankiw, Kling and many other economists to write a post titled "Why I was wrong"."
CR, I couldn't agree more. Lazear and Hubbard, too. The whole lot of them have been so astoundingly wrong, while so many of we amateurs here have been so amazingly right, that either a) They're irredeemingly incompetent, or b) they've been lying through their teeth. Since I find it hard to believe that they could have been so stupid, I'll opt for (b), which is more consistent with the Bush administration, anyhow.
I've been getting all kind of emails and calls from people lower on the hierarchy congratulating me on my vision and begging me to manage their portfolios. Do you think I've gotten any kind words from the top dogs? Heck no. Most still think it's the best time ever in history to buy stocks. I was just talking to my ex-boss mentor and obviously it has not even crossed his mind once that I might have been right. He does not remember a word I said, all he remembers is that I'm not optimistic enough for my own good, a risk-o-phobe.
What I forgot to say was that these top dog PMs couldn't care less if the average Joe's pension fund just lost bundles. Most of them have already cashed out (banks buying them out at the peak or just having more money than knowing what to do with it). They were probably out of equities before the market tank. They don't care whether we realists are right or wrong. They don't care about the masses, they only care about their pocket. As a Portfolio Manager, the expression I've heard the most over the last 15 years is: "Think about number 1, nobody else will". Interestingly, that has NOT been my experience in other walks of life. Many people out there are ready to lend you a hand. But that's the ethos up the ladder.
Personally, it's Hubbard I'd like to see tar and feathered - and he's still out there, tossing out little pro-deregulation commentaries and cheerleading for more of the same.
Shamelessly intellectual dishonesty is what comes to mind. The blending of a little fact with a lot of wishful thinking in order to arrive at desired foregone conclusions is pretty much the sine qua non of the technocrats of the right-wing establishment.
Of course, I take some real comfort about having attended a non-Ivy league school from Mankiw's status at Harvard - it's clear that the quality of undergraduate instruction isn't a linear function with prestige.
You may want to note that EVERY analyst schooled in Austrian Economics had this one nailed well ahead of Roubini and other left leaning (solution wise) pop-economists. Read Rotbhard's America's Great Depression (written many decades ago) and you can see this whole scenario described as the Fed and Treasury (and the entire banking system / economy) stumbled into it blindly with it's Keynesian noose firmly around the neck. Read Rotbhard's Man Economy State or Mises many works on Credit and business cycles, and it's plain as day: The Austrian School had this pegged in the 1920s let alone a few years back like Roubini and Krugman. Only the latter two propose solutions that are nothing more than the very poison that got the economy into this severe plight in the first place.
Hence, all devotees of the Austrian view take umbrage with the Buscho econ comment that it's only lefties who called this out. It was the classical economists / Austrians who warned about it amid the initial bailout of the last bubble and every bubble fight against recession before it.
Good luck getting those pseudo-intellectuals to admit their idiocy.
Time to put down the nice talk and call a spade a spade.
Those pseudo-economists should have their degrees revoked and jobs removed, and the professors who advised these MORONS should have their degrees removed and those colleges should be placed on probation for accreditation, or have it removed completely.
Unless we get tough with BS education in the this world, these same crony scumbags will re-write history again and again.
ENOUGH, ALREADY!!!
Ouch. Well played, well played.
I love the quote on his blog on a book he is trying to promote: "As I post this, the book is number 41,218 in the Amazon sales ranking. I hope a little free advertising on this blog manages to improve that a bit."
Ahhh. The wonders of the "free" market.
Maybe our chief bankers and Financial PAC collectors in Congress could chip in on the post, as well.
lot of them have been so astoundingly wrong, while so many of we amateurs here have been so amazingly right,
The size of the set of those correctly calling the bubble is not as small as you may think. After all, 133 Representatives voted against the AUMF. The good news here is that being right saved a lot of money.
ESL?
DAMN's comments hit close to home. I have a very close friend who has been in mortgage bank for almost 30 years, and he called this nearly a decade ago. Being a collections manager, he got to see the sharp end of the business and the final product of the abdication of all responsibility in underwriting loans. As long as 7 years ago he was dealing with an incredible number first payment and multi-loan defaults. He also found pretty strong of evidence of out-and-out fraud by some lender. For example, there was the loan that cam across his desk at 3 months past due - exactly 3 months after the firm had purchased it as part of a portfolio. After an up-and-down payment record for the first 4 months, the loan paid exactly on the 15th on the month until the lender sold the note. My friend's firm never received a payment after purchasing the loan. It was clear to him that the borrower had defaulted sometime after three or four months, so the lender bundled the loan with a bunch of others to sell to a secondary servicer and made the payments until the sale was complete.
In the many, many conversations we've had about the subject, he's always laid the blame for the problem squarely at the feet of the lenders. They knowingly and willingly made bad loans because they had set up a system that enabled them to maximize their profit and quickly shift the risk onto another party. Everyone involved in setting these policies - and most of those involved in implementing them - knew damned well what they were doing. They were simply hoping that no large portion of the loans would fail at the same time, based on historical assumptions about the housing market without considering (or, more likely, ignoring) the fact that their lending practices had completely undermined those assumptions.
The scary part is that, like DAMN's ex-boss, most of my friend's colleagues still don't get it, either. There seems to be an institutional mindset that states that the bold investor never loses - every setback is a "buying opportunity." That mindset works if you have lots of disposable income to put into the market and you can still live comfortably if your investment portfolio declines precipitously. Few people enjoy that luxury, yet an amazing number of middle-class folks have brought themselves to the brink of financial ruin by living as if they could. Perhaps in the coming years, living within one's means will come back in vogue, but I don't expect anyone in the financial industry to encourage or embrace that ethos.
I have to agree on the Austrian school. Mainstream economists are very resistant to Austrian ideas, and often mainstream is right, but it's time for them to admit the Austrians nailed the credit cycle. Every Austrian in the world was screaming that the easy credit and asset bubble of the 2000's would lead to tears. And this isn't new, either - von Mises famously predicted the Great Depression, too, back in 1929. The evidence is in, and isn't economics supposed to be scientific?
CR,
Confusing the wall street "right" with the right is deeply unfair. The Bush economists, in public, were positive because high profile incumbent economists are always positive through very rapid natural selection. Wall street shills like Kudlow are just that.
The real story here, the credit crisis, was bi-partisan (and, in fact, international): greenspan going negative with real rates (to the cheers of nearly all keynesians) in reaction to the cratering of the previous bubble, a housing mania (cheered by nearly everyone, period) with all sorts of enablers (among them, the GSE's at the start, Wallstreet at the end), a huge appetite for strategic debt by the worlds largest producer and everyone getting into the leverage game after the .com fallout.
Failure has many, many fathers.
Cheers,
prat
The criteria for "grown-up" notably missing from the professor's list is "Nobel Prize winner".
=
J.C. Ernharth writes: "Hence, all devotees of the Austrian view take umbrage with the Buscho econ comment that it's only lefties who called this out."
The Austrian devotees should relax: anyone who disagreed with the Republican "conservatives" were labeled as "lefties". And they still are doing the mis-labeling, but the rhetoric has gotten pale and squeaky so it's not really heard. It's a right-wing tactic (see how well it works?). It won't ever stop, you just have to be smart or experienced enough to see through it. We used to hope that a liberal education would inoculate against these sorts of tactics, but everything corrupts. What to try next, eh?
Not saying you, Ernharth, but it is interesting how many are desperately trying to make this financial (& military, etc.) disaster something that "both sides of the aisle" are responsible for. It's like their souls are worth nothing to them, nothing, so much that they will even lie for the devil when the devil is gone, baby, gone.
saddam did it
mock mankiw
You forgot --
Michael Moore is fat
Al Gore uses electricity
Shut up or the terrorists wi
jjcomet | 11.28.08 - 11:02 am | #
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Stock Trading | Forex | Financial Markets: Stock Market Bottom November 2008 Tomorrow Price Action
Ah, but they're never wrong. Remember: conservatism never fails, it can only BE failed. If something went wrong, it means they did not deregulate ENOUGH....
I think this cuts to the heart of the current crisis. This is not an economic crisis, it is a policy crisis. Or rather, it is now an economic crisis because the policy apparatus undermined the real economy.
Anyone could have seen this coming. Everyone except a handful ignored the signs. The people who stuck to honesty were sidetracked and maligned.
This is about a duration mismatch in the macro-analytic community -- rewards are paid for analysis suited to the moment, not to the results timeframe of the analysis.
Analysts work for people to justify their policy choices. Cheerleaders win because risk-takers outperform, even if the risks they take are ultimately fatal, and people who help risk-takers justify their actions reap both survival and outsize rewards.
This peculiar plasticity of fact is a key lesson of our times. The ability to produce analysis that is objectively rooted and not beholden is one of the key challenges.
"Micro" answers to this can never be anything more than stopgaps because the problem is in the roots of intellectual congress as of our society practices it.
Sure Roubini was early (I thought so at the time), but show me someone who has been more right!
and Henry C.K Liu are just two for starters.
-CR
Michael Hudson
For a Really Smart Guy, Prof. Mankiw seems to be unable to distinguish between "prolific author" and "right."
What a tool.
Stratonovich calculus-
I read the link you posted to Bush's "prediction" of housing price increases. It was the same kind of "prediction" I made today when I told my friend that if it rains tomorrow, we'll go to the movies instead of having a picnic. According to your standards, that makes me prescient!
Not only Mankiw has quite a bit of explaining to do, but he's got to grow a pair asap.
He writes on his blog but won't let anyone comment: Wazup Greg? Scared of reality-based feedback? Is your ego so fragile that you can't stand the truth or even just a contrary opinion. Of course, the man can do whatever he wish with his blog, but just don't be a coward attacking someone without giving a chance to directly answer.
BTW, has anyone ever heard of this IDEAS "objective rankings" alluded to be Greg-O?
What does this ranking REALLY means?
"Instead of leaving it to us to guess why their analysis was so flawed, I believe the time has come for Mankiw, Kling and many other economists to write a post titled "Why I was wrong"
For many economists, that wouldn't be the appropriate title to their posts. Other appropriate titles could be "Why I'm retiring from economics", "Why no one ever asked for my opinions on these topics", "Why the Bush administration only hired people who agreed with them".
I would of course be very impressed with anyone who could make a good case with post titled "Why most economists are wrong NOW, and this will be a shallow recession with a strong recovery". I would like to see such a post for the same reason I sought out Nouriel Roublini's stuff a couple of years ago. When everyone has similar opinions, an articulate opposing voice with some real data is very interesting. They don't even have to be right to be valuable. All they have to do is alert people to issues which they haven't been thinking about.
Search Mankiw's blog for 'housing bubble' and you get only one substantive post
Greg Mankiw's Blog: Housing Bubble?
with the conclusion
"Okay, so the housing market has "reached what looks like a permanently high plateau." Now that's reassuring."
Compare to Krugman in 2006:
Bursting Bubble Blues - New York Times
Economists can be plenty good academically but of no use to the real world. Obviously it can't be retroactively avoided but those saying there was a housing bubble deserve credit over those who ignored or profited from it.
Better question ought to be -- why, since there's more than a century of history about the kind of behavior to prohibit, was the law changed in 1999 to allow it and prevent the states' laws from being used to stop it state by state?
Eight years is all it took, this time. But there's plenty of history to read. Just one example, but a thorough one, Google will find you much more.
Duke Law Journal: Lynn A. Stout, Why The Law Hates Speculators: Regulation And Private Ordering In The Market For OTC Derivatives, 48 Duke L. J. 701 (1999)
This was written in 1999, just before it changed:
Cited: 48 Duke L. J. 701 [*pg 701]
WHY THE LAW HATES SPECULATORS: REGULATION AND PRIVATE ORDERING IN THE MARKET FOR OTC DERIVATIVES -- LYNN A. STOUT
I. ANTISPECULATION RULES IN AMERICAN LAW
A. The Common Law Rule Against Difference Contracts
B. Codifying the Common Law: Antibucketshop Statutes and the Commodity Exchange Act
C. Antispeculation Rules in Insurance Law: The Doctrines of Indemnity and Insurable Interest
D. The Securities Exchange Act of 1934
E. Summary: The Prevalence of Antispeculation Law
II. CONVENTIONAL ECONOMIC THEORIES OF SPECULATION: THE RISK HEDGING AND INFORMATION ARBITRAGE MODELS
A. Risk Hedging
B. Information Arbitrage
C. Summary: Normative Implications of Conventional Theories
III. THE HETEROGENEOUS EXPECTATIONS THEORY OF SPECULATION
A. The Heterogeneous Expectations Approach
B. Normative Implications of the HE Model
C. Summary: The HE Model and the Common Law Conception of Speculation
IV. HE SPECULATION AND THE MARKET FOR OTC DERIVATIVES
A. OTC Derivatives as Off-Exchange Futures and Options
B. The Controversy over Applying the CEA to Derivatives
C. HE Theory and the Economic Consequences of Derivatives Speculation
D. Discouraging HE Trading in Derivatives: Lessons from the CEA
E. Discouraging HE Trading in Derivatives: Lessons from the Common Law
F. Summary: Regulation and Private Ordering in the Market for OTC Derivatives
CONCLUSION
ABSTRACT
A wide variety of statutory and common law doctrines in American law evidence hostility towards speculation. Conventional economic theory, however, generally views speculation as an efficient form of trading that shifts risk to those who can bear it most easily and improves the accuracy of market prices. This Article reconciles the apparent conflict between legal tradition and economic theory by explaining why some forms of speculative trading may be inefficient. It presents a heterogeneous expectations model of speculative trading that offers important insights into antispeculation laws in general, and the ongoing debate concerning over-the-counter (OTC) derivatives in particular.
Although trading in OTC derivatives is presently largely unregulated, the Commodity Futures Trading Commission recently announced its intention to consider substantively regulating OTC derivatives under the Commodity Exchange Act (CEA). ....
[*pg 703]
INTRODUCTION
The public disapproves of speculators.1 So, traditionally, does the law. Although hostility towards speculators is so deeply woven into our nation's legal fabric that it often goes unnoticed, a remarkable variety of laws discourages people from trying to profit from short-term price changes. ....
In 2000 Mankiw had an article in Fortune explaining who he was voting for and why: Bush, because he would let "the invisible hand" have free reign. Seriously, he said: "Gore relies more on the intrusive hand of government, while Bush trusts the invisible hand of the market." Doh!
Recently Mankiw said that if Obama raises his taxes he's going to have less incentive to work, and so will work less... hey, by all means take it easy, Prof... I mean, it's not like your "work" as a right-wing propagandist is really helping any of us at this point...
CR,
I am disappointed in you. As a conservative, I have enjoyed your subtle digs, but appreciated the professional tone. The gloating is unbecoming. Greg Mankiw, Arnold Kling, and others have highly praised your work and contributions. They have highly praised the economic contributions of Paul Krugman. Please stay positive. The facts alone are enough to vindidate and validate your views.
PRINCETON, New Jersey: Some skeptics are calling Henry Paulson's $700 billion rescue plan for the U.S. financial system "cash for trash." Others are calling the proposed legislation the Authorization for Use of Financial Force, after the Authorization for Use of Military Force, the infamous bill that gave the Bush administration the green light to invade Iraq.
There's justice in the gibes. Everyone agrees that something major must be done. But Paulson is demanding extraordinary power for himself - and for his successor - to deploy taxpayers' money on behalf of a plan that, as far as I can see, doesn't make sense.
Some are saying that we Americans should simply trust Paulson, because he's a smart guy who knows what he's doing. But that's only half true: He is a smart guy, but what, exactly, in the experience of the past year and a half - a period during which Paulson repeatedly declared the financial crisis "contained," and then offered a series of unsuccessful fixes - justifies the belief that he knows what he's doing? He's making it up as he goes along, just like the rest of us.
Paul Krugman: Cash for trash - The New York Times
We have created monsters in the form of omnipotent economists. They are not what they seem.
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The PACIFIC GATE POST: • ECONOMISTS, OUR NEW PHILOSOPHER KINGS?
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Perhaps society has simply overplayed them. We should instead listen to entrepreneurs.
I think a lot of people thought that we were seeing inflation starting. The big mystery in the middle of the 2000's was when will it hit wages.
I think it's easy to forget the history of all this. Debt was soaring, but many inflationary indicators were rising too.
And, I think the Fed will monetize most of this problem away and we will end up back in the original scenario.
Good macroeconomics is simply microeconomics extended to the time structure of the economy.
The macroeconomics of the top 20 schools is utterly brain dead because by assumption it forbids relative price microeconomics across the time structure of the economy -- most significantly in the time structure of production.
There have been books written on this, e.g. by Roger Garrison, Gerald O'Driscoll, Jr. and Friedrich Hayek. I'd recommend that folks read one.
"Rob Dawg, I think micro economics works great - it really helps with setting prices and I believe it helped my company maximize profits. I think Macro predictions are far more difficult - although the housing bubble / bust was easy to call (IMO).
Best Wishes
Calculated Risk"
the man asked for names. next to no names here because the focus is on economists. read people like bill fleckenstein, jim grant, fred hickey, jim rogers, marc faber (i'm naming just the first to come to mind)--investors all--and you read people who got it really right years ago. put beside these guys, krugman's few warnings were tepid. if krugman had seen what they saw, he would have been hammering it weekly. he would have sounded really really shrill! brad delong (lauding greenspan through last year) is a joke. from what i've just witnessed, i'm inclined to dismiss all economists.
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Do I have to be the one to point out that Roubini was predicting a recession at the end of 2006?
Uh, I know you are an economist, but I assume you know how to use a calendar.
There was no GDP recession in 2006, or 2007 for that matter.
Despite what NBER says regarding the beginning of the "jobs" recession, the economy was not contracting until very recently.
There is ZERO case for saying Roubini was anything but WRONG!
He was off by a year, and that is with the most liberal moving of the goalposts.
By Krugman advocating financial reform is he recommending that we finally do away with all federal housing and lending mandates?
Does he propose the full and final privatization of Fannie and Freddie once the housing market stabilizes and it if can fetch a price north of ZERO?
Does he propose the implementation of a clearinghouse for CDS instruments as was long ago called for in 2000, but never chartered by the Clinton Administration?
That would be real reform. The kind that prevents future distortion of our asset markets for political gain.
Krugman is the perpetual doomsayer. Eventually you get to be right...about every 6-8 years.
I still recall suffering through his "Age of Diminished Expectations" back in Intro Econ in 1992.
Talk about a book that could not have been more wrong if you tried.
When Krugman gets an Al Gore Prize for political hackery, you know there is hope for anyone with the courage to be a loudmouth.