Monday, January 12, 2009

An Economist’s Mea Culpa

According to Princeton economist Uwe E. Reinhardt, writing in the NY Times:

1. Our entire 21st-century banking sector, managed as it is by graduates of the nation’s top business schools, supported by highly trained financial engineers, and monitored around the clock by thousands of allegedly bright financial analysts, immolated itself with highly toxic assets, purchased with borrowed money, and in the process infected the entire world economy.

2. The economics profession slept comfortably as Wall Street was imploding. Fewer than a dozen prominent economists saw this economic train wreck coming — and the Federal Reserve chairman, Ben Bernanke, an economist famous for his academic research on the Great Depression, was notably not among them.


At 1/12/2009 9:29 AM, Blogger juandos said...

"The economics profession slept comfortably as Wall Street was imploding"...

LOL! Even now at least one economist can't come to the realities of the real world...

It seems that only relatively recently that some economists are saying publically that FDR was responsible for extending the Great Depression...

At 1/12/2009 10:19 AM, Blogger PeakTrader said...

1. The U.S. banking system distributed trillions of dollars of foreign capital to the U.S. masses for fees raising American living standards at a steeper rate. Foreigners received 10% negative annual returns on their investment, because of negative real interest rates, inflation (i.e. opportunity cost of not exchanging their goods for U.S. goods), and currency exchange rates.

2. The Federal Reserve began an easing cycle in the third quarter of 2007, when U.S. real GDP growth was 4.9% and commodity prices rose sharply hitting all-time highs until July 2008.

At 1/12/2009 10:24 AM, Blogger Milena said...

Hmm. What does this say about the nation's top business schools is the real question? Camille Paglia calls Ivy League schools the "sub-prime mortgages of higher education."


Anyway, that "no one" saw the implosion coming is a ridiculous claim. The problem is anyone who said an implosion was coming was not considered a reputable economist, and received no coverage.

I'm certain plenty of Austrians saw this coming a mile away.

At 1/12/2009 10:30 AM, Blogger bix1951 said...

What is pain?

"Democracy equals inflation." Who said that?

Fiat money....

If I sell my house and make a $200,000 profit, where did that money come from?

Social justice....

I still fault government for increasing the money supply over the years. This has been going on since I was a baby.

So I still "blame" government, which is the people!

What I believe is healthy is price stability. That means some years are of inflation and some years are of deflation. Deflation is a good thing!
Bring it on!
We can learn to live with it.

At 1/12/2009 10:44 AM, Blogger Bruce Hall said...

2-3 years ago, many non-economists, including myself, were posting about the fragile or fading economy... despite the statistics.

Perhaps the "economics profession" is too focused on "big picture statistics" to be able to observe real-time changes. Most data-focused professions do a good job explaining what happened, but not necessarily what is or will be happening. Databases obfuscate the "little pictures" that ultimately make up the "big picture."

While anecdotal information is not "scientific," it is often accurate and more current than statistical data that is constantly subject to revision. That is because databases or computer models do not necessarily provide the relevant connections to perceive change points. Having developed and used econometric models for a large corporation, I understood the distinction between correlation and causation... and the need for "what if" factors.

I also understood the need to listen to the anecdotal information from sales staff and customers... information simply not found in economy databases.

Small wonder that Ben Bernanke thought that inflation was the biggest threat as late as the first half of 2008. That's what the database analysis showed... that's not what was important. The stalling of the housing boom and the oil price bubble told those who were observing [rather than analyzing databases] that the consumer was in for a rough ride and, ergo, so was the economy.

At 1/12/2009 11:02 AM, Blogger PeakTrader said...

The Fed uses "jawboning" to keep inflation expectations low. The Fed works in the future economy, because of lags in the adjustment process.

Bernanke knew in August 2007 he kept the money supply restrictive for too long and was behind the curve easing the money supply. However, the Fed kept the money supply restrictive, because foreigners absorbed massive quantities of dollars, which had the potential to flood the world with dollars, and cause a precipitous fall in the dollar.

At 1/12/2009 11:17 AM, Blogger PeakTrader said...

The U.S. government deficit revealed the U.S. money supply was restrictive. In 2007, the U.S. budget deficit narrowed to $162 billion (or roughly 1% of 2007 U.S. GDP), although there were two wars, in Iraq and Afghanistan, the war on terror, and Homeland Security.

U.S. consumers exchanged dollars for foreign goods. However, foreigners exchanged dollars for U.S. Treasury bonds. So, those dollars didn't flow back into the economy. Recent U.S. recessions have been caused by contractionary fiscal policy.

At 1/12/2009 7:33 PM, Anonymous Anonymous said...

The economics profession EXCEPT the Austrian school, who warned about this from the moment Greenspan pulled rates down to 1% and held them there.

No offense "free-market" economists who've been drinking the moneterists Kool-Aid for the last 30 years, and had no idea this was coming (i.e., Mark Perry, Larry Kudlow, Art Laughable etc)

At 1/13/2009 9:25 AM, Anonymous Anonymous said...

In 2007, the U.S. budget deficit narrowed to $162 billion (or roughly 1% of 2007 U.S. GDP), although there were two wars, in Iraq and Afghanistan

Which are funded off the books and do not contribute toward the budget deficit. If you include this funding, it is actually higher.


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