Paul Krugman has an opinion piece about the Economic profession.
www.nytimes.com/2009/09/06/magazine/06Economic-t.html?scp=3&sq=paul%20krugman&st=cse
Its a long and winding read about how smart intelligent economists acted so stupidly. It really is a great piece on why the Nobel Prize for Economics should be retired, even though that is not the intent of the author who is a Nobel prize winner himself.
Economists generally got it wrong because they never thought there was a problem in the first place. Almost every leading economist and financier in the world was so deeply embedded in hero worship of Alan Greenspan, that these economists believed that the policies that had been enacted by the central bank over the preceding 25 years was the correct policy. We have seen over the past few years that Milton Friedman and Greenspan are not hero's. They were free market/Wall Street cheerleaders. They were flawed just like the rest of us.
Greenspan and others had seen this crisis coming for years, they just didn't act on it because Wall Street wanted that way. Wall Street had created a system that was not regulated or overlooked by anyone except Wall Street. From this alone "Too Big Too Fail" was created.
Central Bank Officials models missed the crisis not because the conditions were so unusual, as Greenspan and Bernanke have repeatedly have stated, they missed it by design. It is impossible to warn against a debt deflation recession in a model world where debt does not exist. This is the world our policymakers have been living in. They urgently need to change the very environment that they currently live in. These models were as flawed as the worst models that AIG was using. AIG CDS models never accounted for a decrease in housing prices, that is why AIG blew up. The Fed models basically had the idea that debt was a nonexistent form of policy, from this the economy and financial system blew up.
There were many economists that so this coming, but their timing was off. The classical economist living in reality knew in the late 90's that America's obsession with debt would lead to ruin, only some 10 years later did that come to fruition. But when bad policy is headed by the powers, and its that same policy that is making the powers incredibly wealthy, dissension has no place, it is muted and silenced. The dissenters were considered quacks.
Here are some dissenting opinions of economists that got in right as far back as 2001.
"the new housing bubble,together with the bond and stock bubbles,will inevitably implode in the foreseeable future, plunging the US economy into a protracted, deep recession".
-Kurt Richebächer - Investment Newsletter Writer,2001
"all remaining questions pertain solely to [the] speed, depth and duration of the economy's downturn".
"the small slowdown in the rate at which US household debt levels are rising resulting from the house price decline, will immediately lead to a sustained growth recession before 2010".
Wynne Godley - Levy Economics Institute, 2006
"debt deflation will shrink the 'real' economy, drive down real wages, and push our debt ridden economy into Japan style stagnation or worse".
-Michael Hudson - University of Missouri, 2006
I an thinking these guys had the same thesis for years but the market kept on humming along, so they were marginalized and forgotten.
Most of the economists that got it right used a model called "Flow Of Funds", which states that liquidity generated in the financial sector flows to companies, households and the government as they borrow. This may facilitate capital investment, production and consumption, but also asset price inflation and debt growth. Liquidity returns to the financial sector as a result of more debt and investment fees. But there is a trade off in the use of credit and debt. The economies assets and liabilities must balance, growing financial assets must be counter balanced by debt. As credit expands so does the debt burden. Flow of funds models quantify the sustainability of the debt burden and the financial sector's drain on the real economy, and when a breaking point will be reached.
The turnover in credit and debt in the financial sector is many times larger then the actual GDP. This has been the case here as well as in the UK.
Even the OECD had this terribly wrong as late as 2007:
"the current economic situation is in many ways better then what we have experienced in years. Our central forecast remains indeed quite benign: a soft landing in the United States and a strong and sustained recovery in Europe."
Most central bankers, financiers, and policy makers say that using a Flow Of Funds model is difficult because you cant identify a bubble. This is ludicrous. Bubbles are easy to spot if you are living in realty. We just had a credit/debt/housing bubble. We are in a debt bubble at the moment, soon to go back into a debt/housing bubble once again. Its only difficult to realize your in a bubble when you fail to take into account balance sheets and the very existence of debt. When everyone is making vulgar amounts of money, bubbles are just fallacy.
No comments:
Post a Comment