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Bankrupt Theories for a Bankrupt Nation


Paul Krugman has been thinking deep meta-thoughts about deep meta-theories, and his foundational analysis of evolutionary biology has been chronicled on a New York Times blog devoted to similar issues.

Krugman celebrates the factuality of biological research, and encourages old-media economists to gather much, much more data from the internet, where graduate students in economics can "download securities prices from Bloomberg and see how blue skies and rain affect the behavior of financial markets." The blog's curator indulges Krugman's fantasy in a made-to-order universe where we can "brutally confront theory with data."

Obviously both of those hyper-intelligent individuals could avoid this sort of "abuse of language" at the price of tedious qualifications which would quickly overburden their readership and leave them talking into a vacuum, and nobody wants that, but nevertheless it may not be entirely out of place to wonder exactly how tedious those qualifications would have to be.

Unfortunately for all of us, the qualifications are endless, and we will never ever "see" a connection between cause and effect, neither on the Bloomberg ticker or even in a physics lab, where visual and conceptual "metaphors" are respectably anchored in standard procedures, but inevitably dissolve into the fog of quantum mechanics before anybody "sees" anything.

So what?

Everybody already knows that data only really "confront" the bleary eyes of weary lab assistants, and what's the harm in a little convenient shorthand for what everybody already knows? Without it no finite person could ever enunciate any kind of theory, economic or physical.

The harm is payrolls shrinking by hundreds of thousands of jobs month after month, and almost every relevant article in the New York Times winding up with a professor of economics somewhere "seeing" light at the end of the tunnel. Happy days are (almost) here again!

Meanwhile simple alternatives to watching this mess get worse, like hiring the unemployed for massive public-works projects which our disintegrating infrastructure absolutely requires anyway, get lost in a fog of Keynesian stimuli or Chicago laissez-aller, and outright destitution is now confronting millions of Americans more brutally than mere data will ever confront anything.

Obama's stimulus was a bastardization of Keynesian deficit spending and Friedman-esque tax cuts, a grab-bag of almost all contemporary economic theories, and only the eyes of faith can "see" much in the way of results, but the same $700 billion package could have employed 6,000,000 people at $3000 per month tax-free for about 40 months, with no theoretical framework whatsoever except giving jobs to the jobless, and if our moribund economy still didn't have a pulse after 40 months, at least tax-payers would have had some brand new bridges and thousands of windmills to show for their money, and 6,000,000 people would have also earned a living for what promises to be three lean, mean years.

But instead we got theories, and "abuse of language."


18 Comments

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"Brutally confront theory with data."

Theory? Bernanke, Geithner & Summers are impervious to pain.
Data? Louisville Slugger.

Oh to be that lab assistant.

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This blog caused the margins of my monitor to fill up with ads about "Theories of Infinity," a "New eBook" which "Explores The Transcendent Realm."

The cover of "Theories of Infinity" feature's quinn's avatar!

Coincidence? Or is that a grassy knoll where a nose should be?

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I get "Sustainable Infrastructure Solutions for Greener Cities" - from Siemens. You HAD to say f*cking "infrastructure" didn't ya? Like it MEANS anything... and like we can keep the vultures off it.

We may have missed out on that Bridge to Nowhere, but we sure as shit are gonna patch our Highways to Hell.

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I liked it when "infra" was the province of sci-fi writers rather than tech geeks and public policy majors. Check out them x-ray specs.

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Infra-dig, Des!

But isn't everything infra-dig in the world of today... and tomorrow?

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heh..."The Roads Must Roll" - Robert Heinlein (1940). I can't resist pasting from Wiki's plot summary:

"Larry Gaines, Chief Engineer of the Diego-Reno roadtown, is dining in a moving restaurant on the road when one of the moving sidewalk strips unexpectedly stops, causing injuries to the thousands of commuters on it. Gaines learns that it was sabotage. The technicians who maintain the Stockton section of the road have been persuaded by a radical social theory, Functionalism, that their role in maintaining the nation's transport infrastructure is more important than that of any other workers and that they should therefore be in control. The roads are managed by the Transport Cadets, an elite paramilitary organization formed by the US Military to keep this crucial infrastructure running. The rebels have stopped the strip as a demonstration to encourage their fellow technicians around the country to rebel against the Cadets, and start the Functionalist Revolution."

http://en.wikipedia.org/wiki/The_Roads_Must_Roll

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Now my ads say...

"Are You Going Bankrupt?"

And...

"Are You "PM" Certified?"

Apparently "PM" Certified means you can take a nap every day from 4 to 6 PM, and then get drunk again.

And... yes, I am!

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Third, they’ll have to do their best to incorporate the realities of finance into macroeconomics. Paul Krugman

"Third"? And on his blog Krugman apologizes -- sort of -- for "also" ("also"?) omitting Hyman Minsky due to space limitations. Minsky got it right; Krugman never got it and now wants to claim on behalf of his "profession" -- that is, both neoclassical and New Keynesian economists -- that their fault comes from their unwillingness to introduce psychiatry and sociology into their theories.

Their actual fault is a groveling subservience before the purported powers of the Fed and their refusal to contemplate the fact that uncontrolled, a credit boom always ends badly.

I'm a big fan of Citizen Krugman; Economist Krugman not so much.

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Thanks for your intelligent comment about Hyman Minsky, Ellen.

Now that Minsky has been dead for more than a decade, mainstream economists are recognizing "Minsky moments" here, there, and everywhere, from Moscow to Wall Street, and his analysis of typical speculative bubbles has more or less passed into the received wisdom of the dismal science.

And of course it was also immediately over-extended to cover the recent collapse of financial derivatives, a fantastical development of unreal and unbelievably leveraged "assets" which I can't believe that Minsky foresaw.

IMHO the financial crisis of 2007-9 is different in kind and significantly more serious than the collapse of previous housing and other bubbles as in 2000-1. The first sub-prime crisis, for example, didn't leave behind multi-trillion dollar obligations which far exceed the entire capitalization of all markets everywhere combined, and although the Fed and Treasury are only guaranteeing $27.3 trillion of that monstrous and mostly invisible iceberg of interlocking debts, and everybody knows that not all those guarantees will have to be paid off even in the worst case scenario that anyone now imagines, behind that relatively meager $27.3 trillion another $500 trillion of nebulous financial derivatives are still on the books at BIS, and I can't quite believe that even the excellent Hyman Minsky could have predicted how that monstrosity will evolve.

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Don't confuse nominal derivative amounts with real (that is, netted) amounts.

And too, derivatives aren't what cratered the system. The realization that a $14 trillion economy can't support a $56 trillion debt is what brought everyone up short. And much of the rest of the world is in worse shape than the U.S.

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I hope this next question doesn't sound argumentative, because it isn't meant to be, and I belong to the WTF school of financial derivatives...

Where is the bright line between what somebody somewhere might actually have to pay, and the awe-inspiring nominal amounts, which must mean something, because the BIS keeps adjusting the numbers, now down from the really awe-inspiring $1.1 quadrillion in 2008, but still in the neighborhood of $500 trillion?

And as far as I can tell, the OTC totals which periodically appear on the BIS site are not necessarily the whole story, since there isn't a universal obligation to report derivatives exchanged between institutions.

This is a volatile mix in almost everybody's opinion now, and reasonably estimating the volatility would probably mean getting a fix on so-called "exotic options" like peronis and lookbacks, along with simple swaps and guarantees of interest rates.

The net value seems to hover around $33 trillion, give or take $10 trillion, but "net values" have been notoriously unreliable numbers since 2007.

Again, let me say that I have zero confidence in my comprehension of this miasma, and any clarification or correction you would be kind enough to add would be greatly appreciated.

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More on excessive debt driving an economy to its knees:

[T]he initial economic slowdown was a direct result of an over-leveraged household sector unable to keep pace with its debt obligations. Mian and Sufi

Once investors understood that these debts weren't going to be paid back -- and it took the government-trusting morons 14 months and Lehman going under before they did -- it was Katie-bar-the-door.

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that their fault comes from their unwillingness to introduce psychiatry and sociology into their theories.

Not just their theories but the way they assume the populace will react. They - as well as others in and out of government - assume that people will react in a rational manner during a crisis.

They most assuredly do not. Which is why most of the expectations of where the economy should be going have fallen flatter than a piece of papper.

C

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Krugman's Sunday analysis of what went wrong with neoclassical and New Keynesian economics is nothing but New Kool-Aid drinking -- some of the behavioral economists got it right; we didn't; ergo, the Madness of Crowds must be the explanation.

Bull! Throughout the credit boom/bubble all the players acted rationally.

Home buyers bought homes with no money down and at low interest rates together with a no-cost "call option" on future price increases and a no-cost "put option" if things went badly -- the right to walk away.

As for Wall Street, Chuck Prince, CEO of Citigroup, said it best (N.B. This is 14 months before Lehman):

When the music stops, in terms of liquidity, things will be complicated. But as long as the music is playing, you’ve got to get up and dance. We’re still dancing. (July 2007)

Keynes said it this way:

A "sound" banker, alas! is not one who foresees danger and avoids it, but one who, when he is ruined, is ruined in a conventional and orthodox way along with his fellows, so that no one can really blame him.

Why did the economics profession fail to get it right. Look to the usual suspects -- greed, careerism, opportunism, and cowardice on the part of economists -- in a word an obsequious deference to the people who caused the crisis, the Chairman of the Federal Reserve Board and his friends.

But Krugman won't say it.

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THe problem appears to stem in part from the economist conflating institutions with rational actors: the economists assumed that the institutions would behave in terms of the institutions' best interests even though the individual people of whom the institutions are comprised were presented with and responded rationally to incentives which lead the people to take steps which harmed the institutions as a whole.

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And themselves in some cases.


C

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Eloquent, Rootie. I can't add anything eloquent in return. I don't even have a seat at the theoretical or the real table.

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You always have a seat at my table, gasket.

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Rutabaga Ridgepole

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