Friday, May 11, 2012

On Economics

A direct steal from Brad de Long who stole it from John Emerson, but right on target to what Eli, MT, Ankh and others have been trying to tell the Weasel and apologies to John Quiggin, Paul Krugman, NoahAngry Bear, and even Brad de Long

John Emerson:
Brad DeLong: Luke Lea Gets It Wrong, I Think: Assessing John Cochrane's "Can't I Let Sleeping Dogs Lie?" Department: Brad's argument would make sense if none of his bullshit artists had been awarded Nobel Prizes for economics, or if most of them did not outrank DeLong in the profession. As it is, laymen can have no trust in the economics profession as such or professional economists as such. There are no internal standards, and any credentialed PhD can say anything he wants with no worries about sanctions. My understanding is that economics has all the right answers sitting there on shelf, mixed in with all the wrong answers. Every once in awhile someone like Minsky or Veblen or Kalecki or Pigou is moved forward on the shelf to patch the failed consensus.
For the last 30-40 years I've been fighting a losing battle with well-regarded Chicago School and neoliberal economists and watching the society I live in being degraded in front of my eyes. During that time the economics profession was doing harm. As long as thing were going well by their standards, there was nothing I could say; I was a laughable crank, fanatic, and slave of archaic ideology. Only now when they've caused a disaster have I become marginally respectable. I don't think that the profession can self-correct fast enough to make it useful in the world it lives in. Maybe by 2050 the profession will have remediated itself enough to become capable of understanding the world of 2012, but that's not soon enough. There needs to be a serious pruning and thinning, but that's not institutionally possible using normal methods. The tumbril and guillotine method is precluded too. A parallel discipline needs to be developed.
I used to--six years ago--be certain that people like Emerson were wrong.

It seemed to me that economics had a powerful technocratic core and a powerful set of analytical tools that helped to make sense of the world.

But the treatment that the world has gotten from the Lucases, Cochranes, Famas, Kocherlakotas, and many others, not to mention the Prescotts--none of whom seems to have made any effort to mark their prejudices to reality--has shaken my confidence to the core. They seemed to me and seem to me to have simply not done their homework, and not be trying to do their homework.

Oh yes, J. P. Morgan lost $2 Billion today on a wise guy bet.


joabbess said...

Pragmatically speaking, I doubt the world will organise itself sufficiently quickly or effectively to efficiently price carbon out of the economies. I think that we should stop trying to charge for negative virtual commodities like carbon dioxide, and start positive investment into renewable energy technologies, conservation and efficiency standards/deployment :-

Anonymous said...

Dr. Jay Cadbury, phd.

I agree that economics is at a low point right now but I am not familiar with these economists, besides Krugman.

I am interested to know if anyone here would vote for Hilary Clinton instead of Obama. I cannot believe that there aren't a lot of democrats out there that know she would do a better job.

J Bowers said...

Frederic Mishkin > Iceland > report title.

Frederic Mishkin Iceland Prize for Intellectual Integrity

'Nuff said.

EliRabett said...

She has a job

Anonymous said...

There are no right answers in economics. Only right economists.


William Connolley said...

> Oh yes, J. P. Morgan lost $2 Billion today on a wise guy bet.

Why do you care? If they lost, someone else gained. That particular business is zero-sum.

Not that they have actually lost it yet, of course, but that's a fine distinction.

Anonymous said...

Well color me stoopid, that's why they call me stoopid.

Is there not an old saying about economists that goes like this:-

In a room with one hundred economists, all fed with the same data, you will get three hundred different opinions. Such is the black art alchemy science of 'Austrian School Economics'.

So the "Nick Leeson Syndrome" has returned to haunt JP Morgan, after killing Bear Stearns, Lehman Bros and Merrill Lynch. It would appear, the senior management at 'JP' have not heard of the "Peter Principle".

Such is life.

EliRabett said...

It went the same place the value of your house went in 2008, glug. Markets are not just trades but valuations. Right now a whole lot of bonds are worth a whole lot less.

Hank Roberts said...

> if they lost somebody else gained

That's the misunderstanding.

Mainstream opinion, widely understood.

Excerpt follows:

"I have seen no reliable statistics on the identities of the counterparties in the leading derivatives markets. My best guess is that most of the activity is not between households and financial intermediaries or between non-financial enterprises and financial intermediaries, but among financial intermediaries, mainly among different banking or shadow-banking player. Much of this trading appears to be driven by overconfidence and hubris. I have yet to meet a trader who did not believe that he or she could not beat the market. Because collectively these traders effectively are the market, they are collectively irrational, as they cannot beat themselves. So the risk ends up being concentrated not among those most capable of bearing it, but among those most willing to bear it – those most confident of being able to bear it and profit from it.

(5) Churning

The collective hubris of the banking sector (broadly defined to include all the shadow-banking sector institutions like hedge funds, private equity funds, SIVs, conduits, other investment funds, AIG-style insurance companies etc.) means that enormous volumes of bets are placed on the behaviour of endogenous variables. The first consequence of this is that, since derivatives trading is not costless, scarce skilled resources are diverted to what are not even games of pure redistribution. Instead these resources are diverted towards games involving the redistribution of a social pie that shrinks as more players enter the game.

The inefficient redistribution of risk that can be the by-product of the creation of new derivatives markets and their inadequate regulation can also affect the real economy through an increase in the scope and severity of defaults. Defaults, insolvency and bankruptcy are key components of a market economy based on property rights. There involve more than a redistribution of property rights (both income and control rights). They also destroy real resources. The zero-sum redistribution characteristic of derivatives contracts in a frictionless world becomes a negative-sum redistribution when default and insolvency is involved. There is a fundamental asymmetry in the market game between winners and losers: there is no such thing as super-solvency for winners. But there is such a thing as insolvency for losers, if the losses are large enough."

----- that was a few years ago------


"Details Of The $291 Trillion In Derivatives To Which American Taxpayers Are Exposed
April 17, 2012

The entire US GDP is less than $15 trillion each year. The gross notional amount of derivatives issued in the USA is more than $291 trillion. Does that sound like a lot? Apologists for derivatives dealers don't like it when we talk about derivatives in terms of the notional totals. Large numbers, like these, discussed publicly, frighten too many people. According to the apologists, gross "notional" is misleading, because it does not include "hedges," offsets and the limits on interest rate risk.

In fact, the total amount of derivatives cannot be accurately presented in any other form but gross notional obligations. The risk to society cannot be judged in any other way. That's why the FDIC, US Comptroller of the Currency and the Bank for International Settlement (BIS) all use gross notional...."


Skipped all that?

Shorter: it's not a zero sum game
The financial system halts eventually
when used more for gambling than for marketing.

I'm no expert at all.
I just read this stuff
figuring my assumptions
are most likely too naive.

I recommend reading and asking yourself the same question.

Hank Roberts said...

A bit more from Seeking Alpha, again, mainstream opinion:

--- excerpt follows ----

"... the risk is astronomical, and imposes a grave risk upon American taxpayers. It is not surprising that FDIC staff is not thrilled with US bank derivative exposures. In fact, Sheila Bair, who until recently ran the FDIC, is as disgusted with the Federal Reserve slush fund and the banking cartel as you and I. A few days ago, she penned a satirical article heavily critical of Fed policy and published it in the Washington Post.

The FDIC staff doesn't like the fact that the Federal Reserve keeps allowing banks to put their derivatives inside insured depositary institutions. This is mostly for the same reason the banks want to put them there. Insolvency laws provides priority to derivatives counter-parties over the FDIC. If and when a bank is liquidated, the FDIC will be on the hook to repay depositors, but the failing bank will be stripped of all assets.

The US government's full faith and credit guaranty means massive amounts of new US Treasuries will need to be sold, massive numbers of new counterfeit dollars will need to be printed under color of law, and significant tax hikes will need to be levied to pay the bill.

FDIC opposition, however, has had little to no effect on keeping derivatives out of insured units. The Federal Reserve, and not the FDIC, has the authority to approve the practice and it keeps doing so. The FDIC staff can complain privately, and issue regulations forcing disclosures, but little more. But, because of the disclosure requirements, more detailed information than ever is now available concerning derivatives.

In fact, FDIC has made far more information about derivatives public, over the last 3 years, than the Fed and OCC ever disclosed over decades. The numbers reveal a frightening concentration of risk. Five large "TBTF" US banks hold 96% of derivatives issued in the United States.

But the Bank for International Settlements in Switzerland reports that about $707.6 trillion worth of derivative obligations have been issued worldwide as of the end of 2011. That leaves about $417 trillion worth of derivatives that are not accounted for, in the FDIC records.

The surplus derivatives have been written mostly in London ...."


Shorter: find the guy in London and stop him.
Anybody live near London want to take this on?

David B. Benson said...

~@:> --- No left economists left?

Anonymous said...

In response to Eli's original post I was going to expound on how all economists should mandatorily study physics and/or physical chemistry, and most especially thermodynamics, with a strong recommendation for and ecology side-dish of ecosystem processes and trophic relationships.

And then J Bowers linked to physicsof finance... which makes anything I was going to say somewhat superfluous. And JB - thanks, I'll now have another permanently open tab to add to the scores that I already have.

Bernard J. Hyphen-Anonymous XVII, Esq.

John said...

To David B. Benson:

The Left Business Observer

John Puma

Anonymous said...

A couple of observations arising from the entertainment at the weasel-hole...

Law, even in the Lands of the 'Free' Markets, is a subjective, partisan, and contextual beast. It's not objective, or always (or even often) fair - ask the homosexual communities in the USA and Australia about this right now... Appealing to 'law,' as it is currently practised, in establishing an economic paradigm is an exercise in futility - and as acknowledged at the Hole, an exercise in circularity.

And in a complete change of subject, slavery was the fossil fuel equivalent pre fossil fuels. Context...

Bernard J. Hyphen-Anonymous XVII, Esq.

Anonymous said...


Even left economists are right (or at least believe they are)


EliRabett said...

Oh yes, JP lost about 9% of its value on the stock market on Friday, that is several times the $2B and probably triggered a number of margin calls where the stock was used as collateral. No harm, no foul.

J Bowers said...

JP Morgan can't explain how they lost $2bn (too complex to even rate for risk, "barely vetted, barely monitored") and the bank were dismissing concerns about The Whale's bets since April. Nothing learned since 2008, it would seem. JPM's CEO is one of the key lobbysits against the Volcker Rule, ironically.

Anonymous said...

There are no negative consequences in "investment" banking. Only transaction fees and bonuses.


Anonymous said...

...and bailouts (of course)


Anonymous said...

Well color me stoopid, that they call me stoopid.

Breaking News on JP Morgan's losses:
"US fund manager Saratoga Capital Management, filed a class-action lawsuit against JP Morgan Chase after the bank lost more than $2 billion in derivatives trading."

The suit said the economic loss suffered by the plaintiffs was ``a direct result of defendants' fraudulent scheme to artificially inflate the price of JP Morgan common stock and the subsequent significant decline in the value of JP Morgan common stock when defendants' prior misrepresentations and other fraudulent conduct were revealed.''

[Epic FacePalm](

J Bowers said...

I had no idea where to put this, but it's too fascinating not to share, and has very big implications for emissions reductions, as well as addressing many other issues.

Will 3D printers make food sustainable?

"Producing beef this way results in a 96% reduction in greenhouse gas emissions compared to rearing animals, and uses 45% of the energy, 1% of the land and 4% of the water associated with conventional beef production."

Michael Tobis said...

So it will turn out that hearts are needed for vat meat to be something other than a hideous pink gelatin, and that neurons are needed to create hearts, which leads us directly to amoral corporate entities growing neurons in vats. What could possibly go wrong with that?

I'm unenthusiastic.

Adding a little more texture to legume protein seems both more feasible and less alarming for those who can't let go of the texture of meat.

What I do is use strongly flavored meat in very small quantites, and stretch it with tofu, TVP, whole grains, and/or mushrooms. The middle ground between vegetarianism and carnivorism is, what do you know, to eat the stuff humans traditionally have eaten in the past.

But if that doesn't work for you, root for the soy labs not the meat vats, ewww...


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I introduce a Economics student in Islamic University of Indonesia Yogyakarta

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