Daily Archives: 02/05/2011

If Reagan Were A GOP Candidate Today . . .

He signed one of the more liberal state abortion laws on the books of any state at the time. That would never fly with the current conservative movement.

The Big Picture

image

via If Reagan Were A GOP Candidate Today . . ..

One for My Photo Album

Greg Mankiw’s Blog

via One for My Photo Album.

From last week’s conference at MIT:

Photo by Dominick Reuter for MIT

Update: One of my Harvard colleagues suggests a caption contest and proposes the first two entries.  Readers should feel free to email me others, and I will add them to the list.  My favorite in in bold.

  1. "He really is a socialist!"
  2. "I’m thinking of writing a principles text."
  3. "Freshmen really are a faster study than Presidents."

  4. "Goolsbee wanted me to ask you how to adjust the lumbar support on his office chair."

  5. "Buy GE."

  6. "I voted for Obama."

  7. "Your tie hasn’t matched my outfit this well since your wedding."

  8. "CDO’s were my idea…."

  9. CR: "Lend me twenty bucks for cab fare home."  GM:"I’ll give you 15. You can model the other 5."

  10. "I’m sorry, Greg, but I just don’t think Brad wants to be friends."

  11. "’Mr. President,’ I said, ‘if I were you, I wouldn’t sign this thing into a law’. ‘Really? Then I won’t sign it!’, he answered." Christina Romer tells her dream of how she stopped the President from signing the Healthcare Bill.

  12. “I was wondering, Greg, where does that bottled water fit in your ten principles?”

  13. "Water or diamonds, Greg?"

  14. "I’m going green. I use cap-less bottles now and assume away the spills!"

 

Why Did Economists Not Spot the Crisis?

 

 

This from Fault Lines

CHICAGO – At the height of the financial crisis, the Queen of England asked my friends at the London School of Economics a simple question, but one for which there is no easy answer: Why did academic economists fail to foresee the crisis?

There have been several responses to that query. One is that economists simply lacked models that could account for the behavior that led to the crisis. Another is that economists were blinkered by an ideology according to which a free and unfettered market could do no wrong.

Finally, an answer that is gaining ground is that the system bribed economists to stay silent.

In my view, the truth lies elsewhere.

It is not true that we academics did not have useful models to explain what happened. If you believe that the crisis was caused by a shortage of liquidity, we had plenty of models analyzing liquidity shortages and their effects on financial institutions. If you believe that the blame lies with greedy bankers and unthinking investors, lulled by the promise of a government bailout, or with a market driven crazy by irrational exuberance, we had studied all this too, in great detail.

Economists had even analyzed the political economy of regulation and deregulation, so we could have understood why some US politicians pushed the private sector into financing affordable housing, while others deregulated private finance. Yet, somehow, we did not bring all this understanding to bear and collectively shout out our warnings.

Perhaps the reason was ideology: we were too wedded to the idea that markets are efficient, market participants are rational, and high prices are justified by economic fundamentals. But some of this criticism of “market fundamentalism” reflects a misunderstanding. The dominant “efficient markets theory” says only that markets reflect what is publicly known, and that it is hard to make money off markets consistently – something verified by the hit that most investor portfolios took in the crisis. The theory does not say that markets cannot plummet if the news is bad, or if investors become risk-averse.

Critics argue that the fundamentals were deteriorating in plain sight, and that the market (and economists) simply ignored it. But hindsight distorts analysis. We cannot point to a lonely Cassandra like Robert Shiller of Yale University, who regularly argued that house prices were unsustainable, as proof that the truth was ignored. There are always naysayers, and they are often wrong. There were many more economists who believed that house prices, though high, were unlikely to fall across the board.

Of course, these expectations could have been distorted by ideology – it is hard to get into the past minds of economists. But there is a better reason to be skeptical of explanations relying on ideology. As a group, neither behavioral economists, who think that market efficiency is a joke, nor progressive economists, who distrust free markets, predicted the crisis.

Could it be corruption? Some academic economists consult for banks or rating agencies, give speeches to investor conferences, serve as expert witnesses, and carry out sponsored research. It would be natural to suspect us of bias. The bias could be implicit: our worldview is shaped by what our friends in industry believe. Or it may be an explicit bias: an economist might write a report that is influenced by what a sponsor wants to hear, or give testimony that is purely mercenary.

There are enough instances of possible bias that the issue cannot be ignored. One remedy would be to ban all interaction between economists and the corporate world. But if economists are confined to the ivory tower, we may be unbiased but also ignorant of practicalities – and thus even less capable of predicting problems. One way to restore trust may be disclosure – for economists to declare a monetary interest in a particular analysis and, more generally, to explain who pays us. A number of universities are moving in this direction.

But I believe that corruption is not the main reason that the profession missed the crisis. Most economists have very little interaction with the corporate world, and these “unbiased” economists were no better at forecasting the crisis.

I would argue that three factors largely explain our collective failure: specialization, the difficulty of forecasting, and the disengagement of much of the profession from the real world.

Like medicine, economics has become highly compartmentalized – macroeconomists typically do not pay attention to what financial economists or real-estate economists study, and vice versa. Yet, in order to see the crisis coming, you had to know something about each of these areas, just like it takes a good general practitioner to recognize an exotic disease. Because the profession rewards only careful, well-supported, but necessarily narrow analysis, few economists try to span sub-fields.

Even if they did, they would shy away from forecasting. The main advantage that academic economists’ have over professional forecasters may be their greater awareness of established relationships between factors. What is hardest to forecast, though, are turning points – when the old relationships break down. While there may be some factors that signal turning points – a run-up in short-term leverage and asset prices, for example, often presages a bust – they are not infallible predictors of trouble to come.

The meager professional rewards for breadth, coupled with the inaccuracy and reputational risk associated with forecasting, leads to disengagement for most academics. And it may well be that academic economists have little to say about short-term economic movements, so that forecasting, with all its errors, is best left to professional forecasters.

The danger, though, is that disengagement from short-term developments leads academic economists to ignore medium-term trends that they can address. If so, the true reason why academics missed the crisis could be far more mundane than inadequate models, ideological blindness, or corruption and thus far more worrisome; many simply were not paying attention!

via Why Did Economists Not Spot the Crisis?.

Fearless

I watched this for the second time I think tonight.  I really like this film.  I think it leads you to great insights about life.  Maybe the main one is we mostly let our lives be ruled by fear.

The first few minutes are fantastic.  Max Klein (Jeff Bridges) leads a handful of survivors away from a horrific crash of an airliner in a corn field.  He then leaves to find a hotel room forgoing any opportunity to be ministered to by first responders, interviewed by reporters, or consult with an attorney.

Ectasy

Instead he rents a car drives from the crash near Bakersfield to Los Angeles planning to visit an old girl friend, listening to the radio cranked up, feeling the wind in his face with his head out the car window, pausing to to just sit by the car drink in a stunning purple desert landscape. 

Desert View

Knowing now more than ever that life with all its pain and suffering is at least punctuated with moments of intense maybe even painful beauty, he lets it be and takes in the landscape.

Old Lover

Listening to the former lover, he takes in her story that her life is a “disaster”:  disappointing children, a husband denied promotion who sleeps with a student.  Knowing more than ever what a real disaster is, he knows and tells her and I think most us of that:  our lives are not disasters.

Crash!

Finally, a representative of the airline catches up with him and offers him train travel back to his home in San Francisco.  Fearing liability and to speak the truth,She euphemistically speaks of the “emergency landing”.   Not fearing speaking directly and truthfully, he directly corrects her to speak as he does, of the crash.

Having faced death and having felt able to accept its apparent imminence, the liberated Max asks to fly back to San Francisco, and does.  He teeters between a sense of invulnerability and indifference toward death.

Having faced death and having felt able to accept its apparent imminence, he is unshackled in many ways from the conventions most of live by:  fear of offending by speaking too directly; fear of drinking in the experience of the moment because what may be around the corner; fear of what people may think when maybe it doesn’t matter what they think; finally fearing to recognize that everything is our choice – living is a choice we don’t have to make and whining we “have” to do this or that is mostly a cop out.

Most of the rest of the film deals with his difficult path to reconcile these revelations to the life he had when left on the flight.  His honesty often becomes cruel.  His acceptance of his mortality becomes recklessness.  Having learned so much, he forgets one crucial fact.  Much of the meaning of life is in your few deepest relationships, and cruelty and recklessness endangers his marriage and family.  Alienated from his family, he bonds with a fellow crash survivor, who he guides to acceptance of death of a child in the crash.

So what do I take away from all this?  Don’t confuse inconvenience with disaster.  Don’t miss the joy from the ability to live in the moment.  Any moment could be your last.  Don’t confuse making a choice to avoid bad consequences with “having” to do anything.  Don’t be afraid to tell the truth, but don’t be cruel.

Desert in Winter




Desert in Winter

Originally uploaded by BruceTheEconomist