[And here's an informative backgrounder -]
What Caused The Great Financial Crash: Gary Gorton Is Right, by Tim Worstall, 10/08/2012 Forbes.com
As you will have noticed, there’s still a certain amount of shouting going on about what precisely caused the Great Financial Crash of 2007/08. Explanations run from some explosion of greed in the banking classes through massive deregulation of finance to increasing inequality and even, in some of the more bizarre diagnoses, an insistence that this is just late stage capitalism and the communist nirvana is soon to be at hand.
The thing is there’s a much simpler explanation for what happened. A much simpler explanation that has the great merit of actually being correct. David Warsh over at Economic Principals lays it out in somewhat technical language. But the basic point is that Gary Gorton is right.
Leave aside all of the more complicated explanations. Look purely at what fractional reserve banking itself is. You put your money into a bank and the bank then lends it out to someone else. They have a spread on the interest rate they charge the other person over what they pay you and this pays for the buildings, the unpaid loans, the staff and everything else. So far so simple but we need to add two more little facts here: only two more and we can explain what happened.
The first is temporal arbitrage between the preferences for saving and lending. Which is such a mouthful that it doesn’t really explain anything. What it means is that people tend to want to borrow money for longer than they want to save it. If I go and borrow money for a mortgage then I want to borrow that money for 30 years. But you, putting your money on deposit at the bank, don’t want to leave your money there for 30 years so that I can borrow it. You might just be saving for your vacation in the spring. Or for a deposit for your own house in a year’s time, or even just so that you’ve a little spare cash to deal with any of life’s little emergencies. So, what a bank actually does is borrow short and lend long: Brad Delong has used this as a definition of a bank. If you do this you are a bank and if you don’t you’re not. The bank borrows from depositors from on demand (our checking accounts) up to perhaps 90 days (CDs perhaps). But it will usually be lending for some years to some decades: borrowing short and lending long. The bank relies on the idea that there will be a continual stream of those short term deposits with which it can finance those much longer loans.
If all the money is lent out in this manner then there’s no way that we could get out money back when we wanted it. We’d have to wait until someone else deposited some money and then we could take ours out. So, clearly, the bank doesn’t lend out all the deposits, just a very large portion of them. They’ll keep a few percent (at times and places an amount insisted upon by law, now not so much) in actual cash around for those who want their deposits back but they essentially rely upon the idea that we’re not all going to turn up and demand our money back in one go. Thus the bank is holding only a fraction of deposits in reserves and is lending out the rest: fractional reserve banking which is what we call the system.
So, that’s our set up of the system. There are other ways to do it (100% reserve banking for example but that would severely crimp economic growth as everyone since Adam Smith has pointed out) but this is the way that we do do it.
What could go wrong? Well, what happens if we all do turn up demanding our cash? Or even what happens if 5% of us do and that reserve is only 4%? The bank cannot pay us all back because it just doesn’t have the money. It’s in the mortgage of Mr. Jones down the street or that business loan that Ms. Smith has just used to install an accounting system. And we can’t sell those two things to get the money to appease the angry crowd milling around in front of the bank: we get a bank run. And all it requires is just the rumour that the bank doesn’t have enough cash for people to rush to be the first (and only!) people to get their cash back for it to be true that the bank doesn’t have enough money.
All of the above is well enough known and I’ve given the kindergarten version of it just to point out quite what a simple problem it is. The solution is also well known: the government provides deposit insurance. The bank might go bust, they might have lent everything to jackalope farmers but you, Mr. Depositor, will still get your money back (sometimes with limits, or a percentage, but that’s the general idea). People therefore don’t think the bank will run out of cash because the government stands behind them. Thus we don’t get bank runs.
Excellent, but what happened in 2007/08? As I’ve been saying for a number of years now (and as Gary Gorton confirms, but he’s a Professor and I’m not so listen to him not me) we in fact had two sets of depositors. We have the wholesale depositors and we have the individual and retail ones. That second group is you and me and we were insured. The first is what we might collectively call “Wall Street” or “ The City”. All of the other banks, the hedge funds, money market funds and so on. They were lending money to each other with gay abandon. But, crucially, they didn’t have deposit insurance. Plus, they were lending the money short (often only overnight) and the banks taking in those deposits were transforming them into longer term loans to their customers.
We can see that this is a system likely to be exposed to bank runs. For all the same reasons that Jimmy Stewart had to deal with in “It’s A Wonderful Life“. Just much bigger, much faster and far more worrying when it happened. As, indeed, it did happen. The classic example of recent times was Northern Rock. Really it was a mortgage bank: their main lending business was mortgages. Sure, they were aggressive in their lending (up to 125% of property value for example) but the underlying business was really very simple. Issue mortgages, using deposits from those wholesale markets. This is risky, because they were borrowing on 1 and 7 day terms and lending the money out on 30 year terms. Then, every few months, they would bundle up those mortgages they had issued into a bond issue and sell that. At which point they were maturity matched: they had borrowed for 15 or 20 years and that’s around the average life of a mortgage (as people move, pay up early and so on). So they were only exposed to that risk of a run on the amount of mortgages that they had issued but which were not yet in a bond.
And that’s exactly what happened. It was retail depositors who got worried first but once they had then those wholesale depositors got very worried indeed. Financing was not rolled over, Northern Rock could not borrow overnight to fund the mortgages it had issued and….well, there we go, first bank in the UK to go down from a bank run for over a century.
And that, effectively, is what happened to everyone. Lehman Brothers didn’t go down because it was bust (it might well have been but that wasn’t the reason) but because it couldn’t finance itself. Bear Sterns sold itself very quickly indeed for the same reason. Essentially what happened was wholesale runs on banking institutions. Runs which, arguably, would not have happened if there was some form of deposit insurance for wholesale depositors.
Which is where we come to the one thing that people have unambiguously got right since 2007. In both the US and the UK now there is deposit insurance for wholesale depositors. That’s not quite what we call it but it is what it is. In my native UK we call it the banking levy. For banks over a certain size (because we don’t care about the small ones, they won’t damage the entire system) they must pay an insurance premium to the government each year for their borrowings (to a bank, our deposits are their borrowings) that are not covered by one or other of the already extant deposit insurance schemes. We all know that the governments will bail out the big banks if they get into problems: this is just a way of making sure that the banks pay for that insurance. As they should do of course.
I’m sure that Professor Gorton maps it out rather better than I have done above in Misunderstanding Financial Crises: Why We Don’t See Them Coming and that’s certainly where you should go to get all the detail.
But the argument in a nutshell is this. Banks in a fractional reserve banking system are subject to runs. The solution is deposit insurance. The wholesale banking system did not have deposit insurance and what really happened in the Great Financial Crash was a wholesale banking run. The solution to that is to extend deposit insurance which we have done.
This doesn’t mean that there aren’t other problems out there. We might still face excessive inequality, insufficient regulation, it might even be the final crisis of late stage capitalism and the communist nirvana really is just about to arrive. But the very specific thing which actually caused the banks to fall over has already been dealt with.
6/19/2012 headlines from hell (or at least internal quotes) from Wall St. Journal, NY Times or online - missing earlier and later dates are handled entirely on recent archive page(s) -
6/03-04/2012 headlines from hell (or at least internal quotes) from Wall St. Journal, NY Times or online - missing earlier and later dates are handled entirely on recent archive page(s) -
6/02/2012 headlines from hell (or at least internal quotes) from Wall St. Journal, NY Times or online - missing earlier and later dates are handled entirely on recent archive page(s) -
5/03/2012 headlines from hell (or at least internal quotes) from Wall St. Journal, NY Times or online - missing earlier and later dates are handled entirely on recent archive page(s) -
4/27/2012 headlines from hell (or at least internal quotes) from Wall St. Journal, NY Times or online - missing earlier and later dates are handled entirely on recent archive page(s) -
4/24/2012 headlines from hell (or at least internal quotes) from Wall St. Journal, NY Times or online - missing earlier and later dates are handled entirely on recent archive page(s) -
3/25/2012 headlines from hell (or at least internal quotes) from Wall St. Journal, NY Times or online - missing earlier and later dates are handled entirely on recent archive page(s) -
3/17/2012 headlines from hell (or at least internal quotes) from Wall St. Journal, NY Times or online - missing earlier and later dates are handled entirely on recent archive page(s) -
12/27/2011 headlines from hell (or at least internal quotes) from Wall St. Journal, NY Times or online - missing earlier and later dates are handled entirely on recent archive page(s) -
11/25/2011 headlines from hell (or at least internal quotes) from Wall St. Journal, NY Times or online - missing earlier and later dates are handled entirely on recent archive page(s) -
11/25/2011 headlines from hell from Wall St. Journal, NY Times or online - missing earlier and later dates are handled entirely on recent archive page(s) -
10/28/2011 headlines from hell from Wall St. Journal, NY Times or online - missing earlier and later dates are handled entirely on recent archive page(s) - Three great articles today -
10/26/2011 headlines from hell from Wall St. Journal, NY Times or online - missing earlier and later dates are handled entirely on recent archive page(s) -
8/16/2011 headlines from hell from Wall St. Journal, NY Times or online - missing earlier and later dates are handled entirely on recent archive page(s) -
7/30/2011 headlines from hell from Wall St. Journal, NY Times or online - missing earlier and later dates are handled entirely on recent archive page(s) -
7/15/2011 headlines from hell from Wall St. Journal, NY Times or online - missing earlier and later dates are handled entirely on recent archive page(s) -
2/06-08/2011 headlines from hell from Wall St. Journal, NY Times or Boston Globe - missing earlier and later dates are handled entirely on recent archive page(s) -
3/07-08-09/2010 headlines from hell from Wall St. Journal, NY Times or Boston Globe - missing earlier and later dates are handled entirely on recent archive page(s) -
2/21-22/2010 headlines from hell from Wall St. Journal, NY Times or Boston Globe - missing earlier and later dates are handled entirely on recent archive page(s) -
1/08/2010 headlines from hell from Wall St. Journal (j), NY Times (t) or Boston Globe (g) - missing earlier and later dates are handled entirely on recent archive page(s) -
1/07/2010 headlines from hell from Wall St. Journal (j), NY Times (t) or Boston Globe (g) - missing earlier and later dates are handled entirely on recent archive page(s) -
1/05/2010 headlines from hell from Wall St. Journal (j), NY Times (t) or Boston Globe (g) - missing earlier and later dates are handled entirely on recent archive page(s) -
12/27-28/2009 headlines from hell from Wall St. Journal (j), NY Times (t) or Boston Globe (g) - missing earlier and later dates are handled entirely on recent archive page(s) -
11/09/2009 headlines from hell from Wall St. Journal (j), NY Times (t) or Boston Globe (g) - missing earlier and later dates are handled entirely on recent archive page(s) -
10/31/2009 headlines from hell from Wall St. Journal (j), NY Times (t) or Boston Globe (g) - missing earlier and later dates are handled entirely on recent archive page(s) -
10/30/2009 headlines from hell from Wall St. Journal (j), NY Times (t) or Boston Globe (g) - missing earlier and later dates are handled entirely on recent archive page(s) -
10/17/2009 headlines from hell from Wall St. Journal (j), NY Times (t) or Boston Globe (g) - missing earlier and later dates are handled entirely on recent archive page(s) -
10/10/2009 headlines from hell from Wall St. Journal (j), NY Times (t) or ... - missing earlier and later dates are handled entirely on recent archive page(s) -
10/03/2009 headlines from hell from Wall St. Journal (j), NY Times (t) or Boston Globe (g) - missing earlier and later dates are handled entirely on recent archive page(s) -
9/11/2009 headlines from hell from Wall St. Journal (j), NY Times (t) or Boston Globe (g) - missing earlier and later dates are handled entirely on recent archive page(s) -
9/10/2009 headlines from hell from Wall St. Journal (j), NY Times (t) or Boston Globe (g) - missing earlier and later dates are handled entirely on recent archive page(s) -
7/18/2009 headlines from hell from Wall St. Journal (j), NY Times (t) or Boston Globe (g) - missing earlier and later dates are handled entirely on recent archive page(s) -
In the wake of the biggest economic calamity in 80 years, that reputation has taken a beating.
In the public mind, an arrogant profession has been humbled.
[Unfortunately, it's the profession's mind, if any, that counts.]
Though economists are still at the centre of the policy debate—think of Ben Bernanke or Larry Summers in America or Mervyn King in Britain—their pronouncements are viewed with more scepticism than before.
The profession itself is suffering from guilt and rancour.
[Ah, now we're honing in...]
In a recent lecture, Paul Krugman, winner of the Nobel prize in economics in 2008, argued that much of the past 30 years of macroeconomics was “spectacularly useless at best, and positively harmful at worst.” Barry Eichengreen, a prominent American economic historian, says the crisis has “cast into doubt much of what we thought we knew about economics.”
[Gee, didn't know there were any economic historians left in the U.S. once Charly Kindleberger ("those damned autodidacts!") died. (And an economic historian is the kind of economist you'd most expect to appreciate autodidacts! So the profession is sooo tied up in its own rhetoric that not even an historian can gain sufficient perspective. So let's hear it once again for worktime economics' historian, Ben Hunnicutt, of the University of Iowa and his masterpiece, Work Without End. How the heck did he ever get the perspective to write that baby? Hafta askim. Maybe cuz he's more a sociological historian?)]
In its crudest form—the idea that economics as a whole is discredited—the current backlash has gone far too far....
[So what. It's the radicals who lend cover to the progressives and get them taken seriously enough for a hearing.]
Economics is less a slavish creed than a prism through which to understand the world.
[- the prism of quantification and mathematics as a second language. Got a problem? Don't give me your politics or religion. What's your bottom line? - Maybe we can agree. (But maybe arrogant economists also true-believe it into a slavish creed. Like The Economist itself that keeps trotting out the Lump-of-Labour-Fallacy smear-sneer, a garbled disservice to real progress if there ever was one.]
It is a broad canon, stretching from theories to explain how prices are determined to how economies grow. Much of that body of knowledge has no link to the financial crisis and remains as useful as ever.
[Error - this is not just a financial crisis. In fact, the Economist's persistent neglect of the employment base and the consumer base and the b2b markets is a major symptom of the major problem, and an indication that nothing they say in these three articles is going to come close - just some more red herrings to hope no one gets too close to the truth.]
And if economics as a broad discipline deserves a robust defence,
[De-inflammatizing and numb(er)ing problems with quantification to facilitate sharing partial agreement is currently our best sharing technology (though it's lacking in extended self-interest and long-term perspective).]
...so does the free-market paradigm.
[Amen, except the free-market fanatics think market forces can do everything, include reslope the playing field and reframe the market itself - but the closest we can come to a market decision there is a referendum of all market players - as in Phase One of the Timesizing Program where referendums are used to define our top-priority problem, un(der)employment, and central-bank variables which could otherwise be used to sabotage the whole solution.]
Too many people, especially in Europe, equate mistakes made by economists with a failure of economic liberalism.
["Economic liberalism"? That's a laugh!]
Their logic seems to be that if economists got things wrong, then politicians will do better. That is a false—and dangerous—conclusion.
These important caveats, however, should not obscure the fact
that two central parts of the discipline [ie: two subdisciplines]— [I] macroeconomics and [II] financial economics—are now, rightly, being severely re-examined (see 2 articles below) [ie: criticized]. There are three main critiques:
 that macro and financial economists helped cause the crisis,
 that they failed to spot it, and
 that they have no idea how to fix it.
 The first charge [they helped cause the crisis] is half right. Macroeconomists, especially within central banks, were too fixated on taming inflation and too cavalier about asset bubbles.
[And too completely unconcerned about unemployment (asset bubbles are far secondary - OK, specifically, a fourth derivative of the employment base). The U.S. central bank, the Federal Reserve, was given the responsibility when it was set up to solve both unemployment and runaway inflation - and in the last 30-40 years it has come to completely ignore the first and most important part of its responsibility. Inflation is a compound-complex thing whose parts we need to peel off and stabilize one by one, and counter to prevailing economic 'wisdom,' we posit that un(der)employment can actually, and helpfully, be regarded as the most actionable component of potentially runaway inflation and therefore a higher priority than runaway inflation itself, which, like poverty in Jesus' view, is always with us. In short, some people will always have more, and some less, of SOMEthing, and the resulting envy and striving will always pose the danger of runaway inflation in some value-dimension 'currency' or other. Non-runaway inflation is actually a healthy thing and nature's none-too-efficient but virtually unstoppable way of deconcentrating value - and the first-up value dimension to stabilize, sportsfans, is the hyperconcentration of skills and natural, market-demanded employment in the form of working hours, dba workaholism, overwork, busyness, crisis-orientation, etc.]
Financial economists, meanwhile, formalised theories of the efficiency of markets,
[ignoring the all-important question of "efficient for whom?" - "from whose limited perspective?" "Efficiency" that downsizes consumption via employment and thereby gradually shuts down the whole system is a pretty weird kind of efficiency, and "lean and mean," "competitive," "more efficient," downsizing of one's workforce without connecting the dots and accounting for the impact on one's customers' customers, was, is and always will be Suicide, Everyone Else First.] ...fuelling the notion that markets would regulate themselves
[markets only regulate the details within themselves, not their entire framework or 'playing field' - which during peacetime (and now also wartime cuz wars no longer kill enough Americans to create the magic labor shortage at home that yields higher wages, a deconcentrated money supply, higher spending and faster currency circulation and daa dada daaaa, "wartime prosperity") tends to get more and more steeply sloped in favor of employers and against employees; that is, toward the concentration and "saving" of the money supply and against its scattering/spreading/centrifugation and spending.]
...and financial innovation [and concentration of the money supply for unlimited investing power] was always beneficial.
Wall Street’s most esoteric instruments were built on these ideas.
But economists were hardly naive believers in market efficiency. [oh no?] Financial academics have spent much of the past 30 years poking holes in the “efficient market hypothesis”.
[Just 'holes' when we needed a bodyslam?]
A recent ranking of academic economists was topped by Joseph Stiglitz and Andrei Shleifer, two prominent hole-pokers. A newly prominent field, behavioural economics, concentrates on the consequences of irrational actions.
[A cloud of no-see-ums when all we need is a single rattler.]
So there were [ineffective] caveats aplenty. But as insights from academia arrived in the rough and tumble of Wall Street, such delicacies were put aside.
[Or rather, as these conspiracy-theoried Cassandra's arrived on the precious and delicate and busybusybusy and Very Important and insulated and isolated Planet of Wall Street, such gnats, pickypickies, distractions were ignored...]
And absurd assumptions ['absurd' from viewpoint of off-Planet Wall Street only] were added. No economic theory suggests you should value mortgage derivatives on the basis that house prices would always rise. Finance professors are not to blame for this, but they might have shouted more loudly that their insights were being misused. Instead many cheered the party along (often from within banks). Put that together with the complacency of the macroeconomists and there were too few voices shouting stop.
 Blindsided and divided
The charge that most economists failed to see the crisis coming also has merit. To be sure, some warned of trouble. The likes of Robert Shiller of Yale, Nouriel Roubini of New York University and the team at the Bank for International Settlements are now famous for their prescience. But most were blindsided. And even worrywarts who felt something was amiss had no idea of how bad the consequences would be.
That was partly to do with professional silos, which limited both the tools available and the imaginations of the practitioners.
[Hmm, it seems "silo" has become a new metaphor for insulation and isolation, like "what planet are they on?"]
Few financial economists thought much about illiquidity or counterparty risk [an unnecessary buzzword apparently for the pre-existent stability/honesty or lack thereof of the other party to a loan, from either the lender's or borrower's viewpoint], for instance, because their standard models ignore it; and few worried about the effect on the overall economy of the markets for all asset classes seizing up simultaneously, since few believed that was possible.
Macroeconomists also had a blindspot [just one?]: their standard models assumed that capital markets work perfectly.
[Phew -what a leap - an assumption of perfection!]
Their framework reflected an uneasy truce between the intellectual heirs of Keynes [erstwhile "demand-siders"?], who accept that economies can fall short of their potential, and purists [erstwhile "supply-siders"?] who hold that supply must always equal demand.
[Notice how their skewed labels bias the case for supply-siders, who should have been totally routed by the Great Depression. Depressions are failures of demand to match supply; hence, Keynes' solution of demand-side economics arose, though it has more recently been overwhelmed since Reagan by supply-side economics (if we build it, they will come, oops, it will sell = Say's "Law" = "markets always clear" (never mind under what disastrous conditions) - and never mind "balance-side economics" such as the worktime economics embodied in the Timesizing Program where the balance is actively and automatically pursued by the guarantee of full employment - no matter how diminished a workshare of natural market-demanded employment that may require. In other words, the workweek is decremented until the goal of full employment ( referendum-defined) is reached, and the workweek is further, automatically fluctuated, incremented or decremented, around that target - no government interference, and especially no hyperinflation control by diluting full employment and impeding growth - a new natural hyperinflation control is employed.]
The models that epitomise this synthesis—the sort used in many central banks—incorporate imperfections in labour markets (“sticky” wages, for instance, which allow unemployment to rise [but no complaints about CEOs' compensation! - or the consumption strength that those horrible "sticky wages" provide]), but make no room for such blemishes in finance. By assuming that capital markets worked perfectly, macroeconomists were largely able to ignore the economy’s financial plumbing [all biased toward the top 0.01%]. But models that ignored finance had little chance of spotting a calamity that stemmed from it.
[And the wealthy are hardly likely to realize The Problem is ... themselves ... and the whole unlimited concentration of the money supply in the first place.]
 What about trying to fix it?
[Hmm, funny how the Economist has not made this a separate section = less confidence/arrogance?]
Here the financial crisis has blown apart the fragile [macroeconomic] consensus between purists ["supply-siders"?] and Keynesians ["demand-siders"?] that monetary policy was the best way to smooth the business cycle.
[So Keynesian demand-siders gradually sold out to monetarists (Friedmanians) who seemed to go to bed more easily - maybe were already in bed with - the so-called "purist" (ha!) supply-siders.]
In many countries, short-term interest rates are near zero and in a banking crisis monetary policy works less well.
[that is to say, does not work at all.]
With their compromise tool useless, both sides have retreated to their [superficial] roots, ignoring the other camp’s ideas.
[No loss to either.]
Keynesians, such as Mr Krugman, have become uncritical supporters of fiscal stimulus.
[And "stimulating" the rich is just making things worse since the whole idea that "the more investment money/savings in an economy, the better" is lethally flawed; that is, unlimited concentration of the money supply is good.]
Purists are vocal opponents.
[But have nothing positive to say??]
To outsiders, the cacophony underlines the profession’s uselessness.
[Amen to that.]
Add these criticisms together and there is a clear case for reinvention, especially in macroeconomics.
[Or more specifically, a re-identification/affirmation of The foundation market = the employment base. Watch the Economist economists totally miss this now - - -]
Just as the Depression spawned Keynesianism [note biassed, disrespectful verb], and the 1970s stagflation fuelled a backlash [against Keynesianism],
[indicating that the Keynesian makework was always too little, too late except in wartime, and kinda beside the point, which was, there was this huge labor surplus in the Depression due to worksaving equipment and downward workweek inflexibility - the labor surplus led to downward pressure on wages (except CEOs') and the strengthening of the centripetal, concentrating forces on the money supply that caused the Great Depression, and the 44-42-40-hour workweek of 1938-39-40 and the killing and maiming of a large part of the workforce in World War 2 reduced the labor surplus sufficiently to raise wage levels enough (quick to centrifuge the money supply enough to get it out to the hundreds of millions who actually want and need to spend it - but by the early 1970s when stagflation reared its head (standard in the Third World), the babyboomers had grown up and entered the job market and restored the labor surplus of the Great Depression - there were no jobs [high unemployment] but there lots of income supports = lotsa dough chasing limited output [inflation] - ergo, stagnation+inflation=stagflation.]
...creative destruction is already under way.
[Ever notice how these geniuses of conventional, lethally flawed economics get to a point of hopelessness where, to salvage their pathetic ideas, they have to invoke Schumpeter's Phrase for the Supreme Cop-out, "creative destruction."]
Central banks are busy bolting crude analyses of financial markets onto their workhorse [hobbyhorse] models. Financial economists are studying the way that incentives can skew market efficiency. And today’s dilemmas are prompting new research: which form of fiscal stimulus is most effective?
[None - make the private sector clean up its own mess of discarded employees and re-activate its own deactivated consumers by hiring its own markets - impossible while geniuses like The Economist's economists are still sneering at the supposed true believers in the Lump of Labor Fallacy = anyone so silly and stupid as to want to quit the strain to fill a frozen pre-technology workweek of 40 hours, and just share - and spread - the yet-unautomated human employment, in order to achieve full employment and maximum consumer markets and growth regardless of short a "full time" workweek that may take.]
How do you best loosen monetary policy when interest rates are at zero?
[Obviously you don't, since zero is the lowest the conventional brains of monetarists can go. But what would negative interest look like? You have to loosen and centrifuge the huge overproportion of the money supply that is crushed together and thereby deactivated among the relatively tiny population (Krugman speaks of the top 0.01% of the population) at the top of the income-wealth continuum, and you can do that sustainably by engineering a perceived labor shortage by downward redefinition of "full time workweek," now downwardly inflexible since 1940 despite previous downward flexibility for 100-150 years, or quick short-term tide-me-over = restoring wartime levels of graduated income taxes and of estate taxes, currently being smeared as 'death taxes' that Terribly Hurt small businesspersons (ha!).]
And so on.
[So far, they've come up empty. Now watch their pathetic rhetoric fly forth in impotent glory -]
But a broader change in mindset is still needed.
[But "Don't anyone dare to threaten our habit of sneering that worksharing (despite reinvention by necessity thousands of times a day all over the world in this recession) is advocated only by suckers who buy The Lump of Labor Fallacy!"]
Economists need to reach out from their specialised silos:
[So far only "broaden" and "reach out" - advice for everyone except themselves.]
macroeconomists must understand finance,
[how would that help when as this article has just explained, both macro and financial are idea-bankrupt?]
and finance professors need to think harder about the context within which markets work.
[Oh here we go. Where "broad" and wide ("reach out") fail, we go back to that old standby, "hard" - and note that the essence of the current crisis can be seen as unwillingness to give up the "work hard to get ahead" litany in the age of robotics despite the waiting "work smart, not hard."]
And everybody needs to work harder on understanding asset bubbles and what happens when they burst.
[Yeah yeah, all these putzes know in their narrowness is "work harder." But they can't compete with robots in that arena - and as Reuther pointed out to Henry Ford ("Let's see you unionize these robots!"), robots don't buy stuff ("Let's see YOU sell them cars.") The Economists' economists are completely circumscribed by Economics 101, however flawed, and despite their weak calls for broadening and reaching out, they are completely incapable of it themselves.]
For in the end economists are social scientists, trying to understand the real world.
[Whoa, what a slice of humilty = identification with the other, supposedly softer social sciences, and possibly even with sociology, whither they have driven a number of shorter worktime advocates such as Juliet Schor.]
And the financial crisis has changed that world.
[But not their world, yet. There it is. The Economist economists have completely missed the boat, and come up empty. Let's see what they say about macroeconomics in their next article - probably too little to quote the whole thing -]
[I - macroeconomics] The other-worldly philosophers - Although the crisis has exposed bitter divisions among economists, it could still be good for economics. Our first article looks at the turmoil among macroeconomists. Our second (beloe) examines the foundations of financial economics, Economist, 65.
ROBERT LUCAS, one of the greatest macroeconomists of his generation, and his followers are “making ancient and basic analytical errors all over the place” [DeLong, UCBerkeley - see below].
[Hmm, repeating errors? Isn't that a symptom of ignoring history?! But then, US economists are not big on history, so they're doomed to repeat it, and the once-great USA falls behind.]
Harvard’s Robert Barro, another towering figure in the discipline, is “making truly boneheaded arguments” [NYT's Krugman]. The past 30 years of macroeconomics training at American and British universities were a “costly waste of time” [LSE's Buiter].
[And Quebec universities, since you expect them to have the sense to explore the ideas of the Jospinists in France, but oooh nooo, they blindly follow the anglo Canadian economists who are blindly following the lethally flawed US economists.]
To the uninitiated [or those too close to the truth that we wish to discredit], economics has always been a dismal science.
[Hey, they've already given up the ship if they've been tricked into pre-admitting that it's a science.]
But all these attacks [above?] come from within the guild: from Brad DeLong of the University of California, Berkeley; Paul Krugman of Princeton and the New York Times; and Willem Buiter of the London School of Economics (LSE), respectively. The macroeconomic crisis of the past two years is also provoking a crisis of confidence in macroeconomics. In the last of his Lionel Robbins lectures at the LSE on June 10th, Mr Krugman feared that most macroeconomics of the past 30 years was “spectacularly useless at best, and positively harmful at worst”.
[But he has nothing to replace/repair it with.]
These internal critics argue that economists
[1 = cause] missed the origins of the crisis;
[2 = diagnose] failed to appreciate its worst symptoms; and
[3 = cure] cannot now agree about the cure.
In other words, economists  misread the economy on the way up,  misread it on the way down and now  mistake the right way out.
 On the way up, macroeconomists were not wholly complacent [rationalizing...]. Many of them thought the housing bubble would pop or the dollar would fall. But they did not expect the financial system to break [and it didn't break so it's still deteriorating - they merely duct-taped it over with trillions of taxpayers' dollars without ousting the guys that caused it].
 Even after the seizure in interbank markets in August 2007 [that event got missed in the four-year gap in our daily updates], macroeconomists misread the danger. Most were quite sanguine [here meaning stoical or even cheerful] about the prospect of Lehman Brothers going bust in September 2008.
 Nor can economists now agree on the best way to resolve the crisis. They mostly overestimated the [curative] power of routine monetary policy (ie, central-bank purchases of government bills) to restore prosperity. Some now dismiss the power of fiscal policy (ie, government sales of its securities) to do the same. Others advocate it with passionate intensity.
[So, "The 'best' lack all conviction (policy ideas), while the 'worst'
Are full of passionate intensity." - quoting the end of the first stanza of Yeats' 1921 masterpiece, The Second Coming.]
Among the passionate are Mr DeLong and Mr Krugman. They turn for inspiration to Depression-era texts, especially the writings of John Maynard Keynes, and forgotten mavericks, such as Hyman Minsky.
[Unfortunately, they still haven't gone below the surface structure to the writings of Arthur Dahlberg (Jobs, Machines and Capitalism, 1932) or Lord Leverhulme (The Six-Hour Day and Other Industrial Questions, 1919) or the later masterpieces of historian Ben Hunnicutt (Work Without End, 1988, and Kellogg's Six-Hour Day, 1996), let alone Phil Hyde (Timesizing, Not Downsizing, 1998.]
In the humanities this would count as routine scholarship.
[Keynes? All too routine, alas.]
But to many high-tech economists it is a bit undignified. Real scientists, after all, do not leaf through Newton’s “Principia Mathematica” to solve contemporary problems in physics.
[God forbid! - they might discover from Newton's Definition I right at the beginning that the real, non-optional fourth dimension is not time, but quantity of matter ("mass" in today's quaint terminology) and from his Definition II that the logically hard-wired, non-arbitrary, non-woowoo fifth dimension is the quantity of motion ("momentum" in today's quaint terminology), of which a special case is time.]
They [high-tech economists] accuse economists like Mr DeLong and Mr Krugman of falling back on antiquated Keynesian doctrines—as if nothing had been learned in the past 70 years.
[Nothing 'deep-structure' has!]
Messrs DeLong and Krugman, in turn, accuse economists like Mr Lucas of not falling back on Keynesian economics—as if everything had been forgotten over the past 70 years.
[Everything 'deep-structure' has been forgotten, even by DeLong and Krugman - for example, the critical role of general labor surplus or shortage relative to general employment supply (or v.v.) in the long Kondratieff Wave.]
For Mr Krugman, we are living through a “Dark Age of macroeconomics”, in which the wisdom of the ancients has been lost.
[But alas, Mr Krugman has not found it either.]
What was this wisdom, and how was it forgotten?
[Aha, a version of The Big Question. But watch us immediately go offtrack -]
The history of macroeconomics begins in intellectual struggle.
[Conventional macroeconomics is the key to nothing. We should be looking at worktime economics as initiated by Sismondi in his 1819 oeuvre, New Principles, 'Book' 7 and developed by Sydney Chapman in 1909 and Arthur Dahlberg in 1932.]
Keynes wrote the “General Theory of Employment, Interest and Money”, which was published in 1936, in an “unnecessarily controversial tone”, according to some readers.
[Dahlberg wrote "Jobs, Machines and Capitalism" in an unnecessarily sci-fi tone according to this reader.]
But it was a controversy the author had waged in his own mind. He saw the book as a “struggle of escape from habitual modes of thought” he had inherited from his classical predecessors.
[But he failed to escape their time blindness, their habitual neglect of the deep structure of the economy in the time dimension = the great quantifier of all activity and inactivity on the surface of this planet, and by extension, above and below that surface - and so he failed to escape their habitual neglect of worktime economics, and their exclusive focus on the surface structure in terms of symptom-level diagnoses and cures.]
That classical mode of thought held that full employment would prevail, because supply created its own demand [Jean Baptiste Say's Fallacy, still spun as Say's Law]. In a classical economy, whatever people earn is either spent or saved; and whatever is saved is invested in capital projects. Nothing is hoarded, nothing lies idle.
[Ri-i-ight - not.]
Keynes appreciated the classical model’s elegance and consistency, virtues economists still crave [and can still find...in worktime economics]. But that did not stop him demolishing it.
[Not really - he maintained its time-blindness and de-facto superficiality that preserved the fundamentally skewed and self-eroding status quo no matter what.]
In his scheme, investment was governed by the animal spirits of entrepreneurs, facing an imponderable future.
[Most entrepreneurs would regard this idea as an impossible dream.]
The same uncertainty gave savers a reason to hoard their wealth in liquid assets, like money, rather than committing it to new capital projects. This liquidity-preference, as Keynes called it, governed the price of financial securities and hence the rate of interest. If animal spirits flagged or liquidity-preference surged, the pace of investment would falter, with no obvious market force to restore it.
[- unless there was a labor shortage, real or perceived, natural or artificial, that got employers bidding against one another for good help.]
Demand would fall short of supply, leaving willing workers on the shelf. It fell to governments to revive demand, by cutting interest rates if possible or by public works if necessary.
[Both are artificial and distorting interventions by government into free markets (which place government in the invalid roles of employer and charity of last resort, roles that now account for maybe 70-80% of most governments, all unnecessary under worktime economics and " timesizing, not downsizing"), when all government has to do is rebalance the steeply sloping power gradient between employers and employees (in favor of employers of course) by engineering a perceived shortage of labor by reducing the fulltime workweek - a third way that actually passed the US Senate on Apr.6, 1933, by a vote of 53-30 in the form of the rigid but much lower Black-Perkins alias Black-Connery Thirty Hour Work Week Bill - defeated in the House, but revived and implemented five years later as a 44-hour workweek in the overtime section of the Fair Labor Standards Act. The subsequent 2-hour/year reduction resulted in the famed 40-hour workweek in 1940 and a one percent reduction in unemployment for each hour cut from the workweek (1938,39,40 = 19.0, 17.2, 14.6%) same as France's 4-hour reduction from 39 to 35 hours between 1997 (12.6%) and 2001 (8.6%) before the US-led recession hit.]
The Keynesian task of “demand management” outlived the Depression, becoming a routine duty of governments. They were aided by economic advisers, who built working models of the economy, quantifying the key relationships. For almost three decades after the second world war these advisers seemed to know what they were doing [because the postwar babyboomers had still not entered the workforce and replaced the labor kill-off of WW2 and the labor surplus of the Great Depression], guided by an apparent trade-off between inflation and unemployment [only in 'advanced' economies with good social safety nets dba income supports]. But their [these advisers'] credibility did not survive the oil-price shocks of the 1970s. These condemned Western economies to “stagflation”, a baffling [but common in third-world economies with no social safety nets] combination of unemployment and inflation, which the Keynesian consensus grasped poorly and failed to prevent.
The Federal Reserve, led by Paul Volcker, eventually defeated American inflation in the early 1980s, albeit at a grievous cost to employment.
[In short, he cured the disease by killing the patient.]
But victory [Pyrrhic] did not restore the intellectual peace. Macroeconomists split into two camps, drawing opposite lessons from the episode.
[Both lessons superficial and irrelevant at best, destructive at worst.]
The purists, known as “freshwater” economists because of the lakeside universities where they happened to congregate, blamed stagflation on restless central bankers trying to do too much. They started from the classical assumption that markets cleared [Say's Law, exposed as fallacy by the Great Depression but, how soon we forget!], leaving no unsold goods or unemployed workers. Efforts by policymakers to smooth the economy’s natural ups and downs did more harm than good.
[These so-called purists or conservatives were funded by wealthy alumni, and hey, the system was workin' for them, so why fix it?]
America’s coastal universities housed most of the other lot, “saltwater” pragmatists [oh right, how pragmatic to make government the employer and charity of last/first resort]. To them, the double-digit unemployment that accompanied Mr Volcker’s assault on inflation was proof enough that markets could malfunction. Wages might fail to adjust, and prices might stick. This grit in the economic machine justified some meddling by policymakers.
And basically both sides substituted makework for sharework, the only difference being that saltwater demand-siders favored civilian makework while freshwater supply-siders favored military makework as the only makework that could really get the rich to unclench from their millions, and meanwhile both sides helped the rich to divert more and more of the national income and wealth, which helped the economy careen ever farther past the point where the concentration of the money supply began to undermine itself - after all, the top bracket$ were already spending all they cared to before they got the last $20-30 million so they couldn't spend it, and it got past the point where they could even invest it sustainably, because their fostering of worksaving technology and freezing of a 1940 pre-technology workweek yielded a labor surplus that market forces punished with wage stagnation and diminishment, and the national income began funneling up to the top 30,000 Americans instead of spreading out to the other 270,000,000 who had much more time, desire and need to spend it. So this effectively vacuumed the spending power OUT of the markets for the productivity that the top brackets NEEDED to invest in, so ordinary investments began to spiral up in price since there were insufficient alternatives (P/E ratios went off the charts in the early 90s), brokers started inventing ever more complicated "investment instruments" such as derivatives and single-stock futures etc.m, and we started the series of bubbles (dot-com, housing, bailout...). Brilliant.]
Mr Volcker’s recession bottomed out in 1982. Nothing like it was seen again [except in 1987 (stock crash) - 1992 "it's the economy, stupid" - how soon we forget] until last year. In the intervening quarter-century of tranquillity [ha], macroeconomics also recovered its composure. The opposing schools of thought converged. The freshwater economists accepted a saltier view of policymaking. Their opponents adopted a more freshwater style of modelmaking.
[so both sides compromised and got co-opted by the No Problemo top brackets - who owned the media and the universities and the foundations and and and ... ultimately the playing field and the voting machines.]
You might call the new synthesis brackish macroeconomics.
[or, the sabotage of 'science' by source-of-income = wealthy alumni ( = "follow the money").]
Pinches of salt
Brackish macroeconomics flowed from universities into central banks. It underlay the doctrine of inflation-targeting embraced in New Zealand, Canada, Britain, Sweden [Iceland?] and several emerging markets, such as Turkey. Ben Bernanke, chairman of the Fed since 2006, is a renowned contributor to brackish economics.
[And he's still in power instead of in penitentiary.]
For about a decade before the crisis, macroeconomists once again appeared to know what they were doing. Their thinking was embodied in a new genre of working models of the economy, called “dynamic stochastic general equilibrium” (DSGE) models. These helped guide deliberations at several central banks.
[- and followed Keynes' practice of making it difficult and obscure to make it seem brilliant or at least intimidating.]
Mr Buiter, who helped set interest rates at the Bank of England from 1997 to 2000, believes the latest academic theories had a profound influence there. He now thinks this influence was baleful. On his blog, Mr Buiter argues that a training in modern macroeconomics was a “severe handicap” at the onset of the financial crisis, when the central bank had to “switch gears” from preserving price stability to safeguarding financial stability.
[- "had to" just because of the latest academic theories?]
Modern macroeconomists worried about the prices of goods and services, but neglected the prices of assets.
[Is this what Marshall meant by 'partial analysis'?]
This was partly because they had too much faith in financial markets.
[Compare Chomsky's preference for the Wall Street Journal over the New York Times because the Journal "has to have some reality for investors." - Not any more!]
If asset prices reflect economic fundamentals [never mind the takeoff of stocks' P/E ratios in the early 90s], why not just model the fundamentals, ignoring the shadow they cast on Wall Street?
[Why not? Probably because by now, the experts were so immersed in superficialities that they had no idea what the fundamentals were - after all, the Fed had by now been ignoring unemployment for decades.]
It was also because they had too little interest in the inner workings of the financial system.
[Yeah, inner workings like "you raise my salary and I'll raise yours" is not something you want to spread around.]
“Philosophically speaking,” writes Perry Mehrling of Barnard College, Columbia University, economists are “materialists” for whom “bags of wheat are more important than stacks of bonds.”
[Not any more - that's a big part of the problem!]
Finance is a veil, obscuring what really matters.
[True, but economists and decision-makers act as if finance is the foundation of the economy instead of the employment base (or the consumer base that derives from it).]
As a poet once said, “promises of payment/Are neither food nor raiment”.
[Well, they are between those in the top brackets (except between Madoff and others) but not between the top brackets and everyone else, where the sanctity of contract has been violated more and more.]
In many macroeconomic models, therefore, insolvencies cannot occur. Financial intermediaries, like banks, often don’t exist.
[Oh brother = vaporware!]
And whether firms finance themselves with equity or debt is a matter of indifference. The Bank of England’s DSGE model, for example, does not even try to incorporate financial middlemen, such as banks. “The model is not, therefore, directly useful for issues where financial intermediation is of first-order importance,” its designers admit. The present crisis is, unfortunately, one of those issues.
The bank’s modellers go on to say that they prefer to study finance with specialised models designed for that purpose. One of the most prominent was, in fact, pioneered by Mr Bernanke, with Mark Gertler of New York University. Unfortunately, models that include such financial-market complications “can be very difficult to handle,” according to Markus Brunnermeier of Princeton, who has handled more of these difficulties than most. Convenience, not conviction, often dictates the choices economists make.
Convenience, however, is addictive. Economists can become seduced by their models, fooling themselves that what the model leaves out does not matter. It is, for example, often convenient to assume that markets are “complete”—that a price exists today, for every good, at every date, in every contingency. In this world, you can always borrow as much as you want at the going rate, and you can always sell as much as you want at the going rate.
Before the crisis, many banks and shadow banks [= institutions not subject to all the banking regulations that were designed to 'complete' markets by spinning specific types of risk off regular banks' accounts (regulators who should have had the sense to raise red flags thought these might be great = bored regulators)] made similar assumptions. They believed they could always roll over their short-term debts or sell their mortgage-backed securities, if the need arose. The financial crisis made a mockery of both assumptions. Funds dried up, and markets thinned out. In his anatomy of the crisis, Mr Brunnermeier shows how both of these constraints [ie: disasters] fed on each other, producing a [downward] “liquidity spiral”.
[Ah, isn't this getting away from macro and into the turf of the next article on financial?!]
What followed was a furious dash for cash, as investment banks sold whatever they could, commercial banks hoarded reserves and firms drew on lines of credit. Keynes would have interpreted this as an extreme outbreak of liquidity-preference, says Paul Davidson, whose biography of the master has just been republished with a new afterword. But contemporary economics had all but forgotten the term.
The mainstream macroeconomics embodied in DSGE models was a poor guide to the origins of the financial crisis, and left its followers unprepared for the symptoms. Does it offer any insight into the best means of recovery?
[Stupid to even bother asking.]
In the first months of the crisis, macroeconomists reposed great faith in the powers of the Fed and other central banks. In the summer of 2007, a few weeks after the August liquidity crisis began, Frederic Mishkin, a distinguished academic economist and then a governor of the Fed, gave a reassuring talk at the Federal Reserve Bank of Kansas City’s annual symposium in Jackson Hole, Wyoming [prophetically named location!]. He presented the results of simulations from the Fed’s FRB/US model [are we supposed to assume it is similar to DSGE?]. Even if house prices fell by a fifth in the next two years, the slump would knock only 0.25% off GDP, according to his benchmark model, and add only a tenth of a percentage point to the unemployment rate [hey, at least unemployment was in there]. The reason was that the Fed would respond “aggressively”, by which he meant a cut in the federal funds rate of just one percentage point. He concluded that the central bank had the tools to contain the damage at a “manageable level”.
Since his presentation, the Fed has cut its key rate by five percentage points to a mere 0-0.25%. Its conventional weapons have proved insufficient to the task [ah, wouldn't that be "weapon" singular?!]. This has shaken economists’ faith in monetary policy [and rightly so]. Unfortunately, they are also horribly divided about what comes next [no wonder, they're still ignoring the deep structure, the employment base].
Mr Krugman and others advocate a bold fiscal expansion, borrowing their logic from Keynes and his contemporary, Richard Kahn.
[They've already mortgaged taxpayers in the trillions - does Krugman want quadrillions? quintillions? a hyperinflation that would make 1920s Germany look tame and starve hundreds of millions as we're plunged back to barter?]
Kahn pointed out that a dollar spent on public works might generate more than a dollar of output if the spending circulated repeatedly through the economy, stimulating resources that might otherwise have lain idle.
[You don't need artificial, eco-hostile, job-creation-just-for-the-sake-of-jobs 'public works' straining to fill a frozen, prehistoric 40-hour workweek. You just need to cut the full-time workweek till everybody has a piece of the vanishing still-unrobotized employment, and the reduced labor surplus will raise wages by flexible market forces and centrifuge the black hole of money in the topmost brackets.]
Today’s economists disagree over the size of this multiplier. Mr Barro thinks the estimates of Barack Obama’s Council of Economic Advisors are absurdly large. Mr Lucas calls them “schlock economics”, contrived to justify Mr Obama’s projections for the budget deficit. But economists are not exactly drowning in research on this question. Mr Krugman calculates that of the 7,000 or so papers published by the National Bureau of Economic Research between 1985 and 2000, only five mentioned fiscal policy in their title or abstract.
Do these public spats damage macroeconomics? Greg Mankiw, of Harvard, recalls the angry exchanges in the 1980s between Robert Solow and Mr Lucas—both eminent economists who could not take each other seriously. This vitriol, he writes, attracted attention, much like a bar-room fist-fight. But he thinks it also dismayed younger scholars, who gave these macroeconomic disputes a wide berth.
By this account, the period of intellectual peace that followed in the 1990s should have been a golden age for macroeconomics. But the brackish consensus also seems to leave students cold. According to David Colander, who has twice surveyed the opinions of economists in the best American PhD programmes, macroeconomics is often the least popular class. “What did you learn in macro?” Mr Colander asked a group of Chicago students. “Did you do the dynamic stochastic general equilibrium model?” “We learned a lot of junk like that,” one replied.
It takes a model to beat a model
The benchmark macroeconomic model, though not junk, suffers from some obvious flaws, such as the assumption of complete markets or frictionless finance.
[We'd say that such fundamental flaws do make it junk.]
Indeed, because these flaws are obvious, economists are well aware of them.
[Awareness without correction? Dumba dumbdumb.]
Critics like Mr Buiter are not telling them anything new.
[= a standard remark to excuse doing nothing.]
Economists can and do depart from the benchmark. That, indeed, is how they get published. Thus a growing number of cutting-edge models incorporate one or two financial frictions.
And economists like Mr Brunnermeier are trying to fit their small, “blackboard” models of the crisis into a larger macroeconomic frame.
[All this is just trivial rearrangement of deckchairs on the surface of the Titanic without looking deeper at the ongoing gash below the waterline. The diminishing downsizing of the employment base is still going on, instead of the sustaining timesizing of the employment base. Until that is addressed, all these little tweaks to "cutting edge" and small "blackboard" models are whistling in the wind.]
But the benchmark still matters.
[No it doesn't.]
| It formalises economists’ gut instincts about where the best analytical cuts lie.
[Their gut instincts are totally offbase and irrelevant to the worsening problem of the still-further-concentration and deactivation of the money supply.]
It is the starting point to which the theorist returns after every ingenious excursion.
[A totally nowhere starting point. The real starting point is the employment base.]
Few economists really believe all its assumptions, but few would rather start anywhere else.
[And it is to those few we must look for a real solution because the others are totally irrelevant.]
Unfortunately, it is these primitive models, rather than their sophisticated descendants, that often exert the most influence over the world of policy and practice.
[If you build sophistication on crap, you just get a 'silk' purse made out of sow's ear.]
This is partly because these first principles endure long enough to find their way from academia into policymaking circles.
[And how long does it take to register that these first principles are wrong?]
As Keynes pointed out, the economists who most influence practical men of action are the defunct ones whose scribblings have had time to percolate from the seminar room to wider conversations.
[Then the once-great USA is going down, and so is anyone who follows its "practical men of action" and its "wider conversations."]
These "basic" models [our quotes] are also influential because of their simplicity [ie: simplistic irrelevance]. Faced with the “blooming, buzzing confusion” of the real world, policymakers often fall back on the highest-order principles [high is surface structure, not deep structure] and the broadest [ie; vaguest?] presumptions. More specific, nuanced theories are often less versatile. They shed light on whatever they were designed to explain, but little beyond.
[And again, nuances built on a fundamentally irrelevant theory are also irrelevant.]
Would economists be better off starting from somewhere else? Some think so.
[Ah, isn't that obvious?]
They draw inspiration from neglected prophets, like Minsky, who recognised that the “real” economy was inseparable from the financial.
[Then he "recognized" a fallacy, because when hyperinflation takes off and a barter economy is borne, the financial economy separates off, languishes and dies.]
Such prophets were neglected not for what they said, but for the way they said it. Today’s economists tend to be open-minded about content, but doctrinaire about form. They are more wedded to their techniques than to their theories. They will believe something when they can model it.
[- which brings us back to the irrelevance and impotence of today's economists and today's economics.]
Mr Colander, therefore, thinks economics requires a revolution in technique.
[What an idiot! Still talking about form rather than content.]
Instead of solving models “by hand” [unhelpful metaphor] using economists’ powers of deduction, he proposes simulating economies on the computer.
In this line of research, the economist specifies simple rules of thumb by which agents interact with each other, and then lets the computer go to work, grinding out repeated simulations to reveal what kind of unforeseen patterns might emerge.
[Aren't they already doing this, and if not, what the heck are they doing??]
If he is right, then macroeconomists, like zombie banks, must write off many of their past intellectual investments before they can make progress again.
[That should already be a 'given' too.]
Mr Krugman, by contrast, thinks reform is more likely to come from within [ha!]. Keynes, he observes, was a “consummate insider”, who understood the theory he was demolishing precisely because he was once convinced by it.
[He didn't demolish it - he actually propped it up for another 50 years, substituting makework for sharework. just like McCain said about "indispensable" Greenspan = if he dies, prop up his corpse and put a pair of glasses on it.]
In the meantime, he says, macroeconomists should turn to patient empirical spadework, documenting crises past and present, in the hope that a fresh theory might later make sense of it all.
[You're looking at it = worktime economics - but can you imagine any pathway that will induce these entrenched, intellectually arthritic, conventional thinkers to notice it and even just explore it let alone adopt it? It will take decades = decades of unnecessary suffering but mostly not affecting them.]
Macroeconomics began with Keynes, but the word did not appear in the journals until 1945, in an article by Jacob Marschak. He reviewed the profession’s growing understanding of the business cycle, making an analogy with other sciences. Seismology, for example, makes progress through better instruments, improved theories or more frequent earthquakes [ah, no... better-studied earthquakes - frequency is irrelevant]. In the case of economics, Marschak concluded, “the earthquakes did most of the job.”
Economists were deprived of earthquakes for a quarter of a century.
[Not worktime economists - it was a period of increasing mergers and acquisitions, increasing downsizing of the employment base (and, proportionally, the consumer base!), increasing of the actual workweek and workyear despite ever more injections of ever more worksaving technology, increasing labor surplus, decreasing real wages, increasing hidden un- and under-employment, and ever more diluted definitions of unemployment. Not to mention ever more shouting of ever tinier good news and ever more whispering or ignoring of ever huger bad news. And let's face it - ever more blindness to the obvious and ever more total irrelevance of mainstream economics and economists.]
The Great Moderation, as this period was called, was not conducive to great macroeconomics.
[- whose whole foundations are so flawed and irrelevant that "great macroeconomics" is an oxymoron.]
Thanks to the seismic events of the past two years, the prestige of macroeconomists is low, but the potential of their subject is much greater.
[Only if they veer over to worktime economics.]
The furious rows that divide them are a blow to their credibility, but may prove to be a spur to creativity.
[Dubious, like the furious rows of the impoverished and starving - over crumbs.]
7/17/2009 headlines from hell from Wall St. Journal (j), NY Times (t) or Boston Globe (g) - missing earlier and later dates are handled entirely on recent archive page(s) -
7/12/2009 headlines from hell from Wall St. Journal (j), NY Times (t) or Boston Globe (g) - missing earlier and later dates are handled entirely on recent archive page(s) -
6/19/2009 headlines from hell from Wall St. Journal (j), NY Times (t) or Boston Globe (g) - missing earlier and later dates are handled entirely on recent archive page(s) -
6/13/2009 headlines from hell from Wall St. Journal (j), NY Times (t) or Boston Globe (g) - missing earlier and later dates are handled entirely on recent archive page(s) -
5/27/2009 headlines from hell from Wall St. Journal (j), NY Times (t) or Boston Globe (g) - missing earlier and later dates are handled entirely on recent archive page(s) -
2/19/2009 headlines from hell from Wall St. Journal (j), NY Times (t) or other newsfeeds - missing earlier and later dates are handled entirely on recent archive page(s) -
TOP | HOMEPAGE