Government Economic Leaders Surprised that Real World Isn't Responding to their Magic Pixie Dust → Washingtons Blog
Government Economic Leaders Surprised that Real World Isn't Responding to their Magic Pixie Dust - Washingtons Blog

Thursday, September 2, 2010

Government Economic Leaders Surprised that Real World Isn't Responding to their Magic Pixie Dust




Fed chief Ben Bernanke told the financial crisis inquiry commission today:

If the crisis has a single lesson, it is that the too-big-to-fail problem must be solved

***

Too-big-to-fail financial institutions were both a source ... of the crisis and among the primary impediments to policymakers' efforts to contain it ....

That's funny, given that Bernanke has been one of the biggest defenders of the too big to fail banks, arguing strenuously against breaking them up, throwing trillions of dollars their way, and begging the banks to play nice with one hand, while patting them on the back with the other hand and giving them a big wink.

And Christina Romer - Obama's outgoing chief economist and Chair of the Council of Economic Advisers - said in her outgoing speech yesterday, as summarized by Dana Milbank at the Washington Post:

She had no idea how bad the economic collapse would be. She still doesn't understand exactly why it was so bad. The response to the collapse was inadequate. And she doesn't have much of an idea about how to fix things.

Many have tried to explain to the neoclassical economists running the show exactly how bad the economic collapse would be, why it was so bad, and how to mount an adequate response to fix things. But Bernanke, Romer and the rest of the gang ignored them.

Who Knew?


ATT952177.gif

As I pointed out in March:

Greenspan's big defense is that the financial crisis was caused by a "once-in-a-century" event.

Forget about the fact that the "once-in-a-century event" couldn't have happened if Greenspan's Fed hadn't:

  • Acted as cheerleader in chief for unregulated use of derivatives at least as far back as 1999 (see this and this)
  • Allowed the giant banks to grow into mega-banks. For example, Citigroup's former chief executive says that when Citigroup was formed in 1998 out of the merger of banking and insurance giants, Greenspan told him, “I have nothing against size. It doesn’t bother me at all”
  • Preached that a new bubble be blown every time the last one bursts
  • Kept interest rates too low
  • And did alot of other hinky things

More importantly, as Nassim Taleb repeatedly points out, financial experts who don't plan for rare events are like pilots who don't know about storms.

There are storms out there, Taleb says, and any pilot who doesn't know how to deal with storms shouldn't be flying. Similarly, no one should be in a position of financial leadership if they don't know about - and plan for - the infrequent event:



High Priests Shake their Magic Wands Even Harder


As Australian economist Steve Keen wrote last week, mainstream economists have been acting like religious fundamentalists, rather than scientists:
Bernanke’s failure to realize this: it’s a failing that he shares in common with the vast majority of economists. His problem is the theory he learnt in high school and university that he thought was simply “economics”—as if it was the only way one could think about how the economy operated. In reality, it was “Neoclassical economics”, which is just one of the many schools of thought within economics. In the same way that Christianity is not the only religion in the world, there are other schools of thought in economics. And just as different religions have different beliefs, so too do schools of thought within economics—only economists tend to call their beliefs “assumptions” because this sounds more scientific than “beliefs”.

Let’s call a spade a spade: two of the key beliefs of the Neoclassical school of thought are now coming to haunt Bernanke—because they are false. These are that the economy is (almost) always in equilibrium, and that private debt doesn’t matter.

Indeed, as I wrote in June:

Most economists don't exercise any independent thinking because economists are trained to ignore reality:

As I have repeatedly noted, mainstream economists and financial advisors have been using faulty and unrealistic models for years. See this, this, this, this, this and this.

And I have pointed out numerous times that economists and advisors have a financial incentive to use faulty models. For example, I pointed out last month:

The decision to use faulty models was an economic and political choice, because it benefited the economists and those who hired them.

For example, the elites get wealthy during booms and they get wealthy during busts. Therefore, the boom-and-bust cycle benefits them enormously, as they can trade both ways.

Specifically, as Simon Johnson, William K. Black and others point out, the big boys make bucketloads of money during the booms using fraudulent schemes and knowing that many borrowers will default. Then, during the bust, they know the government will bail them out, and they will be able to buy up competitors for cheap and consolidate power. They may also bet against the same products they are selling during the boom (more here), knowing that they'll make a killing when it busts.

But economists have pretended there is no such thing as a bubble. Indeed, BIS slammed the Fed and other central banks for blowing bubbles and then using "gimmicks and palliatives" afterwards.

It is not like economists weren't warning about booms and busts. Nobel prize winner Hayek and others were, but were ignored because it was "inconvenient" to discuss this "impolite" issue.

Likewise, the entire Federal Reserve model is faulty, benefiting the banks themselves but not the public.

However, as Huffington Post notes:

The Federal Reserve, through its extensive network of consultants, visiting scholars, alumni and staff economists, so thoroughly dominates the field of economics that real criticism of the central bank has become a career liability for members of the profession, an investigation by the Huffington Post has found.

This dominance helps explain how, even after the Fed failed to foresee the greatest economic collapse since the Great Depression, the central bank has largely escaped criticism from academic economists. In the Fed's thrall, the economists missed it, too.

"The Fed has a lock on the economics world," says Joshua Rosner, a Wall Street analyst who correctly called the meltdown. "There is no room for other views, which I guess is why economists got it so wrong."

The problems of a massive debt overhang were also thoroughly documented by Minsky, but mainstream economists pretended that debt doesn't matter.

And - even now - mainstream economists are STILL willfully ignoring things like massive leverage, hoping that the economy can be pumped back up to super-leveraged house-of-cards levels.

As the Wall Street Journal article notes:
As they did in the two revolutions in economic thought of the past century, economists are rediscovering relevant work.
It is only "rediscovered" because it was out of favor, and it was only out of favor because it was seen as unnecessarily crimping profits by, for example, arguing for more moderation during boom times.

The powers-that-be do not like economists who say "Boys, if you don't slow down, that bubble is going to get too big and pop right in your face". They don't want to hear that they can't make endless money using crazy levels of leverage and 30-to-1 levels of fractional reserve banking, and credit derivatives. And of course, they don't want to hear that the Federal Reserve is a big part of the problem.

Indeed, the Journal and the economists it quotes seem to be in no hurry whatsoever to change things:
The quest is bringing financial economists -- long viewed by some as a curiosity mostly relevant to Wall Street -- together with macroeconomists. Some believe a viable solution will emerge within a couple of years; others say it could take decades.

Saturday, PhD economist Michael Hudson made the same point:

I think that the question that needs to be asked is how the discipline was untracked and trivialized from its classical flowering? How did it become marginalized and trivialized, taking for granted the social structures and dynamics that should be the substance and focal point of its analysis?...

To answer this question, my book describes the "intellectual engineering" that has turned the economics discipline into a public relations exercise for the rentier classes criticized by the classical economists: landlords, bankers and monopolists. It was largely to counter criticisms of their unearned income and wealth, after all, that the post-classical reaction aimed to limit the conceptual "toolbox" of economists to become so unrealistic, narrow-minded and self-serving to the status quo. It has ended up as an intellectual ploy to distract attention away from the financial and property dynamics that are polarizing our world between debtors and creditors, property owners and renters, while steering politics from democracy to oligarchy...

[As one Nobel prize winning economist stated,] "In pointing out the consequences of a set of abstract assumptions, one need not be committed unduly as to the relation between reality and these assumptions."

This attitude did not deter him from drawing policy conclusions affecting the material world in which real people live. These conclusions are diametrically opposed to the empirically successful protectionism by which Britain, the United States and Germany rose to industrial supremacy.

Typical of this now widespread attitude is the textbook Microeconomics by William Vickery, winner of the 1997 Nobel Economics Prize:
"Economic theory proper, indeed, is nothing more than a system of logical relations between certain sets of assumptions and the conclusions derived from them... The validity of a theory proper does not depend on the correspondence or lack of it between the assumptions of the theory or its conclusions and observations in the real world. A theory as an internally consistent system is valid if the conclusions follow logically from its premises, and the fact that neither the premises nor the conclusions correspond to reality may show that the theory is not very useful, but does not invalidate it. In any pure theory, all propositions are essentially tautological, in the sense that the results are implicit in the assumptions made."
Such disdain for empirical verification is not found in the physical sciences. Its popularity in the social sciences is sponsored by vested interests. There is always self-interest behind methodological madness. That is because success requires heavy subsidies from special interests, who benefit from an erroneous, misleading or deceptive economic logic. Why promote unrealistic abstractions, after all, if not to distract attention from reforms aimed at creating rules that oblige people actually to earn their income rather than simply extracting it from the rest of the economy?
***
Michael Rivero may have the hardest-hitting critique of all:
This seems to be a return to the mindset of the middle ages where only the clergy were allowed to read and interpret the bible and the laity were presumed incapable of comprehending the intricacies and subtle nuances of the faith.

And indeed there is a great deal of similarity between economics and [fundamentalist version of] religion in that both depend on the unquestioning faith of the masses that those pretty printed pieces of paper represent something real, albeit invisible.

But the advent of the printing press led people to take a closer look at the actual content of [fundamentalist version of] religion and it has been revealed not as a complex and sophisticated system but as a mish-mash of half-baked myths and legends often in contradiction with itself and used to enrich the church ....

The same is true of economics. the advent of the blog has led people to take a closer look at the actual content of economics and it has been revealed not as a complex and sophisticated system but as a mish-mash of half-baked theories and math often in contradiction with itself and used to enrich the bankers and conceal their fraud against the public. [Federal Reserve economist Karthik Athreya, who claims that only people with a PhD in economics can comment on economic policy] is reacting to the blogs the way [fundamentalist] priests reacted to Gutenberg's Printing Press.

The fraud and danger of the Federal Reserve system of banking stands exposed to the public eye, sans the "benefit" of correct interpretation by the self-appointed priests of Mammon. The public now understands that when a private bank issues the public currency at interest, debt will always exceed the available money supply. The public now understands that the Federal Reserve is no more Federal than Federal Express. The public now understands that the Federal Reserve is a legalized counterfeiting operation, that creates the money they loan out out of thin air! The public now understands that the Federal Reserve system of banking, since its creation in 1913, has reduced the value of a dollar down to about four cents! The public now understands that the Federal Reserve system is a pyramid scam that only works when ever larger populations of borrowers can be found, and that once an entire nation or planet has borrowed to the max, the system must crash (which is what is happening now).

Just as the [fundamentalist] priests, stripped of the arcane scriptures and rituals, stand exposed ... so too the economists, stripped of their arcane equations and theories, stand exposed ....

Karthik Athreya doesn't like that fact that the public sees the Federal Reserve for what it really is.

What Could Possibly Go Wrong?

Not only have our government "leaders" in the Fed, Treasury, Congress and White House ignored the real world, they have taunted it - like monkeys who pull the tail of the lion and then are surprised when the lion attacks:

They have:
  • Given trillions in bailout or other emergency funds to private companies, but then refusing to disclose to either the media, the American people or even Congress where the money went
  • Failed to take any meaningful steps to stabilize - let alone fix - the economy (see this and this)
Under these conditions, it is impossible to have a decent economy. After pulling these kind of shenanigans, of course the lion of debt and depression is going to eat us alive.

6 comments:

  1. because we have less money, and the money we do have we try to save as much as possible because the government has shown repeatedly that they and these corporations can never be trusted.

    ReplyDelete
  2. It all comes down to fraud and the fact that none of the watchdogs bother to do anything about it because they are in cahoots with the fraudsters. The SEC is the worst offender because of collusion. And Congress does nothing because of bribery.

    I really think it's time for the French revolution to happen here.

    ReplyDelete
  3. What propped this up for so long was the continued discovery of cheap oil. Energy in the end is what fuels an economy - at one time the energy of food, but now supplemented with ancient energy in oil, gas and coal. More than anything it will be the end of cheap oil that will precipitate the coming crash. The acknowledgement of the finiteness of planet earth and its resources is IMO the biggest failure of economists. You cannot fill your tank (car or body) with paper money or even gold. Food and fuel are the basis for true wealth

    ReplyDelete
  4. So! What are We, the Peopple going to do abut igt. Just let the current take us along to the Big Splash? OR are we going to localize into self-sustaining communities, with our own local currencies, and or Goods and Services?

    Like many Communities are doing, with their local currencies...Ithaca, etc.

    And figure out, as well, how we can inter act with other Communities, doing the same thing?

    ReplyDelete
  5. when politicians wave their magic wands and it doesn't work, people get angry. when they promise to wave their magic wands and don't, people get confused and demand more wand-waving. No surprise then that they talk about waving them a lot more often than they actually use them; after all, as with any magic act, the power is in the mystique, not in its non-extant ability to actually change anything. The difficulty for all of us is that the politician's magic wand is the barrel of a gun, and when it does finally get waved people get hurt and the problem gets worse. Are you going to fall into the trap of begging for more guns because the ones they had and didn't use did absolutely nothing to save you? Or are you going to start thinking about how you can solve your own problems without violence, and the without cowards who demand you wield it on their behalf?

    ReplyDelete
  6. The economy is being engineered and the gov’t spending is the key part of this. However, the gov’t is operating under the jurisdiction of foreign commerce.
    The Declaration of Independence is the organic law of the land and its main tenet is that "all men are created equal". The Constitution acknowledges this where in Article I, section 8 it grants the federal government jurisdiction over foreign commerce, interstate commerce, and trade with the Indians. The federal government has no jurisdiction over intrastate commerce because "all men are created equal". The individual American is sovereign, not the federal gov’t. - United States v. Lee, 106 U.S. 196, Hale v. Henkle, 201 U.S. 43, Julliard v. Greenman, 110 U.S. 421, Chisholm v. Georgia, 1 L.Ed. (2 Dall.) 415.
    The FED bankrupted the gov't in the 1930's. This is evidenced by the correlation between the United States Code (USC) and the Code of Federal Regulations (CFR): title 11 USC, "Bankruptcy", is implemented by title 11 CFR, "Federal Elections".
    Bankrupting the federal gov't wasn't enough to make Americans pay the interest on the FED's counterfeit money loans to the gov't. because of individual sovereignty.
    To get around all of the chains that the Constitution imposes on the federal gov't, Social Security was created to destroy American sovereignty. The "Form SS-5" that an applicant uses to apply for a S.S.# is actually a federal employment form. The federal employee is the "taxpayer". "Taxpayer" is a legal term defined at 26 CFR 2.1-1(a)(5) as a member of the Merchant Marine - a federal employee.
    The gov’t has been given jurisdiction over its possessions by Article IV, section 3 of the Constitution. By checking the box "U.S. citizen" on the "Form SS-5" the applicant has given the gov't prima facie evidence of U.S. possession citizenship. "U.S. citizen" is also a legal term exemplified at 26 CFR 25.2501-1(c) as a person born in one of the States who then establishes a residence in a U.S. possession and, further, acquires U.S. possession citizenship. The U.S. possessions are treated as foreign countries (see 26 USC sec. 865(i)(3), 872(b)(7), and 2014(g) for example). This makes a “U.S. citizen” a foreigner in relation to America - the 14th Amendment citizen.
    The combination of the legal terms "taxpayer" and "U.S. citizen" is known as the legal term "U.S. resident" at 26 USC sec. 865(g). A "U.S. resident" is a "U.S citizen" living in America - a foreigner.
    The income tax was ruled to be constitutional - Brushaber v. Union Pacific R.R. Co., 240 U.S. 1 (1916), Stanton v. Baltic Mining, 240 US 103 (1916), Peck & Co. v. Lowe, 247 US 165 (1918), Eisner v. Macomber, 252 U.S. 189 (1920). These Supreme Court decisions all stated that the gov’t always had the power to tax income and, further, that no new power of taxation was granted to the federal gov’t by the 16th Amendment. Therefore, the income being taxed must be within the limited jurisdiction of the federal gov’t to begin with since no new power was granted to the federal gov’t.
    The 3 commerce jurisdictions are cited separately in title 28 USC, "Judiciary and Judicial Procedure", chapter 85, "District Courts; Jurisdiction". Section 1336, "Surface Board Transportation Orders", is the interstate commerce jurisdiction. Section 1362, "Indian Tribes", is obviously the trade with the Indians commerce jurisdiction. Section 1340, "Internal revenue; customs duties", is the foreign commerce jurisdiction.
    The gov’t now has an unending reservoir of money from its “taxpayers” to spend on whatever illogical, uneconomical agenda it wishes.
    I have evidenced the entire Social Security Scam on my Blog at LLSTULER.wordpress.com.

    ReplyDelete

→ Thank you for contributing to the conversation by commenting. We try to read all of the comments (but don't always have the time).

→ If you write a long comment, please use paragraph breaks. Otherwise, no one will read it. Many people still won't read it, so shorter is usually better (but it's your choice).

→ The following types of comments will be deleted if we happen to see them:

-- Comments that criticize any class of people as a whole, especially when based on an attribute they don't have control over

-- Comments that explicitly call for violence

→ Because we do not read all of the comments, I am not responsible for any unlawful or distasteful comments.