New Economics or just proper economics?

I've been reading Pablo Triana's Lecturing Birds on Flying, a review of which you can find here. I write as someone who occasionally teaches monetary economics and macroeconomic theory, from the perspective of an historian, to undergraduates as well as someone who has made a reasonable amount of money over the years teaching High School economics at international schools. It follows on from my consumption of John Cassidy's (Soros-friendly) How Markets Fail, which I'd recommend to anyone

I find myself wondering at the parade of market-makers and analysts employing now-ubiquitous terms such as 'perfect storm' or 'unforeseeable problems' when discussing the perfectly natural and foreseeable collapse of their multi-trillion dollar, psuedo-mathematical fantasy constructions over the past three years. There appears to be a sort of vast flight from accountability going on, masked by the screaming absence of any humility or sense of responsibility whatsoever.

I have friends and readers who will simply note that this is the nature of the economic beast. 'Value at Risk' and the employment of standard deviation and gaussian copulation and other technical devices to validate greed were always charlatanism, of course. But the thing about charlatanism, which I know about (like any self-respecting Irish catholic who has ever been on the make), is that it is most successful when attached to or rooted in a truth. If people believe in something beforehand, because it is believable and useful, the confidence trickster can implant himself on the back of it fairly easily. You don't have to have read W.H.Auden to know that.
In that ago when being was believing
Truth was the most of many credibles
More first, more always, than a bat-winged lion,
A fish-tailed dog or eagle-headed fish,
The least like mortals, doubted by their deaths.

Truth was their model as they strove to build
A world of lasting objects to believe in,
Without believing earthenware and legend,
Archway and song, were truthful or untruthful:
The Truth was there already to be true.

This while when, practical like paper dishes,
Truth is convertible to kilo-watts,
Our last to do by is an anti-model,
Some untruth anyone can give the lie to,
A nothing no one need believe is there.

The fact is that an understanding of economic life informed by a political and historical understanding--ultimately by a sense of humanity--is always going to end up noting that people are flawed and that models are models, but that there are demonstrable truths. One is that, across time, countries that did not trade, with workers who could not work, and managers who acted like slavemasters when they were not idle or talking rubbish, which lived beyond their means spending like there was no tomorrow and respecting nothing held in common very soon found that tomorrow had arrived. There is no passable exam that allows for a certificate of permanent economic health.

But there are things that people can do. They are all the more important now, at the beginning of an age of savage limits.

What is necessary in life is to save when one can, to procure enough resources to have food and shelter and a chance of self-validation, and to worship no material thing. That is true. It has been true since before Aristotle, regardless of Platonic truth. This truth is not incompatible with a sound approach to fiscal policy, or to monetary discipline, or to the supply side, or with immigration. It's not even incompatible with something as clever as a derivative, handled properly.

What it is incompatible with is the odd mixture of cynicism and anti-human utopianism alloyed with nonsense mathematics that has characterised economic education and practice for some decades now. An economics rooted in a doctrine of limits, and caution, and licensed spheres of risk with clear warnings and a sense of humanity about it is very necessary. I wonder at how many economic students, most of whom undergo the more bizarre initiation rituals of the subject quite openly in order to gain a chance to be very rich would be interested in such a doctrine.

All professional qualifications have an element of the self-interested cipher about them. People, after all, are wonderful, mad, selfish, self-interested fallen beings and children of God. Economists are no different. I find myself asking, in a week when a weird, pre-stagflation silence fell on the American money supply, when the European banks and markets creaked and groaned, and when the patterns playing on the Chinese bubble began to look dangerous, how much longer can we put up with the delusions of the economics profession?


Toni said…
Wow, your blog is very academic and I am not an educated man, so forgive me for any incorrect assumptions.

You are right to lambast the VaR models and even thought they have been widely discredited, they are still used as a reference point. The reason of course is that we have nothing else to use. The risk management departments of most banks feed in the 95% certainty over 98% of the time numbers and this produces a number, a dollar amount, that can be presented to the senior management. This number allows management to feel that they are somehow "on top of the situation" and also allows them to approve the compensation to traders that have projected earnings rather than demonstrated past performance. Of course the VaR model is inherently flawed, much like the standard Black-Scholes model, which, as I am sure you know, assumes fixed volatility. Still can't believe they gave Scholes the Nobel prize for that! Of course it is the 2% of the time that traders are interested in. I know little of statistics but it seems to me that one in a million years or "perfect storm" events happen with alarming and ever-increasing regularity. I started work in 86. my first job was a junior on the desk converting defaulted Latin American syndicated loans to Brady bonds and the global banking industry was smarting after Citibank took the decision to write of the, now laughable, amount of 6 billion. Since then, and just of the top of my head, we have had the 87 market crash, the 92 currency crisis, the Barings collapse, The 94 Mexican debt crisis, the Asian crisis of 97, The 98 Russian debt default, the LTCM collapse. The Argentian default of 2002, The burst of the .com bubble, The collapse of Enron, the events of 9/11 and the credit crisis. I am sure that I am missing a few, "once in a million years" events, but in a relatively short working career it seems rather eventful.

In my limited opinion, the Greenspan policy of monetary easing is the major failing in the global economy. The reluctance to take immediate economic pain has created a world of almost free money that also generates limited returns with hugely negative effects to pyramid schemes such as the NHS. As traders are forced to hunt for returns they will find a way to create yield. The growth of the credit derivatives market and the asset backed securities is a testament to that. I worked of the embryonic CDS market and am stunned by the growth and misude of these instruments.

I am not sure what point I am trying to make, perhaps I am just trying to say we use certain methods because there is no alternative, mainly I am just saying how much I enjoyed my first visit to your blog and look forward to future posts.
Martin Meenagh said…
Toni, thank you for your comment, I am grateful for your views.

I think that sometimes I make the best the enemy of the good. I tut at the flaws in what people do--its the nature of blogging--and don't ask the practical question of what they were expected to do instead. So I take your point about management control.

Crashing and booming are in the nature of unregulated markets run by people who want certainty from models regardless of reality and outside of any constraining tradition. I think that this has become true of much of our politics, our environmental outlooks, and our culture of law--and that this need to have faith in mechanisms that purport to offer control whilst having no faith in people is the crisis of liberalism.

It comes down to whether one is prepared to inculcate a common and objective morality, to tie that to physical resource constraints and to land and to social regulation, and to give everyone in a society a reason to live within it. If not, thirty or forty years of exhilarating freedom will be met with an adjustment into relativism, resource depletion, mad and absurd schemes of social brainwashing, and all the vices that go with decline with precious little of the fun that goes with vice!

What really worries me--I've been going on about this for several years--is the coming together of credit, pensions, sovereign default, and bubble crises with some event or combination of events--an oil spill or a spot of global cooling or peak oil or a small war--that leads to a catastrophic slump. I think that we are in the depths and skirting the edge of the abyss there. I think that the media and political classes do not want to acknowledge that, probably because it gets in the way of business.

I am making a real effort not to be gloomy at the minute, so please don't get the wrong impression of the blog. There are articles on whiskey, cigars, America, literature, Sarah Palin, religion, and art on here, and sundry other topics. I hope that you enjoy them. If you ever really disagree with me, feel free to say so--I'm glad to say that there is precious little swearing or personal abuse on here and that my collective 'one demented reader' is a lovely collection of independent minded people.

All the best, and sorry for the long ramble--M
Toni said…
I have been reading through the blog and find much of what you write amusing and all of it interesting, although I am no lover of Merkel. Loved your observation on Gandolfini though.

I agree with you about the possibility of an upcoming depression, after all the solution to a debt crisis was what? add liquidity to a system swimming in liquidity. The markets are addicted to cheap credit the way I am to vodka. One of my points I was trying to make earlier is that when I first started work, shortly after Walter Wriston was proven wrong when he said "countries don't go bankrupt", people said South America will never be able to borrow in the capital markets again. After the Russian crisis I remember hearing a CSFB trader berating a Russki saying, "You guys will be frozen out of the markets for at least 10 years". Now economists are actually advising Greece that default is the quickest and easiest option. The memory of the markets has become almost goldfish like. I am not quite as optimistic as you. Short of a major war, I cannot see a way for the world to extricate itself from the unsustainable situation it is in. As usual, the masses are easy to placate with satellite tv and heat magazine, but few people really know how close to the abyss this country came. I know someone who was called into a meeting at the Bank of England who said there was a very real possibility of NatWest having to close its cash machines and the bank not opening on Monday morning. The implications of this is that every other bank would also cease operations, all shops would refuse payment by credit or debit cards and wages would have been frozen. The government knew that if anything was likely to cause a civil disturbance it would be the inability to withdraw money that we have all grown familiar with. Whatever people say about Gordon Brown, he took the only decision he could. The trouble is that the problem was not dealt with - just put off.
Martin Meenagh said…
Put off, in the hope that we would be punched repeatedly but with breathing space between the hits, rather than thumped all at once.

People who worked for the banks and the government, and in foreign countries, kept telling me that the cashpoints almost went down. I think that's now been acknowledged. There were also rumours sweeping around about Barclays, which have obviously proved untrue, and which are anyway now moot because of their gulf loans (so long as they themselves weren't unreliable).

I tell you a mad, silly thing about myself. I have a cupboard full of cans of tuna, rice, dry noodles and beans now, amongst other things. Every time I go to the shops, I pick up a couple of extra, storable items. If I am wrong about how bad things can get when we enter the next phase of whatever it was, fifty trillion of non-money, being withdrawn at the same time as the dollar, euro and pound go down, at least I can eat for a while; and, if not, well, I won't look any more stupid than usual.

We've built so many social institutions around credit--from universities to PFI schemes that provide hospitals and public goods to student loans and bank overdrafts--that when the commercial mortgages go down, the music in personal credit slows further, and the stagflation begins in earnest, the scaffolding of society is just going to go concave and crack beneath our feet.

This is not unusual in history. Big, very bad crashes and collapses happen. The combination of these with things like an unsustainable energy model, global cooling, political instability, and the massive weakness of the superpower, and an economic shift back to Asia, is what is not usual.

I felt sorry for Gordon brown, probably unjustifiably since he should have risked more political capital as Chancellor to restrain the boom. He was handed a big pot of bad and no spoon. At least it wasn't Hillary Clinton's fate--she instead is now reduced to wandering around Asia with a Hapsburg-style ultimatum under her arm and a begging bowl full of bullshit in both hands. Sic transit gloria mundi....

You've got to laugh, haven't you?

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