According to an article in the New York Times (Thanks to Lars Eirik for noticing and posting) on the 27th of July, two economists Alan Blinder, a Princeton professor, former Clinton advisor and former board member of the Fed, and Mr Zandl chief economist at Moody’s Analytics claim that with a “complex quantitative model”, they have “proved” that without the bank bail outs and the stimulus policies, we would have been plunged into Great Depression 2.0 with an additional 8.5 million more unemployed on top of the current 8 million and with GDP lower by 6.5% and suffering from deflation.
So there you have it. A computer model, empirical proof, exact numbers and world class authority. So SHUT UP everyone else! Especially people who don’t have empirical models or credentials.
Basically this seems to be the follow up to that Fed paper which said you shouldn’t listen to anyone but serious, PhD-holding economists. Do outsiders and critics have empirical proof, complex models, exact numbers or world class authority? Actually no – I, for one, have none of these advantages.
But you might not be entirely surprised to hear that I still have a few things to say.
First, while “complex empirical model” is modern code for – “It must be true” it might be worth remembering that their model will be of the SAME family of linked, linear-equation models used by all economists and financial institutions, and which neither saw the crash coming, nor accurately predicted any of the ups and downs since. So I don’t feel too bad about not having one.
The exactness of the results from their model is largely spurious and more importantly un-falsifiable. As with most models, the outcome is largely bracketed by the input assumptions. Do you feed the output from this equation as the input to that one? If so, then doing this WILL cause that. This is not testing theories it is asserting assumptions. It’s interesting but its not science, its not discovery and its most definitely not proof. It is story telling with numbers.
OK that’s enough diplomacy.
What this paper did, was compare what the model said the results of the actions taken, policy followed, would be, and compared that with if we had done nothing. What it did NOT do was compare what might have happened if we had followed other actions, other policies.
So the research and the paper are NOT a vindication of our present policy or proof it was the best course of action, because no other course of action was modelled.
Of course modelling ‘what if’s’ is frowned upon as being pseudo scientific. But then again that is exactly what this paper did. Doing nothing is itself a ‘what if’. One that was carefully chosen to ensure the policy we did take, looked good by comparison. Like comparing a botched and unnecessary amputation with ‘not bothering with the patient at all’. As long as you don’t compare the amputation with, lets say, simply staunching the bleeding and cleaning the wound, then the amputation seems to have saved the day. After all the patient didn’t die.
So I’m afraid I see this paper as just another in the long list of efforts at post hoc justification by those with a vested interest in doing so. It’s central claim is simply “we fixed it” and if we hadn’t we’d all be dead!
Which I think begs more interesting questions than any the authors addressed. WHAT is it we have allegedly fixed? And have we?
These questions come up in a much more interesting paper written by researchers at the Fed on the Shadow Banking System. It’s what I have been reading this last week and want to write about in the next post.
So they have basically paid out 2.5 trillion so save 8.5 million jobs! Doesn't sound like such a good deal to me. I think that the money has been used to save the fortunes of a few thousand mega rich people.
Yes, Rob, you are fundamentally right, but how can we uphold that distinction confronted with that both may be "true" according to certain "models"? What is that counterfactual trajectory of economy that we would have preferred to happen to what has actually happened? Do we say that the 8,5 million job loss would not have happened (or maybe only 1,5 million?) or do we say that it might have been better if those jobs were lost (costs considered) and the people concerned would eventually find jobs in more sustainable sectors of the economy. I worry that our Golem XIV be torn to shreds by the ideologue "experts" of finance if his ideas are taken seriously in the public domaine (book published – media interest) and our reply begins with "I think…." Golem XIV, seek out scholar economist to test your ideas on and get feed-back from before you defend your ideas in real public media!! You know Beeb and the likes…(not crack-pot internet)
Interesting Read
On Physics and Money
Lars Eirik, I think….. Golem is more than capable of holding his own against anybody. It is more than likely they would end up looking foolish.
Macleod, anybody can, according to circumstances, be perceived to be holding his own or look foolish. Lastly, it's in the eye of the beholder, but don't ignore the first two "dragons" that must be slain: mainstream thinking and traditional (political or academic) authority. I do not beleive that present day politicians in office will see reason in Mr. Golem's sayings. You have to communicate directly with the electorate – behind the elected's backs, so to speak. How can one gain their trust in the face of authority and traditional thinking? You know, the field is open to all kinds of counterfactual hypothesis of "science". There has been no more 9/11s since invading Afghanistan and Iraq… Proof that the invasion was successful and necessary? Well, many people probably would say yes – how do you adress the segment of the population that believes bail-outs worked since we are still alive?
Dear Mr Eirik,
Believe me, I take your concerns very seriously. I know you to be a very thoughtful person. But I think you have touched upon part of the answer yourself. Reasoning with those who believe totally in the traditional paradigm will not work. This goes for both the politicians and the academics.
When Luther or Calvin broke from the orthodoxy they did not try to get the approval of Catholic theologians. Darwin did not try to reason with the church. I am NOT comapring myself with them. But I amsaying we are in a simiar position facing similar entrenched ideas and powers.
They all wrote what they wrote, articulated what they believed clearly and with passion and exactly as you said, communicated directly. That is what we have to do. You and I and all those who do not believe in the present priestly class or the church they serve.
As there was, at the time of the reformation, or on the cusp of the English revolution, there is today a deep and spreading unease that the priestly class is corrupt. That their faith is corrupt. The louder the warnings and threats from the Priests, not to listen to the unbelievers, the more people will feel encouraged to do exactly that.
I believe we are at such a moment of reformation. At a moment when a paradigm is losing its grip on people's imagination. At such a moment I don't believe debate is the best way forward. We must seize this chance and speak out.
Offence is the best defence
I believe pushing our understanding forward, making it clear and voicing it powerfullly, confidently and with conviction is what is required.
Many will not hear but some will. We will just have to suffer attacks as they come. To be attacked is already to give us power.
This reminds me of the 'Year-2000 Bug'. I have heard many people argue that the Year-2000 Bug was blown out of proportion, or simply did not exist, or was an excuse to force customers to upgrade their products. Whilst the latter may be plausible, what they forget is that thousands of engineers were working to correct the problem.
As one of those engineers, I can wholeheartedly state that there would have been serious consequences if we had done nothing. The fact that there were few problems may be testament to the work those engineers did. But, I guess we'll never know.
If the bail-out did not postpone the Great Depression 2.0, what did?
RichGB,
I think its fair to say that the bail out postponed, not GD2.0, but The Great Bank Collapse. Or to be more specific the collapse of the insolvent banks. Banking as an activity would have continued but without the dinosaurs.
But we did bail them out and did postpone the bank collapse. The question for me has always been at what cost.
It is now rather clear what the cost is. A decade of debt indenture, the dismantling of much of the framdework of social care and welfare and a considerable roll-back of democracy.
The worst of it is we are setting up mechanisms and a volcabulary which are going to make transfering bank debt to the public purse seem a normal and necessary activity and in the end standing ever ready and willing to back-stop the financial world will be seen as 'the role' of prudent government.
Bonjour Golem, I html'd your link to the new york fed, and tagged on my little bit on the Guardian editorial .
x!
May have made a bad job of it tho, but got to go gardening !
The trouble with 'formal' economic debates is that they always end up getting so esoteric that the 'layman' quickly ends up getting lost and is reduced to having to decide who sounds most convincing and wears the best suit; this complexity is what lets people like Alan Greenspan hide behind ridiculous statements like 'I have discovered a flaw in the system' without being mocked in the same way as, for example, England's football managers.
Although economics is inherently pretty complex, a lot of people have vested interests in ramping up that complexity even further. I've found a good way to clearly explain any economic concept to the uninitiated is to imagine it being used on a desert island with about ten people on it. People can immediately understand and see the implications of a certain policy. If you can keep things simple, it's not hard to persuade the public.
Hi, new to site. (from Guardian)
quick question: can someone tell me how 8 million unemployed (as mentioned in the first para in above article) in USA equates. does anyone know how this figure is arrived at? for a pop of 315 million i'm thinking a working age pop of 200+million with a (west world avg) participation rate of 65-70%…is this right? if so the 10% unemployment rate, that i have also seen widely touted around, would mean nigh on twice this at 13-14 million. any light anyone can shed will be much appreciated.
thanks
good site by the way Golemxiv and i like the look of the new book.
Well, leave communication issues for now until the book is published.
On another note: Quietely and discreetly insolvency of US banks are being recognized (with the not-TBTF)
http://www.bloomberg.com/news/2010-07-31/home-bancshares-buys-two-lenders-as-u-s-failures-this-year-climb-to-108.html
Small potatoes of course, as this Friday's failures cost only 334 millions USD to the FDIC deposit insurance fund. Remind me: the fund was already depleted and topped up? Pretty awesome though the list of 775 banks still waiting to be recognised failures
Ozzydave,
I can't tell you how the Fed arrived at this figure. I took it direct form their document.
I agree it seems odd. But then almost everything about unemployment figures is screwed with. The more accurate unemployment rate for the US is the 'U6' figure which is up around 17%.. U6 is an offical statstic. just not one they like to see quoted.
The reason I just took the figure form the Fed doc is that I have been wrestling with it for a couple of days and am trying to get inside their logic.
Hope to post something on it soon.
Glad to meet you!
Lars,
The FDIC did go negaitve and was bailed out by the Treasury once already. They are going to have to back for more money probably before the end of the year.
There are a whole lot of regional banks drifting without power closer and closer to the waterfall's edge. Take a look at some of the US branches Santander bought up. YIKES!
And the deliquency rate on Commerical Loans is climbing higher every month. Total delinquent unpaid balance for CMBS increased by $3.1 billion to $60.5 billion, 111% higher than the $28.6 billion from a year ago. So expect that list to make steady progress through the red banks!
ozzydave US bureau of labor statistics
Over the years I've seen the U6 fig gradually being given more prominence, quite right too !
On the US Regional banks golem pointed out way back that the failure would be taken over by the biggies, making them even more TBTF … crazy world.
frog2,
I don't know if I have ever thanked you for mentioning the blog when you post of the Guardian? But if I didn't before, I do so now.
It is kind of you and has brought in a steady flow of new people. How many stay who can say. But you do more to get our meeting place noticed than anyone or anything else.
So thank you Frog2!
Hi Golem,
Nice to be thanked for links, by linkers or linkees ! I was once a good team-worker in money-broking too 🙂
Just stuck this up at the Gdn editorial —
Hi Shinsei, I was playing a little fast and loose on my trillions, but here's a link to —
Andrew Haldane of the BoE on the Crisis and Systemic Risk
Unusually clear language, so recommended to all !
Seeya
Tam, Golem, and you all, what a beautiful day it will be the day when common people criticize economics "experts" with the same confidence as they criticize football managers!!
Mr Eirik,
That made me laugh out loud. I am sure you know it well, but it's still a classic and funny
http://www.youtube.com/watch?v=PqZTP8-8wIs
Golem – how wonderful – you have a sense of humour!
Hi Golem, yes, I know it well, I was there when it happened, and I'm pleased that you do too – and that you appreciate its lunacy… but, you know, back then, 20 years or so, beating England in football was really something. Since then, the Norwegian team has beaten Brazil twice and today "nous sommes un peu plus blasés".
In my spare time I still play a little myself, and I'm involved in the management of a footballteam; I still feel like I'm entering a church when I see the pitch. I prefer more solemn language than that of the reporter, but I completely understand him being carried away like that….
Me too Lars. Wasn't it Bill Shankly who said football isn't a matter of life and death. It's far more important than that.
For me it isn't football that engages and consumes me.
It's the people who don't have something in their lives about which they are passionate, who worry me.
c.a.macleod,
Yep and it's still 12 years old!
Since you've been kind enough to send me a clip, I hereby return the favour
http://www.youtube.com/watch?v=da9Q6fiHFz8&feature=related
enjoy true british humour!
I'd completely forgotten that one! Enjoyed. Thanks
Sorry cant copy link using phone, but search youtube for
"harry enfield 1933 arsenal"
I love that sketch
Classic!
Ozzydave says:
many thanks to Frog2 and Golem. i can get very cynical and therefore waylaid (in my attempts to fit the pieces into the jigsaw) when the parameters for crucial figures are altered (or at least very unclear) and/or the media narrative is essentially non existent between CLEARLY related events. thanks again.
PS: has anyone read 'Loretta Napoleoni's "Rogue Economics: Capitalism’s New Reality"
Recommend? i heard her in a lecture yesterday and she made some very refreshing comments about where we are going economically (due to the same foxes being in the hen house) and also in relation to the Islamic banking system.
Is there any thought that a "good bank" solution could have worked? I.e., rather than buying up all the troubled assets from banks in distress, buying up all the ordinary deposits and sound loans (paying a fair price for them), and creating new banks owning them which could then allow the normal economy to carry on regardless, paying wages and so on.
The bad banks would be left with all their bad assets and a fair price paid for all their good ones, and left to fight it out for themselves as to whether they were solvent.