Schooling David Brooks (and Everybody Else) on the Causes of Economic Busts

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Hayek image

The New York Time's house conservative columnist David Brooks muses today on the lessons that economists and the rest of us can take from the recent economic crisis. Brooks notes:

Economists and financiers spent decades building ever more sophisticated models to anticipate market behavior, yet these models did not predict the financial crisis as it approached. In fact, cutting-edge financial models contributed to it by getting behavior so wrong — helping to wipe out $50 trillion in global wealth and causing untold human suffering.

Now that the highly mathematicized and modeled version of economics has so signally failed, Brooks argues that the field of economics' pretensions to being a "science" are overblown. Brooks observes:

In The Wall Street Journal, Russ Roberts of George Mason University wondered why economics is even considered a science. Real sciences make progress. But in economics, old thinkers cycle in and out of fashion. In real sciences, evidence solves problems. Roberts asked his colleagues if they could think of any econometric study so well done that it had definitively settled a dispute. Nobody could think of one.

As all too often happens, the modelers began to believe what the outputs from their models rather than what the real world was trying to tell them. Brooks concludes:

One gets the sense, at least from the outside, that the intellectual energy is no longer with the economists who construct abstract and elaborate models. Instead, the field seems to be moving in a humanist direction. Many economists are now trying to absorb lessons learned by psychologists, neuroscientists and sociologists.

Although Brooks mentions economist Friedrich Hayek in passing, he would find that the intellectual tradition of Austrian economics offers some insights into the causes of the recent crisis. Austrian economics has long eschewed the false precision of mathematical models in favor of a multi-dimensional humanistic approach. What is Austrian economics? Turning to Wikipedia (the online encyclopedia that arises from the sort of spontaneous institutional order described and favored by Austrian school economists) one finds it defined as…

… a non-mainstream school of economic thought that emphasizes the spontaneous organizing power of the price mechanism or price system. Austrians hold that the complexity of human behavior makes mathematical modeling of the evolving market extremely difficult (or undecidable) and advocate a laissez faire approach to the economy. Austrian School economists advocate the strict enforcement of voluntary contractual agreements between economic agents, and hold that commercial transactions should be subject to the smallest possible imposition of forces they consider to be coercive (in particular the smallest possible amount of government intervention). …

Austrian economists contend that testability in economics is virtually impossible since it relies on human actors who cannot be placed in a lab setting without altering their would-be actions. Mainstream economists are generally critical of methodologies used by modern Austrian economics.

For an informative and very entertaining (at least it is for economics geeks) lesson in the distinction between Keynesian and Hayekian theories of the business cycle, I highly recommend Russ Robert's "Fear the Boom and Bust" rap anthem (YouTube).

Intellectual disclosure: I generally prefer the more empirical approach of Hayek over the more deductive version of economics advocated by his mentor Ludwig von Mises.

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  1. When people found out that Newton’s laws didn’t work in all cases, people didn’t say, “Ha! Physics is all lies! We don’t have to listen to those physicists anymore.” Instead, they said, “Hmm, there seem to be some circumstances in which our current models don’t work. Let’s come up with some new theories (relativity and quantum theory) that can explain them.”

    Unfortunately, liberals like Brooks and Krugman have used the latest financial crisis as an excuse to attack the science of economics and the free market. If the methematical models didn’t predict the last crisis, fine, let’s work on better models, and test them empirically, since that is how science works.

    If Brooks thinks that economics has never made any progress, he is an even greater fool than I thought.

  2. As I recall from “The Road to Serfdom” Hayek didn’t advocate laissez faire. I don’t remember the exact quote but I believe he took pains to explain that a basically free market economy wasn’t at odds with a government providing a minimal income to the destitute or other social safety net features. He also suggested that the relation between government (or at least legal rules) and the economy was a continually evolving one so he didn’t necessarily advocate a complete laissez faire approach.

    1. It says FA wins 4-3, but her tits and superior accent count as 2 bonus points in my book. Salma wins 5-4.

      1. I’m not following your math. Wouldn’t two extra points for Salma bring the final score to 6-3?

        1. I wish I had that ASCII image of the star trek guy doing a facepalm handy.

      2. Exactly. Salma Hayek is too hot to be explained with mathematics!

    2. We built upon the foundation laid by that scorecard with pictures and quotes a while back in a Urkobold posting. Hayek wins!

  3. Economics is not a Science, it is Social Science, i.e., one othe Humanities. It deals with human behavior something which can not be quantified. Attempts to do so will fail (e.g. see Marxism).

    The term Socisl Science dates from the early 19th ct when every one wanted to be a scientist, thought they could quztify human behavior.

    1. Solcial sciences, like social justice, are bullshit.

      1. Not complete bullshit. They’re just not science. Like climate science isn’t science. Most of the topics in the social sciences aren’t amenable to controlled studies using the scientific method.

        1. Climate science isn’t science? A lot of what people try to pass of as climate science may not really be science, but I would say that climate is a proper subject of scientific study.

          1. Climate modeling isn’t real science. I think that one day we might have reliable computer models, but until the age of artificial intelligence and perfect simulations, we’ll have to measure the accuracy of computer models against real life experiments before the model can be trusted. The problem with climate models is that it is impossible to test them against any real world experimentation, so they cannot be relied upon.

    2. …quztifying human behavior has long been a goal of mine!

      1. syntax.

  4. There were a few economists that didn’t seem to need a fucking model to predict this shit.

  5. That dude actually makes sense when you think about it.

    TO
    http://www.anonymous-proxy.us.tc

    1. Which dude? Brooks or Bailey?

      1. Lebowski.

  6. I predict the effect of global warming, if unchecked, will not be that detrimental. Trust me, I’m not like those silly climate models.

    1. EM: So this would include the economic catastrophes predicted by the Stern Review as a result of future climate change?

      1. That’s me you’re hearing.

  7. The danger in building models is that the modeler must know the domain of inputs for which the model will provide valid outputs. use the model outside this domain and you get bad results.

    In econometric models, the domain is limited in time in ways that are unknowable, because in the end many of the values being predicted are dependent on the value scales of individuals, value scales which can change dramatically in a short period of time.

    There is no way to predict with precision the future value scales of people. We can make guesses by looking at recent history and extending trends into the future, but the farther into the future one goes, the more likely it is that the underlying value scales will change in ways not predicted by a historical model.

    The holy grail in modern economics seems to be a sort of Asimovian theory of psychohistory. Since no such theory can be constructed in the real world, the econometricians must accept that their predictions will fail, pretty spectacularly, at some point in the future, and act cognizant of these limitations.

  8. “In real sciences, evidence solves problems. Roberts asked his colleagues if they could think of any econometric study so well done that it had definitively settled a dispute. Nobody could think of one.”

    Perhaps, but real science doesn’t have to contend with the problem of induction…

    …oh, wait. Yes it does. And old beliefs are discarded in the harder sciences regularly.

    This kinda reminds me of the old stale joke about how everyone’s always talking about the weather, but nobody ever does anything to stop it?

    …economics and meteorology really are in the deeper end of the inductive pool. More people should realize that.

    I suppose it’s true too that economics is always coming back to prove its original sources, and that’s something that a lot of other disciplines don’t do.

    It should be surprising to come across people who believe in evolution but don’t believe in the invisible hand. But It’s a fairly common thing.

    …and yet one really is fundamental to the other.

    And if the original basic premise of economics was that economic systems are too complicated to manage well from the top down, why should it be surprising to find that there isn’t a way to manage them well from the top?

    It may be that advances in economics aren’t recognized for what they are until they’ve been integrated into some other harder science too, and maybe then they’re generally thought of as being a part of that other discipline?

  9. ECON = UBW

  10. Talking about schooling, did anyone see the article David Friedman wrote on hos David Frum doesn’t know diddly shit about what his father Milton wrote?

    1. ‘how David Frum’, but ‘ho David Frum’ kind of works there too.

      1. “she ain’t a ho, but she don’t hang out with no unemployed conservative thinktanker”

  11. (e.g. see Marxism)

    Marx’s economics are deterministic, but not quantitative. His model is deduced, and its predictions aren’t mathematical, so they’re not entirely bullshit. He’s more like Mises than like Keynes.

    If economists favored Kapital over The General Theory, we’d be wrong to kill them.

  12. cutting-edge financial models contributed to it by getting behavior so wrong ? helping to wipe out $50 trillion in global wealth and causing untold human suffering.

    The greatest suffering caused by the “meltdown” is the insufferable simpering anguish it produced in morons like David Brooks about the “untold suffering” it caused.

    1. There was no $50 trillion in wealth that was wiped out. What happened was that it was discovered that the $50 trillion in wealth had not actually been created.
      Only the accounting of it was created.

  13. The problem with economics is that it is so closely tied to politics, sociology, psychology and even evolutionary behavioralism that studying it in isolation is pure folly. Economics is about people making decisions about money, while politics is about people making decisions about power. The two are so closely tied that you can’t come to any meaningful economic conclusions without understanding the existing political situation (and this works in reverse too). An in depth look at the politics of Fannie Mae and Freddie Mac, along with a myriad of other government regulations and trade/tax laws, would have pointed out that things weren’t looking so good for the long term. But politicians don’t want to hear this and economists don’t generally want to report this. The two groups covered their eyes, ignored the problems and forgot the fact that the economy always has cycles of boom and bust.

    Now that the bust is here they find it easy to blame the one group of economists/politicians that had almost the least to do with the problem. These crass free market advocates and their libertarian bedfellows have the nerve to remind them that continuous political screwing with the economy can cause, or at least worsen, the bust cycle. So the best way to handle these naysayers (you know the ones who feel it might not be such a great idea to have a lot of people with balloon mortgages on houses costing 10x their yearly salary) is to blame them and their “capitalist” (When did capitalist become a bad word?) ideology for the bust.

    Until people in power start to realize that politics and economics are basically one and the same the stupidity shall never end.

    1. I’m pretty sure Public Choice econ has you covered there.

    2. **When did capitalism become a bad-word?**

      It always has been. I understand those who use capitalism to mean free market or laissez-faire (“Radicals for Capitalism” was a great book), but I think a great point can be made by a libertarian self-describing as a “free market anti-capitalist” given the history of the status quo that people generally consider capitalism.

      1. Except that a lot of people use “free market” as a pejorative as well, while often confusing it for crony-capitalism.

        1. I know the kind of people you’re referring to. Getting them to use the term “free market”, though, at least makes it possible to debate with them in the same language.

      2. Yup, I never talk about being pro-capitalism. It would guarantee that any point I try to make would be misinterpreted. I’m for free markets.

  14. The worst(?) thing about predictive models is that they fail to account for self-correction. Eventually, you run out of people to lay off. Eventually, you run out of “investments” which will provide a positive return. Eventually, you will run out of “qualified” borrowers.

    et c

    1. That doesn’t sound like a fundamental problem with predictive models. It sounds like inept model building.

      I know what you mean, though. I’m a Computer Science major. In the college courses, there’s a large amount of theoretical discussion of algorithms run on ideal machines that never run out of memory. Then you go work on software in the real world, where you have to worry about the user’s computer running out of memory all the time.

    2. Hmm, come to think of it, I came to the same conclusions as Hayek before I ever heard of Hayek because I had studied Computer Science.

      To a computer scientist it’s just obvious that the economy is a very complex network that could never possibly be centrally controlled. Part of the reason there are a lot of libertarian comptuer geeks.

      Computer Science is another science that isn’t a science, by the way.

  15. Ironically, it’s Keynesianism, the economics of government intervention and “expert” overseers of monetary policy, that uses the vast mathematical models.

    1. Keynes looses his shirt during the ’29 crash. Mises saw it coming and adjusted his livelihood expectations accordingly.

      Mises tells policy makers exactly the opposite of what policy makers want to hear in terms of what their actions should be. Keyens tells them what they want to hear.

      Whose views dominate the profession for the next half century?

      Yep, economics, its a human nature thing, both in practice and in theory.

    2. It’s more than just Keynesianism, not that anyone is really an old-school Keynesian anymore.

      Despite taking the opposite of Keynesianism, Friedman and the “Chicago School” were extremely mathematical.

      Indeed, they were successful at overcoming much of Keynesian belief through the use of mathematical models.

      Most economists use math (with the exception of Austrians) because it is very clear. There is no ambiguity like the stuff written by Keynes, Marx and others.

      I don’t think this crisis is a failure of economists using math, but a failure of some flawed understanding of human behavior and the vagaries of randomness.

      We can always learn more about human behavior and model it mathematically, but randomness will always haunt us.

      –Pingry

      1. Math is useful as a way of stating certain sorts of ideas more clearly, in the process of understanding them. But I don’t think you should confuse that approach, which Chicago school people indeed use, with the construction of large econometrics models, an enterprise which uses economics but isn’t really a part of economic theory.

        Alfred Marshall, who put modern economics together at the end of the 19th century, wrote somewhere that he worked his ideas out in mathematics then translated to English, and if he couldn’t translate to English he burned the math.

    3. The other thing to keep in mind is that politicians who invoke Keynes as justification for their action are just quoting the parts of Keynes economics that serve their purposes. Sort of like Christians who selectively quote the Bible.

  16. How exactly can economics be considered separate from all other social sciences? People make the economy. Goods and services don’t go around exchanging themselves.

    1. Just you wait for the underground robot economy! You’ll eat your words then.

  17. Economics that treat humans like passive particles in a mathematical model ignore the basic reality that other social sciences have long (or at least more quickly) accepted- the basic variability and unpredictability of human behavior. Thus, “Human Action” and Mises’s attempt to define his economics as “praxeology”. Same basic point, made better I think, by Hayek with the Knowledge Problem and Spontaneous Order.

  18. Actually, the fact that economic theories change, evolve, are overturned, and sometimes recycle old ideas makes it MORE scientific, not less.

    What science *doesn’t* evolve?
    Plus there are LOTS of cases where a theory in biology once thought to be wrong was recycled in a new form. Happens all the time. Like the constant back and forth between genetic and environmental factors.

    It’s really pretty dumb to proclaim that because economics has unanswered questions that the entire field should be discarded. That’s exactly how the creationists treat evolution. Not all questions are answered, and theories change … therefore believing God created it all is just as reasonable!

    1. Russ Roberts’ position is far from saying that the entire field of Economics should be discarded. He just wants Economists to be honest about how much of their “science” is really just philosophy. He came to his views on the status of Economics as a science reluctantly, by the way — he would like it to be a solid science.

  19. Peter Schiff stands up, looks around, points at Brooks and says-

    “Uh, I’m a product of years of study and practice withing the real world of market economics, and I predicted this crash in 2006.”

    So Brooks, please sit down and STFU. Just because you can’t find anyone who predicted the crash doesn’t mean no one did.

  20. I think econ has contributed some interesting technical innovations (Granger causation and IV/regression discontinuity models are pretty cool), and you have to give it credit for game theory. I also think it’s more internally consistent and systematic than the other social sciences. But that’s as far as my good opinions go: in terms of the predictive validity of its theories, particularly in the macro realm, I think it’s crap, and its pretensions to the precision of a hard science like physics or chemistry are nonsense.

  21. Austrian economics is BS. David Harsanyi said so on this very website.

  22. The best book in which to examine this crisis is ‘Extraordinary Popular Delusions and the Madness of Crowds’ by Charles Mackay.

    The manias and delusions this time extended to such knee slappers as –

    Home prices always rise.
    Creditworthiness can be modeled on the past.
    Ratings agencies are always right.
    The Ownership Society is here.
    Risk analysis is now unnecessary.
    Banks serve the public interest.

    Just picked up ‘The Big Short’ by Michael Lewis. The longs were all full of shit and deluded.

  23. I disagree about the testability thing. Granted, you can’t start an entirely new country and then screw with the laws to test economic theories – but all the world’s governments over the history of the world have adopted many many different policies, and the effects provide plenty of evidence to study. Indeed, half of all the studies done in medicine are based off of polls they do of people’s histories – i.e. not actually paying people to do anything, there’s no laboratory.

    Some examples are pretty undeniable. At one point, a newly-implemented minimum wage law accidentally applied to Puerto Rico, and within days there were tons of lay-offs and long lines of people trying to get jobs. There’s another similar example with one of the carribean islands that used to belong to England.

    Anybody who can read that and still deny that minimum wage laws cause unemployment when they’re high enough is in denial. And THAT’S the main problem – economics comes up with certain conclusions, but people don’t want to hear it. None of the positive statements about what policies end up doing are anything more than just common sense, but the human propensity towards denial is endless. Especially nowadays, with modern technology and freedom, a lot of people have become shrill pansies (mainly liberals) and don’t want to hear suggestions that maybe the world is the cruel place that it is. Doesn’t stop it from being true.

  24. The manias and delusions this time extended to such knee slappers as –

    We can run 9 and 10 figure deficits indefinitely.

    Adding more people and more benefits to health insurance will result in lower health care costs.

    Other nominations?

    1. “Other nominations?”

      How about:

      Let me be clear. The time for debate is over.

  25. Also the thing about predicting financial crises…

    If people who earn their living trying to predict economic trends and invest in the right places can’t predict shit like this, why does anyone imagine the government could?

    If anyone can predict anything about the stock market, they would bet on it in the stock market, and make money off of it.

    Interestingly, the government appears to be making money off of TARP. In part, perhaps, because they are able to artificially inflate housing prices to support the value of the toxic assets they’ve been acquiring.

    How is this different from a monopoly manipulating market prices to profit itself. It’s exactly the same kind of coercive, manipulative power that progressives always think large corporations have. But the government has guns backing it up.

    1. Despite Brooks argument to the contrary, many economists did predict the crash and have made a bundle off of it.

  26. Economics is a SOCIAL science. It ain’t physics, and attempts to turn it into physics fail.

  27. I absolutely must share this Brooks article with my math finance colleagues. They get very, very upset when people start blaming the mathematical models for the mess we’re in. With the incredibly perverse incentives brought about by govt interference in the markets, and the fraudulent behavior of Fannie and Freddie in mischaracterizing the subprime loans on their balance sheets, it’s a classic case of garbage in, garbage out. But of course Brooks can’t blame the govt for this — it has to be those nerdy math people’s fault.

    1. Why stoop to a pedantic exercise with Fannie/Freddie? Their bondholders haven’t lost a dime (thanks to the implicit guarantee by the government).

      Test the totally unregulated I-banks that really blew up the credit markets. (Lehman, Bear, and Merrill).

      Look for the real killers, OJ.

      1. Why stoop to a pedantic exercise with Fannie/Freddie? Their bondholders haven’t lost a dime (thanks to the implicit guarantee by the government).

        No price was paid, but the cost remain the same(as traditional micro-eco would have told you). Trillions covered by the tax payer.

        Test the totally unregulated I-banks that really blew up the credit markets. (Lehman, Bear, and Merrill).

        Aside from the reality there is no such thing as a non regulated financial market (how did the market advantage of these big houses come about in the first place, hmm?), look into the product that was being sold — securitization of the debt that official government and quasi-government (for you Fed pendants) policy promoted and implicitly backed as well.

        If any of these firms ever considered the possibility that they could go into receivership and be auctioned off and taken apart by a thousand bidders looking to take their place if things wnet South, they would have been much more careful. That was never going to happen, and they knew it because they were doing their part to promote the ownership society.

        1. True about the cost occurred on FNM/FRE debt.

          But Lehman did go into receivership. The other two were sold at fire sales to avoid more market roil.

          And the government explicitly avoided backing I-bank debt – the were NON-conforming loans for the most part.

          The Fed had no resolution authority on the I-banks until they gained Discount Window status after the crisis hit full head.

          The MBS these guys packaged were free-agent MBS that FNM/FRE would never touch.

          1. The Fed had no resolution authority on the I-banks until they gained Discount Window status after the crisis hit full head.

            That is the official line I expected for your answer but it doesn’t square with the facts. Lehman was pushed to achieve Paulson and Bernanke’s objective of passing TARP to save their friends at some places I noticed you conspicuously did not mention. Also, the Fed already had the authority to prevent the crises but chose not to to further an agenda.

            Less this comes across as the tract of a right wing ‘market doomer’, I’ll limit my sources to leftwing and mainstream sources to under line my two points. With one hand tied behind my back, here we go (okay, I’m actually cribbing because I have had these saved for over a year to punch joe around with before that weasel left. You are not a weasel though but it is an excellent time to use them)!

            Here is economist economist Dean Baker writing in Counterpunch:

            “Last September, when he (Bernanke) was telling Congress that the economy would collapse if it did not approve the $700 billion TARP bailout, he warned that the commercial paper market was shutting down.

            This was hugely important because most major companies rely on selling commercial paper to meet their payrolls and pay other routine bills. If they could not sell commercial paper, then millions of people would soon be laid off and the economy would literally collapse.

            What Mr. Bernanke apparently forgot to tell Congress back then is that the Fed has the authority to directly buy commercial paper from financial and non-financial companies. In other words, the Fed has the power to prevent the sort of economic collapse that Bernanke warned would happen if Congress did not quickly approve the TARP. In fact, Bernanke announced that the Fed would create a special lending facility to buy commercial paper the weekend after Congress voted to approve the TARP.

            But what does a commie writing for Cockburn know, right? Here is the New York Times editorial page on those poor Kehman bros. outsiders:

            Mr. Nocera says that almost everyone he’s ever spoken to in Hank Paulson’s old Treasury Department agrees that without the immediate panic caused by the Lehman default, the government would never have agreed to make the loans needed to save A.I.G., a company it knew very little about. In effect, the Lehman bankruptcy caused the government to panic, which in turn caused it to save the firm it really had to save to prevent catastrophe. In retrospect, if you had to choose one firm to throw under the bus to save everyone else, you would choose Lehman…. it is quite likely that the financial crisis would have been even worse had Lehman been rescued. Although nobody realized it at the time, Lehman Brothers had to die for the rest of Wall Street to live.

            That is just opinion page mumbo jumble, what was actually happening on the ground that would prove any of this speculation?

            On Tuesday, Sept. 16, the run on Reserve Primary continued. Between the time of Lehman’s Chapter 11 announcement and 3 p.m. on Tuesday, investors asked for $39.9 billion, more than half of the fund’s assets, according to Crane Data.

            “Reserve’s trustees instructed employees to sell the Lehman debt, according to the SEC.

            “They couldn’t find a buyer.

            “At 4 p.m., the trustees determined that the $785 million investment was worth nothing. With all the withdrawals from the fund, the value of a single share dipped to 97 cents.

            “Legg Mason, Janus Capital Group Inc., Northern Trust Corp., Evergreen and Bank of America Corp.’s Columbia Management investment unit were all able to inject cash into their funds to shore up losses or buy assets from them. Putnam closed its Prime Money Market Fund on Sept. 18 and later sold its assets to Pittsburgh-based Federated Investors.

            “At least 20 money fund managers were forced to seek financial support or sell holdings to maintain their $1 net asset value, according to documents on the SEC Web Site.

            “When news that Reserve Primary broke the buck hit the wires at 5:04 p.m. that Tuesday, the race was on.” (Bloomberg)

            What? A run on paper, and not toxic assets? That is not the conventional narrative we have been sold!

            How did the story we all know and love get sold and bought by the congress?

            From the UK Telegraph (okay, I’m cheating a little, they are more on my end of the spectrum, but still . . .)

            On Thursday night, the Treasury went literally down on his knees before Nancy Pelosi, speaker of the House of Representatives, begging her to agree taxpayer money to bail out the financial system. Bernanke, a scholar of the financial panic that caused the Great Depression, told fearful lawmakers there wouldn’t be a banking system in place by Monday morning if they didn’t act. Paulson talked openly about planning for martial law, about how to feed the American people if banking and commerce collapsed.

            OMG! OMG! OMG! Food lines stretching miles long. How did you save us, Mr. Paulson! Did you put that big chunk of TARP money to good use?

            On Oct. 7, the Fed creates the Commercial Paper Funding Facility to backstop the commercial paper market. Two weeks later, Bernanke announces the Money Market Investor Funding Facility to make loans of longer maturities.

            Oh, you went about doing what you could have done in the first place but stalled to get TARP passed. You are a tricky one, Mr Paulson, I’ll give you that!

            Once more, Dean Baker

            “Bernanke was working with Paulson and the Bush administration to promote a climate of panic. This climate was necessary in order to push Congress to hastily pass the TARP without serious restrictions on executive compensation, dividends, or measures that would ensure a fair return for the public’s investment.

            “Bernanke did not start buying commercial paper until after the TARP was approved by Congress because he did not want to take the pressure off, thereby leading Congress to believe that it had time to develop a better rescue package. (“Did Ben Bernanke Pull the TARP Over Eyes?”, Dean Baker, The American Prospect)

            1. Substantial post. I have added it to my calender for Saturday.

              I respect Dean Baker.

              I will reply.

              1. The Fed can lend money to whoever it wants… just not through the discount window.

                So, your example isn’t exactly right.

            2. Addendum:

              How did you save us, Mr. Paulson! Did you put that big chunk of TARP money to good use?

              Compared to the size of the losses and size of the financial markets, TARP was a mere few quarts in the bucket. Not enough to really make a difference in economic performance of the over all economy in the short term. However, what it did make possible, those institutions that long played ball with the goals of Washington, favored interests, once again gained competitive advantage against outsiders who were ready to pounce and gain market share.

              The most dire long term consequence of TARP is that players driving the malinvestments were not driven out of the market and this was done at the expense of those with more sound portfolios, and the long term soundness of the market.

              Still, when Pelosi sits them down and tells her grandchildren how she helped prevent the collapse of civilization and the return of the dark ages, its going to be an incredible story.

      2. Test the totally unregulated I-banks that really blew up the credit markets. (Lehman, Bear, and Merrill).

        Totally unregulated?

        Fantastic. (thinking of a joke about a woman who went to finishing school and learned to say “fantastic” instead of “bullshit”)

    2. Tulpa: I don’t think that the argument is that the math models caused the problem; rather it is that many of the math models missed the problem.

    3. I do blame the models. If the ratings had been correct, the derivatives would have been priced differently, and would have resulted in a quicker shut off of the cashflow to the mortgage market. Investors would have had correct signals that this was a high-risk, rather than a low-risk investment, relative to the return.
      Banks would consequently not have invested their reserve capital in MBS and consequently would not have been overleveraged when the market collapsed.

      However, even beyond that, the cartel status of the ratings agency is a problem. People need honest ratings, and to get honest ratings there needs to be competition. Simply regulating the ratings agencies so that people can’t pay for ratings would NOT have caught this problem, since the problem was not one of conflicts of interest, it was one of laziness.

      If the ratings agencies were constantly being evaluated by investors for the accuracy and performance of their ratings, the ratings agencies would be much more alert for errors in their predictions.

      1. If the ratings agencies were constantly being evaluated by investors for the accuracy and performance of their ratings, the ratings agencies would be much more alert for errors in their predictions.

        But…I thought the market always took care of providing unbiased information to customers?

        What does this do to the beloved “ad Underwriterorum Laboratorium” argument when libertarians are questioned about how consumers can make sure there aren’t rat droppings in their hot dogs without any mandatory inspection regime.

    4. Brooks has it a little bit wrong. He quotes Russ Roberts, but on Russ Roberts’ podcast he has interviewed people who worked on mathematical models who said they did see it all coming. They worked for managers who didn’t want to hear about it.

  28. Nassim Taleb (of Black Swan fame) released a draft chapter of an upcoming book that discusses the error of rationalism…specifically as it applies to dismal sciences like economics. Not sure it all hangs together, but it does make a few good points about what we know and what we think we know…which might easily be applied to pseudo-scientific pursuits like economics.

    1. oops. here’s a link http://www.zerohedge.com/sites…..tTony2.pdf

      1. Ugghh – Zerohedge. A conspiracy site for market doomers.

        Their pockets should be thoroughly picked clean by now.

        1. just try not to let the bias you have for the URL get in the way of the PDF attached to it.

          1. Point taken. I have no problem with Taleb (have not read his book but listen to him on Bloomberg). He is very bright.

  29. David Brooks has a great point about mainstream economics. It has a lot more in common with the Court Astrologers and Magicians of old than any actual science. So-and-so Economist at the Treasury Department is the same sort of yutz who faced Moses 3500 years ago.

    I should point out, in a delicious twist, that the crisis was predicted both by Austrians and Marxists. The Austrians could have told you that a huge increase in money and credit would misalign production and cause a bust. The Marxists could have told you that the overproduction of financial products by the capitalist classes, and the Capitalist State’s purchases and subsidies to them, would cause massive misalignments.

    But hey, Paul Krugman~!

  30. Like to know where that $50 Trillion number came from. An Economist maybe?

  31. Brooks does have a point. Many economists have as much ability to predict the future as the psychic hotline. But this is all the more reason to adopt a laissez-faire standard, since not even an economist can predict the outcome of any policy designed to help the economy.

  32. Unfortunately, I don’t think Brooks would tend toward the Austrian or Public Choice schools or Experimental Economics, but rather Behavioral Economics and its ugly, mustachioed sister, libertarian paternalism.

    Rather than adopt the attitude that no ones knows enough about others’ business to rule, he believes that no one knows anything, and therefore must be ruled.

    1. I don’t think behavioral economics necessarily lends itself to paternalism. As long as you don’t believe that government officials and institutions are somehow immune from the psychological factors driving economic decisions (and clearly, they’re not).

  33. “…the modelers began to believe what the outputs from their models rather than what the real world was trying to tell them.”

    For a second there, I thought I was reading about climatologists, not economists.

  34. As all too often happens, the modelers began to believe what the outputs from their models rather than what the real world was trying to tell them.

    I am reminded of the neo-classicists assertion that positive externalites prevent privately funded lighthouses from existing. They of course did exist back before the economists convinced governments to fund them.

    1. Yes, it amuses me too. Oldschool neoclassicists ignored (or didn’t understand) that externalities don’t matter if transaction costs are low. Coase was the first to really point this out.

      This is naturally the way things work. Some economists is convinced that coercion should be used to fund something, this then makes non-coercive means unprofitable and they fold up. Then gradually, bit, by bit coercive measures expand.

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