Never too old to learn

There was an article on Alan Greenspan the other day in The Business Australian about his new book The Map and the Territory in which he made an interesting set of observations, both political and economic. First the political:

ALAN Greenspan, the former chairman of the US Federal Reserve, goes to a lot of parties. He and his wife, the TV journalist Andrea Mitchell, ‘sort of get invited everywhere’, he says, sitting in front of the long bay window in his office in Washington.

Lately, though, cocktails and dinners seem to have guest lists drawn almost exclusively from one political party or the other. ‘It used to be a ritualistic 50-50 at parties – the doyennes of culture and partying were very strict about bipartisanship,’ he adds. ‘That doesn’t exist any more.’

Talking to each other is what much of politics is about. Although there’s not a lot to say for Canberra, it is small enough that you are always bumping into people and the informal side of making contacts helps. Now we find the former more collegial atmosphere in Washington has been superseded by a poisonous rancour to such an extent that people don’t even meet each other any more.

Even here, the kind of viciousness that seems to have invaded Gillard’s speech on misogyny was personal and would have made it much more difficult for Abbott to even pretend to have a friendly relationship with the then-Prime Minister. As I learned in industrial relations, you can only settle a dispute by sitting down with the other side. Turning opponents into visceral enemies cannot be good for getting on with the business of getting things done. “Electricity Bill” Shorten travelling to Afghanistan with Tony Abbott is how these things ought to be.

But it was what Greenspan says about economics that I found perhaps even more interesting.

‘I’ve always considered myself more of a mathematician than a psychologist,’says Greenspan. But after the Fed’s model failed to predict the financial crisis, he realised that there was more to forecasting than numbers. ‘It all fell apart, in the sense that not a single major forecaster of note or institution caught it,’ he says. ‘The Federal Reserve has got the most elaborate econometric model, which incorporates all the newfangled models of how the world works – and it missed it completely.’

Econometric models are based on the past so that they can really only forecast the kinds of events that have happened before. But even after the event, I would have to think that the linkages from the housing market to the world’s financial system would have made forecasting what did happen all but impossible, which is why no one did. Many claim they did but no one did. So the story goes on:

‘A few days (after the crisis hit), I run into an article, and it is titled, “Do we economists know anything?”‘ he says.

Greenspan set out to find his blind spot step by step. First he drew the conclusion that [A] the non-financial sector of the economy had been healthy. The problem lay in finance, [B] because of its vulnerability to spells of euphoria and irrational fear. Studying the results of herd behaviour provided him with some surprises. ‘I was actually flabbergasted,’ he says. ‘It upended my view of how the world works.’

He concluded that fear has at least three times the effect of euphoria in producing market gyrations.

A bit of economic history and a study of the history of economics would not go amiss. The man who invented the term “irrational exuberance” now says he’s just discovered that “irrational fears” drive markets. Middle stages of dementia, obviously.So please let me point out that so far as [A] was concerned, the problem was the housing market which had over-produced and found a sub-prime market amongst those who could never repay their debts. This was a real problem, not financial and not psychological. The underlying structure of the American economy was fantastically distorted and has become even more so with the coming of the stimulus. He needs to read a bit of pre-Keynesian business cycle theory, or if he would like a short cut, he could read my Free Market Economics.

And so far as [B] goes, if he thinks that fears that mounted at the end of 2008 were mere shadows with no substance then he is even more off centre than he thinks he is. If this is the new wisdom in Washington, I can only think it would be better if both sides stop inviting him to parties if that is what he now has to say.

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14 Responses to Never too old to learn

  1. Georg Thomas

    I never cease to admire and promote Steve Kates’ superb “Free Market Economics”, such as in this post in a blog to which I make contributions on a regular basis.

  2. He concluded that fear has at least three times the effect of euphoria in producing market gyrations.

    I didn’t need Greenspan or anyone else to tell me that, the ASX graph tells you that anytime. The forward lean? That’s the slower rises followed by faster falls. It tells you that you have time to react to a rise, but falls can be instantaneous.

    Why is caveat emptor not the very first economic lesson taught in school?

  3. H B Bear

    Even here, the kind of viciousness that seems to have invaded Gillard’s speech on misogyny was personal and would have made it much more difficult for Abbott to even pretend to have a friendly relationship with the then-Prime Minister.

    Gillard, like many in the Labor party, has never progressed beyond undergraduate student politics. It didn’t help that she was advised by a UK import, class based, intellectual pygmy like McSporran – although that would have merely reinforced Gillard, Conroy and others world view.

  4. Louis Hissink

    The reason the Fed missed it is simple – their econometric forecasts are based on the error form plotting prices versus time under the assumption that the value of that statistic is functionally related to time itself. It’s not. It’s tantamount to asserting that the price of a carton of eggs depends on where that carton eggs is on the rotating earth, along its orbit around the sun.

    BS.

    Doesn’t matter what complex econometric equation one comes up with, plotting any economic statistic versus time is only applicable as a means to show what happened during the past as an aid in understanding, but there is NO functional relationship between that economic statistic and time, and so nothing can be forecast or predicted from that statistic. That’s what Keynes’ never understood, but Mises did. That’s why the Fed will ALWAYS miss it.

    The origin for all this misunderstanding has to be Marxism and the belief in the historical inevitability of progress, whether as a species biologically or in an economic statistic such as wages always increasing with time, or history. It’s the confusion between correlation and causation, whether in economics or climate studies or other soft science areas of study.

    And Greenspan doesn’t get it either, from Steve’s post. It’s why all socialist economies tank over time, apart from not understanding socialism being post modern subsistence.

  5. Bruce

    The man who invented the term “irrational exuberance” now says he’s just discovered that “irrational fears” drive markets.

    Markets are simple things. They require a willing seller and a willing buyer.

    When there is a paucity of willing sellers the price goes up. When there is a lack of willing buyers the price goes down.

    If there are no buyers at all, because they are all scared, then the price will crash since the sellers are scared too (and sometimes are also unwilling sellers).

    And he has just worked this out? Give the man a Nobel prize!

    There is one limit to this process: terminal velocity. Which is the speed that margin calls cause indebted traders to reach as they pass the 5th floor on the way to the sidewalk below.

    Greenspan’s proteges, by pumping away at QE-forever, are blowing a big hairy bubble which is not supported by fundamentals. The only way that fundamentals might catch up is if microeconomic reform could reduce the barriers to carrying out business, and in the US that is not going to happen. So put some pillows on the sidewalk: the traders on margin will be briefly grateful.

  6. Rabz

    Why is caveat emptor not the very first economic lesson taught in school?

    Because everything bad that happens to anyone is always the fault of someone else.

  7. Andrew

    Gillard, like many in the Labor party, has never progressed beyond undergraduate student politics. It didn’t help that she was advised by a UK import, class based, intellectual pygmy like McSporran – although that would have merely reinforced Gillard, Conroy and others world view.

    Hey, don’t knock Mc457. He is a national hero – his elevation of Our Lady of Altona as the Patron Saint of Wymin bought her an extra 18 months. Instead, Mc457 kept Krudd out until the ALP was not only unwinnable but looking at minor party status. The bloke should be given citizenship, and a steady job as host of Queers & Alarmists.

  8. Steve, firstly, love your work.

    Secondly, is it possible for Greenspan, a former Ayn Rand acolyte, who has worked at the highest levels for so many years to be so obtuse or is he being disingenuous?

  9. I am the Walrus, koo koo k'choo

    Studying the results of herd behaviour provided him with some surprises. ‘I was actually flabbergasted,’ he says. ‘It upended my view of how the world works.’

    This guy was head of the Federal Reserve for what, twenty years.

    And be didn’t know the most basic thing about financial markets??

    Jesus H. Christ.

    I’m really beginning to think the problem in economics is that it simply doesn’t attract the brightest kids. They all go to study medicine, or law, or if they study economics they leave to become bankers.

    What a cretin. What a disaster for the world.

  10. johanna

    “fear has at least three times the effect of euphoria in producing market gyrations.”
    —————————————————-
    For a guy who claims to be an expert in econometrics, he makes a lot of unsubstantiated claims.

    How did he come up with “at least three times?” What does that even mean?

    Apart from acknowledging that there are scares and bubbles in the market (well, der) – what has his article done to add to the sum of human knowledge?

  11. Token

    Why is caveat emptor not the very first economic lesson taught in school?

    The first lesson I learned about economics is that everything is taught with the qualifier “ceteris paribus”.

    One would think that would be warning enough.

  12. Token

    Secondly, is it possible for Greenspan, a former Ayn Rand acolyte, who has worked at the highest levels for so many years to be so obtuse or is he being disingenuous?

    Another gem of home spun wisdom I’ve found is this quote – “You can learn a lot about people by the company they keep.”

    …his wife, the TV journalist Andrea Mitchell…

    Remember this famous bit of MSNBC doctoring of Romney? Who was the presenter?

    NBC has been caught AGAIN using edited footage to fabricate lies and distort the truth to suit their own liberal agenda. Andrea Mitchell (a lying, liberal “journalist”) uses an edited video to portray Romney as out of touch after his comments about the amazing touch screen technology used to order a sandwich at a local Wawa. What she didn’t show you was the nearly 3 minutes of remarks about government inefficiency that led up to his Wawa comments and put them into context. Yet another example of the liberal media lying and misleading the American people in order to acheive their liberal agenda.

  13. .

    Can he get a gig at ACIL Allen?

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