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 Now we find the former more collegial atmosphere in Washington has been superseded by a poisonous rancour to such an extent that people don’t even meet each other any more.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.