The Failure of the Economy&the Economists - The New York Review of Books »
Posted By deathray 5 months, 3 weeks ago in Business & FinanceBy now there are few people who do not acknowledge that the major American financial institutions and the markets they dominate turn out to have served the country badly in recent years. The surface evidence of this failure is the enormous losses— more than $4 trillion on the latest estimate from the International Monetary Fund— that banks and other lenders have suffered on their mortgage-related investments, together with the consequent need for the taxpayers to put up still larger sums in direct subsidies and guarantees to keep these firms from failing. With nearly 9 percent of the labor force now unemployed and still more joining their ranks, industrial production off by 13 percent compared to a year ago, and most companies' profits either falling rapidly or morphing into losses, it is also evident that the financial failure has imposed huge economic costs.
Read Full Story at nybooks.com »
329 Views Share Story 18 Comments Report
Submitted By:
deathray
Hm...summarizing a life...Investment banker, sailor, unintentional gourmet cook. Ex US Naval officer, also Foreign Service. Split my time between NYC and Miami Beach ...
RSS Join the Discussion
+ Add CommentComments So Far: 18 (view all)
-
100%
deathray5 months, 3 weeks ago
This comment is below the standard viewing threshold View It »
this is pretty wonky stuff...but if akerloff and shiller are right (and i believe that they are,) a lot of the assumptions non-economists make about the world are a direct result of the lack of insight economists have about how psychological processes affect the marketplace.
Reply
FTA:
"Akerlof and Shiller identify five distinct elements in what they call "animal spirits": confidence, or the lack of it; concern for fairness, that is, for how people think they and others should behave—for example, that a hardware store shouldn't raise the price of snow shovels after a blizzard despite the increased demand; corruption and other tendencies toward antisocial behavior; "money illusion," meaning susceptibility to being misled by purely nominal price movements that, because of inflation or deflation, do not correspond to real values; and reliance on "stories"—for example, inspirational accounts of how the Internet led to a "new era" of productivity. The omission of these five aspects of "animal spirits," they argue, blocks conventional economics from either understanding today's crisis or providing useful ideas for dealing with it." -
100%
deathray5 months, 3 weeks ago
This comment is below the standard viewing threshold View It »
Also, FTA:
Reply
"Most of Animal Spirits consists of surveys of disparate research programs in which either Akerlof or Shiller or both have participated—in many cases, led the way—demonstrating that the conventional economic models fail to fit the facts of one or another aspect of observable economic behavior. The topics they cover include (among others) joblessness, saving, the volatile prices of financial assets and of real estate, and the prevalence of poverty among African-Americans. Akerlof, a professor at Berkeley who deservedly won the Nobel Prize in 2001, and Shiller, a Yale professor who in time should do likewise, are both outstanding economists, and the work they review in each of these areas of research is of high quality. In this respect, their book is similar to recent offerings by other scholars that have also presented for a broader audience many of the findings of what has come to be known as "behavioral economics."[3] " -
100%
gamahuche5 months, 3 weeks ago
This comment is below the standard viewing threshold View It »
This was the bit I liked - and was able to understand, even after being up all night..
Reply
Its a good effort to remove the dismal label from economics!
FTA
The economists George Akerlof and Robert Shiller suggest a third reason. In their view, the problem is also intellectual—a systematic failure of thinking on the part of their fellow economists. Taking the title of their new book from a phrase famously used by John Maynard Keynes, Akerlof and Shiller argue that what is missing in the worldview of today's economists is sufficient attention to "animal spirits," by which they mean the psychological and even irrational elements that figure importantly in so many other familiar aspects of personal choices and personal behavior, and that, they believe, pervade economic behavior too.-
100%
deathray5 months, 3 weeks ago
This comment is below the standard viewing threshold View It »
i am an advocate for behavioral economics
Reply
that economics is viewed as distinct from the human sciences has always struck me as somewhat disingenuous. economics, ultimately, is the science that defines the domain of the tension between greed and the greater good.
-
-
-
100%
cowboygrandpa5 months, 3 weeks ago
This comment is below the standard viewing threshold View It »
FTA:
Reply
"Further, the latest financial crisis is a sharp reminder that the simple operating expense of running the financial system—including profits of financial firms—is not the only cost if this system also exposes the economy at large to episodic losses in production and incomes, and to the need for taxpayer subsidies. Today those losses are mounting, and so are the subsidies. Many US banks, including some of the largest ones, are now insolvent. The bank rescue plans offered to date by both the Bush and the Obama administrations amount to ever more expensive fig leafs for avoiding concrete recognition of this sad development.
In the same effort, the Financial Accounting Standards Board—the independent organization designated by the SEC to set accounting standards—acting at the strong urging of Congress, recently changed its rules to allow banks more latitude to claim that assets on their balance sheets are worth more than what anyone is willing to pay for them. (Next time you apply for a loan, try mentioning FAS 157-4 and telling your banker that you should be allowed to calculate your net worth with your house priced not at what comparable houses are selling for now but at what you paid for it and what you hope you'll get for it if you hold on to it for some years. The banker will laugh, even while the bank applies just such standards to its own balance sheet.)
Another fundamental issue that the current discussion has overlooked almost entirely is the distinction between the losses to banks and other lenders that reflect genuine losses of wealth to the economy, and other losses that don't. When the value of your house falls, that's a loss of wealth to the economy as a whole. If you keep paying your mortgage, you bear the loss yourself: your net worth is diminished by the amount of the decline in the home's price. If you default on your loan, then someone else—maybe the bank that lent you the money, maybe some investor to whom the bank sold the loan—also bears part of the loss. If the government steps in and reimburses the bank, or the investor, the taxpayers will bear part of the loss as well. But however this loss is divided, what is inescapable is that someone, somewhere, will bear it. What much of today's debate is about is how these losses should be divided among homeowners, banks, loan-purchasing investors, and the taxpayers. But the loss must be borne by someone, and America's economy is poorer because it has occurred."
Voodoo economics at its worst. Saddle the tax payers with a mountain of debt so that a few gain wealth.
Yeah just let me use the FASB's standards of valuation. According to me my computer is worth $100,000.00. so I have an asset worth that to put as collateral on a loan right ???? LOL
If I default they can have my computer and sell it to cover the loss. Hahahahahahahaa
Liar economics. The one thing that bankers and wall street stock shills are good at.
Good article dr -
100%
lfergie8125 months, 3 weeks ago
This comment is below the standard viewing threshold View It »
When did we lose the accountability factor in business? When I first started working, if you screwed up, you were fired and given your last paycheck on the way out. Now it seem as though a CEO can go into a company and disrupt everything good about the company and get a bonus when he is replaced after it loses money. One only has to look at what happened at AIG to see there is a problem on the board of directors of big corporations and they were not the first to reward bad decisions.
Reply
Laws that were put in place to prevent the problem we have experienced in banking were removed by congress in 1999 with none other than Phil Gramm pushing it through.
http://www.wsws.org/articles/1999/nov1999/bank-n01...
FTA
"The proposed Financial Services Modernization Act of 1999 would do away with restrictions on the integration of banking, insurance and stock trading imposed by the Glass-Steagall Act of 1933"-
100%
cowboygrandpa5 months, 3 weeks ago
This comment is below the standard viewing threshold View It »
"When did we lose the accountability factor in business? When I first started working, if you screwed up, you were fired and given your last paycheck on the way out."
Reply
That was lost, when money was deemed more important than the truth.
I too remember those days. Now if one at the top screws up the workers get fired because they cannot produce enough to cover the CEO's bull crap.
Management has become everything but management. It has become the "hole in the wall gang."
They perform illegal tranactions then are allowed to hide them in the bloated stock prices. They value assets at much more than they are worth, then take a write down that affectas the companies value at a later date.
Modern day bank robbers don't need guns. Hell they run the institutions they steal from and we pay the price. -
Neutral
rimbaud5 months, 3 weeks ago
This comment is below the standard viewing threshold View It »
You can't legislate responsible management and, for those at the top, getting fired from one company doesn't seem to inhibit their chances of getting better pay at another.
Reply
The "managers" where I work have very little exposure to the operational realities of our business... they spend their time poring over their spreadhseets and instituting bureaucratic controls.
-
-
100%
Spadecaller5 months, 3 weeks ago
This comment is below the standard viewing threshold View It »
Thanks DR
Reply
A well written article worthy of some thought.
FTA: "...there is a troubling lack of attention to reforms that might prevent such a crisis from recurring."
While it seems reasonable to assume that when a boat is leaking, one must concentrate more on the emergency of getting ashore before it sinks. Trying to figure out how the boat sprung a leak may be valuable on the next journey, but it is certainly a lesser priority in an emergency situation - so some people believe. That analogy, however, does not work with our economy that is barely staying afloat and springing new leaks as we paddle harder.
Unfortunately, our economy and unregulated mortgage and banking industries are severely dysfunctional and we do not have the luxury of giving our nation a remedy by only infusing funds, when at the same time the very reasons that led our nation into this financial abyss remain unchanged. Many of the same practices used by the mortgage industries and the banks are still in operation and will only increase the toxic atmosphere that we now know has left our nation in chaos.
Our economy is hemorrhaging and though our government is providing a transfusion consisting of large sums of money to stimulate the anemic economy, we must change the policies at once that are responsibly for this condition.
American manufacturing and labor also must be preserved and protected. Free trade has proven to be a complete failure as we must learn that regulated and fair trade must be adhered to in order to protect our nation's working class and its solvency. Without an affluent middle class, we have no one to buy American cars and products.
Seeking overseas markets are great, as long as they do not sacrifice employment at home. Exploiting cheap labor has proven to only profit the top executives on a short term basis, while causing severe hardship in our labor markets. In addition, the safety and quality of our products continue to decline. Unfair profit taking by American corporations abroad must be tempered and regulated fairly.
Yes, the need to return to good business ethics and to principles that will encourage quality manufacturing, ethical banking, fair labor, and sound lending must be implemented while this fusion of funds continues; otherwise we will be shoveling sh!t against the tide. -
100%
Progressive5 months, 3 weeks ago
This comment is below the standard viewing threshold View It »
Thanks for the invite...this is an interesting submission--though a bit wonkier than I'm up to these days.
Reply
FTA:
Some ideas now under discussion include stronger accounting rules and wider capital requirements, so that hedge funds and insurance companies and other nonbanks too would have to hold capital against their risk positions. There is also support for empowering the government to take "prompt corrective action" to force nonbanks to address problems in their balance sheets, or if necessary take them into receivership, just as it already can with banks. A more controversial idea is to reinstitute some form of the Glass-Steagall Act that, until Congress repealed it in 1999, barred commercial banks from also doing investment banking.
IMHO, these are all valid...As is Akerlof and Shiller's theory of "animal spirits".
I was never comfortable with the concept of reducing economics to mathematical formulae. It always seems to me that confidence is key, so behavioral economics will ultimately be the greater determinant. -
100%
alakazam5 months, 3 weeks ago
This comment is below the standard viewing threshold View It »
"...for purposes of macroeconomics—the study of the economy as a whole—most of the standard models do not admit the possibility of unemployment. The reason is not that no one knows unemployment exists. Rather, no one has figured out how to allow for it within the confines of sufficiently simple mathematics; and faced with the choice between excluding unemployment and sacrificing analytical simplicity, most macroeconomists have opted for the former.
Reply
To point to another example even more central to what is happening currently, the standard macroeconomic analysis today also does not acknowledge the existence of banking or other kinds of borrowing and lending. Instructive models of credit markets are certainly available.But incorporating them within the standard macroeconomic models would place too much strain on mathematical simplicity.
Akerlof and Shiller succeed, too, in demonstrating that conventional macroeconomic analyses often fail because they omit not just readily observable facts like unemployment and institutions such as credit markets but also harder-to-document behavioral patterns that fall within the authors' notion of "animal spirits."
------
So current macroeconomic theory has been developed by people who are just looking for an easy calculation instead of a detailed construct? Given the track record that sounds about right.
Allowing any facts that may complicate a theory to be ignored is a real nice form of analysis if you really want to promote an idea irregardless of it's validity. It sounds real similar to acknowledging six feet of snow on a mountain trail that must be traveled but saying that since it would be difficult to actually prepare for that condition we should just ignore it and carry on as though it didn't exist.
An anthill keeps coming to mind. It seems to fit perfectly with the concept of macroeconomic modeling as being described in the article. Using an anthill as a model just doesn't work when trying to draw conclusions concerning people. It would be real nice to assume the productivity of people is similar to that of ants and everything runs along it's allotted path at it's allotted time but that simply isn't so.
Sounds more like wishful thinking than anything else.
Nice article DR. It's great to see someone take a new approach like this. -
100%
chevydog5 months, 3 weeks ago
This comment is below the standard viewing threshold View It »
Good post and a long read. I have to agree with Akerlof and Shiller that certain elements of what make people behave as they do have not been included in our thinking. Almost everyone who has learned economics has flinched at "homo economicus". The problem, as the review correctly notes, is to move from this recognition to a practical inclusion in policy-making. The irrational is not much loved because it is ... well ... irrational. IMHO this book does its job if it gets us to realizing that irrational reality is still reality; and somehow has to be taken into account.
Reply
More News
Daily Finance
Daily Blogwatch: Is it a crash -- or Dow 12,000? And, seven bizarre divorce settlements
Stocks in the news: Wells Fargo, Nokia, Walgreens, Novavax, UAL Corp.
Ray of light: ADP reports 'only' 169,000 private sector job cuts in November
Will holiday sales come up short? Not according to the stock market
Add a Comment
Sign In With Your Propeller Account
Please keep your comments relevant to this story.
To create a live link, simply type the URL (including http://) or email address and we will make it a live link for you. You can put up to 3 URLs in your comments. Line breaks and paragraphs are automatically converted — no need to use <p> or <br /> tags.