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Actually, no it's not. It was talked about alot at the time, from when Greenspan first called the stock market boom in the mid-1990's "irrational exuberance" in his now famous speech at the American Enterprise Institute.  But it was argued by most other policymakers at that time that 1) it was not the Fed's job to burst bubbles, and 2) how do you know for sure if it really is a bubble?  

Even now, there's no consensus anywhere that it's a central bank's job to burst asset bubbles of any kind, although fortunately that consensus appears to be growing.

by santiago on Thu Nov 4th, 2010 at 10:41:58 PM EST
[ Parent ]
Ad 1) Popping bubbles is the only thing monetary policy does better than fiscal policy. If you don't want to pop bubbles, then what's the point of having a central bank in the first place?

Ad 2) Simple: You poke it. If it blows up, it was a bubble.

In this particular case, you knock out the shadow banking system and the securitisation train(wreck). Those had to go anyway, since they were blatantly vehicles for regulatory arbitrage cheating the solidity requirements. (The central bank is permitted to object to blatant and organised counterfeiting of the currency, even in the neo-liberal fantasy world, right?) This is functionally equivalent to raising margin requirements, since the whole point of securitising and establishing a shadow banking system is to cheat the margin requirements.

If asset prices collapse when you raise margin requirements a little bit, then there was a bubble. If killing the shadow banking system causes margin requirements to rise by more than a little bit, then you have a corrupt banking sector, and it's time for housecleaning. If raising margin requirements a little bit does not cause asset prices to collapse, then you go back to business as usual, and nobody has been harmed (except the banks who had to foot a small increase in funding cost for a limited time - if they can't take that on the chin, then there was a bubble in the banking sector - and anyway it is relatively easy for the central bank to make banks whole; all it has to do is offer an overnight rediscount at a lower rate than its overnight reserves rate).

None of this is rocket science - all of this has been well known at least since the Panic of 1921.

- Jake

Austerity can only be implemented in the shadow of a concentration camp.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Fri Nov 5th, 2010 at 03:38:24 AM EST
[ Parent ]
It might work, but that doesn't mean central banks have any authority to do it. And how often has it ever been done, given that it is as easy and clear as you claim?
by santiago on Fri Nov 5th, 2010 at 03:58:20 AM EST
[ Parent ]
It was done in 1921. Not soon enough to avert a serious crisis, but soon enough that the real great depression didn't show up until ten years later. It was done in Spain and Sweden in the '90s. It was done

And of course the central bank has the necessary authority. The central bank controls the discount window, which is a perfectly fine way to reward banks that behave like you want them to behave and punish banks that don't. Simply drive the open market rate sky-high and offer to fund legitimate activities through the discount window... but only to banks that both behave properly and don't re-lend to poorly behaving banks.

For that matter, Greenspan could have simply not been a cheerleader. The fact that he was a cheerleader throughout his tenure (he actively lobbied for tax cuts at the end of Clinton's term; he actively lobbied against regulating credit default swaps; he actively lobbied in favour of adjustable-rate time-bomb mortgages; he actively lobbied in favour of pension privatisation; the list goes on) goes a long way towards incriminating him in and of itself.

Even granting the spurious assumption that these policies were not self-evidently moronic to anybody with a functioning brain and a bare minimum of familiarity with the way the financial system works, that sort of lobbying is clearly just as much or as little outside his remit as central banker as punishing banks for not exercising due diligence. You can't have it both ways: Either he was grossly out of bounds by cheerleading on the financial crazies, or he was well within his rights to curb stomp them, but decided not to.

- Jake

Austerity can only be implemented in the shadow of a concentration camp.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Fri Nov 5th, 2010 at 04:52:00 AM EST
[ Parent ]
The central bank has the tools, but not necessarily the authority. That power can be, and has been contested.  The existence of bubbles is still contested, as well, let alone that the central bank should try to do anything about them.  The examples you provided aren't examples of particularly successful outcomes, so they add to the ambiguity of policy not clarity. (I think Australia in 2002 is held up as the successful example of doing what you say.)

Whatever the case, there was just no political consensus for doing something like that at a central bank, and although it might seem like Fed chairmen are very powerful individuals, really they are just bureaucratic implementers of policy in a contested democratic arena and they can't do anything outside of an established political consensus or they'll quickly be shown the door, like anyone else.

by santiago on Fri Nov 5th, 2010 at 11:58:42 AM EST
[ Parent ]
The existence of bubbles is still contested,

The theory of evolution is contested in some quarters. The germ theory of disease is contested in some quarters. The theory of relativity is contested in some quarters. Hell, even heliocentric cosmology is contested in some quarters.

Only in economics are the crackpots who deny well-established phenomena put in charge of academia and allowed to "contest" empirical evidence they don't like.

The examples you provided aren't examples of particularly successful outcomes,

Say what? The Spanish and Swedish interventions in their financial markets were not successful? In which alternative universe?

Whatever the case, there was just no political consensus for doing something

That does not excuse Greenspan being a cheerleader. If he had been honestly doing his level best to bring sane policies to Washington and been obstructed by incompetent and negligent neoliberals every step of the way, then I could have cut him some slack. But he was one of the obstructionist neoliberal cheerleaders himself.

If being a neoliberal means that you are excused from being negligent and incompetent, then neoliberalism is a prima facie disqualifier for any public office more important than dog catcher.

- Jake

Austerity can only be implemented in the shadow of a concentration camp.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Fri Nov 5th, 2010 at 03:59:05 PM EST
[ Parent ]
The theory of evolution is not contested by any leading biologists, however. The concept of bubbles is nowhere near as clear at that. Bubbles are simply not well established phenomenon.  There isn't even a language for it, just a weak analogy to a airborne globes of soap and air.

Again, it's another example of something that seems to be a certain, but when you really try to pin it down explicitly, the thinking and evidence just isn't there yet to do it. There's no causality demonstrated yet in the whole bubble concept, so it just another gut judgment, among many others. And when gut judgments are involved, it's asking alot for a policymaker to go outside of the available consensus in a democracy.

The problem of bubbles is likely solvable, but it's not a "trivial" problem to do so, even if it seems apparently evident.  It's the kind of problem noted by the famous AI scientist, Judea Pearl, who first solved this puzzle which also seems straightforward but turns out to be difficult to show:

If the statement that if Oswald didn't shoot Kennedy, someone else must have is so apparently true, why isn't the statement if Oswald didn't shoot Kennedy someone else would have also true?

Most of social science has to do with similar statements in the subjunctive conditional tense, as are a substantial amount of questions in natural science too.

by santiago on Fri Nov 5th, 2010 at 05:09:04 PM EST
[ Parent ]
The theory of evolution is not contested by any leading biologists, however.

Only in economics...

Only in economics can you waltz into a reactor control room, disable all the interlocks, override all the warning klaxons, remove all the control rods and then proclaim startled surprise when the reactor goes supercritical.

I never really could picture the scene in the Chernobyl control room until now. But now I see it clearly:

Alan Greenspan walks in, and starts disabling the interlocks. An engineer walks up to him and asks:

Engineer: Are you quite sure you know what you're doing?

Greenspan: Of course. I'm operating the reactor.

E: Uh, yeah, I know that. But you really aren't supposed to disable those safety features.

G: Don't worry. I'm applying best practise as developed by the University of Chicago nuclear engineering division.

E: Didn't those guys have five meltdowns over the last twenty years?

G: Pish-tosh. You know how hard it is to see a meltdown coming. You only really know that you were building up to one after the fact. Can't blame a chap for an honest mistake.

E: Meaning no disrespect, sir, but we actually have a pretty good idea about how to prevent meltdowns. See, you make sure that you have enough control rods in the reactor core at all times, and...

G [interrupting]: Control rods? What silly nonsense! The reaction becomes much more efficient if you remove the control rods. Why, the only function served by control rods is to impair nuclear reactions.

E: Uh, yeah, that's sort of the whole point.

G: Shut up! I'm applying best practise as developed by the University of Chicago nuclear engineering division. Do you want to keep your job?

E: Sir, yes sir.

G: Good.

[Greenspan goes back to tinkering with the reactor. Five minutes pass.]

Reactor: KA-BOOOOM!

Greenspan [looking into the rapidly expanding fireball that's about to swallow him and the rest of the reactor crew]: Oooops. Well, can't blame a man for failing if he was giving his best effort.

The one obvious difference is that nuclear engineers only get to make one such colossal fuckup in their career.

Bubbles are simply not well established phenomenon.  There isn't even a language for it,

There is a perfectly fine language for it, developed by Keynes and Minsky. The fact that Greenspan's ideology made him discount that language does not mean that it does not exist.

There's no causality demonstrated yet in the whole bubble concept, so it just another gut judgment, among many others.

Bullshit.

That was the case in the late 19th and early 20th centuries. We have a hundred years' worth of data on the phenomenon by now. The fact that Greenspan subscribes to a garbage model of the political economy does not excuse his incompetence any more than the fact that a paediatrician is a germ theory denier would excuse failing to vaccinate the children in his care.

If the statement that if Oswald didn't shoot Kennedy, someone else must have is so apparently true, why isn't the statement if Oswald didn't shoot Kennedy someone else would have also true?

That is trivial. The second statement discusses what might have been if whomever shot Kennedy that day had not shot him. Whereas the first statement confines itself to describing the history that actually did occur, where Kennedy was shot.

None of which has any bearing on whether it was Greenspan's job to kill the shadow banking system, kill the unregulated derivatives, kill the TBTF banks and thereby kill the bubble.

I always felt that this entire line of conversation was a surreal deja vu, and I've finally pinned down precisely where I've seen it before. It starts three minutes in:

And continues here:

- Jake

Austerity can only be implemented in the shadow of a concentration camp.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Fri Nov 5th, 2010 at 05:58:45 PM EST
[ Parent ]
There is a perfectly fine language for it, developed by Keynes and Minsky. The fact that Greenspan's ideology made him discount that language does not mean that it does not exist.

Don't forget Irving Fisher's Debt-Deflation Theory of Great Depressions. In point #19 Fisher postulates that the one factor that accounts for great crashes is an excessive build-up of debt. This 20 page paper was published in Econometrica in 1933 and was immediately ignored.

While it is not true that there was no theory of bubbles in economic theory it is true that there is no theory of bubbles in mainstream US economics. They have actively excluded and marginalized the works of Fisher, Keynes and Minsky that deal with the subject. They don't even include debt as a factor in their considerations. This was the grounds on which Bernanke, in the 1990s, dismissed Fisher's work as irrelevant.

The "mainstream", via their gatekeepers, exclude from their theories time and debt, require that their econometric model, the General Dynamic Stochastic Equilibrium Model analyze the entire economy as though all decisions are made by a single rational actor and are unable, from what they accept into their theories, to account for profit and they refuse to acknowledge alternative approaches that do incorporate time and debt and that do include multiple sectors into their econometric models and which can derive wages and profits directly as a function of time from the models.

As the Dutch said while fighting the Spanish: "It is not necessary to have hope in order to persevere."

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Fri Nov 5th, 2010 at 08:52:46 PM EST
[ Parent ]
While it is not true that there was no theory of bubbles in economic theory it is true that there is no theory of bubbles in mainstream US economics.

I'm well aware of that fact.

This does not justify Greenspan's ideological excesses, any more than the fact that there was no mainstream opposition to it at the time justifies the Tuskegee experiment. "But the rules of the time said I was allowed to" didn't cut it as a defence at Nürnberg, and it doesn't cut it as a defence today.

- Jake

Austerity can only be implemented in the shadow of a concentration camp.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Fri Nov 5th, 2010 at 09:24:01 PM EST
[ Parent ]
Do you think I am disagreeing with you?

As the Dutch said while fighting the Spanish: "It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Fri Nov 5th, 2010 at 10:05:53 PM EST
[ Parent ]
No, but I still think it's important to point it out.

- Jake

Austerity can only be implemented in the shadow of a concentration camp.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Sat Nov 6th, 2010 at 12:01:58 AM EST
[ Parent ]
You're missing the point.  The Oswald-Kennedy puzzle (on which you don't have the right answer, incidentally -- outside of mere intuition, which isn't science, you haven't demonstrated why what did occur in the past (observation) is necessarily more compelling than what might occur if the past were different) is important because it is an example of a counter-factual conditional problem -- things that might be true based on what we can observe, but because we can't actually observe the phenomenon directly, and must instead substitute conception for observation, it could just as well not be true. If Oswald didn't kill Kennedy, someone else could have, but we'll never be able to know for certain because Oswald ruined any possibility of testing any other hypothesis, not because it false.

Same with a bubble.  If asset values of a certain class are increasing, it certainly could be a harbinger of disaster, but if we intervene to try to change the event, we'll never know. Another example: in the lead up to the invasion of Iraq, the pro-war argument frequently was that if Allied forces had intervened more aggressively against Hitler before he invaded Poland and Czechoslovakia, WWII would have been thwarted, ergo, we should stop Sadaam now before he becomes another Hitler. That's a bubble argument, and it assumes that the conditional -- WWII would have been avoided if the Allies attacked Germany instead of the other way around -- is true, when it is only one possibility among others.  

The historical record of intervening in bubbles, based on the attempts you cited and the poor outcomes that occurred nonetheless, are good reasons to be wary of concluding that intervention to "pop" asset bubbles actually does any better than doing nothing, particularly if you consider the possibility of false positives when identifying bubbles.

by santiago on Sat Nov 6th, 2010 at 03:21:39 AM EST
[ Parent ]
Same with a bubble.  If asset values of a certain class are increasing, it certainly could be a harbinger of disaster, but if we intervene to try to change the event, we'll never know.

This is missing the point.

The point is that the action you take to pop bubbles is perfectly harmless if there is, in fact, no bubble. It's like having an alien invasion by a species that's vulnerable to nerf darts. You then shoot Kennedy with a nerf dart. If he keels over from the nerf dart, then he was an alien impostor. If he isn't an alien impostor; well no harm, no foul.

The first and most important thing is to properly police your financial system. And already at this very preliminary stage, we start seeing Greenspan's record of unsuitability for any regulatory function that deals with the financial industry:

  • In 1999, he was lobbying Congress to repeal Glass-Steagall. This, alone and in itself, is prima facie evidence that he was unfit for any regulatory duty involving the financial system. He had no obligation, political or institutional, to lobby against responsible regulation of the financial system, he did not need to pander to anybody at the time by doing so, and he had the perfect excuse for not supporting the bill that it would be inappropriate for him to use his position at the Fed to lobby Congress.

  • In the late 1990s, Greenspan and Rubin fought a running battle with the Commodities Future Trading Commission to prevent the latter from regulating credit default swaps. All the above considerations about Greenspan's hands being wholly unforced apply here as well, making this another cardinal sin committed of his own free will.

  • He encouraged people to take out option adjustable-rate mortgages at a time of historically low interest rates. There is no economic theory, left, right or centre, where this advice makes sense, unless you are deliberately trying to inflate housing prices.

And that's just the three best known examples of Greenspan not wanting to do his job (and making it harder for his successors to do his job for him to boost). It's not like they're the only ones.

Having a properly regulated financial system is not sufficient, obviously, to prevent asset price inflation. But having a properly regulated financial system means that you can control the financial system's aggregate leverage with reasonable precision. So, when suspecting a bubble, you temporarily raise the solidity requirements on the banking system by a little bit. If prices collapse, you had a bubble. If prices do not collapse, well no harm, no foul. And if you really are blind as a bat and can't see a bubble coming even when, like the housing bubble, it is equipped with floodlights, fog horn and a radar beacon, you just hike capital adequacy ratios at irregular intervals to test the waters. Obviously, this is less efficient than being able to actually understand what's going on (as hiking capitalisation ratios imposes a negligible but nonzero cost on the financial system), but that's the price you pay for putting blind morons in charge of managing your financial regulation.

Another example: in the lead up to the invasion of Iraq, the pro-war argument frequently was that if Allied forces had intervened more aggressively against Hitler before he invaded Poland and Czechoslovakia, WWII would have been thwarted, ergo, we should stop Sadaam now before he becomes another Hitler. That's a bubble argument, and it assumes that the conditional -- WWII would have been avoided if the Allies attacked Germany instead of the other way around -- is true, when it is only one possibility among others.

Yes, it is possible to construct bubble arguments that are transparently moronic. If it were impossible to construct invalid bubble arguments, it wouldn't be much of a theory, would it now? It is also possible to construct arguments for space exploration that are transparently moronic, such as suggesting that we should go to the moon in order to mine the blue cheese that it is made of.

Your argument actually provides an excellent illustration of why popping the housing bubble was so obviously the right choice, and attacking Iraq was so obviously the wrong choice. Consider:

  • The historical evidence supported the conclusion that a housing bubble was credible. It was well known at the time that median real estate prices were grossly out of line with median income. Every single time, for as long as we have recorded real estate prices and incomes, that behaviour has terminated in a crash. There are no exceptions what so ever. By contrast, history provides no indication that two-bit tin-pot crooks like Hussein tend to become genocidal demagogues. There are plenty of two-bit tin-pot crooks like Hussein in the world (most of them supported by the very same neocon chickenhawks who wanted to go after Hussein, incidentally), and most of them are not genocidal maniacs.

  • The housing bubble, if indeed it existed, posed a credible threat to the world economy in general, and the American economy in particular. If the price/income ratio reverted to its historical norm, in the same manner as in previous inflationary episodes, it would blow a bigger hole in aggregate demand than the great crash of 1929 did. By contrast, Hussein wasn't even a credible threat to many of his own subjects - he was under intense surveillance, he had no significant military capabilities, his industrial plant pretty much didn't exists and he didn't even have sovereignty over his own airspace.

  • If and when the housing bubble had started doing damage, it would have been too late to intervene. This is in the nature of bubbles. Contrast this with Iraq, which had neither the military nor the industrial capacity to seriously resist a punitive expedition. Meaning that if and when Hussein jumped the shark, he'd be gone in two weeks flat, if the US decided to intervene. And while modern technology is incredibly efficient, including in aiding the death and dismemberment of one's fellow man, even Hitler - who had the full support of the premier industrial power of his age - did require more than two weeks to do any material harm.

  • The cost of intervening against a bubble that does not, in fact, exist is negligible. The cost of toppling an innocent government by military invasion is calculated in human lives, using six or seven figures.

Every term of the cost-benefit analysis was clearly in favour of intervening against a potential housing bubble - it was clearly visible; if it were real, it posed a credible threat; the cost of not acting if it were real would have been very great; and the cost of acting if it were not real would be negligible.

Similarly, the cost-benefit analysis of the Iraq war was just as clearly in the other direction: There was no credible indications that the threat was real. Even if it were real, it was not very great. The cost of delaying action, if the threat were real, would not have been very great. And the cost of taking action if the threat were not real was very great.

This chain of reasoning should not be very hard to understand.

The historical record of intervening in bubbles, based on the attempts you cited and the poor outcomes that occurred nonetheless, are good reasons to be wary of concluding that intervention to "pop" asset bubbles actually does any better than doing nothing,

Uh, no.

The historical examples of not popping asset bubbles include the Long Depression, the Great Depression and the South Sea Bubble. That's like saying that the consequences of installing safety interlocks on nuclear reactors are ambiguous, because a security lockdown occasionally causes a blackout.

particularly if you consider the possibility of false positives when identifying bubbles.

sigh The actions you take to pop bubbles are perfectly harmless if there is no bubble. Well, no, not perfectly harmless, because they impose a negligible but nonzero cost on the financial system. But that's hardly onerous, and Greenspan had several percentage points of federal funds rate to compensate for that before hitting the zero lower bound on nominal interest rates.

- Jake

Austerity can only be implemented in the shadow of a concentration camp.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Sat Nov 6th, 2010 at 09:18:59 AM EST
[ Parent ]
Okay, I see where we're passing each other now.  You believe this to be true when it is just another example of the counterfactual problem, like the Oswald-Kennedy one:

The point is that the action you take to pop bubbles is perfectly harmless if there is, in fact, no bubble.

But it isn't. Popping a non-bubble may, in fact, be as harmful to both the allocation of resources (equity) and growth prospects for an economy (efficiency) as not not popping a true bubble. We have no reason, based on the data, to believe otherwise. The only way you can make the argument you do, that popping bubbles is perfectly harmless, is if you assume that you actually know when some phenomenon is a bubble with perfect certainty, which you can't.  Volatility, up as well as down, is a normal part of any market and may be random and thus not a bubble.  The science with which to determine what is random and what is caused by correctable monetary policy is what isn't there yet, despite the good work by Minsky, Schiller and others that is happening right now.

And since it is usually harder to convince people to fix something that isn't apparently broken, it usually isn't feasible either.

by santiago on Sat Nov 6th, 2010 at 02:12:05 PM EST
[ Parent ]
But it isn't. Popping a non-bubble may, in fact, be as harmful to both the allocation of resources (equity) and growth prospects for an economy (efficiency) as not not popping a true bubble. We have no reason, based on the data, to believe otherwise.

Uh, yes we have. We spent the years from 1945 through 1980 testing what happens when you castrate the financial sector. We have plenty of data on how much damage bubbles do when they are popped in different stages of life. It requires only the most trivial interpolation to conclude that even if (and this is a big if) popping the bubble in a controlled fashion on your own time table created a result every bit as bad as having it pop of its own accord, then popping it deliberately remains the superior option, because bubbles only get worse the longer you let them live. I really don't see how anybody with even the most cursory knowledge of the economic history of the first world over the last century or two can claim otherwise.

Volatility, up as well as down, is a normal part of any market and may be random and thus not a bubble.  The science with which to determine what is random and what is caused by correctable monetary policy is what isn't there yet

Poke it. If it blows up, it was a bubble. If it doesn't blow up, poking it doesn't hurt anybody who can't be made whole by easing terms at the discount window.

- Jake

Austerity can only be implemented in the shadow of a concentration camp.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Sat Nov 6th, 2010 at 02:50:51 PM EST
[ Parent ]
We don't have a lot of data on what happens when you pop non-bubbles, however. And that's that main problem because we have no reason to believe that popping non bubbles is any less harmful than not popping true bubbles.

Poke it. If it blows up, it was a bubble. If it doesn't blow up, poking it doesn't hurt anybody who can't be made whole by easing terms at the discount window.

No, this is just the drowning the witch argument. Poking a non- bubble, if "poking" however it is done is actually effective at poking real bubbles, will also depress economic growth and re-allocate resources in possibly perverse ways when a condition is not really a bubble.  We have no information which indicated otherwise.  Intervention in markets always introduces inefficiency, and may introduce inequity. Intervention, of which "poking" is a kind, is therefore justified when we know that the market is already grossly inefficient or grossly inequitable. But that's what's hard to know because of the counter-factual conditional problem.

Arguably, and this was the argument of Krugman and others on the left, the market was demonstrably inequitable and this justified some sort of intervention.  Problem is, popping a bubble wasn't the sort of intervention that could be certain to correct inequity if it turned out that the housing market was, in fact, not a bubble.  If it hadn't been a bubble and the Fed had attempted to "pop" it, the result would have had greater consequences on the poor than on the rich as reduced home ownership availability for the poor would have been affected first. See the problem?

by santiago on Sat Nov 6th, 2010 at 03:24:50 PM EST
[ Parent ]
We don't have a lot of data on what happens when you pop non-bubbles, however. And that's that main problem because we have no reason to believe that popping non bubbles is any less harmful than not popping true bubbles.

Yes we do. The dynamics of a bubble - that asset prices rise in expectation of capital gains rather than dividends in a credit-fuelled feedback loop - make it vulnerable to much smaller perturbations than a market where prices are determined without explicit feedback loops in price.

If the price of an asset class is chiefly determined by something other than the price movements in the recent past, then a small suppression of the price of that asset class will be self-contained and largely reversible (as long as you reverse policy before the new pricing regime has had time to work its way through the rest of the economy). If, on the other hand, you are in a bubble environment where the price changes in any given period depends on price changes in the immediately preceding period, then suppressing prices cause a non-linear cascade, which is not self-contained and is not reversible. So a small, short-lived intervention can reliably pop bubbles but leave benign price increases mostly alone.

When you have strong non-linearities, small perturbations can have large effects. When you have no non-linearities, small perturbations have small effects. You can suppress bubbles but not non-bubbles precisely by exploiting the fact that bubbles involve non-linear response to price changes, whereas non-bubbles, by definition, involve only linear responses to price changes.

Poking a non- bubble, if "poking" however it is done is actually effective at poking real bubbles, will also depress economic growth and re-allocate resources in possibly perverse ways when a condition is not really a bubble.

Not necessarily. The magnitude and duration of the effect required to suppress a bubble is very, very small compared to the magnitude and duration of the effect required to affect the price of a non-bubble asset in a way that causes any measurable hysteresis.

Moreover, if you design your intervention so it levies the cost chiefly on the banking system, you can compensate them through ordinary central bank operations afterwards if there turned out to be no bubble. Any bank that can't handle a small, temporary perturbation of this sort isn't doing its job properly (Like all infrastructure, banks are not supposed to be efficient, they're supposed to be reliable, which is not the same thing).

Intervention in markets always introduces inefficiency,

In which fictional alternative universe? One very prominent intervention in the market - the 95 % income tax - introduces efficiency, by making asset stripping prohibitively expensive.

If it hadn't been a bubble and the Fed had attempted to "pop" it, the result would have had greater consequences on the poor than on the rich as reduced home ownership availability for the poor would have been affected first. See the problem?

No.

In the first place, I don't see why homeownership should, in and of itself, be an objective. Ensuring that everybody has a home is a policy objective. Ensuring that everybody owns a home is a policy tool. There are plenty of other tools available, including, but not limited to, publicly owned rental units.

In the second place, you can control the price movements of a non-bubble real estate market pretty well: In the most extreme non-bubble case of price sensitivity, prices are roughly inversely proportional to mortgage interest rates (in a bubble they are more sensitive than this, in most non-bubble cases they are less sensitive than this). So you can take an action that will not in any (non-bubble) case drop prices by more than, say, 5-10 % for a couple of months, and then unwind it. This does not cause anybody to go bankrupt (all mortgages are 20 % down, 20 year fixed rate, right? If not, your financial regulator isn't doing its job).

It does cause the people who net sell (i.e. people who move in together, the heirs of people who die, people who sell to rent and people who buy down after their kids leave home) during that period to lose, and the people who net buy (divorcees, first time buyers, people who have kids and need to buy up and people who buy to let) during the period to gain. But a) people who net sell real estate are typically better off than people who net buy, and b) you only undertake this kind of poke action when the prices have been rising lately - so you are really just putting a temporary break on a price rise (that the net sellers had no right to plan for - planning for price rises is speculation, and that should not be encouraged), not taking away from the net sellers in absolute terms.

- Jake

Austerity can only be implemented in the shadow of a concentration camp.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Sat Nov 6th, 2010 at 04:43:14 PM EST
[ Parent ]
You've made a lot of new claims here, and I agree with almost none of them, but this thread is getting too long at this point to go on, so we might have to hold this for another day.

In general though, you have an overly optimistic assessment of the ability of economists to actually measure what causes price movements and their ability to intervene, using blunt monetary instruments of interest rates, without causing lots of collateral damage on real people who have nothing to gain by your attempts to avert bubbles.

And if you don't believe that markets work, then you can't really invoke market logic to argue that a bubble exists, which is what you're doing here.

by santiago on Sun Nov 7th, 2010 at 11:17:30 PM EST
[ Parent ]
Markets totally work.

They just work very, very stupidly and badly.

by ThatBritGuy (thatbritguy (at) googlemail.com) on Sun Nov 7th, 2010 at 11:30:08 PM EST
[ Parent ]
For decades it was expected that the Fed would intervene with higher interest rates if WAGES began to increase. When The Fed intervened and the economy slowed it was called a Recession. Many times, when resource prices such as oil increased, this rippled through the economy and caused wages to also increase. But The Fed employed the same kind of intervention, even when the recession had to reduce oil demand sufficient to cause a fall in oil prices before the inflation could abate. But still, intervention was considered to be justified.

When asset prices begin to soar and are left to sort themselves out we have a bubble that pops, as in 1929 and 2008 and the result is a Depression. Deflation resulted from returning stock prices to reality following 1929. Returning housing prices to levels first time buyers could afford and which are within shouting distance of rent costs after the real estate collapse that began in 2007 and went critical in Sept. 2008 also would involve deflation, but Fed policy has been oriented to avoiding that outcome. But that policy has discouraged acknowledging and writing down the inflated asset values created around that over priced real estate.

This has left us in a situation where the financial sector remains "levitated" well above the remains of any true foundation on which it could rest. The consequences of this situation are certain to be worse than the consequences of forcing a writedown of counterfeit MBSs, CDOs, etc., as we continue to expand liabilities and guarantees and incur additional costs as a consequence of not resolving the underlying situation. Meanwhile the economy is paralyzed with no end in sight.

The Great Depression of the 1930s had consequences that cannot be compared to the recessions that we experienced from the end of WW II to 2004. There will soon come a point at which it will be impossible to deny that our current situation is also a depression. Unfortunately, the economic understanding that enabled us to cope with economic down turns is being actively repressed from memory in the perceived interests of the wealthy. And the consequences of this emerging depression are likely to be worse and the prospects for recovery more remote due to exhaustion of cheap oil reserves and other resources.

Once the impending developments have become undeniable there will be little argument that had the Fed intervened to pop the real estate price bubble in 2003 the USA and the world would have been much better off. Then we will only have remaining the excuse: "Who coulda knowed?" And we know the answer to that: "Economists and social critics that the Fed, the Executive Branch, almost all of the Congress and the media refused to acknowledge or consider."

Developments in the USA in the next two years could well make it clear that no political solution will emerge to resolve the crisis. "The last, best hope for Democracy" will have been turned into "the People's" worst nightmare. Things will be worse in absolute terms for the very wealthy, but, relatively, they will be vastly better off than the rest of society.

All that remains is to determine what can be done that can get a better understanding of the existing crisis across to enough people to make a difference. This is clearly a man made disaster and it doesn't have to be this way.

As the Dutch said while fighting the Spanish: "It is not necessary to have hope in order to persevere."

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Mon Nov 8th, 2010 at 08:18:36 AM EST
[ Parent ]
Things will be worse in absolute terms for the very wealthy, but, relatively, they will be vastly better off than the rest of society.

You, a human being, own a large cattle ranch where you feed your cattle with ... feed, not grass. Something happens, your financing goes kaput, and you have to decide who will starve, the cattle or your family.

Human = the few very wealthy

Cattle = the rest of us.

Can we predict what the solution will look like?

The good news ... it's only a life sentence. You eventually leave this planet of idiots.

by THE Twank (yatta blah blah @ blah.com) on Mon Nov 8th, 2010 at 08:35:06 AM EST
[ Parent ]
Returning housing prices to levels first time buyers could afford and which are within shouting distance of rent costs after the real estate collapse that began in 2007 and went critical in Sept. 2008 also would involve deflation, but Fed policy has been oriented to avoiding that outcome. But that policy has discouraged acknowledging and writing down the inflated asset values created around that over priced real estate.

Or a few years of modest inflation combined with constant nominal housing prices.  

by MarekNYC on Mon Nov 8th, 2010 at 08:45:49 AM EST
[ Parent ]
And we can see how well that has worked out in Japan.

The median now in Reseda, Los Angeles County, is $340,000. In January, 2006 it was >$500,000. And while interest rates are at all time lows it will still take two very good incomes to qualify. But those kinds of jobs are in serious decline. Combine that fact with the consideration that there is a serious cloud over the title of any home mortgaged after 2003 and the fact that a significant portion of the real estate that owners would like to sell is being held off the market for various reasons, the shadow housing market, and we can see that housing prices have 10-20% further to decline, if not more.

That drop will only create more "air" beneath the stated values of the MBSs and CDOs in the Fed's sardonically named Maiden Lane "special vehicles" and the trash taken on by Freddie and Fanny. Thus the gap between pretense and reality will only widen for a while. Of course that is not the situation in all areas, only some of those areas with the largest number of houses and mortgages.

The real question is if the decline in real estate prices is greater than the decline in the ability of potential buyers to qualify. We are likely to get "modest inflation", especially since the CPI does not include increases in the cost of food or energy, nor, I believe in medical care. So to the potential buyer it is likely to seem that they have even less money that they can save.

As the Dutch said while fighting the Spanish: "It is not necessary to have hope in order to persevere."

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Mon Nov 8th, 2010 at 11:33:18 AM EST
[ Parent ]
CPI does include food and energy. Core CPI doesn't. Both include health care.

And we can see how well that has worked out in Japan.

Japan has had zero inflation.

You are right that affordability is the real question, but as long as nominal housing prices go up more slowly than nominal wages, you can even have falling real wages while housing gets more affordable and borderline mortgages rise above the waterline.  Krugman has recently been pushing for a 5% inflation target.

by MarekNYC on Mon Nov 8th, 2010 at 11:51:57 AM EST
[ Parent ]
Japan has had zero inflation.

What I was really talking about was the policy of allowing time to cure an overpriced real estate market. That has not worked out so well in Japan. If we could get several years of 5% CPI core inflation in the USA it would make the problems more tractable. But it is far from clear that this can be accomplished by the current means. Massive fiscal stimulus could do the trick - no doubt. But pumping more money into only the financial sector could have many (officially) unintended consequences. Already it is producing new asset bubbles in gold, commodities and stocks.

But the problem remains that we have a criminalized financial sector and that it has become grossly over-sized and a parasite on what is left of the "real economy". This COULD be cured with vigorous prosecutions of the malefactors, but that is unlikely with Mr. Don't Look Back.

As the Dutch said while fighting the Spanish: "It is not necessary to have hope in order to persevere."

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Mon Nov 8th, 2010 at 12:10:06 PM EST
[ Parent ]
Or a few years of modest inflation combined with constant nominal housing prices.

Yes. That is one way to "write down" the fraudulent debt.

The trouble is that it's really hard to see a plausible mechanism for causing inflation in the current environment.

- Jake

Austerity can only be implemented in the shadow of a concentration camp.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Mon Nov 8th, 2010 at 03:18:14 PM EST
[ Parent ]
I think you're right, but where folks like Jake and others are arguing, based on the Minsky-school stuff, for a more aggressive monetary policy engagement in such issues -- that is, expanding (i.e. constraining) the central bank mandate to include bubble management in addition to price stability, economic growth, and full employment -- I think that an alternative look at monetary theory will argue the opposite. It will argue that fiscal policy -- how things are distributed -- are much more useful and precise means of managing things like asset bubbles. It's not Greenspan's low interest -- low unemployment monetary policy that caused the crisis, in other words.  It's the Bush tax cuts. Had the higher Clinton era taxes been able to continue to retire excess cash from circulation be taking it out of the hands of the wealthy, they likely would not have been able to bid up assets so high.
by santiago on Mon Nov 8th, 2010 at 11:10:35 AM EST
[ Parent ]
Jerome has made similar comments, if I read him correctly. He proposes higher marginal tax rates on the wealthy and I would add higher estate taxes, especially on estates over a few million dollars. The Clinton rates might do it if combined with aggressive closing of tax loop holes and pursuit of off-shore havens.

But I do not think we can allow the regulators the option of not regulating. The Fed had the explicit power to enforce lending standards since the early Clinton Administration years, and, implicitly, for a lot longer. Had lending standards been maintained and vigorously enforced, had Greenspan accepted then what he said Saturday at Jeckel Island on Saturday, that fraud must be prosecuted in the financial sector, we would not be in the situation in which we find ourselves. If Obama accepted today that financial fraud must be prosecuted we might be on the road to some recovery.

How can the Greenspan Fed's refusal to consider the possibility of mortgage origination control fraud be excused, especially in the light of what was learned from the S & L crisis? Do you have an practical answer for how to deal with regulators who refuse to regulate? It seems to me to involve a re-education of the whole electorate. Instead we are just getting more of the same lying bull shit as we got before the crisis, but now it is even clearer just how bi-partisan the problem is.

As the Dutch said while fighting the Spanish: "It is not necessary to have hope in order to persevere."

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Mon Nov 8th, 2010 at 11:52:33 AM EST
[ Parent ]
The problem of regulators refusing to regulate is actually a lot more widespread and ambiguous than just the matter with monetary policy and banking we're discussing here. It's an area of new research in the policy studies field actually. It turns out that cases of not regulating, or over-regulating, are more common than not and are actually important means of contesting policy in a democracy where so much of the work of governance is performed by bureaucratic infrastructures which relate more directly with the stakeholders of an issue than macro-level legislative bodies are able to.

In other words, actual policy is usually designed as well as implemented within the bureaucratic implementation or regulatory structures of governance, and the deliberately ambiguous nature of democratic law-making provides for this. The high school civics model of democratic governance has simply always been a fiction, it turns out. Non-compliance with the intention of a law by regulators (or stakeholders -- for example unauthorized immigrants) may be as much a feature of democratic society as it is problematic. And policy making occurs strategically with regulatory non-compliance already in mind. It's yet another check and balance on the problem of the tyranny of the majority endemic in all liberal democracies.

Greenspan was very clear about his philosophy regarding credit standards in the post-9/11 world while Fed chair.  Contrary to the conservative majority and his normal constituency, he advocated for looser lending standards precisely because he thought fear of loss given the 2001 recession and uncertainty regarding the wars had to be counteracted by encouragement of risk taking, a decidedly Keynsian point of view and one that was absolutely right. Where Greenspan was wrong was where he had no policy authority even if he did have an opinion -- tax cuts. Taxes should not have been cut because tax cuts are used differently by the rich than by the poor, contrary to what Greenspan and other conservatives, as well as even many Keynesians, assume.

(Poor people may react to windfall wealth gains by increasing spending because increasing consumption provides more utility given where they are in life.  The rich, on the other hand, may react to windfall wealth gains by increasing their wealth-securing activities, not necessarily by increasing their investments in productive things. Keeping their wealth may be more important to rich people than making even more wealth, despite notable exceptions to the contrary. A simple, individual  model of decreasing returns to higher wealth provided by the standard, neoclassical concave utility function implies this. The empirical work coming out goes both ways on this question so far, however.)

The bubble, therefore, may have been solved by simply inhibiting rich people from doing dumb things with their windfall wealth that tax cuts provided to them.

by santiago on Mon Nov 8th, 2010 at 01:43:59 PM EST
[ Parent ]
Greenspan was very clear about his philosophy regarding credit standards in the post-9/11 world while Fed chair

You don't actually connect his opinion on tax cuts with 9/11, but as it's in the same paragraph it leaves that impression. Greenspan was pushing for tax cuts in his  testimony on January 25, 2001, to the U.S. Senate Committee on the Budget (here is the first reference I found), right after Bush's inauguration. I recall the way it was covered at the time treated his opinion as being much more important than other people's opinions.

by gk (g k quattro due due sette "at" gmail.com) on Mon Nov 8th, 2010 at 03:03:29 PM EST
[ Parent ]
Yes, you're right. I used 9/11 for brevity. He pushed for tax cuts as a standard, Keynesian fiscal response to the 2000-2001 recession. But he continued to justify them subsequently due to the fear factor brought on by the uncertainties and costs imposed on businesses in the post-9/11 world.
by santiago on Mon Nov 8th, 2010 at 04:14:20 PM EST
[ Parent ]
Tax cuts are only Keynesian when combined with other policies that push up aggregate demand.

Greenspan was never a Keynesian in that sense - or indeed in any other sense.

by ThatBritGuy (thatbritguy (at) googlemail.com) on Mon Nov 8th, 2010 at 04:40:08 PM EST
[ Parent ]
Except that the Keynesian policy playbook, pre-2008, doesn't differentiate between tax cuts or direct government spending, nor did Keynes himself. Both lead to increases in aggregate demand and deficit spending. Where the conservatives like Greenspan depart from Keynes is their insistence on keeping tax cuts after the recession ends, which according to Keynesian theory is exactly what leads to exaggerated booms and the consequently larger busts -- what others now call bubbles.  As Krugman often argues, mainstream Keynesian economics (i.e., the Hicks and Samuelson formulation of it that gets so derided around here at times) provides a perfectly good framework as it is today for explaining the crisis and how to recover from it. Where I disagree with that assessment, however, is that it didn't adequately distinguish between how rich people and everyone else reacts to getting a stimulus check. People like James Galbraith are making that argument only now.
by santiago on Mon Nov 8th, 2010 at 05:25:52 PM EST
[ Parent ]
Almost. The motivation of Keynesians is to distribute money so everyone can spend it. This Makes Stuff Happen in the economy - q.v. China, which is very possibly the most Keynesian country in history. (Albeit supported by some fancy forex footwork.)

The motivation of the NCE types is to hoard money so they can spend it - and screw everyone else. And the lie is that they will generously share it and graciously allow stuff to happen if only the bad, bad government doesn't steal it from them.

In practice, against all reasonable expectation, they never do share it. As Jake said, they Ponzi it instead, which is very definitely not a good Keynesian outcome.

by ThatBritGuy (thatbritguy (at) googlemail.com) on Mon Nov 8th, 2010 at 05:45:12 PM EST
[ Parent ]
santiago:
Except that the Keynesian policy playbook, pre-2008, doesn't differentiate between tax cuts or direct government spending, nor did Keynes himself.

But who kept that "Keynesian policy playbook, pre-2008"?

Keynes has been dead 40 years and there are all sorts of Keynsians and Post Keynsians about, each emphasizing a different set of recent developments. Steve Keen produced a three sector dynamic model in 2009 that showed a significantly greater social benefit for a stimulus provided directly to businesses than a similar stimulus provided directly to banks.


As the Dutch said while fighting the Spanish: "It is not necessary to have hope in order to persevere."

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Tue Nov 9th, 2010 at 05:52:24 PM EST
[ Parent ]
Greenspan was very clear about his philosophy regarding credit standards in the post-9/11dotcom world while Fed chair. Contrary to the conservative majority and his normal constituency, he advocated for looser lending standards precisely because he thought fear of loss given the 2001 recession and uncertainty regarding the wars had to be counteracted by encouragement of risk taking, a decidedly Keynsian point of view and one that was absolutely right.

Having not yet reached Keynes on my reading list, I shall refrain from commenting on whether that is an actual Keynesian or a "crass Keynesian" policy stance. But it's wrong. You do not counteract insecurity about future incomes in the wake of a serious financial Panic by tolerating even more gambling in the financial markets. You counteract insecurity about future incomes in the wake of a serious financial Panic by having the sovereign provide a guaranteed back-stop to incomes, by using its unlimited creditworthiness to act as investor of last resort.

Backstopping incomes both restores economic activity and reduces the power of the financial sector over the rest of society. Simply dismantling restrictions on the financial sector gives the financial sector more power over the rest of society - power that it has demonstrated time and time again that it is unfit to wield.

- Jake

Austerity can only be implemented in the shadow of a concentration camp.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Mon Nov 8th, 2010 at 03:25:26 PM EST
[ Parent ]
At the time, it wasn't considered gambling because securitized loan performance was so good. So the fear was that despite having no evidence to the contrary, banks would tighten their lending standards when stimulus was needed, just like now but on a smaller scale. That's pure Keynesian school thinking -- and where Friedman agreed with Keynes, actually.  
by santiago on Mon Nov 8th, 2010 at 04:18:34 PM EST
[ Parent ]
At the time, it wasn't considered gambling because securitized loan performance was so good.

My mistake. Strike "gambling" from the record, please, and replace with "buying into Ponzi scams."

So the fear was that despite having no evidence to the contrary,

Other than the fact that a structurally identical (except that it revolved around stocks rather than real estate) Ponzi scam had just blown up in everybody's face.

The solution to lack of aggregate demand is not lending more. It is spending more. Implicitly, this means government spending, because the government is the only economic entity that can spend in excess of its income without borrowing.

- Jake

Austerity can only be implemented in the shadow of a concentration camp.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Mon Nov 8th, 2010 at 04:36:05 PM EST
[ Parent ]
Don't forget the peak oil argument though. That argument said (indeed says) that there were real consequences to scarce resources and that high prices for some things may be one of those. Assets were being bid up to reduce further claims on them, as even Krugman argued regarding oil, but was easily expanded to land based on the same constraint paradigm.
by santiago on Mon Nov 8th, 2010 at 05:14:16 PM EST
[ Parent ]
Land is unlikely to display the same price behaviour as oil when it is a constraining factor on the economy: Urban and suburban land is reusable, which means that supply will always have a finite price (agricultural land is more properly treated as renewable, since it will degrade if over-exploited - but we're talking (sub)urban land here). Oil, on the other hand, is consumable, which means that the cost of supply can and will go to infinity when attempting to exceed certain quantities of production.

So the analogy does not hold: In an economy of highly inelastic demand, a pure demand-destruction price shock will be much more notable than a mixed supply-increase/demand-destruction shock.

- Jake

Austerity can only be implemented in the shadow of a concentration camp.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Mon Nov 8th, 2010 at 06:12:54 PM EST
[ Parent ]
You're advancing an hypothesis there, not an accepted fact. It might very well be right, and research should be able to confirm it if it is, but there are currently other competing hypotheses out there which are consistent with the evidence so far and which also may be right until more evidence shows otherwise. Namely, land might be reusable in some ways but not others. Since it is exclusive in use and there are finite, fixed quantities available, and it can get pulled out of other people's use for very long periods of time, it might actually behave the same as a non-renewable resource in many market conditions.
by santiago on Tue Nov 9th, 2010 at 10:57:41 AM EST
[ Parent ]
You are essentially arguing that there is no difference between resources that can be reclaimed at a finite cost and resources that cannot be reclaimed. That may be true, but if it is, we would expect to see no difference between the economics of oil and copper in a supply-constrained scenario. It's hard to put to the test, of course, because we've never really been supply-constrained in copper, and we haven't been supply-constrained in land since the railroads made it profitable to displace the local population of the American Great Plains.

However, and more to the point, the fact that there is a difference in the underlying physics of the two commodities means that it is incumbent upon those who would draw analogies between them to establish that they actually do behave in the same manner under a supply constraint, not upon those who point out the difference to prove that they do not.

- Jake

Austerity can only be implemented in the shadow of a concentration camp.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Tue Nov 9th, 2010 at 11:10:02 AM EST
[ Parent ]
In some ways yes, but supply constraints can show up in two ways -- actual reduction in quantities available, or constraints in quantities available that can be obtained at acceptable prices (acceptable being that which allows people continue doing as before with that resource).  There is no reason to believe, a priori, that actual physical reduction in a resource is any different than constraining a renewable resource through other means, such as excluding its use for some social purposes.  There might be a lot of land available, for example, but almost none of it is available any more more the kind of economic development in dispersed site housing without taking it away from other use of it. So, since you can't assume that markets for it should view them any different, a priori, it is just as incumbent upon those who would hypothesize that oil behaves differently than land to prove it than the other way around.
by santiago on Tue Nov 9th, 2010 at 11:48:02 AM EST
[ Parent ]
There is no reason to believe, a priori, that actual physical reduction in a resource is any different than constraining a renewable resource through other means, such as excluding its use for some social purposes.

The central point is not whether the resource is physically reduced or not. The central point is whether it is possible to reclaim previously used resources. If it is possible, then you will always have a supply response to a price hike (if the resource in question is traded on a reasonably competitive market, which houses and oil are but natural gas is not). If it's impossible, then you can't necessarily expect a supply response to a price hike. Ceteris paribus, this causes sharper spikes for non-recoverable resources than for recoverable resources.

- Jake

Austerity can only be implemented in the shadow of a concentration camp.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Tue Nov 9th, 2010 at 02:38:21 PM EST
[ Parent ]
That's a good point, and its a good hypothesis. But it might not be as simple, either. Although consumed oil itself may not be possible to reclaim again regardless of how high its price gets, substitutes for oil, including energy savings, can be, and the substitution effect should cause the price of oil to fall the same as if oil itself was renewable. (That was Julian Simon's thesis in his famous bet against Paul Erlich, anyway.) So there are some reasons to expect the that the hypothesis might not work.  Has it been looked at before, I wonder?
by santiago on Tue Nov 9th, 2010 at 04:28:53 PM EST
[ Parent ]
Those are good points, but all of those effects are also true for the reusable resources. In the case of urban land, public transit is a substitute for parking lots, for instance.

So I'll still maintain that, ceteris paribus, you'll get harder price shocks from non-recoverable resources. And even if ceteris may not be paribus, because it is easier to employ substitutes for oil than for land, you'll still not see a virtually vertical gain in price for a recoverable resource based purely on the fundamentals: A vertical (or near enough as makes no matter) gain in price requires that you can jump from a regime in which prices are set by the most expensive supplier needed to clear the market, to a regime in which the least expensive demand destruction is used to clear the market. This is only possible if you have zero or near-zero price elasticity of supply. Which really shouldn't be the case for reusable resources in any but the most contrived scenarios.

- Jake

Austerity can only be implemented in the shadow of a concentration camp.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Tue Nov 9th, 2010 at 07:02:11 PM EST
[ Parent ]
Excuse me, first you basically echo Eugene Fama on how bubbles don't exist and now you give us Julian Simon?
Dr. Bartlett has the following to say on Julian Simon:
""" Chief amongst these optimists was the late Dr Julian Simon, formerly professor of economics and business administration at the University of Illinois, and later at the University of Maryland. With regard to copper, Simon has written that we will never run out of copper because "copper can be made from other metals." The letters to the editor jumped all over him, told him about chemistry. He just brushed it off: "Don't worry," he said, "if it's ever important, we can make copper out of other metals."

Now, Simon had a book that was published by the Princeton University Press. In that book, he's writing about oil from many sources, including biomass, and he says, "Clearly there is no meaningful limit to this source except for the sun's energy." He goes on to note, "But even if our sun was not so vast as it is, there may well be other suns elsewhere." Well, Simon's right; there are other suns elsewhere, but the question is, would you base public policy on the belief that if we need another sun, we will figure out how to go get it and haul it back into our solar system? (audience laughter) """

Are you serious?

Of all the ways of organizing banking, the worst is the one we have today — Mervyn King, 25 October 2010
by Migeru (migeru at eurotrib dot com) on Tue Nov 9th, 2010 at 07:03:21 PM EST
[ Parent ]
Well, Eugene Fama and Julian Simon are exactly the people that Greenspan listened to, and they are not flakes nor are their ideas.  They might be wrong about things, but you have to take their ideas very seriously when trying to argue against them not dismiss them because, ad hominem, they were the deans of the neoclassical establishment.  Julian Simon was right, after all, in his bet with Erlich, remember.  
by santiago on Tue Nov 9th, 2010 at 08:01:37 PM EST
[ Parent ]
Well, Eugene Fama and Julian Simon are exactly the people that Greenspan listened to, and they are not flakes nor are their ideas.

Dude. Simon thought that copper can be made from other metals. That's about as flaky as it gets.

I think it's safe to dismiss Simon out of hand when discussing the implications of resource constraints, since he clearly failed to understand the most basic physics and chemistry that governs those constraints.

- Jake

Austerity can only be implemented in the shadow of a concentration camp.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Tue Nov 9th, 2010 at 08:19:30 PM EST
[ Parent ]
But he won a bet on commodity price trends within his lifetime! That has to count for something as, in Fama's world, if you are not able to make money betting you don't know anything.

Of all the ways of organizing banking, the worst is the one we have today — Mervyn King, 25 October 2010
by Migeru (migeru at eurotrib dot com) on Wed Nov 10th, 2010 at 04:27:48 AM EST
[ Parent ]
The markets can remain irrational longer than you can remain solvent.

- Jake

Austerity can only be implemented in the shadow of a concentration camp.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Wed Nov 10th, 2010 at 08:05:54 AM EST
[ Parent ]
I was going to volunteer that as a reply to Fama's
That's what I would think it is, but that means that somebody must have made a lot of money betting on that, if you could identify it.


Of all the ways of organizing banking, the worst is the one we have today — Mervyn King, 25 October 2010
by Migeru (migeru at eurotrib dot com) on Wed Nov 10th, 2010 at 09:02:16 AM EST
[ Parent ]
That's a misrepresentation of what actually occurred. He was one step ahead of his detractors in that exchange.  He meant that given scarcity, people would find substitutes for copper for most things, including use of other metals or or new inventions, because its not the chemical makeup of copper that matters but its function for human use.  That's why I invoked him for the oil problem too.  There are lots of possible substitutes for oil because energy is the function people are after, not the oil itself.
by santiago on Wed Nov 10th, 2010 at 09:06:36 AM EST
[ Parent ]
That's utter nonsense.

Firstly if that's what he meant, why didn't he say it? It's not a difficult distinction to make.

Secondly there are no alternative metals. The chemical makeup of copper defines its function and its usefulness. The only alternatives - silver would do, at a pinch - are less plentiful and far more expensive.

I expect you believe we can make the sun out of other suns too?

by ThatBritGuy (thatbritguy (at) googlemail.com) on Wed Nov 10th, 2010 at 09:13:05 AM EST
[ Parent ]
Um, he did say it.  You are reading a misrepresentation of what he said.  Buy his books if you want to see what his real argument was.
by santiago on Wed Nov 10th, 2010 at 09:27:08 AM EST
[ Parent ]
Nope.

In the words of the man himself, as quoted at Cato:

We have in our hands now--actually, in our libraries--the technology to feed, clothe, and supply energy to an ever-growing population for the next 7 billion years. Most amazing is that most of this specific body of knowledge was developed within just the past two centuries or so, though it rests, of course, on basic knowledge that had accumulated for millennia.

Indeed, the last necessary additions to this body of technology--nuclear fission and space travel--occurred decades ago. Even if no new knowledge were ever gained after those advances, we would be able to go on increasing our population forever, while improving our standard of living and our control over our environment. The discovery of genetic manipulation certainly enhances our powers greatly, but even without it we could have continued our progress forever.

The man was a kook - of Palinesque stature. No two ways about it.

by ThatBritGuy (thatbritguy (at) googlemail.com) on Wed Nov 10th, 2010 at 09:37:05 AM EST
[ Parent ]
I can't speak to whether he was a kook or not. He has said some disturbing things, as well as other rather more humane things (he was a significant contributor to efforts to improve the rights and conditions of illegal immigrants, for example, long before that ever became a popular progressive issue).

But what he says in that quote is a lot different from saying that he is ignorant of chemistry and therefore an idiot.  He is making a serious argument there that can be refuted or not with evidence.  His argument is that we have enough knowledge, technically, for no limits on human population, that the only limitations are social ones and and the eventual death of the sun.  

Is that actually wrong, and how if it is? That's how to respond.  Not, "He's ignorant of physics."

I think he is actually wrong. That without new technology, some of which may be physically impossible, there may be limits to population growth that we will have to contend with because the costs of adapting, even if physically possible, will outweigh the costs of just dying off. But that's a dispute settled with empirical evidence, not accusations of one or the other being an ignoramus.  He is making a serious and influential argument here with real policy implications, and it should be addressed seriously.

by santiago on Wed Nov 10th, 2010 at 10:12:12 AM EST
[ Parent ]
No, anyone who thinks that humanity can expand without physical constraints for the next seven billion years based on what we already know is suffering from kookiness of the first water.

It's not even an argument. It's blind, wilfully ignorant, self-regarding wishful thinking.

Argument this sloppy, stupid and wrong wouldn't last a week in a physics or engineering department.

But the difference between physics/engineering and economics is that in the former you have to prove stuff works, empirically.

In right-wing economics it's clear you can just say whatever you feel like saying, with no evidence of insight or intelligence. Shabby expedience is entirely enough.

by ThatBritGuy (thatbritguy (at) googlemail.com) on Wed Nov 10th, 2010 at 10:54:44 AM EST
[ Parent ]
You asserting again, not arguing.  In what way, specifically, can knowledge from physics or engineering that he is apparently ignorant of actually address what he's saying? Other economists did argue with him, with pretty well reasoned ideas, from what I recall at that time, and some engineers (of which there are many at CATO, engineering being a field dominated by anti-government types from what I can see) came to his support as well. This just isn't the open and shut case you contend it is.  Can you specify, in specific terms, why he is wrong?  Where is the technical know-how today actually lacking that would make, ignoring the economics of it for the moment, continued human population expansion, on earth or throughout the solar system, impossible?  I can think of a few things off hand, but most would still have to invoke economic arguments of benefits vs. costs to get there.
by santiago on Wed Nov 10th, 2010 at 11:21:49 AM EST
[ Parent ]
His argument is that we have enough knowledge, technically, for no limits on human population, that the only limitations are social ones and and the eventual death of the sun.  

Is that actually wrong, and how if it is? That's how to respond.  Not, "He's ignorant of physics."

Yes, he's ignorant of basic physics, and basic geology, if he labours under the delusion that nuclear power makes energy too cheap to meter, as he appears to do in this example. It is highly questionable whether the proven reserves of fissionables would be able to sustain our current electricity consumption for two centuries, let alone massively expand it for several millennia.

For that matter, he's ignorant of the behaviour of the exponential function if he believes in sustained population growth over the next seven billion years. A fairly conservative population growth rate of one half of one percent per year translates into a doubling of human population in just 140 years. Seven billion years... that's fifty million doublings, or a hair over fifteen million orders of magnitude. That's a one with fifteen million zeros after it. It really doesn't matter what population figures you start out with when you tack fifteen million zeros on it. So no, there will not be sustained population growth for the next seven billion years. And any high school student with a passing grade in introductory mathematics should be able to tell you that.

- Jake

Austerity can only be implemented in the shadow of a concentration camp.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Wed Nov 10th, 2010 at 01:48:39 PM EST
[ Parent ]
heh

I hadn't seen Jake's comment about "Exponential Growth" when I wrote my comment in today's Open Thread.

Skepticism is the first step on the road to truth. -- Denis Diderot

by ATinNM on Wed Nov 10th, 2010 at 02:12:27 PM EST
[ Parent ]
That's being too literal again and missing his point.  He means 7 billion in the sense of "a gazillion," not in the sense of having actually working out the math because that isn't necessary to address his point, either to attack it or defend it.  

His argument is just that adaptation plus a big universe allows for ever increasing population, not that any given growth rate is sustainable for 7 billion years. It's an important argument, either to contend with or support, because it frames policy options vastly differently from a zero or negative population growth argument with which it debates, which says that any population growth rate likely to lead to a catastrophe of some kind.

by santiago on Wed Nov 10th, 2010 at 10:35:23 PM EST
[ Parent ]
He means 7 billion in the sense of "a gazillion," not in the sense of having actually working out the math because that isn't necessary to address his point, either to attack it or defend it.

You may be right.

Clearly, whenever an economist says '7 billion' he really means 'a gazillion.'

Thinking about this, it pretty much explains everything that's happened to the US economy since 2001.

As Colman would say - comedy gold.

by ThatBritGuy (thatbritguy (at) googlemail.com) on Wed Nov 10th, 2010 at 10:57:37 PM EST
[ Parent ]
Sigh.

Still not getting the exponential function and what "doubling times" mean...



Of all the ways of organizing banking, the worst is the one we have today — Mervyn King, 25 October 2010

by Migeru (migeru at eurotrib dot com) on Thu Nov 11th, 2010 at 04:39:55 AM EST
[ Parent ]
No, that's not right.  The presumption of any constant growth rate of humanity is a straw man argument. You can have growth at a declining rate, for example, or a waxing and waning of growth, or even periods of negative growth which, on average over time is still an average positive growth rate. Simon makes no such assertion of any specific rate of growth because his argument doesn't hinge on any rate of growth.
by santiago on Thu Nov 11th, 2010 at 03:34:31 PM EST
[ Parent ]
But yes, he does miss the insight of his own argument this way, I neglected to add.
by santiago on Thu Nov 11th, 2010 at 03:36:55 PM EST
[ Parent ]
Well obviously, the words 'ever growing population' couldn't possibly be taken to mean a population that's ever growing.

Just as seven billion clearly means 'a gazillion.'

"When I use a word," Humpty Dumpty said, in rather a scornful tone, "it means just what I choose it to mean - neither more nor less."

Lewis Carroll, Through the Looking Glass - 1871

Alas, I think we should try to remember that in the end, Mr Dumpty's fate was not a happy one.

by ThatBritGuy (thatbritguy (at) googlemail.com) on Thu Nov 11th, 2010 at 04:00:20 PM EST
[ Parent ]
To be simplistic about it, like with the assumption of a constant, albeit low, growth rate as you provided, "ever growing" could also mean an always positive growth rate that is decreasing over time. It doesn't change Simon's argument to think of ever growing as a general concept instead of as a given specified function that may or may not be true.

What would change Simon's argument is showing that growth at any rate is impossible if followed for a long time.

by santiago on Thu Nov 11th, 2010 at 04:11:47 PM EST
[ Parent ]
An exponential decline down to a remnant population between 1% and 10% of today's is likely to be sustainable and could even conceivably result in an increased quality of life for that population, unless they attempted to run their society along neo-liberal lines and with Neo-Classical Economics. And while that process would involve a growth rate, albeit a negative rate, I have trouble imagining that Fama or Simon would embrace such a goal or a policy that would lead to such a goal.

As the Dutch said while fighting the Spanish: "It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Thu Nov 11th, 2010 at 04:26:30 PM EST
[ Parent ]
That's being too literal again and missing his point.  He means 7 billion in the sense of "a gazillion," not in the sense of having actually working out the math

No, that's not being too literal.

He gives a number. When you give a number - a hundred years, two hundred years, seven billion years, whatever - then the reader should be able to reasonably expect that there is some justification for that number. Every time you pull a number out of your ass it requires a separate and explicit apology for imposing upon the reader's credulity, since the reader might otherwise assume that there is prior evidence for choosing that number over any other number - evidence that does not, in fact, exist in this case.

And in fact there is a reason why he picked that particular number. He picked that particular number because that particular number is as close to "forever" as you can get: It's the approximate remaining lifetime of the Sun. So it's not just a random number he pulled out of his ass. It's a specific number he pulled out of his ass for a specific reason, which means it's perfectly fair game to point and laugh when basic back-of-the-envelope arithmetic will tell you that it's a spurious number.

- Jake

Austerity can only be implemented in the shadow of a concentration camp.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Thu Nov 11th, 2010 at 08:56:00 AM EST
[ Parent ]
It's not just a random number, but it is a number that doesn't have to tie to any assumed rate of growth or any better number than someone can provide.  

If someone worked out the math better and said, no, it's really 3 billion years for some reason, or 5 million years, or 10,000 years or whatever, it wouldn't change the outcome of his argument unless the number was considerably less than what one presumes, arbitrarily, is an important limit.

Even if Simon can't do math at all, it's similar to Christopher Columbus' discovery of America.  Columbus got the math wrong and calculated the earth to be smaller than it was thus making the trip to India shorter than it really is. But that doesn't change the fundamental, world-changing insight that he had in any way -- that you can profitably travel around the world in the other direction, from east to west instead of west to east, to get to India.

Likewise, Simon's insight is not so easily dismissed even if you can refute some of the numbers he had given in support of it -- that there is no reason to presume that human population growth actually be limited by merely linear projections of resource use and availability into the future because people can adapt to scarcity.

by santiago on Thu Nov 11th, 2010 at 03:48:15 PM EST
[ Parent ]
That insight was not that new, but the profitability hinged on the size of the planet.

Christopher Columbus - Wikipedia, the free encyclopedia

Columbus therefore estimated the distance from the Canary Islands to Japan to be about 3,000 Italian miles (3,700 km, or 2,300 statute miles), while the correct figure is 19,600 km (12,200 mi). No ship in the 15th century could carry enough food and fresh water for such a long voyage and the dangers involved in navigating through the uncharted ocean would have been formidable. Most European navigators reasonably concluded that a westward voyage from Europe to Asia was unfeasible. The Catholic Monarchs, however, having completed an expensive war in the Iberian Peninsula, were desperate for a competitive edge over other European countries in the quest for trade with the Indies. Columbus promised such an advantage.

Had he not stumbled on unknown land he would have been an utter failure, because he did the math wrong.

A vote for PES is a vote for EPP! A vote for EPP is a vote for PES! Support the coalition, vote EPP-PES!

by A swedish kind of death on Thu Nov 11th, 2010 at 04:25:21 PM EST
[ Parent ]
Perhaps (but perhaps not as well), but that idiosyncrasy still doesn't change the truth of being able to go the other way around the world to get there, which is the essential part of the insight.
by santiago on Thu Nov 11th, 2010 at 05:29:55 PM EST
[ Parent ]
Yes. Yes it does.

It was perfectly well known that it was theoretically possible to go around the world in the other direction.

If you had the ability to magically create food and fresh water out of thin air to supply your crew for the duration of the trip.

If not for what you dismiss as an unimportant idiosyncrasy, Columbus would not have returned home in abject failure, he would not have returned home at all. For all practical economic purposes, the Pacific Ocean was not crossable with 16th century technology. Full stop.

The difference between Columbus and every other schmuck out there was not that he had any unique insight. It was that he had a desperate sponsor who didn't do the math, and was willing to bet the lives of his crew on an Oil E. Coyote forecast. Rather like Julian Simon, actually.

- Jake

Austerity can only be implemented in the shadow of a concentration camp.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Thu Nov 11th, 2010 at 05:55:48 PM EST
[ Parent ]
I'd agree with you about the Pacific Ocean not being crossable with 15th century technology, but Magellan would like to have a word with you about the effectiveness of 16th century technology...

Un roi sans divertissement est un homme plein de misères
by linca (antonin POINT lucas AROBASE gmail.com) on Mon Nov 15th, 2010 at 02:46:06 AM EST
[ Parent ]
OK, the Pacific was crossable. But assuming the Americas hadn't been there, the combined Atlantic, Pacific and water-that-should-have-been-America would probably not have been. Nevermind that it wouldn't have been profitable to do so...

- Jake

Austerity can only be implemented in the shadow of a concentration camp.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Mon Nov 15th, 2010 at 09:44:11 AM EST
[ Parent ]
Can I point out in passing that comparing some idiot gibbering about the inevitable immortality of the human race with Columbus is a completely facile argument anyway?
by ThatBritGuy (thatbritguy (at) googlemail.com) on Mon Nov 15th, 2010 at 09:51:13 AM EST
[ Parent ]
Actually, we don't know any of that.  We don't know that crossing a combined Atlantic-Pacific stretch was truly impossible with 15th century technology at all.  Just that it seemed really hard and was more likely to end in failure than the shorter Atlantic crossing. During that age and for the next century or so, most voyages of all kinds ended in failure for lots of other reasons.

Columbus just said, it's theoretically possible, so let's try it, and he convinced himself and his patrons that it would actually be easier because of calculation mistake. The mistake might have been dreadful, but there were many other factors more likely to cause Columbus' trip to end in failure than that at the time, and due to good luck, none of them occurred either, allowing Columbus to both prove his first insight true as well as finding something really big and unanticipated in the process.  

by santiago on Tue Nov 16th, 2010 at 01:50:50 PM EST
[ Parent ]
i think the polynesians were sailing vast swathes of the pacific way before the C15-16th.

"We can all be prosperous but we can't all be rich." Ian Welsh
by melo (melometa4(at)gmail.com) on Tue Nov 16th, 2010 at 02:33:08 PM EST
[ Parent ]
Good point.
by santiago on Tue Nov 16th, 2010 at 02:34:00 PM EST
[ Parent ]
Simon's insight is not so easily dismissed even if you can refute some of the numbers he had given in support of it -- that there is no reason to presume that human population growth actually be limited by merely linear projections of resource use and availability into the future because people can adapt to scarcity.

This apparently makes sense to adherents of Neo-Classical Economics. Perhaps that explains why they deny that financial bubbles occur, that they can be seen as they inflate and that they can be managed in the long term interest of society. A better question just now seems to be if the world economy can successfully recover from the most recently burst bubble.

To others, this "insight" seems more like folly and wishful thinking. Prudence would seem to dictate that we take seriously the pending depletion of the fossil energy resources on which the increasingly complex societies of the last two hundred years have been built. Without access to the highly favorable EROIs that were available until the 1970s, much, if not all, of that complexity could undergo a dramatic collapse in the not too distant future.

The problems for the next two decades are likely to be learning to deal with declining marginal returns on the investments required to provide the energy to drive our cultures. Renewable energy sources provide positive marginal returns. I have seen figures of up to 20:1 for wind. But that may be inadequate to support systems that were built up during times of 50:1 returns.

My fear is that by denying the existence of foreseeable constraints we will run into them very hard and, instead of moving gracefully to a scenario in which we rely on 20:1 returns from renewables, we end up in a near total collapse of the culture. We have to consider that, by blindly following hopeful scenarios and denying the possibility of negative scenarios we could end up needing to rebuild all of our coastal cities on higher ground in a world in which 20:1 returns on investment are the best obtainable. And we could end up having to do that in a social context where a tiny minority possesses almost all disposable wealth and control of the apparatuses of government and has no interest in the survival of the bottom 90% of income earners in the society. But that might get us back to a population less than 10% of what we have today.

As the Dutch said while fighting the Spanish: "It is not necessary to have hope in order to persevere."

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Thu Nov 11th, 2010 at 04:53:30 PM EST
[ Parent ]
There are two arguments being conflated here (and I don't mean just your comment).  One is an efficiency (or growth) argument, and one is an equity argument.  That the world will recover from the latest economic calamity is a forgone conclusion -- of course it will, because it already has. Neoclassicals argue that collective efforts should not try to intervene in this process, while Keynsians argue that collective action should be attempted.  The reason Keynsians argue this, however, is NOT because it will lead to higher growth than would occur otherwise.  Rather, it is because it will prevent the poorer among us from having to experience deprivation.  That is, Keynsian analysis is, first and foremost, an equity argument, not a growth argument.  Keynes framework, even in its later Minsky versions, doesn't argue that the world will collapse if government doesn't stimulate demand and employ people.  Rather, Keynes framework argues that doing so keeps more people alive and better off than otherwise.

Neoclassical economics, on the other hand, doesn't argue that the poor will be better off if government keeps its hands off the economy and lets the forces of "creative destruction*" do its necessary work in a recession.  Rather they just argue that more growth will happen if it's done that way instead of through stimulus packages of some kind.  

Both views may be mutually consistent. We need to keep that in mind here.

*I know. "Creative destruction" is not a neoclassical idea, but it has been invoked, improperly, to apply to the current crisis and the imagined purging that it performs on weak parts of the economy.

by santiago on Thu Nov 11th, 2010 at 05:43:36 PM EST
[ Parent ]
That the world will recover from the latest economic calamity is a forgone conclusion -- of course it will, because it already has.

In which fictional alternative universe?

Strip out financial sector income, and the world hasn't recovered. And until and unless the non-financial sector recovers, the financial sector incomes are Monopoly money. The stock market produces nothing, runs nothing, builds nothing, creates nothing. A stock market rally therefore does not indicate a recovery. A recovery in wind turbine production, a recovery in steel production, a recovery in employment, those are real indicators of a real recovery.

The reason Keynsians argue this, however, is NOT because it will lead to higher growth than would occur otherwise.

No, of course not. The fact that it demonstrably does lead to higher growth is a nice aside, but not central to the point.

Neoclassical economics, on the other hand, doesn't argue that the poor will be better off if government keeps its hands off the economy and lets the forces of "creative destruction*" do its necessary work in a recession.  Rather they just argue that more growth will happen if it's done that way instead of through stimulus packages of some kind.

The neo-classicals are demonstrably wrong on the facts. Keynesian interventionist economics produce higher growth overall.

Both views may be mutually consistent. We need to keep that in mind here.

Only in the fantasy world in which the neo-classicals are not full of shit. Which they are in the real world, where their policy prescriptions always lead to lower growth, cycle-averaged, than responsible policy prescriptions.

- Jake

Austerity can only be implemented in the shadow of a concentration camp.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Thu Nov 11th, 2010 at 06:05:16 PM EST
[ Parent ]
JakeS:
The neo-classicals are demonstrably wrong on the facts.

they know that, their job is to keep a straight face act properly innocent under the rigorous media glare.

JakeS:

Keynesian interventionist economics produce higher growth overall.

and why would they actually want that? that would be deflationary, (most of all to their egos).

"We can all be prosperous but we can't all be rich." Ian Welsh

by melo (melometa4(at)gmail.com) on Thu Nov 11th, 2010 at 06:48:16 PM EST
[ Parent ]
Some of them are, obviously, simply whores. But a lot of them really do believe that they are on a sound empirical footing, for a variety of reasons. Now, I happen to disagree with their confidence in the quality of their empiricism, but that is a discussion that really can only be fruitfully carried out in the presence of concrete data.

- Jake

Austerity can only be implemented in the shadow of a concentration camp.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Thu Nov 11th, 2010 at 08:09:06 PM EST
[ Parent ]
JakeS:
for a variety of reasons.

any good valid ones? the concrete data is always hindsight, no?
so it's on faith partly, and the power to convince/dupe others that this time it really really really will work.

just because it didn't before, doesn't mean anything because this time is new and different!

trust us, even wrong, we know more than you...shit happens!

"We can all be prosperous but we can't all be rich." Ian Welsh

by melo (melometa4(at)gmail.com) on Fri Nov 12th, 2010 at 10:27:56 AM EST
[ Parent ]
It's not that cut and dried. Usually. You're dealing with numbers that can often be sliced in several different ways, so you can't attribute to malice what is adequately explained by confirmation bias.

There are a few cases where their empirics are simply out-and-out sloppy, such as the way they analyse unemployment. And there are some cases where they resort to blatant cop-outs, such as financial shocks being exogenous. But for the most part, their models are not blatantly wrong as long as you massage your data in a not too extravagant fashion.

There's a substantial component of black magic to statistical data analysis, no matter how rigorously you do the math. Because there is no theory-neutral method for deriving which of the infinitely many possible mathematical models you want to compare your data to. So there's plenty of room for honest mistakes, even in the natural sciences. Add in the fact that economics deals with data that's so noisy that most physicists wouldn't even bother trying to extract a signal, and, well...

- Jake

Austerity can only be implemented in the shadow of a concentration camp.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Fri Nov 12th, 2010 at 12:05:47 PM EST
[ Parent ]
thanks teach, a pitch perfect reply for my comprehension levels!

all the other economists say the emperor is naked, any that spin even illusive clothes get the (well-paid) jobs being Serious.

"We can all be prosperous but we can't all be rich." Ian Welsh

by melo (melometa4(at)gmail.com) on Sun Nov 14th, 2010 at 08:41:00 AM EST
[ Parent ]
No, the facts don't actually indicate that higher growth results from Keynesian intervention compared to non-intervention if you're talking about the long term.  That's neither something hypothesized by Keynesian theory or supported by evidence, largely because that it not what Keynesian theory is meant to address. Keynesian theory is about reducing unemployment and deprivation as a policy priority, not maximizing economic growth, which is seen as a secondary outcome, but not a primary one. It is a primary one for neoclassical views of macroeconomics, however, but it still remains largely unknown. It may be true, but even if it is, it doesn't mean that the Keynesian view is false because they have different objectives.
by santiago on Thu Nov 11th, 2010 at 11:58:05 PM EST
[ Parent ]
No, the facts don't actually indicate that higher growth results from Keynesian intervention compared to non-intervention if you're talking about the long term.

Yes, they do. There is a measurable anticorrelation between economic instability and long-run growth. Pro-cyclical policies hurt long-run growth. Either because they are intrinsically stupid, wasteful and destructive, because "long-run" growth is really just a series of short-run growth cycles, and pro-cyclical policies disrupt short-run growth, or (usually) both of the above.

Keynesian theory is about reducing unemployment and deprivation as a policy priority, not maximizing economic growth,

Yes and no. It's about reducing unemployment and deprivation, but the way it does so is by ensuring maximum possible growth. Keynesian economics - or at least the crass Keynesian economics that resulted after the academic economists were done with re-casting Keynes in terms of Walrasian epicycles - is primarily about sidestepping questions of equity by ensuring the highest possible growth.

It is a primary one for neoclassical views of macroeconomics, however,

Yep. Even by its own official meterstick, neo-classical economics is pure FAIL.

Of course, the official productivist meterstick never had anything to do with the actual objectives of those who dogmatically insist on clinging to their Walrasian epicycles...

- Jake

Austerity can only be implemented in the shadow of a concentration camp.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Fri Nov 12th, 2010 at 10:52:46 AM EST
[ Parent ]
No, the facts don't actually indicate that higher growth results from Keynesian intervention compared to non-intervention if you're talking about the long term.

Actually, Richard Koo presented a good, well supported argument that such intervention is less costly than not intervening at the inaugural meeting of George Soros' Institute for New Economic Thinking in April, 2010. He drew from The Bank of Japan's experience during Japan's "Long Recession" after the real estate bubble of the '80s collapsed. BOJ raised interest rates too soon and produced a "double dip" out of poorly founded concerns about the effects of deficits. The double dip resulted in lost production. BOJ found that repairing the additional damage was more expensive than continuing the stimulus would have been.

A link to the video presentation is here.

Koo's slide presentation is here.

And Yves Smith's coverage with lots of links and intelligent commentary is here

(Sorry for the late response. I was traveling Friday and this morning and will be again Sunday and Monday morning.)

As the Dutch said while fighting the Spanish: "It is not necessary to have hope in order to persevere."

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Sat Nov 13th, 2010 at 04:43:57 PM EST
[ Parent ]
Yes, it has been argued, and is often done so in public policy debate, but I'm arguing that such propositions really miss the point and ultimately weaken the Keynesian case. Irregardless of how fast the economy might grow, the Keynesian argument has always been to maximize employment to ensure that deprivation is minimized. This means that even if it is true that an economy grows slower by trying to employ everyone, introducing the possibility of inefficiencies, it's still superior to another policy that would allow high unemployment to persist even if there was higher overall economic growth.
by santiago on Mon Nov 15th, 2010 at 10:57:37 AM EST
[ Parent ]
What Koo argued was more that ignoring the need to maintain full employment, which I agree is a key goal of Keynes, with the aim of reducing the deficit will actually result in an increase of the deficit over what would have been the case had full employment been maintained. This is much more true now, with such stabilizers as unemployment insurance and welfare, that it was in the '30s. (Of course pressure will continue to build to eliminate those stabilizers.)

I would love to see the goal of full employment taken seriously by the Fed, Congress and the Administration. Were it taken seriously, robust fiscal policies could readily be employed to start doing a variety of greatly needed social tasks, from maintaining employment in K-12 and post-secondary education, repairing deteriorating infrastructure -- roads, bridges, and sewage treatment facilities, putting in place electrical transmission infrastructure coordinated with the construction of windmills along the front range of the Rockies, converting our rail infrastructure to electric power, etc.

But even more important would be reversing the last 40 years worth of policies on "globalization" so as to encourage, to the maximum possible extent, repatriation of manufacturing to the USA. But this would require that policy be directed towards the welfare of the population as a whole rather than exclusively to the benefit of those with great wealth.

What has served to discredit Keynes in the USA, to the extent of those who have even heard of him, is the caricature of him as favoring squandering of government money pointlessly. This has consisted of taking rhetorical flourishes of his that made sense in the context of the mid-1930s, even if they were written to make a point, not as a policy recommendation, and presenting them as what Keynes would have us do today. Indeed, it is almost impossible to further damage the popular image of Keynes in the USA.

As the Dutch said while fighting the Spanish: "It is not necessary to have hope in order to persevere."

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Mon Nov 15th, 2010 at 05:03:18 PM EST
[ Parent ]
That the world will recover from the latest economic calamity is a forgone conclusion -- of course it will, because it already has.

In which fictional alternative universe?
Well, just this past September the NBER dated the end of the recession in June 2009. And the folks at VoxEU agree:
Global industrial production continues to recover - something for which policy deserves considerable credit (as we have argued on this site, see Almunia et al 2009 and O'Rourke and Eichengreen 2009). But before indulging in self-congratulation, policymakers should note that the level of industrial production is still 6% below its previous peak (figure 1). (At the trough it was 13% below its previous peak.) It follows that considerable excess capacity remains in a number of important economies. Exiting now from policies of stimulus in those countries would therefore be premature.
Instead, we got austerity...

Of all the ways of organizing banking, the worst is the one we have today — Mervyn King, 25 October 2010
by Migeru (migeru at eurotrib dot com) on Fri Nov 12th, 2010 at 02:50:03 AM EST
[ Parent ]
ARGeezer:
My fear is that by denying the existence of foreseeable constraints we will run into them very hard and, instead of moving gracefully to a scenario in which we rely on 20:1 returns from renewables, we end up in a near total collapse of the culture.

the most concisely -and elegantly_ put raison d'etre for ET that i've read so far.

very nice

"We can all be prosperous but we can't all be rich." Ian Welsh

by melo (melometa4(at)gmail.com) on Thu Nov 11th, 2010 at 07:04:52 PM EST
[ Parent ]
If someone worked out the math better and said, no, it's really 3 billion years for some reason, or 5 million years, or 10,000 years or whatever, it wouldn't change the outcome of his argument unless the number was considerably less than what one presumes, arbitrarily, is an important limit.

He gave a number. That makes it his responsibility to back it up with plausible calculations.

Our society gives a quite inordinate persuasive weight to numbers. Padding his argument by citing some astronomically huge number is simply lying unless he has some reasonably plausible arithmetic to back it up.

He is not a crackpot because he is wrong. He is a crackpot because he is pulling numbers out of his ass.

"Population can continue to grow at some unspecified, perhaps non-constant, rate forever" is not an argument. That's solipsistic wankery. Of course population can continue to grow at the rate of one person per millennium essentially forever. In order for his argument to have any formal meaning at all - in other words, in order for him to not be a complete crackpot - you have to assume a growth rate that will be statistically distinguishable from zero.

No such growth rate exists for which population can continue, using only current technology, to grow for seven billion years, or one billion years, or one million years or even ten thousand years.

- Jake

Austerity can only be implemented in the shadow of a concentration camp.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Thu Nov 11th, 2010 at 05:47:09 PM EST
[ Parent ]
He meant that given scarcity, people would find substitutes for copper for most things, including use of other metals or or new inventions, because its not the chemical makeup of copper that matters but its function for human use.

Materials science has been looking for that substitute for more than twice as long as I have been alive. Copper was never particularly cheap, it's just that all the elements and alloys that have the same physical properties (electrical conductivity) and chemical properties (low reactivity) are even more expensive.

Even assuming that such a material exists, the best zeroth-order guess for when it will be available on an industrial scale is therefore around half a century from now.

- Jake

Austerity can only be implemented in the shadow of a concentration camp.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Wed Nov 10th, 2010 at 01:35:18 PM EST
[ Parent ]
Substitutes have already been found for some of the most intensive uses of copper, however. PVC tubing has mostly replaced copper in plumbing, for instance. In most cases, simply doing things differently allows close to cost-free adaptation given an increase in prices.

I think the coming phosphate wall within a century or so is likely to be the real test of Simon's thesis, and I'm not betting with Simon for that one.  All available mined phosphate, a necessary fertilizer for industrial (and even modern organic) agriculture, is projected to be exhausted within a century or so, at which time really only recycling much more expensive phosphate from human sewage is expected to be possible, providing an effective limit on more population until knew knowledge can figure something else out, if ever.

by santiago on Wed Nov 10th, 2010 at 11:06:36 PM EST
[ Parent ]
The 'deans of the economic establishment' think copper is made from other metals?

And you're defending them with the argument that just because they're wrong about something trivial, like a belief in alchemy, doesn't mean they're wrong about everything?

Dude - someone who makes such a basic mistake has no business being taken seriously about anything.

You could pick a hundred people off the street at random and most of them would know more about the real world than this.

This isn't even about economics - it's about policy being set by adults who are nowhere close to meeting undemanding high school requirements for basic scientific literacy.

by ThatBritGuy (thatbritguy (at) googlemail.com) on Tue Nov 9th, 2010 at 08:30:25 PM EST
[ Parent ]
ThatBritGuy:
someone who makes such a basic mistake has no business being taken seriously about anything
No, the problem is not making a mistake or being ignorant. The problem is holding on to the mistake after careful correction.
Simon has written that we will never run out of copper because "copper can be made from other metals." The letters to the editor jumped all over him, told him about chemistry. He just brushed it off


Of all the ways of organizing banking, the worst is the one we have today — Mervyn King, 25 October 2010
by Migeru (migeru at eurotrib dot com) on Wed Nov 10th, 2010 at 05:03:15 AM EST
[ Parent ]
And the fundamental problem behind this is the fact that our elites, including (and perhaps especially) in the press, are accountable to no one but themselves and the class they represent.
by redstar on Wed Nov 10th, 2010 at 05:15:52 AM EST
[ Parent ]
I don't think it's either/or. Lack of knowledge suggests lack of education. Lack of willingness to correct a mistake suggests arrogance.

But I'd guess these are right-wingers, so finding those two qualities working together as militant ignorance shouldn't be a surprise.

by ThatBritGuy (thatbritguy (at) googlemail.com) on Wed Nov 10th, 2010 at 07:24:32 AM EST
[ Parent ]
I think arrogance comes first and makes it possible to write about metals without bothering to learn the first thing about them.

Of all the ways of organizing banking, the worst is the one we have today — Mervyn King, 25 October 2010
by Migeru (migeru at eurotrib dot com) on Wed Nov 10th, 2010 at 09:00:14 AM EST
[ Parent ]
Some elements have been created from other elements in high energy physics experiments by bombarding one element with nuclei of another and obtaining either fusion or fission products as an output. Whether there is a feasible chain that results in a stable isotope of copper I do not know. This process has been likened to alchemy and got some coverage in the popular press. It may be to what Simon was referring.

As the Dutch said while fighting the Spanish: "It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Wed Nov 10th, 2010 at 12:37:10 PM EST
[ Parent ]
Yes, I can see that.

Of all the ways of organizing banking, the worst is the one we have today — Mervyn King, 25 October 2010
by Migeru (migeru at eurotrib dot com) on Wed Nov 10th, 2010 at 12:43:35 PM EST
[ Parent ]
I see no evidence that his understanding of physics is deep enough to know about that process.

It's also insanely expensive, produces tiny quantities, and tends to leave radioactive debris behind, so it's not going to be a practical alternative to digging useful stuff out of the ground.

by ThatBritGuy (thatbritguy (at) googlemail.com) on Wed Nov 10th, 2010 at 01:08:56 PM EST
[ Parent ]
It's also insanely expensive

Of course. But it is not impossible that the cost could decline and better means than accelerators could be found to accomplish the same task. Likewise, it is possible that "high temperature" superconducting materials, such as the iron alloys now under development, could prove to be superior alternatives to copper for many applications, or that some version of carbon nano-tubes might emerge for high temperature applications. Probably not for twenty or thirty years, but then copper will likely still be available at some feasible price for 20 years. However, it is questionable to base policy on "might emerge", especially absent serious commitments to R&D.

As the Dutch said while fighting the Spanish: "It is not necessary to have hope in order to persevere."

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Wed Nov 10th, 2010 at 02:03:33 PM EST
[ Parent ]
Copper is already scarce and valuable enough to be worth stealing. Network Rail in the UK has been dealing with incidents where power and signal cabling has been stolen from the trackside, because it's so easy to fence.

As prices increase, so will thefts. So one of the side-effects of resource scarcity is cannibalised infrastructure. At some point it's going to become too expensive to replace, which is when things stop working.

Assuming the inevitability of a literal deus ex machina which will solve these problems is a faith-based argument, not a reality-based one.

I'd have been more persuaded if there had been any attempt to quantify or monitor innovation over time - but this is NCE, so that was never likely.

by ThatBritGuy (thatbritguy (at) googlemail.com) on Wed Nov 10th, 2010 at 02:24:00 PM EST
[ Parent ]
As far ago as the mid-'90s in South Central LA during the construction of the Maxine Waters Skill Center for LAUSD thieves went onto the roof and ripped out all of the copper piping for the HVAC, along with the condensers and electrical contractors had learned to lock copper wire into shipping containers over night and then to hire a night and weekend watchman, complete with a trailer, to call police should wholesale efforts, such as attempts to steal the containers or break into them occur.

As the Dutch said while fighting the Spanish: "It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Wed Nov 10th, 2010 at 04:40:08 PM EST
[ Parent ]
Of course. But it is not impossible that the cost could decline and better means than accelerators could be found to accomplish the same task.

Quantum mechanics would beg to differ.

Even if you strip out all the energy waste (which is in itself entering the realm of magitech), the energy cost would still be prohibitive. That's just the way the fundamental physics of the problem works out. It is already cheaper today to send a robotic mining probe to the asteroid belt between Mars and Jupiter than it will ever be to synthesise metals in an accelerator (and no, you won't get around the need for an accelerator until you find a way to alter the electroweak force - and a device that did that would be a weapon of mass destruction that would make nukes and weaponized ebola look like toys by comparison, even if it were possible at all, which it isn't).

Likewise, it is possible that "high temperature" superconducting materials, such as the iron alloys now under development, could prove to be superior alternatives to copper for many applications,

For a sufficiently wide definition of "many" or a sufficiently narrow definition of "applications," yes. The "high temperature" in "high temperature superconductor" means "higher than the boiling point of liquid nitrogen," not "room temperature." The latter is widely considered a form of magitech on par with cold fusion.

Now, high temperature superconductors are nifty little things, and they will certainly make a lot of devices a lot cheaper to operate (medical imaging devices come to mind). But while liquid nitrogen is cheap, it is not something you want to have every odd Joe fuck around with (which rules out its use in most commercial electronics), and it is completely unsuitable for cooling long-range transmission cables.

or that some version of carbon nano-tubes might emerge for high temperature applications.

Unlikely. The electron structure of nanotubes makes it more likely that they will behave like semiconductors than full conductors. Again, useful and interesting, but not a viable substitute for noble metals.

- Jake

Austerity can only be implemented in the shadow of a concentration camp.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Wed Nov 10th, 2010 at 03:05:47 PM EST
[ Parent ]
I did say "not impossible" and 'it is questionable to base policy on "might emerge", especially absent serious commitments to R&D.' Perhaps Simon was referring to technology to be supplied by space aliens.

As the Dutch said while fighting the Spanish: "It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Wed Nov 10th, 2010 at 04:42:26 PM EST
[ Parent ]
Some elements have been created from other elements in high energy physics experiments by bombarding one element with nuclei of another and obtaining either fusion or fission products as an output.

Indeed, with a linear accelerator, a magneto-optical trap and a neutron source, it should be possible to create any isotope you want by starting with a Bose-Einstein condensate of hydrogen and adding protons and neutrons one at a time. However, the energy cost of this operation is prohibitive for any industrial use - and the energy cost is embedded very deeply in the physics, it's not something you can ameliorate sufficiently with clever engineering.

Whether there is a feasible chain that results in a stable isotope of copper I do not know.

There isn't. All reaction chains that start by bombarding a stable isotope with one or two particles involve other subgroup metals which are almost equally uncommon, and which in any case have their own industrially interesting uses.

Oh, and the energy cost would be ridiculous.

- Jake

Austerity can only be implemented in the shadow of a concentration camp.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Wed Nov 10th, 2010 at 02:49:33 PM EST
[ Parent ]
santiago:
you have to take their ideas very seriously when trying to argue against them not dismiss them because, ad hominem, they were the deans of the neoclassical establishment
I consider that reason enough to dismiss neoclassical economics, to be honest.

Angels on pinheads, srsly.

This is like scholasticism. It's completely divorced from reality, and trying to change it from the inside is pointless. Better to build something else and stop trying to learn it well enough to mount a critique, let alone building up enough status within the establishment to have a snowball's chance in hell of having the critique acknowledged.

Of all the ways of organizing banking, the worst is the one we have today — Mervyn King, 25 October 2010

by Migeru (migeru at eurotrib dot com) on Wed Nov 10th, 2010 at 04:17:54 AM EST
[ Parent ]
Migeru:
Better to build something else and stop trying to learn it well enough to mount a critique,

you touch on something here... by the time i understand all the multilayer in fixes, the tripletalk, the up-is-down orwellisms, and the gibberish jargon, it will be all over but the digging the garden to survive...

sigh

as for building something new, we're all ears!

"We can all be prosperous but we can't all be rich." Ian Welsh

by melo (melometa4(at)gmail.com) on Wed Nov 10th, 2010 at 07:28:04 AM EST
[ Parent ]
santiago:
Humans have never yet had to face absolute consequences of scarcity because they have adapted to substitute other resources for what they used before or developed new technologies.

jared diamond notwithstanding?

"We can all be prosperous but we can't all be rich." Ian Welsh

by melo (melometa4(at)gmail.com) on Wed Nov 10th, 2010 at 09:34:18 AM EST
[ Parent ]
It's not divorced from reality. The essential argument is this: The physics don't matter because humans can adapt to any physical limitation through adaption or new technology, outcomes of market responses to scarcity. If physical constraints do matter, as those of us here argue, why do they matter? Why can't substitutes or new technological innovations allow us to adapt to scarcity in copper, oil, or anything else, forever.  The answer has nothing to do with understanding the chemistry of metals, because such understanding has only increased the capacity for humans to adapt to scarcity thus far, never decreased that capacity. This is why Simon argues that understanding what copper is physically is irrelevant -- it's the function of copper that matters, not its chemistry. The only relevant thing is whether you can show why real constraints to growth actually exist given human capacity so far to adapt to such constraint with technology.
by santiago on Wed Nov 10th, 2010 at 09:40:42 AM EST
[ Parent ]
I think that Mig's argument was that all of NCE is so divorced from reality and immune to criticism that we might as well start building something that works instead of wasting effort building careers INSIDE NCE in a futile attempt to change it from within.

As the Dutch said while fighting the Spanish: "It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Wed Nov 10th, 2010 at 12:47:32 PM EST
[ Parent ]
I started out 6 years ago trying to read Samuelson and it was all downhill from there...

Of all the ways of organizing banking, the worst is the one we have today — Mervyn King, 25 October 2010
by Migeru (migeru at eurotrib dot com) on Wed Nov 10th, 2010 at 12:50:55 PM EST
[ Parent ]
I was more or less reacting to this, too:

ARGeezer:

I believe that santiago is framing his arguments in those terms that would be necessary were he to present those arguments to others within the church of "mainstream" economists and that he is so doing because, in order to be considered by those in that mainstream, this is how they must be framed. It also seems that he sees problems with that mainstream and would like to advance approaches that could remedy those problems.

...

From this point of view santiago is providing those of us here with a pacing activity that allows us to sharpen our arguments. This should not be a thankless activity, so I offer him my thanks for his contributions. It may be that "mainstream economics" is so ensconced and entrenched that no arguments that could significantly change it will be allowed, but we won't really know unless we try.



Of all the ways of organizing banking, the worst is the one we have today — Mervyn King, 25 October 2010
by Migeru (migeru at eurotrib dot com) on Wed Nov 10th, 2010 at 12:55:27 PM EST
[ Parent ]
I suspected so. But if NCE is "the enemy" it is always good to know your enemy better. And, regardless of his personal beliefs, it is obvious that santiago well understands the thinking common in "the mainstream."

As the Dutch said while fighting the Spanish: "It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Wed Nov 10th, 2010 at 01:56:25 PM EST
[ Parent ]
No, NCE is not 'the enemy'.

NCE is pure misdirection - it hides 'the enemy' behind a wall of rhetoric.

Attempting to parse the rhetoric is futile. Attempting to deconstruct and argue with the rhetoric directly is also futile, although it can be an amusing hobby if you're that way inclined.

'The enemy' relies on the appearance of inevitability to project and maintain power. Challenging that lie directly will always be more effective than trying to argue with a wall of nonsense.

by ThatBritGuy (thatbritguy (at) googlemail.com) on Wed Nov 10th, 2010 at 02:06:19 PM EST
[ Parent ]
You have to make a serious attempt at parsing the discourse and deconstructing it. But eventually you need a bit of self-confidence to allow yourself to conclude that yes, it is rhetoric, misdirection and a smokescreen.

Of all the ways of organizing banking, the worst is the one we have today — Mervyn King, 25 October 2010
by Migeru (migeru at eurotrib dot com) on Wed Nov 10th, 2010 at 03:43:29 PM EST
[ Parent ]
It's not divorced from reality. The essential argument is this: The physics don't matter because humans can adapt to any physical limitation through adaption or new technology

Several Mesoamerican and Polynesian civilisations (or, rather, ex-civilisations) would beg to differ. Once you chop down the last tree, it's pretty much game over.

- Jake

Austerity can only be implemented in the shadow of a concentration camp.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Wed Nov 10th, 2010 at 02:15:59 PM EST
[ Parent ]
Kind of.

Firstly almost any good-faith reality-based model of economics will be more useful and accurate than NCE. If there's any reasonable attempt at honesty and rigour, devising better models won't be hard.

But that's not the issue. The issue is devising a political system which makes it impossible for NCE or any equivalently self-serving rhetorical narrative to invade and overrun the body politic.

NCE itself is meaningless gibbering and spitting. It's a political game token, not a scientific model.

But the dominant influence of NCE and the right is evidence of fatal weaknesses in the tools and ideas that structure policy and decision making.

by ThatBritGuy (thatbritguy (at) googlemail.com) on Wed Nov 10th, 2010 at 01:23:13 PM EST
[ Parent ]
Simon's point is valid and a serious one here. He is not arguing that physically impossible things are true.  He is instead arguing, as can be seen by any direct reading of his work instead of misquotes of it by others, that people respond to scarcity by adapting and technological advancement so far has more than kept up with the scarcity of resources. Humans have never yet had to face absolute consequences of scarcity because they have adapted to substitute other resources for what they used before or developed new technologies.  Simon is arguing that since humans have done so up to this date, why presume that any apparent scarcity in the immediate future is going to be any more of an obstacle.

It might not be correct, but misrepresenting his understanding of chemistry is not the way defend your position.  Address the real argument he is making: Given that people can adapt and substitute abundant resources for scarce ones, why should we think that oil (or any other critical resource constraint) is ever going o be a serious problem for humanity instead of just a local problem to be solved by some humans?

by santiago on Wed Nov 10th, 2010 at 09:19:47 AM EST
[ Parent ]
santiago:
Given that people can adapt and substitute abundant resources for scarce ones, why should we think that oil (or any other critical resource constraint) is ever going o be a serious problem for humanity instead of just a local problem to be solved by some humans?

why do you think hemp's illegal?

makes good plastic! (amongst many other useful things...)

"We can all be prosperous but we can't all be rich." Ian Welsh

by melo (melometa4(at)gmail.com) on Wed Nov 10th, 2010 at 09:36:23 AM EST
[ Parent ]
santiago:
Humans have never yet had to face absolute consequences of scarcity because they have adapted to substitute other resources for what they used before or developed new technologies.
Wikipedia: Nauru
Throughout the first half of the 20th century, Nauru was a "rentier state". Nauru is a phosphate rock island, with deposits close to the surface, which allow for simple strip mining operations. This island was a major exporter of phosphate starting in 1907, when the Pacific Phosphate Company began mining there, through the formation of the British Phosphate Commission in 1919, and continuing after independence. This gave Nauru back full control of its minerals under the Nauru Phosphate Corporation, until the deposits ran out during the 1980s.[4] For this reason, Nauru briefly boasted the highest per-capita income enjoyed by any sovereign state in the world during the late 1960s and early 1970s. When the phosphate reserves were exhausted, and the environment had been seriously harmed by mining, the trust established to manage the island's wealth became greatly reduced in value. To earn income, the government resorted to unusual measures. In the 1990s, Nauru briefly became a tax haven and illegal money laundering centre. From 2001 to 2008, it accepted aid from the Australian government in exchange for housing a Nauru detention centre that held and processed those who had tried to enter Australia in an irregular manner.[5]
Yeah, I guess you have a point. You can always recycle your strip-mining operation into a money laundering tax haven, and when that folds into a prison complex.

Of all the ways of organizing banking, the worst is the one we have today — Mervyn King, 25 October 2010
by Migeru (migeru at eurotrib dot com) on Wed Nov 10th, 2010 at 09:40:21 AM EST
[ Parent ]
santiago:
Humans have never yet had to face absolute consequences of scarcity because they have adapted to substitute other resources for what they used before or developed new technologies.  Simon is arguing that since humans have done so up to this date, why presume that any apparent scarcity in the immediate future is going to be any more of an obstacle.

Only if you ignore every famine in the history of the world.

A vote for PES is a vote for EPP! A vote for EPP is a vote for PES! Support the coalition, vote EPP-PES!

by A swedish kind of death on Wed Nov 10th, 2010 at 10:09:30 AM EST
[ Parent ]
Actually, no, as Amartya Sen discovered and for which he was awarded the Nobel prize.  Few famines have ever been the result of physical scarcity of food.  Rather, they have typically been the result of inequitable distribution of food.  In the major 20th century famines in Ethiopia and Bengal, for example, Sen discovered that there was more than enough food available for people right in the immediate areas of greatest starvation.  People just lacked the means -- income -- of getting a hold of it.  
by santiago on Wed Nov 10th, 2010 at 10:16:40 AM EST
[ Parent ]
With global trade, no local famine needs to occur. Before global trade, Jared Diamond has covered some of the cases.

Looking at the Bengal 1943:
Bengal famine of 1943 - Wikipedia, the free encyclopedia

On 16 October 1942 the whole east coast of Bengal and Orissa was hit by a cyclone. A huge area of rice cultivation up to forty miles inland was flooded, causing the autumn crop in these areas to fail. This meant that the peasantry had to eat their surplus, and the seed that should have been planted in the winter of 1942-3 had been consumed by the time the hot weather began in May 1943.[7]

And Bangladesh in 1974:
Bangladesh famine of 1974 - Wikipedia, the free encyclopedia

From April to July, Bangladesh was hit by heavy rainfall and a series of devastating floods along the Brahmaputra river, with notably destructive incidents in May, July [5]

There was enough food available, but the decrease in food production caused famine nevertheless. It did not need to - given other circumstances - but it did.

So the resource constraint was evidently there, even if it did not need to lead to famine.

A vote for PES is a vote for EPP! A vote for EPP is a vote for PES! Support the coalition, vote EPP-PES!

by A swedish kind of death on Wed Nov 10th, 2010 at 10:52:46 AM EST
[ Parent ]
With global trade, no local famine needs to occur yet.

FIFY.

As populations increase and food production is reduced because of the effects of global warming, current surpluses will disappear.

At a guess, this is likely by the end of the decade.

See e.g. here.

by ThatBritGuy (thatbritguy (at) googlemail.com) on Wed Nov 10th, 2010 at 11:01:38 AM EST
[ Parent ]
And this might well be true, especially considering that mineral phosphate which is key to industrial agricultural production, is due to run out in about 120 years.  

Nonetheless, the facts remain that despite geometric growth in the human population over the last two centuries, food has always been in abundance.  Indeed, if food were not in abundance, population growth would not have occurred.  There does seem to be physical limits to producing more food, but objectively, it has always seemed that way and nonetheless people have figured out how to produce, in any given time period, enough to feed a growing world population on ever few inputs per calorie.  

by santiago on Wed Nov 10th, 2010 at 11:32:00 AM EST
[ Parent ]
You're confusing 'two centuries' with 'forever.'

This is basic logic. Your argument reduces to 'This happened recently, and therefore it must continue happening.'

But that's not an argument. Given that obvious constraints are visible and predictable, it's just nonsense.

by ThatBritGuy (thatbritguy (at) googlemail.com) on Wed Nov 10th, 2010 at 01:11:59 PM EST
[ Parent ]
True, we can find examples of closed societies or other  historical episodes that experienced absolute scarcity -- not enough stuff regardless of how you distributed it.  And those are valid arguments against Simon's view of things. However Simon's point that in the last 200 years -- capitalism basically -- we have developed a social system of adaptation to scarcity that allows population to always grow (which is not the same as having no limits) is still a serious argument that cannot dismissed so easily -- there is a lot of truth in it, which is why it has proven so compelling.
by santiago on Wed Nov 10th, 2010 at 07:04:08 PM EST
[ Parent ]
That would be a lot more reassuring if we hadn't had a continually accelerating expansion of our energy footprint in the same period. The reality is that industrial society has never been tested in the context of a serious energy scarcity. And there's excellent physical reasons to believe that industrial society will not, in fact, work in the context of serious energy scarcity.

Hence the imperative to ensure that energy never does become scarce, by planning ahead, something markets are, by design, incapable of doing.

Another reality is that our decisionmaking processes are no longer those of an industrial society. We cannot put a man on the moon today, not because we lack the technical expertise, but because we lack the institutional and political infrastructure that makes such feats of engineering possible. At the zenith of industrial civilisation, we wiped out smallpox without even trying very hard - in the present day, the program to wipe out polio was de-funded within an inch of total victory because the present value of completely wiping out a disease that was substantially under control was judged to be less than the cost of doing it.

- Jake

Austerity can only be implemented in the shadow of a concentration camp.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Wed Nov 10th, 2010 at 07:33:55 PM EST
[ Parent ]
santiago:
we can find examples of closed societies or other  historical episodes that experienced absolute scarcity
You do realize the global economy is a closed system?

It's like the mercantilist/austere insanity that passes for conventional wisdom among the global policy apparatus right now. If everyone is a net exporter, where are we exporting to? Mars?

Of all the ways of organizing banking, the worst is the one we have today — Mervyn King, 25 October 2010

by Migeru (migeru at eurotrib dot com) on Thu Nov 11th, 2010 at 04:48:29 AM EST
[ Parent ]
Diamond actually contradicts Sen's extensive study of the Bangali famine, in which he found that was actually ample supplies of rice in storage in the affected area for both food and seed.  The problem was that farmers hoarded the rice for seed in excess of what they actually needed because the price of it had gotten so high.  I've looked at both arguments before, and from what I could see when I did, the evidence supported Sen's argument better -- there was plenty of rice to go around, just not enough money. Hence the famine was a socially imposed constraint, not a physical one.
by santiago on Wed Nov 10th, 2010 at 11:26:15 AM EST
[ Parent ]
So production goes down, prices goes up, hoarding starts and famine occurs.

If that does not fit your definition of scarcity, then your argument becomes:

Humans have never yet had to face absolute consequences of scarcity because they have adapted to substitute other resources for what they used before or developed new technologies social constraints enter before physical.

In effect, before absolute lack hits, relative lack begets class war.

A vote for PES is a vote for EPP! A vote for EPP is a vote for PES! Support the coalition, vote EPP-PES!

by A swedish kind of death on Wed Nov 10th, 2010 at 02:05:18 PM EST
[ Parent ]
Given that people can adapt and substitute abundant resources for scarce ones, why should we think that oil (or any other critical resource constraint) is ever going o be a serious problem for humanity instead of just a local problem to be solved by some humans?

That particular exercise is called "shifting the burden of proof."

It is not incumbent upon those who point out that a growth path is unsustainable to prove beyond reasonable doubt that there is no conceivable way in which human ingenuity can possibly circumvent the constraints that make it unsustainable. It is incumbent upon those who argue that it is sustainable to provide a plausible story of how the constraints that make it unsustainable are going to be circumvented.

"The market will provide," which is what Simon's argument boils down to when you strip out his 17th century understanding of chemistry, is not a plausible story. "Technological advance will provide because it has done so in the past" is not a plausible story. A plausible story involves technology that is at worst on the second tier from the top of xkcd's researcher translation diagram, and it involves a back-of-the-envelope calculation of what development regimes will render it unsustainable w.r.t. its two or three most obvious constraints.

And the reason that the burden of proof is upon those who argue the what-me-worry position to provide a plausible story is that if we adopt a what-me-worry stance and they are wrong, then the result will be anywhere from unpleasant through to catastrophic. Whereas if we adopt a development path that is known to be sustainable under currently commercially available technology, the result will at worst be merely suboptimal.

- Jake

Austerity can only be implemented in the shadow of a concentration camp.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Wed Nov 10th, 2010 at 02:45:23 PM EST
[ Parent ]
The problem of regulators refusing to regulate is actually a lot more widespread and ambiguous than just the matter with monetary policy and banking we're discussing here.

This is all useful information on the current state of the field. But how does it justify willful neglect of even an attempt to investigate and control fraudulent mortgage origination and financial control fraud when the FBI is warning of an avalanche of fraudulent loans and we have the recent history of the S & L debacle, the resolution of which occurred on Greenspan's watch. It seems that the justification for Greenspan was something like: "these alleged frauds are keeping the market booming going into the election and are totally dwarfing the impact of the Iraq war deficit spending and tax spending on tax cuts for the rich. If they are frauds, they are beneficial frauds and we should let them continue." But even after the election of 2004 he let the fraud run. How can any of it be justified. If he didn't see it it was because he refused to look AFTER it was pointed out to him.

As the Dutch said while fighting the Spanish: "It is not necessary to have hope in order to persevere."

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Mon Nov 8th, 2010 at 05:52:01 PM EST
[ Parent ]
It explains that Greenspan was not being willfully negligent.  He was instead directly contesting policy, along with others of his conservative, free-market coalition, based on earnest, if mistaken, beliefs about how the world works, in an institutional setting which allows him to do that. While it helps our side to paint him as a lawbreaker and crook, it's also important not to take that kind of talk too seriously -- to recognize it as propaganda and not truth.  That's because we also have to retain the ability to contest power in the same way, and truth is always the winning argument. Even when lies carry the day with people, it is because people believe them to be true, so taking care with the truth is fundamental.
by santiago on Mon Nov 8th, 2010 at 06:10:43 PM EST
[ Parent ]
It explains that Greenspan was not being willfully negligent.  He was instead directly contesting policy, along with others of his conservative, free-market coalition

You say tomAto, I say tomAHto. All you're explaining here is what ideology led him to be wilfully negligent of his duty to regulate the economy.

In government, you are held to a "knew, or should have known, at the time" standard. If you turn every refusal to regulate into a legitimate policy contest (which is a valid point - civil disobedience is a perfectly legitimate direct action tactic), then you should also accept that those who take this form of direct action are held to a higher standard of foresight than those who do not. Preventable ignorance is a weak excuse for technocrats, but no excuse at all for policymakers.

In other words, you cannot implement a policy prescription - in this case laissez-faire - which has a solid two-century history of FAIL wherever and whenever it has been attempted, and then walk away from the resulting FAIL with an "oops, my bad. Sure didn't see that coming."

While it helps our side to paint him as a lawbreaker and crook, it's also important not to take that kind of talk too seriously -- to recognize it as propaganda and not truth.

Lawbreaker, no. And I don't believe that anybody here ever suggested that Greenspan committed actionable crimes. Crook, though, he certainly was (and is).

- Jake

Austerity can only be implemented in the shadow of a concentration camp.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Mon Nov 8th, 2010 at 06:31:20 PM EST
[ Parent ]
If you kill someone because you believe the wrong thing, the person is still dead.

If you kill an economy because you believe the wrong thing, the economy is still dead.

'Oopsie - my bad' isn't usually considered a valid legal defence in either situation.

It's a remarkable argument to pretend that somehow it is. If an engineer, architect, doctor or some other professional makes a mistake that results in lost lives, the professional is considered responsible, and may be sued.

But somehow the rules are different whenever banking is involved. Apparently in banking it's quite acceptable to do anything at all without personal or legal consequences, no matter how other people are affected.

The only exception to this rule is if an action damages a bank's standing - see e.g. Nick Leeson.

But otherwise, anything goes.

It's really quite strange.

by ThatBritGuy (thatbritguy (at) googlemail.com) on Mon Nov 8th, 2010 at 06:55:18 PM EST
[ Parent ]
Not to be too technical, but actually in both cases those are usually successful legal defenses.  A doctor, for example, who kills a patient while earnestly treating that patient is often found not liable, even in litigious USA, as long as it cannot be proven that his mistake was not an honest one given the technology and state of knowledge in the field at the time. It's basic legal defense -- if anyone in a similar position with the same knowledge could also have made the tragic mistake, then "sorry, my bad," is an acceptable defense and people get acquitted all the time in all sorts of alleged crimes with it.  That's just life.
by santiago on Tue Nov 9th, 2010 at 11:54:54 AM EST
[ Parent ]
Yeah, but Greenspan was chelating the economy a the time.

The difference is that in the economics profession, the quacks are running the institutional review boards.

- Jake

Austerity can only be implemented in the shadow of a concentration camp.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Tue Nov 9th, 2010 at 02:31:14 PM EST
[ Parent ]
I think you're right, but where folks like Jake and others are arguing, based on the Minsky-school stuff, for a more aggressive monetary policy engagement in such issues -- that is, expanding (i.e. constraining) the central bank mandate to include bubble management in addition to price stability, economic growth, and full employment

That's not what I'm arguing. I want central banks to pop bubbles and kill shadow banks and leveraged investment trusts. That's the only thing I want central banks to do.

Real economic growth is of questionable value in a mature industrial economy. Nominal economic growth is and full employment are the job(s) of fiscal policy. And fuck price stability - we're not on a gold standard anymore. No need to act the part.

I think that an alternative look at monetary theory will argue the opposite. It will argue that fiscal policy -- how things are distributed -- are much more useful and precise means of managing things like asset bubbles. It's not Greenspan's low interest -- low unemployment monetary policy that caused the crisis, in other words.  It's the Bush tax cuts. Had the higher Clinton era taxes been able to continue to retire excess cash from circulation be taking it out of the hands of the wealthy, they likely would not have been able to bid up assets so high.

There is certainly a case to be made for that, It's the case the people like Bill Mitchell is making, by the way: That we should stop using the central bank for economic planning, and rely exclusively on fiscal policy to achieve growth, full employment, price stability and protection against financial panics. The central bank would then function exclusively as a clearing house, rather than a policymaking institution.

This suggestion has a lot of merit, and I have no doubt that it would work better than the current system. But the merit that I see in keeping a central bank as a unit for killing spurious financial assets is that its function as clearing house can be used to give it a far more direct and detailed view into the composition of the balance sheets of private banks than the Treasury will ever be likely to obtain.

- Jake

Austerity can only be implemented in the shadow of a concentration camp.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Mon Nov 8th, 2010 at 03:11:27 PM EST
[ Parent ]
I really don't see how anybody with even the most cursory knowledge of the economic history of the first world over the last century or two can claim otherwise.

Since economic history is generally absent form economics curricula...

Of all the ways of organizing banking, the worst is the one we have today — Mervyn King, 25 October 2010

by Migeru (migeru at eurotrib dot com) on Tue Nov 9th, 2010 at 09:00:00 AM EST
[ Parent ]
I think part of the problem that makes convergence in this discussion difficult is the differences between the theoretical formulation, analytical approach and language used in contemporary "mainstream" economics and the and that employed by non economists and economists not in the mainstream. We are looking at the same set of data from different paradigms.

I believe that santiago is framing his arguments in those terms that would be necessary were he to present those arguments to others within the church of "mainstream" economists and that he is so doing because, in order to be considered by those in that mainstream, this is how they must be framed. It also seems that he sees problems with that mainstream and would like to advance approaches that could remedy those problems.

But for a variety of reasons, the approach utilized in "mainstream economics" is fundamentally different from that used in physics, math, engineering, psychology, biology, sociology, anthropology and other scientific disciplines from hard to soft. Those of us who are not part of "mainstream economics" or who are not formally trained as economists have complained about this issue repeatedly and, IMO, with great merit, but, largely, futilely.

Criticisms of a discipline from the outside tend to bounce off that discipline. This is especially the case in economics, where the true legitimizing agency for the discipline is not scientific validity or conformance with observable reality, but the appeal that the approach in the discipline has to those who have most of the money -- the bankers and their biggest clients.

The most difficult, yet the most satisfying task in an argument is to defeat your opponent from within his system. And this is the most likely to have an immediate effect. Even if that defeat does not carry the field, if it carries a significant minority of that field, it creates a new reality. A new approach can do this if it provides a competitive edge to those who employ it.

But this comes back to the problem that so many of those with great wealth prefer the existing form of economics for the utility it offers in rationalizing their activities and that they have used their economic power to grab control of the political system, which they then have used to insure that nothing that seriously disturbs their game is allowed to gain traction. A competitive edge doesn't matter if there is no competition, and currently that is largely the case. When outright criminality is allowed to flourish unhindered, science is either perverted or silenced.

From this point of view santiago is providing those of us here with a pacing activity that allows us to sharpen our arguments. This should not be a thankless activity, so I offer him my thanks for his contributions. It may be that "mainstream economics" is so ensconced and entrenched that no arguments that could significantly change it will be allowed, but we won't really know unless we try.

As the Dutch said while fighting the Spanish: "It is not necessary to have hope in order to persevere."

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Sat Nov 6th, 2010 at 11:53:23 PM EST
[ Parent ]
ARGeezer:
From this point of view santiago is providing those of us here with a pacing activity that allows us to sharpen our arguments.

hear, hear. no amen corners needed.

"We can all be prosperous but we can't all be rich." Ian Welsh

by melo (melometa4(at)gmail.com) on Sun Nov 7th, 2010 at 08:09:27 AM EST
[ Parent ]
santiago:
it's asking a lot for a policymaker to go outside of the available consensus

this argument really borders on the disingenuous. by that logic what's the point of appointing regulators at all? we wouldn't want them to 'go outside the consensus'? how can they do their job?

adding 'in a democracy' at the end makes it even odder. in what political system are people less constrained to stay in (enforced) consensus than (so-called) democracies?

scare quotes because democracy has always had to compromise to survive at all, and because of that has never been more than incompletely accomplished, and most importantly cannot survive in any thing like a pure form without extensive, rigorous, universal education in civic, political and economic world history, including many historians such as Zinn, not just the usual brainwashed codswallop served up presently...


"We can all be prosperous but we can't all be rich." Ian Welsh

by melo (melometa4(at)gmail.com) on Fri Nov 5th, 2010 at 06:52:48 PM EST
[ Parent ]
I disagree. It is the central problem of political economy in general, and particularly in a democracy, that policymakers retain the support of their constituents for the actions they take.  This means that it is, by institutional definition, illegitimate for a policymaker to adopt a theory of how the world works that is not shared by his or her constituents as the basis of making major policy changes. And if a policymaker did try to do that, he or she would quickly be shown the door by those same constituents. That's just reality. And it means that blaming a policymaker for having a mainstream view of the world, even where that view was subsequently proven to be wrong by historical events, is unreasonable and unfair.

No one outside of a radical fringe (albeit growing), even today, actually believes the world view of Minsky, so before it is reasonable to expect any policymaker to be able to site that view of the world when advocating a policy change, Minsky has to be mainstreamed. That is happening, particularly with the growing behavioral economics field and the clout on Wall Street that Case and Schiller have gained, but it isn't there yet, and it was even further away when Greenspan was in charge.

But this basic rule is key, especially in a democracy: only mainstream frameworks for thinking about things can become reflected in policy (everyone from Lakoff to Chomsky have supported this), so if you want your outsider view of the world to become reflected in policy, you have to mainstream it first. That's why Barry Goldwater lost in the 1960's, but his outsider view of the world holds supreme today, allowing even crazier people like Rand Paul to get elected to high office.

by santiago on Sat Nov 6th, 2010 at 02:34:22 PM EST
[ Parent ]
blaming a policymaker for having a mainstream view of the world, even where that view was subsequently proven to be wrong by historical events, is unreasonable and unfair.

Euthanasia was a mainstream position in Germany in the '30s and '40s. We still hanged the concentration camp commanders.

Tarring and feathering the prominent proponents of the failed mainstream view is a necessary part of the process of marginalising the current mainstream. Greenspan is one of the prominent proponents of the failed Laissez-Faire mainstream view, which means he needs to get run out of town on a rail. Whether it is fair or not doesn't really matter (and for the record, I don't think it's the least bit unfair - Laissez-Faire has failed, failed again and failed miserably every single time it's been tried, so mainstreaming it in the '70s was very little short of economic and academic treason.

- Jake

Austerity can only be implemented in the shadow of a concentration camp.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Sat Nov 6th, 2010 at 02:44:08 PM EST
[ Parent ]
The camp commanders were not hung for euthanasia, but for murder genocide, two different things entirely unless you want charge the Dutch medical establishment with genocide.

But on the other point you're right, I have nothing against tarring and feathering Greenspan's mistaken view of the world, so if that is your purpose, go for it.

by santiago on Sat Nov 6th, 2010 at 03:07:27 PM EST
[ Parent ]
Well, genocide was also a mainstream position at the time.

- Jake

Austerity can only be implemented in the shadow of a concentration camp.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Sat Nov 6th, 2010 at 03:09:58 PM EST
[ Parent ]
Yes, and that is why it occurred. Advocating against genocide in wartime Germany would likely get you killed because it would be viewed as a radical position.

The consensus in support of that view had to be changed and marginalized, and in the case of Germany, it required military action by outside forces to do so.

by santiago on Sat Nov 6th, 2010 at 03:13:08 PM EST
[ Parent ]
Is the economic analogy to be taken seriously here?

Of all the ways of organizing banking, the worst is the one we have today — Mervyn King, 25 October 2010
by Migeru (migeru at eurotrib dot com) on Tue Nov 9th, 2010 at 09:25:16 AM EST
[ Parent ]
That neoliberalism must be defeated by mobilizing troops, attack neoliberal economists strongholds, invade their home territory and place them on trial for crimes against humanity?

A vote for PES is a vote for EPP! A vote for EPP is a vote for PES! Support the coalition, vote EPP-PES!
by A swedish kind of death on Tue Nov 9th, 2010 at 03:53:03 PM EST
[ Parent ]
It is the central problem of political economy in general, and particularly in a democracy, that policymakers retain the support of their constituents for the actions they take.

No, the central problem of a 'democracy' is to remove choice from constituents while appearing to leave it in place.

This is what NCE is designed to do. And it's done it fairly effectively, by baffling voters with smoke and bullshit and There Is No Alternative rhetoric.

As for 'mainstream frameworks' - the Nazis, the Soviets and the early medieval theocracy all had their own versions of 'mainstream frameworks', and they all turned out to be self-destructively wrong.

No one cares if a framework is mainstream if it destroys your culture.

The point of progress is to modify policy so that it does insightful, reality-based things, not moronic ideologically approved ones.

At least - that's the plan, unless you're more interested in creating a Capitalist Politburo where you can create truth simply by repeating it often enough, and hoping no one notices you're lying through your teeth.

by ThatBritGuy (thatbritguy (at) googlemail.com) on Sat Nov 6th, 2010 at 02:51:07 PM EST
[ Parent ]
No, what I have described is a feature of democracy.  That the problem policy advocates must solve is to gain consensus for their views before they can be implemented.

What you are describing is one, among many, possible strategies for doing so.

by santiago on Sat Nov 6th, 2010 at 03:09:56 PM EST
[ Parent ]
No, what I have described is a feature of democracy.  That the The problem policy advocates must solve is to gain consensus for their views before they can be implemented.

This is self evidently true. But the process by which that is accomplished is much more concerned with propaganda and rhetoric than with solid analysis of policy implications. Thus there are two problems involved. One is developing and making coherent and respectable an alternative analysis to the current "mainstream" view. The other is winding up a sufficient majority of the population to insist that this alternative be adopted.

Towards the latter end, which progressives tend to ignore, different approaches are required. I would suggest that a fruitful approach would be to popularize the notion that we have a system of "cafeteria law enforcement" and "cafeteria regulatory enforcement" and that we have had a political system, a legal system and a regulatory system that has had NO appetite for investigating criminal and civil fraud in the financial sector.

This notion has come about through the efforts of think tanks funded by self-interested wealthy individuals who have spent tirelessly to convince the US electorate that markets are self regulating and that attempts to impose regulation by government bodies will impair the "efficiency" of those markets.

The results of that effort has been three fold:

  1. Laws such as Glass-Steagall have been repealed.

  2. Regulators have been appointed, such as Alan Greenspan, who do not believe in regulating.

  3. The highly profitable manipulation of the financial system from Wall Street has enabled the financial sector to, in effect, buy the federal political process.

The average US citizen now has at risk their Social Securtiy and Medicare coverage in retirement, their state and private pensions and even the security of their title to their houses. Worse, with the organs of the federal government rented out to the financial sector, that government has become an instrument of oppression of the people in the interests of a tiny minority of wealthy individuals.

It is time to stop worshiping the wealthy and to stop buying the false views of the nature of society that they have been selling us. If the people want to have a constitutional government that works in their interests they have to break the hold that big finance has over our government. THIS WILL NOT BE ACCOMPLISHED BY DESTROYING THE GOVERNMENT AND THE ABILITY TO GOVERN.

Instead, the political process has to be taken back by a party that is pledged to break the power of big finance over the government and the people, by, if necessary, destroying the big financial corporations. ALL THAT IS REQUIRED TO BREAK THE BANKS IS TO ENFORCE EXISTING LAWS FOR CRIMES THAT HAVE ALREADY BEEN COMMITTED.

As the Dutch said while fighting the Spanish: "It is not necessary to have hope in order to persevere."

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Tue Nov 9th, 2010 at 03:17:44 PM EST
[ Parent ]
santiago:
Bubbles are simply not well established phenomenon.
Dude, stop channelling Eugene Fama if you want me to take you seriously. According to him, there was no bubble: Rational Irrationality: Interview with Eugene Fama : The New Yorker

Many people would argue that, in this case, the inefficiency was primarily in the credit markets, not the stock market--that there was a credit bubble that inflated and ultimately burst.

I don't even know what that means. People who get credit have to get it from somewhere. Does a credit bubble mean that people save too much during that period? I don't know what a credit bubble means. I don't even know what a bubble means. These words have become popular. I don't think they have any meaning.

I guess most people would define a bubble as an extended period during which asset prices depart quite significantly from economic fundamentals.

That's what I would think it is, but that means that somebody must have made a lot of money betting on that, if you could identify it. It's easy to say prices went down, it must have been a bubble, after the fact. I think most bubbles are twenty-twenty hindsight. Now after the fact you always find people who said before the fact that prices are too high. People are always saying that prices are too high. When they turn out to be right, we anoint them. When they turn out to be wrong, we ignore them. They are typically right and wrong about half the time.

Are you saying that bubbles can't exist?

They have to be predictable phenomena. I don't think any of this was particularly predictable.

Unless I'm misunderstanding Fama, it appears in his opinion a recession came out of the blue (in polite company you'd say "an exogenous recession occurred") and this caused the credit crisis.

Financial economists' reaction to the present crisis has been universally hilarious. Take, for instance, what Fama himself was saying before the crash, as quoted by Krugman: Ketchup and the housing bubble

So I ran across this revealing late-2007 interview with Eugene Fama. In it, Fama dismisses the whole idea of bubbles:
Well, economists are arrogant people. And because they can't explain something, it becomes irrational. The way I look at it, there were two crashes in the last century. One turned out to be too small. The '29 crash was too small; the market went down subsequently. The '87 crash turned out to be too big; the market went up afterwards. So you have two cases: One was an underreaction; the other was an overreaction. That's exactly what you'd expect if the market's efficient.

The word "bubble" drives me nuts. For example, people say "the Internet bubble." Well, if you go back to that time, most people were saying the Internet was going to revolutionize business, so companies that had a leg up on the Internet were going to become very successful.

I did a calculation. Microsoft was an example of a corporation that came from the previous revolution, the computer revolution. It was hugely profitable and successful. How many Microsofts would it have taken to justify the whole set of Internet valuations? I think I estimated it to be something like 1.4.

And he expresses confidence over housing (rather late in the game, wouldn't you say?):
Housing markets are less liquid, but people are very careful when they buy houses. It's typically the biggest investment they're going to make, so they look around very carefully and they compare prices. The bidding process is very detailed.
What this made me think of was an old paper by Larry Summers mocking finance economists as the equivalent of "ketchup economists", who believe that they've demonstrated market efficiency by showing that two-quart bottles of ketchup always sell for twice the price of one-quart bottles.
Bubbles are like porn, nobody can write down a model that satisfies the neoclassicals but everyone who isn't a neoclassical economist knows one when they see one.

And part of the problem is that the neoclassical framework simply doesn't have the language to describe a bubble because a bubble is a non-equilibrium phenomenon. I mean, for them even the business cycle is exogenous to the economy!

Of all the ways of organizing banking, the worst is the one we have today — Mervyn King, 25 October 2010

by Migeru (migeru at eurotrib dot com) on Tue Nov 9th, 2010 at 08:25:28 AM EST
[ Parent ]
This Fama character would be funny if he weren't taken seriously by the Serious People.

Does a credit bubble mean that people save too much during that period?

No, it means that there is no such thing as "loanable funds."

I don't even know what a bubble means. These words have become popular. I don't think they have any meaning.

That is a reflection of Fama's ignorance, not of the state of the art.

That's what I would think it is, but that means that somebody must have made a lot of money betting on that, if you could identify it.

Wow. He's basically saying that if you can't time the popping of the bubble, you can't identify the bubble. Or, to put it in other terms, a model that tells you that you are at risk of an earthquake, and describes how an earthquake will affect a building, is worthless if it doesn't tell you precisely which month the earthquake will occur in.

He seems to have confused the roles of economist and speculator.

Oh, and some people did make obscene amounts of money by being short during the crash.

- Jake

Austerity can only be implemented in the shadow of a concentration camp.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Tue Nov 9th, 2010 at 11:37:56 AM EST
[ Parent ]
This Fama character would be funny if he weren't taken seriously by the Serious People.
Show some respect, we're talking about a Bank of Sweden Phony Nobel Prize winner.

Of all the ways of organizing banking, the worst is the one we have today — Mervyn King, 25 October 2010
by Migeru (migeru at eurotrib dot com) on Tue Nov 9th, 2010 at 06:43:29 PM EST
[ Parent ]

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