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and I got to thinking: if during good times being in certain positions of responsibility is an unchallenging job, how do you ensure that people with the necessary skills and resolve (not necessarily individually, but certainly collectively) are where they need to be in a time of crisis?

A military analogy would be, how do you maintain combat-readiness in your defence forces after two generations of peace? And if you don't, who do you turn to when the unthinkable happens and you're invaded?

The military does it with drills and war games, and I could well imagine that this might work for a central bank/financial regulator as well. Every quarter, the ministry of finance would make a scenario in which a Charlie Foxtrot of random severity occurs, ranging from the insolvency of a small bank all the way through to systemic insolvency coupled with a run on the currency.

For maximum effect, you'd spring it on the financial regulator on a random day in the quarter, and the financial regulator would game out the scenario. The disadvantage of that approach is that, unlike the military in peacetime, the financial regulator has a day job. So running unscheduled exercises is going to be a real pain in the ass. It may be more sustainable to pick a long weekend (i.e. a weekend where Friday or Monday is also a bank holiday) somewhere in each quarter and hold the exercise then. Or simply cook up an exercise for each long weekend in the year.

If they pass an exercise, its weigh in the random draw is reduced, so the exercise schedule becomes biased towards the sorts of exercises they need to get better at.

The big problem is, of course, that you'd have to get someone to design realistic scenarios - and since nobody among Die Seriöse Leute predicted this Charlie Foxtrot in advance...

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Fri Dec 3rd, 2010 at 11:39:52 AM EST
[ Parent ]
But didn't all those monster econometric models run on monster computers predict the crisis and provide all the options for sorting it (and measuring the success of alternate strategies) enabling a perfect optimisation of the required solution?

Index of Frank's Diaries
by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Fri Dec 3rd, 2010 at 11:47:34 AM EST
[ Parent ]
No.  

Neo-Classical Economics cannot predict Bubbles will happen much less what to do when they do.  

She believed in nothing; only her skepticism kept her from being an atheist. -- Jean-Paul Sartre

by ATinNM on Fri Dec 3rd, 2010 at 12:58:19 PM EST
[ Parent ]
I forgot the ;-)

Index of Frank's Diaries
by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Fri Dec 3rd, 2010 at 01:02:46 PM EST
[ Parent ]
Sorry, my snark detector is in the shop.  

:-)


She believed in nothing; only her skepticism kept her from being an atheist. -- Jean-Paul Sartre

by ATinNM on Fri Dec 3rd, 2010 at 01:09:29 PM EST
[ Parent ]
Commas are free - you don't have to spare, them ;-)

You can't be me, I'm taken
by Sven Triloqvist on Fri Dec 3rd, 2010 at 01:13:00 PM EST
[ Parent ]
That might be of more use were they using models that actually gave time dependent outcomes that were similar to real world developments, such as those being developed by Steve Keen.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Fri Dec 3rd, 2010 at 11:50:48 AM EST
[ Parent ]
I'm not talking about modelling. I'm talking about going through the motions of taking, say, Deutche Bank into receivership, divvying up its assets into good and bad, and shafting the unsecured creditors. Y'know, doing their job. Or working out a plan for how to deal with a Soros attack ahead of time, even if you believe that it can't happen in the real world.

I don't expect the military to be able to accurately predict whether the Russians will invade or not, but I do expect the military to have run enough exercises to convince themselves that they know how to hurt the Russians if they did decide to invade, for whatever obscure reason. Hell, the military has scenarios for fighting a nuclear war, which is probably about the most pointless sort of war game you can imagine - if people start lobbing around megatons, you lose. Even if you win.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Fri Dec 3rd, 2010 at 12:21:10 PM EST
[ Parent ]
Those things certainly would help. An FDR type audit of all the banks -- for real -- not a bunch of phony stress test PR exercises. But still, being able to accurately model even the shape of the curve for various economic parameters that would result from various actions would be helpful. Even with three sector dynamic models Steve acheives that. Calibrating the response will take longer. Especially if he is the only one doing it.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Fri Dec 3rd, 2010 at 01:52:49 PM EST
[ Parent ]
Lots of things might be helpful. But the response to a currency run or an intervention against a TBTF bank is something you can drill even if your macroeconomic models are shit. You can simply download a bank's balance sheet and declare this or that asset class to be so-and-so much impaired (or, if you want an extra layer of realism, only give this information to the referee, and have people figure it out on their own from trying to "sell" the assets to the referee).

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Fri Dec 3rd, 2010 at 02:26:30 PM EST
[ Parent ]
... I don't want the central bank or financial regulator to be doing macroeconomic modelling. I want them to kill financial bubbles, I want them to kill aggressive accounting in the financial sector, I want them to make sure that depositors' money isn't used for gambling and I want them to take insolvent banks through bankruptcy.

Macroeconomic modelling is the Treasury's job. The CB and FR do not need macroeconomic models to do the jobs I want them to do, and if they feel the need for the results of macroeconomic modelling, they can ask the Treasury to do a run for them. Macroeconomic policy is properly the Treasury's turf, and I don't want the CB and FR developing a parallel capability in that area. That would almost inevitably lead lead to a sort of mission creep that I consider harmful in an institution that is traditionally not particularly democratically accountable.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Fri Dec 3rd, 2010 at 02:39:03 PM EST
[ Parent ]
OK then, let the treasury use models that actually work.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Fri Dec 3rd, 2010 at 02:56:44 PM EST
[ Parent ]
You know I'm with you on that.

But good macro is preventative more than it is curative. What I'm talking about here is crisis management, and you don't need good macro models for that - all you need is a firm political will to screw over bondholders and use the power of the sovereign to restore full employment. After you've arrested the rise in unemployment, you can start firing up your macro models to develop medium-term policies.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Fri Dec 3rd, 2010 at 03:06:08 PM EST
[ Parent ]
To my knowledge, current as of 2007, the relation between macroeconomic models and policies and their determinative affect on microeconomic activity has never been proven.  All papers demonstrating such are ex post facto.

If there IS a paper I'd be eager to read it.

She believed in nothing; only her skepticism kept her from being an atheist. -- Jean-Paul Sartre

by ATinNM on Fri Dec 3rd, 2010 at 03:05:09 PM EST
[ Parent ]
Damn it all.

I meant an NCE paper.

There are UnSerious People who have written such.


She believed in nothing; only her skepticism kept her from being an atheist. -- Jean-Paul Sartre

by ATinNM on Fri Dec 3rd, 2010 at 03:11:36 PM EST
[ Parent ]
I don't want the central bank or financial regulator to be doing macroeconomic modelling.

In the case of Ireland and Greece, were capable macro modeling of the sort I suggested performed on the "resolutions" imposed by the ECB and IMF in those cases, it would be clear what an ineffectual disaster the policies would be and that the chief result will be gratuitous damage to the societies involved via a debt-deflation death spiral. Use of such models would only strengthen the hand of the IMF, who, interestingly, seems to have been the voice of moderation in these cases, not having banks for which it is directly responsible which might take a haircut on bonds they hold.

One of the advantages of having useless theories and models is that it facilitates an Alice in Wonderland situation in which everything means exactly what the relevant authority says it means.

"It is not necessary to have hope in order to persevere."

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Sat Dec 4th, 2010 at 12:41:44 PM EST
[ Parent ]
But I don't want central banks to recommend structural adjustment programmes and fiscal austerity. That's none of their business. They're there to kill insolvent banks and print money for the government. That's all I want them to do. The fact that the ECB is the entity with the greatest influence on federal-level EU macroeconomic planning is a disgrace and a perversion of the proper way to run an industrial state.

The IMF is a different sort of story - they should be doing macro, and they should be doing it right. (But they should never have been involved in an internal €-zone crisis in the first place...)

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Sat Dec 4th, 2010 at 01:32:45 PM EST
[ Parent ]
And I wholly agree with this. We need a reassertion of the political in political economy. But, given the existing presumptions, economics has to be governed entirely by its own internal rules -- no matter that this is bunk, has never an will never really work -- at least for the good of the overall society. Supposedly autonomous economics HAS been a very effective smoke screen for the looting of societies, however.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Sat Dec 4th, 2010 at 05:06:32 PM EST
[ Parent ]

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