News That's Fit To Punt - 04/Jun/2012

The Keynsian View Of The Mess

Walk-off HBP sent me this link today. It's probably pertinent on a day where 24billion dollars got wiped off the share market in Australia after a month in which 100billion got wiped off, thanks to the unfolding Euro Crisis which followed on from the Global Financial Crisis. Sometimes it's hard to tell the two things apart as I've been following it here on this blog; it strikes me that they're really one and the same problem just being played out in different geographical locations.

Anyway, the link gives us Paul Krugman who has been stressing for quite some time that these austerity measures don't work; and none of the politicians seem to be listening. 

There were early warning signs, such as the savings and loans crisis of the late 80s, that should have alerted politicians to the dangers of financial deregulation, moral hazard and subsequent spiralling debt. But by then Wall Street's influence over policy-makers had rendered them deaf to alarm bells – in part because bankers were financing so many politicians' campaigns. Krugman quotes Upton Sinclair's famous observation: "It's difficult to get a man to understand something, when his salary depends on his not understanding it" – but more than that, he suspects the sheer glamour of wealthy bankers had a powerful influence over politicians.

"My impression is that old style captains of industry can be rather boring. I'm not sure how much thrill there is in hanging out with someone like that. But Wall Street people are in fact very smart; they're funny, they're not company men who work their way up the chain. They're impressive."

Even Obama is not immune to their charms, says Krugman. Early into the administration he met the president and his economics team, "and it was just clear that rumpled professors with beards just didn't come across as being so impressive. Yeah," he chuckles. "I had that definite sense." But even many of the rumpled professors had been seduced by the promise of a new world economic order, in which Keynesianism was not just redundant but faintly ridiculous.

And isn't that how it always goes?

You've Never Had It So Bad?

Here's an interesting article that says brokerage firms are being driven to the wall.Anyway, this bit caught my eye:

Mr Manford, who holds a number of senior positions with the Australian Securities Exchange, expects even more job losses in financial services industry in coming weeks and months.

 

‘‘It really reminds me of the situation of 1991, but even more prolonged than even that extended downturn. You probably have to go back all the way to 1981, when things were really bleak.’’

 

Evans & Partners managing director David Evans said his firm had tapped into a better business by exposing clients to fixed income products and corporate debt recently.

 

One veteran broker who declined to be named said it had turned particularly tough for the industry in the past two to three months, especially for pure equities brokers. He said he believed many bonuses this year would be slashed - or not paid at all.

The bit that got my attention was the 1991 and 1981. Yeah, I'm old enough to remember 1991, but only vaguely remember 1981 being so tough - probably because I was at school. Anyway, when I reflect upon the early 1990s, that was the aftermath of the bubble bursting in Japan as well as the recession we had to have. That was pretty ugly - and I'm a dyed-in-the-wool Keating  supporter saying this - but it also has to be said, I never got the feeling the whole system was coming apart at the seams. The 5 years since the credit flow dried up in August 2007, and became the GFC in 2008, have felt much more like a slow-motion economic apocalypse. This has been some seriously mind-warping times. 

Please, Save Us From These 'Leaders' - We've Never Had It So Bad (For Sure)

The polls keep confirming something we all know. The voting public don't like Julia Gillard. They don't like Tony Abbott either. Neither are going away because they're very much liked by the powerbrokers in each of their respective parties, but the polls also say we would like to go back to December 2010 when it was Kevin Rudd as Prime Minister and Malcolm Turnbull as Opposition leader.

Later on in the morning, the ALP came out and reassured us that Julia Gillard will lead Labor to the next election; which is no assurance at all because it's like being told she's going set fire to Australia in 18 months time and we can't do anything to stop her. It's 3 months removed from that ill-fated contest that sent Kevin Rudd to the backbench and it's amazing there are still ructions that there might be a challenge. Which inane person would take on the job? the mind boggles.

Today's poll puts Labor's primary vote at 26 per cent, while, two party preferred, the Coalition comprehensively leads Labor by 57 per cent to 43 per cent.

 

If there was a uniform swing, this would give the Coalition about 31 extra seats.

 

Mr Abbott's personal approval also fell 5 points to 39 per cent, while his disapproval rose 5 points to 57 per cent.

 

This morning, Treasurer Wayne Swan said he was not focused on the poll.
"The opinion polls will come, week to week, month to month," Mr Swan told ABC Radio. "I don't get focused on the opinion polls at all."

Thank you Mr. Swan for the insight. This is the problem I have with Labor. They're totally in denial about how fucked their situation really is. And somebody needs to tell them. Soon.

Wayward Economics

Paul Krugman's Take

Here is a remarkable perspicacious article about how economists missed the onset of the GFC as we know it.

As I see it, the economics profession went astray because economists, as a group, mistook beauty, clad in impressive-looking mathematics, for truth. Until the Great Depression, most economists clung to a vision of capitalism as a perfect or nearly perfect system. That vision wasn’t sustainable in the face of mass unemployment, but as memories of the Depression faded, economists fell back in love with the old, idealized vision of an economy in which rational individuals interact in perfect markets, this time gussied up with fancy equations. The renewed romance with the idealized market was, to be sure, partly a response to shifting political winds, partly a response to financial incentives. But while sabbaticals at the Hoover Institution and job opportunities on Wall Street are nothing to sneeze at, the central cause of the profession’s failure was the desire for an all-encompassing, intellectually elegant approach that also gave economists a chance to show off their mathematical prowess.

Unfortunately, this romanticized and sanitized vision of the economy led most economists to ignore all the things that can go wrong. They turned a blind eye to the limitations of human rationality that often lead to bubbles and busts; to the problems of institutions that run amok; to the imperfections of markets — especially financial markets — that can cause the economy’s operating system to undergo sudden, unpredictable crashes; and to the dangers created when regulators don’t believe in regulation.

It’s much harder to say where the economics profession goes from here. But what’s almost certain is that economists will have to learn to live with messiness. That is, they will have to acknowledge the importance of irrational and often unpredictable behavior, face up to the often idiosyncratic imperfections of markets and accept that an elegant economic “theory of everything” is a long way off. In practical terms, this will translate into more cautious policy advice — and a reduced willingness to dismantle economic safeguards in the faith that markets will solve all problems.

There follows a beautiful account of just how weird the economists' view of the economy itself got with their insistence on the rational market. This bit also caught my eye so I think it's vry pertinent for us all:

And it wasn’t just Keynes whose ideas seemed to have been forgotten. As Brad DeLong of the University of California, Berkeley, has pointed out in his laments about the Chicago school’s “intellectual collapse,” the school’s current stance amounts to a wholesale rejection of Milton Friedman’s ideas, as well. Friedman believed that Fed policy rather than changes in government spending should be used to stabilize the economy, but he never asserted that an increase in government spending cannot, under any circumstances, increase employment. In fact, rereading Friedman’s 1970 summary of his ideas, “A Theoretical Framework for Monetary Analysis,” what’s striking is how Keynesian it seems.

And Friedman certainly never bought into the idea that mass unemployment represents a voluntary reduction in work effort or the idea that recessions are actually good for the economy. Yet the current generation of freshwater economists has been making both arguments. Thus Chicago’s Casey Mulligan suggests that unemployment is so high because many workers are choosing not to take jobs: “Employees face financial incentives that encourage them not to work . . . decreased employment is explained more by reductions in the supply of labor (the willingness of people to work) and less by the demand for labor (the number of workers that employers need to hire).” Mulligan has suggested, in particular, that workers are choosing to remain unemployed because that improves their odds of receiving mortgage relief. And Cochrane declares that high unemployment is actually good: “We should have a recession. People who spend their lives pounding nails in Nevada need something else to do.”

Personally, I think this is crazy. Why should it take mass unemployment across the whole nation to get carpenters to move out of Nevada? Can anyone seriously claim that we’ve lost 6.7 million jobs because fewer Americans want to work? But it was inevitable that freshwater economists would find themselves trapped in this cul-de-sac: if you start from the assumption that people are perfectly rational and markets are perfectly efficient, you have to conclude that unemployment is voluntary and recessions are desirable.

Yes, and it's amazing how much of this stuff you hear. It's as if these economists in the ivory tower don't comprehend the pain and suffering of what they are saying. Anyway, it's worth the time of the read so do check it out.