Blog Watch: Naked Capitalism's Yves Smith blames economists for being wrong. - 17-Jan-2009 - Generational Dynamics

In a posting on Monday, entitled "Why So Little Self-Recrimination Among Economists?", blogger Yves Smith wonders, "Why is it that economics is a Teflon discipline, seemingly unable to admit or recognize its errors?"

Now this is a subject of some interest and bemusement to me, because I've been criticizing economists, analysts, financial journalists and bloggers for years for not having the vaguest clue what's going on. In fact, I've received much criticism from readers of this web site for calling these people morons, and blaming them for saying things that are so stupid they couldn't possibly believe them.

Today it's clear that economists have been massive failures. They still have absolutely no idea what's going on today. Also, they have no idea why all of last year's bailouts have had no effect at all, and seem to have made things works.

So when blogger Yves Smith criticizes economists for not admitting that they've been wrong, I perk up and listen.

"Why is it that economics is a Teflon discipline, seemingly unable to admit or recognize its errors?

Economic policies in the US and most advanced economies are to a significant degree devised by economists. They also serve as policy advocates, and are regularly quoted in the business and political media and contribute regularly to op-ed pages.

We have just witnessed them make a massive failure in diagnosis. Despite the fact that there was rampant evidence of trouble on various fronts – a housing bubble in many countries (the Economist had a major story on it in June 2005 and as readers well know, prices rose at an accelerating pace), rising levels of consumer debt, stagnant average worker wages, lack of corporate investment, a gaping US trade deficit, insanely low spreads for risky credits – the authorities took the "everything is for the best in this best of all possible worlds" posture until the wheels started coming off. And even when they did, the vast majority were constitutionally unable to call its trajectory.

Now of course, a lonely few did sound alarms. Nouriel Roubini and Robert Shiller both saw the danger of the housing/asset bubble; Jim Hamilton at the 2007 Jackson Hole conference said that the markets would test the implicit government guarantee of Fannie and Freddie; Henry Kaufman warned how consumer and companies were confusing access to credit (which could be cut off) with liquidity, and about how technology would amplify a financial crisis. Other names no doubt belong on this list, but the bigger point is that these warnings were often ignored."

Now, there are a few peculiarities about this. First, Smith points to a June 2005 article in the Economist, and so there were SOME people pointing out the danger as early as 2005.

So why does she give credit to people like Roubini and Hamilton, who's warnings only first appeared in 2006 and 2007?

(And, as I always whine, I was warning people as early as 2002. How come I never get credit for these and other predictions? See "List of major Generational Dynamics predictions" for more information.)

In fact, I quoted a Morgan Stanley study in an article from July 30, 2004, "Real estate is in an overpriced bubble all over the world." According to the Morgan Stanley study, residential properties in countries around the world, including America, Australia, the United Kingdom, China, South Korea, Spain, the Netherlands, and South Africa, were overpriced by 50% or more, and that the global economy should expect "potentially devastating aftershocks" when the property bubble finally bursts.

So, there WERE economists sounding warnings, and the question to be asked is this: Why did economists purposely ignore these warnings -- and did they do so for their own benefit?

Actually, Smith doesn't ask the question of why these economists didn't foresee the crisis. She asks a different question: Having failed to foresee the crisis, why are these economists not admitting their failures?

Smith is obviously very knowledgeable about economics and macroecomics, and she's also very knowledgeable about the finance industry. She was in a perfect position to see the stock market, credit and real estate bubbles as early as 2002 (as I did) or as early as 2004 (when Morgan Stanley did), or as early in 2005 (when Greenspan was talking about them).

In order to investigate this further, I decided to look at some of the articles that Yves Smith wrote in the early days of her blog. As far as I can tell, her blog began in December 2006. Now, surely by that time the real estate bubble must have been obvious to every person in the world with knowledge of economics. If Smith is going to criticize others for not saying anything, then it's fair to ask whether Smith said anything.

I did some other random checking around in Smith's blog, and didn't find anything where she foresaw the crisis.

And so, Smith is guilty of exactly the same thing she's blaming everyone else for. The title of her posting is, "Why So Little Self-Recrimination Among Economists?" To which I ask, "Why so little self-recrimination in Yves Smith?" Basically Smith did what everyone else does -- blame everyone else for her own sins and failings.

The above three articles, especially the last two, are left of center themes, and in fact many of Smith's articles are ideologically on the left, and she's often bitterly critical of the Bush administration.

That's fine, but that's her problem. We have strongly partisan ideologues on the right, like CNBC's Larry Kudlow, who has always talked about how he loves free markets and the Bush administration; and we have strongly partisan ideologues on the left like Nobel Prize winners Paul Krugman and Joseph Stiglitz, both of whom are praised by Smith. This is particularly egregious in the case of Stiglitz, since he actually participated in the theoretical development of the mortgage-backed securities that turned out to be fraudulent. Smith is simply another ideologue on the left.

You could say that Larry Kudlow and Yves Smith are mirror reflections of one another, ideologues at opposite ends of the spectrum.

There's nothing wrong with being an ideologue, of course, but you can't make rational judgments about complex economic subjects if you are.

And that's why I never take any political or ideological positions, except to be pro-American. As soon as you let a political thought enter your mind -- as soon as you allow yourself to think "I like what Barack Obama is saying," or "I like what John McCain is saying," then your mind becomes tainted and you interpret every event through the same political and ideological filter.

That doesn't explain everything, of course. There are undoubtedly other economists who aren't ideological, but who still never foresaw the current problems, and who are still not admitting guilt. As for them, I have little doubt that they're just like the financial engineers who created the fraudulent mortgage-backed securities -- they were in it for the money and personal benefit, rather than ideology.

I started this web site in 2002, and I've become infuriated and sickened by the ubiquitous fraud and deception at every level in every situation, self-justified by ideology and personal gain.

The real answer to Yves Smith's question is that people cannot talk about what they did in the past because to do so would be to admit to their own fraud and deception, and their own ideological biases.

I've been watching pundits on CNN and other news stations talk about the coming inauguration, and it's amazing how much they're drooling over the Obama presidency. I'd say that it's insane, but it's just part of today's insane world. These reporters, like everyone else, are desperately hoping that Obama is going to save them personally, and the world in general. Instead, they're all acting their parts in a script that's been played many times in history, and which never has a happy ending.

Generational Dynamics Web Log for 17-Jan-2009
Blog Watch: Naked Capitalism's Yves Smith blames economists for being wrong.

Web Log Pages

	Generational Dynamics
	Forecasting America's Destiny ... and the World's

\| HOME \| WEB LOG \| COUNTRY WIKI \| COMMENT \| FORUM \| DOWNLOADS \| ABOUT \|

Generational Dynamics Web Log for 17-Jan-2009 Blog Watch: Naked Capitalism's Yves Smith blames economists for being wrong.

Web Log Pages

Generational Dynamics Web Log for 17-Jan-2009
Blog Watch: Naked Capitalism's Yves Smith blames economists for being wrong.