One of the handful of journalists to fully grasp the enormity of the economic crisis that was to commence in late 2007 has died, long before the crisis itself will end. In his column Planet Wall Street, David Hirst’s poetic prose warned his readers of the coming economic tsunami, at the same time as the officials who should have prevented it continued to laud the very instruments of financial deceit that made it possible.
Paul Krugman recently posted on predictions of the crisis before it happened, in a piece entitled “Non-prophet Economics”. It had a set of propositions about how one should evaluate such claims with which I completely and utterly agree. I’ll quote it in its entirety, because it’s an eminently suitable starting point for evaluating whether a prediction was in fact made:
In 1992, I built a model of Minsky’s ‘Financial Instability Hypothesis’ that simulated the debt-induced breakdown he argued could happen in a capitalist economy. But it also had an unexpected feature: the breakdown was preceded by a period of apparent stability. Initial volatility gave way to a period of tranquillity, which was then followed by increasing volatility and finally a breakdown (see Figure 1: the two variables are the employment rate and the wage share of GDP):
America is a land of contention, and one of the most contentious topics here (I’m in Seattle as I write) is the impact of the Federal Reserve’s policy of “Quantitative Easing” – otherwise known as ‘QE’. The Federal Reserve has committed to spending $85 billion every month buying a wide range of bonds from banks, until such time as the US unemployment rate falls below 6.5 per cent.
One of the many schisms in economics is between economists – new and old – who believe that prices are set by supply and demand, and economists – also new and old – who believe they are set by a mark-up on the cost of production.
The Seattle Economics Council has invited me to speak on the topic of “The Great Financial Crisis and the Great Recession: How we got here and the way out”. The details are:
Venue: Seattle Town Hall
Date: May 23rd
If you’d like to attend, click on this link.
The ABS publishes its house price index data today. My leading indicator for this is the Mortgage Accelerator, and it implies another increase in prices—and the first sign of rising real prices on an annual basis since early 2011. But there’s also a turnaround developing in mortgage acceleration which implies that the rate of increase will top out at a much lower level than the 2008 and 2010 booms.
I interrupt my series on the instability of capitalism for a special report on the serious problem of Australia’s budget deficit. As everyone knows, the world will end tomorrow unless Australia’s government plugs its $12 billion ‘budget black hole’.
As I noted in my previous post, neoclassical economics made it an item of faith that capitalism was inherently stable, and dismissed arguments to the contrary as no more than left-wing propaganda. My favourite statement of this perspective came from the pen of Nobel Prize winner Ed Prescott, who was one of the key players in introducing the concept of “rational expectations” into economics. Not only was capitalism inherently stable, he claimed in 1999, but it was so stable that we can reliably expect the economy to double the standard of living every 40 years. Marx and his ilk were simply wrong:
Sydney Morning Herald commentator Gareth Hutchens commented that the Rogoff and Reinhart affair shows how slow economists are to realise that their data may be dodgy, but to my mind that is insignificant compared to how slow they are to realise that their theories are dodgier still.