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June 28, 2009

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"What sort of person would have such an inflated sense of entitlement that he thought he could get money for writing about something he knew nothing about?"

He did not need an inflated sense of entitlement. Just an understanding of the sort of article the Guardian wanted to see in its pages.

Bull Fax

How does the picture of the girl ( not that I object ) fit in? Is she a clue too?

By the way nowadays, the above is true for many Mickey mouse analysis published nowadays. Wikipedian blogger society has diminished the value of formal education, and expertise is starting to get judged by the PR of your blog. I am not sure if economic commentators were ever much smarter though. Probably issues were simpler.

Mr Eugenides

A joy from start to finish. My favourite is this bit:

---
What caused the current global financial meltdown?

The easiest way to explain it is to retell a joke my sister-in-law, a financial adviser, told a group of women 15 years ago.
---

Too bad all the truly brilliant economic thinkers are too busy addressing women's meetings to run the world.

Ivo Vegter

Funny thing is how parts of the article are quite correct. (E.g. throwing money at the failures isn't a solution; the Great Depression was ended not by the New Deal, but by WWII.)

But then, if you flip coins, you'll get heads sometimes.

The rest of the piece has no basis in either fact or reason. If he doesn't understand the purpose of financial transactions, no amount of useful, productive knowledge (like medieval proofs of the existence of God) will help explain what they're good for.

Luis Enrique

Never mind just writing an occasional article for The Guardian, ignorance is no barrier to being a section editor. Take this from its economics editor:

http://www.guardian.co.uk/business/2009/jun/01/larry-elliott-fantasy-economics

I keep harping on about this ... nobody else seems to think it's as outrageously bad as I do (which probably indicates I'm over-reacting). Never the less, to my mind the article is peppered with assertions that ought to disbar Elliot from writing about economics.

Just to pick one: "there is not the slightest sense that the world of general equilibrium .... has been turned upside down in the past two years". What on earth is he on about here? Does he mean the concept of general equilibrium, that a change in one place can affect things in other parts of the economy? Surely not. He must mean the Walrasian G.E. model, price taking, perfect competition and all that. What is he saying, that economists think this model describes the world, and this crisis ought to show them that it does not? Jesus Christ! Where to start with that? Not the slightest sense!

And I love this: "As a profession, economics not only has nothing to say about what caused the world to come to the brink of financial collapse last autumn, but also a supreme lack of interest in it" I mean, this guy is the flaming economics editor - doesn't he think that standards of economic theory like imperfect information market failures, contract theory (principal agent problems) offer any insights? Or how about more recent work. Here's a book from my shelf: "Rational Herds" by Christophe Chamley, published 2004. Funnily enough, it's not the first ever work of economics on this subject - it has quite an extensive bibliography! Here's a syllabus for a course on financial crisis - http://braddelong.posterous.com/hans-joachim-voth-syllabus-fin - do you think the f*cking economics editor the UK's leading left-wing newspaper might be expected to be aware of the existence of such work? Do you think he might be expected to have read, say, Gary Gorton (http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1401882), whose getting cited all over the place. No, because that's not what the Guardian wants from its economics editor. What incentive does it have to employ an economics editor that knows their stuff?

phew. \rant.

Dave Whelan

Your comment on the piece might be regarded in a similar vein. At first sight to the superficial reader, it appears to be attacking someone's ideas by denying their right to have any, whereas in reality it is a heartbreaking demonstration of the staggering intellectual arrogance of financial geniuses like you that got us into this mess in the first place.

Luis Enrique

Mr Whelan, what is more indicative of intellectual arrogance, thinking that you might what to learn about economics before writing about it, or thinking that you can just go ahead and pontificate?

Tom James

Well Californication was OK, but I can't bring any connection to mind immediately.

Is the Natascha McElhone link that she was also in The Truman Show and Chris is implying that the good folks at The Guardian occupy a similarly fictional universe?

chris

The picture is a reference to Californication, in particular the line (IIRC):
Charlie "stunt cock" Runkle: "I can't tell if it's a heartbreaking work of staggering genius or a piece of shit."
Hank: "You mean there's a difference."

Phil

There's a half-decent half-column buried in there, which would go something like this:

"Bloody hell, CDOs are weird, aren't they? Bound to come unstuck sooner or later if you ask me."

But even that wouldn't actually be true or useful.

What do you reckon to Donald MacKenzie's review of Gillian Tett in the LRB? (I'd put in a link if Typepad didn't eat them - it's on open access.) I liked it, but I'm an English graduate.

Luis Enrique

Phil - thanks for suggestion, v interesting read. I guess I'd better add Fool's Gold to the pile of books I'll never get around to reading.

Cabalamat

LOL

Funniest thing I've read all week.

reason

Thin skins haven't we!

dsquared

[What on earth is he on about here? Does he mean the concept of general equilibrium, that a change in one place can affect things in other parts of the economy? Surely not. He must mean the Walrasian G.E. model, price taking, perfect competition and all that. What is he saying, that economists think this model describes the world, and this crisis ought to show them that it does not? ]

surely he's referring to dynamic stochastic general equilibrium models? And although I didn't like that piece either, and posted on it myself, I think most economists would agree (Brad certainly does) that the profession has got a real crisis on at the moment through its failure to either predict or explain the crisis.

Luis Enrique

D2,

Maybe so, but if he knows the difference between a DSGE short-run macro model and 'the world of general equilibrium' why doesn't he find a way to explain it to his readers?

From what I've picked up from my senior peers / superiors, the limitations of short-run macroeconomics have been known for years. (In 2005 my lecturers were telling me short run macro was 'a mess'). But there's more to economics than short-run macro, and Elliot is just taking aim at 'economics' - do you think readers of that article are going to come away thinking anything other than 'economics is rubbish'?. Economists have been writing about financial crisis since year dot, and there's tons within micro, for instance, that speaks directly to the current crisis (and 'frontier' research in macro) and there is 'not the slightest sense' Elliot is aware of any of that. And yes, the practise of trying to model how exogneous shocks propogate through the economy (new keynesian DSGE) does look rather like a bark up the wrong tree, but doesn't strike you as a bit weird to have expected people working on that topic to predict a crisis which is (perhaps) best explained by banks having taken what turned out to be insanely risky positions in obscure financial instruments? There were plenty of macroeconomists in 2007 worrying about global imbalances, debt & deficits, and predicting a house price crash (hell, I was), but none of that quite adds up to predicting this crisis. Was anybody telling Oliver Blanchard in 2006 that he really he should be learning about sliced and diced mortgage backed securities and trying to find out how exposed banks were to a decline in their value? And as for DSGE, even if they're not much use for 'predicting' global banking crisis, it's not clear to me these models are quite so useless for other purposes (and they are used all over the place). And secondly, it's not clear to me that better macro models will not emerge from extensions to the DSGE framework, say adding small deviations from rationality that can generate herd behaviour. After all, I'd expect a model of the macro economy to be dynamic, capable of incorporating shocks, and to have some general equilibirium-esque properties, even if out of equilibrium behaviour ends up being where the interest lies.

But this is all by the by. Whatever the shortcomings and limitations that short-run macroeconomics has, that does not mean that any article that contains the sentiment 'economics is rubbish' is acceptable. I think that article demonstrates that Elliot is grossly ignorant of his subject, in a way that just wouldn't be acceptable in a newspaper science editor or a politics editor.

ydue

Brad cited it (apparently) approvingly too. I thought it was a bit flimsy (look how many economists I can name!) but not too bad, apart from the _oooooh this paper features a lot of silly long words_ bit. It'd also be interesting to know how heavily Minsky featured in his articles (or indeed those of anyone else now banging on about him) before ~12 months ago.

ejh

"in a way that just wouldn't be acceptable in a newspaper science editor or a politics editor"

Couple of hostages to fortune there, especially the latter...

Come on Luis Enrique, get a sense of proportion. Elliott's been writing about economics for a very long time and is highly-respected. He's not, however, writing for an academic audience and he's not writing from a position that much respects contemporary mainstream economics.

He's written something you think is ill-informed - well, sooner or later all columnists do that, even the best ones. But unless you can show that he does this regularly then it might be more reasonable to take a position of "even Homer nods" (as the great Martin O'Neill once said at half-time).

Because otherwise, if you apply this standard across-the-board, then given the propensity of economists to tell one another that they're wrong, don't know what they're talking about, or worse, you're liable soon to find yourself a saint stranded in a world of sinners.

Luis Enrique

ejh

I'm not pretending to be doing anything other than having a rant (and thanks for giving me another reason to admire Martin O'Neill, although I had to google that phrase first).

Elliot is well respected by who? Elliot is highly regarded at The Guardian; perhaps for the reasons Chris' post is about.

Yes, he's been writing about economics for a very long time, making it all the more incredible he can write a sentence like "economics not only has nothing to say about what caused the world to come to the brink of financial collapse last autumn, but also a supreme lack of interest in it". I know economists disagree and like to sling accusations of cluelessness about, but Elliot has entered a whole different category of wrong. It's like the difference between arguing over why Neil Kinnock lost the 1992 election, and asserting that Neil Kinnock doesn't exist (or something like that). I think he does write this kind of crap regularly, but I'm not about the trawl through the archives to try and prove it.

dsquared

[the limitations of short-run macroeconomics have been known for years]

surprising that nothing was done about them then, wasn't it?

and

[economics not only has nothing to say about what caused the world to come to the brink of financial collapse last autumn, but also a supreme lack of interest in it]

strikes me as a very fair summary of how far macroeconomics had got from relevance to the macroeconomy by mid-2007, and Steven Levitt (a link from whose blog originally led me to the Elliott piece) agrees.

The answer to your question:

"Was anybody telling Oliver Blanchard in 2006 that he really he should be learning about sliced and diced mortgage backed securities and trying to find out how exposed banks were to a decline in their value?"

is "yes, Larry Elliott was". The problem here is that academic economists (like, I'm afraid, yourself) are still acting as if an "Economics Editor" ought to be knowledgeable about their own arcane theoretical disputes, rather than about the economy, and really haven't realised quite how badly adrift their subject has come from the objective facts that it ought to have been studying. It's not like a politics editor failing to address why Neil Kinnock lost the 1992 election; it's like a politics editor failing to address whether Neil Kinnock's conception of the post-imperialist workerist social compromise was an example of premature Pabloism of the Fourth International and therefore inconsistent with Trotsky's interpretation of the Critique of the Gotha Program. And to put it bluntly, you're rather like the Marxist academics insisting that the arcane theoretical debate is more interesting than the factual one.

Elliott's right on the substantial point - economics did go right off the rails, and it did so because it made a whole lot of equilibrium assumptions that were totally unjustifiable, and it became far too interested in studying the properties of equilibrium models. I don't agree with him on the specifics, but on the big issue, he's right. And a last warning:

[And secondly, it's not clear to me that better macro models will not emerge from extensions to the DSGE framework, say adding small deviations from rationality that can generate herd behaviour. After all, I'd expect a model of the macro economy to be dynamic, capable of incorporating shocks, and to have some general equilibirium-esque properties, even if out of equilibrium behaviour ends up being where the interest lies. ]

A lot of Marxist economists around the 1970s were convinced that a new and superior approach would arise out of the wreckage of the Transformation Problem, by making small adjustments to take into account the minor tweaks needed. They didn't.

Luis Enrique

D2,

You're claiming on the one hand that Elliot is interested in the 'real economy' and not 'arcane theoretical disputes', and on other the other hand, when he writes about how "economics has nothing to say ...." etc. you say he's really talking about the limitations of DSGE short-run macro models not economics per se. Which is it?

You might like to read his comments as a "fair summary" of how short-run macro had gone adrift, but that's not that article he wrote. Economics has a great deal to say about the source of the crisis and economists have a great deal of interest in it, and Elliot either does know that or does but wishes to misinform his readers, either of which means in an ideal world he wouldn't have that job.

In 2006 I was taking my MSc Macro course - RBC, New Keynsian models etc. We spent a lot of time on the shortcomings of these models, meaning how the models failed to satisfactorily account for the "objective facts" you seem to think get ignored. If you'd asked me at the time whether these models had anything to say about financial crisis, I'd have said of course not. Does that mean that financial crisis don't exist or aren't important? Of course not. There's a large literature studying financial crises - it's not as if economists didn't know they happened or weren't interested in them (they just thought they didn't happen at home).

Macro is a long way from being a perfect theory of everything, and has further to go than just writing down a model that generates endgoenous financial crisis. I don't know why macroeconomists hadn't already solved all its problems in 2006 but I didn't find it "surprising nothing was done about it" because I thought that was kind of the point of continuing macro reearch. I'm not saying macro had gone in the right direction. I don't know why macro economists didn't do more to incorporate the banking sector into their models. I don't know why so many people thought financial crisis weren't a concern for 'advanced' economies, but I don't think Greenspan based his thinking on DSGE macro models (in fact he explicitly disavowed reliance on maths). There were certainly plenty of reasons from within mainstream economics to think financial markets could misbehave. I think Rajan's 2005 speech "The Greenspan Era: Lessons for the Future" is a good place to look.

If Elliot really was urging everybody to pay attention to the positions banks were taking in mortgage backed assets, and the risks therein, in 2006, then I take my hat off to him and would very much like to see a link or two. I'd thought he had just been worrying about household debt and the current account deficit and so forth.

I don't really know what you mean by "a whole lot of equilibrium assumptions that were totally unjustifiable" - if I was a macro economist, I'd be thinking about increasing the level of disaggregation in the models, paying attention to asset prices and stocks of debt, and introducing say a learning algorithm for expectations rather than strong "expectations are always correct" rationality. I don't know whether these are the equilibrium assumptions you're talking about. And I'm not sure it would adequately capture dysfunctional behaviour in the banking system - that seems to me more of a micro story with macro consequences.

But I'm not a macro economist, I'm a budding development economist, and finally I'd like to take exception to your insinuation that academic economists are only interested in their arcane theoretical disputes as opposed to the objective facts. I am interested only in understanding the real world, which is why I am interested in theory, and I think the same goes for most economists. (But not all; there are some a 'pure theorists' out there, but I don't object to that either).

I don't expect the economics editor of a national newspaper to be up to date with the latest theoretical disputes, but I do expect him or her to be familiar with broad areas of economics research and know a bit about what the sujbect has to say about, say, the fiancial crisis. And when this economics editor is writing an article explicitly about academic economics, I don't think it should be pure crap from start to finish.

Luis Enrique

I hope there aren't as many lapses of thought as there are typos in that last comment.

Luis Enrique

sorry to go on ... but the more I think up this, the further it gets up my nose:

"And to put it bluntly, you're rather like the Marxist academics insisting that the arcane theoretical debate is more interesting than the factual one."

What are you talking about? What arcane theoretical debate do I think is more interesting than the factual one?

Are we talking about the correspondence between Elliot's depiction of the 'economics profession' and the facts of the matter? In which case, factually speaking, Elliot full of crap. He could have written that the bit of economics that studies recessions had, wrongly, largely ignored the sorts of things involved in this financial crisis, although other branches of economics have plenty to say, and even then he'd have been wrong about the 'supreme lack of interest' on the part of macroeconomists. But he didn't write anything like that.

Or, when it comes to macroeconomics itself, are you saying I'm more interested in arcane theoretical debates than factual ones ... but no, you wouldn't make unfounded accusations like that.

You can't be suggesting that I think Elliot should be writing about arcane theoretical debates rather than 'the facts', because of course Elliot chose to write an article about economists (those 'arcane theorists') and I'm just raising factual objections to what he wrote.

Churm Rincewind

Setting aside the substance, or lack of it, of Teitel's argument, it seems to me obvious that "the job of the writer is to echo his readers’ prejudices, not to make them think", at least as far as daily journalism is concerned. The error is in the supposition that this is undertaken in order to massage the egos of newspaper editors. It's not - it's a decision undertaken by newspaper editors in order to massage the egos of their readers, and thereby to sell more newspapers. The Guardian is hardly egregious in this regard, as a casual glance at any British tabloids will easily demonstrate.

Of course, the actual process is not quite as simple as this, since it requires editors to predict accurately the views and prejudices of their readers, which is often extremely difficult. For example, the daily papers were initially uncertain of their readers' views on the death of Princess Diana, and her total saintliness was only established as a universal point of view in all newspapers some days after the accident. Their prior coverage was much more ambiguous, as editors anxiously sought to detect their readers' reaction to the event with a view to reflecting it back at them.

All Murray Teitel did was to write for Guardian readers what oft they thought, but ne'er so well expressed.

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And a lot of it reflects a switch from bank deposits to securities; foreigners “other investments” in the UK, http://www.watchgy.com/ mostly bank deposits, fell by £143.2bn in Q1. And of course there’s no guarantee such buying will continue.
http://www.watchgy.com/tag-heuer-c-24.html
http://www.watchgy.com/rolex-submariner-c-8.html

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When the door of happiness closes, another opens, but often times we look so long at the closed door that we don't see the one which has been opened for us.

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