Eight years ago, I was chatting with a friend over his scholarship applications filed to accompany his admission to the prestigious London School of Economics. He jokingly described how economists, at least in his imagination, react when their predictions fail,
Oh, this is because of changes in this and that.. Instead, we should now be looking at...
(and when the follow-up prediction go out the window)
Oh, that happened because of that and this.. Now looking at this, the market will react to that and...
Simon Jenkins' column in The Guardian today nailed that imagination without mincing any words, asking the economists to voice up now in the face of current sub-prime housing crash.
Forgive me for asking, but where are the economists? As the nation approaches recession, an entire profession seems to have vanished over the horizon, like conmen stuffed with cash, and thousands left destitute behind. They said recessions were over. They told politicians to leave things to them and all would be fine. Yet they failed to spot the sub-prime housing crash, and now look at the mess.
Ripping into heavyweights such as Milton Friedman, John Kenneth Galbraith, Alan Greenspan, names that inspire awe and surely add celestial glow to one's application if listed as references, Jenkins calls economics "a Telfon profession" and wants to prioritize the role of politics
in politics rather than having politicians eating out of the economists' hands.
When Jon Stewart interviewed
Greenspan on The Daily Show last year, Stewart questioned the very definition of a free, open market and "free choice" since there exists regulation vis-à-vis the amount of money made available by the central bank. It is clear to me any question on "freedom" inevitably leads to some inconvenient truth and Greenspan admits economics is largely about perception and that the collective convention still fails to "figure out [human nature] in the forecasting business."
Stewart: So we’re not a free market then - there is an invisible... there is a “benevolent” hand that touches us...
Greenspan: Absolutely, you are quite correct. To the extent that there is a central bank governing the amount of money in the system, that is not a Free Market, and most people call it regulation.
Stewart: And we are really deciding... When you lower interest rates, it drives money to stocks and lowers the return people get on savings.
Greenspan: Yes, indeed.
Stewart: So they’ve made a choice - “We would like to favor those who invest in the stock market and not those who invest in a bank and helps us”...
Greenspan: That’s the way it comes out, but that’s not the way we think about it.
Stewart: Explain that to me. It seems to me that we favor investment, but we don’t favor work. The vast majority of people work, and they pay payroll taxes, and they use banks. And then there’s this whole other world of hedge funds and short betting... you know, it seems like craps. And they keep saying, “No no no, don’t worry about it, it’s Free Market, that’s why we live in much bigger houses.” But it really is, it’s the Fed, or some other thing, no?
Greenspan: I think you’d better re-read my book.
Stewart: All right, all right. But... Am I wrong that we penalize work by not making the choice to...
Greenspan: No, what a sound money system does is to stabilize all the elements in it and reduces the uncertainty that people confront, and the one thing all human beings do when they are confronted with uncertainty is pullback, withdraw, disengage, and that means economic activity, which is really dealing with people, just goes straight down... and so the key problem...
Stewart: So it’s all about perception then. It’s about making people believe the system is sound. If the stock market is high, people feel confident in spending, and if it lowers, they feel less confident?
Greenspan: Well...uh... I think you have to recognize, there are certain aspects of human nature, which essentially move exactly the way you defined it. The problem is, periodically we all go a little bit euphoric until we are effectively assuming with confidence that everything is terrific, there will be no problems, nothing will ever happen, and then it dawns on us - NO! And...
Stewart: And then it goes the other way.
Greenspan: Exactly.
Stewart: Huge Fear.
Greenspan: I was telling my colleagues the other day... I said I’d been dealing with these big mathematical models for forecasting the economy, and I’m looking at what’s going on the last few weeks and I say, “You know, if I could figure out a way to determine whether or not people are more fearful, or changing to euphoric... and have a third way of figuring out which of the two things are working, I don’t need any of this other stuff. I could forecast the economy better than any way I know.” The trouble is, that, we can’t figure that out. I said the same at the meeting I was at... I’ve been in the forecasting business for 50 years, more than that actually, to think about that, and I’m no better than I ever was, and nobody else is either. Forecasting 50 years ago is as good or bad as it is today. And the reason is that human nature hasn't change. We can't improve ourselves.
Stewart: (Leans back in chair)...You just bummed the shit outta me!
Fast forward to March, this year, where
Stewart poked fun at Jim Cramer, host of CNBC's Mad Money, for his predictions on Bears Stearns to a concerned viewer about pulling out his investment.
Cramer: Peter writes, “should I be worried about Bear Stearns in terms of liquidity and get my money out of there?” No, no, no! Bear Stearns is fine! Do not take your money out. If there's one takeaway... Bear Stearns is not in trouble. If anything, they're more likely to be taken over. Don't move your money from Bear! That's just being silly. Don't be silly!
(As widely reported, Bear Stearns stock fell from $60 to $2 in just a few days.)
Stewart: I love the way Jim Cramer breaks down really complex financial issues into ones that are WRONG!
Funny haha, but no consolation to Peter and other investors who banked on Bear Stearns.
It is easy to join Jenkins in frowning at how economists' predications, ubiquitous as their origins may be from welfare governance to credit agencies, fail once and again only to have politicians blame politicians for
this and that. It is also very entertaining to watch Stewart point out the unspoken truth about media and public perception in the economy. And then I suspect it is, perhaps diabolically, most satisfying to read of two
Bear Stearns fund managers surrendering to federal agents last month after the prosecutors obtained e-mail exchanges that revealed the managers' worries about the funds' performances while presenting an optimistic picture to investors.
It does seems to me as we develop further as a race with our technological advancements and increasing intelligence some fundamental aspect of our "human nature" remains irreducible and firmly influential in all our decisions. If we already know that perception matters (would you have
really bought that jar of moisturizing cream if the product copy boldly states that the expensive and exotic ingredients contained cannot be affirmatively proven to help smooth out your skin any better than a $12 tube?) would not building extensive and complicated marketing and economic systems on fundamentally shaky understanding of "human nature" be problematic sooner or later?
While the Bear Stearns indictment is the first of the expected many to come for the failed Wall Street giant, would deciding on its outcome and potentially sealing the verdict as a landmark cases for future trials have much impact on understanding the "human nature" other than tweaking the already Goliath financial system in accordance to new rules? If anything is to be learned it seems that we keep skirting around this irreducible "human nature" rather than face it.
Greenspan's notion that stabilization is needed to avoid an all-out panic withdrawal is to be empathized but then the question to probe again is to ask if there is more to "human nature" that is worth investigating. Jenkins' return to politics is underlined by his point that economics is not a science as physics and chemistry are but “it is rather a branch of psychology, a study of the peculiarities of human nature” and for him, politics is the “true master of things” and should rescue us from tough times. While I agree that economics studies the oddities of our "human nature" as a psychology, I only meet him halfway. For me, politics is no more "purer" a social science or social study than psychology. If perception matters in economics, it is a bedrock in politics. And perception is never worth undertaking without understanding psychology. Ultimately, any overtly clear distinction between politics, economics, and psychology is always too contrived. An amalgamation of these approaches, however, may point to deeper learning about our idiosyncratic nature.
