
What Economists Still Don’t Get About the 2008 Crisis - paulpauper
https://www.bloomberg.com/view/articles/2018-07-29/what-economists-still-don-t-get-about-2008-crisis
======
cm2187
To me the biggest mystery about the 2008 crisis is why so much QE has resulted
in so little inflation.

The only convincing arguments I have heard so far is that:

1\. at the same time banks were forced to significantly deleverage, so while
the fed was pouring money into the systems, banks were effectively pouring
money out of the system.

2\. inflation happened but it was all concentrated into financial assets, real
estate, and salaries for the upper middle class, which expenses (college
tuition, luxury flats and houses, restaurants, etc) have seen a double digit
inflation (my FT subscription must have doubled in 10 years!). These aren't
really measured by CPI indices.

I guess it may also have to do with how the QE was introduced. If it was money
printed to pay civil servants it might have had a different effect than
introduced in the bond market.

But I don't know if it is reproducible. It feels like we are at the end of the
current cycle (it's hard not to be nervous when looking at a 30y chart of the
S&P500). QE is pretty much all the way in, rates are low. There isn't going to
be much more central banks can do than print even more money. Inflation should
show its ugly head sooner or later.

~~~
pdonis
_> at the same time banks were forced to significantly deleverage, so while
the fed was pouring money into the systems, banks were effectively pouring
money out of the system._

That's not an "argument", it's an observation. Almost all of the QE "new
money" was never used by the banks to make loans; it just sat in their
accounts at the Fed. Why? Because the banks weren't fools: they knew they had
way too little reserves for the loans they already had outstanding, so they
just used the QE funds to increase their reserves. That equates to
"significantly deleverage".

 _> I guess it may also have to do with how the QE was introduced. If it was
money printed to pay civil servants it might have had a different effect than
introduced in the bond market._

Or money printed to pay ordinary people whose retirement savings had collapsed
through no fault of their own. And yes, that would have caused inflation,
because you would have had a greatly increased quantity of money chasing the
same quantity of goods and services. It might also have stimulated some
economic growth which could have offset that effect, but that's a chancy thing
to rely on.

~~~
adventured
> Or money printed to pay ordinary people whose retirement savings had
> collapsed through no fault of their own. And yes, that would have caused
> inflation

We did exactly that. The Fed orchestrated the greatest ordinary person bailout
the world has ever seen: it reinflated the US housing market and salvaged the
net worth of the entire middle class in the process.

It did cause vast inflation. Just look at the cost of a house in 2012 vs 2018
or the equity situation then vs now:

Average gain on a home sale in 1Q04: positive ~$50,000.

Average gain on a home sale in 1Q12: negative ~$50,000.

Average gain on a home sale in 1Q18: positive ~$55,000.

[https://i.imgur.com/SfktmBU.png](https://i.imgur.com/SfktmBU.png)

Median sales price for homes sold in the US:

1Q06: $247,000 (peak bubble...)

1Q12: $238,000

1Q18: $338,000 (!)

Those recent gains are very heavy with inflation courtesy of the Fed, and they
are entering the real economy slowly but surely with every exit. That's also
why the Fed is being forced to raise interest rates when it's the last thing
the economic party wants.

The artificially juiced stock market (artificial courtesy of the low rates),
which has created millions of new millionaires in the last four or so years,
is also inflationary. It has also helped to salvage countless pension funds
for large numbers of ordinary persons, funds that were badly under water.
Every time someone sells their hilariously inflated Netflix stock at 200 times
earnings, they can thank the Fed, and when they dump that into the economy
(consumer goods or housing) it's inflation in action.

~~~
pdonis
_> The Fed orchestrated the greatest ordinary person bailout the world has
ever seen: it reinflated the US housing market and salvaged the net worth of
the entire middle class in the process._

How the the Fed do this? Certainly not by QE, which did none of these things.

 _> Just look at the cost of a house in 2012 vs 2018_

What did the Fed do during this time? Most of the money printed by QE happened
from 2009-2013, and QE was shut down completely in October 2014.

~~~
pas
QE bought a lot of long term junk-ish bonds (full of "AAA housing"), no?

QE was the bridge between the two sides of the chasm, hence it's not visible
on the graph. We see a rapid fall, a smooth bottom and a nice rise, but it
could have been simply a big crash at the bottom and nothing for a decade.

~~~
pdonis
_> QE bought a lot of long term junk-ish bonds (full of "AAA housing"), no?_

No. QE bought T-bills in order to exchange them for increases in the banks'
account balances at the Fed.

TARP funds bought junk-ish bonds back in 2008-2009, but all that did was make
banks and financial institutions not go bankrupt from being forced to make
subprime mortgages for several decades due to the federal government's policy
to "encourage" home ownership.

------
dalbasal
It's a pleasure to read an article by a writer who understands of the history
economic thought, though I suspect I will disagree with him on a lot of
things.

Anyway, this is interesting. I'll look up these economists.

On the face of it, I think it's interesting how economists are hesitant to
consider money real. Money is fictional to most economists. What's real is
consumer surplus, utility or some other abstract way of reasoning about
consumption. ...skeptical eyebrow.

I liked David Graeber's book about money. First, because I like his
intellectual shit-stirring. Second, because I think he's right about the
origin of money. Money evolved from debt. Debt did not evolve from money, as
liberal 17/18th century thinkers assumed.

Beyond this relatively simple point, I don't think he had much of anything
concrete. But, as he talked about little local revolts and the role debt
played... idk. Makes you think.

In any case, from a reactive european perspective in the post financial crisis
world... I suspect that what business cycles _are_ is a system wide
insolvency. It turns out tat some of the money isn't _real_. That is, some of
the debts floating around the economy are not going to be paid. The dollar
isn't worth a dollar, your bank doesn't really have your money, the stock will
never pay a dividend, the national debt will never be repaid, someone isn't as
rich as they think they are, the mortgages are in arrears.

The crisis, whether it's a on banks, devaluation of assets, currency
inflation... this is a bankruptcy proceeding, a negotiation determining who
really owes who what, given that not everyone can get paid.

~~~
deadmetheny
Reminds me of an amusing story I read somewhere a while back:

>It is the month of August; a resort town sits next to the shores of a lake.
It is raining, and the little town looks totally deserted. It is tough times,
everybody is in debt, and everybody lives on credit.

>Suddenly, a rich tourist comes to town. He enters the only hotel, lays a 100
dollar bill on the reception counter, and goes to inspect the rooms upstairs
in order to pick one.

>The hotel proprietor takes the 100 dollar bill and runs to pay his debt to
the butcher. The Butcher takes the 100 dollar bill and runs to pay his debt to
the pig raiser. The pig raiser takes the 100 dollar bill and runs to pay his
debt to the supplier of his feed and fuel. The supplier of feed and fuel takes
the 100 dollar bill and runs to pay his debt to the town’s prostitute that, in
these hard times, gave her “services” on credit. The hooker runs to the hotel,
and pays off her debt with the 100 dollar bill to the hotel proprietor to pay
for the rooms that she rented when she brought her clients there.

>The hotel proprietor then lays the 100 dollar bill back on the counter so
that the rich tourist will not suspect anything. At that moment, the rich
tourist comes down after inspecting the rooms, and takes his 100 dollar bill,
after saying he did not like any of the rooms, and leaves town.

>No one earned anything. However, the whole town is now without debt, and
looks to the future with a lot of optimism.

~~~
nextweek2
It's not that clever, they might be out of debt but they are also out of
creditors. Nobody got richer or poorer just balances were settled.

That's kind of the point of money.

~~~
paulddraper
Exactly.

> However, the whole town is now without debt

And without credit.

I next expect to hear a ingenious story about someone who pays off a car loan
in a way that results in an empty bank account.

------
zjacobi
I've been reading through Anna Schwartz's papers on monetary economics and I
think they're the real story on what economists still don't get about the 2008
crisis.

If you read through the old monetarist research, you see that change in money
supply has a better correlation with recession than basically anything else.
This holds true even when you control for the possibility of reverse
causation, when you make sure that you're actually dealing with a leading
indicator of this cycle rather than a lagging indicator of the next cycle,
etc, etc.

Keynesians think that the only measure of how tight or loose monetary policy
is comes from interest rates, so they can't wrap their heads around how 1%
interest rates can still be tight money. The real story of the economics
crisis is that the banking crisis deposit:reserve ratio through the floor.
This means that a bunch of money disappeared as banks preferred liquidity. The
central bank didn't do enough to replace this money, so people couldn't hold
the money balances they wanted and stopped spending. The Fed said they were
doing all they could to spur inflation, but that's obviously false. The
central bank can always inflate the currency and the fact that they weren't
hitting their inflation targets shows that they had tight money.

Keynesians ultimately don't think money is important enough to model and until
they change that, they're going to be confused.

~~~
nickik
Totally agree with your post, I explain it like this:

The problem with the old monetarists was always that they assumed a constant
demand of money (or velocity) how they called it. Now they had some empirical
reasons for this (see PhD under Friedman) but they missed something that
earlier economists had already figured out. Namely that monetary demand can
shift for all kinds of reasons and that any good monetary system needs to
adjusts to that.

However they were totally correct on interest rate and that interest rate are
a terrible guide for monetary policy.

When you actually study New-Keynesian it is perfectly clear that it is not the
interest rate that sets monetary policy (or indicts it) but rather interest
rate relative to the natural rate. Why New-Keynesian never explain this to
anybody when giving interviews or anything like that boggles my mind
sometimes.

So in New-Keynesiansim everything hinges on your assumption of the natural
rate. 1% interest rate can be contracting or expeditionary depending on the
natural rate.

What happened in 2008 is actually quite simple, the Fed had the interest rate
fixed and didn't lower it (inflation fears because of oil prices, see FOMC
meeting late 2008).

While in the real economy the natural rate was making the Fed policy more and
more contractility.

Modern monetarists (Market Monetarists) like Scott Sumner have been point this
out since 2009 of course.

------
ksec
My own theory after digging sometime into Economics is that no one seems to
have a clear idea what on earth we are actually doing. We all seems to have
our own theory, and they all seems to answer half of the question. And in
practice none of them currently models the world we have now. And it will take
a long time before any of those theory are proved to be correct this time
around. May be we can finally say Keynesian is wrong. ( At the expenses of our
generation )

And it makes things more complicated when people start messing around with how
they measure things, and messing with formulas. Numbers like China which are
inaccurate. Inflation number which are messed with by FEDs. IMF prediction
model which has been wrong every time for years and it seems its only job is
to please or more accurately manipulate the market mindset.

~~~
smacktoward
_> My own theory after digging sometime into Economics is that no one seems to
have a clear idea what on earth we are actually doing._

I still remember the moment I realized this. It was on the first day of my
first class in Economics 101, when the professor began by telling us that
economics was a science built upon the assumption that people are rational
actors. I thought about all the people I'd ever known, and all the deeply
irrational things I'd seen them do, and got the sinking feeling that I had
committed myself to studying a field of thought that had chosen the wrong rock
upon which to build its church.

~~~
JumpCrisscross
> _economics was a science built upon the assumption that people are rational
> actors_

You may have taken a statement made in jest literally. _Homo economicus_ is a
known fiction. Just as frictionless, airless physics are a known fiction.
They're useful, however, for (a) defining a limit or ideal, (b) pedagogical
purposes and (c) starting to think about a problem.

Microeconomics makes falsifiable predictions which can be repeated in
experiment. (I'll go ahead and quibble over whether macroeconomics is a
science. It's closer to an art, like politics. A field with its own rules and
lessons worth learning, but without the capacity to experiment and make
falsifiable predictions.)

~~~
dv_dt
Physics was able to go on from the simplistic models, refine and extend them
to both a wide scale and very high quality of theoretical and empirical
concurrence in exquisite detail and generality.

On the other hand, economics goes on from Homo economicus into a mass of
mathiness with very poor empirical correlation except perhaps in very very
narrow circumstances.

~~~
ghein
The second part of your analogy is off.

It's not billiard physics to general relativity, it's billiard physics to
fluid dynamics and predicting the exact route of a stick through a set of
rapids.

In economics our biggest complaints are around failure to determine that we're
near a singularity and failure to predict behaviour through singularities (in
a signal processing sense). It's understandable, as we all strongly care about
the path of the stick, yet still unreasonable.

Macro is a decent enough tool most of the time, as are traditional fluid
mechanics approaches. What we don't have are ultra precise CFD tools but in
our arguments we act like we should/do. Sometimes traders think that they do
have a great CFD solution and that's how we get LTCM crashes!

~~~
dv_dt
Fluids is a pretty good metaphor, but I would say that today we have
sufficiently good reproducible physical understanding of fluids that we can
generally fly airplanes at a high level of certainty (e.g. turbulence on the
wings is both predictable and controlled in the correct ways that the plane
does not crash). In comparison we crash the economy and even sub portions of
markets periodically (and the last general crash was worse than many previous
recessions) - we don't even have a complete picture of which turbulent areas
to be wary of economically.

Or to maybe to a more human point, we can carry humans around on airplanes
just fine, but don't know how to carry a payload of a nation of humans on a
stable and healthy economic vehicle.

------
gshulegaard
Not a great opinion piece with an overly-dramatic title. The forecasting
failures of major world economic bodies leading up to the 2008 financial
crisis were (and somewhat still are) widely examined and criticized.

> [https://www.economist.com/free-exchange/2011/02/11/the-
> warni...](https://www.economist.com/free-exchange/2011/02/11/the-warning-
> signs-they-missed)

From that article a choice quote from a referenced report:

> "In the United States, for example, it did not discuss, until the crisis had
> already erupted, the deteriorating lending standards for mortgage financing,
> or adequately assess the risks and impact of a major housing price
> correction on financial institutions…As late as April 2006, shortly before
> U.S. housing prices peaked, the WEO and the GFSR explained away the rising
> share of non-traditional mortgages in the United States thus: “Default rates
> on residential mortgage loans have been low historically. Together with
> securitization of the mortgage market, this suggests that the impact of a
> slowing housing market on the financial sector is likely to be limited."

So to say that Economists still "don't get" the 2008 crisis is a somewhat
heavy rose-colored embellishment of the actual state of the field.

~~~
mcguire
" _So to say that Economists still "don't get" the 2008 crisis is a somewhat
heavy rose-colored embellishment of the actual state of the field._"

Have economists actually changed their models, or are they still referring to
the 2008 crisis as an unexpected shock?

What are the chances that their "understanding" of the 2008 crisis will
prevent them from being surprised by the next one?

~~~
gshulegaard
The 2008 financial crisis is a pretty expansive event but it's unclear whether
or not Economists were "surprised" to the extent the public has been led to
believe by somewhat biased media coverage.

For example, the quote from my original comment was from an internal report by
the IMF on the IMF's own forecasting/reporting in the period leading up to the
financial crisis. It even calls out a presentation made by it's Chief
Economist (at the time) which warned against risky behavior that was wholesale
ignored by the fund's management (from the Economist article before):

> Even when some of its officials had different ideas, the fund's management
> seemed not to be listening. Its then chief economist, Raghuram Rajan,
> concluded a presentation at the annual Jackson Hole conference of central
> bankers in 2005 by arguing that “we should be prepared for the low
> probability but highly costly downturn”. But the IMF now admits that:

> "Despite the importance of the Economic Counsellor's position, there was no
> follow up on Rajan's analysis and concerns— his views did not influence the
> IMF's work program or even the flagship documents issued after the Jackson
> Hole speech."

That presentation by Raghuram Rajan is now fairly well known as having fairly
accurately predicted the crisis (in 2005) but fell on ears deafened by
prosperity (he was the Chief Economist at the IMF and IMF Management
completely dismissed it). Here he is on a different list of 6 economists who
"predicted the global financial crisis":

[https://www.intheblack.com/articles/2015/07/07/6-economists-...](https://www.intheblack.com/articles/2015/07/07/6-economists-
who-predicted-the-global-financial-crisis-and-why-we-should-listen-to-them-
from-now-on)

He later went on to be the 23rd governor of the Reserve Bank of India.

I am by no means an expert on the subject so take this all as a layman's loose
following of the topic...but it seems to me that the lack of recognition of
the dangers by Economists is only part of the problem. It also seems that many
major organizations were incentivized to turn a blind eye or even actively
downplay concerns in the face of overwhelming financial growth. Even before
the crisis, there were Economists writing about the dangers[1] (2006); so to
say the entire field of Economics were completely blindsided is itself a bit
of an exaggeration. In reality, many large Economic organizations were
incentivized to downplay concerns by rampant growth. No one wants to be the
one that says, "Hey let's slow down," when the economy is booming.

[1]
[http://keenomics.s3.amazonaws.com/debtdeflation_media/2007/0...](http://keenomics.s3.amazonaws.com/debtdeflation_media/2007/03/SteveKeenDebtReportNovember2006.pdf)

------
Finnucane
I remember distinctly the moment I realized the housing bubble was going to
end badly. I was wondering in the early 00's how house prices, more or less
everywhere, could continue rising past what most people could actually afford
to pay. I hadn't really being paying much attention to the financial world,
but sometime in 2004 or so, I saw an ad on tv for a mortgage deal that seemed
to make no sense. I looked it up and discovered they were selling a negative
amortization loan. On late-night tv.

~~~
dfee
I wonder that same thing today. To me, it feels like the bubble burst in 2007.
But, that we're still here today, seems to indicate it didn't really pop, but
instead it's a side-effect of another system.

Recently in Southern California, listening to the local NPR affiliate, they
were covering a candidate race where one candidate accused the other of not
hearing his constituents: ~"House prices have fallen, and that's bad for our
voters. I hear them, and he doesn't."

I feel like housing in California is unsustainable: pricing, development, etc.

What's strange is that the candidate doing the accusation was a Democrat. I
assume he benefits from loose borders (more housing demand), but constituents
who can't actually vote and get their voices heard (immigrants wanting
affordable housing, not what begins to approach slum-lord style ghettos).

~~~
criddell
> "House prices have fallen, and that's bad for our voters. I hear them, and
> he doesn't."

There are a few things that are absolutely essential to life: housing,
clothing, food are among the most basic. If the price of clothing or food
increased at the same rate as houusing, people would be rioting.

~~~
marnett
oddly enough we aren't told that food or clothing are investments.

~~~
criddell
A house is an investment, housing is an expense. Even when you own your house,
the cost of housing can go up.

------
zwaps
Please also be aware that by reading pundits like Noah Smith, you are buying
into what is basically a historical fanfic of economics "schools" fighting
fiercly over who is right. This sells a lot of articles, but it doesn't really
reflect academia (if it ever did).

The god to honest truth is that macroeconomics in aggregated form is an
undertaking based on extremely scarce data, and it always was. Traditional
statistical inference invariable fails if you basically only do observational
studies where you observe everything once, more or less.

This is also why these grand theories have fallen out of style, except of
course for those vocal pundits like Noah Smith, who literally has a job
because he conjures up debates on political economy.

The gold standard in todays Macroeconomics are either some variation of VAR
models, more or less assumptionless vector-autoregressions of whatever flavor,
or more structural DSGEs, who are fine-tuned to explain certain mechanisms but
are arguably incomplete as models. Neither of these models are Keynesian, or
Austrian, or monetarist, or whatever.

It is also wrong that the mainstream is some sort of monolithic entity. The
biggest econ association in Germany is trying to engage "heterodox" scholars,
inviting them to conferences and such. Several universities keep clusters for
agent-based models, complexity research and even econphysics. The research
output, however, has been a bit lacking as of yet. In Paris, there is an
active community of "Post-Keynesians" right in the top-7 econ university in
the world. I know that figures like Prof. Keen are invited regularly.

In contrast, it seems to be in the interest of some heterodox scholars to
conjure up a hostile "mainstream theory" and then refrain from actually
engaging with it in academic channels.

The same is true for those pundits going on about Keynesians vs. Chicago boys
in this day and age.

Insofar that academic discussions did occur, they have been extremely
productive imo.

Well I am not an Macroeconomist but there you go.

~~~
TheCowboy
I agree that the headline and tone of this article are engaging in unnecessary
hyperbole, but this description of Noah Smith's views and arguments are not
consistent with what I've read. I don't see him arguing for a Grand Theories
perspective of economics, and he grounds his arguments in empirical evidence
and is vocal about the need to do this.

I also think you have contrived an exaggerated view, attributed it to him, and
are arguing against that. I'd like to see more quotes to back up your argument
because it is difficult to find it persuasive.

Doing a quick search I found an older blog post where he touches on a lot of
the same points that you just did, so maybe you agree with him more than you
think:

[http://noahpinionblog.blogspot.com/2013/04/the-reason-
macroe...](http://noahpinionblog.blogspot.com/2013/04/the-reason-
macroeconomics-doesnt-work.html)

~~~
zwaps
You are probably correct that I am not really reasonable in singling out Noah.
I apologize for being wrong here.

It's just that he is front and center in in this econ-blog industry that has
been often unhelpful in making people with ideas engage the literature in an
academic context, which (in other areas) I am a bit bitter about.

I am sure he is a nice guy personally, and switching from his AP position
without actually doing research to Bloomberg was probably putting more bread
on the table, but still, the whole WAY the debate about economics is lead in
the public has been stinted away from scientific context toward hostility and
tribe mentality, and I do believe he is partly to blame for that.

------
ChicagoDave
Or more simply put...unregulated greed eventually runs out of buyers and the
sellers are left with overpriced junk.

Of course I still don't get why the three ratings agencies are allowed to
continue without actually doing their jobs or how banks pay the ratings
agencies and _tell_ them what their "paper" ratings should be.

It's all a trust game and when one of the players decides (inevitably) to game
the game, the house of cards collapses....and those of us that rely on a
normalized system of monetary policy are screwed.

------
hayekfan
Keynesian Economics are the economics of political convenience. If something
goes wrong, we can juice the economy by engaging in extaordinary activities
which generate the illusion of wealth resulting in increased spending.

These ideas were very popular until Great Britain encountered stagflation -
conditions under which both economic recession and inflation coincided and
traditional Keynesian levers and predictions did not function.

Zero Interest Rate conditions are not normal. Never in this history of
humanity have interest rates been held this low for so long.

I strongly recommend taking a long walk through the videos on the Mises
Institute, reading Daniel DiMartino Booth and listening to several Peter
Schiff podcasts.

I don’t recommend buying gold, but if you want a real critique of what is
happening, listen to the leading critics and not this weirdly mangled and
factually questionable Bloomberg piece.

There are many better people to learn about this from.

We are living in absolutely extraordinary times which will need with a severe
economic implosion.

~~~
sonnyblarney
" If something goes wrong, we can juice the economy by engaging in
extaordinary activities which generate the illusion of wealth resulting in
increased spending."

This is not what Keynesian economics is. It's perfectly rational for the
government to step up their investment in things like bridges and roads as the
private sector weakens for a bit. This restores confidence in markets, and
keeps money flowing through the economy.

So long as there are savings during the good times, and the projects are not
wasted (even though in some extraordinary cases it would actually make sense
to dig holes and fill them) ... it makes sense.

Of course the governments ability to 'save' during the good times and to
necessarily spend efficiently is questionable.

"Zero Interest Rate conditions are not normal. Never in this history of
humanity have interest rates been held this low for so long."

Central banks as we understand them are a very new phenom. Who's to say
'what's normal' when the very construct of our current version of monetary
policy is really only a few decades old?

Maybe this is the actual normal.

Maybe because we are getting older, and working an ever decreasing share of
our lives, our net productivity is going down and that's being reflected in
rates?

Maybe the amount of debt hanging over every economy is a drag on productivity?
(Because debt levels are high and this is new)

Maybe surpluses are being pushed into the real economy and captured by
consumers who are getting a good deal, so bonds and stocks just aren't getting
the great returns they were before.

Maybe we haven't had a war in a long time, which leads to fixed/stagnated
human organizations, and without the opportunity for 'ground up renewal' every
once and a while, we can't leap forward.

Maybe the benefits of carbon fuels + industrial revolution have mostly been
had, or at least, fully priced into stocks.

Maybe we're just measuring inflation the wrong way.

So many maybes.

This could be very normal.

We probably won't know until another 50 years and then only in hindsight.

~~~
mrob
>in some extraordinary cases it would actually make sense to dig holes and
fill them

How is paying people to dig and fill holes better than just giving them money
without requiring the useless activity? Even if "dignity of work" is a real
thing, there's no way doing useless work could provide it.

~~~
crdoconnor
Keynes wrote that that would be one way - although, he stressed, not actually
a _good_ way - of escaping from a liquidity trap.

The real irony is that he was actually decrying digging gold out of the ground
and burying it in vaults as he wrote that and among his critics, _that_ kind
of "digging a hole in a ground and filling it up" is typically considered
above reproach.

~~~
UncleEntity
Probably because you aren't literally digging gold out of the ground and
reburying it, you are transforming land, labor and capital into a finished
product which, in this case, is gold bullion.

Be like saying digging a hole and "planting" a fencepost is a wasteful
activity because the wood was nearly in the same state to begin with.

~~~
zxcmx
I think the complaint is that the gold bullion will just be hoarded and used
as a unit of account. You could have achieved a similar thing with some
strokes of a pen.

It's wasted effort in the same sense that bitcoin mining is wasted energy.

------
justboxing
> Basically, this theory holds that when asset prices rise — home values,
> stocks and so on — without a break, investors start to believe that this
> trend represents a new normal. They pile into the asset, pumping up the
> price even more, and seeming to confirm the idea that the trend will never
> end. But when the extrapolators’ money runs out, reality sets in and a crash
> ensues

So what's new here?

~~~
techbio
That zero is a real number.

------
debatem1
Adjusted household income has been essentially flat since the 70s. The
percentage of those households with two earners has gone from 25% to 60%
during that time. Productivity has grown nearly every year during that time.

This, combined with our rising income inequality, means that the economy is
not okay for most people even if a few widely-watched numbers are high. It
should not come as a surprise that such an economy would be more fragile than
those high numbers would indicate.

~~~
nickik
Whatever the truth is about the numbers you present.

The argument that the recession happened because of a fragility of inequality
is a highly speculative theory. I have not heard a single economist make that
claim.

Also, it fails as an explanation because you are explaining a momentary event
with a long term situation.

~~~
mcguire
" _Also, it fails as an explanation because you are explaining a momentary
event with a long term situation._ "

Yes. This is why plate tectonics is widely known to be false.

~~~
nickik
The earth quake does not just happen because of tectonics. You need some sort
of translation mechanism how a long term buildup can lead to a event.

Just saying, 'there are plates' is not an acceptable explanation of earth
quakes.

------
pwned1
Umm, Austrian Business Cycle Theory?

[https://en.wikipedia.org/wiki/Austrian_business_cycle_theory](https://en.wikipedia.org/wiki/Austrian_business_cycle_theory)

~~~
TheCowboy
"Umm" what about this exactly?

------
dood
One of HN's favourite quotes applies here too:

"It is difficult to get a man to understand something, when his salary depends
on his not understanding it."

Ironically, the incentives for economists to understand booms and busts are
much weaker than the incentives not to understand.

------
clarkmoody
Reading through this thread we have a bunch of theories about what must be
right. And there are a few predictable responses of "the government didn't do
enough."

So I'll throw in the Austrian Theory of the Business Cycle to the mix:
[https://en.wikipedia.org/wiki/Austrian_business_cycle_theory](https://en.wikipedia.org/wiki/Austrian_business_cycle_theory)

Basically, the artificial expansion of bank credit kicks off the boom. The
bust must inevitably follow. And the credit expansion is enabled by an unsound
fiat money and banking cartel protection, such as the US Federal Reserve
system.

~~~
nickik
One should not that this theory is not incompatible with modern monetarism.

Hayek had a concept called secondary deflation they fit the pattern of 2008.

The problem with ABCT is that Hayek and Mises both made the mistake that they
assumed to much correlation between the boom and the bust.

While Hayek had the 'secondary deflation' concept, he failed to realize that
this was the far more destructive part (if mishandled by the central bank).

So Hayek did not spend enough time on that and it caused him to misunderstand
the Great Depression even when his theory was actually capable of explaining
it.

------
notacoward
The one thing all the predictors mentioned in the article seem to have in
common is that they're all efforts by the financial industry to wring more
profit out of the real economy - i.e. the one that produces goods and services
of more tangible value than numbers on a balance sheet. Without proper
regulation, competing on the basis of investment returns inevitably creates a
race to take ever greater real risks, independently of the risks as portrayed
to investors, and employ ever more sophisticated tactics to obscure the
difference. That's why I and many others who've lived through more than one
economic cycle know that when the ratio of finance-industry profits to real
productivity takes a sharp uptick it's time to run for cover.

------
jessaustin
Lots about monetary policy, and very little about what will actually cause the
next big recession. Bank executives, shareholders, and creditors have learned
well from the last go-round. They can do whatever they want, and unless their
interests are opposed to those of Goldman Sachs, the USA government will bail
them out. It won't be smaller next time.

This will continue until it brings down the republic.

------
mcguire
" _These are important innovations, and they address glaring deficiencies in
the pre-2008 models. But they don’t feel like a big break with the status quo.
Most importantly, the basic notion of recessions as driven by rational actors’
responses to unpredictable, sudden events — or shocks, as economists call them
— remains in place._ "

One of the fundamental weaknesses of modern economics is its reliance on un-
knowable, extraordinary, incomprehensible "shocks" when faced with evidence
that their theories have flaws. One thing it does is to prevent their theories
from making progress in understanding...economics.

One might even call such behavior irrational.

~~~
nickik
Do you actually know what economists talk about when talking about 'shocks'? I
mean outside popular media.

Economist do actually quite a bit about studying these shocks, and trying to
explain what they are, where the come from and so on and so on.

Take a simple example, tomorrow there is war between Iran and Saudi Arabia and
there is no more oil coming from the middle east. That would be a supply
shock.

It is true that sometime we can only observe that something change and
sometimes its hard to say why that happens, but that is a problem you have in
all complex systems.

Your asserting that economists invent 'shocks' when the evidence doesn't fit
there models is totally incorrect and leads me to believe that you don't know
anything about modern economics.

~~~
mcguire
" _Take a simple example, tomorrow there is war between Iran and Saudi Arabia
and there is no more oil coming from the middle east. That would be a supply
shock._ "

Would it be? One would expect, given that oil prices and the middle east are
some of the most watched economic sectors, that there would be a very visible
run up to such a war, the effects would be estimated and accounted for, and
there would be no economic discontinuity. This is economics working correctly.

As late as 2006 and 2007, we have economists on record as saying "everything's
dandy". This was not due to a lack of data; they had most of the information
then that we're arguing about now. Instead, it was because their models said
what happened couldn't happen.

~~~
nickik
Tons of war happen without run up. Even if the run-up happened threw-out a
period of months, it would still be shock.

A shock is change relative to some trend, not necessarily a fixed thing that
happens in the news.

> As late as 2006 and 2007, we have economists on record as saying
> "everything's dandy". This was not due to a lack of data; they had most of
> the information then that we're arguing about now. Instead, it was because
> their models said what happened couldn't happen.

In 2006/2007 everything was more or less ok. While there was a housing crisis,
GDP growth was on track and unemployment did not go up. You seem to think that
everything after late 2008 was predetermined, witch is false.

~~~
mcguire
You seem to be asserting that events like 2006-2009 are, in principle,
unforeseeable. If so, you are making my point for me.

~~~
nickik
No. The point is that the recession happen because of monetary policy mistakes
in 2008 and the only way to know if it was gone happen would be to have
perfect knowlage of how the central bank is was to respond to monetary demand
changes in 2008.

------
e67f70028a46fba
until the word 'usury' is resurrected and reintegrated into economic thought,
nothing changes: there will be cycles of capital concentration followed by
credit collapses and, eventually, social unrest

thus always to debtors

------
howard941
_Some_ economists don't accept the damage that austerity coupled with the lack
of robust fiscal stimulus continues to exact on the economy.

~~~
fbonetti
> lack of robust fiscal stimulus

Have you been living under a rock? We've been in continuous quantitative
easing for over a decade. The Fed is just now started to raise rates.

------
nickik
So, by their theory what happens if the central bank collapses NGDP by 20%
tomorrow? Would that not cause a recession?

I simply don't see the need for a new theory. If you have a monetary
contraction its gone cause a huge problem with wages and prices and that has
been the most solid empirical result in economic history. It explains tons of
stuff that simply could not be explained by this high debt theory.

So lets just look at some basic evidence for that.

As you can see here:

[https://marketmonetarist.files.wordpress.com/2014/09/ngdp-
ez...](https://marketmonetarist.files.wordpress.com/2014/09/ngdp-ez-us.jpg)

Is is totally clear that in order to go back to the original trend inflation
would have to be above 2% for a short time to get back to the level. However
the Fed and the ECB were simply not willing to do that. The Fed often repeated
that they would do 'everything' but then followed it up with 'but if inflation
goes up we stop'

However that policy does not make any sense. The monetary disruption has
already happened and then they are massively below trend and are unwilling to
go back to the original trend.

This policy however is totally mistaken because it makes macro economic sense
to go back to the trend as you want to stabilize long term wages and prices
and not force the whole economy to adjust to a new level.

(Btw this is called 'level targeting' and has huge support from many monetary
economist)

Now, some New Keynesian agree that this should be the policy, they like the
term 'flexible inflation tarting' because they assume perfectly rational
central bankers that will figure out the right number but essentially the
agree that 'the right number' is going back to trend.

However some of them believe this is not possible because of the 'liquidity
trap'. However here is where this recession actually showed that their
assumption is simply false. Many countries, like Switzerland have shown that
if the central bank is willing boosting NGDP with zero interest rate is no
problem. This was actually tough in mainstream monetary macro books before the
crisis but somehow this was ignored because 'fiscal stimulus' was the
politically favored narrative.

Lets look at one economy that didn't have a recession. Australia is a good
example, they never had a drop in NGDP and they didn't have a recession even
when their housing 'bubble' and many other things are not that different from
many other countries that had a recession.

One more thing:

> other measures are needed. These could include quantitative easing, forward
> guidance ...

Well, if funny how nobody remembers history. Before the New-Keynesian
revolution some of those tools were called 'monetary policy'. This nothing
new, but rather the way monetary policy has been practiced for a long time.
Central banks that didn't build their entire operational model New Keynesian
interest rate theory were perfectly able to act at the Zero Bound.

By the way this is in many way the same problem as in the early 1930s, the
theory for this is nothing new. R. G. Hawtrey spend the whole 20s to try to
explain people what would happen if there was a nominal contraction and he was
exactly 100% on point.

------
jadedhacker
Ah bloomberg news, understanding that a new economic slowdown is in the cards
wants to reassure the public that the economists have learned something. What
they've learned is that they are ever more desperate to attempt to coax
additional growth out of a slowing machine that increasingly just fails and
takes ordinary people with it. Without new markets, the economy will continue
to slow and monopolization will continue to increase.

Look to Africa for the empire's new concepts:
[http://www.tomdispatch.com/blog/175567/tomgram%3A_nick_turse...](http://www.tomdispatch.com/blog/175567/tomgram%3A_nick_turse,_america%27s_shadow_wars_in_africa_)

------
mkirklions
No credit to libertarians and the Austrian business cycle theory?

They are describing it on the page, but no mention that this idea has existed
for decades. Meddling in the economy wins out due to politics, but it always
leads to gigantic downturn.

------
paulpauper
the post-2009 recovery is now the longest ever ,exceeding the 90's even, and I
think it will last much longer given how low interest rates still are and the
absence of any problems. I think this calls into doubt business cycles and
other concepts economists take for granted. The steady-state economy (similar
to that of Australia) where there are few, if any, recessions may be the
applicable model. People get too hung up on 2008 and forget that although it
was bad, it was brief, relativity speaking, and the economy has not only
recovered but made huge gains too.

~~~
wahern
Australia absolutely has business cycles and recessions. Here's a paper
describing them:

    
    
      https://www.imf.org/en/Publications/WP/Issues/2016/12/30/Key-Features-of-Australian-Business-Cycles-15438
    

Granted, the paper is from 2001, but it describes what's unique about the
Australian cycle--symmetry between growth and recession periods. Rather than
short, sharp recessions with prolonged growth, Australia has extended periods
of growth followed by extended periods of recession. Moreover, it says that
Australia's cycle strongly correlates with changes in supply, which I suppose
isn't shocking considering that Australia in many respects has an island
economy.

~~~
OscarCunningham
That paper looks at the 41 year period from 1959 to 2000, so the fact that
Australia hasn't had a recession for the 17 years after that is fairly
significant.

------
pleasecalllater
I think they just don't understand almost anything.

I have a real problem with the economists. Take four professors of economics
into a room and ask a simple question. A question like "is this a good thing
for X to implement Y", like "is this good for the Great Britain to exit the
EU" or "is this a good thing to increase taxes for the rich".

Just ask - you will get at least 5 different answers to every question. Those
answers will usually exclude each other.

So now me: I listen to those professors and who's right? I'm sure some of them
are not. Some of them are simply saying the truth, some are lying.

And now take just one professor - ask him/her something - you will get
answers. How should I know that they are right? I simply cannot. I simply
don't believe them.

~~~
throwawaymath
_> Take four professors of economics into a room and ask a simple question. A
question like "is this a good thing for X to implement Y", like "is this good
for the Great Britain to exit the EU" or "is this a good thing to increase
taxes for the rich".

Just ask - you will get at least 5 different answers to every question. Those
answers will usually exclude each other._

Have you actually done this? Survey results from people who _have_ done this
(such as [1]) suggest that economists frequently do come to a majority
consensus.

Furthermore, if you ask a group of software engineers how to design or
implement complex software. you'll find many conflicting suggestions about
which languages, libraries, programming models, databases, etc to use. Does
that mean none of them know what they're doing, or does it suggest that
complex systems don't have simple, straightforward solutions?

I'd like to gently suggest that you might not know as much about economists
and what _they_ know as you think you do.

_______________

1\.
[https://people.uwec.edu/jamelsem/fte/fte/efl/teacher_stuff/a...](https://people.uwec.edu/jamelsem/fte/fte/efl/teacher_stuff/articles/economists_agree.pdf)

~~~
TheCowboy
I like your point about software engineers. Economics, like software
engineering, is a dynamic field where knowledge advances at an irregular pace.

IGM Economics Experts Panel is interesting to read example of an expert
survey. Economists also self-report their confidence and how strongly they
agree with a statement.

[http://www.igmchicago.org/surveys/trade-
disruptions](http://www.igmchicago.org/surveys/trade-disruptions)

