Why Economic Models Are Always Wrong 676
mayberry42 writes "Did you ever wonder how and why professional economists often seem to get it wrong in terms of predicting consequences or policies accurately (or even at all)? Or how very few even saw the current economic collapse? This article provides an interesting, if obvious, reason as to why economic models are effectively always wrong."
Obvious really (Score:4, Interesting)
Most economic models are based on "how we would like people to act" rather than "how people actually act". Much of the time, the model works, but they fail when people act in irrational ways.
Simples.
Even rational models are unstable (Score:5, Interesting)
Even if everyone acted rationally, you would then have the instability which is generated because all of these rational people would then change their behavior based on ... the model. It's unclear, and in my eyes rather unlikely, that a "fixed point" exists where all of these rational people start behaving identically and predictably.
The unpredictability doesn't only come out of irrationality. If you look at game theory, you see that many optimal (i.e., rational) strategies are "mixed" strategies where the rational party necessarily behaves probabilistically, not deterministically.
Re:Even rational models are unstable (Score:5, Interesting)
I prefer:
Adam Curtis, The Trap: What Happened to Our Dream of Freedom, Part 2.
WTF are you talking about? (Score:4, Insightful)
Game theory always does account for things like that, primarily because the behavior you're describing is not irrational. The very fact that you are predicting that "he gets ahead" is what makes it rational.
Same for your "when they zig, you zag" idea: I have never heard of anyone using game theory that doesn't account for (and in fact, predict) that sort of behavior.
If you want to come up with an example where game theory doesn't work, you're going to have to try a few thousand times harder than that.
The reason game theory tends to disappoint, is that peoples' intuitive hunches for the payoffs of certain actions don't match the theory, but those hunches are what they act upon -- and that in turn changes all the payoffs, sometimes toward causing the hunches to becomes true (!) and sometimes toward causing the hunches to be more false. And that itself can be analyzed and predicted, but only if you just happen to know what other people's hunches are going to be -- and that is never predictable.
Game theory is about finding optimum equilibriums for behavior; it can never tell you what people believe.
BTW, back onto GP's subject.. a few months ago I went on an AdamCurtis-athon with some high expectations. It was a letdown, and not nearly as serious a criticism of the targets as I had hoped, especially since I just assumed some of them (e.g. the neo-cons) would be shooting fish in a barrel. I won't say watching all his docs is a waste of time -- it's not -- but don't get your hopes up. You'll find some good anecdotes, carefully selected interesting trivia, and great quotes like the one about economists and psychopaths .. but that's all.
Re:Even rational models are unstable (Score:4, Insightful)
Even if everyone acted rationally, you would then have the instability which is generated because all of these rational people would then change their behavior based on ... the model. It's unclear, and in my eyes rather unlikely, that a "fixed point" exists where all of these rational people start behaving identically and predictably.
Hell, even if it were the case that there were a point when people acted in a totally predictable fashion, despite or because of the existence of the model, there is still another issue. Any sufficiently high quality economic model will be modeling a chaotic system. By definition chaotic systems are extremely sensitive to initial conditions. Even if your model has the parameters perfect, if you are even slightly off in your initial conditions the output can differ enormously. This is actually made worse by the fact the the chaotic portion of the model often has minimal impact on the output most of the time, but other times it becomes a dominant factor.
For example, chaos becomes a dominant factor during a catastrophic market collapse, since the exact order of events (what company's go out of business in what order, whose stock prices drop the most before regulators freeze trading, etc) is extremely sensitive to initial conditions, and the order of events determine whether certain events occur at all. If the order of events allows one of the big players in said market barely managing to remain in the game vs them going out of business can make an enormous difference in how quickly said market can recover.
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Re:limited amount of forks (Score:3)
There is no spoon.
Re:Even rational models are unstable (Score:4, Insightful)
actually, there were a lot of people talking about the future mortage crisis way before it became apparent.
the problem is that there will always be biased economist with an agenda, whether they are supporter of the status quo or naysayer, the same way there are biased climate scientist both in the pro warming and negationist crowd.
the problem are the we can't distinguish between unbiased and biased, we can't truly understand their models and thus we cannot discriminate between genuine models and biased ones.
we can only catch blatant lies, but while it easy on hard sciences, it's quite hard on social models.
we can just make sure to avoid blatantly biased studies, but it's not enough to find out who is who, specially because most economist work is known by news and not by papers, specially works that tackle the situation at hand instead of the general situational trends.
Re:Even rational models are unstable (Score:5, Insightful)
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If everyone had listened to the economists talking about the future mortgage crisis, the crisis would have been averted. And those economists would have been called frauds for predicting something that didn't happen.
And here I've been thinking that, after what, 5, 600 years or so they've been studying the problem, that some of the economists started closing in, and a couple were damned near dead on. The problem I see with economics is, a few people at the top of the food chain with enough cash behind them to really fuck things up, took a look at the projections, saw they were heading for a shareholder disaster and 'did something' about it to save their 4 martini lunches. Once you know the system, figuring out a way t
Re:Even rational models are unstable (Score:4, Insightful)
Maybe, maybe not. Many lenders knew very well that their loans would go bad - they called them "liar's loans" even at the time! And many bankers knew the derivatives they created from those bad loans (which they sold back and forth to reach a leverage of about 30x) were not worthy of the AAA rating the ratings agencies gave them.
But here's the thing - a race to the bottom is not averted by knowing it's happening! If you don't think the other guy will stop even if you do, then your best option is to get while the getting is good, before the sh*t hits the fan.
Plus, the outcome wasn't disastrous for those at the top - at worst, they lost their jobs, and walked away keeping the millions they had "earned." They need never work again.
So, even perfect knowledge would not guarantee a good outcome.
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Yep, most economic models do not take actual human action into account. There are some economists that do consider human action, though (and even consider it the foundation of economics). Interestingly, those economists were the ones that did predict the current economic collapse, but were pooh-poohed and marginalized for their views.
Re:Obvious really (Score:4, Informative)
Here is the book you want to read if you want to learn economics that makes sense and has real predictive powers.
http://mises.org/Books/humanaction.pdf [mises.org]
I've been reading about Austrian Economics for years and it has made me much better at understanding what is going on.
I have also saved myself quite a bit of money. While everyone was using their home like an ATM I was paying off that debt and buying gold. I wasn't able to convince my wife to sell the house and rent for 5 years but that is mostly because where I live the rental homes were not very nice. The brilliance of this book is that it takes the fact that humans act as the given. It doesn't try to push a moral code on how they act or judge them for not behaving the way the author thinks they should.
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Last I heard, Austrian economics had all the problems related to the use of parameter-fitting that more mainstream economics did, except that their models were known to be inaccurate and couldn't even predict the past very well and they just ignored this issue.
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Last I heard, Austrian economics had all the problems related to the use of parameter-fitting that more mainstream economics did, except that their models were known to be inaccurate and couldn't even predict the past very well and they just ignored this issue.
Models? Austrian economics is widely criticized because it specifically REJECTS scientific models. Sure it has a few "thought-experiment" models that turn out to be wishy-washy, but parameterized models? They specifically reject.
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I got the dotcom burst, the real estate mortgage burst, the recent renewable energy burst, with US education and the EU bonds bursts coming up. Pretty lucky, eh? How many pats on the back do I get?
No, it's not. Austrian economics always predicts that everything we're doing today will result in a catastrophic financial event. If you're always predicting disaster, then you will always successfully predict disaster. But your track record is going to be horrible.
How can we rationally consider and listen to the guy who every month is shouting, "We're going to have an economic disaster by the end of the month!"? If we don't have a financial disaster for 12 years, and then one month, BOOM! Disaster! Everyon
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Or, statistical predictions don't require knowing the exact behavior of each agent, and expectation values can take you a long way.
Re:Obvious really (Score:5, Insightful)
Nice analogy, but physicist don't have to worry that the CEO molecule in an apple might die.
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You don't need to be able to track individual molecules to apply the gas laws.
Most people are rational enough for most of the time; if you have enough of them the individual irrationalities are just noise.
The problem is that most of the models' parameters (if they represent anything measurable at all) are at best approximations, and at worst guesses. And yet because the answer has 93 decimal places and pops out of a computer people believe it.
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"...as evidenced by the outstanding success of statistical mechanics, and the outstanding failure of economics."
Sigh. You're as bad as the others. "Economics" has not failed. It is only economics as preached and practiced by your government that has failed.
Some alternative schools of economics have NOT failed, and in fact have made better predictions of economic events than our current, "mainstream" view of economics that is self-servingly spread by our government and its friends, who always seem to benefit.
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Hey! 12A is just a broom closet.
Economy is a religion, not a science (Score:5, Insightful)
In a religion, you just tell people what is the Truth. In science, you try to observe and learn.
The models are self fulfilling prophecies.
The high priests of the Economy tell us the Truth. The lower priests spread the word. And the people believe. Without the belief of the people, the system would instantly collapse. And if reality turns out differently, then they/we just invent a New Truth.
I mean, is it really necessary to give trillions of euros/dollars to banks to bail them out? In which pockets is that money disappearing? The bailouts are presented as "The Only Way"... but nobody actually knows.
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Not only that, the money was lent almost completely without strings or controls, and lent back to the governments rather than used to lend to people and businesses.
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Well, Austrian economic school specifically disclaims that what they're doing is science... so what are your suggestions?
Re:Obvious really (Score:4, Interesting)
Ah, to quote an economist acquaintance of mine "Economics isn't about numbers, it's just psychology on a mass scale" and "In school they teach us that everyone is a rational actor but everyone is completely irrational and refuses to admit it because then their models wouldn't be accurate".
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Never mind that in economist modeling, rational means accurately predicting future events. Anywhere else, that would be known as clairvoyance...
Re:Obvious really (Score:5, Insightful)
Just ask Derren Brown if people are predictable. If you think people cannot be modeled, you are deluding yourself. Adam Smith saw it, and came up with a revolutionary theory that worked. Amazingly enough, his model assumes that all people act in their own self interest.
Of course, the way you interpret the 'self interest' is what varies, but I am pretty sure that for the majority of humans self interest is fairly narrowly defined.
Saying that every human is unique and special is like saying you're immune to commercials. It's just wishful thinking.
See comments below. The crash was predicted. People acted in a predictable way.
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Adam Smith saw it, and came up with a revolutionary theory that worked.
Except for the cases when it doesn't.
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Ever read Adam Smith? I have. Smith's economic theory of "self-interest" worked great up until the development of the mature money economy. In other words--not for very long. It was originally based on the idea that the rich landowner would naturally distribute his goods among his tenants, or else risk the material wealth going to waste. After all, he could only personally benefit from a small portion of it. Today's wealth is more effectively locked up in abstractions that offer the potential for eternal, u
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Note that nowhere was it stated that people acted in their LONG TERM self-interest. Getting high and/or feeling good right now may be short-term self-interest, but they're nonetheless self-interest.
Face it, most sports don't qualify as "acting in your own self-interest" if you define "self-interest" as "long term self-inte
Re:Obvious really (Score:5, Funny)
The way I'd heard it phrased is "to an economist, the real world is a special case."
Re:Obvious really (Score:4, Insightful)
Real world data is not going to be an exact fit to any arbitrary type of curve. It might be part of a sine wave, but it could be a quadratic or a quartic; there might even be an odd power with a small coefficient. Which do you choose? It might not be important within the range of data that you have, but once you move outside it might.
Even if you could have "perfect data", you're only taking into account some of the variables involved. Your model would be perfect but partial. One of the factors that you ignored might not have had an effect in the past, but it might be precisely the one that makes it different next time.
Re:Obvious really (Score:4, Insightful)
No, sometimes your personal gain also benefits the community.
If it does then the standard economic model will see it as rational because of the personal gain.
Plus, there are always altruists who get a warm fuzzy (personal gain) from doing good (helping the community).
Yes, and I consider that to be rational, or at least possibly rational. The standard model of human behaviour used by economists, on the other hand, judges that to be irrational behaviour. That's my point: economists use a specific definition of "rational" that doesn't match very well to everyone else's.
But, in large, it's fairly safe to say that everyone is more interested in things that IMMEDIATELY benefit them than they are in things that IMMEDIATELY harm them but benefit others. Hence our general aversion to taxes, tariffs, etc.
Not as safe as you might think. At very least, you can't limit it to material benefits. Research has shown pretty consistently that (in market-based cultures) most people are willing to take a modest financial "hit" on a transaction in order to spite somebody who has treated them badly. Economically that is described as "irrational" behaviour, but all it actually means is that spiting the offender has value. What's more, that behaviour can be shown to be adaptive at the group level, because punishing "bad" behaviour discourages such behaviour, which is to the benefit of the overall community even if those two individuals never do business again.
Could psychohistory be the answer? (Score:2)
Re:Could psychohistory be the answer? (Score:5, Informative)
Yes.
1. The economists, who were correct were not listened to. (just look up Peter Schiff's predictions and how he was ridiculed)
2. The economists, who were wrong were listened to, because that's what everyone *wished* were true.
3. If anyone was in a position to personally gain from what was going on, they would most likely not have stopped it. So even if there were potential whistleblowers among the bankers and brokers, their incentive structure made whistleblowing a dumb move. If everything is going to s**t and you know it, but are in a position to set yourself up for life from the situation, or risk your job and your retirement saving a train that you probably couldn't stop anyway... what do you do? Be honest with yourself.
Re:Could psychohistory be the answer? (Score:5, Insightful)
watch his speech for mortgage bankers he gave in 2006.
http://www.youtube.com/watch?v=jj8rMwdQf6k [youtube.com]
He said that:
- implied government guarantees made dirt cheap loans for ninjas possible because they take risk out of the equation
- interest rate much below supply/demand value doesn't help either because there is too much money in search of fat profits
- nobody cared about sustainability when prices rose, if guy defaults, lender would make a profit either way
- slicing and dicing, creating MBS introduced an incentive to give as much loans as possible just to resell it to wallstreet -> lending standards being taken care of by traditionally cautious lenders went out the window
- bullshit rating assessment of MBS (lowest tranche made of the worst subprime mortgages, rated BBB- needed only 5% loss to channel the damage to higher layers)
- bubble can't go on forever, soon everybody will have a house and nobody will want to buy - price ceiling and subsequent drop is inevitable, MBS will blow up, people borrowing against their appreciating home will be soooo SOL.
Everything he said was common sense, no elaborate equations, aggregate demand and other bullshit.
Schiff was wrong pretty much about one thing (assuming narrow time horizon) - countries of the world are much more dedicated to keeping the dollar and the US afloat (by destroying their own currency nonetheless) than he thought. In the long run he is right though, you can wipe your ass with your own currency only so long (printing, excessive borrowing), especially when you have nothing to show for. Also current eurozone troubles bought the US some time.
another Austrian follower: Ron Paul
In Sept 2001 Ron Paul said that thanks to passed legislation housing bubble will form only to pop later as all bubbles do. Common sense: make borrowing cheap and subsidize housing on top of that and there will be a bubble of epic proportions.
http://www.youtube.com/watch?v=KONpt9a6HrI [youtube.com]
Economics... (Score:4, Insightful)
... is not a science. The legal structure of money, the way prices work in a one way fashion, and private ownershp are all political all the way through. Now this may piss off Americans but there are alternative ways to organize society whether they like it or not. Human beings tend to be people of their era and they often have a profound lack of imagination, the black and white right/left thinking I see from people already disqualifies them for not even having the courage to analyze or think about the structures and societies in which they find themselves, the false notion that it is either THIS/THAT, BLACK/WHITE is having given up critical thinking and analysis for good.
Re:Economics... (Score:5, Insightful)
Actually plenty of economists did predict the crash. It's just that the only way to prevent it would have been to stop the party, and any politician who'd done so would have been replaced by someone who'd allow the credit-fueled binge to continue.
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In many cases It still made no difference (Score:5, Insightful)
Quite a few people who had good savings still lost jobs, burned through their savings and retirement funds and in the end lost their homes anyway.
The idea that only bad or irresponsible people lost their homes in foreclosure is magical thinking. You can be a responsible person and still get wiped out
during a deep recession.
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"Actually plenty of economists did predict the crash"
Crashes are inherent to the nature of capitalist society and has been known about since the time of marx and even before then. Just because you can predict something doesn't say anything about the political foundations of the institutions and social relations in general. I can use science to predict the whether tomorrow will be sunny, but that is different from human societies which are organized on the basis of legal and political structures. Money, p
Re:Economics... (Score:5, Informative)
More to the point, he predicted what would happen afterward, which has also been coming to pass.
Peter Schiff, who is also of the Austrian school of economics, publicly predicted the same, back in 2006-2007. There is a great YouTube video of him arguing with Keynesians who were all basically saying "The economy is fine!"
But of course, he's not a politician. Yet.
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Economists mainly ignore the role of money and debt, they are blind to its influence as they see the role of loans as merely moving spending power between individuals. But 12 economists [uni-muenchen.de] have been identified as publishing models before the crisis that predicted it, and all were found to emphasise the role that credit plays in determining economic performance.
The blindness to the role of credit is the biggest reason why economic models have to be continually recalibrated. And why such modelling never allows
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I watched some of P.S. videos on youtube and he is just a right wing economist, the same idiotic claims: lower taxes, decrease government, etc. pp.
That he was right about the crisis, so big deal. I would think all people knew about that crisis was comming, the bankers, the traders, the politicians. If you really want to know what happened in the decade before the crisis, I would suggest you to watch some videos from William K. Black, for example: http://www.youtube.com/watch?v=Rz1b__MdtHY [youtube.com]
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Not entirely true. Ron Paul, who until now has always been pushed aside as irrelevant to the party, predicted it clearly and concisely. He predicted what would happen, approximately when, and exactly why. And all three of those came to be. ("When" was of course inexact... nobody is claiming clairvoyance here.)
One could just as easily point out that Marxist economists predict there will be an economic recession every few years -- but "when" is inexact. They can point out a number of facts about the state of the economy which are certainly true and make deductions that are controversial from those facts.
The point being, at any given moment, there will be different economists with different ideologies making different predictions from more or less the same data, and if you accept enough fuzziness in the predictions
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"One could just as easily point out that Marxist economists predict there will be an economic recession every few years -- but "when" is inexact."
Not the same at all. We're talking about prediction that the housing bubble would crash within a couple of years, and recognition of the sub-prime debacle, etc. Very specific stuff. Not at all comparable to some generalized prediction of gloom and doom that must happen at some vague time in the future.
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http://consultingbyrpm.com/blog/2009/12/krugman-did-identify-the-housing-bubble-in-2005.html [consultingbyrpm.com]
This links to a Krugman article from 2005 (notably pre-Schiff) when he not only called out the housing bubble, but assumed that it had been known about for some time.
Sure, CERTAIN economists have been wrong about things, but no school has a monopoly on predicting the bubble.
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It's nice that Krugman eventually got it right, but he was a bit slow on the uptake, having actively encouraged the bad behavior in the first place.
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I agree with your numbered points. But they have absolutely nothing to do with the poi
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"But the idea that fiat currency is inherently bad and that we need to go to a "gold" standard, is alarmingly ignorant, as is the idea that all debt is bad and that government can never borrow money (especially during depressions or recessions as a stimulative spending effort)."
True... according to Keynesian economic theory!!! But not others. Have you been listening at all? There are other schools of economics that very, very strongly disagree.
My whole point was that there are ways to do things that do not agree with the Keynesian model, and history has been building up more and more evidence that Keynes was just plain wrong.
Re:Economics... (Score:4, Insightful)
Actually, economists predict crashes all of the time.
For instance, right now there are some people predicting a UK housing market crash of about 20% in the next year. If theres no crash this year, they'll just move forwards to next year. Eventually they'll be right, and will parade their insight for all to see.
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Fun anecdote.
I was in GB in 2007, and the colleague I went to visit told me with amusement that he had trouble getting a loan to pay for the house he wanted to buy. They wanted to lend him money alright, the problem was getting a loan to pay for only the house. He had to argue rather firmly with the lenders to convince them that he did not want a much larger loan ("don't you want to buy a nicer car?").
Unfortunately, I didn't recognize what the underlying phenomenon was, so I did not play it for profit.
I tak
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You've got at LEAST 100 years before peak oil hits. So keep dreaming.
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First we would have to start drilling in difficult places where there was great danger in huge oil spills and we ... oh we have ...
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Except that peak oil is hitting us right now, but don't let that you distract you. Production has basically been flat for the last couple of years, and most of the big fields are already in decline.
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"You've got at LEAST 100 years before peak oil hits"
How could I verify this? May I see your math?
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Societies have been organized differently in the past which is evidence that refutes your rather limited view of the world.
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Wow (Score:5, Funny)
So small changes in inputs can produce big, unpredictable changes in the output of complex systems? It's almost as if a butterfly flapping its wings could affect the weather!
They should find a snappy name for this marvelous discovery. Something like "chaos theory".
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So small changes in inputs can produce big, unpredictable changes in the output of complex systems? It's almost as if a butterfly flapping its wings could affect the weather!
Not what the article said. The article said: If a model can be parameterized, and there are so many possible parameters that the model can be made to match any past data by tweaking the parameters in many different ways, then you will end up with a model that doesn't predict the future.
In mathematics, if you have any set of n points yi = f (xi), then it is possible to find a polynomial of degree n-1 that fits these points exactly, and it is possible to find many polynomials of higher degrees fitting thes
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It's not what the article says, but it's not wrong either. Chaos plays a significant role in the real economic and financial world.
Subtle changes, such as whether Alan Greenspan put a comma before or after a word could make the difference between a good day and a bad day on the stock market.
Many people saw the economic collapse (Score:5, Insightful)
Many, many, many people saw the economic collapse.
I was reading plenty of blogs on the housing bubble, housingpanic.com, et etc, describing the preposterousness of "liar loans", subprime this, and idiocy that, and the crazy valuations.
The New York Times even had a plot of the inflation-adjusted Case-Schiller price index which was enormously above any prior peak. During 2006 and 2007 and 2008.
The notion that "nobody" saw it is simply propagandistic truthiness baloney. I personally didn't profit, because I was much too early shorting the mortgage companies & home builders and got stopped out---the bubble was too powerful.
The real crime is that a small number of very powerful people had an exceptionally lucrative interest in NOT stopping it, because they were getting ginormous paychecks from the continuation of the bubble. And now the notion that nobody could see it is used as excuses for the powerful to excuse themselves from responsibility from fraud and crime.
Down in the guts of banks, there were both risk modeling quants in the fancy banks, and the traditional "ladies with a bun" in the retail banks who processed the paperwork who saw how much outright fraud and insanity there was. Their jobs were threatened when they attempted to speak up and stop the madness, because the business side executives were making shitloads of shekels on volume.
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Sorry for self-responding.
I read the original linked article.
"Carter had initially used arbitrary parameters in his perfect model to generate perfect data, but now, in order to assess his model in a realistic way, he threw those parameters out and used standard calibration techniques to match his perfect model to his perfect data. It was supposed to be a formality--he assumed, reasonably, that the process would simply produce the same parameters that had been used to produce the data in the first place. But
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An enormous number of people had a lucrative interest in the bubble not stopping. (Even of you do accept the ludicrous notion that small number of people *could* have stopped it.) Real estate agents whose commissions were going th
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And it was Joe Sixpack who didn't have the insider knowledge to see what was coming and now owes $400k on a house value at $150k.
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You didn't need insider knowledge, just a healthy dose of common sense.
Re:Many people saw the economic collapse (Score:4, Insightful)
Even of you do accept the ludicrous notion that small number of people *could* have stopped it.
Actually, the notion is that, if a relatively small number of people had not prevented it, a somewhat larger group of people could have acted to ameliorate the consequences of the bubble popping.
The people who should be held accountable for the bubble and the negative consequences of it popping are not (at least for the most part) the bankers. The politicians who started the bubble inflating and then when other politicians tried to let some air out of the bubble used their positions to prevent that are the ones who should be held accountable. There are, also, bureaucrats at Fanie Mae and Freddie Mac who should be held to blame as well. Most of the bankers, while they were happily raking in the profits from the bubble, were not in a position to change the dynamics of it.
What I find most interesting about those who blame the bankers for the situation is that they tend to favor Democrats, just like the bankers most involved in the financial meltdown.
Some economics professors saw it coming ... (Score:5, Interesting)
Many, many, many people saw the economic collapse.
A newsletter from an economics professor and CNBC financial commentator: ...
Any talking head who tells you that this market is a buying opportunity has his/her head screwed on backwards. The only buys are the kind of value plays that the likes of Buffett are pulling off. That is, it is very much a stock picker’s market.
Recession plus inflation plus a credit crisis plus a softening European economy plus an inflation-plagued Chinese economy plus Russian strong-arming in natural gas plus two leading presidential candidates who are ignoramuses on economics plus a rising long bond in the face of Fed rate cuts does not a bull market make."
http://www.peternavarro.com/2008.02.01_arch.html [peternavarro.com]
"Thursday, February 28, 2008
That is his oldest newsletter but I understand he was telling his economics students to "get out" of the market in fall 2007. Plus he was showing them a whole bunch of historical indicators that were all pointing in the wrong direction.
Re:Many people saw the economic collapse (Score:4, Interesting)
Which actually brings up the real problem, bubbles are actually pretty easy to spot, but almost impossible to time. Like you said, a lot of people saw the bubble, but almost nobody predicted when it would actually burst(a couple did, but the % is so low that it can be chalked up to random chance). You short too early and you end up in a bind as your trades are called in, too late and you missed all the fun.
For a current bubble, look at the Japanese yen. There is no way the yen should be as high as it is right now, there is obviously a lot of leveraging going on keeping the currency much stronger than it should be. The currency will snap back, and probably pretty violently due to the massive amount of leveraging, but every single "prediction" I have read of when this will occur has been wrong.
Re:Many people saw the economic collapse (Score:4, Informative)
Bush's budget issued in 2001 warned that Fannie Mae and Freddie Mac were overleveraged, and said that they needed tighter controls, oversight, and a host of reforms because "their failure could cause strong repercussions in financial markets, affecting federally insured entities and economic activity".
D Senator Chris Dodd threatened to filibuster to block it.
D Congressman Barney Frank (who was sleeping with a senior exec at Fannie Mae, coincidentally) claimed the subprime system at Fannie Mae was "fundamentally sound" and the idea it needed reforms "inane".
Nobody saw this coming? No, it was pretty clearly that some people saw it coming but the system is so totally politicized that anything anyone is predictably responded-to according to the following algorithm:
1) who said it?
2) how is he affiliated?
3) are my affiliations in opposition?
4) if they are, I oppose whatever was said.
Really, that's all that's left of intellect inside the beltway.
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I would love to see a source for that.
I do personally recall Bush campaigning in 2004 based on the increase in home ownership. Here are some direct quotes: link [thinkprogress.org]
(think what you will of the linked source, it was the first I found in google with actual quotes)
Very few? (Score:2, Interesting)
Few people saw the collapse coming? Really?
All you had to do was turn on some form of broadcast radio after about 1995 and listen for a little while. When the commercial break appeared you heard one mortgage mill after another hawking refis, credit lines, etc. Bad credit? No credit? No problem! Interest only mortgage. Balloon mortgage. Jumbo mortgage!
This went on for years and years.
I saw it coming. If you missed it you're a fool. Maybe we just have a lot of fools.
Models aren't equal to models (Score:4, Interesting)
Models aren't equal to models, and even rough models of chaotic phenomena can be very useful and predictive, if they are the right ones. Read this [businessinsider.com] for some acknowledgement of which brand of economics has been right during the last few years. Here is another account [newyorker.com], including some pointers to predictions of the current crisis reaching as far back as 1999. Krugman even has a "model" of how good models get out of fashion [nytimes.com].
Economics suffers from the manipulation by political interests, and by the wish of many practitioners to project their moral ideals onto the world. Many economists simply go and try to prove that the world works however they want it to work, and find funding for that from rich supporters. That makes the endeavour biased.
If you knew what was coming... (Score:2)
The problem is, that once it's known what's going to happen, the arbitage people will make it happen sooner, and sooner, until it becomes faster to predict again.
It's like if next weeks lottery numbers were printed in a newpaper, everyone buys tickets with those same numbers, so that a $1 ticket wins a one two-millionth share of a million dollars...
Real world (Score:2)
I recall an article in the Econonist a few years back that described a time when a macro economist visited his chum, who worked on a trading desk in a large bank. The economnist basically came away saying that there's simply no time or space for elegant theories in anything that went on in that environment. The science of economics was more applicable to fly fishng than high frequency trading. But I think the real issue for economics is that it has historically been very prescriptive - what people should do
Adjusting gravitational constant (Score:3, Funny)
From the article:
Wait ... you are saying the growing number on my bath scale isn't because the constant of gravity is growing? :-)
Systematic problems (Score:2)
Wow (Score:2)
So now stuff done in an introduction to numerics class is news.
Not much known to the general population, there are problems that cannot be calculated numerically, usually because a change of input magnifies immensely on the output. So an error of 1 on input becomes an error of 10^n (with n in the two digit range and bigger). The issue here is that basically by definition all numerical systems used to calculate in a computer have builtin error sources, and errors do accumulate.
The pain becomes even bigger if
Lots of math with no science is very bad (Score:2)
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Nothing to do with chaos theory (Score:2)
The phenomenon this guy has observed is nothing to do with chaos theory, as several posters think, but rather to do with error propagation and model uncertainty. This is an issue whether the model is chaotic or not. His mistake is to think that calibration has to choose a single set of parameters, and then one has to make a single prediction from the model. Statistical methods can take into account many sources of uncertainty, including the range of parameters that could have produced the original data a
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Well, Carter's argument is sometimes wrong. I do Bayesian calibration of computer models, and with some models the maximum a posteriori estimate, or the posterior mean, is consistently very different from the "true" parameter values (in a perfect model simulation study). This is basically a combination of non-identifiability in the model combined with insufficiently informative priors. It's hard to do anything about this, and it's a problem if the estimated and "true" parameter values lead to very differ
just leaving this here... (Score:2)
http://www.debtdeflation.com/blogs/2011/10/27/george-monbiot-seminar/ [debtdeflation.com]
Balderdash (Score:3)
"Or how very few even saw the current economic collapse"
Y'know, there's an entire school of economics that predicted the collapse. And the collapse before it and the ones before that. It's called the Austrian school. But even though they predicted every single damned collapse because they didn't use shiny models and after the mid 90's shiny powerpoints nobody pays any attention to them.
There are probably lots of good models... (Score:2)
All models are wrong (Score:5, Interesting)
"Remember that all models are wrong; the practical question is how wrong do they have to be to not be useful." (George E.P. Box and Norman R. Draper, Empirical Model-Building and Response Surfaces (1987), p. 74)
"One of the most insidious and nefarious properties of scientific models is their tendency to take over, and sometimes supplant, reality." (Erwin Chargaff)
I think that says it all, really.
--Bud
Good god... (Score:2)
That man knows nothing about economic modeling. His whole story about "calibrating the model" is just pure and utter bullshit - so much it makes my head hurt to read that. Sure, someone trying to model who knows nothing about it might try to force the model to fit the data, but that's not how actual Economists do it - you'd get laughed out of grad school if you tried the things he mentioned in his articles in a research paper. I'm currently finishing up my Masters in Applied Economics and do quite a bit
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He had two models. The first model produced hypothetical historical data (analogously, the data from 1950 to 2010). He then created a second model, built on part of the 'historical data' (1950-1999) and tested on the remainder (2000-2010). He then used the first model to produce another segment of data (2011-2020), and found that the second model did not predict this 'new' data at all.
You and he are doing the same thing; the fact that your 'historical' data comes from reality and his comes from a model is i
It is much simpler... (Score:2)
...and Peter Drucker observed or rather stated the obvious years ago: One can't really compare models in physics with models in economics, though it's tempting. The problem is, the model or a theory that tries to explain the real world beaviour will be applied in the real world which will in turn influence the real world system, which will eventually adapt, rendering the initial observations (that led to the theory in the first place) irrelevant for future explanations. For example: Every theroy we build on
Austrian economists did not miss it. (Score:3)
Gaming the system (Score:3)
I think the article is missing another key factor - the fact that people abuse the system to their benefit.
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But it is an investment.
What the housing bubble became wasn't investment. It was speculation. And every serious investor will tell you: never speculate with what you can't afford to lose.
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It has always been that way. If houses weren't a good investment, practically nobody would buy one, because renting for 20 years is cheaper... You also wouldn't be able to get a loan at any rate, with anything less than absolutely perfect credit, if the banks didn't expect to be able to recoup the cost by selling the house if you default.
However, the idea of houses being a good investment is actually in jeopardy as never be
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If houses weren't a good investment, practically nobody would buy one, because renting for 20 years is cheaper
If renting from a landlord is cheaper than buying it outright, how does the landlord make money?
Questionable math aside, I think you'll find most people actually do buy their house primarily for a place to live. Call us crazy, but some of us like to live under our own terms rather than a landlord's.
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A relationship between money and debt is inevitable. Imagine there is no money. Suppose I do something for you in exchange for a promise of reciprocation. You are now in debt to me, in the traditional sense. There's no numeric accounting, but this notion of debt is firmly buried in human psychology and is part of the reason humans are able to build economic systems. Then you do something for me and we're even. Now formalize it: imagine, when I do this something for you, that you create out of thin air (in a