Krugman was a cheerleader for Alan Greenspan’s bubble policies. Here’s his advice for getting out of the 2000 recession:

FROM http://www.nytimes.com/2002/08/02/opinion/dubya-s-double-dip.html?scp=4&sq=krugman%20mcculley%20bubble&st=cse

“To fight this recession the Fed needs more than a snapback; it needs soaring household spending to offset moribund business investment. And to do that, as Paul McCulley of Pimco put it, Alan Greenspan needs to create a housing bubble to replace the Nasdaq bubble.”

Which is why it’s so revealing that he’s considered Too Far Left To Be ‘Serious’ by various opinion tastemakers. In fact, one of his bosses at the Times actually said that if they knew he was going to discuss politics at all in his column they never would have hired him — which is ironic as the study of economics used to be called “political economics”.

In the US, the financial sector averaged 41% of all profits earned in the period 2000-07. In 2006, it constituted 8% of US GDP.

No one asked the obvious question about (1) what goods and services the public, businesses, and government got out of this expense and (2) whyever was the services of intermediation so high. The reason IMO is because the pricing of intermediation does not follow a competitive equilibrium model. It comes closer in mind to following a royal tribute or a taxation model. Notice that the cost of services of intermediation (financial sector salaries, building leases, etc) are different than the cost of money (interest rates), which can be jimmied up and down by the Fed.

A quarter century after some economists began working with chaotic and complex models, we are still stuck with the idea the finance (and business) trends are purely periodic, which gives them the patina of “force of nature that cannot be controlled”. We know that complex systems can be stagnant, delivering roughly the same data over long periods of time. We know that they can be periodic. We know that they can be totally random (chaotic) and unpredictable. And we know that they can be complex and self-transforming at the margin of chaotic behavior. It appears that capitalist financial systems without regulation drive from stability to randomness very rapidly. And any transformations must come from outside the frame of economic models. That is, transformation requires political intervention that does not apply a pricing model as a restriction.

But then professional economists are in a similar position to lawyers when they advise the business and policy elite. The fundamental question is not what what will happen with the economy but what will happen with the elite employer’s financial position. Lawyers are oft told “Don’t tell me what I can’t do; tell me how to do what I want to do.” Economists are often good at that same task.

It appears that capitalist financial systems without regulation drive from stability to randomness very rapidly. And any transformations must come from outside the frame of economic models. That is, transformation requires political intervention that does not apply a pricing model as a restriction.

ah com’on. You must know Hyman Minsky. Cousin or something?

except it drives from stability to chaos. As we saw. But close enough.

What?

A quarter century after some economists began working with chaotic and complex models, we are still stuck with the idea the finance (and business) trends are purely periodic, which gives them the patina of “force of nature that cannot be controlled”. We know that complex systems can be stagnant, delivering roughly the same data over long periods of time. We know that they can be periodic. We know that they can be totally random (chaotic) and unpredictable.

They cannot be both periodic (predictable) and chaotic (unpredictable).

They are chaotic, due to non-linear feed-forward. They are never periodic (linear feed-forward), ever.

chaos=randomness

Systems can be periodic. A pendulum is a system that is periodic.

It appears that capitalist financial systems without regulation drive from stability to randomness very rapidly.

Not at all. Stability is an illusion. Nor are they random. They are chaotic, always.

One great period of stability was the feudal system. The black death (an exogenous impulse)changed the system by removing very inexpensive labor.

As will the die-off predicted from climate change changes whatever system is extant when climate change is taking its toll on the then civilization.

Please understand, “change” does not mean nor imply “change for the better”.

There is magisterial economics and there is observational economics. I try, non-economist that I am, to be observational. If Minsky’s observations are similar to mine, so be it. So are some of Newton’s and some of Galileo’s.

I think it was Ives Smith that said at a meeting of economist the problem they all were having was their model was wrong and the fix would be the Amerikan worker should only earn $3.00 per hour that way their model would be correct. No problem can’t be solved by cooking the books as TarheelDem points out at the end of the comment 3. No one from ws goes to jail and economist just keep on giving bad advice with no accountability, good job.
Here’s a little on greenspon.

In the early 1950s, Greenspan began an association with famed novelist and philosopher Ayn Rand.[43] Greenspan was introduced to Rand by his first wife, Joan Mitchell. Rand nicknamed Greenspan “the undertaker” because of his penchant for dark clothing and reserved demeanor. Although Greenspan was initially a logical positivist,[51] he was converted to Rand’s philosophy of Objectivism by her associate Nathaniel Branden. He became one of the members of Rand’s inner circle, the Ayn Rand Collective, who read Atlas Shrugged while it was being written. During the 1950s and 1960s Greenspan was a proponent of Objectivism, writing articles for Objectivist newsletters and contributing several essays for Rand’s 1966 book Capitalism: the Unknown Ideal including an essay supporting the gold standard.[52][53] Rand stood beside him at his 1974 swearing-in as Chair of the Council of Economic Advisers. Greenspan and Rand remained friends until her death in 1982.[43]

From here
http://en.wikipedia.org/wiki/Alan_Greenspan

A pendulum is subject to non-linearit when the suspension cord or support breaks, at which point it ceases to be periodic.

No systems are periodic for ever. In addition, the systems under discussion here are economic systems, not trivial examples of machines.

No, a chaotic system is not random. It is subject to specific equilebria, which with correct and complete indentation of variables and interrelations, can be modeled.

the systems under discussion here are economic systems, not trivial examples of machines.

But very many conventional economists explain economic systems to the public as if they were machines. In which business cycles will automatically restore equilibrium just as mechanical governors control the pistons of steam engines. Which was the point that distracting paragraph.

I may be wrong cause I’m not an economist either. But I think the idea was that first people use regular credit and pay back. both interest and principal. Eventually, bc profits are good they just pay the interest on the loan until they can sell it. Finally, they can’t even pay the interest and so they need to flip the asset at higher prices. One fine day someone says “stop” that is nuts. And the whole thing comes crashing down. I suppose you can call it random but the bubble proceeds to chaos. The only control is regulation, you know stop the gambling on derivatives and the like. Greenspan fed the housing bubble with low interest rates. By the time they figured it all out it was too late. I think it was the same thing in the Great Depression that actually started with cooledge lower taxes and less regulation. People used the money and opportunity to speculate, the roaring twenties.

I encourage you and TarheelDem to take a look through this paper. It helps to see what Borio says are the cycles, none of which are exactly periodic but exhibit some regularity. That helps explain his ideas about how to deal with the bust cycle.

From the more technical side, Borio says this, which may be relevant to your discussion:

Economists are now trying hard to incorporate financial factors into standard macroeconomic models. However, the prevailing, in fact almost exclusive, strategy is a conservative one. It is to graft additional so-called financial “frictions” on otherwise fully well behaved equilibrium macroeconomic models, built on real-business-cycle foundations and augmented with nominal rigidities. The approach is firmly anchored in the New Keynesian Dynamic Stochastic General Equilibrium (DSGE) paradigm.

Here’s a discussion of DSGE. I’m not sure I understand the wisdom of models that don’t start with lots of deep understanding of the economy. If these guys just add some finance stuff onto a model that didn’t work, and gave wrong outcomes, I don’t see the point of learning it.

Yes they do. But Keynes told us there is no built in guarantee that the next equilibrium will be at full employment, we can bounce along the bottom indefinitely.

You don’t have to be an economist to understand Borio’s paper (except a bit of technical stuff), or to get the point of Adair Turner’s speech. It helps to see how they think, and it helps to see the kinds of things they think are important. Anyone can read Wray’s book on MMT, and the diaries we post here.

Once you read a bunch of this stuff, it all starts to make sense, especially if you have been paying attention to what happened and how it happened, as we learn from Yves Smith, Bill Black, and a host of others.

If enough of us do this, we can start knocking down those bogus ideas from the likes of Greenspan and @FixTheDebt and all those shouters on CNBC and their true-believer talking heads.

I just read in that link that the model starts with microeconomics. If so, it is dead wrong, like we should all save more except that wont work, ever or like Obama says we all need to tighten our belts. It is all part of the neoliberal BS that has us trapped here.

I read Wray’s little book and one from Mosler too. Real eye openers.

PS, I am still thick on some of the ideas though.

Book Salon up with Chad Nackers and Alex Blechman’s The President of Vice: The Autobiography of Joe Biden (The Onion) hosted by Watertiger

Trying to get ahold of exactly what Borio is discussing, this comes close:

Financial contracts are set in nominal, not in real, terms. More importantly, the banking system does not simply transfer real resources, more or less efficiently, from one sector to another; it generates (nominal) purchasing power. Deposits are not endowments that precede loan formation; it is loans that create deposits.

There is a gap between the nominal value and the real value of financial contracts (symbolic transactions of real goods and services now for payments in the future) that the financial system trades under the notion of providing some sort of market efficiency.

Those transactions are backed either with real goods or real estate (property) or with trust (credit). Financial booms bring in more overvalued real goods or real estate and more overvalued trust. It does not take much to spook the holders of those contracts who are expecting payment in the future to begin a rush for the exits.

Although the data appears to be cyclical, the process might not be. That is my first observation counter Borio. Borio seems to be using a form of spectral analysis similar to that used for complicated electromagnetic waveforms.

The intent of Borio’s article is to allow prediction of coming the financial cycle peaks that anticipate a financial crisis. If a policymaker had that information, what would that policymaker do with it?

Simply, the process looks like the financial whiz kids of every generation find new ways of increasing the money from assets without necessarily increasing the production of goods and services or employee/consumers. When the gap between promises and reality gets too large, someone blows the whistle, they all panic and no one wants to contract for future production. Borio does not look at the financial incentives for the whiz kids to take cash out for themselves. The huge jumps in CEO salaries is always remarked upon but never modeled as a leading indicator, nor are financial sector corporation profits.

Borio remarks about how transactions across borders is a leading indicator without stating the obvious. A lot of those transactions are arbitraging or even getting around national financial regulations on creating money out of thin air.

In the financial crises examined by Scott Reynolds Nelson in A Nation of Deadbeats: an Uncommon History of America’s Financial Disasters, one of the leading indicators of disaster was insider trading or insider government manipulation; another was some form of derivative leverage in financing, financing the financiers. From the very beginning US finance was transnational, with transnational relationships sometimes triggering the crisis, other times being the cause. That argues that that the modeling of the transnational relationships in financial flows (not just monetary but contractual items like derivatives) might be more useful than nation-by-nation views.

Krugman believed at the time (wrongly, and he has admitted it), that the Fed could engineer an inflationary expectation that would bring the ex ante real rate of inflation below zero, forcing banks and corporations to dishoard their money holdings. The model behind this was Rational Expectations, which any economist who wanted to ge a hearing at that time had to spout, even if, like Krugman, he had some reservations about a model tjat relies completely on logic (i have likened the theory to the ontological proof of the existence of God). Keugman had long since lost his diffidence on that score. He was not a cheerleader.

It’s all so very sad. I started a macro reading group last year where we and the students discuss a paper a week for one hour (no more). The students choose papers they have to read for their courses or for their dissertation. They are all DSGE or non-stochastic GE. All of them make some trivial point that has bearing only relative to a literature that is based on the impossibility of market disequilibrium. My role there is pretty much that of court jester, to remind the students and the younger professors that there is a real world out there, and that they have to synthesize as well as analyze. But it’s almost impossible to get published in the so-called mainstream journals unless they toe the line. Most of what passes for theoretical economics nowadays is applied ideology.

And thus another lightbulb turns on.

Krugman is clearly not advocating creating a housing bubble (hint, he is calling it a bubble…you don’t usually do that when you want to advocate something). What he is suggesting, that the only way Greenspan’s optimism in the economy post the dot com crash would be justified is if Greenspan was willing to replace one bubble with another.

And that is exactly what Greenspan did. However, the entire tone of Lrugman’s article is pessimistic because he clearly believes this is not the right approach.

A quarter century after some economists began working with chaotic and complex models, we are still stuck with the idea the finance (and business) trends are purely periodic, which gives them the patina of “force of nature that cannot be controlled”.

I’m curious about this comment. What do you mean that we’re stuck with that perspective of finance? I would argue the exact opposite, that most people believe that finance specifically and business generally are human forces, not natural ones.

I mean, I find that so dissonant to my own experiences and understandings of history I’m not even sure what you’re saying. Presidents as varied as FDR and Richard Nixon have been deeply involved in regulating such forces over the past century.

Basically everybody agrees that public policy has created excessive wealth concentration in this country, not natural forces. The only debate is about whether that is good or bad.

Stuck in the economics profession. Cycles “just happen”. It’s a matter of checking the leading indicators, which might or might not have anything to do with the processes of decision-making that result in recessions, inflation, crises…

Those regulating forces by Presidents are considered by economists to be in response to the economic “weather”.

The sad fact is not everyone agrees that public policy has created excessive wealth concentration. Some think that public policy had little to do with it; others think that it had very much to do with it. And some gloss over the concentration of wealth with vague general appeals to “the market”.

Eh, sorry, I guess I just don’t understand the problem. I don’t want to threadjack these, but there have been several diaries now by masaccio and letsgetitdone that I just don’t follow and where opposing perspectives aren’t really answered (that latter part is what really gets me).

—

Some people like the Yankees. Some people don’t. You can argue the rules are stacked in their favor (and thus, things could be improved by changing them), but you can’t argue the Yankees have some explicit monopoly on celebrity or World Series births.

And some people don’t like baseball at all – which is really the state of the economics profession. The tragedy is that proposals to tweak technical aspects of monetary policy completely miss the game, which is that nobody outside of the power elite they serve care what bought and paid for Econ PhDs have to say. Conservative economists are basically directly at odds with public opinion.

Moreover, many voices in political economy said precisely that the size, interconnectedness, corruption, compensation practices, governance, and other factors of the financial sector would cause problems. The headline and tone to this diary and others simply makes no sense; if anything, it feeds the false narrative that nobody knew, that people shouldn’t be held accountable, precisely by advancing the patently untrue notion that there aren’t alternative voices in political economy. It’s understandable why GOP politicians listen to wealthy donors and their econ PhD tools. Why do Democrats give them any credence?

Interested citizens have perfectly decent access to Joseph Stiglitz or Robert Reich or Dean Baker or any other number of people offering economic commentary over the years. The effort in getting people like Bill Black or Paul Krugman to come around to gimmicks like high value platinum coins confuses rather than resolves the issues of our day (how money is spent, not how much money is spent).

Plus, a lot of ‘conservative’ or ‘neoliberal’ voices actually have some perfectly sensible suggestions. It’s usually Dem pundits allowing GOP mouthpieces to get away with twisting the kernel of truth that is the real problem. I really enjoyed Mankiw’s intro econ textbook, for example. Not because I agree with his overall ideology, but because if you actually read the thing, a lot of it is applicable in ways both Dems and the GOP purposefully ignore in DC.

Or to throw out a few examples, Milton Friedman was an early, consistent, and vocal opponent of the drug war. Ben Bernanke went before Congress and explained that industrial policy was the role of the legislature, not the Fed. Thomas Hoenig stuck his neck out – when it mattered most – with a stinging critique of Too Big To Fail.

It’s Obama and Biden and Geithner and Holder and the DC Establishment of Serious People that disagreed, that were the constraint. Conservative econ PhDs and the nitty-gritty of the relationship between Fed and Treasury have nothing to do with why leftists tolerate and enable the two-tiered justice system and corporate welfare (ie, wealth inequality).

The sad fact is not everyone agrees that public policy has created excessive wealth concentration.

Or to say this differently, the notion that there is debate about whether public policy matters is simply on its face absurd.

If these mysterious voices didn’t think policy mattered, then why do they oppose minimum wage laws, overtime laws, collective bargaining, progressive taxation, universal health insurance, universal unemployment insurance, net neutrality, free speech, ending the drug war, ending financing bailouts, ending warrantless searches, prosecution of financial fraudsters, prosecution of war criminals, etc., etc.?

That very resistance is absolute proof that they know their excessive wealth is dependent upon public policy.