"This is both clever and facile, in a very Economisty way: it's the sort of thing which reeks of Oxford Union debates."

I decided to give The Economist some free advertising advice. From Free Exchange:

"In May of 2003:

Yet even as house prices start to wobble, many housing experts continue to insist that "this time is different": because interest rates will not rise significantly in the near future, they say, a slump in house prices is unlikely. This survey has argued that even if interest rates stay low, house prices could tumble, undermined by dwindling demand from first-time buyers and waning confidence. However, the experts are right to say that this housing boom is different from previous ones, in two worrying ways. First, inflation today is close to its lowest for half a century. This means that overvalued house prices cannot regain their long-term equilibrium mainly through inflation, as they have done in the past. Instead, house prices will have to fall by at least 20% in money terms in most of the countries with bubbles.

A second important difference is that this time the surge in house prices has gone hand in hand with a proportionately larger jump in household debt. Not only are new home-buyers taking out large mortgages as a percentage of the purchase price, but existing owners have taken advantage of rising house prices to increase their mortgages and turn some of their capital gains into spending money. In America, Britain, and Australia mortgage-equity withdrawal is running at record levels of 5-7% of personal disposable income.

A bubble can never be positively identified until after it has burst, but the rapid increases in both house prices and mortgage debt should set alarm bells ringing. Either way, consumers are living on borrowed time. Even if house prices simply flatten off, the scope for mortgage-equity withdrawal and hence consumer spending will slow sharply. If, as seems more likely, house prices fall, the recent borrowing binge means that more people than ever before will find their homes are worth less than their mortgages.

And in June of 2004:

Housing optimists dismiss these fears by pointing out that doomsters such as The Economist began wringing their hands about a property bubble a year ago, and yet prices have continued to climb. But this has made the housing market not safer, but more vulnerable. The first law of bubbles is that they inflate for a lot longer than anybody expects. The second law is that they eventually burst.

You get the idea."

Here's my comment:

Don the libertarian Democrat wrote:

I'd take this post down, friend. It means no one listens to you. That's hardly what you want on your masthead, is it?

The Economist: Read The Analysis Everyone Ignores

12/1/2008 6:57 PM GST

"warns not to be too impressed by some forecasts that have turned out to be true, because they were lucky, not wise."

The question is, "What Did They Know, And When Did They Know It? Chris Giles, in the FT, has the amusing task, after all, he's dealing with the predictions of human beings, of assessing how well economists, politicians, oracles, seers, and common visionaries predicted our current financial crisis.

We all know the answer, but let's go on:

"Though there is great entertainment in looking back at the silly things economists have said, more is to be gained by examining the particular failings that contributed to forecasters’ general inability to warn of the current mess."

Of course, before getting on to the serious stuff, we need to have a spot of fun by ridiculing the assessments of a lot of so-called "experts". He's right, it's amusing.

"First is the unforeseen, but now evident, fragility of the global economy in the face of a systemic banking collapse. Jim O’Neill, chief economist of Goldman Sachs, says the failure of Lehman Brothers was “a game changer”, before which his forecasts “were panning out OK” and after which “we have been scrambling to keep up”.

Let's see, we didn't foresee that which wasn't foreseen, the so-called "unforeseen". Now that we've seen it, it's no longer unforeseen. Lehman was a royal cock-up. Before the damned unforeseen showed up, I was seeing the future smashingly well.

"Second, as Stephen King, chief economist of HSBC, says: “Almost all economic models assume that the financial system ‘works’.” Economists in general did not foresee how the looser monetary policy of the early part of the decade could lead to an unprecedented credit expansion."

Damned models again. How dare they not conform to the real world. Apparently these economists hadn't seen Monty Python, as Willem Buiter had:

"We have no longer just a crisis in the financial system. We have gone even beyond the stage where there is a crisis of the financial system. The western (north-Atlantic) financial system we knew has collapsed. If I may paraphrase that great ensemble of Nobel-prize winning financial wizards, Monty Python’s Flying Circus:

“This financial system is no more! It has ceased to be! ‘It’s expired and gone to meet its maker! ‘It’s a stiff! Bereft of life, it rests in peace! If you hadn’t nailed ‘it to the tax payer’s perch it’d be pushing up the daisies! ‘Its metabolic processes are now ‘istory! ‘It’s off the twig! It’s kicked the bucket, it’s shuffled off its mortal coil, run down the curtain and joined the bleedin’ choir indivisible!! THIS IS AN EX-FINANCIAL SYSTEM!!”

"Third was the deep squeeze on household and corporate incomes from the commodity boom of the first half of 2008, which almost no one predicted. This weakened the non-financial sector before banks had any chance to repair the damage from the subprime crisis and was a crucial element of the disaster that unfurled this autumn."

Doesn't Jim Rogers say this about as often as Cato The Censor said "Ceterum censeo Carthaginem esse delendam."

"Fourth, most economic models suggest the demand for money will be stable, but banks and households have now begun to hoard cash. This threatens to make monetary policy ineffective as a tool for economic recovery, something that is not generally factored into forecasting models."

Bad news. They're models. Here's a good motto to have on your lapel:"a simplified representation of a system or phenomenon, as in the sciences or economics, with any hypotheses required to describe the system or explain the phenomenon, often mathematically." Let me repeat, sim pli fied. Simplified. From simplify: to make less complex or complicated; make plainer or easier: to simplify a problem.

Bit of a problem here. I'm mocking them for exactly what I do on this blog.

"Fifth is an over-reliance on the output gap – the difference between the level of output and an estimate of what is sustainable – in forecasting. That allowed policymakers to believe everything was fine in the economy, because inflation was under control and growth was not excessive."

Here's a conversation I've never heard:
"What's my problem, dear. I can't foresee the future?"
"You've over-relied on the output gap".

Over-relied. So far, we've had "over", "un", the so-called "mistake prefixes". Personally, I try to avoid having them applied to me.

"Sixth is the natural tendency to seek rationales for events as they unfold, rather than question whether they are sustainable. Kenneth Rogoff, a Harvard professor who is also a former IMF chief economist, thinks the tendency to look on the bright side is particularly prevalent on Wall Street, where “it is difficult to make a living as a mega-bear”, he says."

Here's another conversation I've never heard:

"Son, what do plan on doing now that I've blown my retirement sending you to college?"
"Father, I intend to be a mega-bear".
"Start simple, my boy. Just be a bear for a while, until you get the hang of it".

Looking on the bright side. Rogoff blinds me with science.

"Academics and the Fed also fell into the trap of rationalising unsustainable features of the   global economy. In 2005 a paper by Ricardo Hausmann and Federico Sturzenegger of Harvard caused excitement about the possibility that financial “dark matter” would prevent a big bang in the world economy. The failure to believe in this dark stuff, the authors concluded, made “analysts predict crises that, for good reason, remain elusive”.

It's really quite amazing. I base it on something I saw on Star Trek. A little black hole comes out of nowhere and sucks up wealth. Fortunately, Spock can meld with these black holes and they eventually leave us in peace.

"Mention must also be given to the notable voices of doom, who got important bits of the puzzle correct even if the timing or other details eluded them. Prof Roubini, who now runs the consultancy RGE Monitor, wrote a paper with Brad Setser in August 2004 predicting that the world’s trade imbalances were unsustainable and likely to “crack the system in the next three to four years”. He has been prescient in understanding the links between financial markets and the real economy."

Mention must also be given to Nostradamus and the writer of the Apocalypse, who got important bits of the puzzle correct even if the timing or other details eluded them.

"William White, the former chief economist of the Bank for International Settlements, the central bankers’ bank in Basel, Switzerland, was a persistent critic of lax monetary policy and the failure to stem credit expansion. Prof Rogoff also spotted the dangers of unsustainable global economic expansion in a 2004 paper with Maurice Obstfeld. In more recent work with Carmen Reinhart he has highlighted how policymakers fell into the “this time it’s different” trap that dates back to England’s 14th-century default."

"It's far too lax. Spare the interest rate hike..."
"I see danger ahead. That's it. I hope it helps."

"Prof Persaud has made an honest living for many years warning about the fallibility of value-at-risk models and the tendency for them to encourage herd behaviour. And in the FT’s new year survey of economists for 2008, Wynne Godley of Cambridge university, also a permanent bear, said: “I think the seizing up of financial markets may well result in a collapse in lending in the US to the non-financial sector so large that it causes a recession deeper and more stubborn than any other for decades – and deeper than anyone else is expecting.” Quite."


"Prof Persaud has made an honest living for many years ( before that he was completely untrustworthy )".

A Permanent Bear. Is that the next step up from Mega-Bear?

"Willem Buiter, whose blog on FT.com was praised yesterday in parliament by the Bank of England governor, warns not to be too impressed by some forecasts that have turned out to be true, because they were lucky, not wise. “Hindsight is useless,” Prof Buiter insists. “One has to look at the information available at the time and the arguments used at the time.”

That is certainly valid and should form the basis of any judgment of forecasts or policy decisions taken. But it is also incumbent on the consumers of economic forecasts to be aware of what economic models can and cannot do. They should focus on the risks rather than purely the central forecasts."

I shall never, ever, mock Willem Buiter, and neither should you. Besides, he's correct, as per usual. It's all dumb luck.

"Goldman’s Mr O’Neill says private sector economists should try harder to under-promise and over-deliver. Despite all the talent and the most sophisticated models, they “didn’t and couldn’t have predicted the Lehman ‘event’.”

Enough about these damned models.

"If only society had listened to the younger Cardinal Ratzinger more than 20 years ago – before, of course, it was reasonable to forecast he would be the next Pope."

Sorry old boy, I'm more of a Soloveitchik man myself.