Why Did Economists Not Spot the Crisis?

[random_reader]

Ugh, gonna have to disagree with your assessment here. He won't be turning my head if he walked by me.

Well, that is understandable, too bad we can't do a poll here since it's mostly guys.

I just don't see what the big deal is with George Clooney. The guy hasn't had a hit movie or TV show since ER. Is he good looking? I don't know. I'm not that into guys to tell.

I'm not into guys, but I gotta respect a guy who can get girls without taking off his shirt and showing his abs Brad Pitt-style; rather doing things James bond-style with the suits and smarts. At least I think he can. LOL.

[DOR]

One reason economists didn't see this crisis coming is the lack of information. Who knew the size of AIG's exposure to London-based derivatives written by New York banks?

Another reason is the lack of response from the (mal)administration. Who would have expected Paulson & Co to be so busy looking for new jobs that they ignored the collapse of major institutions?

A third isn’t a reason at all: some of us did predict Bad Things Would Happen. But, if you work for a financial institution (I don’t), you are required to be an optimist, but only “strongly encouraged” to know something about economics. Those of us outside the financial world couldn’t get an audience.

[Versus]

There are many reasons why they didn't respond to crisis. The basic one is that even in crisis there are ways for the profit to be generated so what is seen as a crisis for ones. is also seen as benefit for others. So you can look at crisis as a extreme way of making profit (kind of like extreme fishing) and as long as profit making is there there is no crisis. And especially in the "invisible hand and foot" liberal-growth type economy.

[Terry13]

Predictions are not always true... Not for sure we know about the future that what has been instored for us or what life's gonna give us at it?

[editec]

There is not one single reason why the crash happened, there are many.

Collectively those many are called the MACRO-economy.

Let's start by talking about the big picture.

1. Real incomes for the working middle class have been falling for about 40 years. Obviously much of the loss was due to inflation, but in the case of the lowest quintile and somewhat in the second quintile the loses were just inflation, but actual dollars amounts. Incidently, that disease is migrating up the bell curve of income diversity, too. That problem is still with us, and it is only getting worse, too

2. Real esate bubble developed because we created a disconnect between the originators of the loans and the mortgages. Yes the FED made money too cheap but the BANKS elected to create those LIAR LOANS, those complex loans with teasers rates etc. The banks did NOT take due diligence as they would have had they been holding the mortgages.

Banks weren't making money over the life of the morgages, they were making money originating the loans and then getting them off their books by selling them to Fannie and Freddie and other financial insitutions that bundled them into bonds and sold them by LYING about the risks associated with those bonds.

3. Derivatives --fueled with saving from three decades of SUPPLY SIDE tax policies, the investment class had a LOT of money to invest, but no productive place to invest most of it.
And as the banking and finance industry was creating increasingly complex systems to GAMBLE (you can't call naked derivatives anything else BUT gambling, because it is NOT investing) that's where the money was going in large part.

4 DEREGULATION - Thanks to our shortsighted policies, AND a case of social amnesia, we FORGOT that we needed to keep a firewall between savings and gambling. We repealed all the good sense laws we had about banking thus when those insurance companies and pension funds, started invsting in GAMBLING rather than sensibly investing. Money that ought to have gone to finding productive work, went instead to high risk/potenitally higher return grambles.

5. Moral Hazards - WE have been BAILING BANKS out now for quite some time. We created the moral hazard. For example --do you guys remember that we'be bailed CITIBANK out THREE TIMES in the last 3 decades? EVery time we bail out these high risk taking financial insitutions we encouraged them (almost forced then really) to play more and more risky games. Why didn't AIG go into receivership ? Why did we overpay for GM and why on earth did the taxpayers assume the risk for TOXIC ASSETS?!~

6 LIES LIES AND STILL MORE LIES -- The game was to lie about the real risk inherent with these complex financial insturments. Not ONLY in Real estate based bonds but in most of those highly complex dereivatives. Standard and Poor and Moodies OUGHT TO BE HANGED IN THE COMMONS. Read this as there were players who lied and knew they were lying and didn't give a damn because it made them richer.

7. THE INTERCONNECTEDNESS OF INTERNATIONAL FINANCE - Increasingly money knows no borders. Hence banks and financial houses wove together into a system where a shock to one of them becomes a shock to all of them... hence every shock to the fiancial system anywhere in earth has global implications.

8. FAITH BASED ECONOMICS - The idea that the market is perfect, self correcting, or driven by economicus humicus is PREPOSTEROUS. The market is a nervous herd of cattle. It can be stampded easily and often is.ANIMAL SPIRITS, as much cold blooded analysis, moves the markets. That's why RISK ASSESSMENT is such a dicey task and why it SO OFTEN turns out to be totally wrong.

The actual mechanics of the latest meltdown would take a tome to describe since it involves a cast of specific players doing a host specific things that all interacting to create a perfect economic storm.

But the aforementioned things I noted were the background economy that made those events possible.

This meltdown was ENTIRELY the fault of a FAITH BASED (if you aren't a cynic, at least, I am in this case) belief in how the economy works that is not supportable in history.

We ought to be stringing some of these people up. Seriously I mean that.

Except that's not going to happen because they are the MASTERS OF THE UNIVERSE.

In fact, the VERY same people who caused this problem are still in charge of our collective WORLD economic system.

[DOR]

1. Real incomes for the working middle class have been falling for about 40 years. Obviously much of the loss was due to inflation, but in the case of the lowest quintile and somewhat in the second quintile the loses were just inflation, but actual dollars amounts. Incidently, that disease is migrating up the bell curve of income diversity, too. That problem is still with us, and it is only getting worse, too .

An interesting aside --
In the 1950s, the typical American family spent three times as much of its budget on home appliances as it did in the 2000s. We also spent three times as much on food, and more than twice as much on clothing and footwear. Tobacco was 2.5 times as large a share of the budget, and higher education -- before the baby boomers hit college age -- was four times as much.

Motor vehicle fuel took up 3.3% of the budget, as compared to 2.9% in the past decade. Home heating fuel took up more than 6 times as much space in the 1950s budget as it does today.

Telecoms cost us half again as much in the 1950s, compared to total spending, but half of the larger share we spend today is internet access.

We spent 5.5 times as large a share of the family budget on foreign travel in the 1950s as we did in the 2000s, and frankly, it shows.

All this was possible because of the dramatically lower cost of durable goods, clothing, shoes, toys, sporting goods and motor vehicles.

[editec]

Dor,

And it's a darn good thing that home appliances are relatively less costly than they were in the 1950s, too.

American families need those labor saving devices, today, more than ever.

And in the 1950's about 40% of women sought work outside the home to help their families economically.

Today that number is about 75%.

Meanwhile, the percentage of working men is falling, as have been their incomes relative to the cost of living.

The median family income been falling in absolute dollars terms in the last fews years, as well.

Let's remember that the question before us is:

Why Did Economists Not Spot the Crisis?.

In fact, many of them did.

Usually their warnings were focused in their specialized areas of study, rather than as warnings about the entire economy

Some of those harbingers were calling their warnings out from the so called rightest persuasion, and some were calling from the so-called leftist wings.

But some "economists" did warn us where some of our policies would lead.

Some warned about bad banking policies, some about estate policies that were misguided, some about problems in other areas that collectively have lead us to the sorry state of affairs we are in today

But the data was out there, and our leaders and their pet economists choose to overlook or dismiss it.

And here's another reason that "economist" might have failed to warn us, too.

Those who did were sometimes dismissed as Casandras, as for example, in the case of Brookley Born .

Not only did she warn President Wm. J Clinton that the derivatives market was becoming a an unregulated massive casino, and that it was sapping more and more of the nation's potential investment capital and putting it into very high risk (possibly even fraudulently so) investments, but she also proposed that that such activity needed to be regulated to prevent a crises that could bring down our banking and finance industries exactly as happened 2008.

And what was her reward for warning about that upcoming fiancial crises and warning her POTUS about it?

She was dismissed as a loose cannon.

Her professional repuation was besmirched.

She was fired for proposing regulations that would have mitigated this crises.


Why Did Economists Not Spot the Crisis? we ask ourselves?

One obvious reason is that those who did were dismissed as threats by the masters of our economic universe.

Most of these masters, I might add, remain the economic masters of our universe.

This economic meltdown we are experiencing is NOT a an anomaly. It was to be expected. We have seen this kind of event in the past.

Our current crises is the result of bad policies that allowed financial hucksters to sytematically rape the economy, bamboozle their clients, rip off their shareholders, and then what?

They leave the bill on the TAXPAYERS doorstep.

[editec]

To my knowledge Some economists predicts but no one take them seriously.

You know the old joke about the definition of an economist, JohnA?

An economist is a man with a phi beta kappa watchfob on one end of his watchchain, but no watch on the other.

[FJV]

This could be an answer.

I have to put some remarks with this vid:
-1 I am not an economist.
-2 I have not calculated and checked all the math in the video.
As allways do your own thinking as well.

However IMHO the video does demonstrate how slight changes of assumptions in a mathematical model can lead to totally different conclusions.
(This is a major reason why I do not accept the conclusions of climate change models)

[DOR]

editec,

Real incomes for the working middle class have been falling for about 40 years.

Did you get your data from Table 696. Money Income of Families--Median Income by Race and Hispanic Origin in Current and Constant (2008) Dollars?

It’s true that real median family incomes fell in five out of the eight Bush years, but prior the that there were contractions in just five out of 20 years.

And in the 1950's about 40% of women sought work outside the home to help their families economically.

Today that number is about 75%.

75%? Not even close.
Female employment rose from 32.5% of the workforce in 1964 to 48% in 1990, and then leveled off, barely reaching 50%.

One reason may be that men weren’t earning enough to support their families.
Another might be a little thing called Women’s Liberation . . .

[zraver]

editec,



Did you get your data from Table 696. Money Income of Families--Median Income by Race and Hispanic Origin in Current and Constant (2008) Dollars?

It’s true that real median family incomes fell in five out of the eight Bush years, but prior the that there were contractions in just five out of 20 years.

Thats a bit of a fudge isn't it. Median household incomes as a share of national wealth has been contracting for decades.

75%? Not even close.
Female employment rose from 32.5% of the workforce in 1964 to 48% in 1990, and then leveled off, barely reaching 50%.

One reason may be that men weren’t earning enough to support their families.
Another might be a little thing called Women’s Liberation . . .

Again a bit of a fudge since women enter and leave the work force much more often then men. The number you cite refers only to women in the workforce at any one time.

[Wayfarer]

I have to put some remarks with this vid:
-1 I am not an economist.
-2 I have not calculated and checked all the math in the video.
As allways do your own thinking as well.

However IMHO the video does demonstrate how slight changes of assumptions in a mathematical model can lead to totally different conclusions.
(This is a major reason why I do not accept the conclusions of climate change models)

I'm pretty sure Austrian school economists like Alan Thornton were floating the idea of a housing bubble collapse around 2004.

[DOR]

Thats a bit of a fudge isn't it. Median household incomes as a share of national wealth has been contracting for decades.





Again a bit of a fudge since women enter and leave the work force much more often then men. The number you cite refers only to women in the workforce at any one time.

1) If my household income goes down in real terms, I suffer. Period. If the median household income goes down, the economy suffers. One measures personal situations, which is what "median family income" (in the original post) means; the other measures the national situation.

2) Entering and leaving the workforce is not the subject; rather, it was the half-again-as-high 75% figure that was way off base. In my reply, there was a specific point of data in 1964, and another in 1990. Since I researched the data and crunched the numbers myself, I'm sure you'll be pleased to know that "Female employment rose from 32.5% of the workforce in 1964 to 48% in 1990, and then leveled off, barely reaching 50%."

Let me just add, "barely reaching 50% at any time in the 1964-2009 period."

"Including the months and quarters in those years."

"All of them."

[snapper]

Lol - did they spot the second one?

[RollingWave]

2) Entering and leaving the workforce is not the subject; rather, it was the half-again-as-high 75% figure that was way off base. In my reply, there was a specific point of data in 1964, and another in 1990. Since I researched the data and crunched the numbers myself, I'm sure you'll be pleased to know that "Female employment rose from 32.5% of the workforce in 1964 to 48% in 1990, and then leveled off, barely reaching 50%."

Wow, only 50% ?!?!?! in Taiwan it's at 95.04% , which has surpassed man for 14 years already.