History repeats itself, first as tragedy, second as farce

6 June, 2013 at 18:51 | Posted in Economics, Politics & Society | 3 Comments

These are the days: I stopped reading ‘The economic consequences of the peace’ to read the IMF report on Greece. Did anything change (emphasis added)?

The IMF on Greece, 2013:

One way to make the debt outlook more sustainable would have been to attempt to restructure the debt from the beginning. However, PSI was not part of the original program. This was in contrast with the Fund program in Uruguay in 2002 and Jamaica in 2011 where PSI was announced upfront … Yet in Greece, on the eve of the program, the authorities dismissed debt restructuring as a “red herring” that was off the table for the Greek government and had not been proposed by the Fund … In fact, debt restructuring had been considered by the parties to the negotiations but had been ruled out by the euro area … Some Eurozone partners emphasized moral hazard arguments against restructuring. A rescue package for Greece that incorporated debt restructuring would likely have difficulty being approved, as would be necessary, by all the euro area parliaments … Nonetheless, many commentators considered debt restructuring to be inevitable. With debt restructuring off the table, Greece faced two alternatives: default immediately, or move ahead as if debt restructuring could be avoided. The latter strategy was adopted, but in the event, this only served to delay debt restructuring and allowed many private creditors to escape.

Keynes, ‘The economic consequences of the peace’, about the negotiations in 1919:

As soon as it was admitted that it was in fact impossible to make Germany pay the expenses of both sides, and that the unloading of their liabilities upon the enemy was not practicable, the position of the Ministers of Finance of France and Italy became untenable. Thus a scientific consideration of Germany’s capacity to pay was from the outset out of court. The expectations which the exigencies of politics had made it necessary to raise were so very remote from the truth that a slight distortion of figures was no use, and it was necessary to ignore the facts entirely. The resulting unveracity was fundamental. On a basis of so much falsehood it became impossible to erect any constructive financial policy which was workable. For this reason amongst others, a magnanimous financial policy was essential.

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3 Comments »

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  1. Mea culpa … too late and too unnecessary!!!!

  2. I rather prefer the quote, often incorrectly attributed to Mark Twain, to the effect that history may not repeat itself, but it sometimes rhymes. While the quote from Keynes show how little we have learned from fairly recent economic history, the pattern of the rise of countries and their eventual evolution into rentier economies with the inevitable decline is even more depressing. Please see ‘Economics-Repeating Rhymes’ at http://somewhatlogically.com/?p=562

    Equally depressing are your reports on your blog as to how Sweden seems headed down the same path. Our modeling work at Dominican University using a fluid dynamics analog simulation, shows that Sweden is approaching the same level of inequality and banking induced instability as the U.S. in the late 70′s. Please see the working paper at https://sites.google.com/a/dominican.edu/econo-physics/working-papers with reference to the comparison of the US and Swedish economies as shown in Figures 5 through 7.

    Especially in light of the recent Noah Smith induced discussions as to who and what models predicted what regarding the crash, I think economists are asking the wrong question, and have clearly not read Keynes on probability, or they would be far more concerned with understanding structural instabilities, as per Minsky,(also discussed in the working paper, p19) and advising policymakers as to how to avoid economic regimes where the financial sector is unstable and Keynes’ unpredictable shocks can cause loss of employment and economic growth or, as Keynes predicted in the ‘Economic Consequences of Peace’, far worse.

    Lastly, on economic discussions, please see the Wright Brother’s quote in the conclusion of the working paper: There have been many calls for new models in economics, and one puts forward a new idea at one’s peril, especially given the level of some of the discourse in economics. Therefore, I will close with a quote from a letter by Wilbur Wright to George Spratt, written on 27 April 1903, over their debate in understanding flow:

    “It is not my intention to advocate dishonesty in argument or bad spirit in controversy. No truth is without mixture of error, and no error so false but that it possesses some element of truth. If a man is in so big a hurry to give up an error he is liable to give up some truth with it, and in accepting the arguments of another man, he is sure to get some error with it. Honest argument is merely a process of picking the beams and motes out of each other’s eyes so both can see more clearly.”

  3. “Bill Black: Great Moments in Nobel Prize History – 2007 Winner Pumps for Plutocracy, Billionaire CEOs

    http://www.nakedcapitalism.com/2013/06/bill-black-great-moments-in-nobel-prize-history-2007-winner-pumps-for-plutocracy-billionaire-ceos.html

    By Bill Black, the author of The Best Way to Rob a Bank is to Own One and an associate professor of economics and law at the University of Missouri-Kansas City. Cross posed from Benzinga

    Introduction

    This article begins a project to critique the work by economists concerning regulation that has led to the award of Nobel prizes. The prize in economics in honor of Alfred Nobel is unique. It is not part of the formal Nobel Prize system. It was created by a large Swedish bank and it is the only “science” prize frequently given to those who proved incorrect. The theme of my series is how poorly the work has stood the test of predictive accuracy. Worse, it has led to policies in the private and public sector that are criminogenic and explain our recurrent, intensifying financial crises.

    I want to stress that the reason that the work has proven so faulty is not that the Nobel Laureates in economics are incompetent or evil. Indeed, that is part of my theme. Economics is not a hard science and its pretensions that it is have helped make even brilliant economists vulnerable to grievous error, particularly those who were most dogmatic about their hostility to even democratic governments. A recurrent defect that will emerge is the failure of economics to take ethics seriously.

    This article responds to the Prize Lecture of Roger Myerson, who was made a Laureate in 2007 for his work on “mechanism design.” Mechanism design theory was developed in parallel to Michael Jensen’s work that led to modern executive compensation. Jensen criticized existing executive compensation as paying CEOs as if they were “bureaucrats” and argued that it led CEOs to shirk effort and avoid taking productive risks. These variants of the classic “unfaithful agent” problem were reminiscent of Ayn Rand’s premise of the CEOs going on a mass strike, but here the strike was against the board of directors and the cause was their “inadequate” pay.”


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