Finansvärlden har ingen rätt till immunitet – en annan värld måste vara möjlig

20 Oct, 2011 at 22:50 | Posted in Economics, Politics & Society | Comments Off on Finansvärlden har ingen rätt till immunitet – en annan värld måste vara möjlig

I sin senaste New York Times-artikel skriver Krugman apropå Occupy Wall Street-rörelsens berättigade kritik av finansvärlden: 

As the Occupy Wall Street movement continues to grow, the response from the movement’s targets has gradually changed: contemptuous dismissal has been replaced by whining … The modern lords of finance look at the protesters and ask, Don’t they understand what we’ve done for the U.S. economy? The answer is: yes, many of the protesters do understand what Wall Street and more generally the nation’s economic elite have done for us. And that’s why they’re protesting.

For the financialization of America wasn’t dictated by the invisible hand of the market. What caused the financial industry to grow much faster than the rest of the economy starting around 1980 was a series of deliberate policy choices, in particular a process of deregulation that continued right up to the eve of the 2008 crisis.

Not coincidentally, the era of an ever-growing financial industry was also an era of ever-growing inequality of income and wealth. Wall Street made a large direct contribution to economic polarization, because soaring incomes in finance accounted for a significant fraction of the rising share of the top 1 percent (and the top 0.1 percent, which accounts for most of the top 1 percent’s gains) in the nation’s income. More broadly, the same political forces that promoted financial deregulation fostered overall inequality in a variety of ways, undermining organized labor, doing away with the “outrage constraint” that used to limit executive paychecks, and more.

Then came the crisis, which proved that all those claims about how modern finance had reduced risk and made the system more stable were utter nonsense. Government bailouts were all that saved us from a financial meltdown as bad as or worse than the one that caused the Great Depression.

You see, until a few weeks ago it seemed as if Wall Street had effectively bribed and bullied our political system into forgetting about that whole drawing lavish paychecks while destroying the world economy thing. Then, all of a sudden, some people insisted on bringing the subject up again.

And their outrage has found resonance with millions of Americans. No wonder Wall Street is whining.

Thomas Sargent disbelieving his own methodology

20 Oct, 2011 at 21:33 | Posted in Theory of Science & Methodology | Comments Off on Thomas Sargent disbelieving his own methodology

In Arjo Klamer’s The New Classical Macroeconomics (1984, p 79) Sargent answers a couple of Klamer’s questions in a rather surprising way:

People say that many of your assumptions are unrealistic.

It is true that these assumptions are unrealistic.

Do you feel comfortable with them?

Yes, about certain matters. I’m aware of all the problems with them. There are philosophical contradictions about using this methodoology. Deep down I don’t believe in them, but I don’t have a better method of understanding what’s going on out there.

But if the best is not good enough? Wittgenstein’s dictum in Tractatus Logico-Philosophicus comes to mind:

Wovon man nicht sprechen kann, darüber muss man schweigen.

On Calibration and Nobel Prize Winner Thomas Sargent

19 Oct, 2011 at 19:35 | Posted in Statistics & Econometrics, Theory of Science & Methodology | Comments Off on On Calibration and Nobel Prize Winner Thomas Sargent

In an interview – by Seppo Honkapohja and Lee Evans in Macroeconomic Dynamics (2005, vol.9, 561-583) – Thomas Sargent says:

Evans and Honkapohja: What were the profession’s most important responses to the Lucas Critique?

Sargent: There were two. The first and most optimistic response was complete rational expectations econometrics. A rational expectations equilibrium is a likelihood function. Maximize it.

Evans and Honkapohja: Why optimistic?

Sargent: You have to believe in your model to use the likelihood function. it provides a coherent way to estimate objects of interest (preferences, technologies, information sets, measurement processes) within the context of a trusted model.

Evans and Honkapohja: What was the second response?

Sargent: Various types of calibration. Calibration is less optimistic about what your theory can accomplish because you would only use it if you din’t fully trust your entire model, meaning that you think your model is partly misspecified or incompetely specified, or if you trusted someone else’s model and data set more than your own. My recollection is that Bob Lucas and Ed Prescott were initially very enthusiastic about rational expetations econometrics. After all, it simply involved imposing on ourselves the same high standards we had criticized the Keynesians for failing to live up to. But after about five years of doing likelihood ratio tests on rational expectations models, I recall Bob Lucas and Ed Prescott both telling me that those tests were rejecting too many good models. The idea of calibration is to ignore some of the probabilistic implications of your model but to retain others. Somehow, calibration was intended as a balanced response to professing that your model, although not correct, is still worthy as a vehicle for quantitative policy analysis….

Evans and Honkapohja: Do you think calibration in macroeconomics was an advance?

Sargent: In many ways, yes. I view it as a constructive response to Bob’ remark that “your likelihood ratio tests are rejecting too many good models”. In those days… there was a danger that skeptics and opponents would misread those likelihood ratio tests as rejections of an entire class of models, which of course they were not…. The unstated cse for calibration was that it was a way to continue the process of acquiring experience in matching rational expectations models to data by lowering our standards relative to maximum likelihood, and emphasizing those features of the data that our models could capture. Instead of trumpeting their failures in terms of dismal likelihood ratio statistics, celebrate the featuers that they could capture and focus attention on the next unexplained feature that ought to be explained. One can argue that this was a sensible response… a sequential plan of attack: let’s first devote resources to learning how to create a range of compelling equilibrium models to incorporate interesting mechanisms. We’ll be careful about the estimation in later years when we have mastered the modelling technology…

But is the Lucas/Kydland/Prescott/Sargent calibration really an advance?

Let’s see what two eminent econometricians have to say. In Journal of Economic Perspective (1996, vol. 10, 87-104) Lars Peter Hansen and James J. Hickman writes:

It is only under very special circumstances that a micro parameter such as the intertemporal elasticity of substitution or even a marginal propensity to consume out of income can be ‘plugged into’ a representative consumer model to produce an empirically concordant aggregate model … What credibility should we attach to numbers produced from their ‘computational experiments’, and why should we use their ‘calibrated models’ as a basis for serious quantitative policy evaluation? … There is no filing cabinet full of robust micro estimats ready to use in calibrating dynamic stochastic equilibrium models … The justification for what is called ‘calibration’ is vague and confusing.

This is the view of econometric methodologist Kevin Hoover :

The calibration methodology, to date,  lacks any discipline as stern as that imposed by econometric methods.

And, finally, this is the verdict of Paul Krugman :

The point is that if you have a conceptual model of some aspect of the world, which you know is at best an approximation, it’s OK to see what that model would say if you tried to make it numerically realistic in some dimensions.

But doing this gives you very little help in deciding whether you are more or less on the right analytical track. I was going to say no help, but it is true that a calibration exercise is informative when it fails: if there’s no way to squeeze the relevant data into your model, or the calibrated model makes predictions that you know on other grounds are ludicrous, something was gained. But no way is calibration a substitute for actual econometrics that tests your view about how the world works.

Hur mycket mer tål euron?

19 Oct, 2011 at 15:07 | Posted in Economics | Comments Off on Hur mycket mer tål euron?

Som yours truly skrivit om tidigare så är räntegapet på statsobligationer en bra värdemätare på tillståndet i Europas ekonomier.

Föga förvånande har räntegapet på tio-åriga statsobligationer mellan europeriferiländerna och eurokärnländerna de senaste månaderna fullständigt exploderat.

Men vad som är kanske än mer anmärkningsvärt är att gapet mellan Tyskland och andra kärnländer också börjar rusa i väg. Skillnaden mellan till exempel Belgien och Tyskland ligger nu nästan på 2 %, vilket är rekordstort.

Räntegapet är ju ett slags ”riskpremie” som de placerare kräver för att våga investera i andra länder. Ställda inför risken att länderna inte kan – eller vill –betala för sig i framtiden, måste investerarna premieras med en högre ränta för att det ska bedömas vara värt att våga ta risken.

Det börjar alltmer framstå som om det ska till ett mirakel för att euron ska klara dagens påfrestningar. Eurons saga närmar sig snabbt sitt slut.

Not even IMF believes in self-regulating markets anymore

19 Oct, 2011 at 11:39 | Posted in Economics, Politics & Society | Comments Off on Not even IMF believes in self-regulating markets anymore

Deputy Director Ajai Chopra of IMF, in a speech delivered last week, said:

It is well accepted that the financial crisis that started in 2007-2008 was rooted in a combination of common global factors and vulnerabilities in individual countries. In the decade that preceded the crisis, global financial markets were characterized by high liquidity and low risk premia in a stable economic environment. Financial integration in the euro area was accelerating. European banks, including Irish ones, expanded their balance sheets through unprecedented access to wholesale funding. The new funding structures created deep fragilities that came to the fore when liquidity dried up.

Ideology also played a role. There was a belief that “light-touch” regulation and market discipline would suffice to ensure efficient and stable financial markets. The crisis proved this belief was wrong. Mechanisms of self-regulation and market discipline—such as corporate governance, internal risk management, private audits, and discipline by creditors—failed to prevent the build-up of risk. Market players also anticipated bailouts of “too big to fail” institutions. In addition, in many countries including Ireland, authorities wrongly considered that macroeconomic risks and unsound bank behavior were not sufficiently alarming to require assertive policy responses.

Modest reforms are not sufficient in the current environment. The crisis requires convincing skeptical markets that Europe can make bold and unified decisions. The issues involved are exceedingly complex, but clarity about the goal of establishing an integrated EU crisis management and resolution framework, supported by a more effective supervisory and regulatory regime, will make it easier to deal with these complexities. As the Roman philosopher Seneca said, “If one does not know to which port one is sailing, no wind is favorable.”

It is better late than never. IMF:s waking up from its market-fundamentalist Walt Disney-worldview is welcome.

Än en gång får vi skämmas över regeringen Reinfeldts handfallenhet

19 Oct, 2011 at 11:19 | Posted in Politics & Society | Comments Off on Än en gång får vi skämmas över regeringen Reinfeldts handfallenhet

Europadomstolen beslöt i går att inhibera utvisningen av Ganna.

Det är bra.

Däremot är det minst sagt beklämmande att vi har en regering som inte kan tillämpa begreppet “synnerligen ömmande omständigheter” när det uppenbart just ska tillämpas.

Än en gång får vi stå där och skämmas internationellt över våra ledande politiska företrädares skandalösa handfallenhet.

Gränsen mellan handfallenhet och hjärtlöshet är ibland hårfin.

Tänkte inte på det …

18 Oct, 2011 at 10:11 | Posted in Economics, Politics & Society | 2 Comments

Alla vi som tyckt det är lite märkligt att Folkpartiet driver linjen att Sverige bör gå med i eurosamarbetet får nu reda på varför. Den folkpartistiske EU-parlamentarikern Olle Schmidt säger i en intervju att Sverige bör ställa upp med lån till krisdrabbade Grekland.

– En billig premie för att undvika katastrof, säger Olle Schmidt.

Undrar hur  många svenska väljare som tycker att det är en bra idé att Sverige går med i EMU bara för att få vara med och betala räkningen för eurons misslyckande?

Yours truly och Paul Krugman diskuterar Nobelpriset i ekonomi

17 Oct, 2011 at 20:39 | Posted in Economics | Comments Off on Yours truly och Paul Krugman diskuterar Nobelpriset i ekonomi

Paul Krugman hade idag ett inlägg på sin blog där han ondgjorde sig över vad han uppfattade som orättvis kritik mot årets Nobelpristagare i ekonomi. Paul skriver:

So why does the prize matter? Mainly, I’d say, because it gives visibility. And the main way the Nobel can alter the debate is by highlighting work that wasn’t getting as much attention it arguably should … So the Sims/Sargent prize isn’t a vindication of anyone or any particular point of view; it’s basically a signal saying, hey, if you haven’t been aware of this important line of work, now is a good time to read up on it.

Det är inte så ofta jag har meningsskiljaktigheter med den gode Paul. Men här var jag tvungen att resa frågetecken vad gäller hans analys:

Paul, it’s not everyday that I find myself disagreeing with you. But on this issue I think you’re partly wrong. Knowing – and having debated with – many of the members of the committee for the economics prize over the years, I would rather say that there is a clear bias in whom these guys award the prize (as YOU certainly know, there are exceptions …). They are usually people of the neoclassical school, from Chicago, developing the axiomatic-deductive tool-box and very seldom with a real interest in ontological-methodological questions pertaining to the “realism” and applicability of their preferred models (as a rule based on representative actors making choices in an equlibrium based on some variant of rational expectations). So, of course, the Nobel Prize in economics is apart of a power-game (more on this in this interview with Phil Mirowski:… ). That signaling function of the prize is just as important as the one you chose to focus on.

Man skulle ha kunnat ge priset till exempelvis Axel Leijonhufvud – den ende nu levande svenske ekonom som skulle kunna komma ifråga – eller Paul Davidson. Varför gjorde man inte det? Antagligen därför att det skulle tvinga priskommittén att medge existensen av icke-neoklassisk nationalekonomi. Och att neoklassisk nationalekonomi inte är synonymt med nationalekonomi tout court är något man inte gärna tillstår i den sötvattenimpregnerade klubben.

The Nobel Prize in Freshwater Economics

17 Oct, 2011 at 18:11 | Posted in Economics | Comments Off on The Nobel Prize in Freshwater Economics

John Cassidy has a truly wonderful and illuminating article on the latest Nobel Prize in Economics in The New Yorker. I especially liked the following passage:

Unfortunately, in case it needs restating, freshwater economics turned out to be based on two ideas that aren’t true. The first (Fama) is that financial markets are efficient. The second (Lucas/Sargent/Wallace) is that the economy as a whole is a stable and self-correcting mechanism. The rational-expectations theorists didn’t refute Keynesianism: they assumed away the reason for its existence. Their models were based not just on rational expectations but on the additional assertion that markets clear more or less instantaneously. But were that true, there wouldn’t be any such thing as involuntary unemployment, or any need for counter-cyclical monetary policy.

Perhaps because they wanted to head off this sort of criticism, the Nobel committee said that it was honoring Sargent not for his original work on rational expectations and economic policy but for his contributions to “econometrics”—the application of statistics to economics. But if this is a distinction it is a very fine one. Sargent’s econometric research explored the implications of the rational-expectations hypothesis for testing theories. In the mind of every economist I know, he is still closely associated with rational expectations and its later refinements.

Folkpartiets krav på svenskt medlemskap i EMU – ren självmordspolitik

17 Oct, 2011 at 10:50 | Posted in Economics, Politics & Society | Comments Off on Folkpartiets krav på svenskt medlemskap i EMU – ren självmordspolitik

För en vecka sedan skrev jag en kritisk artikel angående folkpartisten Carl Bastiat Hamiltons oövertänkta förslag om att Sverige borde gå med i EMU. På dagens newsmill har Göran Zettergren – chefsekonom på TCO och tidigare chef för Konjunkturinstitutets enhet för prognosområdena arbetsmarknad, löner, inflation och resursutnyttjande – en synnerligen läsvärd artikel som också hårt kritiserar Hamiltons märkliga argumentation:

Euron bidrog inte bara till att skapa och förvärra problemen i Europa. Den försvårar också allvarligt möjligheterna att komma till rätta med dessa. Den gemensamma valutan är dessutom den egentliga orsaken till att vi överhuvudtaget har en skuldkris i Europa.

Tvärtemot alla förhoppningar ledde införandet av euron inte till någon konvergens av ländernas ekonomier. Även om det kanske såg ut så till en början. Tvärtom ledde den till en divergens som på mindre än tio år skapade gigantiska obalanser inom eurozonen och en ohållbar konkurrenssituation för flera av dess medlemsländer.

Euron är naturligtvis inte orsaken till alla Europas problem. Långt därifrån. Flera länder i eurozonen har dessutom klarat krisen relativt väl medan andra länder utanför zonen idag har allvarliga ekonomiska problem. De flesta industriländer har idag problem med höga offentliga underskott och stigande statsskulder. Det är dock bara i vissa euroländer som vi har en skuldkris. Det är bara euroländer som hotar att ställa in sina betalningar. Och detta är inte någon slump.

Under de europeiska valutakriserna i början av 1990-talet lärde vi oss att en fast växelkurs är en inbjudan till spekulation. Eftersom ländernas valutareserver är begränsade är det bara att satsa tillräckligt stora summor för att knäcka landets centralbank och sedan casha in en säker vinst. När de första länderna ger efter, leder detta till en smittoeffekt på andra länder. Ett efter ett tvingades länderna att ge upp. Till slut tvingades även Danmark att ge upp, trots att man inte hade några fundamentala problem med den då gällande växelkursen.

Från denna episod kan man dra olika slutsatser. Den europeiska slutsatsen var att dessa “halvfasta” växelkurser inte var tillräckligt fasta. Endast en gemensam valuta kunde skydda landet från sådan spekulation. Den svenska slutsatsen – om man får kalla den så – var den omvända. Endast en flytande växelkurs kunde skydda oss från spekulanterna. Jag tror att mycket få då insåg hur rätt vi hade.

Folkpartiets linje att vi ska gå med i eurosamarbetet – när vi nu sitter med facit i hand över det misslyckade experimentet – verkar vara rena politiska självmordet. Obegripligt.

Michael Goldberg on irrationality and financial crises

16 Oct, 2011 at 19:30 | Posted in Economics | Comments Off on Michael Goldberg on irrationality and financial crises

Michel Goldberg is interviewed on the above subjects  here. For more on Michael Goldberg’s and Roman Frydman’s critique of rational expectations and ergodicity, see my earlier posts here and here.

Why occupy Wall Street? Watch MELTDOWN!

15 Oct, 2011 at 19:50 | Posted in Economics, Politics & Society | Comments Off on Why occupy Wall Street? Watch MELTDOWN!

Why Ricardian equivalence is false and expansionary policies might work

15 Oct, 2011 at 16:36 | Posted in Economics | Comments Off on Why Ricardian equivalence is false and expansionary policies might work

Paul Krugman has a nice piece today on what’s wrong with Ricardian equivalence. Commenting on the paper by John Kay that I wrote about the other day here on docendo discimus, he writes:

It’s one thing to have an argument about whether consumers are perfectly rational and have perfect access to the capital markets; it’s another to have the big advocates of all that perfection not understand the implications of their own model.

So let me try this one more time.

Here’s what we agree on: if consumers have perfect foresight, live forever, have perfect access to capital markets, etc., then they will take into account the expected future burden of taxes to pay for government spending. If the government introduces a new program that will spend $100 billion a year forever, then taxes must ultimately go up by the present-value equivalent of $100 billion forever. Assume that consumers want to reduce consumption by the same amount every year to offset this tax burden; then consumer spending will fall by $100 billion per year to compensate, wiping out any expansionary effect of the government spending.

But suppose that the increase in government spending is temporary, not permanent — that it will increase spending by $100 billion per year for only 1 or 2 years, not forever. This clearly implies a lower future tax burden than $100 billion a year forever, and therefore implies a fall in consumer spending of less than $100 billion per year. So the spending program IS expansionary in this case, EVEN IF you have full Ricardian equivalence.

Is that explanation clear enough to get through? Is there anybody out there?

And the answer is that there isn’t.

The fact that these guys don’t even get the implications of their own models right tells us that the problem runs deeper than believing too much in abstract math. At some level it has to be political: they want to declare government policy ineffectual so badly that for all their vaunted modeling mojo they can’t be bothered to think it through, or listen to other people who point out their error.

As I see it Ricardian equivalence is false mainly because it requires rational expectations. As Kevin Hoover has it in his The New Classical Macroeconomics (Basil Blackwell 1988):

Ricardian equivalence is the claim that whether a given path of government expenditure is financed through taxes or debt is unimportant: substituting debt for taxes appears to increase disposable income today. But since the debt must be repaid with interest, a rational taxpayer would save the entire windfall in order to afford the future tax bill, leaving his expenditure unchanged. Ricardian equivalence remains controversial because it depends on assumptions about the public’s foresight and grasp of the fiscal system closely related to the rational-expectations hypothesis and on debatable assumptions about the incidence of taxes and expenditure.

A rather ironic fact is that Ricardo himself didn’t believe in Ricardian equivalence. In “Essay on the Funding System” (1820) he writes:

But the people who paid the taxes never so estimate them, and therefore do not manage their private affairs accordingly. We are too apt to think that the war is burdensome only in proportion to what we are at the moment called to pay for it in taxes, without reflecting on the probable duration of such taxes. It would be difficult to convince a man possessed of £20,000, or any other sum, that a perpetual payment of £50 per annum was equally burdensome with a single tax of £1000.

[For more on this issue: ]

Is it really possible to take the Lucas-Sargent models seriously?

15 Oct, 2011 at 10:33 | Posted in Economics | Comments Off on Is it really possible to take the Lucas-Sargent models seriously?

James Tobin gave the answer to that question already thirty years ago:

They try to explain business cycles solely as problems of information, such as asymmetries and imperfections in the information agents have. Those assumptions are just as arbitrary as the institutional rigidities and inertia they fins objectionable in other theories of business fluctuations … I try to point out how incapable the new equilibrium business cycles models are of explaining the most obvious observed facts of cyclical fluctuations … I don’t think that models so far from realistic description should be taken seriously as a guide to policy … I don’t think that there is a way to write down any model which at one hand respects the possible diversity of agents in taste, circumstances, and so on, and at the other hand also grounds behavior rigorously in utility maximization and which has any substantive content to it.

Arjo Klamer, The New Classical Mcroeconomics: Conversations with the New Classical Economists and their  Opponents,Wheatsheaf Books, 1984

Rigorous models lacking relevance is no to be taken seriously. I would rather be vaguely right, than precisely wrong – as Keynes once put it.

Calmfors medicin räcker inte för att rädda Grekland

14 Oct, 2011 at 21:43 | Posted in Economics, Politics & Society | Comments Off on Calmfors medicin räcker inte för att rädda Grekland

Lars Calmfors argumenterade igår – vid finansutskottets seminarium om EU och finanskrisen – för att Europas ledare “måste komma till skott” och skriva ner Greklands skuld med minst 50 procent. Problemen – inte minst i banksektorn – som följer på detta får sen ECB fixa med ökade resurser till den gemensamma räddningsfonden.

Allt det här låter helt OK – men är ändå fullständigt otillräckligt! Åtminstone i ett blickfält som sträcker sig mer än tre månader framåt i tiden.

På sikt kommer varken Grekland eller de andra PIIGS-länderna att räddas av den här typen av ambulansutryckningar och bankuter. Konstgjord andning i all ära, men i längden är det bättre om man kan andas fritt och utan respirator.

För mig känns det inte intellektuellt hederligt att låtsas som om europeriferiländernas medlemskap i eurosamarbetet fortsatt skulle gå att rädda. Ska Grekland och de andra europeriferiländerna ha en chans att få ordning på sina ekonomier och samhällen måste man bort från den rent kontraproduktiva ekonomiska politik som euron tvingar dem att föra. I stället för att hålla på och laga och lappa på det i grunden förfelade EMU-projektet är det bättre att inse att vi nått vägs ände och att det är dags att erkänna det. Och ta en annan väg. En väg som leder framåt. En väg utan euron.

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