Bashing crises predictions

2 June, 2013 at 18:59 | Posted in Economics | 9 Comments

Noah Smith has a post up on his blog questioning that people like Dean Baker, Dirk Bezemer, Nouriel Roubini, Barkley Rosser and in particular Steve Keen really – in any essential meaning of the word – “predicted” the latest financial-economic crisis, the one that we are still living through (that mainstream economists didn’t, we know). It makes me come to think of (wonder why …) what James K. Galbraith wrote a couple of years ago in The NEA Higher Education Journal:

imagesLeading active members of today’s economics profession… have formed themselves into a kind of Politburo for correct economic thinking. As a general rule—as one might generally expect from a gentleman’s club—this has placed them on the wrong side of every important policy issue, and not just recently but for decades. They predict disaster where none occurs. They deny the possibility of events that then happen. … They oppose the most basic, decent and sensible reforms, while offering placebos instead. They are always surprised when something untoward (like a recession) actually occurs. And when finally they sense that some position cannot be sustained, they do not reexamine their ideas. They do not consider the possibility of a flaw in logic or theory. Rather, they simply change the subject. No one loses face, in this club, for having been wrong. No one is disinvited from presenting papers at later annual meetings. And still less is anyone from the outside invited in.

This remains the essential problem. As I have documented—and only in part— there is a considerable, rich, promising body of economics, theory and evidence, entirely suited to the study of the real economy and its enormous problems. This work is significant in ways in which the entire corpus of mainstream economics—including recent fashions like the new “behavioral economics”— simply is not. But where is it inside the economics profession? Essentially, nowhere.
It is therefore pointless to continue with conversations centered on the conventional economics. The urgent need is instead to expand the academic space and the public visibility of ongoing work that is of actual value when faced with the many deep problems of economic life in our time. It is to make possible careers in those areas, and for people with those perspectives, that have been proven wor- thy by events. This is—obviously—not a matter to be entrusted to the economics departments themselves. It is an imperative, instead, for university administrators, for funding agencies, for foundations, and for students and perhaps their parents. The point is not to argue endlessly with Tweedledum and Tweedledee. The point is to move past them toward the garden that must be out there, that in fact is out there, somewhere.



  1. Actually my post was pretty positive on Dean Baker and Nouriel Roubini. They really did call the housing bubble! And they were more clued in to the systemic fragility of the financial system than most others.

    • Roubini was right on the housing bubble but for the wrong reasons. he basically thought that the bulging US current account deficit would force the dollar down, cause US interest rates to rise, and puncture the housing bubble. If you beleievd that you would have either bet against the dollar or bet on interest rates rising. You would performed pretty poorly. The basic understanding of the causes were wrong. On the other hand, with Keen’s predictions, even if you were wrong for years on the timing, you could have made out pretty well by being long bonds–because the underlying pressures are debt-deflationary type pressures.

  2. See this exchange in the comments between me and Barkley Rosser:

    • OK. I’ll have a look.

  3. Tracking the relationship between $NFA (∑deficits) or more descriptively domestic $NFA (∑deficits – NETEXP) and consumer debt CMDEBT will give one more insight into looming bubbles about to burst than any other measure I can think of.

  4. Noah, Godley also clearly called the housing bubble, and he called the magnitude of the bust. As did Keen.

    • Wynne Godley had been bearish for decades. Like many post-keynesians, he thought the system was highly flawed and was negative through most of his career.

  5. Trending: SteveKeen
    by RAMANAN V on 3 JUNE 2013

    The always excellent JKH has written a nice post on Steve Keen’s latest QE model in a blog post titled The Accounting Quest of Steve Keen.
    JKH has a nice way of summarizing what mainstream macroeconomics is all about:

    “The neo-classical concepts of exogenous money and the money multiplier and loanable funds and ISLM and supply/demand equilibrium are part of the fog within which mainstream has constructed some economic imagery that is in fundamental conflict with the facts of accounting logic and real world financial measurement.”

    The post has nice things to say about flow of funds so you may want to read generally.

    Noah Smith seems to have concluded that Post-Keynesianism is a giant hoax.

    Here is a tweet from him:
    Noah Smith @Noahpinion

    “MMT” and “Post-Keynesian” = giant hoaxes. If you fell for one of these hoaxes, just remember that people fall for Scientology too.”
    6:35 PM – 30 May 2013

    Lars Syll has a nice post quoting Jamie Galbraith on the status of the profession. Go Read.

    Paul Krugman has a follow up blog post Non-Prophet Economics putting down Keen’s achievements. But Krugman is clueless about how money works and his post is a silly defense of his models.

    Krugman is a part of the problem is my view.

    Here is Krugman – clueless about how banks work: Here is Randy Wray quoting Krugman. Krugman says:

    “the self-proclaimed true Minskyites view banks as institutions that are somehow outside the rules that apply to the rest of the economy, as having unique powers for good and/or evil… First of all, any individual bank does, in fact, have to lend out the money it receives in deposits. Bank loan officers can’t just issue checks out of thin air; like employees of any financial intermediary, they must buy assets with funds they have on hand. I hope this isn’t controversial, although given what usually happens when we discuss banks, I assume that even this proposition will spur outrage… Yes, a loan normally gets deposited in another bank — but the recipient of the loan can and sometimes does quickly withdraw the funds, not as a check, but in currency. And currency is in limited supply — with the limit set by Fed decisions. So there is in fact no automatic process by which an increase in bank loans produces a sufficient rise in deposits to back those loans, and a key limiting factor in the size of bank balance sheets is the amount of monetary base the Fed creates — even if banks hold no reserves…”

    So Krugman is clueless about money creation on which he pontificates everyday.

    Here is another Keen article from today in which he quotes Justin Wolfers’ poking fun.

    It shouldn’t be forgotten of course that the economists Robert Pollin and Co who spotted errors in Reinhart and Rogoff’s paper promoting world-wide fiscal contraction by faking a 90% threshold are themselves a mix of Post-Keynesianism and other heterodox schools as per this Washington Post article Inside the offbeat economics department that debunked Reinhart-Rogoff.

    Go for it Steve Keen. Whatever criticism you are taking – including from me – beat ‘em. “

  6. It seems entirely appropriate that mainstream proponents of the Dismal Science would constrain themselves by Scarcity, especially with respect to self renewal. Excellent, thought provoking piece. Thank you.

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