I missed out on the Crooked Timber book title contest (combine a classic title with a “How C did Y” subtitle in the modern manner) a while back, so here’s my entry. As regards earnestness, i’m riffing off Andrew Gelman, via Kieran Healy at CT, who observes “”pissing off conservatives” is boring and earnest?”
The main point, though, is that the fuss over the global cooling chapter in Levitt and Dubner’s new book is the first occasion, I think, where the refutation of specific errors has taken a back seat (partly because, in this case, it’s so easy) to an attack on contrarianism, as such. The general point is that contrarianism is a cheap way of allowing ideological hacks to think of themselves as fearless, independent thinkers, while never challenging (in fact reinforcing) the status quo. Here’s Krugman and Joe Romm, for example
I can certainly remember that I was once positively disposed to contrarianism. Trawling through the blog records, I can find
* A mixed review of Christopher Hitchens (on our side then), Letters to a Young Contrarian. If memory serves, I had a more favorable view of contrarianism, and Hitchens, before reading the book than after.
* A reference to “The worst kind of contrarian: That is, one who makes great play with contradictions in the conventional wisdom, does not put forward a coherent alternative, but nonetheless makes authoritative-sounding pronouncements on public policy.”
* A diagnosis of Richard Lindzen as someone who is “just an irresponsible contrarian as a matter of temperament. ”
To sum up my current view in a contra-contrarian style: “contrarianism” is mostly contrary to reality, the “conventional wisdom” is probably wiser than the typical unconventional alternative, and “politically incorrect” views are almost always incorrect in every way: literally, scientifically and morally.
John Quiggin 
Wasn’t “conventional wisdom” originally an expression of irony?
Pr Q says*:
The problem with Pr Q’s formulation of “contrarian” (opposed to conventional wisdom) is that what is contrarian amongst cultural elites is common sense amongst the cultural populus. His above comment is a perfect illustration of this attitude.
In recent years “political incorrect” views, or at least those skeptical of the generation old conventional wisdom about promoting and “celebrating diversity”, have received a major boost in credibility on the back new research by mainstream social & natural social scientists. To take one significant example, Robert Putnam, Harvard Academic and paid-up Left-liberal, produced a major study showing “the down-side of diversity”.
The import of this study was that “liberal” cultural diversity eroded “corporal” communitarian bonds. It sees the latter are the foundation on which libertarian and egalitarian aspects of the Enlightenment rests.
This conclusion was certainly “politically incorrect” enough for Putnam to withhold publication of his own paper. And contrarian with regard to cultural elite conventional wisdom, who either treated the report as if it was emitting toxic fumes or stonily ignored it.
But of course cultural elites can congratulate themselves that they have taken the high moral ground, even as it shifts beneath their feet.
*this comment addresses a posting related to the science culture wars, initiated by the blog owner. So I believe that I am not violating current comments policy responding to it.
@Donald Oats
“Wasn’t “conventional wisdom” originally an expression of irony?”
Indeed it was, due to JK Galbraith IIRC. I’m attempting a double irony by suggesting the CW is more likely to be wise than the contrarian alternative.
Jack, the relationship between national/ethnic diversity and social solidarity has been debated by liberals and nationalists ever since these ideas came to prominence in the 19th century, with none other than JS Mill on the side of mono-ethnicity. See here. Presenting these arguments as if they are new brave and transgressive is truly sorry stuff.
The ideas that you are attacking in your zombie economics book were all “conventional wisdom” to some extent.
Conventional wisdom when it comes to hard science is one thing, but outside the hard sciences, conventional wisdom is often wrong.
Remember Saddam’s WMD?
Pr Q says:
I cant find much in the way of heteredoxy in Pr Q’s world-view, at least as far as his traditional peers in the liberal academy are concerned. My impression is that Pr Q has always been an exponent of traditional orthodoxy in his economics. This is, BTW, a major reason why I trust his economic views more than exponents of the more crankish extremes to the Right (Austrian) and Left (Marxian).
He is a self-confessed neo-classical-Keynsian mixed-economy economist. This was the conventional wisdom in the economics academy (and most of the polity) from 1945-1975, which is roughly about the time he began his professional education. It only started to change (towards new classical-Monetarism free-market view) around 1985, by which time I presume his professional education was just about completed.
So his education sort of straddled a major sea change in the conventional wisdom in the economics academy. He has my sympathies for somehow dealing with the uncomfortable straddle.
He represents the boring orthodox view on strategy, that most inter-state and some intra-state conflicts are best settled according to international law, preferably by some legitimate global institution. More or less the old Powell Doctrine, pre-Gulf War.
He is also an exponent of orthodoxy on climate science, which is eminently sensible.
My observation is that Pr Q also adheres fairly strictly to liberal orthodoxy on cultural matters, where there are obviously sharp differences with other sectors of society.
The main reason why Pr Q sometimes appeared in a contrarian position is that large numbers of academics and commentators have often noisily fallen for the latest ideological craze, whether it be DOW 36000, pre-emptive war, climate skepticism etc. Its clear that the latter are the true contrarians, but are just more adept at appearing to have authority owing to their skill at media management.
@Jack Strocchi
Jack – we have not had traditional orthodoxy for the past 30 years. That is precisely what is wrong. The traditional orthoxy was chucked out in favour of monetarism, chicago booth pretty models that bore no relationship to the real world, rational expectations theory, and an increasingly free hand over removing important regulations (particularly in the financial sector) in the name of free markets. In fact “fad economics” and “fad religions” became the traditional orthodoxy and any who held sensible views over policy, like prof Q (but there were plenty others) got accused of being some sort of “enemy within”, branded left when they were in fact centre or centre right compared to the ever further extreme hard rightward travelling amongst those in positions of power.
It pays to know who leaned so far on the see saw Jack that they upended themselves and Im sorry to say that the conservatives in this country and the US (republicans) long ago lost the right to the meaning of that word. The conservatives have become dominated by an increasingly lunatic fringe.
I think the electorate voted clearly on that in the last election (here and there).
Im sorry you feel left out because your tribe didnt get home but they need to adjust their ideologies to better suit reality (either that or go find a God to make human sacrifices to which is pretty much what most on your side of the political divide think should be done with the gross surplus and underpaid labour they engineered).
Unemployment? Underemployment? They werent even watching it.
Now the liberals in this country are trying to attract the young by offering $15 associate memberships. What they hope to do is get them and brainwash them before they develop their own views because no young person in this country gets jack from the liberal party.
The only contrarian position is the economic, social and political policy agendas that the conservatives have run for 30 years. Contrary to everyone’s best interests except the greedy few who have profited handsomely and obscenely (and the endless bla bla markets rhetoric). Sorry to pop your bubble Jack Strocchi but your faith is like a mushroom.
The conservatives adopted laissez faire – the same idiot approach that caused the great depression and there were plenty screaming then that “the government shouldnt spend money” and the “markets will work it out.”
BULL Jack and plenty in this country dont see much that appeals in the liberal party. Menzies was better than the lot of them put together since. They have lost it completely.
No one thinks they are conservative party now.
Levitt and Dubner’s response is interesting.
http://freakonomics.blogs.nytimes.com/2009/10/18/global-warming-in-superfreakonomics-the-anatomy-of-a-smear/
@Joseph Clark
Interesting, but thoroughly unconvincing, as the comments make clear. Even more than the criticism from advocates of mainstream science, what’s really damning is the enthusiastic support Levitt and Dubner are getting from the delusional anti-science rightwingers (redundant phrasing, I know, but I try to avoid “deniers”) they are trying to disown.
Anti-contrarianism is the new group think. Just wait til Michael Duffy gets onto this. Be very afraid.
Pr Q says:
I dont know why it took Leavitt’s “global cooling” chapter for people to see that this New Emperors New Clothes were a little threadbare. This chapter suffers from the same defect that afflicts much of Leavitt’s – and indeed many contrarians – other work: he is to trying to be interesting and novel at the same time. Unfortunately Leavitt’s interesting bits are not all that true and his true bits are not all that interesting.
This is the psychology of the contrarian and nine times out of ten it is wrong. As Stove observes in “The Columbus Argument” the vast majority of new ideas and gadget are wrong or monstrous. This is the profound truth behind “c”onservatism.
Novelty, at least in the regulation of human affairs, is mostly wrong or irrelevant. Thats why the human genome spends so much time trying to constrain or delete mutations or copying errors. Most contrarians are cranks or crooks rather than cool creatives.
The academic fuss over Leavitt looks, in retrospect, so early noughties. That was the period of the Great Moderation when everybody (but PrQ and a number of others prepared to take a contrarian stance on the great economic liberal consensus) thought that all the great macro-eco problems had been licked. Goldilocks Central Banking and all that.
This prompted intellectuals to turn to micro-eco for the solution of intellectual problems (and salvation of ideological conflicts), with Leavitt’s silly-cleverness about “abortion and crime” being a paradigmatic example. But it turned out that Leavitt’s headline theory was just another example of late nineties-early noughties razzle-dazzle, to take in along with “Sex and the City” episodes.
The Crooked Timbers did not distinguish themselves by giving Leavitt the rock-star treatment, a fact which is already beginning to haunt them. Pr Q abstained from the general tongue bath being lavished on Leavitt on the abortion-crime topic. No doubt Leavitt deserves some credit for his committment to data-driven science in the “freaky”, rather than “economics”, parts of his social studies.
There were a few skeptics who saw through Leavitt’s silliness on his headline theory right from the get-go. Steve Sailer stands head and shoulders above the rest. Many critics followed and now I dont think anyone takes it all that seriously anymore. I was in New York at the time of the last phase of the Crack Wars (early nineties) and believe you me there was precious little evidence that the “young ‘uns” were properly socialised.
Contrarians are not always wrong, there would be no progress if they were. But mostly it pays to go with the Conventional Wisdom of the older experts and the Collective Wisdom of crowds. That is the strength of conservative populism.
Aren’t contrarians just driven by the need to be sexy? It’s conventional wisdom that humans are Rational Animals, and while there’s a bit of it about, the evidence for rationality as the core of virtually any human activity is weak. Large chunks of human behaviour arise from the designed-in imperative to attract the best sexual partners. And in sexual selection the fundamental requirement is to stand out from competitors. In the absence of a great physique, or the capacity to provide a reliable high level material support, a bunch of unusual sexy ideas isn’t a bad approach, provided you can make them sound plausible. It’s even better if you can deliver them with a bit of wit, though this is obviously not an absolute requirement. Rationality is ok for making stuff work, but in the arena of sexual competition it’s empirically demonstrable that the reasoned thesis runs a distant second to the juicy narrative, especially when backed up with a bit of bravado. The urge to reliable science, truth and rationality is just a weird Holocene aesthetic of the few, biologically.
Contrarians are just grabbing for flashy narratives because they don’t have bodies capable of break dancing, and they’ve got too old for doing doughnuts in the supermarket car park. It’s desperate stuff, really.
@jquiggin
I thought they responded very well to the claim that they misrepresented Caldeira. At minimum Romm overstated Caldeira’s objections to the chapter. Not sure about the rest.
Romm didn’t overstate Caldeira’s objections — he just quoted them.
@Tim Lambert
Romm did try to feed Caldeira a quote and when he didn’t get it he represented that Caledia objected to the villian comment and Levitt and Dubner ignored him because they “wanted to keep it very badly”. Romm’s wording is slippery and he avoids an outright lie but the implication is crystal clear.
Alice at #6
That heavy applause you hear from the gallery is [partly] coming from me.
http://d-squareddigest.blogspot.com/2009/10/hell-freezes-over-yes-folks-its-last.html
gerard, there is a lot of hot air being blown at the moment about the failure of economics. It is hot air in the sense that sweeping generalisations are being spread. For example, you mention ‘dynamic general equilibrium’. Which type do you have in mind? Macro-economic models? If so, then I would agree with you. The entire ‘micro-economic foundation of macroeconomics’ is a methodological mess and it gets even more messy if ‘micro-economics’ is confused with axiomatic general equilibrium theory (more than 1 model). To make this point clear. The distinction between micro- and macroeconomic is totally meaningless in axiomatic general equilibrium theory of which the Arrow-Debreu model is the first of its kind.
I cannot agree that Finance theory can be blamed for the mess. It depends on which literature – Duffie or Fama? However, I would agree if someone were to tell me that they believe that the teaching of reduced form equations from some Finance theory models by accountants in management or business schools is a problem.
I would also agree that ‘Freakonomics’ thrives on the US model of academia, which has been adopted in Australia to some extent during the past 10 to 20 years. About 20 years ago a former colleague from Syd Uni returned from the US where he had obtained a professorship at a respectable university. This academic had a PhD in pure math and a PhD in economics. He did not publish anything for about 8 years – he was thinking, he was digesting. Then he published. He said in the US he would not have survived these 8 years without publications. In the US people are given incentives (performance schemes) which they follow, whether or not it makes sense to them. I did not understand his comment as the result of a complete survey but rather as a comment on how things work in general; exceptions are possible.
well Ernestine it was a quote, not my own comment. I think the point being made, similar to what Jack Strocchi was saying above, is that until very recently there was an assumption that macroeconomic theory had been taken care of and that the Leverett’s work represented the future of the profession. In today’s climate though, he just looks like a redundant joke, and a smug, self-promoting blow-hard (which is pretty much all he ever was – half his original book was about how brilliant he was).
gerard@#16 October 19th, 2009 at 16:30
I am pleased, for once, to agree with gerard. Leavitt’s biggest problems were both moral and intellectual: his vaulting ambition was never matched by merely clever talent. It is an index of the poverty of economic theory during the noughties that this guy was thought worthy of a Bates medal. I, for one, am richly enjoying the schadenfreude at his timely fall from grace.
He always seemed to me to be in an unseely haste to “make it” by hook or by crook. Without in any serious way doing the hard yards of lengthy public service or making a grand breakthrough.
My guess he wanted a number by the age of 40, (probably 10 very large, like most of the MotU). And wanted it fast enough to afford the park-side or lake-side abode, plus enough “f*uck you” money left over to resign his academic and work on best-sellers for the rest of his life. Maybe go skiing in the off-season. JK Galbraith would be a good role model in this respect.
No way was he going to get there by extraordinary skill at economic science or financial technology. Chicago must have been daunting place for Leavittto be to be educated, being in the shadow of the towering giants of empirical economics such as Simons, Stiglitz, Posner and Becker. Not to mention equally towering giants of theoretical economics such as Knight, Coase, Lucas & Hayek. And last but not least the theoretical and empirical master of them all: Milton Friedman. Leavitt could never hold an intellectual candle to anyone on this list.
Nor could he have the grey matter to make it as a hedge-fund boffin for some outfit working out of Connecticut. They tend to hire physics profs, chess masters or ex-Soviet rocket scientists to do their bidding. He just ain’t in that IQ league.
That leaves becoming a celebrity academic with a string of best-sellers a regular gig on the NYT. Well on track so far. But for once he ventured out of his comfort zone into the deeper waters of natural science. And, guess what, he immediately started to flounder.
Now wait for him to beat an increasingly complex and sophisticated back-track from his original outlandish position, following the path well-trodden by his equally ridiculous, but not equally well ridiculed, essay into criminology.
I am just going to sit back and enjoy the show.
[…] Link […]
Jack Strocchi, which economists were responsible for the lastest global financial credit crisis? And please don’t stretch the truth.
@Jack Strocchi
You are wrong on JK being the role model Jack – JK had something to offer – you do JK a great disservice Jack (But would I expect otherwise from you, the original contrarian?). I couldnt even finish the trite and empty first freakonomics before I caste it aside. The Barbara Cartland of economics – now there is a better role model for Levitt.
Hang on a minute folks. These guys are just applying “economics” as it is taught. If you base your discipline on looking for relationships between emergent properties of a system then this is what happens. Emergent properties are interesting and are pointers to what is going on but they are not the appropriate way to model the system.
The physical sciences got over this approach 100 years ago. They model the underlying system and check the model from the emergent properties. Economic modelling models the emergent properties and tries to deduce the underlying mechanisms. While this is interesting and can lead to insights it is fatally flawed and enables contrarians to find evidence for whatever underlying mechanism they think up this week.
[…] John Quiggin […]
Kevin — That’s all very reasonable but what are you suggesting exactly?
MoSH,
How about starting with Krugman for suggesting the overall strategy?
@Andrew Reynolds
What are you talking about Andrew?
@gerard
Gerard – Ill second that (????Andy..??) What strategy?
gerard,
This (in)famous column, where he endorses a suggestion to engineer a housing bubble.
come on Andrew! you can do better than that.
As Krugman has explained: “It wasn’t a piece of policy advocacy, it was just economic analysis. What I said was that the only way the Fed could get traction would be if it could inflate a housing bubble. And that’s just what happened.”
http://krugman.blogs.nytimes.com/2009/06/17/and-i-was-on-the-grassy-knoll-too/
Krugman was explaining what Greenspan’s aims were. He was critical of those aims, has been criticizing Bush’s tax-cutting mega-deficit policy from the outset, and foresaw, at least better than Greenspan did, what the results would look like. Here is his critique from 2005 of Greenspan’s bubble:
http://www.nytimes.com/2005/08/29/opinion/29krugman.html
And beyond that, it wasn’t the housing bubble so much as the hundreds of billions of unregulated derivatives built on top of securitized mortgages that cause this crisis – are you going to blame him for the Gramm-Leach-Bliley Act as well? Probably.
You’re on to a really deliberate, dishonest and desperate distortion, I think. Krugman’s not infallible, but trying to blame him for the GFC is about as honest as blaming Al Gore for the invasion of Iraq.
Just in case anyone wants to know what we’re talking about here – detective Andrew has actually found traced the source of the global financial crisis to the following paragraphs written in a 2002 NYT article.
I present, the smoking gun:
Wow, caught red handed!
gerard,
I expect many economists would like to be able to explain their policy advocacy in that way. If you read the piece he was unequivocal in his support of that line. I do not see how it can be read in any other way.
Krugman, along with many other economists at the time, were supporting the common wisdom.
As for it not being the drop in housing prices – that is a ridiculous statement. What, in your opinion, was the reason why those instruments went bad? Unseasonable weather? Animal spirits?
In any case, I was not suggesting that Krugman can, or should be, blamed for all of the current crisis. He is not that influential. I was clearly saying we could start with him for suggesting it (although I was wrong, he was clearly just supporting another’s suggestion).
Andrew Reynolds, you will find that there is a difference between paraphrasing and citing someone rather than social engineering, and Krugman was actually quoting Paul McCulley of Pimco when he said ‘Alan Greenspan needs to create a housing bubble to replace the Nasdaq bubble’. And in 2006 Krugman again reiterated that ‘As Paul McCulley of PIMCO remarked when the tech boom crashed, Greenspan needed to create a housing bubble to replace the technology bubble. So within limits he may have done the right thing. But by late 2004 he should have seen the danger signs and warned against what was happening; such a warning could have taken the place of rising interest rates. He didn’t, and he left a terrible mess for Ben Bernanke’. Try again Andrew.
No need to try again, MoSH. I suggested the search could start with Prof. Krugman – a suggestion that seems to have offended gerard. In no way did I suggest it should end with him, as gerard (in a poor attempt to argue by extension) seems to think I do.
Just out of interest, where would you start your search? I presume St. Paul is out of bounds.
Andrew Reynolds, the monetarists.
Which monetarists were in any position to run anything? There are no central banks (AFAIK) still trying to run things on a quantity theory of money any more. If they were they would have ben hitting the brakes a long time ago as M3 started to skyrocket.
Andrew Reynolds, read what you have written and think. No more freebies.
LOL MoSH.
Thinking about it, the scary thing there is that you may have been serious. Seriously, though, which “monetarists” do you blame?
Andrew Reynolds, I will give you a hint, read what Krugman said @31 about Greenspan and then use what is between your ears to come up with the answer.
“starting” with Krugman, of all people, pretending he is responsible for “suggesting the overall strategy” that led to the GFC, is pure revisionist history and ideological hackery.
Why not start with Greenspan, who was at least present at the scene of the crime, and has admitted responsibility? instead you want to blame one of the only people who had (partially) diagnosed what was wrong, by pretending that his calling out of Greenspan’s “strategy” (and then immediately going on to say why it wouldn’t work) somehow means that he was responsible for it! Totally upside-down and back-to-front.
A fall in housing prices, by itself, does not have the power to crash a multi-trillion dollar global financial system. It’s only once you create a massive bubble of derivatives on top of these housing prices that their fall can be amplified by orders of magnitude into such a catastrophe.
And it was only due to the expansion of a derivatives industry that there was ever a market for subprime mortgages in the first place. Once banks knew that they could securitize their mortgages and sell them on they didn’t care how junk they were.
AR, I’m disappointed. This is one of those silly talking points that have made the political right a laughing stock. I thought of doing a list, but the examples on climate change alone account for several large websites. And there have been dozens on the GFC, most recently blaming Obama for the Bush-Paulson bailout.
I thought you would have been above this kind of thing (as its been amply refuted in comments, I won’t bother restating).
the subject of this thread is conventional wisdom… does anyone remember when Greenspan was The Smartest Person On Earth?
#23 Joseph
I am not suggesting – I am imploring economists to look at other ways of modelling. The current methods do not handle dynamic systems very well and we have much better tools. So I am suggesting people look at the work on “agent” systems and computational complexity and use similar techniques as those used to model the physical world. For an economic system we replicate the system in a computer so that inside the machine you have representations of economic agents interacting with each other.
This is easy to do because we can measure the actual system without destroying it and use it to check our model. It is easy to do because we KNOW the rules of economic activity.
While it was computationally difficult and technically difficult to do this even five years ago the technology – both software and hardware – has advanced to make it practical today. After all how many economic agents would we have in Australia today? 40 million. How many economic transactions would we have per day 400 million? How many “types” of economic agents would we have maybe 10. How many rules would we need to devise to describe most economic activity maybe 1,000. In the world of computational complexity these are small numbers.
The nice thing about building these systems is that we can start with a system to model say 100 people and all their economic activities, measure it to see it works and then scale it up – and if done well it will scale.
How much would it cost? About 10 people working for one year to get the first results for the whole Australian Economy.
John, would Richard Siegmund Lindzen fit the description of a contrarian.
@gerard
Where is Greenspan now? Writing all about the crash he helped cause!. Apart from the book sitting on the new release shelf, the media appear to be hiding him.
Andy never gives up his robot idealogies (most stubborn libertarian Ive ever met).!
@Andrew Reynolds
Andy – the monetarists of Friedman’s ilk and their (?mutant) off spring have been micro managers of economy intervention via central banks for decades….decades!! Then they have the nerve to critcise fiscal intervention. Yet wars seem to always be OK in their opinion but you cant spend a dollar on health or education. As FDR noted, the US budget deficits between 1920 and 1930 was due solely to expenses for past, present and future wars. What about the deficits that went mad after Iraq and the Vietnam expenditure when the economy was at full employment???
So conservatives dont like budget deficits, but they happily cause them. The US budget deficit ballooned after Reagan and Bush. They dont like government intervention in markets, but its OK for the central bank to intervene every few months. They dont like inflation or high interest rates and say the market is the best manager, except apparently when it comes to the price of money.
As for unemployment, they couldnt give a damn.
Their idealogy is just a grab bag of blatantly hypocritical lies.
Between 1920 and 1939 – I meant.
@Kevin Cox
There’s a lot of work on agent-based modelling in economics. Here’s a link to a book edited by my colleague John Foster
http://books.google.com.au/books?id=FEtb-ZwRl_IC&pg=PA24&lpg=PA24&dq=foster+agent-based&source=bl&ots=PwZAG7AF_r&sig=F-5Y5sk_7e-QVf4a_pHSayCzRe0&hl=en&ei=9VXeStqWD5TitgO7kKjqDw&sa=X&oi=book_result&ct=result&resnum=2&ved=0CBYQ6AEwAQ#v=onepage&q=foster%20agent-based&f=false
Michael of Summer Hill#20 October 20th, 2009 at 05:38
Strictly speaking no “economists were responsible for the latest global financial credit crisis”. Economists dont do things, they say things and then not always in forms that ordinary mortals can understand. Really, economists kid themselves if they think their scribblings make a great deal of difference to major societal outcomes.
The responsibility for the crisis lies with those householders, executives and officials who took on financial contracts which they were unwilling or unable to honour. The buck stops with various home-owners, mortgage touts, non-bank financial institutions, investment banks and Central Banks who participated in this charade in the hope that they would have sold out by the time the money-go-round stopped.
None of these people needed an economic theory to tell them what to do. All they needed was regulatory authorities to not forbid them from doing what they wanted to do. And a permissive banking system to validate their claims.
But, to specifically address MoSH’s point, if I had to point the finger at any theoretical economists who should take the fall for this crisis then it would be Merton-Scholes (and Black’s) capital asset pricing model. This model more or less created the intellectual framework for derivatives trading, an “industry” which generates nothing but transaction churn, obscene profits and mountains of debt. Taleb, writing for the Financial Times, points the finger squarely at Merton-Scholes:
The practical economist who should take most of the blame is, of course, Alan Greenspan, who who headed up the Federal Reserve Board whilst most of the hanky-panky went on. His legacy is the almost complete destruction of the public credibility of the industry he so long defended and promoted.
The Fed more or less relinquished its regulatory and prudential management roles during the noughties (after a brief shining moment of “irrational exuberance” skepticism in 1996). And acted to validate the increasingly outrageous claims made by financial institutions on the governments money supply, irrespective of societal risk (“Greenspan Put”).
If any policy economist should take the blame then it is probably Larry Summers who is certainly sits at the top of the pecking order of economists in government. In 1999, whilst in his role as Treasury Secretary, he signed the repeal of the Glass-Seagall Act which unleashed investment bank hyenas on an unsuspecting commercial banking population.
And lets not forget Robert Rubin who, although not an economist, appears to have been one step ahead of this whole fiasco from the get-go. His career reads like a modern day Robert McNamara. He was head honcho to Goldman Sachs for about 900 years during the seventies and eighties. Then in the early nineties he moved to the Clinton White House where he managed to kill Born’s proposal to regulate derivatives. In 1999 he finally got to be the top of the tree, head of Citigroup. Wall Street wiped more than $200 billion off Citigroup’s market capitalisation whilst on his watch. It is now in the hands of the federal receivers.
Moving away from economics and towards politics, the real culprit for the blowing up an unsustainable bubble in the US home mortgage market is GW Bush and his political officers. They took the leash off Wall Street in a deliberate attempt to engineer a boom in Hispanic home-ownership rates (“the ownership society”).
Thus, from about 2002 onwards, GW Bush gave official encouragement to financial industry to lend uncreditworthy people money hand over foot. The GOP political strategy was to turn more Hispanics into residential property “investor capitalists”, thereby shifting their votes into the Republican column.
The financial industry traditionally perceived that most people who lived in poor neighbourhoods (the lower half of minorities and so-called white “trailer trash”) were poor credit risks (“red-lining”). To turn this around the govt had to give a green light to mortgage providers and securitizers to trade in risky mortgages, specifically lending to those without Incomes, Assets or Jobs (NINJA loans). The govt justified this by assuring the financial industry that it would guarantee all loans with the full faith and credit of the US Treasury.
It turned out that these people really were poor credit risks, mainly due to their low stocks of human capital which generated low income flows to service debt. This is what queered the securitization play and sank the big investment banks.
However it is extremely unlikely that any established economist wants to investigate the ideological source of this colossal failure. Too many people on both Left and Right signed onto this policy and so its best if that sleeping dog is left to lie.