Prediction and retrodiction
From the "Well, quite" files. In actual fact though, Barry is giving away far too much to the economists (this is a mistake of excessive charity that Dean Baker also sometimes makes).
The point I would make is that people can sound spuriously plausible when talking about the crisis in terms of "foresight" and "prediction". It seems (although for the reasons specified, isn't) reasonable to say that "predicting the future is difficult", and that therefore not too much opprobrium should be attached to economists, forecasters and policymakers for not predicting it.
However, the failures of the real estate crisis weren't just failures to foresee the future - they also involved failures to foresee the recent past. The US housing market started to fall in late 2005. By early 2006, a couple of subprime lenders had already failed and Ameriquest was well on the way. Plenty, plenty of economists were still saying that nothing was wrong well into 2007.
I've noted this a couple of times in the past - that while predicting the future, black swans, blah blah blah, is difficult, it is actually of surprisingly high value in investment terms (and this accounts for the success and survival of the global macro hedge fund industry in 2008, per this excellent book) to simply be aware that something big has recently happened in the economy and that this warrants action in response. After all, you can forgive a yacht captain for not predicting a coming storm, but if the guy didn't change his sails after the wind had turned, he thoroughly deserves to be spitting out salt water.
North Dakota has had a metereological black swan event every other year for the last ten or twenty years -- this year's flood was #2 all-time. Some are starting to talk about building permanent levees, but the sandbag interest control policy.
ReplyDeleteThe local consensus is that the gays are at fault.
I still like my theory that the problem was that every major player including the economists was overoptimistic because of the use of cocaine or amphetamine. A psychology PhD I knew estimates that half of his colleagues use legal amphetamines to increase their productivity. Dumb ideas look smart if you're properly medicated, and with luck, the referees and editors will be comparably hopped up.
I don't know about economists but plenty of people involved in the housing market sector of finance knew that the banks were over exposed to housing risk - but there was systemic resistance to facing up to those voices because of vested interests - why plan for a crash tomorrow when you can take profits (and bonuses) today?
ReplyDeleteIn what sense is Dean Baker too charitable towards economists, given that he routinely points out that many of them got the housing bubble wrong?
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