I Got It Wrong…
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“…after forty years of studying markets, I got it wrong…”
As time goes on, the one thing that appears to be both a societal and financial markets constant, is our inability to learn from our past mistakes.
Late, a couple of nights ago (10/23/17), while channel surfing, I happened on an economics program intended to explain the financial crisis of 2008.
My apologies for referring to a programming without its name or network. Instead, I had to consider the person who was the primary focal point of the program: Hyman Minsky (see link to The Economist here).
Before reading the information at the link, please understand I viewed this purely from a non-partisan political perspective. I did not dismiss any views or opinions from any speakers or presenters based on their names; or perceptions by others of their politics.
The program itself included speeches from former Fed Chairman Greenspan, current economic gurus (Krugman – he has a Nobel Prize so he must be smart, right?), London School of Economics, and interviews with graduate economics students. The linked article above also cites Greenspan’s successors Bernanke and Yellen. That’s half a century of Fed policy influence.
One comment by Greenspan before a Congressional Committee in addressing the economic collapse is where he says (in effect)…
“…after forty years of studying markets, I got it wrong.”
He said it was basically because for forty years his economic foundational belief in the ability of financial markets to self-correct appeared to be true… until it ceased to be so. Anyway, y’all don’t need economic preaching or theoretical analyses from me. I’m not qualified to offer them.
In addition to lacking a college degree, I am also burdened by common sense.
I’ll leave real analysis to all the experts who got us into the 2008 crisis. The same ones that appear to be determined to repeat it as soon as is humanly possible today.
You know the ones I mean. Those that rely on infallible models, leveraging big data, Ouija boards and blue smoke and chicken bones forecasting.
Mr. Minsky’s hypothesis was that contrary to the neoclassical economists’ belief (not my wording, honest!), markets are not the healthy, self-correcting rational markets we treat them as. Instead, markets are fraught with risks that we simply choose to ignore. Pay attention FNMA!, CoreLogic, alamode and all the other self-serving hucksters.[i]
Because they render financial modeling ‘inelegant’, financial modeling creators simply ignore them! Instead of factoring price-money-risk factors, accurately or even realistically in their models, the economist elects instead to simply eliminate all such risks or hints of irrationality.
Economists are not compensated for showing all the honest variables (even if they knew how to do so). They get paid for showing ‘foolproof’ models designed to support whatever position their employers want. I use the term fool proof though I suspect it should be fool-proved.
When the model is proven to be inaccurate, instead of admitting its worthless, a NEW model is created to predict and ‘adjust’ for the first models’ unreliability. (Apparently no third model is created to account for that versions inaccuracy). But, that’s ok, because it is all based on the science of mathematics at a level far beyond the capability or mere mortals to understand.
Throw in a few warm and fuzzy feel good adjectives and adverbs and voila! Magical ePixieDust capable of replacing all forms of common sense, while giving the promoters and politicians ‘cover’ for making irresponsible decisions.
Minsky wasn’t big on modelling. Oh, he used it, but he was skeptical of it. Nor was he anti-capitalist. He merely identified that the supposition applied to economics today is… wrong. It is an irrational system; or at least a system with irrational related performance risk that should not be factored out of models.
In fairness, maybe the economic model of 40 years ago was rational. Before we ‘leveraged’ so much big data and turned Wall Street Buy-Sell decisions over to state of the art ‘sophisticated’ programming.
One caution he had that was not picked up on during his lifetime, but which gained widespread acceptance post 2008, was that risk is highest when markets appear to be most stable. That is because the lessons of the past are forgotten. Banks posit that if the market is stable, they should be taking more risks. Regulators contend that it is safe to eliminate checks and balances.
Glass Steagall is not needed in their view. They think its ok to commingle high risk investment lending policies with traditionally lower risk longer term property owner occupied investments. The thinking today is commercial banking and retail consumer banking shouldn’t be separate.
The Grad Students interviewed had an interesting observation. Each believed that they should be able to explain the economic collapse of 2008 if asked, given their years in college. But, not one could do so based on their collegiate studies…because it is simply not taught.
It’s still too inelegant.
Now I understand how CU came to be adopted despite its obvious short comings; how all the AVMs, and even CoreLogic’s “defective patent riddled appraisal program” that is the ‘core’ of their new e-product promotion came about.
Appraisers, be very wary of reliance on systems you don’t fully understand, just because self-proclaimed or sell out ‘experts’ endorse them.
[i] Pre-2008 Freddie Mac is reported to have claimed their policies protected them against a big market downturn. When asked “how much of downturn?” They replied “13%” …THEIR models simply could not /would not consider any scenario where a greater than 13% loss of RE value could occur.