Thursday, May 30, 2013

What does it mean to have "predicted the crisis"?




Since 2008, quite a lot of people have boldly claimed that they "predicted the crisis". Usually, the claimants use this "fact" to argue for the superiority of their economic school of thought, modeling approach, investing approach, or personal intuition. But what does it mean to have "predicted the crisis"?

First of all, there are different things that get labeled "the crisis". These include:

1. The big drop in U.S. housing prices that started in 2006-7.

2. The systemic collapse of the U.S. financial industry that began in 2008.

3. The deep recession and the long stagnation that began in late 2008.

Predicting one of these is not the same as predicting the others. It is possible, for example, to have missed the housing bubble and the finance industry collapse, but to have successfully predicted, after seeing these events happen, that a deep recession and long stagnation would be the result; this is what Marco Del Negro et al. claim to have done, and a number of pundits and commentators made informal recession predictions after housing peaked in 2006. Alternatively, it is possible to have predicted the bursting of the housing bubble without foreseeing the systemic damage that this would cause to the financial system; some economists, such as Dean Baker and Nouriel Roubini (and of course, Robert Shiller), seem to have called the bubble far in advance, as well as some writers like Bill McBride. It is also possible to have predicted the collapse of the big banks and their mortgage-backed bonds - and made money off of this - while staying agnostic about the macroeconomic consequences; this seems to have made a lot of money for investors like Steve Eisman and John Paulson. Of course, in theory it might have been possible to predict all three events.

Then there's the question of what it means to "predict" something. Here are some alternative definitions:

1. You could predict the timing of an event, e.g. when the housing bubble would burst.

2. You could predict the size or severity of an event, e.g. how much house prices would decline or how much the economy would contract in 2009.

3. You could predict the duration of an event, e.g. how long our economy would stagnate after the recession, or how long it would be before housing prices reached their pre-crash peak.

4. You could describe the particular characteristics of an event, e.g. what would cause banks to fail, or whether they would be bailed out, or whether inflation would remain subdued after the recession.

Next, there is the question of with what degree of confidence you make a prediction. Saying "this event is a conceivable possibility" is different than saying "the risk of this event is high," which is different from saying "the risk of this event has increased," which is different from saying "this event will happen."

Also, there is the question of how far in advance a prediction was made. That could be important.

Finally, there is the question of whether the prediction was made by a model or by a human. If it's a model, then there's the hope that humanity has a tool with which to predict future crisis events.

Anyway, how should we evaluate these claims? There are so many different combination of "predictions" and "crises" here that it's very difficult to lay out an explicit taxonomy of who got it "more right," and who got it "less right." As a more humble goal, we can examine a specific individual or model, and identify which events he/she/it predicted, with what degree of confidence, and when.

As an example, let's take Steve Keen.



Steve Keen, formerly a professor at the University of Western Sydney, is known for claiming more loudly and confidently than just about anyone else on the planet that he "predicted the global financial crisis". According to Keen, this should be a reason to believe his extensive critiques of neoclassical (i.e. mainstream) economics, and his suggested alternative paradigm, known as "Post-Keynesianism".

So in what way did Keen "predict the crisis"?

Searching the internet, I can find no record of an ex-ante prediction by Keen of a large-scale U.S. housing bubble. He did, however, predict an Australian housing bubble, in 2007 after the U.S. housing bubble had already begun to pop. That prediction has so far yet to materialize; Australian housing prices have not collapsed yet. As a result of this incorrect prediction, Keen lost a high-profile bet.

Did Keen predict the collapse of the U.S. finance industry (the Lehman shock and subsequent bailouts)? Not that I can find. Nor did he warn of the risk of such an industry collapse, as far as I can find.

How about the recession and stagnation? Here, Keen makes his strongest claim to have made an ex ante prediction. His argument is laid out in this paper. (Warning: as others have noted, Keen's papers are nearly unreadable.)

Much of the paper covers the history of macroeconomics as Keen sees it. Later, on page 10, we get to the part where he explains how he "predicted the crisis". Keen presents a macroeconomic model; actually, a class of macroeconomic models. Each of the models is a system of deterministic Ordinary Differential Equations describing the behavior of macroeconomic aggregates. He claims that this sort of model would allow one to realize that a crisis of the type we observed could potentially occur.

Notice, therefore, that this is not a prediction of timing. It is a prediction of the particular characteristics of a recession. And as to whether or not it is intended to be a prediction of the severity or duration of the recession...that's not clear. Keen isn't saying when a recession would happen, he's saying that his model shows what it would look like.

And what would it look like? Well, one of the models Keen presents (a "Goodwin" model, apparently from the 1960s) produces cycles of employment and output that look like this:


As you can see, these cycles are periodic, and of constant amplitude. But we know that this is not what business cycles really look like. (More complicated versions of this type of model might veer from periodicity into extreme nonlinearity and chaos, but chaotic models by definition have little to no predictive power.)

The next model he references is one of his own, produced in 1995. That model contains the possibility of something like a complete economic collapse:
My own simulations in Keen (1995) illustrated this possibility of a debt-induced collapse if the rate of interest was too high. For a low rate, a convergence to equilibrium occurred (Figure 4): 


At a higher rate, the system approached the infinite debt to output ratio equilibrium...

However, we have not observed an approach toward the infinite-debt-to-output ratio and near-total unemployment equilibrium that . Also, interest rates were still historically low when the financial crisis began. So this 1995 Keen model does not appear to describe the crisis we really had. Keen also adds:
[T]he 1995 model lacked price dynamics.
It's also noteworthy that Keen's 1995 model, like the "Goodwin model", contains plenty of periodicity, which as I mentioned is not observed in real life.

Keen then goes on to present a model that does include price dynamics. The figures he presents from that model is labeled "Schandl (2011)", indicating that it was made after the crisis and cannot therefore cannot be regarded as a prediction. Note that in that model, as presented by Keen, the economic collapse takes 40+ years to happen, and involves unemployment going to 100%:


In any case, it is clearly apparent that nowhere in this paper - or in any other paper that I can find - does Keen present a model whose output bears even a passing resemblance to the crisis we experienced in the late 2000s. (As an aside, note that many models, including a simple neoclassical Ramsey model, have equilibria in which the economy collapses completely. Building such a model is very very easy. But complete economic collapses - total and permanent cessations of economic activity - haven't yet been seen in the real world...ever.)

Therefore, we can conclude that there is no Steve Keen model that predicted the recession and long stagnation that we've experienced. And in fact, there does not seem to be any "Post-Keynesian model" whose features closely resemble the financial crises and recessions that we see in the real world.

So did Steve Keen himself warn in the early or mid 2000s of the impending possibility of an economic collapse? He claims that he did warn of an "impending global recession" in 2005 (see also here). I cannot find any actual writings by Keen from 2005, but I will take him at his word, since if he had made this up, I'm sure that his fellow Aussies would quickly tar and feather him for it. (If you have links to the 2005 prediction, please post them in the comments section.)

So Steve Keen presumably did warn in 2005 that a global recession was coming. This means that, counting his prediction of an imminent Australian crash, he has a 50% success rate. Remember that, according to Bayes' Theorem, the predictions of someone with an unconditional 50% success rate (i.e., coin flips) convey no information.

But is that his true success rate? After all, how many earlier predictions of imminent global recession has Keen made, that did not materialize? According to this website, Keen was predicting an imminent global recession as early as 1995. It was 12 or 13 years before his prediction came true; this long time lag makes the prediction a bit less impressive, since someone who in 1933 predicted a global recession - which did come, 80 years later - would nevertheless now be seen as having been "wrong". Now, 12 years is better than 80 years, of course.

Anyway, so we see that Steve Keen's prediction of the global financial crisis was considerably less impressive than his bold claims would have us believe. He does not have a model that can predict bubbles, financial collapses, or recessions. His personal warnings of doom often don't seem to materialize for over a decade...if they materialize at all. If you trust Steve Keen as an economist or as a personal prognosticator based on his 2005 warnings of imminent global recession, you may be falling victim to the common behavioral phenomenon of overconfidence. (Not that I expect this fact to give pause to many of his...um...ardent followers. Remember that pundits get more fans by displaying self-confidence than by being right!)

Of course, all this is not to say that Keen should receive zero plaudits, respect, or commendation for his 2005 warning - or, for that matter, for his 1995 and 2007 warnings. There are plenty of people out there who said that finance has nothing to do with recessions. There are plenty of people out there - including some very prominent mainstream economists - who said that big recessions couldn't happen anymore. However right Keen did or didn't get it - and even if he made his predictions just by reading old Minsky books and nodding his head in vague agreement - those mainstream people got things far less right.

Anyway, a similar exercise can be applied to any other economist, model, or pundit whom you think may have "predicted the crisis". You will obtain varying results, though my bet is that few will be as spectacular as you might hope.

In conclusion: Predictions are hard, especially about the future. Sometimes people get things right because they understand how the world works, and sometimes they get things right by luck. The idea of a brilliant Cassandra-like sage, shouting in the wilderness while everyone ignores his or her trenchant warnings, is occasionally true, but not as much as we would like to think.


(Update: Naturally, a bunch of people have been asking me: "So, Noah, blah blah blah, but who do you think predicted the crisis the best?" Well, I don't know. Back in 2002 and 2003 I was reading Dean Baker talking about a housing bubble and bank failures. And I remember believing that, and as a result not being too surprised when the crisis came. I'm fairly sure Baker also predicted that the macroeconomic knock-on effects would be severe. Nor do I recall him predicting a bunch of other crises that never happened. So from my very limited set of knowledge, I'd guess that Baker did very well as a prognosticator. But to really know, I'd have to go back and check systematically. Note also that Dean is a quite humble guy and doesn't go around thumping his chest about having "called the crisis"...)

196 comments:

  1. Anonymous7:38 PM

    tl; dr? Keen is a crank.

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  2. I don't think Steve Keen argues that he had a perfect model of the economy that predicted the crisis, the outcomes and how long it would last.

    I think he argues he knew a depression-like crisis was possible because:

    a) He considered the Efficient Finance Hypothesis to be complete nonsense.

    b) He considered rising private debt to be a problem, unlike "neoclassical" models.

    c) He considered the non-neutral nature of money.

    d) Once the crisis hit, he was confident the money multiplier was a textbook myth.

    All these four seem to be correct, so in the worst case scenario it seems to me like he's arguing that "neoclassical economists" could have never predicted the crisis precisely because they assumed a bunch of nonsense, so all of their models seem, like Minsky once argued, to suggest that a depression was not a possible state of affairs, despite the fact it had already happened.

    Pretty much everything from a) to d) are now considered true, or at least partially true.

    Or that's the way it seems to me at least.

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    1. I think he argues he knew a depression-like crisis was possible because:

      a) He considered the Efficient Finance Hypothesis to be complete nonsense.

      b) He considered rising private debt to be a problem, unlike "neoclassical" models.

      c) He considered the non-neutral nature of money.

      d) Once the crisis hit, he was confident the money multiplier was a textbook myth.


      Ahh, but how did he get from those beliefs (a-d) to the conclusion that a depression-like crisis was possible?

      He certainly didn't do it by making a model, because the "crises" in his model don't look anything like the Depression.

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    2. My best guess is he saw how private debt evolved during the Great Depression, and how it was correlated with the slump, so this combined with rising private debt led him to think we were heading to a similar destination.

      Of course that's not a model! But we can say it was kind of an informed guess. And he does seem to have a few intuitions that may point into the right direction, like debt-financed speculation being a major issue.

      One thing that also seems intriguing (although I have not checked it any detail) is his assertion that effective demand = income + the change in debt.

      Again, I don't think he has any advanced robust model, and the first thing I noticed when I was reading his book is his cyclical model doesn't look at all like the real economy.

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    3. My best guess is he saw how private debt evolved during the Great Depression, and how it was correlated with the slump, so this combined with rising private debt led him to think we were heading to a similar destination.

      That would seem to explain why he tried the same trick with respect to Australia and got it wrong...

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    4. Yeah, I agree. That also seems to be pretty much the core of why he so loudly complains about: "We noticed private debt was a problem before you".

      And that has some merit, but he certainly has not yet build a model that can even compete in predictive power with the Ptolemaic models of DSGE.

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    5. Anonymous5:27 AM

      About the ((income+ change in debt) = effective demand). That's of course entirely consisent with modern national accounting. The complete formula is:

      (income plus net change in debt) = (effective demand plus net change in financial assets)

      See p. 349 of the time series of the Dutch national accounts (in english)http://www.cbs.nl/nl-NL/menu/themas/macro-economie/publicaties/publicaties/archief/2008/2008-p41-pub.htm

      This squares with Keynes who stated that spending on stuff with a zero elasticity of production (i.e. financial assets) does not create work or income. Which is a Dutch probolem, at the moment. Mortage lending amounted to about 30 billions a year, around 2005, about as much as pension savings. But today, net mortgage lending is zero while pension savings are still tens of billions of Euro. But they are not financed anymore (on a net basis) by an increase in debts but by financial saving in the sens the final demand is restricted to finance (obligatory) pension savings. Which causes a decline of production, of course. The formula is also consistent with Schumpeter, who stated that investments are financed by money creating credit. One thing which complicates things is however that paying a debt to your dentist does not diminish the amount of M-3 money (i.e. the amount of means of exchange going around). But paying back debts to an MFI does (as it's the MFI which created the money by lending, check the extremely explicit ECB manuals on this). This is of course consistent with Friedman and Fisher, who talked about the necessity of preventing a disasterous decline in the amount of (bank-created) M-3 money (Friedman: M-2). Aside: Koo recently showed that the reversal of the decline of the amount of money in the thirties in the USA was caused by increased borrowing of the government from MFI's - and not by low interest rates which in a Friedmanian way stimulated the private sector to borrow more. Part of this bank-created money is however not part of M-3 but of waht the Bundesbank calls 'financial capital', longer term deposits. And though the Eurozone's present problem is a decline in the amount of (M-3 money plus financial capital) some years ago increases in (mortgage)-lending of course led to things like the 40% money increases in Ireland. Which brings us back to Keen: he states that the amount of lending has to keep increasing, to prevent a slump from happening. And indeed: Irish house prices already started to decline before the amount of mortgage debt started to decline (YoY) - the price decrease already started when the rate of money increase started to decrease sharply.

      Merijn Knibbe

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    6. William Allen7:11 AM

      Yes, Merijn, you are right...and don't forget that R.G. Hawtrey (of the infamous "Treasury View" in UK of the 1930s) explained this relationship credit-growth relationship quite well in his book "Money and Currency", first published in 1919! Keynes credited Hawtrey as being his conceptual "grandfather".

      Noah, this thread is going to be fun to watch because anyone who followed the Keen v Krugman slugfest a while back regarding models with/without money knows that Keen will come out swinging. You must be trying to up your Google hits? Seriously though, interesting post, although I think Keen can take credit for being closer to correct than most others. IMO, Wynne Godley is the economist with the best insight (Keen acknowledges Godley), and we should all be giving him more attention.

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  3. I too am not keen on Keen. I bet you can find the new Nostradamus (this bet has a major moral hazard problem as I don't bet that I will find the new Nostradamus and, although I'm sure you can, you will not be highly motivated to do so and lose the bet)..

    I guess the best candidate is Nouriel Roubini. He was big on shadow banking too. Also Dean Baker and R. Rajan (how can I google him without being able to spell his name). Actually while on R's how about Reinhart and Rogoff ?

    I "R" googling.

    Rajan http://www.kansascityfed.org/publicat/sympos/2005/pdf/rajan2005.pdf
    "one could well have a full blown financial crisis" I say he's very close to R Nostradamus.

    I don't have the attention span to do this.

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    1. Pass me the bong, you've had enough!

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  4. "However right Keen did or didn't get it, those people got things far less right."

    That sums it up for me. I admire Keen for trying new modelling approaches where recessions and depressions can occur. But as I said in your other post on DSGE models, when you start to look at the alternative they aren't all that great either by the criteria you used. They just have different features that might be of use.

    You also need to think about what Keen is doing from a more political perspective. The louder he talks, the more people will listen and want to test different tools for analysing the macro economy. That is a good thing, regardless of how well his current approach works by your metrics (an approach that has seen far less energy devoted to it that DSGE, so it has a long way to go in terms of tweaks etc).

    Maybe these alternative will be far less wrong than DSGE.

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    1. Anonymous6:42 PM

      But the policy makers already were/are exploring alternative models, with or without Keen. Look at what Andy Haldane has been saying. Or his Aussie counterpart, I think she has spoken (maybe only in a Q&A) about DSGE being inappropriate for financial stability analysis. And the BIS has never used DSGE type thinking even before the crisis.

      Do you suppose Keen actually tried to engage those folks and influence them?

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    2. Anonymous10:33 AM

      Andy Haldane is a good guy, but he's had bugger all impact on UK political or even UK Bank of England policy...

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  5. Anonymous9:25 PM

    The only person to predict the economic collapse was Michael Burry of Scion Capital, this was explained in th boom The Big Short by Michael Lewis.

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  6. How can you guys have put in this many comments without even a mention of Peter Schiff? Some of those clips are eery, he called it so well. Are you guys ignoring him on purpose, or haven't the Austrians done a good job getting the word out? Do I need to burn a bra or something?

    (To show I'm fair, I have no problem if someone says Roubini nailed it too.)

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    1. Do I need to burn a bra or something?

      HAHAHAHA

      OK, deal: if you post a video of you burning a bra, I will write a post about Peter Schiff...

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    2. John S11:25 PM

      "if you post a video of you burning a bra"

      I haven't checked Bob's site yet, but I think this is snap getting done. Have you seen his karaoke vids?

      It might be interesting to look at the opposite predictions, ie the economists who underestimated the potential fallout from subprime (like Art Laffer getting posterized by Schiff). According to Jeff Hummel's chapter in Beckworth's "Boom and Bust Banking," "[as of fall 2007] many if not most economists had concluded that potential subprime losses would... have no more macroeconomic downside than the losses from the S&L crisis." (Kindle loc. 3047)

      Can anyone confirm? Of course there are many statements and videos from Bernanke downplaying the future impact of housing, but that can be understood in the context of calming the markets.

      "I will write a post about Peter Schiff"

      I can confidently predict this post: "Where's the hyperinflation, goldbugs?"

      Here's one Austrian answer: http://www.economicthought.net/blog/?p=4494

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    3. Yeah, I remember seeing Schiff in early 2007 on Bloomberg TV and it's true he got a lot of it right.

      The problem is that he still got it wrong. His investment advice was to move out of anything USD denominated - he may have said 'especially Treasuries but I don't recall for sure - and, notably, invest in EM/Gold.

      How that turned out?

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    4. Peter Schiff: A broken clock right twice a day.

      Still predicting higher inflation ("Real inflation is running much higher!"). Still predicting Gold going up really, high, a dollar collapse, a bond bubble, and how we need to destroy our economy with crushing austerity!

      Peter Schiff 2002: DoW will go to 2000, NASDAQ 500: http://www.youtube.com/watch?v=wJqHET-pLZ4

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    5. Oh don't worry, I'll go after Schiff eventually... ;-)

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    6. Anonymous2:53 AM

      If you ever feel like shooting fish in a barrel, Noah, the hatchet job Schiff did on the Sargent & Sims press conference would be a good place to start.

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    7. OH yeah. That's going to figure prominently. ;-)

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    8. Anonymous7:53 AM

      He is predicting a crisis every 5 minutes and claims he was right from the beginning, when it materializes sometime in the next 50 years. And even if he was right, he was right because of wrong reasons.

      Delete
  7. An excellent article Noah. I have been saying this for many years. Steve Keen did not predict the GFC. He made a great many specific calls on Australian property and the Australian economy, all of which he got completely wrong. I have discussed Steve Keen's bad calls and predictions in my blog, here...

    (the blog has links to the original source or quotation for all of these predictions by the way)

    Steve Keen's Bad Calls and Predictions

    01 - In 2006, Keen said we may already be in a recession (we weren't)
    02 - In 2006, Keen said the Australian Debt/GDP ratio would exceed 160% by 2007 (it still hasn't)
    03 - In 2006, Keen said Australia will be in recession long before our Debt/GDP ratio falls (ratio has fallen, no recession yet)
    04 - In 2008, Keen said interest rates would be at 2% by 2009, and ZIRP by 2010 (neither happened)
    05 - In 2008, Keen said we would have double digit unemployment (up to 20%) (didn't happen)
    06 - In 2008, Keen said we would have a severe recession, possibly a depression (didn't happen)
    07 - In 2008, Keen said house prices would be down 40% within 'a few years' (wrong)
    08 - in 2008, Keen sold his Sydney home at a cyclical low point, just before prices rose 20% (very bad call)
    09 - In 2009, Keen admitted he was hopelessly wrong on house prices after losing the bet with Rory Robertson (he walked)
    10 - In 2010, Keen predicted an accelerating rate of decline in Australian house prices (declines eased shortly after, then prices started rising)
    11 - Between 2008 and 2011, Keen claimed the Australian property bubble began in 1964, 1983, and 1988 (when did it begin?)
    12 - In 2008, Keen said his biggest regret was not buying property at the start of the property bubble in the 1970s (so it began in 1970s now?)
    13 - In 2011, Keen identified 1997 as the start of the 'bubble' (he makes it up as he goes along)
    14 - In 2011, Keen said Australian house prices would fall 20% by the end of 2013 (not looking good, prices rising)
    15 - In 2012, Keen said Australian house prices would rally in 2013 (conflicts with #14)
    16 - In 2012, with Australian house prices well above 2008 levels, Keen said his 40% crash call was 'looking healthy' (fail)

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    1. Australia is mostly an extension of China. That's the key. As long as China keeps going on, so will Australia.

      The question is whether China is in the mother of all credit/investment bubble... or not.

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    2. Anonymous3:30 PM

      Shadow and Frederic Mari,I dont say either dit or dat about,if Steve Keen,predicted rigthly the recission,i am not qualified enough ,but in this interview Steve Keen,admits he under-estimated that China was such a booster on Australian economy,and he also explain that Austrialian Govt and Centralbank infact did act very "Keynsian" early and
      stimulated the economy, in that played Steve Keen´s early warning alarm on the the housing bubble and debt a role and had an impact .It´s clear that Keen ´s alarm call about a near comin crises was playing a part in that Australia prevented that a crises devoloped to level of what we see in Europe or US etc. So in that Keen did a real good deed ,whatsoever.

      In conversation with: Prof. Steve Keen
      https://www.youtube.com/watch?v=7F2FKxxN_IE

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    3. Anonymous7:49 AM

      What on earth makes you think that the Australian authorities listened to Steve Keen?

      Delete
  8. Godley, Zezza, Keen understood the importance of debt, understood the Minsky mechanism, so they knew that asset prices cannot go on forever and once they start declining people who can only service their debts as long as asset prices go up will be bankrupt. Nobody can predict the timing but the necessity of a giant balance sheet recession was predicted. Financing and debt are central in Keen's models that is why they are inherently cyclical or chaotic, he speaks the language the Ptolemy-economists can't even comprehend.

    And neoclassicals? Krugman was unable to preduct *any* recession, not to speak about once-in-a-century once even AFTER the bubble burst. http://bigthink.com/ideas/4151 And his sweetwater pals still claim there was no crisis because crises are basically impossible, comedy.

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    1. "Godley, Zezza, Keen understood the importance of debt,"

      How do we know they understood something important, if not the way Noah tries to examine that claim?

      "understood the Minsky mechanism,"

      That would be more than Minsky himself did, it seems.

      "so they knew that asset prices cannot go on forever and once they start declining people who can only service their debts as long as asset prices go up will be bankrupt."

      That's part of the mainstream literature as well.

      "... he speaks the language the Ptolemy-economists can't even comprehend."

      That sounds very esoteric.

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  9. Anonymous10:34 PM

    A recognition that the "Great Moderation" would be revealed , in due time , to be nothing more than a Ponzi scheme , was both prescient and valuable , even without detailed descriptions of the timing or severity of the coming downturn. It showed that even models based on little more than common sense could beat those used by the FED and most economists.

    Here's the thing : we could have avoided significant pain by addressing the serial bubble-blowing earlier rather than later. Here's the other thing : we're doing it again. We haven't changed anything , we're trying to re-create the status quo ante. The obvious prediction that follows from that is that it won't end well this time , either. We become Japan for another decade or two or we crash and burn again.

    That's what those who predicted this mess would say , and they'll be proven right again. Then what'll you say ? That they got lucky twice in a row ?

    These guys got the big picture right , while most economists were too busy twiddling frictions in their imaginary model worlds.

    "No One Saw This Coming":
    Understanding Financial Crisis Through
    Accounting Models

    http://mpra.ub.uni-muenchen.de/15892/1/MPRA_paper_15892.pdf

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  10. According to this website, Keen was predicting an imminent global recession as early as 1995. It was 12 or 13 years before his prediction came true; this long time lag makes the prediction a bit less impressive, since someone who in 1933 predicted a global recession - which did come, 80 years later - would nevertheless now be seen as having been "wrong". Now, 12 years is better than 80 years, of course.

    Noah, I thought you were going pretty well until this part, where I actually followed the link for the RWER blog post you indicated (or maybe i'm missing something). Can you explain where, exactly, you see the information that allows you to claim that Keen was "predicting an imminent global recession as early as 1995"?

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  11. Either you made a ton of money of the event, or you didn't predict it.

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    1. Or at least you didn't have enough confidence in your prediction to put money where your mouth is.

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    2. Or you could have made some money if not a ton by hedging your bets and having a balanced portfolio.

      Keen seems like a crank to me. He has a fair amount of zealous, misunderstood, put-upon defenders, whereas the others who called the bubble don't.

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  12. Anonymous11:50 PM

    I find it fascinating that you write an article like this 4 years after the first version of the Bezemer article and yet only reference it in passing. As someone who's been following the evolving crisis closely in a professional basis since early 2008, Bezemer's work (since updated beyond the version you and the commenter above linked to) is the definitive reference on the subject. Only mentioning it in passing reflects badly on your pretensions to offering something novel. Bezemer also has many of the references you are looking for in the case of Keen for example, so it's obvious you haven't really engaged with its content, four years after it first came out.

    By zeroing in on the question of timing, the hardest of all things to predict, as several commenters have pointed out, you have deliberately set out to devalue the actual contribution of the thinkers who saw it coming, which was mainly to emphasize the role that the size of the stock of debt would play eventually. Surely the important thing to take away is not nitpicking about timing but rather the larger conceptual point that the models (explicit or implicit) employed by mainstream economists and central banks were faulty.

    And sure Keen goes overboard, and has misunderstood the durability of the Australian financial system, or maybe the Chinese economy. But it's uncharitable and incurious to let his personality get in the way of an appreciation for his contributions. What do we gain by making him a bogeyman? It makes you look like one of Kuhn's villains, keen to vilify the outsider and call him a loony so as to protect a decrepit infrastructure in which you've invested your credibility. After what economists enabled happen to the world economy with their misplaced faith in what even Greenspan has recognized as "a flawed model" of the world, this type of insider crowing is the last thing we need. Grow up.

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    1. Anonymous1:50 AM

      "It makes you look like one of Kuhn's villains, keen to vilify the outsider and call him a loony so as to protect a decrepit infrastructure in which you've invested your credibility"

      Lovely!

      Others are gracious:

      Here is Mark Carney - soon to be the BOE Head:

      http://www.bankofcanada.ca/2008/12/speeches/from-hindsight-to-foresight/

      Carney: Few forecast these events; although, in an outbreak of retrospective foresight, an increasing number now claim they saw it coming. The reality is that among all the banks, investors, academics and policy-makers, only a handful were able to identify ahead of time the causes and potential scale of the crisis. …

      Footnote 1 has Wynne Godley's name.

      Delete
    2. Jorge Bielsa4:33 AM

      I agree 110 % with the tone and the content of your comment, but I am unable of writing it so well, not to mention in English.
      I think the only fault of the 1995 prediction was to underestimate the system's capacity for chain bubble after bubble till the final bust, with Greenspan as the big bubble builder.
      Noah, you say: "As an aside, note that many models, including a simple neoclassical Ramsey model, have equilibria in which the economy collapses completely... But complete economic collapses - total and permanent cessations of economic activity - haven't yet been seen in the real world"
      Are you also asking that Keen predicts the exact point in which the world as we know it will collapse?

      Delete
    3. Anonymous12:41 AM

      I frankly didn't see any bubble in the 90's outside the Nasdaq/tech which was innovation related. Saying Greenspan was a bubble blower represents the problem of the modern day intellect. Finding something in nothing.

      Overall leverage wasn't rising fast enough for a bubble. That didn't occur to after Glass Steagall repeal.

      Delete
    4. Anonymous4:07 PM

      Thank you

      Delete
  13. Anonymous12:39 AM

    I'm not an economist, but here's my two cents.

    There were lots of warnings, especially on the housing bubble side. You don't even need to name names, EVERYONE knew housing was in a bubble (except Wall Street and Economists). I remember watching Greenspan testify before Congress and being asked about it. It was in the newspapers, on TV, it was everywhere.

    So, forget about predicting it: why didn't economists acknowledge it as it was happening? That's the bigger question.

    But it's not just economists, I'm still waiting for psychologists to declare a narcissism bubble - every bit as epical to psychology as the great recession is to economics.

    ReplyDelete
  14. I do not want to be a 'keen'student then! I might have a noah sorry loah opinion of him.

    am publicising you downunder you superstar you!

    ReplyDelete
  15. I think Keen was not wrong about Australia, just very early. Maybe 10 years too early which looks bad, but the issue with Keen's conception of the business cycle is not the mechanism (I think he and Minsky have most of the mechanisms roughly right), it's the timing, and as a psychological emergent phenomenon a Minsky Moment is not something that can really be timed. Australia was a special case, because of the continued Asian resource boom. The bust will come, sooner or later, but predicting precisely when within a formal framework is currently impossible (although my estimate is that it will coincide with China's bust, whenever that comes — possibly even this year or next!)

    Certainly, I'd rather have Keen's qualitative predictions than the qualitative predictions of the neoclassical schools. Adding financial frictions to DSGE is nice, but it's going to make unrealistic micro-assumptions realistic, which is the real problem with post-Kydland-Prescott neoclassicalism.

    If we want a predictive model, we're not going to beat autoregressions until we have much, much, much better microfoundations.

    ReplyDelete
    Replies
    1. Did you read your post before posting? Being right but 10 years early? Tbat is called being wrong!

      Delete
    2. I'd happily be right about the mechanism but wrong about the timing in a field in which by definition the timing is chaotic...

      Delete
  16. Nice post Noah.

    Personally, I don’t believe anybody have seen the whole thing coming because no one is omnipotent! And anyone who made this claim must mistakenly have himself confused with GOD (or whatever superpower you believe in). Indeed, only GOD can make a forecast based on the “complete filtration”. Hence, since we human basically have a very narrow set of information, at best we could only see some parts of it.

    Robert Shiller, for example, had lots of housing information embedded in his “filtration”, so he gave warnings very early on but I highly doubt it he knew about the fragility that the bubble induced to the banking system. Nouriel Roubini too was able to decipher other parts of the whole picture.

    The bottom line is this: there is no model which could have been able to foresee the whole thing. And there will never be such a model! Anyone who tries to convince you otherwise, just smile an carry on.

    ReplyDelete
  17. The focus on model-prediction over a pathetically small interval of time is just silly, especially if economies are evolving systems instead of horseraces or three part machines. Who could predict the aardvark from the bacteria? Economists year after year make predictions as though they were weathermen, or bookies, but bookies are much better at it. Economists never have to pay for their mistakes, and they are amply rewarded if whatever they predict corresponds to whatever policy the class of rentseekers wants - which is why, unlike bookies, economists are not very honest. But if we are going to investigate the bookie side of economics, surely you should be looking at the predictions of bigger economists like Lucas or Phelps, Nobel prize winners, re interest rates in the 2009-2013 period, longevity of slump, inflation, etc. The idea that one can shoot at the unorthodox economists within the castle of orthodox economics would be much more ocnvincing if that castle were correct about, well, anything.

    ReplyDelete
  18. Anonymous3:59 AM

    orthodox economics would be much more ocnvincing if that castle were correct about, well, anything.

    ReplyDelete
  19. Anonymous7:17 AM

    Prediction is difficult. It is therefore important to make the system as robust to shocks as reasonable. We need better regulation of shadow banking. We need better automatic fiscal stabilizers (including an infrastructure bank).

    Monetary policy alone is inadequate for managing an economy. Creating more robust institutions, regulatory and fiscal policies will correct the economy as it veers off target. Better automatic fiscal stabilizers would improve the timeliness and effectiveness of fiscal policy.

    -jonny bakho

    ReplyDelete
  20. Here are my two cents, regarding who got it right and why:

    (1) John Paulson: He had a great intuition and an unshakeable faith in his intuition. This led him to stick to his bet (aided by Goldman Sachs). A friend of mine remarked that Paulson is sort of like the captain of the British warship H.M.S. Hood (Wiki it). The fact is that if you stuck with Paulson from 2007 - 2013, you would have actually lost money as an L.P. Lots of traders and portfolio managers knew what to do and made a lot of money AFTER the Bear Stearns crisis hit(mid 2007) and profited from Lehman and others that followed. However this was NOT based on any true prediction but informed adaptive risk-taking, which correctly took advantage of bad pricing.

    (2) Nouriel Roubini: He got a great deal of his predictions right. However it is hard to pin him to a model, since he is overwhelmingly an intuition driven economist, predicting the Ides of March.

    (3) Raghuram Rajan: Did get the financial crisis correctly, however I found his analysis that followed (on what the economy and the labour needed to heal, woefully political and unsupportable by evidence. But that, I suppose, is besides the point here). In any case I am not sure if he put his money where his mouth was.

    (4) Krugman and Shiller: Both got the housing crisis and to some extent the financial shock back in 2005, but did not see the length and depth of the real recession that was to follow

    (5) There are many other like Shiff and Rosenberg (much like Keen it seems), who "stick" to their predictions, operating under the strategy that Bill Clinton alluded to as "even a broken clock gets it right once a day". This is a deliberate professional ploy that relies on the audience's lack of long-term memory.

    ReplyDelete
  21. I'm not sure how you could write this and not link to this:

    http://keenomics.s3.amazonaws.com/debtdeflation_media/2007/04/KeenDebtWatch200704.pdf

    Where Keen notes that similar dynamics with private debt were occurring in both the US and Australia.

    Here is what has happened: Keen realised that private debt was a problem and based his *qualitative* predictions on this. Only since he was proved right has he developed 'real' models. They are still incomplete but they seem to hold more promise than the increasingly convoluted DSGE framework.

    ReplyDelete
    Replies
    1. I did link to that.

      Delete
    2. OK well after going over the article 3 times I cannot find it so obviously I am an idiot.

      Delete
    3. The text "predict an Australian housing bubble" is a link to that.

      Delete
    4. Noah you did link, but only to pooh-pooh the Australian prediction therein. (He's underestimated/underpredicted Australia's export strength.)

      April 2007: He doesn't say explicitly when the US crash will happen, but nobody reading it could come away with any impression other than "the US private debt levels have that country riding for a debt-deflation crash. Soon." (With government debt levels leaving the country ill-prepared to respond, if only for political reasons.)

      Yes, he's been formalizing his models since, but the message was clear and timely -- in April 2007.

      Delete
    5. Yes, he's been formalizing his models since, but the message was clear and timely -- in April 2007.

      And in 2005...and in 2001...and in 1997...and in 1995...

      Hey, saying a crisis is possible is much better than saying one is impossible! I give Keen credit for that in my post...

      ...but let's try to keep things in perspective... ;-)

      Delete
    6. And in 2005...and in 2001...and in 1997...and in 1995...

      Totally true. But I think he was ringing the bell much louder and clearer in 2007 -- partially as he worked out his thinking and his nascent models, partially as the debt levels became so (obviously?) extreme.

      I think his models hold great promise, am looking forward to what he can do formalizing them with Minsky. For now they seem to help us understand. Not sure if they'll be able to help us predict.

      Have you looked at Edward Lambert's stuff? I'm really looking forward to someone who's got the chops (i.e. not me) giving it a vetting.

      Delete
  22. Did Volcker predict the crisis? I would say yes.

    http://www.washingtonpost.com/wp-dyn/articles/A38725-2005Apr8.html

    If you made a big bet on it and made a ton of money, did you predict it? Or would you say you were just hedging your bets and got lucky?

    If your statements and actions were based on the fact that the loans being made were unsound, and the situation was unstable, then in my mind you predicted the crisis, even if you didn't know the banks were going to let it get to the point where they brought down the financial system.

    ReplyDelete
    Replies
    1. Anyway, I think a long list of people predicted the crisis, hedge funders, bloggers, economists like Volcker, Rajan, Roubini, the smarter bankers at Goldman and JPM.

      The thing they had in common was what they called 'soft eyes' in 'The Wire' murder unit... casting a broad view and seeing the things that really did not make any sense.

      Bankers and policymakers (and economists) can point at the craziest aspects and cry 'hoocoodanode.' They can self-servingly define prediction narrowly and say no one could have done better than they did, conveniently ignoring those who did, and whose bank accounts prove otherwise.

      Delete
  23. I'd wager a lot of cash that's a picture of Hari Seldon.

    We know who got it wrong. Clinton, Robert Rubin, Greenspan and conservative economists who said deregulation of the financial sector is the awesome and will make us prosperous.

    Greenspan who said there was no bubble. Bernanke who said sub-prime was contained. Candidate McCain who said in the fall of 2008 "the fundamentals of the economy are sound."

    ReplyDelete
    Replies
    1. Candidate McCain who said in the fall of 2008 "the fundamentals of the economy are sound."

      Everyone who thinks: (1) the "crisis" can be solved with fiscal policy; or (2) the "crisis" can be solved with monetary policy; or (3) the "crisis" can be solved by tinkering with regulatory policy; or (4) the "crisis" will fix itself; or (5) there is no crisis; believes that the fundamentals of the economy are sound.

      The ones who work from a belief that the fundamentals are not sound are the ones who conclude that "root and branch" reforms are necessary. Such people may exist but they are far outside the mainstream.

      Delete
  24. Of course far more important than this willy waving about who predicted the crisis is the quality of economic modelling that an economist contributes to.

    And even more important that is some hit the ground economic policies.

    ReplyDelete
    Replies
    1. How do you measure the quality of a model?

      If your answer is "the best it matches reality the better", then DSGE are not any better than Keen's models.

      Moreover, it seems kind of dismissive regarding non-formal mathematical observations, you can create an axiomatic theory of anything you wish, just because something is formalised that is not necessarily superior to a non-formal intuition.

      A non mathematical set of intuitions that aseveres some stuff that is partially true (private debt matters, debt is not neutral, the efficient market hypothesis is nonsense) is preferable to a precise axiomatic theory of ghosts.

      By the way, let's be clear, I'm not defending Keen's models because as far as I can see his cycles clearly don't resemble the real world.

      Delete
    2. If your answer is "the best it matches reality the better", then DSGE are not any better than Keen's models.

      No, that's false. DSGE models are MUCH better than Keen's models, in terms of fitting the data, forecasting...you name it.

      That doesn't mean DSGE models are useful (see earlier post), or well-specified (they're not). It just reflects on how totally useless and unconnected to data Steve Keen's models are.

      Delete
    3. You decided to ignore the quid of my comment, and you're scarily wrong regarding how scientists should work.

      If you think economics should be a science all efforts on DSGE should be abandoned. It's completely indefensible to build theories on assumptions that have been falsified ad nauseum.

      It's better to have an incomplete yet not well developed model based on a set of correct intuitions, actually, the intuitions, without any model, are better than a mathematically refined theory of nothing.

      Delete
    4. you're scarily wrong regarding how scientists should work

      nope

      Delete
    5. Yes, you are.

      The fact that you're defending a model which its assumptions have been completely falsified versus a model which its assumptions are at least partially true shows quite a lot of how poor your understanding of epistemology and scientific research is.

      Apparently, you've seem to have fall for the same trap as most economists... mistaking mathematics with truth, and axiomatic theory of ghosts is not a scientific theory, just as DSGE isn't a scientific model (or in the best case scenario, is a falsified scientific model, i.e. failed science).

      Go read this: http://www.amazon.com/Philosophy-Science-Explanation-Justification-Technology/dp/076580414X

      And then we can have a talk about the pseudo-scientific nature of mainstream economics (and most of heterodox economics too).

      Delete
    6. Apparently, you've seem to have fall for the same trap as most economists... mistaking mathematics with truth

      nope

      The fact that you're defending a model which its assumptions have been completely falsified

      Which would that be?

      versus a model which its assumptions are at least partially true

      Which would that be?

      Also: "true"? But theories can only be falsified, not proven "true"...

      Delete
    7. You're defending DSGE compared to Keen's model... While every assumption on DSGE is false, the assumptions by Keen, even if the model lefts much to be desired, are far superior, again despite your flawed epistemology a set of correct intuitions is preferable to formalized nonsense.

      And regarding your comment of "theories are never proven true", that's just a poor response, once again, based on your poor understanding of epistemology (perhaps you've read Popper, but I even doubt that), our best theories are partially true (instead of "not yet proven false"...) read a serious epistemologer like Bunge, or Ilkka Niiniluto or Nicholas Rescher.

      And, now, it's not that I'm dumb and you're not, I'm a mathematician, so it's not that I don't understand math... All three I'm recommending you are not just philosophers of much higher quality than Popper, Mario Bunge is a physicist (that has a marvelous book entitled "Foundations of physics" in which he axiomatizes much of it, not to mention he contributed things like the Feynman-Bunge-Corben operator), Ilkka Niiniluoto is an outstanding mathematician and Nicholas Rescher a bright logician. So get off your high horse Noah, your ideas about what constitutes a scientific endeavor are at best rudimentary, as you've made extensively clear when you asked for more epicycles.

      Delete
    8. Anonymous1:56 AM

      The hilarious thing is that Noah's emphasis on "matching the data" ignores any data other than the $$ numbers. Where is the data on the policy variables at each stage of the decision-making process?

      Institutions matter. Law matters. Accounting matters.

      Structural contingencies must be part of any serious economic model, or else you're just assuming the status quo policy-settings are immutable rather than variable elements, and you're pushing political ideology not promoting science.

      Delete
  25. It's a problem geologists have faced for ages. Someone predicts an earthquake, one happens, the predictor claims that disproves all mainstream geology and validates their model. The media give them air time despite a) the person's hundred incorrect predictions (there will always eventually be an earthquake) and b) the times when the exact same conditions are met without anything happening. I'm glad we're starting to unload the lunatics on the economists.

    ReplyDelete
  26. Besides reading Dirk Bezemer, one actually interested in the topic supposedly addressed in this post might want to read James K. Galbraith's Who Are These Economists Anyways?

    ReplyDelete
    Replies
    1. Anonymous4:34 PM

      Prof- Lars Pålsson Syll have post on it at:
      -http://larspsyll.wordpress.com/2013/06/02/bashing-crises-predictions/
      and writes:
      "Bashing crises predictions-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 crises, 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:Leading 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."
      http://larspsyll.wordpress.com/2013/06/02/bashing-crises-predictions/

      Delete
  27. Ok I got a prediction challenge for the economists on this blog:

    Predictions for (1) Next Payroll Number (2) PCE core (3) 10-yr rate by YE and (4) real GDP YoY

    Your predictions can be model based or otherwise. Really like to see what a sample of smart economists, who are not advising hedge funds think.

    And of course, if Noah deems to select the respondent (including himself) this will really turn out to be interesting!

    ReplyDelete
  28. Noah, have your recent posts been inspired by the title of the movie "How to Lose Friends & Alienate People", by any chance? Just kidding, great post :)

    Though Keen (or at least his vocal fans) likes to claim how his models are superior to mainstream because they can "predict" crisis, he never estimates or calibrates them with real data. Thus at best, they give us qualitative insight that "breakdown" can happen - but that's not very helpful by itself, not without presenting at least some arguments or evidence that support the proposed mechanism of the "breakdown".

    And the mechanism in Keen's models is rather stupid - basically, it all boils down to the fact that if firms don't go bankrupt when their debt is high, but just roll over their debts (why? because investment is given by some exogenous function that tells them to do so), debt will eventually explode (and why would banks be OK with that? Never mind). That's rather trivial observation, and I don't see how it could explain the financial crisis. Or how does it have anything to do with Minsky's original story, for that matter.

    ReplyDelete
    Replies
    1. Anonymous1:52 PM

      Like any new Jesuit, Smith's got to go overboard establishing his Defender of the One True Faith cred.

      Delete
    2. Like any new Jesuit, Smith's got to go overboard establishing his Defender of the One True Faith cred.

      So what's the One True Faith I'm defending??

      Delete
    3. Anonymous6:46 PM

      Hi Noah,hope all is well with you!Thanks for a nice blog!But ,Noah i think your wrong
      if you think Steve Keen is representative for Post-Keynsianism ,and that Post-Keynsians is some sort of "Cult-club".Fare from it Noah! Don´t equate the the internet Post-Keynsianism with Post-Keynsianism in general.The real so called Post-Keynsian was simply the students of Keynes at Cambridge the generation and followed after him and many that worked with him a very wellrespected crowd. Many of them were Nobel awarded and is fare from a homogenuos group.I know for sure yourself has much in common with many of them after what i had read from you.
      Look on the list of people that belong to the Post Keynsian tradition :
      Nicholas Kaldor
      Michał Kalecki
      Richard Kahn
      Piero Sraffa
      G. L. S. Shackle
      Geoff Harcourt
      Joan Robinson
      Abba P. Lerner
      Paul Davidson
      Alfred Eichner
      William Vickrey
      Sidney Weintraub
      Augusto Graziani
      Wynne Godley
      Richard M. Goodwin etc etc. It many great names with a lot serouis economists!
      Have a nice time Noah and take care!

      Delete
  29. I am perplexed by the notion, mainly expressed in certain comments, that in mainstream economic models crises do not occur. In endogenous business cycle theory (and yes, these are DSGE models) business cycles arise as a result of changes in people's self-fulfilling beliefs. Here is a discussion by Farmer:
    http://www.nber.org/papers/w18284.pdf?new_window=1
    So, yes, we were pretty aware, even before Keen, that self-fulfilling prophesies can generate fluctuations in economic activity. It seems to me that Farmer deserves kudos for his work way more than Keen does.

    Finally, I have a question that also relates to the previous post. Krugman has been very vocal about his belief that recessions need not be long and painful following a financial crisis, provided that fiscal policy is used aggresively enough. In fact, he disagreed on this point with Reinhart during an interview. So if PK is correct (I think he is only somewhat correct) then the path of output and employment following a financial crisis will depend on the government's response. And unless a model can also predict what the government's response will be (good luck with that!), a model's forecasting ability will be poor and vary inversely with the ability of policy to influence the path of output and the discretion that policy-makers have (as opposed to being commited to a rule). Which, of course, raises the question of whether it is reasonable to want to evaluate economic models by their ability to make unconditional forecasts.

    ReplyDelete
  30. Anonymous2:15 PM

    Mr Smith,

    You are clearly mixing things up and exploiting your own confusions.

    Worst is you using Google search. Shows the ridiculous amount of research gone into this.

    It seems you are simply lifting things randomly. The 1995 paper simply gives a model which *could* lead to debt deflation. It is a toy model of the world where more and more would need to be added (such as an external sector) to make it describe one particular economy. But even so, it has dynamics of debt deflation.

    Unlike the Theoclassical world which converged to "the great moderation".

    The worst point about this post is that Mr Smith doesn't even understand what prediction is. A lot of things are happening and many Post-Keynesians highlight scenarios rather than stock market analyst who behave like they are predicting.

    Take for example the number 50% you discuss. 50% - however arrived at - even handwavingly is high. It is not like a 50% of a coin toss. It just means that over the next few years or so the person is saying high chance. If a doctor says, 50% chance the patient will die in 2 days, do you think his prediction has no value? Poor math skills Mr Smith.

    But can be expected right. Your models have money multipliers and loanable funds. You cannot even articulate simple ways in which money is created.

    I was watching this Adair Turner video today. Whatever he says has been said by Post-Keynesians since long. Strange you want to take it away from them.

    https://www.youtube.com/watch?v=gF9iT_hn5-g

    ReplyDelete
    Replies
    1. Anonymous2:48 PM

      Almost too dumb to respond to, but I'll save Noah some time.

      A doctor saying someone has a 50% chance to live is much different from a doctor who makes predictions about how long a patient will live and is right only 50% of the time.

      Poor logic Mr. Derp.

      Although im sure this article stimulated the ol amygdala enough to trigger your response.

      Delete
    2. Anonymous3:16 PM

      Whatever.

      Point being saying 50% chance for an economic event is not equivalent to assigning 50% for a toss.

      You cannot compare this and appeal to Bayes' Theorem.

      "Poor logic Mr. Derp."

      Sorry Mr. Theoclassical.

      Delete
    3. Keen-ites have to bark loud cuz they got no bite.

      Delete
    4. Anonymous3:50 PM

      You completely misunderstand.

      If I asked you to make ten economic predictions styled for yes or no answeres (ie. will the eocnomy enter recession before next year etc) and you answered right five out of ten times then I would say your opinion is not very useful since a coin toss would have been right an equal number of times (law of large numbers). I think the misunderstand comes the condition of questions style for yes or no answers which is required for a coin toss juxtoposition.

      If you said there is a 50% chance for recession by next year you are headging your bet with uncertainty, a completely different issue but one that also detracts from the value of the prediction.


      And I honestly don't think you have a sufficient understanding of Bayes theorem to invoke it in an argument.

      Delete
  31. Anonymous2:27 PM

    I'm with "I'm not an economist, but here's my two cents."

    I wasn't taking notes at the time, but I've been reading the FT since the '90s and distinctly recall reading that the housing bubble Greenspan used to replace the dot-come bubble was hugely dangerous, based on a lot of fraud, and would lead to a financial disaster.

    So maybe Martin Wolf or Joe Stiglitz...who knows? But since around 2005 I had been watching the market closely and bailed when I thought I finally saw signs of the plotz. I bailed about a month before it happened.

    I am by no means imaginable a finance person, so I had to read it somewhere.

    ReplyDelete
    Replies
    1. Anonymous3:24 PM

      "...distinctly recall reading that the housing bubble Greenspan used to replace the dot-come bubble was hugely dangerous, based on a lot of fraud, and would lead to a financial disaster."


      You recall correctly. You'd think that our world-class stable of economic experts might have taken note of those warnings , looked into them closely , and then issued the appropriate recommendations to policymakers , not to mention unwary consumers. Maybe they were all too busy lining up their cash-out refinances , like the rest of us :

      9/17/2004

      http://www.cnn.com/2004/LAW/09/17/mortgage.fraud/

      "..Assistant FBI Director Chris Swecker said the booming mortgage market, fueled by low interest rates and soaring home values, has attracted unscrupulous professionals and criminal groups whose fraudulent activities could cause multibillion-dollar losses to financial institutions.

      "It has the potential to be an epidemic," said Swecker, who heads the Criminal Division at FBI headquarters in Washington. "We think we can prevent a problem that could have as much impact as the S&L crisis," he said...."

      Delete
  32. If you were to ask the question 'what happens when you put momentous events and crucial changes in economic thinking in the hands of a pedant?' I think you'd get this blog from Noah. This is a wasted opportunity when we're all putting our minds to these important questions.

    ReplyDelete
  33. Anonymous5:36 PM

    I seem to remember someone criticizing "revolutionary" purges. Oh well, that was probably a dumb idea. Back to the e-meter auditing!

    http://noahpinionblog.blogspot.com/2012/09/keen-attempts-purge.html

    ReplyDelete
  34. As one of those favorably mentioned in the link to Jamie Galbraith, while not getting mentioned by Bezemer, I thought I would add some extra observations.

    1) Noah is probably right that there was no one who met all three of his criteria ahead of time, particularly using a well-estimated or calibrated data-based model that provided reasonable timing for what happened. Many got pieces of it ahead of time in various ways while missing out on others. This includes me. DSGE + financial frictions seems to have reproduced it long after the fact, not a forecast, even if the model is better than Keen's by some criteria (and there is an improved version of Keen's in the Feb. 2013 issue of JEBO).

    2) Doing a search via Google misses some things. So, while Dean Baker was almost certainly the first to call the housing bubble, if not predict the moment of its peak or have a model for it, I was hollering about it from not long after he did so, initially inspired by his arguments. However, none of this shows up on google because I was doing most of it on the former blog, MaxSpeak, which was closed down in August, 2007, after the bubble had peaked, and whose archives are sealed and not accessible by google. Curiously, Dean also briefly co-blogged there, but only briefly, having other outlets so his musings can be accessed.

    2) Dean and Nouriel Roubini both called that the end of the housing bubble would bring about a recession, initially through declining housing construcion, but they both jumped the gun, saying it would start at the beginning of 2007. I disputed this at the time, pointing out that the low dollar would spur US exports, which in fact happened with those offsetting declining housing construction through most of 2007, but none of this is accessible by google because nearly all of it was on MaxSpeak.

    3) I first became aware of the deep links between housing finance and the global web of financial assets after Geithner's speech in Hong Kong in Sept. 2006, after the peak passed for the housing bubble. I did not blog on it, but gave talks at conferences in front of numerous well-known economists in March, 2007 and December, 2007, predicting a major global financial crash as a result, although without a specific date. Again, no internet trail as strictly verbal, if publicly so, and I did not write papers on these specific observations either.

    4) I also had a model, although not one calibrated to data, and also drawn on Minsky and Kindleberger. Indeed, I was the first to propose in 1991 a mathematical model of the variety of bubble patterns that Minsky and Kindleberger argued fit historical data, a sudden crash at the peak (fits oil prices in 2008), a gradual decline symmetric to the increase (fits housing prices), and one with a period of financial distress with a gradual decline after the peak before a final and sudden crash, the historically most common pattern by far, and fitting the global derivatives and CDO markets, which peaked in August 2007 and crashed 13 months later.

    This one I did call pretty closely and even cited my model in July, 2008 in a post on Econospeak, picked up by Mark Thoma. See http://economistsview.typepad.com/economistsview/2008/07/gradual-decline.html. I note that the paper I cited in there was an improved ABM version of the 1991 model, and was eventually published in Macroeconomic Dynamics in 2011, well after everything was passe, although the first draft was out in 2005. However, I must confess that while I saw the recession coming, I did not forecast its full length and depth.

    ReplyDelete
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    1. One thing I like about Dean Baker is that he doesn't constantly thump his chest about having "predicted the crisis", even though - as you point out - he arguably did better than nearly anyone else at predicting it.

      Delete
  35. Oh, in case anybody does not know "roserjb" is Barkley Rosser, me. I need to get that google account relabed, :-).

    ReplyDelete
  36. I would agree, Noah. If anybody has the claim, it is Dean and maybe Nouriel. The rest of us are all johnny come latelies or just plain loonies like Schiff, although obviously there were some people in certain financial firms who were on top of things to make money ahead of the market moves, particularly at Goldman Sachs. But then, it is an old story, if you are ahead of the game, the only way to make money on it is to not talk about it.

    ReplyDelete
  37. Anonymous1:09 AM

    Liars poker. All bluffs are predictions until call.

    ReplyDelete
  38. Anonymous8:03 AM

    Noah,

    You piece is great fun and your treatment of Keen fair enough.

    However, I must disagree with one part and that is your ambiguity in defining what should have been predicted.

    We have a great historical date and event which should be used and that is on June 22, 2007, Bear Stearns pledged a collateralized loan of up to $3.2 billion to "bail out" one of its funds, the Bear Stearns High-Grade Structured Credit Fund.

    With this information, any macro economist, worthy of the chest beating of the entire tribe, ought to have been able to foresee the rest of the story.

    It is not important what Keen said before June 22, 2007; what is important is what he said afterward and for the next 6 months and he said not squat.

    A different way to say this is that 6/22 was a Minsky moment but no one would admit such for doing such would be an admission that they were wrong on everything.

    ReplyDelete
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    1. A different way to say this is that 6/22 was a Minsky moment but no one would admit such for doing such would be an admission that they were wrong on everything.

      I think mainstream economists had, by and large, convinced themselves that Minsky moments didn't happen, that coordination failures couldn't bring economies to a halt, and that the Great Depression was a one-time event.

      ...all of which, of course, was bullshit.

      Anyone who managed not to convince themselves of this bullshit, simply by not plugging into the derp machine that was mainstream macro, deserves commendation.

      But that doesn't mean that they themselves know anything about the economy. It just means they read Minsky and liked what he had to say.

      Delete
    2. The Minsky Moment was on September 18, 2008. The first was the peak, the second was the crash following the period of financial distress, and it is the crash that is the Minsky Moment.

      Delete
  39. Noah, I don't think Steve Keen ever argued that a mathematical model predicted the crisis, and this is somewhat of a strawman position you are trying to attribute to him. The fact of the matter is there are really no good mathematical models out there that are good predictors of the the future, and that's the direction Keen has gone on in since 2008 with the credit accelerator and later other monetary system models.

    Dean Baker had no mathematical model either when he predicted the housing bubble in 2002. Baker always claims that it took looking at the data and a little bit of logic. Keen claims to have had a model, but that it was the Minsky verbal model and that in his words, its his project to make that verbal model into mathematics. So by trying to fault and shame him because he didn't use a mathematical model to forecast a period of debt-deflation but rather a verbal model, you'd also have to simultaneously shame someone like Dean Baker or Schiller. And just because Keen's current work on mathematizing Minsky is not complete yet to criticize doesn't justify all of the intellectual capital placed on model frameworks that have always been poor in the first place (DSGEs).

    IMO, one of Keen's weakest area may actually be political economy. He has foretasted throughout the crisis a worse socio-political response among the citizenry than of what has come so far in Europe (he expected more things like the London Riots). He also assumed that Australia would not response with a fiscal stimulus in 2008, but instead the Labor government put in a swift and (relatively) strong one, while putting in a home-buyer credit to send the Aussie housing market back up. That thing kind of ruined his "Australian Housing Market will crash" since he failed to predict the government successfully propping it up. He also said Russia could potentially retaliate against the Cyprus deal by blocking gas to, say, Germany (probably not going to happen). So there's that.

    Here's a question for you Noah: how predictable do you think in, say, 2005 or 2007 would a global Keynesian fiscal stimulus have been in 2008-09? Do you think an economist could say with certainty "A big debt bubble will collapse very soon with housing in America and around the world, debt deflation will come in some parts, but all industrialized governments will respond with a significant fiscal stimulus. Europe will then pursue austerity in 2010- and go into a Depression." ?

    now that would be some REAL Nostradamus stuff. Keen, nor very many people at all, are very good predictors of political behavior. This might be something some economists should think about with some Political Economists or something (unless it's too icky to work with a PoliSci bro).

    ReplyDelete
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    1. Anonymous6:23 PM

      More than that, he acted like it was so unfair that the fiscal stimulus and fall in interest rates happened. How dare the government and the RBA prop up the bubble?

      If I look at what the official sector in Australia was saying, even long prior to the crisis, I think they understood more on housing markets. It might help you to know that the ratio of housing prices to income in Australia has been roughly flat for more than eight years. RBA people predicted a level shift in that ratio and then leveling off. And that's what happened. Keen's models, mathematical or verbal, assume the long run raio never shifts.


      I assume a prediction that other countries would NOT have a us-style meltdown is also valuable? Especially when the price run up was superficially the same?

      Delete
    2. Anonymous8:39 PM

      Immanuel Wallerstein at Yale and the folks a Binghampton University
      for long term studies of economy and politic mentioned and described what must happen in the finaciel crises rather accurately allready way back in 80s and more precisely,in the 90s useing a loud data from all sort statistic economics and other areas of the society,and i never hear Immanuel Wallerstein even mention that he called about and warned rather sharply about what happen in the 2008 crises i guess long before anyone else.I don´t even think he interested ,it´s a pretty humble guy.

      Delete
  40. Anonymous9:20 AM

    Hi Noah,

    Big fan. Question about a minor point: what exactly do you mean by "...according to Bayes' Theorem, the predictions of someone with an unconditional 50% success rate (i.e., coin flips) convey no information."? Maybe it'd help if you showed or described that explicitly

    ReplyDelete
    Replies
    1. So, imagine if you could ask yes-or-no questions to a magic 8-ball, and the 8-ball would give you right answers 50% of the time and wrong answers 50% of the time. Would that 8-ball be useful at all?

      Delete
  41. Stop $%&^@*! using the word 'agnostic' to mean 'uncertain'! Next thing you know, you're going to begin using 'egregious' egregiously or 'literally' metaphorically.

    ReplyDelete
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    1. Hmm, I looked up the definition and it looks like "uncertain" is a synonym for "agnostic":

      http://www.thefreedictionary.com/agnostic

      Literally.

      Delete
  42. I came for the space hamsters. Where are they?

    ReplyDelete
    Replies
    1. EVERYWHERE. Especially behind you. They're invisible, SEE????/?

      Delete
    2. Oh no. This is very disconcerting!

      Delete
  43. I've never been quite able to get my head around whether Keen is a genius (as he thinks) or a charlatan, but I think its fairly obvious that the economists who were most accurate tended to be historical specialists rather than mathematical modellers.

    One example would be Prof. Morgan Kelly of UCD, who was one of the tiny handful of economists who correctly identified the Irish property bubble and (more impressively) predicted accurately the impacts. I believe his speciality is medieval economics. Michael Lewis amusingly attributes his successful predictions to his opinion of his former students who became bank economists and could regularly be heard pontificating on the inevitability of a soft landing.

    http://en.wikipedia.org/wiki/Morgan_Kelly_(economist)

    http://www.vanityfair.com/business/features/2011/03/michael-lewis-ireland-201103

    ReplyDelete
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    1. The safe bet would seem to be "charlatan"...

      Delete
  44. Anonymous9:44 PM

    As I see it, a model can never be correct because human intervention ca change any outcome. The article mentions that Keene predicted a housing collapse in Australia which never happened. Government in Australia went out of its way to make sure of that. No land releases, no public housing, grants to home buyers, approval processes which mean 1to2 years wait before a house can get built...no model is going to predict that sort of behaviour.

    And if we want to go back to say the 1930's and FDR, just what would have happened if WW2 had not happened. I bet nothing like what happened after.

    ReplyDelete
  45. Keen likes thumping his chest and made wrong predictions. Ok, but who cares about the vain and reckless personality of Steve Keen? That's not the point.

    Keen is right (IMO) when he says that credit is endogenous, that the Fed cannot really control the money supply, that banks are not intermediaries between savers and borrowers, and that loans create deposits and not the other way around.

    The rest is rather anecdotical. As I see it, N. Smith is saying "yes I had no clue, but then you were wrong too, so I'm not so bad after all".

    ReplyDelete
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    1. Keen is right (IMO) when he says that credit is endogenous, that the Fed cannot really control the money supply, that banks are not intermediaries between savers and borrowers, and that loans create deposits and not the other way around.

      Sure, but he doesn't know he's right. All he knows is that he read it in Minsky, and it sounded right-ish to him, and people he doesn't like say the opposite. It's not like he's gone to the data and proven anything. It's not like he has a theory that describes these phenomena accurately.

      The rest is rather anecdotical. As I see it, N. Smith is saying "yes I had no clue, but then you were wrong too, so I'm not so bad after all".

      Where did I say I had no clue???

      Delete
    2. Also, I like the word "anecdotical". I'm going to steal that, hope you don't mind...

      Delete
    3. "It's not like he's gone to the data and proven anything. It's not like he has a theory that describes these phenomena accurately."

      A lot of papers have been published about these phenomena, and many data are available, if you care to read today's post-keynesian economists. I guess you've read "Intereste rates and fiscal sustainability" by S. Fullwiler, e.g.?

      "Where did I say I had no clue???"

      Nowhere, I agree with you on that.

      Delete
    4. I'm sorry about "anecdotical", but English is only my 4th language. Next time, I'll write in French, Spanish, or Italian.

      Delete
    5. "Where did I say I had no clue???"

      Nowhere, I agree with you on that.


      Actually, I was not especially surprised when the crisis happened, since I had been reading Dean Baker for years and basically thought he knew what he was talking about.

      Delete
    6. A lot of papers have been published about these phenomena

      Got links?

      I'm sorry about "anecdotical"

      Don't be. It's quite an excellent word, and far superior to the clunky "anecdotal".

      Delete
    7. Anonymous1:40 AM

      It's interesting you think that 1) Dean Baker knows what he is talking about, and 2) MMT is a cult, given that the two seem to be in agreement:

      http://www.modernmoneyandpublicpurpose.com/seminar-6-fiscal-vs-monetary-policy.html

      Delete
    8. Anonymous1:42 AM

      Also here:

      http://www.cepr.net/index.php/blogs/beat-the-press/modern-monetary-theory-whats-modern-about-it

      Delete
    9. It's interesting you think that 1) Dean Baker knows what he is talking about, and 2) MMT is a cult, given that the two seem to be in agreement

      Sure, MMT says some good stuff. That's how they lure you in. Then they sell you the crazy once they've used the smart to get you in the door...

      Delete
    10. You can tell MMT is a cult because no one knows what it is. Every fan or adherent or believer seems to have an entirely different idea of what MMT says. Some of the variants sound great to me, some sound absolutely insane. But all of the believers have great conviction. That's why it seems like a cult to me...

      Delete
    11. Anonymous2:40 AM

      So you are basing your impression of the life's work of a group of serious academics on the basis of internet autodidacts that are trying to teach themselves economics?

      Under that logic, we should dismiss everything written by Keynes as cultish, because people have been arguing about what he said for 80 years.

      What part of it is crazy, in your opinion? And what writings exactly have you read by its developers (not blog comments, the actual academics)?

      Delete
    12. Anonymous2:55 AM

      If you are having trouble understanding their language, perhaps get Brad Delong or someone to interpret for you - he seems to get them. But it would make a lot more sense to critiques the writings of an actual developer, such as Scott Fullwiler's great piece on Interest Rates and Fiscal Sustainability, rather than those purporting to speak on their behalf.

      Otherwise, you should really be arguing that "online MMT proponents are a cult." Then, at least, you would be making explicit the fact you haven't actually bothered to read anything actual MMT academics have read.

      Delete
    13. The guy who worries about how Japan will pay off its debt says MMT is a cult. Do a post on MMT, criticize the lit.

      At least Krugman had courage to state why he thought Keen's model of banking was wrong - and got crushed in the ensuing debate.

      Delete
    14. So you are basing your impression of the life's work of a group of serious academics on the basis of internet autodidacts that are trying to teach themselves economics?

      No, not just that. I've read through some Godley papers on "Stock-Flow Consistent" models. I found those models to be even more unrealistic than DSGE (no mean feat), and not connected to data at all. Plus, the models were often not fully specified in the paper - a big scientific no-no in my opinion. Check out Steve Kinsella on "SFC" models:

      http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1955613

      But you know, after I read more than just Godley, I might revise my opinion.

      What part of it is crazy, in your opinion?

      A lot of the assumptions in the Godley papers I read.

      But it would make a lot more sense to critiques the writings of an actual developer, such as Scott Fullwiler's great piece on Interest Rates and Fiscal Sustainability, rather than those purporting to speak on their behalf.

      Yes, you're right...which is why I will do a lot more background reading before I do a post on MMT.

      Otherwise, you should really be arguing that "online MMT proponents are a cult."

      Yes, that would be much more accurate.

      Then, at least, you would be making explicit the fact you haven't actually bothered to read anything actual MMT academics have read.

      But see, Mr. Anonymous, when you say things like this I start to wonder if you are an online cultist type. Because how on Earth could you possibly know whether I had read any actual MMT papers? Why on Earth would you just assume I had read none, and be confident in that assumption?? You're not even correct! You just seem to assume that if someone thinks MMT is wrong or crazy or a cult, they must not have read any of it. Don't you realize how silly that is???

      At least Krugman had courage to state why he thought Keen's model of banking was wrong - and got crushed in the ensuing debate.

      See, you just say Krugman "got crushed" because A) you like Keen, B) you don't actually understand what was said in the debate, and so C) you conclude that Keen won a smashing victory. That's not thinking, that's just emoting.

      Delete
    15. "See, you just say Krugman "got crushed" because A) you like Keen, B) you don't actually understand what was said in the debate, and so C) you conclude that Keen won a smashing victory. That's not thinking, that's just emoting."

      A) I don't particularly like Keen
      B) You don't know because you don't understand banking yourself. No offense, you share this with most of mainstream economists. Krugman made statements that were factually wrong: the accounting was incorrect. You can show on balance sheet operations that banking is not "collecting money from a saver and lending it on", which Krugman admitted later on. He still claims that the CB uses the rate setting (which is its only tool, as Krugman had to admit) to control the base. Thus he cannot explain runaway debt patterns: http://img84.imageshack.us/img84/9420/debtchart.jpg
      C) That he got crushed was also the conclusion of 90% of commenters on the last piece of the debate, check them out: people agreed that Krugman misrepresented what and how banks do (and some of them actually work at banks unlike you or Krugman) and sadly lost his nerve at the end. He also tried to use Tobin's paper to claim that money in exogenous, but the commenters pointed out that actually he picked the wrong horse to back as Tobin also thought money is endogenous. That is why I say crushed, because he lost a bit of face there, for no reason. "It is not about men, but models", as he puts it himself.

      Therefore I think that if someone is emoting here it is you. You reject MMT because you don't like its proponents on the internetz? Or you didn't get Godley? Great. Btw. Godley had a much better predictive record than Krugman. Must be a cult.

      Delete
    16. You reject MMT because you don't like its proponents on the internetz?

      Well, apart from Godley and a couple other researchers, the belief system seems mainly propagated over the internetz.

      Or you didn't get Godley?

      I think I do get Godley (there you go again, saying "you don't get X" without having any idea if someone actually gets it!).

      I read his models. And no, they didn't predict any crisis.

      Godley had a much better predictive record than Krugman.

      Maybe as an individual he does (and maybe he doesn't). But his models don't predict crises.

      Delete
    17. Anonymous2:31 AM

      Noah, what do you regard as the core "beliefs" of MMT?

      Delete
    18. If you think Godley didn't predict the crisis, read more. Yes, his model is not an optimization over an infinite horizon mumbo jumbo where you feed past GDP and prices and simulate the hell out of it. His model is simple, looking at sectoral balances and sources of spending. And he noticed way before 2006 that spending is financed with debt and that debt can continue to grow only when asset prices continue to grow faster than GDP or incomes. That clearly cannot go on forever so something has to give. Can you time this? No. Or conversely, Godley, Keen and MMT was wrong because they thought the bottom would fall out sooner. But there is a fundamental difference between congratulating themselves on the Great Moderation as the sweetwater did, or worrying about nonsense like deficits of a sovereign currency issuer like Krugman did and not noticing that other and much more imminent things are unsustainable. Godley said the crisis would come from households unable to further increase their debt and it did. Who else was saying this? Who of the neoclassical economists (including neo "Keynesians") was saying this? Similarly about the Eurozone, exacly Godley's scenario played out.

      Krugman you lionize so much got it exactly wrong: he worried about the government financing (His words: "don't you worry there will be a funding crunch?" Nope, I don't) and not a peep from him about the private debt which was actually financing more of the spending. And then the bottom fell out from the private financing mechanism and the state picked up the tab effortlessly. So he got it exactly backwards, quite a feat.

      Keen's models - you are right, they don't give numerical predictions, they are basically toy models but they capture some crucial part: financing spending with debt leads to an unstable economy. Good insight from a toy model. Can he claim this was a model of the US or Australia? Not really. His models don't spit out time series of future GDP and inflation like DSGE garbage-in-garbage-out apparatus does, but so what?
      DSGE models (example IMF's) systematically underperform simple secotral-balances based predictions made by MMT-ers as Bill Mitchell records.

      In general, these Keen/MMT models, toy ones and not, are very Keynesian: they don't care about real productivity or allocation of resources along preferences among an all-knowing agents but about sources of funding. Main insight: a very productive economy with optimistic and entrepreneurial actors can fall into depression if the funding mechanism breaks down. If this is correct, DSGE will never capture that because it doesn't care about the funding mechanism, and adding frictions won't cut it (the problem is there are too little financial frictions in reality, so once the assets go down the whole debt-funding pyramid collapses quickly). SFC models may. Add to that understanding that government spending adds assets and taxing subtracts assets and that state money is a simple public monopoly, all the worries about fiscal crises Krugman was serving us with are gone: the only problem can be with real resources and the private debt. Therefore Wall Street hires people like McCulley and Hatzius (Godley's student) who do sectoral balances, they don't hire people like Krugman doing DSGE, because it is useless, although it does indeed spit out a ton of numbers as output. In the long run I see the industry ignoring the neoclassicals in academia (as it does already) and the neoclassical economics basically dying out. But they may survive for a long time in teaching positions, they are well entrenched. Most of what they do now (and what you help them do) is trying to blur the differences and preserve some credibility.

      Delete
    19. If you think Godley didn't predict the crisis, read more.

      That's always the line from cultists. "Read more. Then you will believe."

      Real scientists take the time and effort to show you how they got it right, with numbers and charts and tables and figures. Cult scientists just say "Read more; wisdom and understanding are buried deep within the text."

      It's just a trick to get you to read so much of the cult material that you buy into the cult. Classic trick.

      His model is simple, looking at sectoral balances and sources of spending. And he noticed way before 2006 that spending is financed with debt and that debt can continue to grow only when asset prices continue to grow faster than GDP or incomes. That clearly cannot go on forever so something has to give. Can you time this? No.

      Sure, but where's the prediction that it will end in a crash instead of just slowly petering out and stagnating?

      Also, and this is a subtle point: That sort of "prediction" follows 100% from the assumptions, which could just come from thumbing through an old Minsky book. The model itself adds no value above and beyond the assumptions.

      (This is also true of a lot of mainstream models, e.g. RBC models.)

      But there is a fundamental difference between congratulating themselves on the Great Moderation as the sweetwater did, or worrying about nonsense like deficits of a sovereign currency issuer like Krugman did and not noticing that other and much more imminent things are unsustainable. Godley said the crisis would come from households unable to further increase their debt and it did. Who else was saying this? Who of the neoclassical economists (including neo "Keynesians") was saying this?

      This is a good point. I agree.

      The fact that Godley had no model that predicted the crisis doesn't mean we should deny him credit for personally saying a crisis - of the kind we ended up seeing - was possible!

      Krugman you lionize so much got it exactly wrong

      Ah, but what he got right was the prediction of what the post-crisis recession would look like (though not entirely).

      Keen's models - you are right, they don't give numerical predictions, they are basically toy models but they capture some crucial part: financing spending with debt leads to an unstable economy. Good insight from a toy model.

      Maybe. Problem: It's not always true. Sometimes, debt/GDP runs up hugely and there's no crash.

      Delete
    20. Anonymous12:58 PM

      I was just a little anon dude so I got lost in the shuffle, but I'm still interested, Noah, in what you regard as the core beliefs of MMT. It doesn't seem to me like they're working off anything more radical than "the government can't default" and "balance sheets must balance," but maybe there are assumptions hidden in there that I'm not seeing.

      Delete
    21. I was just a little anon dude so I got lost in the shuffle, but I'm still interested, Noah, in what you regard as the core beliefs of MMT.

      Actually...I'm not sure! I've read some Wynne Godley papers, but the implications of those papers (if there are any) don't seem much related to what people like Warren Mosler say on the internet and in debates. Yet both those guys are "MMT"? It confuses me.

      "The government can't default" <-- I don't think MMTers believe this...do they? I think they believe that if the central bank and govt. can collude, the central bank can finance debt by printing money. For a while, this won't have much if any deleterious effect, but past some unforseeable point, it will involve a choice between default and hyperinflation.

      Obviously a govt. can choose to default.

      "balance sheets must balance" <-- MMTers do talk about this a lot, but I can't figure out what this is supposed to show.

      Delete
    22. "That's always the line from cultists. "Read more. Then you will believe." "

      Haha, you got me. Ok, don't read any more Godley, or MMT. Happy?

      I am indeed a cult scientist, so you should read real scientists (but not Godley, god forbid!). Catch 22. I think predictions should always be conditional on the policymakers response. And this is what Godley produced, and ppl from the Levy institute produce: their strategic analyses. So there were ones by Godley amd Zezza from 2006 I believe where he showed 3 scenarios of debt, public debt and spending. This showed that if real estate pops either public deficits increase hugely or we will have a depression. But again, please don't read that stuff :)

      "Sure, but where's the prediction that it will end in a crash instead of just slowly petering out and stagnating?"

      The usual bubble mechanism: once asset prices go down, people need to unwind, default, stop spending, put houses on the market, asset prices go down further, people who bought on the hope the prices would appreciate and who couldn't possibly make reset payments start going bankrupt and walk away, banks go bankrupt or jack up lending standards. Etc. This is not a scenario for stagnation "at a permanently high plateau".

      "Maybe. Problem: It's not always true. Sometimes, debt/GDP runs up hugely and there's no crash."

      When did the private debt run up hugely and there was no crash? I showed the graph for the US above, here is Japan: http://1.bp.blogspot.com/_up3_ViopRks/Slx0WvoQFxI/AAAAAAAACBs/7r9BColqB5k/s400/JapanDebtToGDP.jpg

      The problem with Keen and Godley is that they predict rare events. This stuff happened twice in 100 years. Actually each time there was a debt runup (importantly: a private debt runup) prior to that. But indeed it doesn't prove by itself debt runups end 100% of time in crises. But if you look at balance sheets it is indeed very plausible. Minsky shows why: people try to ride the wave, take out debt to bet on the further asset rise, and some get so leveraged that they can make payments *only* when asset prices rise further (the Ponzi phase). If they don't the ride switches to the slide down.

      Can you quantitatively model inflating and popping bubbles? It is like non equilibrium statistical mechanics, phase transitions and renormalization group stuff, in econ we are not yet there, maybe we never will?

      Delete
    23. Anonymous1:31 PM

      You're right, I paraphrased poorly - L. Randall Wray in this video says, "The government can never be forced to default. It can never be forced to miss a payment. It is never subject to the whims of bond vigilantes."

      http://www.youtube.com/watch?v=i35uBVeNp6c (at about 3:15)

      So I think he'd agree with your reading there, that default is possible for political reasons, just never economically necessary if that the central bank does what the treasury tells it to do.

      That video and the Kelton lecture from the same series (http://www.youtube.com/watch?v=ba8XdDqZ-Jg, Mosler is first, Kelton starts about 26 minutes in) have given me what I think is a pretty decent understanding of MMT from a non-economist, non-expert position. Kelton focuses more on the balance sheet stuff - again, as pitched to a layman (me). If you ever do a longer piece on MMT I'd love to see you respond to what you agree and disagree with in those videos!

      Delete
    24. You're right, I paraphrased poorly - L. Randall Wray in this video says, "The government can never be forced to default. It can never be forced to miss a payment. It is never subject to the whims of bond vigilantes."

      Actually I think most mainstream economists would agree with the first two of those sentences. Not with the third, though. Mainstream economists would generally say that if bond vigilantes show up en masse, they can force the central bank to take up more of the burden of financing govt. borrowing, and that that will cause inflation, and eventually hyperinflation.

      If you ever do a longer piece on MMT I'd love to see you respond to what you agree and disagree with in those videos!

      Will do!

      Delete
    25. Noah, one last point:

      You wrote to Anonymous: "Yet both those guys are "MMT"? It confuses me."

      You behave like you do us a favor you learn about MMT. Honestly: nobody cares, you can stay confused, your loss, not ours. It is actually somewhat funny for us how a guy with a PhD in economics struggles with prospects of "financial repression in Japan" because he thinks yen is a scarce commodity like glass beads or something. So MMT is confusing but at the same time you don't want to hear "read this, read that". Yes, actually MMT simply combines insights of Godley, Knapp, Mitchell-Innes, Abba Lerner, Marx, Keynes, Kalecki. Interestingly Mosler figured most of it himself, but it was out there before, now it is getting simply tied together. MMT is fine with admitting it is build on pre-existing stuff. But hey, we are cultists and you don't want to hear where read about this from actual researchers. It is so confusing anyway.

      MMT cultists (like us) are annoying trolls, so I guess you want to be annoying back. :) Good job. But if MMT is right then the joke is on you. Honestly, I would care if Krugman converts (and he made big steps), not whether you convert, no offense intended. Your blog is very interesting anyway.

      Delete
    26. Anonymous7:46 PM

      Are you and I reading the same Kinsella?

      "On the negative side, so far most of these models, with the honorable exception of the Levy model run by the Levy Institute at Bard College, have next to no grounding in empirical macroeconomics."

      The Levy model is Godley's model. Also:

      "Stock flow consistent models have the potential to support, supplant, and substitute for the prevalent macroeconomic modeling methodology."


      Which particular assumptions in Godley? Now we are getting interesting.

      Re: my assumption you haven't read any actual MMT writings - because every critique you have made has been about blogger commenters, not about the actual developers. If you have read the developers, why was your initial response "You can tell MMT is a cult because no one knows what it is. Every fan or adherent or believer seems to have an entirely different idea of what MMT says." - if you had read the actual developers, then you would know they don't have an entirely different idea of what it says, because they are all saying the same thing.


      "Well, apart from Godley and a couple other researchers, the belief system seems mainly propagated over the internetz."

      For your edification, here are some broad supporters of MMT beyond Godley and the names you're probably familiar with (Wray, Mosler, Kelton, Fullwiler), for your edification: Hyman Minsky, James K. Galbraith (co-drafted Humphrey-Hawkins Federal Reserve mandate), Charles Goodhart (Bank of England Monetary Policy Committee), Frank Norman (frmr Ass. Sec. of the Treasury and CEO of Shenzhen Bank, CFO of Bank of America and Vice President of Citigroup), Jan Kregel (frmr high level UN Development/Finance director and student of Joan Robinson), Christine Desan (Harvard Law School Professor and Legal-Monetary Historian), Philip Harvey (Labor law/economics professor at Rutgers) and Bill Black (former deputy at Office of Thrift Supervision).

      Delete
    27. One more thing: why I am an MMT cultist.

      In July 2011 Krugman was "puzzled" (his word) on his blog why Italy has higher debt yields in Japan, with the same demographics. I was one of those who wrote in comments: check out MMT, they have known the answer for years, Japan has its own currency, Italy borrows.

      And in November 2011 Krugman "discovers" the answer: it is because Japan has its own currency!
      http://pragcap.com/a-puzzle-solved

      For a couple of months I knew something Krugman didn't. I must admit it did and still does feel pretty good! I was right and he was confused, and I am a rube (physics PhD).

      Same with the Keen debate: I was one of those who wrote acerbic comments under his early posts that indeed banks create deposits out of thin air. At that point I was pretty pissed that I know that and he doesn't. A couple of days later he admitted: yes they create deposits out of thin air. Again, felt pretty good.

      There is still the belief Krugman holds (I think, at least this was his last beef with MMT) that in good times excess reserves would be inflationary. Bankers say MMT is right and no such thing will happen. Econometric studies also show reverse causality lending->deposits->reserves (I know you don't take links from MMT cultists, but I am ready to paste them), so I feel good that again I will be right and he will be wrong. The results are basically already in, but he simply believes the first thing he learned, the textbook model.

      In late 2010 Scott Sumner predicted no impact from austerity in Britain because "when CB targets inflation the fiscal multiplier is zero". I, imbibed on the Billy Blog, was certain bad times would come to Britain. Again, I was right and the professional economist was wrong.

      Have you ever been right when Krugman was puzzled? Then you know how great it feels (I really like and respect Krugman, not so Sumner). That is why MMT has so many cultists. Once you learn basics you know (in some select areas only) that professional economists at times don't know they they are talking about.

      So if everything else in MMT says turns out to be bunk I am already grateful to it and forever will.

      Annoyingly, recently when writing for the NYRB Krugman claimed that the insight "own currency" comes from Paul de Grauve, who "noticed it" recently. It is false, and he knows it. This was just rewriting history and a crude lie. You always cite the first guy who said this, not the first guy who is from your school of thought. It smacks of DeLong's effort to retroactively sign up himself and Krugman into the "Minskyan" camp, when Krugman first read Minsky ...in 2009. They know their strand lost and that is why they tinker with the public record. Galbraith commented on this attitude many times, they behave like all these insight come from within the school, and this is how they portray if for the public. Otherwise people would start asking: "why is that it is you guys who populate our newspapers and airwaves again?".

      OTOH, when Krugman converts to MMT, DeLong and Thoma will follow in a day and you a week later (you look like a quick study ;)) and then what will dudes like me do? :( The feeling of superiority will have to fodder, this will suck bad. I am not going to Landsburg's and Cochrane's blogs. When you guys convert you will be able to crush them in no time and there will be no function for the cultists...

      Delete
  46. chaotic models by definition have little to no predictive power

    You go through all the different things that predictive power might mean, then throw this out without much thought as to what you mean here. Chaotic models are only limited in their ability to predict timing; they need not be limited in their ability for any of the other kinds of predictions you mention. And they are the only kinds of models that can provide insight into what drives real-world chaotic behavior. Weather forecasters and climate scientists will never give up their chaotic models for ones where storms are predictable responses to exogenous shocks. And what of housing bubbles? If you were presented a model that claimed to be able to able to predict bubbles as a predictable response to some kinds of exogenous shock, that come to an end after a predictable period of time or as a predictable result of some other kind of exogenous shock, would you accept it as a plausible explanation of the dynamics behind bubbles? Of course not. So why would you make one of your selection criteria for economic models an inability to describe such a thing as a bubble?

    ReplyDelete
  47. Anonymous5:06 PM

    The macro models that we studied while I was in business school at U Chicago were so bad that they were laughable. Models that can't explain mass unemployment are useless, and I'd never accept advice from any economist that can't explain involuntary unemployment.

    Here's a snippet of John Cassidy's interview with Gene Fama:

    Cassidy: So what caused the recession if it wasn’t the financial crisis?

    Fama: (Laughs) That’s where economics has always broken down. We don’t know what causes recessions. Now, I’m not a macroeconomist so I don’t feel bad about that. (Laughs again.) We’ve never known. Debates go on to this day about what caused the Great Depression. Economics is not very good at explaining swings in economic activity.

    The full interview is here: http://www.newyorker.com/online/blogs/johncassidy/2010/01/interview-with-eugene-fama.html

    Moral of the story: Never trust a freshwater economist.

    ReplyDelete
    Replies
    1. Models that can't explain mass unemployment are useless, and I'd never accept advice from any economist that can't explain involuntary unemployment.

      Agreed...

      Fama: (Laughs) That’s where economics has always broken down. We don’t know what causes recessions.

      Fama said a lot of silly things after the crisis, like "stimulus can't cause recessions". But in this, he's right. We don't really understand the causes of recessions. By "we" I mean "humanity". And if you think we do, you've either been tricked, or managed to trick yourself...Because we don't. But we understand some things about the phenomenon, and I think we're slowly moving toward a more complete understanding.

      Delete
    2. Anonymous5:17 PM

      Noah, i am not so interested in this debate you and Steve Keen have,i guess one
      could get carried away on internet,and of course there are a lot cultists of all labels on internet,but i must complain when you dismiss people like Wynne Godley as some sort of crank.It´s simply not fair and infact put you in an odd position even among mainstream economists.I don´t think you are that familar with his work,if you make such statements.Wynne Godley worked out his Sectoral Financial Balances Approach together with Nicholas Kaldor Brittish Treasury and it´was used by and is still used by Treasuries around the world in a very effective practical way and it often citen as one of the more inventive useful tools in large scale national accounting.You may go on a rave at people as Godley and Kaldor and why not editor of Financiel Times Martin Wolf,that all was involved building the model but i think it´s like you go on bark at Paul Krugman and claim he don´t know anything about International Trade.I don´t think Godley made any claim about predict anything,he was not that sort of person. But his predictiction on many events from 1970 until his dead 2010 was very good ,and earned him the title 'Cassandra of the Fens' by others.

      Delete
    3. i must complain when you dismiss people like Wynne Godley as some sort of crank

      But I don't! I know relatively little about Godley...I've only read a couple of his papers, and I know nothing about the man himself.

      So I definitely don't dismiss him as a crank. Not at all.

      Delete
    4. Anonymous9:06 PM

      I understand Noah,thanks for your response. Here is some about Wynne Godley, i think worth reading from - Financiel Times- by Martin Wolf, The Economist and The Guardian. Godley was so much more than some papers in late life,he was an first class economist with many contributs,in many fields.
      Since 1956- in Brittish Treasury and as Professor at Cambridge.
      The Guardian:
      http://www.guardian.co.uk/politics/2010/may/20/wynne-godley-obituary

      The Economist:
      http://www.economist.com/node/16214152

      Martin Wolf-Finacial Times
      http://blogs.ft.com/martin-wolf-exchange/2012/07/19/the-balance-sheet-recession-in-the-us/?

      Delete
    5. Thanks, Anon! I shall read.

      Delete
  48. Anonymous12:37 AM

    The installment of the ultimate Wall Street insider, Paulson, as Treasury Secretary; and the fast-tracking of renowned scholar of the Great Depression, Bernanke, as the Fed Chairman during the waning days of a gigantic credit bubble cycle indicated to some extent there were serious worries about the state of the economy at the time by our economic planners. Washington had an inkling of the potential collapse and quietly made plans. Was Hilary Clinton divestment of all her portlios during 2007-2008 primary in the name of conflict avoidance a simple stroke of luck? I think not.

    ReplyDelete
  49. This is too much of a Baker-Smith bromance for a dense economic debate. Write how Nafta sucks or punch someone in the face already!

    ReplyDelete
  50. Sorry...how nafta rules. That'll stir the pot

    ReplyDelete
    Replies
    1. NAFTA sounds like a good deal to me!

      Dean and I disagree on a lot of stuff...high-skilled immigration, for instance.

      Delete
  51. Anonymous1:28 AM

    Anyone who has read Keen knows full well that he has been warning since at least 1995, not of an imminent financial crash (though he did do that in late 2006), but of the likelihood of financial instability based on Minsky's Financial Instability Hypothesis. Which implies that, given a sufficient period of manufactured economic stability, it would certainly lead to an extended period of instability -- just as we have and are continuing to experience. This is not rocket science, unless, of course, one is a neoclassical economist, in which case there is no science, just incompetent make-believe models.

    Keen explains in his Debtwatch No. 41 in December of 2009 just how and when he first realized that the financial crash was imminent. That while preparing to testify as an expert witness in a housing loan fraud case in Australia, he reviewed the levels of private debt to GDP in both Australia and the U.S. and was astonished at how high each had become -- and how dangerous. I have accessed that case (Permanent Mortgages Pty Ltd v Michael Robert Cook and Karen Cook [2006] NSWSC 1104); and that his testimony, as cited by the judge's decision, does, in fact, reflect this assertion.

    Furthermore, he goes on to state that it was at this juncture when he first started to speak out about the imminence of a financial crash as opposed to the issuance of broad general warnings about build ups of massive leverage and unprecedented levels of private debt leading to periods of financial instability.

    It was this kind of general warning, based on extensions of the work Of Minsky and Godley that led to the development of his current Minsky model. It is, I believe irresponsible faux journalism to claim that Keen was predicting an imminent financial crisis in 1995; or that he did not, in fact, predict one at all in 2006.

    It would seem from this that utopian concepts of economics and badly (or incompetently constructed) models, incapable of predicting anything meaningful, which have come to dominate the field have reached a level of theological regard that any challenge brings out the witch hunters in mass.

    ReplyDelete
  52. Anonymous1:52 AM

    Baker says repeatedly - like every day. almost - that any idiot should have seen the housing bubble, the fundamentals of house prices vs rental prices were so out of whack and the trend of house prices versus incomes was so obviously unsustainable, and that the failure of the economics and business journalism professions to fail to see it demonstrates a combination of corruption and incompetence that disqualifies them from being taken seriously on virtually every issue.

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  53. Well, well, well...isn't it amazing how *EVERYONE* seems to be at each others' throats? [/sarcasm]

    ReplyDelete
  54. I knew there was a problem with housing in Florida when I saw people making $100k buying $1M homes, those making < $50k, $500k homes, and people buying 'investment' properties not with the intention of renting them, but to hold them for 6 months, and then just sell them. With the 'investment' property purchases, I also knew that people had to be falsifying the 'primary residence' part of their mortgage. I didn't know the extent of the fraud, but knew there was some there (although that is a minor fraud, it still hurts because it directly affects speculators).

    Now, you have much lower leverage buyers in SoFla at least, investors paying cash and renting homes. The situation definitely different now.

    ReplyDelete
  55. noiselull12:59 PM

    Check this Austrian nuttery out: http://wiki.mises.org/wiki/Austrian_predictions/Housing_bubble

    ReplyDelete
    Replies
    1. Oh Austrians...you're next. ;-)

      Delete
  56. srini1:52 PM

    Roubini was right but for the wrong reasons and is very likely that he would not have made any money because if you dont understand the reasons you cannot bet on the right instruments.

    Roubini's housing bubble collapse hypothesis was based on the causal chain of US current account deficits causing the dollar to collapse, inflation to rise and US interest rates to spike, which in turn would bring down the housing bubble. Well, if you had bet on interest rates rising in 2005, you would have made some money by mid-2006 but lost heavily thereafter. BTW, Delong too was in the camp of dollar plunge--although he was a Pangloss on the bubble.

    BTW, if you believed the Austrian worldview, you might have profited from gold--although it performed poorly during the teeth of the crisis. Like Roubini, they kept looking for dollar weakness and surging inflation.

    On the other hand, those who looked at private debt as the problem (Godley, Keen, etc.) correctly foresaw a deflationary bust with interest rates falling. They might have lost some money in 2005-2006 but would have made 10-fold in the bust. The way to circumvent the timing problem was to buy out of the money puts on rates and keep betting on it. Because the market was essentially pricing stuff like Roubini, the curve was in your favor. I know this first hand because we ran a hedge fund betting on the collapse--but without the benefit of Paulson type sweetheart structures--during this period and eventually made a ton of money. The market and most mainstream economists never saw debt-deflation and they still don't understand debt-deflation, although they appear to pay a lip-service to it since 2008.

    I think it is not just a simple prediction, but the overall analysis of the causal mechanisms and outcomes across a range of indicators that should be taken into account. For example, those housing bubble doomsayers who predicted a dollar collapse or a yield rise because "global savers would not fund US deficits" are simply useless. There is not much you can do with their forecasts either as a investor or as a policymaker.

    ReplyDelete
    Replies
    1. Roubini was right but for the wrong reasons and is very likely that he would not have made any money because if you dont understand the reasons you cannot bet on the right instruments.

      Roubini's housing bubble collapse hypothesis was based on the causal chain of US current account deficits causing the dollar to collapse, inflation to rise and US interest rates to spike, which in turn would bring down the housing bubble. Well, if you had bet on interest rates rising in 2005, you would have made some money by mid-2006 but lost heavily thereafter. BTW, Delong too was in the camp of dollar plunge--although he was a Pangloss on the bubble.

      BTW, if you believed the Austrian worldview, you might have profited from gold--although it performed poorly during the teeth of the crisis. Like Roubini, they kept looking for dollar weakness and surging inflation.


      This is good to know. Yeah, I knew Roubini called the bubble, but I didn't know what economic knock-on effects he predicted. Looks like he got that all wrong.

      Delete
  57. As a fan of yours (because of your Japan connection and my interest in economics) I'm perplexed at your unseemly attacks on Steve Keen and his attempt to apply the now 40+ year old ideas of mathematical analysis of complex dynamic systems -- aka "chaos theory." Reading your comments over the last year I was beginning to think that I had a major misunderstanding of complex dynamic systems math. I brought this up with my son who is in a Master's program in Mechanical Engr (with a second degree in a Japanese Technical Program --language, culture, and Engineering stuff). I described what Keen was doing and he immediately said that this was a basic element of engineering analysis of complex dynamic systems such as structural flight dynamics, power control, and inst4rumental flight control systems. And he proceeded to snow me with ODE's and all sorts of transforms including those elusive Jacobian transforms. What a surprise that was to me that Prof. Steve Keen worked with the applied math folks at the Levy Institute at the Univ of Toronto in developing his economic models.

    Have you read Matheus Grasseli's critiques/analysis of Keen's model (a work in progress)? If so could you explain why this is naive or not applicable to empirically analyzing economic data?

    Steve Keen's latest article in the Business Spectator seems to be a first salvo back at you in your mutual "chess game." Link below:

    http://www.businessspectator.com.au/article/2013/6/3/economy/calm-deathly-debt-storm#ixzz2V7oG1C7R

    I'm learning a lot from your discussion and anxiously await your clarification and arguments.

    ReplyDelete
    Replies
    1. Sorry to be pedantic, but it's not the "Levy Institute at the Univ of Toronto". You're confusing the Fields Institute at the University of Toronto in Toronto, Ontario, Canada, with the Levy Economics Institute at Bard College in Annandale-on-Hudson, New York, U.S.A.

      As for Grasselli's analysis of Keen's Minsky model...I'm not sure how cited Grasselli's article has been. But you do make a good point that it ought to be read.

      Delete
    2. You were absolutely correct -- and no need to feel you were pedantic. I totally blew that by conflating my faulty memories. I did catch it later and offered an apology at 9:52 PM last night.

      Delete
  58. Anonymous9:28 PM

    This is incredibly informative: it states that Steve Keen's models are no better than flipping a coin. Several places not to look for answers.

    ReplyDelete
    Replies
    1. @Anonymous at 9:28 PM

      Excuse me, but what are you referring to with "This is incredibly informative: it states that..." ??

      Do I get a prize if I guess the "Several places not to look for answers." ?

      Delete
  59. Hi Noah,

    I´ve been following your blog for a year, i guess, but sometimes is hard for me to follow your arguments because I didn´t learn well macroeconomics. I was a rebel peruvian student who hated neoclassical economics, and now I want to study Economic History because I want to spend more time in the real world than imaginating theorical worlds that does not match reality. Anyway, NOW I understand that I need to know this stuff before I can critice it correctly, so I´m going to re-learn it. I´ve always admired your critical insight of neoclassical economics and your willingness to find empirical evidence to know which theory is better. So I want your advice about readings. Where should I re-start? Which textbook do you recommend? I would be really greatful if you can help me with this, and hope we can meet in the future in some international congress of economics or whatever.

    ReplyDelete
    Replies
    1. Anonymous3:42 AM

      Why learn a false system. Your fist instinct was correct. Step over or around the dung heap and progress. Many of those people are defending an indefensible theory, against evidence and data. Arguments may not work.

      The field is open for improvement. There are much better approaches. Check out Steve Keen's work. Look at Juris Verzemnieks' comments above.



      Delete
  60. My Bad!

    My party atmosphere clouded my interpretation of IIRC regarding Matheus Grasselli -- an awesome and personable applied mathematician with a wry sense of humor. That's a rare trait in mathematicians, from my experience.

    Grasselli is with McMaster University:

    http://www.math.mcmaster.ca/~grasselli/

    His critique/analysis (with Costa Lima) of the math in Keen's approach
    is found at:

    http://www.math.mcmaster.ca/~grasselli/GrasselliCostaLima_MAFE_published.pdf

    My apologies for the unintended mis-direction.

    ReplyDelete
  61. True story: A friend of mine was thinking of buying an apartment in Harlem a few years ago. Before he did, though, he called Dean and asked him if home prices were still high relative to fundamentals. Only when Dean told him, no, the bubble has fully burst, did he go ahead and buy the place.

    Also, recall that Dean himself sold his house in DC sometime in the mid-2000s and rented a place, specifically because he thought there was a bubble. So he put his money where his mouth was.

    ReplyDelete
  62. Also, as others say, Steve Keen is not representative of Post Keynesian work in general. Marc Lavoie's Introduction to Post-Keynsian Economics, or Paul Davidson's John Maynard Keynes, would give you a better sense of it.

    ReplyDelete
    Replies
    1. This is useful information.

      Delete
    2. Regarding Davidson's book, Noah Smith...there are a few book reviews on Amazon.com. I'll show you the links here (in order of most recent to the oldest) and leave you to decide what to do.

      http://www.amazon.com/review/RH6U5D8J99QR9/

      http://www.amazon.com/review/R29KRQ27V5R0J2/

      http://www.amazon.com/review/R1KYGLAQ1WZPRX/

      BTW, in the third review, that "J. M. KEYNES" is actually Paul Davidson himself.

      Delete
    3. In many ways Keen is more of a Schumpeterian or a Fischerite than a follower of Keynes (though he does agree with Keynes' general points). It's that Post Keynesians are the only 'school' that accepts some form of Endogenous Money, and rejects many of the anti-empirical theories of neoclassical economics (i.e. price theory and general equilibrium).

      Delete
    4. Kain: Um...sorry to be pedantic, but it's "Fisher", not "Fischer". So it ought to be "Fisherite". (But I personally think "Fisherian" sounds better.)

      Delete
  63. For the record, I like Steve Keen. He is a fun bloke, mate, and I think he was very badly mistreated at U. of Western Sydney. This is a scandal, as far as I am concerned.

    That said, this does not mean that I agree with everything he says or does, even though I helped get some of his more important papers published, :-). Oh, and I was ranting about chaos theory and all that long before Steve got out of his diapers, :-).

    On the matter of Roubini, I noted above that neither he nor Baker took account of the effect on US GDP of the weakness of the dollar in 2007, even though Roubini was indeed focusing on a dollar rout for his model. Of course, when the Minsky Moment arrived in Sept. 2008, the dollar surged as the safe haven, and the least known part of the Bernanke/Fed save was to buy $600 billion of eurotrash to prop up the euro. The Fed managed to quietly unload that stuff within about six months.

    ReplyDelete
    Replies
    1. For the record, I like Steve Keen. He is a fun bloke

      Really? On Twitter he's the most incredible jerk. Always telling people they don't understand differential equations, or complexity theory, or chaos. Always starting fights with other people in the Keynesian camp (e.g. Brad DeLong), saying "I predicted the crisis, not you!" And his followers are even worse, and he constantly encourages them to spew.

      Delete
    2. Really, Noah. I agree that some of his followers are insufferable, but with him you have to realize that he is an Aussie, and they are just very punchy about how they deal with others in debate, mate. In person, he is a great guy and lots of fun.

      Delete
    3. Well, you know us Americans. Quick to reach for our guns!

      Delete
    4. Anonymous7:43 AM

      People who are all chummy and charming in person but vituperative jerks in situations where it feels safe to do so are usually known as bullies. I'm just saying.

      Delete
    5. Anonymous7:08 PM

      Here is an ecellent book about what Post-keynsian thinking is real about
      CAPITAL CONTROVERSY, POSTKEYNESIAN ECONOMICS AND
      THE HISTORY OF ECONOMIC
      THOUGHT
      Essays in Honour of Geoff Harcourt Volume One
      Edited by
      Philip Arestis, Gabriel Palma
      and Malcolm Sawyer
      http://digamo.free.fr/arestis972.pdf

      Delete
    6. As a fellow Australian, I can attest that we are a rowdy bunch of brawlers. That said, Keen can be incredibly polite when people actually take him seriously and treat him with equal respect. You can see that in his recent talk at Harvard Law School, which includes in the audience Post-Keynesians from different backgrounds, including Marc Lavoie (he's the one speaking with a French accent):

      https://www.youtube.com/watch?v=qMG8o_YVAt0

      It also doesn't help civil discourse when people like you loudly and prematurely call his (and the PK and MMT schools) life's work that of a "cult", and people like Brad Delong make intellectually dishonest claims like that he and Krugman should be listened to because they work in the "tradition of Minsky" to gain legitimacy, without mentioning those who actually worked with Minsky before he died and with full knowledge that Krugman only read Minsky in 2009. I'm aware of your earlier point that in the specific context of the freshwater vs saltwater debate he was referring to that claim might make sense, but the omission of reference to other Minskyites in his other writings is notable and renders that rejoinder quite unpersuasive, in my opinion.

      I personally don't care about who is working in what tradition as much as i care about the quality of their analysis. But when it comes to who is engaging in appropriate professional academic behavior, the marginalization and delegitimization of the heterodoxy for years by people like Krugman, Brad Delong (and indeed, until your recent "#eggonface" comment, yourself) are felonies compared to any nicety misdemeanors that Keen is guilty of.

      Delete
  64. Anonymous12:59 AM

    The "bubble" was caused by glass steagall's repeal in the US. It allowed the system to build leverage quickly and helped during a tight monetary period. IMO the repeal of Steagall was a targeted risk that didn't pan out. The hope leverage would spur innovation got wasted into useless consumption as investment stalled. I think some of this lack of confidence goes back to the 3 20th century booms in total anyway. They knew that when the tech overhaul was completed in 2000 and past Y2K, there was nothing revolutionary to innovate the modes and they had to hope for a miracle. It didn't work, but they bailed out the system anyway, I doubt the overall economy is far behind where it would be now if the bubble hadn't existed. Just a series of recession's in the 2000's rising unemployment higher and higher each contraction to things balanced.

    The problem is the mode of production isn't producing the amount of profit the capital and executive classes want so they are literally "eating" society to keep up their 90's living styles. The surge in debt provided a cushion for awhile while the mode was rebuilt and reinnovated. Except capitalism found out the needed innovation was far far more daunting in need, than they thought. It wasn't just base systems, but the whole damn thing as seen in rising energy prices. The tech just isn't there. Tell the guy at Papa Johns and his Execs, Shareholders to reduce their living styles so their workers can afford more material wealth to boost the ecoomy. I bet that goes over well.

    The Western economy peaked in 2000 and ever since has been "stagnating". There is not 'stagnation" now, but since 2001. This problem represents the messages on this blog. The only way you can get the capitalist system going is either for the capital and executive classes to reduce their living styles or innovate production modes that can produce profit+lifting of all boats like in the late 20th century.

    Instead we get this intellectual fantasies of fiscal expansions, "liquidations", free markets, command markets ete ete

    Paul Krugman
    Peter Schiff
    Steve Keen
    David Beckworth

    all guys of different "economic" pursuits. Not one wants to admit what capitalism really is and why it is failing. They instead, want to blame the bourgeois government...........the corporation..........the financialist. They don't want to blame the problems of capital ownership itself which has a finite lifespan.



    ReplyDelete
  65. Reading this:
    http://dealbook.nytimes.com/2013/06/03/behind-the-rise-in-house-prices-wall-street-buyers/

    makes me re-think my idea that the rebound in home prices is very solid. There will be a dip in prices when institutional buyers stop buying, and many of those institutional buyers are not turning a profit:
    http://finance.yahoo.com/q/is?s=SBY+Income+Statement&annual

    Small investors quickly get cash-flow positive. I don't know the sales breakdown between institutional buyers and smaller investors. Prices to rents, especially with financing rates are very attractive, but you have to keep the units rented. That is easier for boots on the ground smaller investors. I have not read on a really functional institutional rental operation. It takes leasing agents, handymen, landscapers - if there is no knowledge of a local market, the first encounter can rip-off the investor.

    What happens when a hedge fund invested in rental properties gets a huge redemption call?

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  66. Anonymous9:34 AM

    OK let's play the same game for predictions about interest rates/inflation staying low.

    Who predicted that interest rates/inflation would stay low for the past five years?

    Who is predicting that interest rates/inflation will stay low for the next five years?

    Who is taking credit for being right about interest rates and inflation?

    Economists are basically astrologers; they *all* cheat, and pretend after-the-fact that their hand-wavy "predictions" were right-on-the-money.

    Basically for every prediction there is a tension between improbability and accuracy. I could predict the Sun could come up tomorrow, and I'd be right, but that's not saying much, because it's extremely likely. I could predict that inflation will stay below 10% next year; I'd also be right, but again big deal. What economists usually do is make very ambiguous statments where there is always an interpretation where they can be considered right, so their predictions are actually like predicting the Sun will rise tomorrow; the best at this game seem to make precise predictions, but only because they've put in an intelligently placed weasel. E.g. yesterday Krugman predicted that "the interaction among large welfare states, relatively high labor mobility, and lack of fiscal integration in a currency area may turn out to be really deadly." Can't be wrong with that may!

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  67. Anonymous2:56 PM

    Having read the post and all comments.......
    Not sure I understand the point of the post?

    Keen is not Nostradamus?
    Keen is more personal salesman than economist?
    Keen would be well advised to 'pull his head in'?

    At a high conceptual level, Keens position (amongst others) regarding the role of private debt, the banking system and credit has value. Sure there are no solid quantitative models in place to date to predict more accurate timings, although I've not seen any such claims being made of such.

    I'd agree with my fellow Anonymous commenter above with the statement:

    "But it's uncharitable and incurious to let his personality get in the way of an appreciation for his contributions."

    Reading the article I felt perhaps a sentiment of personal dislike for the Keen chest beating / self promoting / ego driven at times(?) approach has tainted delivering a truly unbiased analysis of where he fits in as role of predicting such crises.

    I'd say the waters are muddied as to who, when, where predicted the crisis. With many laying claim to varying degrees of accuracy.

    However the 2 (imo) main pieces of evidence demonstrated Keen had commenced beating the drum louder than in past years as the crisis approached include the pro-active measure taken in 2006. Each were NOT cited in your original article, (of which evidence could not be more easily found ....simply watching any number of Keen videos on YouTube talking about such measures for example) namely;

    Evidence in Court Case (previously cited above)
    Permanent Mortgages Pty Ltd v Michael Robert Cook and Karen Cook [2006] NSWSC 1104)

    Taking the initiative to create the 'Debt' focused blog in 2006, to monitor and commentate across such issues to to the looming crisis (Archives since 2006);
    http://www.debtdeflation.com/blogs/pre-blog-debtwatch-reports/

    Some great counter argument and points that demonstrate some of the flaw in Keen's predictions. Although (to me) it read a little like one way traffic and a shoot down as opposed to unbiased review.

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  68. I am putting this up here because my link to here in it does not seem to work, nor does my one supposedly going through economistsview. Anyway, I have more to say on all this.

    http://econospeak.blogspot.com/2013/06/who-predicted-crisis-redux.html .

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  69. Perhaps we should all list how we were mistaken. We may learn a lot more from that. I saw the housing bubble but underestimated its magnitude by 50%. Didn't know how bad underwriting had become. Recession timing close, I took 8/8 in honor of the olmypics. A deep one with slow recovery as are all financial crises but not quite that deep. I expected faster and surer Fed action while they decided to fight the last war. I overestimated Wall Street and believed them when they said they had hedged their risk. In retrospect a significant error since their profits wouldn't have been nearly so good beforehand if they had.

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  70. For what it is worth, in my post above, I have corrected the link to this post, and also made various other corrections, perhaps most importantly withdrawing my claim that Steve Keen's department was eliminated to get at him. I have been informed by credible sources that he was a victim of a higher bad policy, but I continue to maintain that it is a scandalous situation and that he should not have become unemployed as a result of what happened there.

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  71. Anonymous7:48 AM

    I find it very frustrating to read articles like this. I am one of the rare ones to have foreseen these 3 events. While they were happening, I was ridiculed and now I am told that I am deluded with the hindsight phenomenon.

    However, I did have one delusion, I actually thought that when the whole thing imploded, that we would finally be forced to clean up our act. LOL!

    I have learned a lot since then. If you were right in your predictions, nobody will remember you were right, they will only remember you were a pessimist. The few who remember will not want to be around you because they will want to avoid any kind of I told you sos.

    But the most important lesson of all is that the world evolves the way it will and not according to your preferences.

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    1. Anonymous3:39 PM

      Yes i agree fully.Everyone with his head screwed on,that read a newspaper must noticed the housing bubble,and that bubbles burst we know .If we not lived in denial we also noticed that we were in a time since 1980-90s with derelugation and it caused financiel speculation,stagnating wages and a very strange peculiar loanmarket that shaped a private debt bubble,was not a secret either.With some common sence i at least foresaw this event long before Dean Baker wrote about it.But this debate about what economic model that are less useless ,is to me little absurd.It´s a debate about rearrang deck chairs on the Titanic in my view.

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  72. Anonymous1:34 PM

    I've read Keen and Minsky and they have some interesting insights, but that is all I'm willing to give any economist credit for. Keen's "sin" was that he claimed to predict the future. I believe that "sin" is called hubris. Most economists suffer from this "sin". I studied political economy in the mid 70s and the only way to get a guaranteed A in my courses was to "puke" back the professor's POV. I graduated summa cum laude. Academics and ego are nothing new. My real life experience in practicing law for over 30 years is that you always recommend settlement if there is a good offer, because litigation is unpredictable. All of the variables are related to how human beings will react in a particular set of circumstances - a clerk may give you a hard time or help you, a judge can give you good or bad rulings, your witness can be great or melt down and you never know what jurors are really thinking. I've won cases that looked very bad and lost cases that looked great on paper. Based on my everyday experiences, I have never understood how economists can ignore the uncertainty inherent in human behavior and believe that they can accurately predict such a complex system of human interaction as an economy. I do believe that they can give us insights into how the economy works, at both the macro and micro level. I am also fascinated by behavioral economics, which appears to have more testable data that can actually be peer reviewed like real science.

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  73. Love this post, Noah.

    Martin Feldstein's fantastic piece "The Return of Saving" in the May/June 2006 issue of Foreign Affairs was timely, prescient, clear-eyed and highly readable. In terms of when it was published and what it laid out, for me it was the first argument that I heard that was so well argued that I immediately started looking for points of support (found a lot) and contrary indicators (not so much). It wasn't the only work that suggested what was unfolding; obviously Nouriel was on it, as were Joe Stiglitz, Martin Wolf, Professor Krugman and others, but Feldstein's is the clearest refutation to date which I can offer to the chuckleheads who suggested--and still suggest--that "no one saw this coming." Just because many of us didn't *want* to see "this" coming, doesn't mean no one did.

    Here's a link to the piece: http://www.nber.org/feldstein/returnofsaving.pdf

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  74. To add to the list of published works with correct anticipation: read what the Laboratoire Europeen d'Anticipation Politique have published EVERY month since 2006:
    http://www.leap2020.eu/Excerpts-and-public-announcements_r41.html?start=170&show=&order=

    The method they are using (and teaching) is fully respecting the criteria listed by Krugman: http://krugman.blogs.nytimes.com/2013/06/02/non-prophet-economics/
    expect that there is no mathematical model... yet. And there is a robust reason for this.

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  75. Anonymous10:23 PM

    Logic and the 50/50 prediction.

    To correctly gauge the value of a 50/50 prediction, you have to take into account the number of possible outcomes. If your mythical forecaster tells you there is a 50/50 chance you will run out of gas today, you could get the same result from the 8 ball if-you-knew-to-ask. If you go to Vegas and play roulette with your forecaster, you will be a very rich person. Meanwhile, you cannot spend your entire life asking the 8-ball questions. In this case, the forecast is very valuable.
    Since there are an infinite range of outcomes for an economy, truly forecasting a pending deep financial crisis 50% of the time is astounding.
    Even though I am an aerospace controls engineer, I find economic theory fascinating. It bothers me when I read a dozen papers from an international conference on the global financial crisis and the vast majority of papers are simply stated opinions with no factual or model backup. Sometimes I think many economists are satisfied to take a numerical Jacobian of an enormously complicated model and then throw away all but 2-3 terms.
    There is an old joke that economists were created to make weather forecaster look good. The irony is that weather forecasters have embraced stochastic models with chaos. They know just how far they can trust their predictions.

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  76. I predicted the Crash with my animated movie "Money as Debt" (2006) watched by perhaps 100's of millions of people in 24 languages 7 alphabets.

    I provided the explanation why in Money as Debt II ( 2009)

    Here's my empirical proof
    http://moneyasdebt.net/M2-M1.htm

    Full analysis and model
    http://paulgrignon.netfirms.com/MoneyasDebt/twicelentanimated.html

    And here's my peer-reviewed paper for the World Economics Association.
    http://peemconference2013.worldeconomicsassociation.org/?paper=proposed-new-metric-the-perpetual-debt-level

    I challenged Steve Keen to refute me. He said he would, but has NOT to date attempted to do so.

    I provided a radical proposed solution in Money as Debt III (2011)

    One Australian economist's assessment of my proposed solution:
    http://paulgrignon.netfirms.com/MoneyasDebt/Peter_Earl_Real-World_Economics_Review_Blog.htm

    This is all very specific reasoning backed by grade school arithmetic and simple logic. Nothing vague about it. So if you are really serious about looking for the "model" I suggest you should try to REFUTE ME. The invitation is OPEN.



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  77. Anonymous4:22 PM

    This should be required reading by schiff, greg mannarino, barnone11967/70, pastor dowell, jsnip4, fabian calvo, and many, many other pathetic YouTube cranks.

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  78. Nathanael11:09 PM

    I "predicted" the financial collapse in 2008 by reading corporate financial statements and realizing they were full of deliberately obfusticated garbage.

    I don't consider that a very impressive prediction. IT was just a matter of reading more corporate financial statements than the average person, and digging through them until I figured out what the core accounting frauds were.

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