Nobody knows nothing

Cross-posted at River Twice Research.

Everyday, my mailbox gets inundated with reports from strategists and economists. Two years ago, most were predicting a fairly rosy scenario for the global economy - and to be fair, so was I. Today, most are predicting a dire future of negative growth and economies mired in a deep and intractable recession. The predictions of the past were mostly wrong; there is little reason to believe that today's forecasts will be much better.

Of course, there were those who were warning of problems, those Cassandras that went unheeded. But many of them warned of problems unrelated to the near-collapse of the global credit system, and the fact that their predictions that something would go wrong were right doesn't actually make them prescient. It's the old "even a broken clock is right twice a day" paradox. You can seem to be right, but it's how you got there that matters. Many people correctly called a housing bubble, but almost no one identified derivatives and structured products as a pending issue that would unravel quite the way it has. The breakdown of the credit system, not the housing market, explains the particular pickle of the present.

When people look to the future, they tend to take the present and extrapolate. Industrial production is plummeting, so people forecast that it will be terrible in 2009. Unemployment is rising steeply and quickly, so predictions are that it will get much worse before it gets better. Past patterns are used as the basis of those predictions, but few question whether those patterns are indeed useful.

We should, because they aren't. Nothing quite like the present crisis has happened before. There has never been a simultaneous, global halt of economic activity. Before the information technology revolution, there couldn't have been. There weren't global synchronized supply chains and credit systems and capital flows that could halt in sync. Now there are, hence the simultaneous, nearly instantaneous cessation of activity after the failure of Lehman Brothers in September.

This also means, however, that the engine could start again in unexpected ways with unanticipated speed. I'm not saying that it will, only that the possibility shouldn't be as discounted as it currently is. Again, no one knows outcomes here, and past patterns are a misleading guide to the future. All that seems certain is that people rarely get future scenarios right, and there is no reason to believe that current projections of a dire future will be any more accurate than past projections of a rosy one.

For a look at additional blogs and other writings of mine, feel free to visit River Twice Research.

Tags: credit crisis, Economy, predictions, Recession (all tags)



But, some people know something....

You say...

Many people correctly called a housing bubble, but almost no one identified derivatives and structured products as a pending issue that would unravel quite the way it has.

But, some people have been consistently more accurate than others, IMHO, including Joseph Stiglitz, who penned this in the most recent issue of Vanity Fair: "Capitalist Fools."

In that, Stiglitz stated:

When I was chairman of the Council of Economic Advisers, during the Clinton administration, I served on a committee of all the major federal financial regulators, a group that included Greenspan and Treasury Secretary Robert Rubin. Even then, it was clear that derivatives posed a danger. We didn't put it as memorably as Warren Buffett--who saw derivatives as "financial weapons of mass destruction"--but we took his point. And yet, for all the risk, the deregulators in charge of the financial system--at the Fed, at the Securities and Exchange Commission, and elsewhere--decided to do nothing, worried that any action might interfere with "innovation" in the financial system. But innovation, like "change," has no inherent value. It can be bad (the "liar" loans are a good example) as well as good.

And, you also say...

The breakdown of the credit system, not the housing market, explains the particular pickle of the present.

So, while I strongly suggest you read his article in Vanity Fair, here's a little more of what Stiglitz says about this history...

As we stripped back the old regulations, we did nothing to address the new challenges posed by 21st-century markets. The most important challenge was that posed by derivatives. In 1998 the head of the Commodity Futures Trading Commission, Brooksley Born, had called for such regulation--a concern that took on urgency after the Fed, in that same year, engineered the bailout of Long-Term Capital Management, a hedge fund whose trillion-dollar-plus failure threatened global financial markets. But Secretary of the Treasury Robert Rubin, his deputy, Larry Summers, and Greenspan were adamant--and successful--in their opposition. Nothing was done.


Then along came the Bush tax cuts, enacted first on June 7, 2001, with a follow-on installment two years later. The president and his advisers seemed to believe that tax cuts, especially for upper-income Americans and corporations, were a cure-all for any economic disease--the modern-day equivalent of leeches. The tax cuts played a pivotal role in shaping the background conditions of the current crisis. Because they did very little to stimulate the economy, real stimulation was left to the Fed, which took up the task with unprecedented low-interest rates and liquidity. The war in Iraq made matters worse, because it led to soaring oil prices. With America so dependent on oil imports, we had to spend several hundred billion more to purchase oil--money that otherwise would have been spent on American goods. Normally this would have led to an economic slowdown, as it had in the 1970s. But the Fed met the challenge in the most myopic way imaginable. The flood of liquidity made money readily available in mortgage markets, even to those who would normally not be able to borrow. And, yes, this succeeded in forestalling an economic downturn; America's household saving rate plummeted to zero. But it should have been clear that we were living on borrowed money and borrowed time.

I think an analysis of history is good thing. We learn from our past mistakes, if we're real lucky, anyway.

Or, we put forth the notion, as you infer in your diary, that there's little or nothing to be learned from history, and that it's impossible to predict the future.

I would beg to differ.

by bobswern 2008-12-16 03:54PM | 0 recs
Re: Nobody knows nothing

You say: "Nothing quite like the present crisis has happened before."


What has been will be again, what has been done will be done again; there is nothing new under the sun. Is there anything of which one can say, "Look! This is something new"? It was here already, long ago; it was here before our time....I devoted myself to study and to explore by wisdom all that is done under heaven....I have seen all the things that are done under the sun; all of them are meaningless, a chasing after the wind.

(Ecclesiastes 1:9-14 NIV)

by QTG 2008-12-16 03:56PM | 0 recs
Re: Nobody knows nothing

I know that it's pretty damn cold out there.

by aggieric 2008-12-16 05:12PM | 0 recs


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