back to article Why OH WHY is economics so bleedin' awful, then?

As Her Majesty the Queen remarked a few years back, why was it that no economist actually saw the crash coming? There's actually two answers to that. First, the cute one: that sort of violent change cannot be predicted. If it could be predicted then prices would move before it happened, meaning that it would have already …


        1. codejunky Silver badge

          Re: The HOW now seems more important than the WHY

          @ Yet Another Anonymous coward

          "So Brown caused the US sub-prime crisis?"

          Not sure if this is how you mean it but defenders of Brown like to say things like this to absolve him of doing the damage he did to the country. However he didnt nor need to cause the US crisis because he had screwed up and sold off as much as we had while still spending more. In short any crisis hit the UK caused the UK to be massively unprepared and vulnerable.

          Had Blair had his way and we were in the eurozone I wouldnt be surprised if we looked something like Greece.

  1. jake Silver badge

    "Economics" is awful for one simple reason.

    It's a term used primarily by marketards.

    Those of us in the realworld tend to exist by sharing, not exploiting.

  2. Tom Foale 1

    Another Tim, Tim Harford (whose books should be mandatory reading for every wannabe politician) recently asked 5 middle-of-the-road economists what policies they would adopt if they were in charge ( This produced some brilliant and very well argued answers. Many of which are in line with what you have written.

    Many economists saw the crash coming. Warren Buffet called CDOs "toxic waste" but many banks still treated them as real assets equivalent to cash on the balance sheet. Even I saw the crash coming, and I'm no economist, I was already advising friends not to buy houses at the inflated prices of the time. What I and nobody else could predict is the timing of the crash, because money is only the exchange of promises and the economy is only the trust in those promises. The crash happened when banks stopped believing each other's promises -or at least the promises made by the issuers and valuers of some of the fancier promises like CDOs. Reagan said "trust, but verify" - it was mark-to-market rules that exposed the loss of trust, because banks suddenly found they could not find a price for these "assets". However, a deeper look at what underlay the promises, such as the risk of mortgage default for a small rise in interest rates, would have identified the problem much earlier and led to a much earlier but shallower crash.

    1. Tim Worstal

      I was one of only two UK press reviewers of his first book, Undercover Economist. That first chapter on coffee shops and Ricardo on rent is the best pop explanation of it that you'll find. He sold 1.5 million copies of the book last I heard, moved on to wondrous things at the FT and BBC.

      I am, of course, having vastly more fun here at El Reg. No. Really.

      1. Yet Another Anonymous coward Silver badge

        But when you are elected you will be able to shut down the socialist BBC and newspapers owned by foreigners.

      2. Anonymous Coward
        Anonymous Coward

        I happened to be studying economics at the time and his book explained the basics more clearly in 3 hours than 2 years of (undergrad, admittedly) study had.

        On the matter at hand; I'm not going to argue that macroeconomics is perfect, Tim, but it's most often a convenient scapegoat rather than a culprit.

        As an obvious example, politicians love Keynesian economics at the foot of the business cycle because it empowers them to spend, spend, spend. At the other end they'll either claim to have defeated the cycle altogether (thanks Gordon) or find one of a myriad other excuses not to do the economically rational but politically unpalatable.

        I'm sure there are a bunch of examples of soundly delivered macroeconomic policy having unforeseen consequences because the real world is uncertain. Most often, though, we see macroeconomic orthodoxy being ignored until something breaks and then being blamed for not being able to predict something that it did a fairly reasonable job of predicting.

        People who were ignoring economic orthodoxy then claim that it has been discredited so that they can justify ignoring it again (propping up failed banks, keeping interest rates low for 7 years and counting etc.) and create another unsustainable 'recovery' which will crash fairly soon (we can't predict when because we can't predict how many desperate levers people will pull to prolong it).

        When it does, I'm sure macroeconomics will be to blame for not predicting it.

  3. MonkeyCee

    Well indeed

    As a student of microeconomics, I can't agree more :) in fact a number of times in tutorials my erstwhile professors have been known to opine about what a load of bollocks certain macro theories are, since using a "average" or "collated" value makes everything following it meaningless. Median values, standard deviation etc make more sense for expressing wages (or disposable income) than an average over a population.

    The interesting thing about the big list of Stuff We Agree On is that pretty much each and every one comes with a host of caveats. Plus it's from polls of USAian economists, not from the profession as a whole.

    "A ceiling on rents reduces the quantity and quality of housing available. (93 per cent)"

    Main caveat: the sentence needs "in the USA" on the end of it.

    While a simple rent cap obviously doesn't work, since everything below is unaffected (or rises to it) and everything above it ends up being nonviable as return on capital, it's a "bad" idea. But housing is never a simple situation, the local and countrywide laws (and how they are implemented) are much more relevant. The Dutch system is interesting, for a start you can't rent if you don't own outright, your mortgage lender forbids you to (by law I think, or habit), you can be forced to sell a rental property (well, not allowed to rent it out) if the social policy of the area dictates it, and there is a rental cap based on a points system for rentals under a certain value (650ish a month) and pretty much no rules above that.

    You've also got very good courts, good quality social housing (long waiting lists, can't get kicked out even if you're now a millionaire), and some of the most evil scammy landlords on the planet. The former may be a result of the latter.

    So while I do agree that rent caps ALONE are a bad idea, it's always part of a more complex equation.

    "Tariffs and import quotas usually reduce general economic welfare. (93 per cent)"

    Fair enough, but that's tied in with subsidies which are functionally reverse tariffs, and runs into issues with anti-dumping "fair" competition legislation.

    "Flexible and floating exchange rates offer an effective international monetary arrangement. (90 per cent)"

    Caveat: As long as monetary policy is sensible. It's also a very bland statement, a gold standard is also effective, if it was "the most effective" then I'm not sure how much agreement you'd get.

    "Fiscal policy (e.g., tax cut and/or government expenditure increase) has a significant stimulative impact on a less than fully employed economy. (90 per cent)"

    Surely it depends on who gets the tax cut, or receives the benefit of the spending. Effective spending has a positive multiplier, ineffective doesn't. Or it would result in it simply not mattering how or what the government spent up large on.

    "The United States should not restrict employers from outsourcing work to foreign countries. (90 per cent)"

    Pointless statement really. Some work cannot be outsourced, since it needs to be done locally. Then it needs to be specified as to what sort of labor is being outsourced. Does it apply to the armed forces? Skilled vs unskilled, where do the payroll taxes end up etc.

    "The United States should eliminate agricultural subsidies. (85 per cent)"

    Sure, subsidies and tariffs distort the market. Getting rid of them would make things more competitive. But no-one wants to be the first to do it, as it will *probably* result in the collapse of that sector of the economy and dependence on imports. Apart from New Zealand (which has significant legislative support for the agribusiness sector) are there ANY first world countries that non-subsidised agribusiness sectors?

    Would be interesting to see if you added "assuming no other countries do" to the statement how many would change their mind.

    Also, what if ALL business subsidies and guarantees where eliminated, not just agriculture?

    "Local and state governments should eliminate subsidies to professional sports franchises. (85 per cent)"

    Sure, sounds good. Again, why not eliminate all subsidies to all business? If it's a loss making public good, then run it as a government department.

    "If the federal budget is to be balanced, it should be done over the business cycle rather than yearly. (85 per cent)"

    Sounds good, because both "balancing the budget" and "business cycle" are suitably undefined.

    "The gap between Social Security funds and expenditures will become unsustainably large within the next fifty years if current policies remain unchanged. (85 per cent)"

    Pointless statement. Extrapolating 50 years into the future without a host of caveats is batshit crazy. If we're doing that, then Apple will own the entire solar system within 30 years anyway :D

    "Cash payments increase the welfare of recipients to a greater degree than do transfers-in-kind of equal cash value. (84 per cent)"

    Can't argue with that really. Central control of individual decision making is almost always going to fail.

    Overall I think there in general the only things that can be agreed on are almost always the things that we know will not happen short of a tectonic shift in politics. It's like saying we can solve all the pollution issues, we just need to dispose of about 85% of the population. Ideally at random :) but that's never going to get you elected.

    As to the general fail of macro vs micro, there seem to be many issues with how you aggregate macro data, and lots of macro theory is some combination of self fulfilling prophecy and just-so stories. Oh, and a willingness to completely disregard observation of human behavior when it doesn't suit.

    If you've got a single explanation for a macro phenomena, then you're clearly not an economist :) you're a politician, and you should already have your "solution" to hand.

  4. Mage Silver badge

    radio spectrum, government should be charging users for its use

    Not by auctions.

    Only by the use of the users. It's such a limited resource it needs to have one infrastructure per mobile band. Multiple physical operators splits the spectrum leading to over 50% inefficiency.

    We need many different Spectrum uses, not just mobile. Under recent schemes the Mobile operators are favoured.

    Since start of 3G auctions this has been a massive failure.

    The so called Digital Dividend is a massive disaster for Terrestrial Broadcast and consumer, for a once of treasury injection and slight lowering of Mobile Operator costs with little long term increase in capacity or coverage. The auction idea encourages Regulators to have almost no conditions imposed.

    Cable, Internet, Mobile and Satellite can't replace Broadcast and many other specialist services that need spectrum.

    Even various satellite services have been threatened by foolish highest bidder spectrum auctions and religion of Mobile (Light squared in USA).

    The rest of the article is only brilliant. Give me a call Worstal and I'll explain why Spectrum is a special case and why you can only have retail competition on Mobile, but the infrastructure needs to be a single operation for large geographic areas.

  5. Rande Knight

    Crash should have happened in 2004

    Which was when house prices hit over 3.5 average wage.

    I actually had my house on the market expecting the prices to crash as I ignorantly thought that no idiot would lend more than that as they wouldn't be able to pay it back. If if things had crashed then, it wouldn't have been nearly as deep or as long.

    The govt were being willfully blind as the BIG indicator - inflation would have told them something was up, except that they left house prices out of the various inflation indexes. And this STILL has not been fixed, so I'm fully expecting more boom and bust in coming years.

  6. Third Man

    Crash was predicted - Cassandras ignored as always

    Article in 2006 Internation Herald Trib pointed out the flaw in the US 'cheap' mortgage martket and when the roll up would hit - June-Sept 2008, and even the almost certain consequences - frankly the observation was trivial - just that no one wanted or possibly could do anything about it.

  7. amanfromMars 1 Silver badge

    IT Futures, and IT is the Future, but not as you may now know it being told, for terrific reasons.

    You know it: There’s a secret that affects (and controls) us all and a group that’s doing everything it can to ensure that secret stays under wraps.

    You probably already suspect it…

    Virtually all outside forces are designed in one way or another to manipulate your mind. By doing so, they can control your actions without needing a gun to do it.

    History may not repeat, but it does rhyme…

    The idea that a ruling class tells everyone else what to do, how to act, and how to think isn’t new. It goes back more than 8,000 years.

    Basically, every great civilization follows the same basic path:

    Rebirth / Recharge: The previous empire collapses and government becomes decentralized, often down to the family level. It gives time for the affected people to readjust to a life without a centralized government telling them what to do. The Dark Ages of Europe is the most well-known example, but there were others, too.

    Formation of Government: Over time, and for various reasons and in various ways, these tiny “micro-states” start to merge together and get bigger. A formal ruling class starts to take shape.

    Domination of Government: Government consolidates power even further, leading to the creation of a powerful capital city. A formal ruling class is now established, and the population is taught that the rulers should be respected and even revered. Taxes rise as more and more production is taken to feed the growing bureaucracy.

    The Great Decline: Government continues to grow. Laws expand exponentially as a form of control. Education is manipulated in an effort to dumb down the population and create obedient taxpayers. Governmental force becomes more aggressive towards its own citizens. Economic growth becomes centrally driven, and as a result, the empire’s debt spins out of control. Monuments, bread and circuses are created to give the illusion that times are the most prosperous ever.

    Systemic Breakdown: Eventually, something snaps and it all comes crashing down, often spectacularly. The old state is washed away, leaving a government-dependent population to fend for themselves for the first time in their lives. This is a very scary and dangerous time for anyone who has assets and family they want to protect.

    … And the cycle repeats.

    By the looks of things, those of us in the West are heading for the end of that cycle.

    It’s not a question of if, but rather when.

    The telltale signs are here:

    More government debt: Passed 100% of GDP at the end of 2011. No large economy has ever recovered from such crushing debt without a currency crisis (or collapse), which then lead to widespread economic hardship.

    Increased militarization of domestic security: Long gone are the days of Barney Fife and Andy Taylor. Welcome to enhanced security measures at airports and other ways of traveling, vague anti-terrorism laws that can be twisted into almost anything, executive decisions without judicial oversight, and disturbing legislation like the NDAA and Patriot Act.

    More surveillance: Introduction of drones over US civilian airspace, increased number of cameras and other monitoring devices, all of the abominable NSA surveillance that Edward Snowden revealed, and more.

    More laws: As of the end of 2011, The Code of Federal Regulations stood at 169,301 pages – an effective doubling since 1975. Over the previous decade, there were just over 38,000 new rules added to the books. And that doubling doesn’t include new state and municipal laws.

    More wars and military actions: Afghanistan, Iraq, Libya, Iraq again, and who knows where next.

    More government welfare: 48 million on food stamps. Credible estimates that nearly 107 million US residents receive some form of government handout.

    All of the above from the webpage Free Man’s Perspective is not untrue and false and thus is the aforementioned “group” …. that’s doing everything it can to ensure that secret that affects (and controls) us all stays under wraps ….. the problem solution to be eradicated and supplanted with something and anything better, and in its Beta IT and Media Programs, experimental and revolutionary, rather than pedestrian evolutionary.

    Which is what Cyber is all about amongst everything else too, n’est ce pas, and why the System and systems that is and are failing, are so intent on making virtually real enemies of that which they cannot hope to defeat and render as impotent and irrelevant in the field as they are in current support and present defence of the indefensible and despicable, the austere and inequitable.

    The SMARTR Money though sees the problem that is and is become, and stealthily feeds and seeds the solution to provide IT with command and control of the Future and Derivatives which supply Options and Hedges which reward success and defer costs of human and personnel failure to flash systems crashes/catastrophic zeroday vulnerability exploitation of systemic ignorance rooted in corrupt legacy practices and perverse executive administrations mirroring of Idiotic Digital Follies ‽

    And exclaimed there as question so that you can ask yourself, should you be at all bothered and wise enough to want to know of the fate and destinies that the Future can easily bring, which group do you belong to. …… the Alpha Beta Cybers or the Delta Epsilon Fails?

    1. dogged
      Black Helicopters

      Re: IT Futures, and IT is the Future + usual wtf

      You are an AI based on Robert Anton Wilson and I claim my five spondulix.

  8. Anonymous Coward
    Anonymous Coward

    Of course we're now in a worse situation than before the troubles of 2008, with runaway house prices and interest rates moving inexorably towards zero its unclear what any government will be able to do in the next recession except QE on an increasingly large scale.

    I wonder whether it will ever be possible for anyone to move base rates back to some kind of sane minimum (say ~ 2%) in the post-2008 world - barring external threats/measures such as for Russia,

  9. markw:

    Nobel prize?

    There is no Nobel prize for economics because Mr Nobel did not set one up.

    The so called "Nobel prize" was set up by a bank in 1969.

    A sham prize for a sham profession.

    1. Tim Worstal

      Re: Nobel prize?

      If you look back at my stuff here at El Reg you will be able to see that I've made that point several times. I don't keep repeating it because as a joke it has something of a limited lifespan./.....

      1. markw:

        Re: Nobel prize?


        "one theory that all Nobel Laureates who work as macroeconomists"

        They are not Nobel Laureates!

  10. Anonymous Coward
    Anonymous Coward

    Greg Mankiw

    was Chairman of George W. Bush's Council of Economic Advisers. He then went on to becoming economic adviser to Mitt Romney's failed presidential campaigns. Mr. Romney was, and still is, known for advocating econonic policies which benefit the upper-income 1% at the expense of the other 99%.

    In 2011 Mr. Mankiw's students at Harvard walked out of his economics class because they were fed up with his heavily biased way of teaching economics.

    Mr. Mankiw is an advocate for income inequality, job outsourcing and global free trade in general. George W. Bush's administration was characterized by a very slow economic and employment recovery after the 2000 - 2001 recession. Mr. Mankiw stated that job outsourcing had no influence on this unusually weak economic performance, and it is "good for the economy in the long-run". Mr. Mankiw also stated that a fast-food restaurant employee selling hamburgers at the counter creates economic value because flipping and selling hamburgers at McDonald's is the economic equivalent of manufacturing.

    Unlike some of his colleagues - such as Martin Feldstein, R. Glenn Hubbard and Ken Rogoff - Mr. Mankiw displayed quite a bit of reputation self-preservation savvy by declining to appear in the film "Inside Job" by Charles Ferguson.

    This article intentionally creates the impression that Mr. Mankiw's economic views are shared by a majority of economists. Nothing could be further from the truth.

    1. Tim Worstal

      Re: Greg Mankiw

      "In 2011 Mr. Mankiw's students at Harvard walked out of his economics class because they were fed up with his heavily biased way of teaching economics."

      We've a certain amount of proof that students at Harvard aren't quite as bright as they like to think they are. That protest took place in the first semester of the introductory course. They complained that they were not being taught Keynes. Keynes is macroeconomics. A brief glance at the syllabus will show that macroeconomics is taught in the second semester of the Harvard introductory economics course.

      1. Anonymous Coward
        Anonymous Coward

        Re: Greg Mankiw

        > They complained that they were not being taught Keynes. Keynes is macroeconomics.

        Lame rebuttal. Close to bullshit actually. Mankiw identifies himself as a "neo-keynesian". Which he is not. Students were protesting the false advertising.

      2. tom dial Silver badge

        Re: Greg Mankiw

        The downvote supports my hunch that fact-statements that happen to be true tend to receive them.

        In fact, for Harvard's introductory course Economics 10:

        a) the first half is microeconomics, and

        b) the second half is macroeconomics, AND has the first half (or instructor permission) as a prerequisite.

        1. Anonymous Coward
          Anonymous Coward

          Re: Greg Mankiw

          And, of course, Keynes has absolutely nothing to do with microeconomics, nor should Keynesian economics ever be mentioned or taught in introductory micro classes. Because Worstall sez so, and you agree, therefore it is an irrefutable fact. A historic necessity if you will, to use Marxist terms.

          The paragraph above is a sarcasm.

          But, the students attending Mankiw's course walked out, and wrote a pretty acerbic open letter to him about why they walked out. Neither you, nor Worstall attended that course, so you have no direct or even indirect knowledge of how it was taught. The students who walked out had such direct knowledge, and they walked out.

          But that is completely irrelevant, because both you and Worstall looked up the Harvard Econ course schedule online. And we all know that reading a college course schedule online - not the actual contents of the course, just the schedule - proves beyond any doubt that the students who walked out of Mankiw's class were just dumb. How do we know they were dumb? Because (1) they walked out and (2) Worstall said they were dumb.

          Perhaps choosing Mankiw as an example of economics views shared by a large majority of economists wasn't such a good idea to begin with, because it is simply not true.

          Unless, of course, the thesis here is that George W. Bush's economic legacy is now considered a success by a majority of economists. Something tells me that is not the case.

          There's one common charactertic that all the one-percenter-economists share, with no exception: whenever their theories fail miserably in the face of reality, and can no longer be supported by any facts, no matter how skewed, incomplete or distorted, they find refuge and consolation in the Victim Complex. It's not that their theories are fundamentally wrong, and unsupported by facts. It's just that reality is heavily biased against them.

          1. Tim Worstal

            Re: Greg Mankiw

            "Perhaps choosing Mankiw as an example of economics views shared by a large majority of economists"

            You did note that this is not a list of what Mankiw believes economists believe, but a result of a survey conducted by someone else of economists, then reported by Mankiw?

            1. Anonymous Coward
              Anonymous Coward

              Re: Greg Mankiw

              Perhaps you shouldn't base your articles on survey results as reported by a biased ideological and political hack such as Mankiw.

              You could, instead, choose to read the actual literature, as written in original. But that requires time and effort.

            2. MonkeyCee

              Re: Greg Mankiw

              Here's the list of the all the people who contributed to the survey that we're debating:

              Daron Acemoglu - MIT

              Alberto Alesina - Harvard

              Joseph Altonji - Yale

              Alan Auerbach - Berkeley

              David Autor - MIT

              Katherine Baicker - Harvard

              Abhijit Banerjee - MIT

              Marianne Bertrand - Chicago

              Markus Brunnermeier - Princeton

              Raj Chetty - Harvard

              Judith Chevalier - Yale

              Janet Currie - Princeton

              David Cutler - Harvard

              Angus Deaton - Princeton

              Darrell Duffie - Stanford

              Aaron Edlin - Berkeley

              Barry Eichengreen - Berkeley

              Liran Einav - Stanford

              Ray Fair - Yale

              Amy Finkelstein - MIT

              Pinelopi Goldberg - Yale

              Claudia Goldin - Harvard

              Austan Goolsbee - Chicago

              Michael Greenstone - Chicago

              Robert Hall - Stanford

              Oliver Hart - Harvard

              Bengt Holmström - MIT

              Caroline Hoxby - Stanford

              Hilary Hoynes - Berkeley

              Kenneth Judd - Stanford

              Steven Kaplan - Chicago

              Anil Kashyap - Chicago

              Pete Klenow - Stanford

              Edward Lazear - Stanford

              Jonathan Levin - Stanford

              Eric Maskin - Harvard

              William Nordhaus - Yale

              Maurice Obstfeld - Berkeley

              Cecilia Rouse - Princeton

              Emmanuel Saez - Berkeley

              Larry Samuelson - Yale

              José Scheinkman - Princeton

              Richard Schmalensee - MIT

              Carl Shapiro - Berkeley

              Robert Shimer - Chicago

              Hyun Song Shin - Princeton

              James Stock - Harvard

              Nancy Stokey - Chicago

              Richard Thaler - Chicago

              Christopher Udry - Yale

              Luigi Zingales - Chicago

  11. Eric Olson

    Sensible words from Mr. Worstall

    I'm curious to see if we'll see less Left/Right BS and more "If this is the stated goal, here's what the research says we should do."

    Before this, I often read pieces from Mr. Worstall that started the other way, "Here's the right thing to do; the goals are inconsequential," which is where you start to get into trouble and have 200+ comment sections arguing about subjective concepts like fairness or talk about the silliness of emotional debates. A society may not actually be interested in maximizing output or economic growth if it means degradation of the environment, extreme income inequality, etc. A decision to trade some economic growth for social security, universal health care, or other expensive government service that requires a higher level of taxation is perfectly acceptable.

    I applaud the recognition that of all the social sciences, economics is the least scientific or social. It's a lot of cultural or cognitive biases that get rolled into a single model or paper that outlines exactly why one person thinks the best way to explain an economy is to examine the entrails of a recently slaughtered pig.

  12. Jason Hindle

    Plenty of outsiders predicted the crash

    I used to read a newsletter from some contrarian cranks. I say cranks since they also have dangerous (to my mind) libertarian tendencies. They actually made the upcoming crash, and the reasoning for it, pretty intuitive. I made a tidy profit from buying into gold and resources (thanks Dad*), then selling **. The fact we had a credit bubble was simple enough to see***. Bubbles either burst or deflate. Both Brown and Osborne are examples of bubble inflators, IMHO (or at least they bury their heads in the sand, when bubbles happen).

    * Dad the copper smith, who knew a thing or two about i) the ups and downs of a bag of scrap copper, and ii) the fact that China was happening, a good few years before China happened to me.

    ** I wish I'd held longer, but that's life.

    *** To this day, the very idea of sub-prime lending baffles me. That no one took a bullet for it baffles me more.

    1. MonkeyCee

      Re: Plenty of outsiders predicted the crash

      "I wish I'd held longer, but that's life."

      Selling early is how one makes their fortunes :)

    2. Tim Worstal

      Re: Plenty of outsiders predicted the crash

      "To this day, the very idea of sub-prime lending baffles me. That no one took a bullet for it baffles me more."

      Does the concept of insurance baffle you? At core it's no different: the pooling of risks.

      1. MonkeyCee

        Re: Plenty of outsiders predicted the crash

        There are some fairly big differences between the two. Here's my sophomoric take on them,:

        Insurance consists of the risk of an event happening in a time frame, the cost of the event, and whatever margin is needed for safe operating and profit. So say there is a 1% chance of a fire destroying your property in a year, which will cost $100,000 to repair, and 20% is a "safe" margin. The premium will be $1200 a year, so that after 100 years the $100k cost is covered, $20k in admin and profit taken.

        This can _only_ work with enough people paying in, if you only had say 100 people in the pool, the chance of 2 claims in a year might bankrupt the insurer. So you need a big pool, enough that it is an accurate sample of the population you base the risk calculation from. Hence why there is almost always state backing of certain types of insurance, otherwise most insurers business plans consist of "good times profit, bad times fold company". There are a variety of other ways the insurers make their dime, more accurate risk calculation, selection of clients, higher margins and spreading the risk to a third party.

        Making an asset backed loan consists of the value of the asset, the interest rate, and what the creditor can do to get their money back. A normal ("prime") loan would be on something that the creditor is pretty sure will hold or gain value, to a debtor who is very likely to be capable of making the payments on the principal and the interest. Thus the risk is relatively low, thus the interest is relatively low. Typical mortgage would be that the debtor pays the creditor roughly twice the properties value over the course of 25 years, and the creditor owns the property until the final payments is made, and can sell it if the payment schedule is not met. No pooling required, works fine with small numbers as well as large numbers, just easier to predict the average risk with large numbers.

        A sub-prime loan is when either the asset is less likely to hold value, or more often that the creditor is less likely to be able to make the payments, Thus the interest rate is higher, and the creditor has a higher exception of taking possession of the asset. A typical example would be a rent-to-own appliance store selling someone a $100 item (a washing machine for this example) for $2 per week for 2 years. The creditor expects to either collect the $200, or that the washing machine will be returned and re-sold for $100 plus money made from the rent. Again, no pooling required, you can do it as effectively with one client as you can a hundred.

        Now, to make a prime loan from sub-prime loans, that's where the pooling comes in (the collective part of a CDO) put enough sub-prime loans together, and repay in tranches, the top tranche or two will function like a prime loan.

        As for why would anyone make sub-prime loans, that's easy. They are very profitable in the short term, and if they are asset backed then also in the long term. Why anyone would take them is a classic poverty trap. You don't have any other way to get the loan, so either you do without or you pay more for the same service.

        If property "always" goes up in price, and the expected price increase is close enough to the sub prime interest rate, then everyone is fine. If the asset is education then it may be a perfectly good investment to pay 10% above the base rate, since once you're qualified and have a job, you then move into the "prime" category, and can re-finance at a less punitive rate.

        I still do not see how sub-prime requires pooling. It's the mildest form of loan sharking, and works on any scale. Insurance requires pooling.

        I do see how for the specific case of US mortgages to dis-advantaged people being backed by Fannie and Freddie (and thus by the taxpayer) is a pooling of sorts. It's just a terrible idea, if we want taxpayer funded mortgages, then have them. Don't pretend it's something else.

        But that's my view on insurance anyway, I've worked for a few insurance companies, and the issue is that they are just administrators of government policy. They make guaranteed profits (and get money to invest) until a payout is required, then they either stall, deny cover, or if enough claims are correct, declare they are going bankrupt without a bailout.

  13. phil dude

    mathematics is needed...

    We use mathematics for models of molecular systems, biological systems even transport systems.

    Why not economic systems? "Wait!", I hear you say, "Don't we already use models?".

    You couldn't publish results from a molecular dynamics code without publish the mathematics of your model, I fail to see how economics gets a free pass and gives politics the <handwaveium> tag to play with.

    For the learned commentards reading this familiar with differential equations, you will realise that the introduction of a time-delay in the transfer function of a feedback loop can lead to oscillations.

    Too much of modern economics is predicated on the historical inertia that many of the models pre-2000 were built on. Modern economics has the ability to move much faster than the physical world can catch up, the dot-com boom was a symptom of this. This hysteresis is acute where human timescales are eclipsed by economic ones. For example, how long is the supply chain for your food? Your petrol? Your house? Your job?

    In short, I don't believe any economics model that has less mathematics than my biophysics models.

    And I don't trust any politician who talks about economics without mathematics.


    1. Anonymous Coward
      Anonymous Coward

      Re: mathematics is needed...

      > And I don't trust any politician who talks about economics without mathematics

      I'd like to see just one politician - or economics journalist for that matter <COUGH-AHEM> - solve a PDE. No, scratch that, too hard. An ODE.

      Unlikely in my lifetime.

      1. MonkeyCee

        Re: mathematics is needed...

        There are a few engineers who are politicians who probably could.

        There should be a fair few economists who should be able to. I'm studying econometrics, which means roughly the same math load as engineering or physics. Calculus through second year, more probability, less applied math. However, the main branches of econ (international business, fiscal economics) don't do nearly as much, and thus don't even have to learn differentiation/integration. Because you can always reduce a curve to a straight line, thus you just assume everything is a straight line :D what could possibly go wrong?

        Politicians don't get to head up a party by being good at math. They get it by being good at power politics, and by being "electable".

  14. WalterAlter

    Let's just face some ding dong facts here. NOBODY knows what makes economics work beyond a cartoon picture that blows up in everyone's faces periodically. All the textbooks are shite, all the experts have their heads up their butts, all the ideologies are crap when it comes to economics. This sad panoply will continue into armageddon until bankers and market freebooters are literally thrashed into a permanent state of ethics. In any game where you have to be a psychopath to claw your way to the top and stay there, the consequences will be dire. 1 + 1 = 2, too big to fail = fascism. Kill the monopolists, kill them all and pile their skulls in front of every bank in the land.

  15. Anonymous Coward
    Anonymous Coward

    Just one question...

    Is economics supposed to serve people, or are people supposed to serve economics?

  16. bep

    There's no such thing as 'economics'.

    Maggie Thatcher told us that. After all, if there is no such thing as society, and as economics is a social science, well.... Really 'the economy' is just a model, with all the limitations of every model. They used to call it 'Econometrics', but they seem to have convinced themselves that it was real. As for Keynes, I think he understood markets, didn't he make his money, as well as that of his Bloomsbury mates, from money market speculation?

  17. Tail Up

    У Лукоморья

    Hi amanfromMars, thank you for the valuable feedback. Please be sure that whatever monitoring and moroning devices are being used, Language is the master (-: difference how many letters constitute it - 22, 27 or 33. In 1817, Russia's poet AIexander Pushkine [whose surname translates as "Cannon's son"] mentions thirty units mentored by an "elder" one, which one after 195 years of research apeared to be more of a dynamic rebuilding and ensounding force than another "more old letter, previously known and lost later on" [what a completely mysterious power it is in our hitech postmodern 3000s...],

    "And from the clear and shining water

    Step thirty goodly knights escorted

    By their old tutor, of the deep

    An ancient dweller"...

    Obviously, the ecology of environment matters, also.

    Hmm, Nobel Prize :-)

    1. amanfromMars 1 Silver badge

      Re: У Лукоморья

      Funny, but...... Russia wants to build its own Windows, says it's got to be Open Sauce full of sovereignity. …… Tail Up …….

      I'd be most pleased and more than just a tad interested in providing the armoured glass for such as would be both a noble ennobling and Nobel worthy enterprise, Tail Up. The Western punted pictures presented by their SCADA administration systems are suffering debilitating pains with terminal prognoses from broken cracked panes and obviously bankrupt subprime intellectual property supply.

      1. Tail Up

        Re: У Лукоморья

        With the Team Surreal like yours, it would be a Sure Fire action.

        Need some courage to say "Let's try it", given the level of specific attendance :-)

    2. Solmyr ibn Wali Barad

      Re: У Лукоморья

      "AIexander Pushkine [whose surname translates as "Cannon's son"]"

      Ha! Never thought of that. And going by the countless anecdotes about him, "son of a gun" is an apt translation.

      Charming guy and a great poet.

  18. itzman

    What do you call a system

    ..that is highly interconnected, with multiple time delayed negative feedback paths and non linear responses with respect to superposition of these effects, and which has had its localised feedback paths de regulated?


    What do we know about chaotic systems?

    They may display long term averages but these are subject to change if they flip from one attractor to another. But mostly they are unpredictable to any large degree, and they are almost impossible to control. Especially when affected by things outside the scope of control anyway.

    Economics gurus and politicians who act on their prognostications are all just a bunch of Cnuts trying to stem the tides of human economic affairs.

    If there is one thing that has characterised the 20th century, it is the understanding of the difficulty of applying classical science to systems that dont fall within a narrow range of 'broadly linear'

    Economics, climate change...examples of the types of systems that we can only prove that we cannot offer useful predictions on.

    Gödel, Turing, Lorenz, the Quantum boys...all filling our theory maps with huge areas marked 'insoluble' , 'unprovable', 'Here Be Tygers' the broad tenet of Western Progressive Thought continues in the blithe assumption that humans can control anything. World government (or as big a government as we can get) is the Answer To Anything, and if money runs out well simply print more!.

    Hubris and Nemesis beckon...

    PS why Brenda?

    1. dogged

      Re: What do you call a system

      > PS why Brenda?

      It's a Private Eye thing.

  19. airbrush


    Id only trust the ones that value their reputation over the corporate coin :

  20. JJSmith1950

    Rent Controls...

    Rent controls do not reduce the number of available houses; quite the opposite, as the German experience testifies. It's our "cap-less" system that has produced a housing crisis, not market controls; but it's no surprise another economist is totally wrong. Of course, Tim will ignore the empirical evidence and reach for a mathematical formulae to dazzle the plebs, we must collectively remind him: the map is not the territory.

    It is people like Tim who got us into this mess, given half the chance they would make the mess far, far worse.

    1. MonkeyCee

      Re: Rent Controls...

      The rent controls thing is about America, and the American housing system, and is based of a survey of selected American economists.

      According to many people (the Gruan comment section) Germany does have rent controls, and a wonderful rental sector, and if only the same rules where applied in blighty then Everything Would Be Awesome.

      The reality, as you correctly note, is not quite like that. My experiences with renting in various countries is that landlords get away with what they can, and if demand exceeds supply for their property then they can get away with an awful lot. Doesn't really matter what the law is, or how it's applied.

      I still think rent caps are a bad to terrible idea, if government is going to stick it's oar in I think they should provide rentals, which would put an effective floor on rents. But this is politically unpalatable, or gets tied up with who is eligible, thus creating classes of renters.

  21. TheRealRiff

    Growthism makes crash invitable

    Even a child know that if you continue to blow up a balloon it will burst!


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