There were many...
... who observed the credit bubble from the start of the millienium would lead to a crash.
Thing is though, it hasn't really happened yet...
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 …
People being offered unsecured loans they had no real prospect of paying back.
People being told to spend, spend, spend rather than save and if you don't any money? Then just borrow, borrow, borrow.
People being told that they *need* that 50" TV, they *need* the big car, they *need* the house full of electronic gizmos and they *need* it NOW. And if they can't afford it, well, then just borrow, borrow, borrow!!
What could possibly go wrong there?
>What could possibly go wrong there?
Well they could all decide that they don't need any of that stuff, stop buying anything, keep the cash under the matress and suffer a couple of decades of deflation.
And that is if they are lucky and started off with a prosperous efficent technological economy - what would happen outside Japan would be much much worse.
"Thing is though, it hasn't really happened yet..."
Don't worry. Internationally debt levels are rising - largely because although the private sector has pulled its belt in somewhat, governments continue to spend beyond their means. My suggestion is to keep an eye on China and Japan. At the moment nobody wants to lend to Japan given their bonkers level of national debt, so their central bank is printing the money to lend to itself. This can't end well.
China on the other hand, is about where Japan was back at the millennium. Vast amounts of debt financed property and infrastructure development that will go sour, and a rush of speculative lemmings into the stock market. We've seen this sooooo many times before that we know how this ends. You can fend off the inevitable for a while with yet more debt, but ultimately you end up like Spain or Greece - a bankrupt economy that has to endure five to fifteen years of stagnation and mass unemployment. I don't like the idea of mass unemployment in China any more than the Chinese Communist party, albeit for different if related reasons. But once you've wasted good money on bad investments, you can't wind the clock back, the money's gone, the banks are insolvent, and the brown stuff is being flicked off the fan with every rotation.
If either Japan or China has a real economic shock, then that will cause problems in other fragile economies with too much debt - the UK, Europe, and ultimately the US. All those free trade agreements won't looks so good when China's desperately devaluing to try and keep export levels up.
"Yes, it ends in an almighty great war, orchestrated and provoked by the elites - as always."
Whats this elites anyway? Is it the people we buy goods from or the people we willingly elect into government? The people we decry for not being as 'moral' as we want but still want their goodies, or the politicians we want but wont vote for because they are labelled nutters or racists?
The elites are in the mirror. But they dont like to think of themselves that way or feel they cant make a difference so why try. Or they band into a tribe and attack others because they are told to.
Is it the people we buy goods from or the people we willingly elect into government?
How touchingly quaint.
The elites today are the people of influence, i.e. the people with money or with the capacity to influence the people with money. The people with money tell governments what they want, and your elected muppets do what they say.
Democracy ? It's a great idea. To work, The People need to do more than watch sports on the telly and complain about whoever it is they didn't elect.
To (mis)quote the famous saying an economist "is an expert who will very seriously explain to you tomorrow why the things he predicted yesterday didn’t happen today. (and make you pay for telling you so)."
You will note that this definition is very close to that of a politician who "is a person who will explain you tomorrow why the things he promised yesterday didn’t happen today. (and why you need to pay more taxes)."
Economics masquerades as a "science" but when all is said and done is just a messy pile of theoretical models so remote from reality than their predictive power is close to 0. Somehow there is always an excuse for the prediction of economists to fail - it's not their fault if this this annoying reality stubbornly refuses to follow the elegant arbitrary equations of economics.
In a nutshell economists predict what will happen "if nothing unpredictable happens" (nice caveat isn't it).
The reason is that, at the end of the day, economics is "made" by people through their individual daily decisions, in other words economic trends are not the result of abstract equations painted on the wall of reality by the infamous invisible hand. Economic trends are rooted in human psychology and that is hellishly difficult to predict.
What will make people (and banks where decisions are after all made by humans - err at least I think so) feel positive and confident to invest? What will scare them away and generate a bank run? What new technology will radically change our lifestyles? Which products will become the next "must haves" and which ones will suddenly drop in oblivion? That's what drives economies.
If you could predict future events and model human reaction to them - with some level of confidence - then you would have a useful economic model. And also a magical tool to become a billionaire investor real fast.
So the day where you will see economists suddenly become fast track millionaires (and probably bust the market doing so :-) then you'll know economics has come of age.... until then it's just a very fancy snake oil extract.
With all due respect sir, I was not attempting to make an historically accurate reference to the way Adam Smith originally used the term. This was clearly not the context of the article, nor that of my comment, - had you taken the time to read either properly ;-)
I was merely hinting at the way the "invisible hand" expression has been abused by generations of economists - invoking it as a "deus ex machina" that could explain or solve everything without need for further evidence or accountability.
Sorry, can't resist a shot at each of them:
* A ceiling on rents reduces the quantity and quality of housing available. (93 per cent)
In isolation, yes. Falls down in a system where housing benefit dominates much of the market. Falls down even worse when building land is the limiting factor and taxpayer subsidies feed through to higher land prices.
* Tariffs and import quotas usually reduce general economic welfare. (93 per cent)
In isolation, yes. But may have perverse effects on movements of people.
* Flexible and floating exchange rates offer an effective international monetary arrangement. (90 per cent)
Yes, with various flaws including race-to-the-bottom and debasement. Haven't you put the case here for freer competition (c.f. Bitcoin)?
* 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)
Dangerous. As exercised in the West, it's gone from sugar-rush to heroin-rush. The politician's dream: short-term gain, for long-term pain. Keynes must be spinning in his grave!
* The United States should not restrict employers from outsourcing work to foreign countries. (90 per cent)
You source work to people, not countries. Where those people are physically located matters in some jobs but not others.
* The United States should eliminate agricultural subsidies. (85 per cent)
As should other countries. And agriculture should be weaned off unsustainable practices such as heavy use of petrochemical fertilisers. In other words, post-1945 policy (whence came the subsidies) should have been an emergency measure to tide us over a period of unsustainable overpopulation.
* Local and state governments should eliminate subsidies to professional sports franchises. (85 per cent)
Bugger. Can't bring myself to quibble with that at all. Put a levy on overfed "sports" (like professional football) to fund sporting facilities for kids.
* If the federal budget is to be balanced, it should be done over the business cycle rather than yearly. (85 per cent)
Horribly dangerous. That's what Brown was saying around 2004/5 when the big Ballsian stimulus was supposed to get us through a percieved downturn to the sunny uplands of never-never-land. Turns a regular recession into a generational crash and a zombie economy. And it's happening again now as another chancellor runs a huge deficit right through the illusory Good Times.
* 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)
Interesting use of the future tense. Politicians like to compare to post-war reconstruction, but it's kind-of a 90/10 rule: you can rebuild the 90% very easily from a bombed-out 1945, but you won't get that kind of growth when you're already at 90% and up.
* Cash payments increase the welfare of recipients to a greater degree than do transfers-in-kind of equal cash value. (84 per cent)
What recipients? Not those who spend it on fags-and-booze, nor their children. And that's precisely where the worst social problems lie.
"What recipients? Not those who spend it on fags-and-booze, nor their children. And that's precisely where the worst social problems lie."
I think you mean "which recipients". If you mean "what recipients", I can point to thousands in my constituency.
But you actually completely miss what Tim has actually said. Benefits should go directly to the recipents as cash. The bit you've missed is "recipient", meaning the actual person due the benefits instead of a proxy. If that recipent choses to destroy their own life by spending it on booze'n'fags instead of food'n'rent, that is their problem. The problem is if a proxy gets the money instead of the recipeint.
The problem with designing the system is to ensure the money actually does go to the benefit recipient, and not a feckless proxy. Children of feckless parents who spend their child benefit on booze'n'fags are poor because it's the untrusty proxy that gets the money, not the child. It is difficult to design a benefits system that has no negative externalities when people aggregate into families and we assign proxy responsibilities to people. How do you give a poor 5-year-old benefits? In our system it has to go to a parent. This is a reason that universal free school meals works better than giving poor parents money to pay for their child's school meals.
AC to comply with election rules 'cos I'm an election candidate.
"AC to comply with election rules 'cos I'm an election candidate."
"A pox on you and all the other indistinguishable charlatans standing for election."
Ok, who would you prefer to run the country, and how would they be chosen? And, importantly, how would Joe Everyman get to be one of the people doing the choosing without having to ensure they came out of the right vagina?
So, your answer to the person who says "I don't like what's going on, I want to try and change things!" is: Fuck off. Your system is essentially what we had before the 19th century where those in power were picked randomly from the population based on the random selection of what vagina they'd slid down.
"But you actually completely miss what Tim has actually said. Benefits should go directly to the recipents as cash. The bit you've missed is "recipient", meaning the actual person due the benefits instead of a proxy. If that recipent choses to destroy their own life by spending it on booze'n'fags instead of food'n'rent, that is their problem. The problem is if a proxy gets the money instead of the recipeint."
But many times the recipient IS the parent (the poor parent getting SNAP/EBT benefits on their card). But this all assumes rational actors. Trouble is, what's the most common food bought with SNAP? Junk food. The FDA would love to change this to tightly restrict the eligible foods list (the way WIC is done with a specific list of foods you can buy with the vouchers), but that takes an Act of Congress, and Congress isn't interested.
In terms of the bigger picture, do the economists take irrational behavior into account with their agreements? What about knock-on effects like the thought that sending jobs abroad can have an effect on the home country full of people too old or too ingrained to re-train?
'This is a reason that universal free school meals works better than giving poor parents money to pay for their child's school meals'
Do the rules prevent you from declaring your interest in Compass (other private meal [sic] providers available).
There are very good reasons why 'Company Scrip' was outlawed.
The reasoning seems to that poor people are poor because they are feckless, lazy and stupid and as such can't be allowed to make their own decisions or given the opportunity to learn from their own mistakes, the outcome from that line of thinking is to transfer the benefits (both cash and economic) from the poor person to the large corporate.
As the large corporates take the lions share of any public benefits just who are the scroungers here ?
Benefit levels are set at subsistance levels not because that is all the country can afford but so that large corporates can extract as much profit per employee as possible, demonising the poor helps the cause which is idealogical and not based on any reality. (low benefit levels stops everybody getting rich)
I don't have any interest in Compass (and I had to look it up to check what it was - I thought you were referring to Political Compass).
Some people are poor because they are feckless, but that is a small minority. Most poor people are poor because the world has conspired, in one way or another, to make them poor. Mostly it is the same as how rich people are rich - luck. Whose vagina you came out of, what school you went to, what in-crowd that school gave you, what strings your parents were able to pull for you, what collections of aptitudes you were born with that you can convert into skills somebody is willing to pay for.
The more that poor people are automatically assumed to be stupid and feckless and have their decision-making powers taken away from them, the more they are unable to actually learn from their decision-making processes and escape from the lottery that life has given them.
Personally, I don't care if feckless poor people destroy their own lives through their own fecklessness, as long as they don't take anybody else with them.
Macroeconomics is mostly the pseudo-scientific justification for politicians doing stupid things.
It is a bit like suggesting that the real problem with the economy is that people don't have enough
debt credit. No wait, its the same thing.
Reduce debt and people will be richer. I don't care about "feeling richer" I want, "actually richer."
I don't want the government over-spending on my behalf - that doesn't make "the government" poorer, that makes *me* poorer. If you don't think that, talk to the Greeks.
Thinking about ruined economies, my personal belief is that part of the problem is that we have allowed companies to become too large. The speed at which vast amounts of capital can move around the world brings chaos. Call centres moved into Ireland, hired labour from Eastern Europe, the lack of housing supply pushed up house prices, speculation and easy mortgages pushed them further. Then the call-centres close/shrink, the Eastern Europeans go home, housing demand drops through the floor and people are left with massive mortgages and no demand.
Its untrendy, but immigration controls could have helped avoid that. Mortgage controls and credit limits could have helped avoid that. Corporates would scream about being anti-business. Yes, that's right. I don't think its right for corporates to induce 25 years of debt pain in the general population in order to gain a few years higher profits. They can dump the warehouse call-centre shells and move everything to the Philippines to add 1.5 pennies per share profit for that quarter. In economics we call them "externalities" and in my view it is the governments' role to assess those and regulate the environment to keep it competitive and to limit the damage which can be caused by millions or billions of dollars, pounds and euros careening around the world.
I saw one estimate (on the BBC I think) that around 4-5% of the forex traded in London is needed to enable trade. The rest of it is all speculation. Yes we need exchange markets, but that level of volatility is a disaster waiting to happen. When that quantity of money can be shifted around based on rumour, gossip, news and a herd mentality, things are bound to go wrong which have a massive negative impact in the real world.
Are free markets a good thing? Not usually as far as I've seen, when you start getting very large corporations involved. Your ishiney might be slightly cheaper, but I'm not convinced the cost is worth it and I'm reasonably upset that governments have pretty much ceased conducting proper cost-benefit analyses. Competitive markets are generally good. These days however, nearly every industry appears to be a "natural monopoly" as companies try to get big in order to survive and who cares about the debt? It isn't my quarterly bonus which is affected.
In the long-term, things will even out, but there'll be a lot of pain in the mean-time. So much for a border-free Europe and the free market. The problem is that there is a difference between a free market and a competitive market. A competitive market keeps things broadly homogeneous. The real world is so far from "perfect competition" that its useless as a model for creating policy.
Exactly - because many of the "obvious agreements" are just disguised versions of the completely discredited "rational actor, perfect information" economics.
Rent control - yes, and following on from the point, there is NO shortage of land in the UK at least. There is a shortage of planning permission. This causes that the entire housing industry, Including housing benefit, is slaved around literal rent-seeking behaviour as far as it possible to be from economic equilibrium. To put some figures, agricultural land two miles from where we live is £6k per acre, which fits 9 houses, or £700 per house (including overhead for roads). With planning permission in our village on the edge of Cambridge, more like £300K for the same land area.
Tariffs and import quotas are bad. I happen to agree on the outcome in specific UK circumstances, but the assumptions behind this as a general macroeconomic philosophy are ludicrous. Allegedly free trade is good, because you get to focus on what you are good at (comparative advantage). But Looking around you today, does comparative advantage really drive what countries export? When did Huawei, cough China, gain the CA in making telecom equipment against Ericsson and Nokia? They didn't, they just picked a winner, invested massively, and leveraged large numbers of very smart emigrants and then re-immigrants 10-15 years later, to capture the market. Good luck to them. But CA it ain't. UK "exports" financial services. Is that CA? Because every time the government thinks about the Tobin tax of 0.1% they all threaten to move country. Well if it is a CA, then 0.1% isn't a very big one.......
The real reason macroeconomics doesn't predict anything, is that it is spreadsheet economics
* Cash payments increase the welfare of recipients to a greater degree than do transfers-in-kind of equal cash value. (84 per cent)
What recipients? Not those who spend it on fags-and-booze, nor their children. And that's precisely where the worst social problems lie.
It starts with people whining about sin spending, and then you have presidential candidates talking about "strapping young bucks [minority men]" using welfare to buy T-Bone steaks (Reagan, 1976). If there ever was a slippery slope that existed in the real world, it's the insidious myth of welfare cheats/queens. These people rarely exist.
Yet because of this pernicious talking point, we have states passing restrictions on how cash-like benefits can be used, like no seafood (sounds good when it's lobster, not so good when it also prevents buying a tin of tuna), no spices or herbs (favor is only for those who earn it), or nuts (because good health is also something you have to earn). And even if we applied rules that restricted it to healthy items, that definition 15 years ago would have excluded butter, eggs, dairy with fat, and many vegetable oils while providing "healthful" alternatives like partially hydrogenated oils (margarine), fruit juices, and "fortified" cereals like Frosted Mini Wheats. Never mind that today, those "healthy" items all have a growing list of ills associated to them while the demonized items of the 90s are turning out to be a lot healthier than originally thought.
As someone who seems to be concerned with the removal of the free market from things, by advocating the picking of winners and losers in the food world by the government, or more specifically, the morality police, you screw the rest of us who aren't getting benefits. There are enough welfare dollars there to sway manufacturers and producers in a direction that may be proven wrong in another 15 years. Worst of all, the benefit of being able to pivot with the market is removed because laws take forever to change and the morality police are not exactly known for being receptive to ideas that challenge or refute their world-views.
As Mr. Worstall talked about a few weeks back, scrap welfare and this hand-wringing over the morality of certain items and just give a minimum basic income to everyone. That way, I can tell you and all those morality cops to stop policing the lives of others because you think they are deficient or incapable of living without someone over their shoulder telling them how they are failing. The fact that you have a job does not give you some kind of superiority or moral high ground; it just means you have a job (which many people on welfare have, it just doesn't provide enough)
You really want humanity to reach the lowest possible common denominator don't you?
If you give money to the seriously drug addled, they will keep spending it on drugs until they either die or grow up. Most choose to die high.
The same with welfare queens that have been on welfare for 40 years and have raised 4 generations of children to think if I can just get pregnant I can get my own welfare check and my own apartment. Keep making the problem worse by supporting the source.
Just so much to aspire to in your world. Why even go to school and learn when you can get welfare? What possible reason could you have for becoming "better"? That word doesn't exist in your world.
If people have no compass (moral or otherwise), they lose their way and most fail.
The idea of "superiority" is only a problem when you have already defeated yourself by not trying.
If you don't even try to strive towards a better life, you're already lost and should just kill yourself.
You'll find that your "welfare queen" is a political straw(wo)man that is used to rile folks like you up. Congratulations, you've fallen for the ruse, hook, line, and sinker.
And as a sworn officer of the morality cops, I'm sure this next piece of information won't sway you a bit, as it contradicts your carefully constructed view of the world.
Families that receive cash benefits instead of vouchers or other restricted-use benefits have better outcomes for their children (http://www.nber.org/papers/w21101)
From the paper's abstract:
Our findings suggest that additional income may improve outcomes through both mechanisms: some benefit income is spent on direct education and health inputs, while some is spent on everyday items likely to improve the general conditions children face. Additionally, some families reduce spending on risky behavior items
@ Eric Olson
"You'll find that your "welfare queen" is a political straw(wo)man that is used to rile folks like you up. Congratulations, you've fallen for the ruse, hook, line, and sinker."
FYI I went to school with a few of them. I say a few because just in my year there were 3 pregnancies during school and at least 2 from leaving school (all different girls) who had done it for the free house and free cash (as well as a cute little baby). They had no shame about it, they were proud. One even went so far as to rub it in the nose of the very people she had been working with for the few months after she left school.
People who say such things are a lie and a straw man have had a lucky time of not meeting them (or knowingly).
Did they personally tell you this, or was that rumor? Did you actually verify they received such a benefit? Last I checked in the US, there is no such thing as free housing. You can sign up for a waiting list, assuming you can actually find one that's open, to get Section 8 housing, but that still requires that you pay a portion of the rent. And many people have been on Section 8 housing assistance waiting lists for over a year. And the "free cash" has always been a small amount, such that a single parent with one child with a low income receives around $400 a month. And there are work or retraining requirements to continue the benefits. And if they are minors themselves, they generally have to continue living with their parents, or a legal guardian, and still remain in school to get the benefit, and the benefit goes to their parents or caretaker.
In short, your anecdote doesn't pass the smell test from a US standpoint. You have an incorrect memory of the events, were mislead about what exactly happened to them, or are misrepresenting what actually happened. I applaud your attempt to lend plausibility to the story by making it seem like you were actually there, but it's not any less asinine than Reagan's oft-repeated claims about those strapping young bucks. That, or you are referring to a time many years ago when it was hard to verify identify and fraud could happen with only a few aliases. But that's called criminal behavior and is prosecuted as such, and happens as much as other sensational crimes that cause plenty of tittering at media outlets of ill-repute. There are plenty more cases of elder abuse and identity theft to defraud Medicare and Medicaid, perpetrated by white collar crooks looks to make a quick buck, or the hucksters selling snake oil because the law of the land allows anyone to sell a pill as a "supplement" and sell it through Dr. Oz and his ilk. The volume and cost to the country dwarf any of the costs we could recover by going after mythical welfare queens.
But hey, don't let that dissuade you from your crusade.
@ Eric Olson
"Did they personally tell you this, or was that rumor? Did you actually verify they received such a benefit?"
In person, no shame, more than happy about it (hence their bragging). By verify do you mean did I break into their home or demand to see their balance sheets (amuse me and say yes, please)? No rumour involved all first hand. I am aware of others but that would be by rumour not first hand (from the same school, tight knit groups who talked about it openly).
"Last I checked in the US, there is no such thing as free housing."
That may be where we are parting on this, I am in the UK not US. And here the welfare state is loved even if the people who pay for it are vilified.
As for their situations now, I cannot tell as I moved out of the area a few years ago. I know (first hand) that 2 of the girls had a second child while considering a third. One seemed less impressed with her dream life but had yet to do anything about it.
I also knew a couple more who didnt get pregnant but lived at home while refusing to work. They enjoyed coming into the workplace (they used to work the same store as me) and muse over how much more they get 'now they dont work'. However they only seemed to last a few years before getting jobs but I dont know the reason.
Maybe you dont have the same problem in the US. I dunno.
Saw this happen in real life with my own two eyes and ears. And no, if you are section 8, the whole rent and even some utility costs can be paid directly to the property owner.
Everything else you mention doesn't happen in NY State where you can get LIFETIME welfare benefits. The age of majority to emancipate yourself from parental regulation is 16. Getting pregnant seals the deal and qualifies you for every benefit including housing. Yes, there is some wait for housing but the cash rolls in regardless.
You are so full of your so called "Education" that you only believe what you read in studies, not what happens in real life.
Take your over-educated head out of your butt and see what is really happening. Who said anything about "going after welfare queens"? I just said it was happening all over and that people should not get benefits without something in return like work.
But hey, don't that get in the way of your leftwing propaganda and lies.
Over 50% of the people in this country recieve some kind of social support payment. Fraud is rarely investigated because that could be considered "racist".
The rest of us work for a living and I for one am sick and tired of supporting the lazy ones with my taxes when I don't get a say in how they are spent.
My ex girlfriend was a property manager for subsidized housing for well over 10 years and yes, the "Welfare Queen" is alive and well in the Buffalo, NY area and everywhere else in cities in the USA.
It's not a strawman argument.
She personally handled the paperwork for dozens of them in her apartment buildings and knew the status of their children. Children who left the roost, got pregnant, got welfare and immediately tried to get section 8 housing subsidies at the same apartment complex where their mother lived.
Every family consisted of a single parent and multiple children and were completley dependent on welfare for everything.
This apartment building would ONLY take Section 8 clients as the payments go directly
to the apartment owner.
Any payments made to the "Welfare Queens" never made it to the building owner and the "client" was soon evicted (actually took over a year to accomplish eviction and costs thousands to do it).
You can quote all the so called studies you want. Reality beats academia every day.
No ruse, just simple fact, no weasel words just real life examples... and none of it came from a questionable source like NBER who has a leftwing socialist agenda.
>> A ceiling on rents reduces the quantity and quality of housing available. (93 per cent)
> In isolation, yes. Falls down in a system where housing benefit dominates much of the market. Falls down even worse when building land is the limiting factor and taxpayer subsidies feed through to higher land prices.
Yes, I agree that artificially restricting supply (planning control) will raise prices, as will having a system that pays "market price" for the product. But that doesn't negate the first statement - it's quite convincingly shown that everywhere that has rent control, also has worse (and less of it) housing than places that don't.
Whatever you think of the "corporate landlord", studies have shown that many housing development can only be built because some buyers will buy "off plan" - ie pay up front based only on some drawings of what the property will look like when it's been built. Few private buyers have the cash for that - so it comes down to businesses who have enough cash for a deposit, a business plan that a lender will believe, and enough cash to pay mortgage repayments between buying and the property being ready to rent out.
Businesses and their lenders will not lend on a deal which doesn't allow for a reasonable profit - if yuo can't make a profit on the deal, then the money goes where it can make a profit. That's economics basics !
So if the money doesn't go into buying off plan for new developments - many of them won't get built.
And for those properties that are already built - if you cap income (ie rent), then you'll also restrict investment in maintaining that property.
In the interests of disclosure, I'm a landlord. Supposedly, if you listen to the politicians and their soundbites, I'm some evil "Mr Big" screwing my tenants and living it up on obscene profits. Guess what, I make naff-all profit on my 2 properties by the time bills are paid, and my tenants are very happy.
One in particular is a friend of a friend, and a divorcee. She's happy to have someone else worry about maintenance etc - she just pays the rents and lets me take care of stuff. She used to have her own home, so fully understands the costs and hassles that so many ignore.
Electrical problems - SEP. Boiler breakdown - SEP. Leaky roof - SEP. Long list of other expenses - SEP.
SEP = Someone Else's Problem
And all that for less that I pay in mortgage repayments each month.
All of this seems to assume that theories are developed from studying the fluid "money" and how it behaves under pressure, when its flow constrained etc., etc. Implicit in this approach is the assumption that the "markets" have "natural properties" than can be deduced in a similar way to the natural laws that govern the world around it.
Alternatively, money might be more like a flow of electrons that can be enriched or impoverished and made to flow and behave in complex ways using hardware and software to achieve specific results.
Which may or may not include "crashes".
...you know where the catastrophe is going to hit, but no one can predict when. I remember predictions of disaster years in advanced but the crisis was well under way before it became general knowledge. At least a year before Lehmans went down I was reading the blog of a (now sadly deceased) SAP consultant describing what was going wrong and the likely implications.
It doesn't help that the political class is shit scared of being honest and precipitating things. Do remember the shit Alistair Darling got when he said how bad it was going to get?
And one which deserved a good answer. The growth of credit before the crash seemed unsustainable to me so why did nobody in government - such as a chancellor who seemed to consider himself in economics whizz - think the same? And decide that applying the breaks might have been a good idea?
Agreed. But, assuming that the question was asked of Blair or Brown, it deserved a straight answer. Politicians are in the habit of lying to their electorates because they can get away with it. But the head of state should be answered honestly if only because heads of government need something to make them face facts. Giving such an answer might have required some uncomfortable introspection.
Please don't forget that the Tories were complaining that Labour weren't doing enough to expand the economy, just like they attacked Brown for not doing enough to help the City when it hit the fan.
Both parties were (and are) in thrall to the City and that will remain their overriding priority; as Paxman pointed out, we voters get to choose between two men who both went to school with Boris Johnson.
What could they have done ?
The only power they have would have been to take over the bank of England (preferably involving the SAS bursting through windows) and raise interest rates to what people were paying on their credit cards. Cause a massive housing crash, 100,000s of evictions and raise the value of sterling to the point that totally destroyed any remaining industry.
Or Blair could have gone on TV and said, "the economy is going to crash in 45minutes/weeks/months, trust me" and everyone would stop bing big screen tvs
The root cause of the crash was because the banks were cutting their opiates (low default probability mortgages) with some junk (high default probability mortgages) which was sold on the open market and pushing up housing prices internationally.
Once the financial con was discovered an entire part of society found that their homes repayments got unaffordable, banks didn't trust what was being traded and unwilling to take on the risk they caused.
Predicting criminal behaviour can be done & was in the law, but stopping such behaviour means policing, something banks are quite notably against.
"The root cause of the crash was because the banks were cutting their opiates (low default probability mortgages) with some junk (high default probability mortgages) which was sold on the open market "
Well, there are more moving parts than that.
The ratings agencies, who should have been correctly identifying the actual risk used incorrect or criminally incompetent or corrupted methods the value them.
The buyers shouldn't have so trusted the clearly BS figures given. Some people are not really culturally open to the idea that other bankers/governments might actually be outright liars (see Greek government figures and trusting Germans).
Then you've got straight up political interference in the market, in the form of Fannie and Freddie in the US. So everyone should get a home loan, even if you cannot pay that home loan, which is as doomed to failure as setting the price of toilet paper. You can't just legislate something that is fundamentally a market good.
Then the incentives system whereby selling something, even if it later turns out to be pure crap, earns you more than honest work. Be that the people making NINJA loans (or guiding their clients to fraud), the ratings agencies paid by the rating they give, the people selling clearly bunk derivatives, and the politicians who are happy to be paid to remove regulatory barriers that prevent some of these abuses.
It's a cycle of problems, not just one part. Blaming the banks alone is fun, but to truly fuck something up you need to have government, business and the plebs all working together :)
I think you need to look further for the root cause. The only reason the junk was saleable was because the interest rates were low and the interest rates were kept low because politicians like Brown deliberately ignored house price inflation by leaving housing costs out of the indices used to determine interest rates*. At one level this was probably to promote a boom and help re-election. I suspect there was a further motive. Low interest rates encouraged more private borrowing and part of that borrowed money came into the exchequer in the form of VAT & stamp duty. So in addition to Brown's stealth taxes he also had stealth borrowing; borrowed money that wasn't on the government's books.
*At the same time a lot of formerly domestic production was being offshored which further reduced inflation and hence interest rates. This, of course, didn't help employment.
@ 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.
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 (http://timharford.com/2015/04/the-economists-manifesto/). 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.
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.
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.
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.
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.
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.
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.
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?
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,
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.
"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.
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.
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.
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
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.
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.
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.
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.
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".
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.
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?
Hi amanfromMars, thank you for the valuable feedback. Please be sure that whatever monitoring and moroning devices are being used, Language is the master (-: ....no 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 :-)
Funny, but...... Russia wants to build its own Windows, says it's got to be Open Sauce full of sovereignity. …… Tail Up ……. http://forums.theregister.co.uk/forum/1/2014/11/27/home_office_tender_top_secret_surveillance_gear/#c_2372887
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.
..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' ...as 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?
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.
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.
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