Comments on: Did Policy Economists Get It That Wrong? http://www.ritholtz.com/blog/2009/09/did-policy-economists-get-it-that-wrong/ Macro Perspective on the Capital Markets, Economy, Geopolitics, Technology, and Digital Media Tue, 14 Feb 2012 22:30:38 +0000 hourly 1 http://wordpress.org/?v=3.0.5 By: chris steinbach http://www.ritholtz.com/blog/2009/09/did-policy-economists-get-it-that-wrong/comment-page-1/#comment-218367 chris steinbach Wed, 23 Sep 2009 22:07:01 +0000 http://www.ritholtz.com/blog/?p=38787#comment-218367 So, the point of this post is that efficient market models are better because they are based on over-simplified assumptions that make the equations easier to solve? This would explain why the models are popular in business - It's hard to give guidance to traders if you can't solve your equations. This would also explain why the models are so popular with academics - Who wants to publish a paper of a model they can't solve? For those of us in the trenches making day-to-day economic decisions for our firms (at least before we were laid off), what we consider to be rational changes over time. Needing cash and selling assets at a loss to cover is not irrational. But it does totally f**k up the rational behavior models. So, the point of this post is that efficient market models are better because they are based on over-simplified assumptions that make the equations easier to solve? This would explain why the models are popular in business – It’s hard to give guidance to traders if you can’t solve your equations. This would also explain why the models are so popular with academics – Who wants to publish a paper of a model they can’t solve?

For those of us in the trenches making day-to-day economic decisions for our firms (at least before we were laid off), what we consider to be rational changes over time. Needing cash and selling assets at a loss to cover is not irrational. But it does totally f**k up the rational behavior models.

]]> By: How the Common Man Sees It http://www.ritholtz.com/blog/2009/09/did-policy-economists-get-it-that-wrong/comment-page-1/#comment-217766 How the Common Man Sees It Tue, 22 Sep 2009 13:08:52 +0000 http://www.ritholtz.com/blog/?p=38787#comment-217766 I posted this the other day. I hope you don't mind the repeat Priceless: How The Federal Reserve Bought The Economics Profession http://tinyurl.com/kvyhv3 I posted this the other day. I hope you don’t mind the repeat

Priceless: How The Federal Reserve Bought The Economics Profession

http://tinyurl.com/kvyhv3

]]> By: AustinKelly http://www.ritholtz.com/blog/2009/09/did-policy-economists-get-it-that-wrong/comment-page-1/#comment-217660 AustinKelly Mon, 21 Sep 2009 20:52:19 +0000 http://www.ritholtz.com/blog/?p=38787#comment-217660 At least some of the economists in the trenches got their pieces right. GAO tagged the problems with loose underwriting at FHA in 2005, for example. The question is whether or not anyone at the top was adding together all the pieces found by economists in the various trenches. http://www.gao.gov/new.items/d0624.pdf What GAO Found: Almost half of all single-family home purchase mortgages that FHA insured in fiscal year 2004 had down payment assistance. Nonprofit organizations that received at least part of their funding from sellers provided assistance for about 30 percent of these loans and represent a growing source of down payment assistance. However, assistance from seller-funded nonprofits alters the structure of the purchase transaction. First, because many seller-funded nonprofits require property sellers to make a payment to their organization; assistance from these nonprofits creates an indirect funding stream from property sellers to homebuyers. Second, GAO analysis indicated that FHA-insured homes bought with seller-funded nonprofit assistance were appraised at and sold for about 2 to 3 percent more than comparable homes bought without such assistance. Regardless of the source of assistance and holding other variables constant, GAO analysis indicated that FHA-insured loans with down payment assistance have higher delinquency and claim rates than do similar loans without such assistance. Furthermore, loans with assistance from seller-funded nonprofits do not perform as well as loans with assistance from other sources. This difference may be explained, in part, by the higher sales prices of comparable homes bought with seller-funded assistance. At least some of the economists in the trenches got their pieces right. GAO tagged the problems with loose underwriting at FHA in 2005, for example. The question is whether or not anyone at the top was adding together all the pieces found by economists in the various trenches.

http://www.gao.gov/new.items/d0624.pdf

What GAO Found:

Almost half of all single-family home purchase mortgages that FHA
insured in fiscal year 2004 had down payment assistance. Nonprofit
organizations that received at least part of their funding from sellers
provided assistance for about 30 percent of these loans and represent a
growing source of down payment assistance. However, assistance from
seller-funded nonprofits alters the structure of the purchase
transaction. First, because many seller-funded nonprofits require
property sellers to make a payment to their organization; assistance
from these nonprofits creates an indirect funding stream from property
sellers to homebuyers. Second, GAO analysis indicated that FHA-insured
homes bought with seller-funded nonprofit assistance were appraised at
and sold for about 2 to 3 percent more than comparable homes bought
without such assistance.

Regardless of the source of assistance and holding other variables
constant, GAO analysis indicated that FHA-insured loans with down
payment assistance have higher delinquency and claim rates than do
similar loans without such assistance. Furthermore, loans with
assistance from seller-funded nonprofits do not perform as well as
loans with assistance from other sources. This difference may be
explained, in part, by the higher sales prices of comparable homes
bought with seller-funded assistance.

]]> By: gloppie http://www.ritholtz.com/blog/2009/09/did-policy-economists-get-it-that-wrong/comment-page-1/#comment-217607 gloppie Mon, 21 Sep 2009 18:22:11 +0000 http://www.ritholtz.com/blog/?p=38787#comment-217607 "Publish these types of models and you will advance your academic career. " Hyman Minsky could have attested to that. One could also argue that when viewed in the context of a society where physiological needs are fulfilled (according to Maslow Hierarchy of needs Theory), Fear and Greed are somewhat irrational emotions in the first place, yet those are the prime Market movers. Multiply this by the "herd effect" and you get chaos (as in too complex to be effectively modeled), not self regulation. “Publish these types of models and you will advance your academic career. ”
Hyman Minsky could have attested to that.
One could also argue that when viewed in the context of a society where physiological needs are fulfilled (according to Maslow Hierarchy of needs Theory), Fear and Greed are somewhat irrational emotions in the first place, yet those are the prime Market movers.
Multiply this by the “herd effect” and you get chaos (as in too complex to be effectively modeled), not self regulation.

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