Bob Eisenbeis is Cumberland’s Chief Monetary Economist. Prior to joining Cumberland Advisors he was the Executive Vice President and Director of Research at the Federal Reserve Bank of Atlanta. Bob is presently a member of the U.S. Shadow Financial Regulatory Committee and the Financial Economist Roundtable. His bio is found at www.cumber.com. He may be reached at Bob.Eisenbeis@cumber.com. ~~~
It has become fashionable for commentators to bash economists for having missed the financial crisis of 2007-2009. Nobel Prize winner Robert Lucas provided a recent rebuttal to critics in a guest article in The Economist of August 6, 2009. Unfortunately, it was a rather unconvincing effort.
More recently, Nobel laureate Paul Krugman, in his NY Times article of September 2, 2009 entitled “How Did Economists Get It So Wrong?” took his own shots at the profession. He essentially repeats two criticisms that were addressed in Lucas’ article. The first is the profession’s fixation on elegant mathematical models, and the second is its belief in efficient markets – the idea that market participants use all available information when making economic decisions and pricing securities. He claims that in the world of theory – which many economists tend to believe is the “real” world – markets are inherently stable and do not admit the possibility of “catastrophic failures in a market economy” like the current crisis. Should a problem occur then it could be easily corrected by appropriately administered Federal Reserve policy. Are these criticisms well-deserved and are they directed at the right people?
Krugman’s critique has brought forth a host of rebuttals from academic economists who defended their performance. Still, one has to concede that Krugman has some valid points. The first concerns the bias among theorists for stability and stationarity in their models. Models serve a useful purpose in all fields of physical and social science. In economics, the trend has been toward building models that exhibit stationarity and stability, so that they tend toward a fixed long-run equilibrium and naturally return to that equilibrium if shocked. Publish these types of models and you will advance your academic career. There has been relatively little interest in the contemporary academic profession in market imperfections or in models that may admit such properties.
However, what critics also fail to recognize is that academic economists are not engaged in the same activity as business and policy economists. Academics are not building forecasting and prediction models of the kind the critics seem to be demanding or expecting. Academic economists are mostly unconcerned and largely uninformed about the week-to-week data releases or the policy moves that the Federal Reserve makes and that fill time on CNBC, Fox Business, and Bloomberg TV. In fact, academia puts little value on forecasting. Once you have built a forecasting model, there is nothing more to be gained intellectually from the academician’s perspective by running the model week by week as new data becomes available. This is really the province of the Federal Reserve and other government agencies, economic consultants, the business economists that populate Wall Street and large corporations who have to make business and policy decisions based upon the outcomes of those forecasts.
“Federal Reserve Board has rejected a request by U.S. Treasury Secretary Timothy Geithner for a public review of the central bank’s structure and governance, three people familiar with the matter said.
The Obama administration proposed on June 17 a financial- regulatory overhaul including a “comprehensive review” of the Fed’s “ability to accomplish its existing and proposed functions” and the role of its regional banks. The Fed was to lead the study and enlist the Treasury and “a wide range of external experts.”
The Fed needs to be VERY concerned with maintaining their independence.
Regardless of your views about Ron Paul (his new book is called End the Fed), its the rest of the crowd of that scares me. Imagine what the dolts who run congress would do if they had access to the Fed’s authority.
The key to intelligent central banking is a clear charge (i.e., fighting inflation), a pragmatic (more Bernanke, less Greenspan) approach, and the willingness to make the unpopular necessary steps (Volcker).
Imagine what the giveaways would be like if the idiots in Congress were in charge . . .
Georgetown University Conference on Future of Global Finances
The White House’s top economic adviser Lawrence Summers delivered a keynote address about the future of global finance. A number of Obama administration decision makers attended this Georgetown Univ. conference. Earlier, FDIC Chair Sheila Bair and SEC Chair Mary Schapiro spoke. Washington, DC
Ack! As noted last week, we have been suffering from some hosting/node/database issues.
Okay (as you’ve noticed) we’re backup…one big server for the frontend (running apache) and the medium-sized server for the backend (handling mysql). This was the quick fix to get the site back up, and now we are going to start optimizing the servers.
Corporate America loves buying its own stock — but apparently. only at the worst times, like when they are expensive or at the top of a bull market. When shares are cheap, or during a bear market, companies stop their usual buying.
Via Floyd Norris, we get the specifics:
“Standard & Poor’s reported this week that stock buybacks by companies in the S.& P. 500 fell to $24.2 billion in the second quarter of 2009. That was down 28 percent from the first quarter and was 72 percent below the figure for the same quarter of 2008. The amount was also the lowest for any quarter since S.& P. began tallying the figures in 1998. . .
At the peak of the buyback boom, in the third quarter of 2007, companies in the S.& P. 500 spent $171.9 billion repurchasing shares. The stock market peaked on Oct. 9 of that year, a few days after the quarter ended.
This year, the stock market hit bottom on March 9, and is up more than 50 percent since then. But buybacks continued to decline in the second quarter.”
As my 7 year son last week junked his velcro sneakers for a pair of Nike’s with shoelaces as he finally learned to tie them, it was hard not to think about when the private sector was finally going to learn how to tie its shoelaces again without the help of government velcro. The FOMC on Wednesday will update us with their thoughts but expect little to change as they reiterate the end to their Treasury purchase plan while they continue to buy RMBS to keep mortgage rates artificially low. However, the Pandora’s box of government intervention has opened and just because some program ends soon doesn’t mean it can’t be resurrected if things change again in the future. The G20 meets too and expect only style with very little substance but unwind strategies will certainly be a topic of discussion. The $ index is rising for a 2nd day and the reflation trade is taking a rest as a result. The IMF detailed its gold sale plans initially announced months ago.
“The end of the world appears to have been postponed. We’ve had an extraordinarily terrible crisis though we’ve probably hit bottom as world output has turned positive.”
-Paul Krugman, Princeton University
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A few bullet points from Krugman’s comments in Helsinki:
• The U.S. may have emerged from recession at the end of July or in August
• Growth may be returning after 4 consecutive Qs of negative GDP — the longest contraction since record-keeping began in 1947.
• U.S. has $1.1 trillion in annual capacity “staying idle.”
• The world has become “highly subject” to financial bubbles;
• There was a “remarkable” willingness to ignore signs of the bubble — or more politely, to fail to recognize it.
I believe the NBER made a mistake in the dating of the 2001 recession — they tagged it as over November 2001 — too soon, based on the subsequent employment data. The trough wasn’t for some time.
I suspect we won’t see a similar error this time, and that implies the official mark of the recession being over may be later than many economists (including Krugman) believe.
One of the oddities of the current rally is that Futures before the open seem to have little correlation with closing prices.
Today, we see futes are pretty ugly. Yet its hard to guess where we will close.
Bill King likes to point out that after a Quad Expiration like we had on Friday, the option pressure dissipates. That suggests the market will have a more difficult time making up the opening gap down.
Various housing benchmarks are due this coming week, along with meetings at the Fed and of world leaders. Can the markets sustain their rally? Stacey Delo reports.
2:41
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Asia’s Week Ahead: Economic Data and Bank Policy 9/18/2009
New Zealand will get an update on the state of its economy with Wednesday’s release of gross domestic product data. Also, in Taiwan, the central bank holds its quarterly policy meeting. MarketWatch’s Andria Cheng reports.
"I sincerely believe, with you, that banking establishments are more dangerous than standing armies; and that the principle of spending money to be paid by posterity, under the name of funding, is but swindling futurity on a large scale." -Thomas Jefferson (letter to John Taylor in 1816)
After 3 quarters in a row that averaged just 1.2%, Q4 GDP grew 2.8%, a touch below expectations of 3.0% BUT Nominal GDP grew well below forecasts. Because the price deflator was up just .4% vs the estimate of 1.9%, Nominal GDP was up 3.2% vs the estimate of 4.9%. Personal Consumption rose 2.0% vs the forecast of 2.4%. Fixed Investment rose 3.3% helped by a 5.2% increase in equipment and software spending and residential construction rose by 10.9%. Trade was a slight drag on GDP growth and government spending was as well led by a 12.5% decline on national...
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