Posts filed under “Politics”
“A great many people think they are thinking when they are merely rearranging their prejudices.”
Reinhart and Rogoff are being blamed for the damaging, widespread adaption of post-crisis austerity programs in Europe and in the United States. This reflects a fundamental misunderstanding of how political decision get made.
Regardless of what you think of either R&R, austerity or its opposite, stimulus spending, this blame on two academics is not based on how most Humans make decisions. After years of studying investor behavior, I believe this newly discovered conclusion is actually inverted — it is opposite to how people make their decisions — especially ideological driven politicians.
Academia presents a buffet of theoretical options. Amongst the intellectual cognoscenti — those academics who toil in the world of abstract thought — this is a normal part of their process. We have an academic equivalent of millions of typing monkeys trying to produce Shakespeare — only most of the output is peer reviewed and challenged by other experts. This should inexorably lead us towards a basic form of Truth regarding specific aspects of society. Indeed, this is how soft sciences like Sociology, Political Science and Economics eventually develop and refine their understanding of how human society functions.
When policy makers and politicians get involved, we run into trouble. They have no interest in pursuing the “Truth” — rather, they look for rationales for what they have decided they want to do regardless. It is confirmation bias writ large. They seek out that which agrees with their preconceived notions, and adapt it as a rationale for what they already believe in.
Did Reinhart and Rogoff persuade many politicians to forgo stimulus and embrace austerity? I am unsure that their error-laden, cherry-picked data really convinced any one who wasn’t already leaning in that direction. Indeed, the fact that their magnum opus was never peer reviewed tells you much about how serious it was as an academic work. That is much more revealing about the people who championed the paper than it is about the paper itself. We now know it was little more than junk science, but it fit the pre-existing narrative of those who favor smaller government. They adopted it not despite of its flaws, but rather because of them. It said exactly what it was they wanted to hear, so why bother having it peer-reviewed?
If the thinking process of investors is flawed, filled with cognitive errors and biases, imagine what the process is like for ideologues and political types. The bottom line is that, just as investors seek out those articles, research reports and commentary that support their existing portfolios, so too do politicians look for similar writings that confirm their pre-existing notions.
We know that human thinking all too often is a flawed process which quite often resembles little more than James’ “rearranging of their prejudices.” We might as well blame farmers for obesity; they grow lots of different foods, but they do not force anyone eat french fries.
We as a society run into a problem when we confuse confirmation bias with thought — especially in the political arena.
Confusing Cause & Effect: Elections and Markets (January 9th, 2008)
Are You an Investor or a Story Teller? (April 25th, 2013)
Is there a more reliable fade than Donald Luskin? Exactly one year ago this week (May 4, 2012), Luskin exhorted WSJ readers to dump equities because The 2013 Fiscal Cliff Could Crush Stocks. “Do the math on dividend taxes” he advised, warning that dividend yields would be lower, and stock prices would be considerably lower…Read More
Matt Stoller writes: Earlier this week, the House Ag Committee marked up some bills deregulating derivatives. I don’t think they were expecting anyone to really notice, but there was a bunch of press on what they did. The next step in the legislative process is for the House Financial Services Committee to look at the…Read More
Congress Did Nothing to Rein In One of the Main Causes of the Financial Crisis … and Is About to Let Things Get Even MORE Insane
Out-of-control derivatives were largely responsible for the 2008 financial crisis … and still pose a massive threat to the economy.
Unchecked derivatives are so harmful to the economy that:
- Warren Buffet called them “weapons of mass destruction”
- A Nobel prize winning economist who helped develop derivatives pricing said some of them were so dangerous that they should be “blown up or burned”
- Newsweek called them “The Monster that Ate Wall Street” after the financial crash
This is especially true since the big banks are manipulating the hundred trillion dollar derivatives market.
No, the big “financial reform” bill passed in the wake of the financial crisis didn’t fix anything. We noted last year:
No, there have not been any reforms or attempts to rein in derivatives, and the Dodd-Frank financial legislation was really just a p.r. stunt which didn’t really change anything.
Harold Bradley – who oversees almost $2 billion in assets as chief investment officer at the Kauffman Foundation – told the Reuters Global Exchanges and Trading Summit in New York that a cabal is preventing swap derivatives from being forced onto clearing exchanges:
There is no incentive from the moneyed interests in either Washington or New York to change it…I believe we are in a cabal. There are five or six players only who are engaged and dominant in this marketplace and apparently they own the regulatory apparatus. Everybody is afraid to regulate them.
Indeed, the U.S. has agreed to backstop potential trillions in derivatives in the U.S. … and abroad.
If the big banks are manipulating the derivatives market, they could manipulate every other market on the planet. Given that the size of the derivatives market dwarfs the entire global economy, and given that derivatives are – by definition – not real assets, but paper abstractions loosely based upon real assets, manipulation of derivatives can drive asset prices up or down at whim.
There wasn’t a big enough public outcry. So the boys are at it again.
Voters should pay attention to politics. Investors should ignore it. By Barry Ritholtz Washington Post, March 8 2013 On March 1, the $85 billion sequester went into effect. It will potentially shave half a percentage point from GDP. With estimates for this year’s economic growth at 1.5 to 2.0 percent, the sequester by…Read More
Fascinating rant from Jon Talton: “Let the sequester happen and keep it going. Ever since Ronald Reagan ran for the presidency, politicians have gotten ahead by claiming “government is the problem.” And voters accept this as they accept their Social Security checks, Medicare benefits, safe food and drugs, freeways and roads to drive on, in…Read More
Politics matters little to your investment outcomes. This has been a theme of mine for nearly forever. I discuss this in presentations all the time. It was — literally — my first column for the Washington Post. And yet the financial press simply cannot get enough of this stuff. They love a good narrative. While…Read More
Source: Bloomberg As the chart above shows, federal outlays for goods, services and employee compensation have fallen in seven of the past nine quarters, according to data compiled by the Commerce Department. The inflation-adjusted annual rate fell 7.9 percent from a peak reached in the third quarter of 2010. Spending by state and local…Read More
“Don’t tax you. Don’t tax me. Tax that fellow behind the tree.” -Louisiana Senator Russell Long. The famous Russell Long quote above reflects a basic truth about politics: Many people want other people’s taxes to go up, but not their own. The same is true for spending: Other programs are wasteful, but…Read More