Posts filed under “Really, really bad calls”
Why aren’t we listening more to this font of common sense and logic?
“A proposal to give banking regulators authority to block accounting standards is “a terrible idea,” Paul A. Volcker, a former chairman of the Federal Reserve Board, said Monday.
Mr. Volcker has been an outspoken critic of “mark to market” accounting that forced banks to take large write-downs in asset values, a position cited by banks earlier this year when they persuaded members of the House Financial Services Committee to demand changes in that rule.
But in an interview Monday, two days before a House committee vote on a proposal that would grant bank regulators the power to sidestep accounting standards, Mr. Volcker said he believed that accounting rules had to be set by an independent agency. He voiced concern that rising political pressures on both sides of the Atlantic were endangering that independence.”
The Financial Services Committee is to vote on amendments to a bill to establish a council of bank regulators as a systemic risk regulator, able to take action if bank activities threaten financial stability. . .
Mr. Volcker was the founding chairman of the International Accounting Standards Committee Foundation, which oversees the International Accounting Standards Board, and has long been a supporter of independent rule-setting. He has been campaigning for a single set of international accounting standards, but he said on Monday that he feared that effort was being undermined.”
Its quite likely that this power will be exercised in the next crisis, removing yet more transparency and data for investors; Worse still, the accounting exemptions will create a new class of zombie banks.
The amendment is strongly supported by the banks. In addition to removing Mark-to-Market accounting, it allows a systemic regulators “to order the Securities and Exchange Commission, which now oversees the Financial Accounting Standards Board, to suspend or change any accounting rule that the council thinks is a threat to financial stability.”
Here’s the most insane quote I’ve seen in a long time:
“The amendment has been endorsed by the American Bankers Association, which says the S.E.C.’s focus, on helping investors, is too narrow. The amendment has been strongly opposed by groups including the Chamber of Commerce and groups representing investors.” (emphasis added)
If this passes, there will be no end to the shenanigans banks can play in the next crisis. As we have sen, many financials insitutions have taken egregious advantage of the crisis they created.
This new reg will be a license to pillage . . .
Volcker Criticizes Accounting Proposal
NYT, November 17, 2009
There is a substantial take-down of pedantic bore Ayn Rand in GQ. They tease it thusly: 2009′s most influential author is a mirthless Russian-American who loves money, hates God, and swings a gigantic dick. She died in 1982, but her spawn soldier on. And the Great Recession is all their fault. I love that because…Read More
Long standing readers of TBP know I like to try to slip in a lesson or two. The humor and money making market commentary is used as a device to keep you coming back and learning, despite yourself. Today, I require no pretense for the edumacation. Instead, I will demonstrate one of my favorite peeves,…Read More
Shorter Floyd Norris: “Goldman Sachs is trying to arrange to buy tax credits from Fannie Mae. Obviously, it would buy them at a discount. Goldman, you may recall, was saved with taxpayer money when the panic spread last year. A naïve person might think such a company would see a patriotic virtue in paying taxes….Read More
On Tuesday, the 2nd most emailed article on WSJ.com was Crisis Compels Economists To Reach for New Paradigm.
It is an intriguing look at the problems of the the field of economics. It went, however, way too easy on both the profession and its practitioners. The article fails to ask some very basic questions about the soft science, and does not discuss the fundamental incompetency of many economists.
Given the failures of the profession — failing to anticipate the worst recession in decades, missing the warping effect of the housing boom, not recognizing the credit collapse until too late — a damning indictment of the dismal science might have been more appropriate.
Perhaps I can be of assistance.
There are many areas I would have liked to see the Economics Crisis article explore: The lack of Scientific Method, the mostly awful performance of economists, its misunderstanding of the value of modeling, the bias inherent in Wall Street variant of economics, and lastly, the corruption of economics by politics. I will just touch on some of these; you can fill in much of the blanks yourself.
Let’s start with the basics. Hard “science” — Physics, Biology, Chemistry, and all variants thereto — begins humbly. They try to describe the universe around us by creating theories, and then testing them. These theorems are always preliminary. Even when testing validates them, Science is always prepared — even eager — to replace them with newer theories that are proven to be even more valid.
The humility of science begins with an admission: We know nothing. We seek to learn through experiment and logic, and constantly evolve more and more accurate explanations. Scientific belief evolves gradually over time. Nothing is assumed, presumed, or hypothesized as true. Indeed, research is a presumption that current theories are inadequate or incomplete. The practice of science is a an ongoing search for better explanations, more proof, further verification — for Truth.
Science is the ultimate “show me” state.
Economics has a somewhat, shall we call it, less rigorous approach. Indeed, the arrogance of economics is that it is the polar opposite of Science. It begins with a few basic assumptions, many of which are obviously untrue; some are demonstrably false.
No, Mankind is not a rational, profit maximizing actor. No, markets are not perfectly, or even nearly, efficient. No, prices do not reflect the sum total of all that is known about a given market, sector or stock. Those of you who pretend otherwise are fools who deserve to have your 401ks cut in half. That is called just desserts. The problem is that your foolishness helped cut nearly everyone else’s 401ks in half. That is called criminal incompetence.
Where was I? Ahhh, our sad tale of the practitioners of the dismal arts.
Starting from a false premise that fails to understand the most basic behaviors of the Human animal, economics proceeds to build an edifice of cards on a foundation of sand. (How could that possibly go astray?) Like a moonshot off by a few inches at launch, by the time the we reach further into time and space, the trajectory is off by millions of miles . . .
Economics has had a justifiable inferiority complex versus real sciences the past century. It has attempted to overcome this by throwing lots of smart mathematicians at its practice, in an attempt to make the social art seem more “sciency,” and thus more credible. This had led to lots and lots of formulas and models. The problems is, Economics places way too much weight on these. It creates an illusion of precision where none exists. The belief in their models led to all manner of mischief, from subprime to derivatives to risk management.
Economics forgot George E. P. Box’s most basic rule:
“Essentially, all models are wrong, but some are useful”
Box was a statistician who recognized the fundamental truth of all attempts to depict the universe mathematically: They are inherently flawed.
He also understood that these flawed attempts can at times have value. His insights contextualize what mathematical modelers do — and fail to achieve.
Economics fails at this often. The belief in the validity of their models — like the theories they are based upon — is the Achilles heel of the profession.
This is not to say there are not good, even great economists (some are even friends of mine!) who foresaw the coming crisis and warned about it. Many are aghast at the rigor mortis in the academic establishment; some are horrified at how poorly the profession has done. Forget forecasting the future, too many economists cannot accurately describe what happened yesterday.
The Behaviorists have been fighting the mainstream for decades now, trying to correct the errors of the basic building blocks of the dismal science.
Excerpt after the jump.
The Mystery of the Awful Economists
RealMoney.com, 3/2/2005 3:42 PM EST
(If you cannot access the Real Money piece, click here).
Mystery of the Awful Economists, part II (April 8th, 2005)
Mystery of the Awful Economists part III (April 13th, 2005)
RIP Chicago School of Economics: 1976-2008 (December 23rd, 2008)
Why Economists Missed the Crises (January 5th, 2009)
Crisis Compels Economists To Reach for New Paradigm
WSJ, NOVEMBER 3, 2009
No worries! The same people who missed the worst oncoming recession in 80 years, the credit collapse (worst in US), and the market crash are now telling you the recovery is for real. Gee, why does this — Economists expect recovery to stick, see slow, steady GDP rise — not make me more comfortable? “Nearly…Read More
You might have missed yet another smackdown yesterday: A debate on the Efficient Market Hypothesis in the FT vs the WSJ: • Martin Wolf: How mistaken ideas helped to bring the economy down (FT) • Jeremy Siegel: Efficient Market Theory and the Crisis (WSJ) My read is Wolf trounced Siegel, but as a non-fanboy of…Read More
It seems to be Real Estate Monday, as a series of intriguing articles have broken recently. First and foremost, the Seattle Times has a fascinating two parter, that you must not miss: A series of interviews with former WaMu executives and employees, as well as a survey of internal company documents, reveals that management plotted…Read More