Friday, January 09, 2009

CJR: The Insiders' Insider Says "FINALLY! Somebody's Saying the Unsayable!"

And the "Unsayable?" The whole economics "profession" is a fucking charade! Via CJR:
Economist, author and Audit pal Jeff Madrick has a piece on the Daily Beast that I’ve been hoping someone would write:
How the Entire Economics Profession Failed
Not a bad topic, right?

Here’s a partial list of misguided and dangerous notions to which mainstream economics and economists have lent their considerable academic and intellectual heft:
Wall Streeters paid themselves enormous bonuses based on rising market values of investments, not on revenues actually made. The bonus system has been based on the preposterous assumption that the value of an investment set by traders in financial markets rationally reflects the true future value of that asset almost all the time. …

Investment banks took on $25 to $40 of debt for every dollar of capital in order to maximize their returns. It was assumed that these smart people wouldn’t do this if they didn’t know how to manage their risk. …

Average Americans took on record amounts of debt compared to incomes, which was said to be just fine because it was supported by high stock prices and, when that bubble burst, by high house prices. …

Financial deregulation freed MBAs to make the brilliant technical innovations. I could find no single mainstream academic economist who criticized financial deregulation in a systematic way since the 1990s until only very recently. Two veteran Wall Street economists, Henry Kaufman and Al Wojnilower, were partial exceptions. …

Low rates of unemployment were proof the American economic model was working. In light of this, stagnant or falling wages in the 2000s was not an indication of economic failure—just a reflection of American competitiveness.

The Federal Reserve can always save the day, as Milton Friedman taught us. Just add more reserves and believe in Ben Bernanke, whose mentor was Friedman. So now Bernanke is adding reserves far beyond anyone’s imagination, just like Friedman said he should do, and the economy is in ever-deeper trouble.
And check out this figure. Unbelievable:
The earnings of financial institutions rose to more than one-third of all American profits. This only proved how valuable finance was to the economy and that manufacturing was simply old hat.
It ends on a nice coda, too:
What most economists can't seem to acknowledge is that they have been overcome by free market ideology over the past thirty years. Such ideology is especially beneficial to wealthy vested interests. But economists are purportedly dedicated to objective empirical and statistical analysis. Ideology has little part in the work of these serious empiricists, but surely there was no buttering up of the rich and powerful that provide jobs and grants.

Only with the near collapse of the economy are economists changing their tunes slightly, accepting the need for regulation and Keynesian stimulus. But they will probably not change their deepest assumptions about how markets work, or about when they should and should not be given free reign. They will make no bigger place for government than to adjust a little more for “market failures.” They will go back to tinkering with those models, not transforming them, and even make them fit the current crisis without blinking an eye.

As I say, at least they now believe in Keynesian stimulus and are a little more skeptical of Friedmanism. Be thankful for small changes, I suppose. A few will fight for a larger shift. Among mainstreamers Shiller and George Akerlof at Berkeley are leading the charge. A lot of pertinent and important ideas are percolating among the liberal fringe. If there were some humility at the San Francisco gathering I’d be more optimistic these voices could prevail. Government has a central place in the economy, after all, as the Obama administration is about to demonstrate. It is not merely an option of last resort. In general—and I think the above examples of dereliction of duty make it just fine to generalize—mainstream economists are a long way from getting that fundamental idea.
The country needs a huge jolt of Keynes, without the military 'excuse' to sustain it. Dredge up Milton Friedman's carcass and tie it to Tom Friedman's leg, and leave 'em both to rot in a verypublic place...

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