The Grand Illusion
The November 20th edition of The Economist features an observation on the growth of data surrounding purchases of bonds, stocks, derivatives, etc. The article notes that since the founding of the Centre for Research in Security Prices at the University of Chicago in 1960, initially funded by Merrill Lynch, the number of academic economic journals dealing with, analyzing, or providing such data has grown from 80 then to over 800 today.
Yet some economists, such as Robert Shiller of Yale University, according to The Economist, dispute the value of such information, noting that even with all the proliferation of data, no one can explain the market melt-down of two years ago. Others dispute Shiller, pointing out that the market demand for such information proves its value.
In my view, they’re both right, because each is talking about a different aspect of the information. Shiller is talking about understanding how the securities markets actually work, especially in times when markets perform “abnormally,” while all those who want more and more data are talking about how valuable they find it in making money through trading.
Combine all that data with sophisticated trend analysis and you get knowledge that can make a great deal of money, generally always in short-run situations, but what all that data won’t tell you is when something basic is going to change, and change abruptly. And those who mine the data are more than happy to be able to use that data 99% of the time to make piles of money. As for the one percent of the time that they’re wrong… well… everything they’ve made the rest of the time covers that – for them. What their profits don’t do is remedy the vast economic damage that ripples through the economy when one of those unforeseen market meltdowns occurs.
The problem with the computerized use of all this securities market data is that, because it works so well so much of the time for those with the resources to exploit it, there’s little incentive to fund or look into basic research in the field. In addition, the economists who do all the short-term analysis are, according to Professor Shiller, “idiot savants, who get a sense of authority from work that contains lots of data.” Again, the problem is that the focus on daily market economics stresses immediate returns to the detriment of long-term understanding… or wisdom, if you will.
And what else is new?
Without taking anything away from the main thrust of the argument being made, to say that no one is able to make any sense of the economic collapse two years ago is simply wrong. Not only are there people who can make sense of it, there were a good number of people who did so before it happened.
Not that they were listened to.
Those that were able to see what was coming weren’t looking through the current dominant economic paradigm. They were people looking at it from either ‘outdated’ or ‘novel’ perspectives.
Wisdom – the ability to see the truths at the heart of heresy.
Indeed – in fact, everything is starting to look very much like the first chapters of F. Paul Wilson’s _LaNague Chronicles_ to me.
However, the short-term focus is not just in the knowledge sector, but in the very fabric of the corporations aiming for next quarter’s profits (and if there were monthly reporting requirements, they’d be looking at next *MONTH’S* profit…) People say that the Government should handle the big, long-term projects, but that’s worse, in many ways. If a large project, such as most anything for the Space Program, takes longer than the current administration is going to be in office, it gets de-funded at the start of the next administration, and some bigger, better project gets started, that for some reason can’t use any of the parts from the current project.
When the government went beyond saying that home loans should not be discriminatory on the usual litany of categories, to saying (via what Freddy and Fannie would issue) that discrimination on ability to repay was inherently discriminatory in other ways as well, justifying a range of risky options, it set the conditions for the housing bubble. As long as the rest of the economy went well, that wasn’t an obvious problem, yet it massively increased the risk to the entire economy. Something similar could be said about long-term negative balance of payments. But after the impacts of the 2000 Internet bubble burst, 9/11, Katrina, the costs of Iraq and Afghanistan, and maybe more, that massive risk was no longer sustainable. Insurance and bank companies started to fail, and it went from there.
Government under both parties created or allowed, for political rather than economically sound reasons, this combination of events to occur. In government, DoD and the Coast Guard handle crisis well, but even they,
let alone any other functions, handle planning much less well; and FEMA, which should specialize in crises, has been a disappointment.
Rather than intrusive regulation, or even vastly increased data collection, what the government _could_ do but seldom does is provide a neutral ground for open but privately conducted collaborative research and information exchange that would avoid any appearance of collusion or anti-trust issues. It could ensure that such collaboration included a diversity of not just voices but considerations, all brought forward and researched to a common standard of excellence by private interests; commercial, but also academic and non-profit. Further, it could moderate such collaboration in a manner that would de-fang rather than amplify lobbying efforts.
Insofar as consensus could be reached _before_ government policy-makers took over, it might make it possible for politics to return a bit to civility.
I do not however go so far as to propose a shadow government such as the Ecolitan Institute. 🙂 Much as I like the idea of confronting destructive behavior before it reaches the level of universal condemnation, I can’t see any organization being able to depend on its leaders to be so accountable for the consequences of their actions that they would go into voluntary and probably fatal exile after having arranged necessary actions; and without that, such a concentration of power would become a threat to everyone’s liberty.