tag:blogger.com,1999:blog-38908269761527071132024-02-18T19:46:41.070-08:00sunbringer"sunshine is the best disinfectant" Justice Louis BrandeisDoru Dan Lunghttp://www.blogger.com/profile/13972303952456203618noreply@blogger.comBlogger36125tag:blogger.com,1999:blog-3890826976152707113.post-37640357764541194062011-12-11T01:29:00.001-08:002011-12-20T04:58:48.232-08:00A Behavioral Perspective of Decision Making Under Risk and Uncertainty<div dir="ltr" style="text-align: left;" trbidi="on">
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<span class="Apple-style-span" style="font-family: Arial;"><span class="Apple-style-span" style="font-size: 15px; white-space: pre-wrap;">Here is the first part of a paper of mine that is available on the Social Science Research Network. Although the paper is several years old and I do not necessarily still agree with everything I had to say back then, I still stand by by the criticism of neo-classical economics and firmly believe that the manner in which economics is practiced at present makes it at best irrelevant and at worst dangerous and destructive. I do not still think that behavioral economics--that is, adding more "realistic" behavioral assumptions to the neo-classical model in order to allow for irrationality and to explain irrational outcomes-- is the way forward, or even a good program to adopt, adapt and work with. Some of these points can be found in my post on ecological rationality <a href="http://sunbringerblog.blogspot.com/2011/08/towards-ecological-rationality.html" target="_blank">here.</a> But, as I said, the criticism is still valid and therefore I am posting an excerpt from the paper here for anyone interested to peruse. </span></span></div>
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<span style="background-color: transparent; font-family: Arial; font-size: 15px; font-style: italic; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">A Behavioral Perspective of Decision Making Under Risk and Uncertainty</span></div>
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<span style="background-color: transparent; font-family: Arial; font-size: 15px; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">by Doru Lung</span></div>
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<span style="background-color: transparent; font-family: Arial; font-size: 15px; font-weight: bold; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Abstract</span></div>
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<span style="background-color: transparent; font-family: Arial; font-size: 15px; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">The global financial crisis that began in 2007 was not predicted by standard economic theory which assumes rational actors, efficient markets and equilibrium. Alternative explanations of economic behavior that are based on psychological regularities which are observed in human behavior were until recently relegated to the fringes of the discourse regarding economic phenomena. It will be argued that this has proven to have been a mistake. Psychology has a long history in economic thought, but its influence on economic theory has ebbed and flowed over the years. Keynes had important psychological insights, but they have not been focused upon sufficiently in the last decades. Since the late 1970´s, though, new theories have emerged that are behavioral in nature. That is, they attempt to explain economic phenomena by being based on empirically observed psychological regularities of human behavior. This paper will show that psychology needs to be taken into consideration when reasoning about economic phenomena. The assumption of rationality that is prevalent in much of economic theory is based on a series of axioms and assumptions that are unrealistic. It will be argued that when reasoning about economic phenomena, that theory should be adopted which has more empirical support. The findings are that adopting a behavioral perspective of decision making has more explanatory and predictive power. </span></div>
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<span style="background-color: transparent; font-family: Arial; font-size: 15px; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Keywords: economics, behavioral economics, behavioral finance, behavioral corporate finance, rationality, efficient markets, psychology</span></div>
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<span style="background-color: transparent; font-family: Arial; font-size: 15px; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">A slightly different version of this paper formed part of the literature review of my dissertation for the Master of Business Administration degree of the University of Wales, but it has never been published before. </span></div>
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<span style="background-color: transparent; font-family: Arial; font-size: 15px; font-style: italic; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">A Behavioral Perspective of Decision Making Under Risk and Uncertainty</span></div>
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<span style="background-color: transparent; font-family: Arial; font-size: 15px; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">by Doru Lung</span></div>
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<span style="background-color: transparent; font-family: Arial; font-size: 15px; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">“</span><span style="background-color: transparent; font-family: Arial; font-size: 15px; font-style: italic; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">However unwillingly a person who has a strong opinion may admit the possibility that his opinion may be false, he ought to be moved by the consideration that however true it may be, if it is not fully, frequently, and fearlessly discussed, it will be held as a dead dogma, not a living truth” </span><span style="background-color: transparent; font-family: Arial; font-size: 15px; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">John Stuart Mill (Mill 1859 / 2008, p45).</span></div>
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<span style="background-color: transparent; font-family: Arial; font-size: 15px; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">On July 26, 2009 the on-line edition of the Guardian newspaper reported on the response given to the Queen of England by economists after she had asked why no one had seen the credit crisis coming. As reported by the Guardian´s economics editor Heather Stewart, the answer cited “</span><span style="background-color: transparent; font-family: Arial; font-size: 15px; font-style: italic; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">a failure of the collective imagination of many bright people...[a] psychology of denial...[and] wishful thinking combined with hubris</span><span style="background-color: transparent; font-family: Arial; font-size: 15px; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">.” Nevertheless, Professor Tim Besley of The London School of Economics, one of the signatories of the explanation addressed to the Queen, “</span><span style="background-color: transparent; color: #333333; font-family: Arial; font-size: 15px; font-style: italic; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">denied that economics as a profession had been discredited by the scale of the crisis, but admitted that unconventional ideas - about how herd psychology and bouts of irrationality can grip financial markets, for example - had sometimes received "less play" during the boom years” </span><span style="background-color: transparent; color: #333333; font-family: Arial; font-size: 15px; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">(Stewart 2009, p1)</span><span style="background-color: transparent; color: #333333; font-family: Arial; font-size: 15px; font-style: italic; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">.</span><span style="background-color: transparent; font-family: Arial; font-size: 15px; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"> Less august audiences than the Queen may ask themselves whether it would not perhaps be fruitful to have a look at some of these “</span><span style="background-color: transparent; font-family: Arial; font-size: 15px; font-style: italic; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">unconventional ideas”</span><span style="background-color: transparent; font-family: Arial; font-size: 15px; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"> in order to see whether they have more explanatory and predictive power than the conventional ones.</span></div>
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<span style="background-color: transparent; font-family: Arial; font-size: 15px; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">The global financial crisis that began in 2007 has drawn attention to the academic theories which underpinned most, if not all, regulation and risk management, as well as the assumptions of many financial market actors. Many observers have asked themselves just how the economist community as a whole seemed to be taken utterly by surprise by the events that eventually unfolded. Some critics, such as Stiglitz (2010) or Akerlof (2010), place partial blame on the efficient markets hypothesis (EMH) and its postulate of rational behavior on the part of investors. The EMH is accused of not being an accurate description of the behavior of financial markets and for having played a major part in the complacent behavior leading up to the ensuing economic meltdown. The efficient markets hypothesis states “</span><span style="background-color: transparent; font-family: Arial; font-size: 15px; font-style: italic; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">that financial prices efficiently incorporate all public information and that prices can be regarded as optimal estimates of the true investment value at all times. The efficient market hypothesis in turn is based on more primitive notions that people behave rationally, or accurately maximize expected utility, and are able to process all available information” </span><span style="background-color: transparent; font-family: Arial; font-size: 15px; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">(Shiller 1998, p1). Assuming that people rationally pursue their perceived self-interest and that on average the prevailing market result (price) correctly represents the best estimate of fundamental value given all available information is a powerful theoretical statement which, if accepted unquestioningly, can be used to explain away any mis-allocation of resources, excessive valuation, boom or bust. Unfortunately, trusting "the market" has led to some rather suboptimal outcomes: a quick perusal of any major newspaper will show that the ongoing turmoil in financial markets, the demise of some storied institutions and the bailout of others, the deepest recession since the 1930´s, sovereign debt crises, and millions of jobs lost are just some of the consequences of the boom and bust sequence whose effects are still being felt. "The market" is at any time the sum of the decisions of individuals in the face of risk or uncertainty. Studying how individuals really make decisions, therefore, can provide a better understanding of the functioning of markets and the behavior of investors. In what follows a critical look will be taken at the postulate of rationality in standard economic theory and the efficient markets hypothesis, and evidence of deviations from rationality as posited by standard economic theory from the fields of Behavioral Economics and Behavioral Finance will be presented. </span><br />
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<span style="background-color: transparent; font-family: Arial; font-size: 15px; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Not only has the efficient markets hypothesis come under fire, but the standard neo-classical economic model (SEM) has also been accused of having failed for both descriptive as well as normative purposes. Smith (2010), for example, sees academic economics as having given intellectual respectability to the deregulatory movement that led to the subprime crisis, ensuing credit crunch, recession and overall economic turmoil. That standard economic theory is not a good description of reality has not stopped massive amounts of theorizing from being done on the basis of rather unrealistic assumptions. In his </span><span style="background-color: transparent; font-family: Arial; font-size: 15px; font-style: italic; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">The Methodology of Positive Economics</span><span style="background-color: transparent; font-family: Arial; font-size: 15px; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"> Friedman (1953) famously set forth the view that the realism of the assumptions does not matter as long as the predictions generated by the model are useful. This instrumentalist approach, however, is on precarious footing because when reality fails to conform to the model, it is not reality that is wrong. Rabin (2000) counters Friedman´s view by stating that "</span><span style="background-color: transparent; font-family: Arial; font-size: 15px; font-style: italic; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">[c]eteris paribus, the more realistic our assumptions about economic actors, the better our economics. Hence, economists should aspire to making our assumptions about humans as psychologically realistic as possible" </span><span style="background-color: transparent; font-family: Arial; font-size: 15px; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">(Rabin 2000, p3). Rabin (2000) goes on to say that there is no reason that tackling economic questions should require an economic agent with 100% rationality, 100% self interest, 100% self-control, and many other assumptions that are used in economics but are not supported by the empirical behavioral evidence. Wilkinson (2008) sets forth the view that precision and psychological plausibility should be added as criteria for economic theory in addition to the criteria of congruence with reality, generality, tractability and parsimony. He goes on to show that adding realistic behavioral assumptions to economic theory does indeed fulfill all of the criteria mentioned above, and that the results are supported by empirical evidence. And Hausman reminds us that it is necessary to "</span><span style="background-color: transparent; font-family: Arial; font-size: 15px; font-style: italic; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">look under the hood,</span><span style="background-color: transparent; font-family: Arial; font-size: 15px; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">" that is, to evaluate the assumptions on which theory is based, especially “</span><span style="background-color: transparent; font-family: Arial; font-size: 15px; font-style: italic; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">when extending the theory to new circumstances or revising it in the face of predictive failure” </span><span style="background-color: transparent; font-family: Arial; font-size: 15px; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">(Hausman 2008, p.185).</span><br />
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<span style="background-color: transparent; font-family: Arial; font-size: 15px; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Are economic agents truly rational in the sense postulated by economic theory? This is a fundamental question whose answer has serious implications for academics, policy makers and, of course, market participants. The efficient markets hypothesis breaks down when market agents fuel bubbles that to everyone´s consternation eventually burst. Shiller (2002; 2006) shows us that markets are too volatile when compared to any discounted dividend model, and they can deviate from any measure of fundamental value, being prone to bubbles and busts. The huge swings in asset prices in both directions are just one indication that markets are not always efficient and that participants' behavior in the market does not conform to definitions of rationality. Bromiley (2005) points out that if markets indeed tended toward equilibrium and were efficient and populated by rational agents, then there would be nothing to study since the optimal strategic decision would have already been made. A significant amount of empirical evidence has resuscitated the theory that (to use Keynes's [1936] felicitous phrase) </span><span style="background-color: transparent; font-family: Arial; font-size: 15px; font-style: italic; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">animal spirits</span><span style="background-color: transparent; font-family: Arial; font-size: 15px; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"> play a part in the determination of asset prices (see e.g. Akerlof and Shiller 2009) and has given birth to alternative theories that are </span><span style="background-color: transparent; font-family: Arial; font-size: 15px; font-style: italic; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">behavioral</span><span style="background-color: transparent; font-family: Arial; font-size: 15px; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"> in nature. </span></div>
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<span class="Apple-style-span" style="font-family: Arial;"><span class="Apple-style-span" style="font-size: 15px; white-space: pre-wrap;">For the rest of the paper please go to the Social Science Research Network and <a href="http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1927170" target="_blank">download it.</a></span></span></div>
</div>Doru Dan Lunghttp://www.blogger.com/profile/13972303952456203618noreply@blogger.com0tag:blogger.com,1999:blog-3890826976152707113.post-36423575074095648422011-12-02T13:04:00.001-08:002011-12-11T01:12:44.956-08:00Financial weapons of mass destruction strike again: naked<div dir="ltr" style="text-align: left;" trbidi="on">
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<span id="internal-source-marker_0.5555232516489923" style="background-color: transparent; font-family: Arial; font-size: 15px; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">On October 23, 2008, in the middle of the biggest financial crisis since the Great Depression, Reuters ran an article entitled: “</span><span style="background-color: transparent; font-family: Arial; font-size: 15px; font-style: italic; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Greenspan says was ‘partially’ wrong on CDS regulation</span><span style="background-color: transparent; font-family: Arial; font-size: 15px; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">.” </span><br />
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<span style="background-color: white; font-family: Arial; font-size: 15px; font-style: italic; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">“Former Federal Reserve Chairman Alan Greenspan acknowledged he was "partially" wrong in his belief that some trading instruments, specifically credit default swaps, did not need regulation.</span></div>
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<span style="background-color: white; font-family: Arial; font-size: 15px; font-style: italic; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Henry Waxman, the Democrat who chairs the U.S. House of Representatives Committee on Oversight and Government Reform, cited a series of public statements by Greenspan saying the market could handle regulation of derivatives without government intervention.</span></div>
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<span style="background-color: white; font-family: Arial; font-size: 15px; font-style: italic; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">"My question is simple: Were you wrong?" Waxman said.</span></div>
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<span style="background-color: white; font-family: Arial; font-size: 15px; font-style: italic; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Greenspan said he was "partially" wrong in the case of credit default swaps, complex trading instruments meant to act as insurance for bond buyers against default.</span></div>
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<span style="background-color: white; font-family: Arial; font-size: 15px; font-style: italic; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">"I made a mistake in presuming that the self-interest of organizations, specifically banks and others, was such that they were best capable of protecting their own shareholders and the equity," Greenspan said.</span></div>
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<span style="background-color: white; font-family: Arial; font-size: 15px; font-style: italic; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">When asked by Waxman if his ideology pushed him to make bad decisions, Greenspan said he found a "flaw" in his governing ideology that has led him to reexamine his thinking” </span><span style="background-color: white; font-family: Arial; font-size: 15px; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">(<a href="http://www.reuters.com/article/2008/10/23/financial-greenspan-cds-idUSWAT01037820081023" target="_blank">Dixon 2008</a>).</span><span style="background-color: transparent; font-family: Arial; font-size: 15px; font-style: italic; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"></span></div>
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<span style="background-color: transparent; font-family: Arial; font-size: 15px; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">CDS is an acronym for Credit Default Swap, a credit derivative that resembles insurance in that the buyer pays a premium to the seller in order to protect against the default of another entity. The purchaser of a CDS may have an insurable interest in the entity on which CDS’s are being written, by being a creditor or a bondholder, for example, which consequently means that a legitimate interest in protection against default exists, and the purchase of CDS’s can be seen as constituting a hedge, or a way of managing risk. In case the purchaser does not have an insurable interest, however, the purchase of a CDS is termed “naked” and constitutes nothing more than speculation that the entity on which the CDS is written will default. In case of default or a credit event the seller of the CDS has to pay the CDS holder the previously agreed upon sum, as stipulated in the contract. So while this may seem to be a fairly straight-forward insurance-type product, the fact that these instruments are traded OTC, or “over the counter,” however, means that no one really knows who has written how many CDS’s, on whom, for how much, to whom they have been sold, or whether there is any money to pay out in case of a default. This last point came into focus quite clearly when American International Group (AIG) had to be bailed out by the US taxpayer to the tune of over $180 billion in large part because they did not have any money to pay out on the Credit Default Swaps they had written (<a href="http://law.wlu.edu/deptimages/Law%20Review/66-3Sjostrom.pdf" target="_blank">Sjostrom Jr. 2008</a>). </span><br />
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<span style="background-color: transparent; font-family: Arial; font-size: 15px; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">As reported by the BBC, back in 2003, when the notional amount of the entire derivatives market was only $85 trillion, Warren Buffet famously likened them to time bombs and “financial weapons of mass destruction,” some of which seemed to have been devised by “madmen,” and the whole derivatives industry was similar to “</span><span style="background-color: white; font-family: Arial; font-size: 15px; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">hell... easy to enter and almost impossible to exit” (<a href="http://news.bbc.co.uk/2/hi/2817995.stm" target="_blank">BBC 2003</a>). While Buffet did not specify CDS’s at the time, by September 2011, when, as reported by The Bank of International Settlements (<a href="http://www.bis.org/statistics/otcder/dt1920a.pdf" target="_blank">BIS 2011</a>), the entire derivatives market had swollen to over $700 trillion and the notional amount of Credit Default Swaps outstanding was still $32 trillion, down from $62 trillion in 2007, the Financial Times had no problem running an article titled:”</span><span style="background-color: white; font-family: Arial; font-size: 15px; font-style: italic; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">CDS: modern day weapons of mass destruction</span><span style="background-color: white; font-family: Arial; font-size: 15px; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">.” The article by <a href="http://www.ft.com/intl/cms/s/0/1c81fdf8-d4b9-11e0-a7ac-00144feab49a.html#axzz1fPAlZMyN" target="_blank">Chapman (2011)</a> cited a paper by <a href="http://www.ft.com/intl/cms/e6b7d644-decb-11e0-a228-00144feabdc0.pdf" target="_blank"> Calice, Chen and Williams (2011)</a> which found that “</span><span style="background-color: white; font-family: Arial; font-size: 15px; font-style: italic; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">for several countries including Greece, Portugal and Ireland the liquidity of the sovereign CDS market has a substantial infuence on sovereign debt spreads</span><span style="background-color: white; font-family: Arial; font-size: 15px; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">,” meaning that CDS’s could contribute to rising bond yields and thus push up borrowing costs and increase the risk of default by sovereign countries. Faced with contagion in the Eurozone and a possible cascade of defaults, the German government, on whose shoulders much of the cost of bailing out the periphery falls, demanded a ban on “naked short selling” and, especially, “naked” CDS’s as well (<a href="http://www.ft.com/intl/cms/s/0/881ae5b4-c4f8-11e0-ba51-00144feabdc0.html#axzz1fPAlZMyN" target="_blank">Baker and Peel 2011</a>). </span><br />
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<span style="background-color: white; font-family: Arial; font-size: 15px; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">In an article calling for a ban on “naked” CDS’s <a href="http://www.ft.com/intl/cms/s/0/7b56f5b2-24a3-11df-8be0-00144feab49a.html#axzz1fPAlZMyN" target="_blank">Wolfgang Münchau (2010)</a> noted that a “</span><span style="background-color: white; font-family: Arial; font-size: 15px; font-style: italic; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">naked CDS...is a purely speculative gamble [without even] one social or economic benefit [which is something that] even hardened speculators agree on. [Moreover a] universally accepted aspect of insurance regulation is that you can only insure what you actually own [and not] even the most libertarian extremist would accept that you could take out insurance on your neighbour’s house or the life of your boss,</span><span style="background-color: white; font-family: Arial; font-size: 15px; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">” especially if you proceeded to light a match to the house or push the boss of a cliff, which, after keeping in mind the findings from above, is what the whole thing amounts to. Greece, Portugal, Ireland, Spain, Italy are all facing ruinous borrowing costs in late 2011 and it is utterly uncertain whether the Eurozone will make it through 2012. </span><br />
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<span style="background-color: white; font-family: Arial; font-size: 15px; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Credit Default Swaps are consequently living up to the moniker given derivatives by Warren Buffett: “financial weapons of mass destruction.” Alan Greenspan, Robert Rubin and Larry Summers refused to consider regulation of CDS’s back in 1997 when Brooksley Born testified before Congress that trading in unregulated derivatives would "</span><span style="background-color: white; font-family: Arial; font-size: 15px; font-style: italic; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">threaten our regulated markets or, indeed, our economy without any federal agency knowing about it</span><span style="background-color: white; font-family: Arial; font-size: 15px; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">" (<a href="http://www.thenation.com/blog/woman-greenspan-rubin-summers-silenced" target="_blank">van den Heuvel 2008</a>). They refused, due to the belief noted above that the self-interest of rational economic agents and organizations would be sufficient to prevent the taking on of too much risk and “</span><span style="background-color: white; font-family: Arial; font-size: 15px; font-style: italic; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">was such that they were best capable of protecting their own shareholders and the equity.</span><span style="background-color: white; font-family: Arial; font-size: 15px; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">” After admitting that this belief was wrong and that he had found a flaw in his worldview, his ideology, the disciple of Ayn Rand also admitted that: “</span><span style="background-color: white; font-family: Arial; font-size: 15px; font-style: italic; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">This modern risk-management paradigm held sway for decades. The whole intellectual edifice, however, collapsed in the summer of last yea</span><span style="background-color: white; font-family: Arial; font-size: 15px; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">r” (<a href="http://www.nytimes.com/2008/10/24/business/economy/24panel.html" target="_blank">Andrews 2008</a>). We are still dealing with the fallout and should prepare for worse, <a href="http://www.zerohedge.com/news/707568901000000-how-and-why-banks-increased-total-outstanding-derivatives-record-107-trillion-6" target="_blank">as reported by zerohedge</a>, who address the meaning and significance of the derivatives market number reported by the BIS being</span></div>
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<blockquote class="tr_bq" style="font-family: Arial; font-size: 15px; white-space: pre-wrap;">
<span style="background-color: white; text-decoration: none; vertical-align: baseline;"><i><span class="Apple-style-span" style="font-family: 'Lucida Grande', Verdana, sans-serif; font-size: 13px; line-height: 17px; white-space: normal;">the biggest </span><strong style="font-family: 'Lucida Grande', Verdana, sans-serif; font-size: 13px; line-height: 17px; text-align: -webkit-auto; white-space: normal;">ever </strong><span class="Apple-style-span" style="font-family: 'Lucida Grande', Verdana, sans-serif; font-size: 13px; line-height: 17px; text-align: -webkit-auto; white-space: normal;">reported in the financial world: </span><strong style="font-family: 'Lucida Grande', Verdana, sans-serif; font-size: 13px; line-height: 17px; text-align: -webkit-auto; white-space: normal;">the number in question is $707,568,901,000,000 and represents the latest total amount of all notional Over The Counter (read unregulated) outstanding derivatives...</strong></i><span class="Apple-style-span" style="font-family: 'Lucida Grande', Verdana, sans-serif; font-size: 13px; line-height: 17px; white-space: normal;"><i>Indicatively, global GDP is about $63 trillion if one can trust any numbers released by modern governments...</i></span></span></blockquote>
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<span style="background-color: white; text-decoration: none; vertical-align: baseline;"><span class="Apple-style-span" style="font-family: 'Lucida Grande', Verdana, sans-serif; font-size: 13px; line-height: 17px;">for the six month period ended June 30, 2011, the total number of outstanding derivatives surged past the previous all time high of $673 trillion from June 2008, and is now firmly in 7-handle territory: the synthetic credit bubble has now been blown to a new all time high. Another way of looking at the data is that one of the key contributors to global growth and prosperity in the past 10 years was an increase in total derivatives from just under $100 trillion to $708 trillion in exactly one decade. And soon we have to pay the mean reversion price.</span> </span></blockquote>
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<span style="background-color: white; text-decoration: none; vertical-align: baseline;"><span class="Apple-style-span" style="font-family: 'Lucida Grande', Verdana, sans-serif; font-size: 13px; line-height: 17px;">What is probably just as disturbing is that in the first 6 months of 2011, the total outstanding notional of all derivatives rose from $601 trillion at December 31, 2010 to $708 trillion at June 30, 2011. </span><strong style="font-family: 'Lucida Grande', Verdana, sans-serif; font-size: 13px; line-height: 17px; text-align: -webkit-auto;"><span style="text-decoration: underline;">A $107 trillion increase in notional in half a year</span>.</strong> </span></blockquote>
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<span style="background-color: white; text-decoration: none; vertical-align: baseline;">There is much more than can be said on this topic, and has to be said, because an increase of that magnitude is simply impossible to perceive without alarm bells going off everywhere, especially when one considers the <strong>pervasive deleveraging occurring at every sector but the government</strong>. All else equal, this move may well explain the massive surge in bank profitability in the first half of the year. It also means that with banks suffering massive losses, and rumors of bank runs and collateral calls, not to mention the aftermath of the MF Global insolvency, the world financial syndicate will have no choice but to increase gross notional even more, even as the market value continues to get ever lower, thus sparking the risk of the mother of all margin calls: a veritable credit fission reaction.</span></div>
<span style="background-color: white; text-decoration: none; vertical-align: baseline;"><span class="Apple-style-span" style="font-family: 'Lucida Grande', Verdana, sans-serif; font-size: 13px; line-height: 17px;">But no matter what: the important thing to remember is that "they are all hedged" - or so they say, a claim we made a completely mockery of a</span><span class="Apple-style-span" style="font-family: 'Lucida Grande', Verdana, sans-serif; font-size: 13px; line-height: 17px; text-align: -webkit-auto;"> </span><a href="http://www.zerohedge.com/news/how-us-banks-are-lying-about-their-european-exposure-or-how-bilateral-netting-ends-bang-not-whi" style="color: #1e439a; font-family: 'Lucida Grande', Verdana, sans-serif; font-size: 13px; line-height: 17px; text-align: -webkit-auto; text-decoration: none;">few weeks back</a><span class="Apple-style-span" style="font-family: 'Lucida Grande', Verdana, sans-serif; font-size: 13px; line-height: 17px; text-align: -webkit-auto;">. So ex-sarcasm, the now parabolic increase in derivatives means that when the bilateral netting chain is once again broken, and it will be (because AIG was not a one off event), there will simply be trillions more in derivatives that no longer generate a booked cash flow stream for the remaining counterparty, until at the very end, the whole inverted credit0money pyramid collapses in on itself.</span> </span></blockquote>
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<span style="background-color: white; text-decoration: none; vertical-align: baseline;"><span class="Apple-style-span" style="font-family: 'Lucida Grande', Verdana, sans-serif; font-size: 13px; line-height: 17px;">Because once the whole bilateral netting chain is broken, net becomes gross. And gross market value becomes total notional outstanding. And, to quote Hudson, it's game over.</span> </span></blockquote>
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<span style="background-color: white; text-decoration: none; vertical-align: baseline;"><i style="font-family: Arial; font-size: 15px; white-space: pre-wrap;">Expect to see gross market value declines persisting even as the now parabolic increase in total notional persists. At this rate we would not be surprised to see one quadrillion in OTC derivatives by the middle of next year.</i></span></blockquote>
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<i><span class="Apple-style-span" style="font-family: Arial;"><span class="Apple-style-span" style="font-size: 15px; white-space: pre-wrap;">And, once again for those confused, the fact that notional had to increase so epically as market value tumbled most likely means that the global derivative pyramid scheme (no pun intended) is almost over.</span></span></i></blockquote>
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</div>Doru Dan Lunghttp://www.blogger.com/profile/13972303952456203618noreply@blogger.com0tag:blogger.com,1999:blog-3890826976152707113.post-27855998471920742392011-11-19T09:50:00.001-08:002011-11-26T15:46:38.464-08:00To protect and serve the 1% and kick the crap out of everybody else<div dir="ltr" style="text-align: left;" trbidi="on">
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<span id="internal-source-marker_0.49848922388628125" style="background-color: transparent; font-family: Arial; font-size: 15px; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">“If you want a vision of the future, imagine a boot stomping on a human face -- forever.”<a href="http://en.wikiquote.org/wiki/Nineteen_Eighty-Four" target="_blank"> George Orwell, 1984</a></span><br />
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<span style="background-color: transparent; font-family: Arial; font-size: 15px; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">So disillusionment with the powers that be, anger and outrage at bailouts for banks and austerity for everyone else, disappointment with the lack of economic opportunity and excessive debt that can consequently never be paid back, are among the reasons that have led to the formation of the #OWS (Occupy Wall Street) movement. After two months of peaceful protest and civil disobedience, the protesters have been attacked by the police in a concerted action across the country. Now, the police are obviously here to protect and serve the <a href="http://www.vanityfair.com/society/features/2011/05/top-one-percent-201105" target="_blank">top one percent of the population</a> </span><span style="background-color: transparent; font-family: Arial; font-size: 15px; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">that has most of the <a href="http://www.economist.com/blogs/dailychart/2011/10/income-inequality-america" target="_blank">income</a> and to kick the shit out of anybody else who dares to dissent or protest. Hyperbole, you say? Looking at the following pictures will make even the most law-abiding citizen cringe with disgust, disillusionment and despair. These emotions should quickly give way to outrage, anger and the determination to DO SOMETHING, anything, to fight not only against this level of crass brutality that is not to be accepted or tolerated, but against the corrupt, destructive finance driven junta that seems to have taken over the countries of the West, in what Simon Johnson called <a href="http://www.theatlantic.com/magazine/archive/2009/05/the-quiet-coup/7364/" target="_blank">the quiet coup</a>.</span><br />
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<span style="background-color: white; color: #1122cc; font-family: Arial; font-size: 16px; vertical-align: baseline; white-space: pre-wrap;"><a href="http://www.google.de/imgres?imgurl=http://www.wearechange.org/wp-content/uploads/2011/10/Untitled-3.jpg&imgrefurl=http://www.wearechange.org/%3Fp%3D10328&usg=__0pn9CMog3uw6Qva57NP9Mx6auU0=&h=314&w=591&sz=37&hl=de&start=0&zoom=1&tbnid=GR7eNtCZLKg6GM:&tbnh=98&tbnw=185&ei=9N_HTqq_DoSk4gSFvsVA&prev=/search%3Fq%3Doccupy%2Bpolice%2Bbrutality%26um%3D1%26hl%3Dde%26biw%3D1920%26bih%3D955%26tbm%3Disch&um=1&itbs=1&iact=hc&vpx=698&vpy=480&dur=3168&hovh=164&hovw=308&tx=202&ty=193&sig=108126466516423961994&page=1&ndsp=44&ved=1t:429,r:38,s:0">Untitled‑3.jpg</a></span></div>
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<span style="background-color: white; font-family: Arial; font-size: 13px; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Via the </span><a href="http://photos.oregonlive.com/oregonian/2011/11/occupy_portland_pepper_sprayjp.html"><span style="background-color: white; color: #ca8500; font-family: Arial; font-size: 13px; font-style: italic; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Oregonian</span></a><span style="background-color: white; font-family: Arial; font-size: 13px; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">:</span><img height="404px;" src="https://lh4.googleusercontent.com/vXUy1TNJ75S9tLVVCnoytQve0qXSyuILMLHu9WVXqLYEAgkrNBaxsMs_-bFi-2uA979Teh7Kh8lBZ7HXHlmT8M5ZPZv6Ap_XrolmI9glQjbPTP7j1w" width="606px;" /><br />
<span style="background-color: white; font-family: Arial; font-size: 13px; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Via @</span><a href="http://twitter.com/#%21/JATayler"><span style="background-color: white; color: #ca8500; font-family: Arial; font-size: 13px; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">JATayler</span></a><span style="background-color: white; font-family: Arial; font-size: 13px; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">:</span><img height="427" src="https://lh3.googleusercontent.com/fJSGqCZ6s3JCfdGjK9UKgRANW73MLM3GXUcMyN47AgC4dEmTd0pleFFr18Mx3_yoKI6oneHvlgCWnree0z5ePhDAkTBAzkXBgaTi9Z4ACvM4DVD6fQ" width="640" /><br />
<span style="background-color: white; font-family: Arial; font-size: 13px; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">By </span><span style="background-color: white; color: #de4900; font-family: Arial; font-size: 13px; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Lauren Kelley</span><span style="background-color: white; font-family: Arial; font-size: 13px; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"> | Sourced from </span><span style="background-color: white; color: #de4900; font-family: Arial; font-size: 13px; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">AlterNet </span><br />
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<img height="299px;" src="https://lh3.googleusercontent.com/4LBb7nV0JDnFkKddYo6LN4CXhyNdccwfS3q6KTjybs7F-PzwLTRXtRipFO5N42IURsMKLKl5Hydxz8eIts4TEd-6tshey4PxSK90kbE_xa6jxJWhjg" width="450px;" /><br />
<a href="http://www.google.de/imgres?imgurl=http://www.prosebeforehos.com/wordpress/wp-content/uploads/2011/11/84-year-old-pepper-sprayed-ows.jpg&imgrefurl=http://www.prosebeforehos.com/image-of-the-day/11/16/an-84-year-old-gets-pepper-sprayed-at-occupy-seattle/&usg=__BxT0b1GtkpBB1LjlWBlPkcLAx_I=&h=466&w=700&sz=40&hl=de&start=0&zoom=1&tbnid=zF6edrbSqnJPiM:&tbnh=138&tbnw=184&ei=eOLHTvqhIY_04QSAhYhN&prev=/search%3Fq%3D84%2Byear%2Bold%2Bpepper%2Bspray%26hl%3Dde%26biw%3D1920%26bih%3D955%26tbm%3Disch&itbs=1&iact=hc&vpx=175&vpy=157&dur=1203&hovh=183&hovw=275&tx=276&ty=214&sig=108126466516423961994&page=1&ndsp=45&ved=1t:429,r:0,s:0"><span style="background-color: black; color: white; font-family: Arial; font-size: 11px; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">vor 2 Tagen</span></a><br />
<a href="http://www.google.de/imgres?imgurl=http://www.prosebeforehos.com/wordpress/wp-content/uploads/2011/11/84-year-old-pepper-sprayed-ows.jpg&imgrefurl=http://www.prosebeforehos.com/image-of-the-day/11/16/an-84-year-old-gets-pepper-sprayed-at-occupy-seattle/&usg=__BxT0b1GtkpBB1LjlWBlPkcLAx_I=&h=466&w=700&sz=40&hl=de&start=0&zoom=1&tbnid=zF6edrbSqnJPiM:&tbnh=138&tbnw=184&ei=eOLHTvqhIY_04QSAhYhN&prev=/search%3Fq%3D84%2Byear%2Bold%2Bpepper%2Bspray%26hl%3Dde%26biw%3D1920%26bih%3D955%26tbm%3Disch&itbs=1&iact=hc&vpx=175&vpy=157&dur=1203&hovh=183&hovw=275&tx=276&ty=214&sig=108126466516423961994&page=1&ndsp=45&ved=1t:429,r:0,s:0"><span style="background-color: white; color: white; font-family: Arial; font-size: 11px; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">vor 2 Tagen</span></a><br />
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<a href="http://www.google.de/imgres?imgurl=http://www.prosebeforehos.com/wordpress/wp-content/uploads/2011/11/84-year-old-pepper-sprayed-ows.jpg&imgrefurl=http://www.prosebeforehos.com/image-of-the-day/11/16/an-84-year-old-gets-pepper-sprayed-at-occupy-seattle/&usg=__BxT0b1GtkpBB1LjlWBlPkcLAx_I=&h=466&w=700&sz=40&hl=de&start=0&zoom=1&tbnid=zF6edrbSqnJPiM:&tbnh=138&tbnw=184&ei=eOLHTvqhIY_04QSAhYhN&prev=/search%3Fq%3D84%2Byear%2Bold%2Bpepper%2Bspray%26hl%3Dde%26biw%3D1920%26bih%3D955%26tbm%3Disch&itbs=1&iact=hc&vpx=175&vpy=157&dur=1203&hovh=183&hovw=275&tx=276&ty=214&sig=108126466516423961994&page=1&ndsp=45&ved=1t:429,r:0,s:0"><span style="background-color: white; color: #1122cc; font-family: Arial; font-size: 16px; vertical-align: baseline; white-space: pre-wrap;">84‑year‑old‑pepper‑sprayed‑ows.jpg</span></a></div>
<span style="background-color: transparent; font-family: Arial; font-size: 15px; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"></span><img height="360px;" src="https://lh5.googleusercontent.com/dwW0PtMMppjcT5a3OtwHHvk-VBCYcAs3IGF0Yb4dMLlGWDwjf-IFBHjn_O4tj9H7It9K9wA2UHOWLmMDlr-gvXNskYHFpKk3_wbTclDa6iXqblrJng" width="480px;" /></div>
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<span style="background-color: transparent; font-family: Arial; font-size: 15px; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"></span><img height="287px;" src="https://lh3.googleusercontent.com/lRk8h-aOdmgNr49xLiaV9r-pLPB404JW-O0EipV4UI9pxUCC8brIYfR5Tgmji_GF2pccU3nOySlA0xDYm0rGryC6bgNDoq2pfOl81ZIaUTgVgsilSw" width="404px;" /><br />
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<span style="background-color: white; font-family: Georgia; font-size: 13px; font-style: italic; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Photo Credit: Newsweek</span></div>
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<span class="Apple-style-span" style="font-family: Arial; font-size: 15px; white-space: pre-wrap;"><a href="http://www.alternet.org/occupywallst/153134/caught_on_camera%3A_10_shockingly_violent_police_assaults_on_occupy_protesters/?page=entire" target="_blank">More police violence against #occupy protesters here. </a>. </span></div>
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</div>Doru Dan Lunghttp://www.blogger.com/profile/13972303952456203618noreply@blogger.com0tag:blogger.com,1999:blog-3890826976152707113.post-87516549575401019792011-08-19T22:33:00.000-07:002011-12-09T12:42:56.061-08:00Towards Ecological Rationality<div dir="ltr" style="text-align: left;" trbidi="on">
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<span id="internal-source-marker_0.6906459394376725" style="background-color: transparent; color: black; font-family: Arial; font-size: 11pt; font-style: normal; font-variant: normal; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Economics as a discipline has detached itself from both psychology and political philosophy in an unfortunate turn of events that has led what used to be known as political economy to become an exercise in obfuscation through mathematics. By assuming what was supposed to be proven, and by blurring the lines between descriptive and normative theory, economics as it is currently practiced has become increasingly irrelevant to the description of the interaction of people going about their business. By forgetting that the economy is in the end comprised of people and instead hypothesizing a rational representative agent economics has assumed away that which it is supposed to describe and explain. </span><br />
<span style="background-color: transparent; color: black; font-family: Arial; font-size: 11pt; font-style: normal; font-variant: normal; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"></span><br />
<span style="background-color: transparent; color: black; font-family: Arial; font-size: 11pt; font-style: normal; font-variant: normal; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">The problem is that economics divorced from political philosophy and psychology has been the cause of much mischief and suffering. It was thought that self-regulating efficient markets populated by rational economic agents pursuing their own interest would ensure the best possible outcome for everyone. But this Panglossian “invisible hand” was invisible precisely because it was not there. Ask Alan Greenspan, who, when asked by US congressmen why the crisis was not foreseen, admitted to finding a flaw in his worldview, his ideology (Andrews 2008). Four years on and the Global Financial Crisis is arguably still ongoing. Part of the blame can be laid squarely in the lap of neo-classical economics, which became obsessed with physics envy in its use of mathematics yet all the while almost obsessively ignoring psychology and real people. This unfortunate state of affairs needs to be rectified and getting rid of the rational representative agent with his well-ordered, transitive preferences is a first step. . </span><br />
<span style="background-color: transparent; color: black; font-family: Arial; font-size: 11pt; font-style: normal; font-variant: normal; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"></span><br />
<span style="background-color: transparent; color: black; font-family: Arial; font-size: 11pt; font-style: normal; font-variant: normal; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">When the student of psychology is first confronted with the idea espoused in standard economic theory that people (or economic agents as they are called) are rational, have well defined preferences, take into account all relevant information in forming their preferences and making decisions, make decisions that maximize their utility (with utility being a catch-all phrase for anything someone perceives as good), and take into consideration only their own well-being when forming preferences or making decisions; well, then the student of psychology must first ask him- or herself whether this is a normative or a descriptive theory; second, whether this behavior being perceived as normative is something to be desired; and, third, if this behavior is also supposed to be descriptive, then beings of which planet, exactly, are being described. </span><br />
<span style="background-color: transparent; color: black; font-family: Arial; font-size: 11pt; font-style: normal; font-variant: normal; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"></span><br />
<span style="background-color: transparent; color: black; font-family: Arial; font-size: 11pt; font-style: normal; font-variant: normal; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">That economics needs to do some soul-searching is not necessarily well accepted in the academic discussions about economic theory. Some accept as normative the rationality posited in economics and point out that human decision makers deviate from this posited rationality in a systematic and predictable manner; others claim that the deviations from rationality that are observed and discussed in much of the behavioral literature are either: a) artifacts of the population; b) artifacts of the (tricky) methodology used; c) not important because irrational actors are driven from the market by rational actors so that only rational outcomes prevail; or, d) not important because the rationality posited in economics is neither normative nor descriptive but rather a methodological stance. These disagreements are fundamental and irreconcilable but not necessarily the only two ways of looking at the issue at hand. </span><br />
<span style="background-color: transparent; color: black; font-family: Arial; font-size: 11pt; font-style: normal; font-variant: normal; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"></span><br />
<span style="background-color: transparent; color: black; font-family: Arial; font-size: 11pt; font-style: normal; font-variant: normal; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">The heuristics and biases approach to decision making that has developed around the work pioneered by Daniel Kahnemann and Amos Tversky seems to accept as normative the rationality posited in economics while aiming to provide a better descriptive theory of decision making by pointing out that humans are loss averse, susceptible to anchoring or framing effects, affected by the representativeness bias, and in general do not make decisions in a manner that conforms to the rationality posited in economic theory because they are prone to deviate from this rationality due to an extended list of heuristics and cognitive and behavioral biases that lead to sub-optimal outcomes. This school of thought has blossomed into the relatively new field of behavioral economics, with the application of the insights gleaned therefrom leading to the even newer fields of behavioral finance and behavioral corporate finance. These disciplines aim at providing the theories of economics and finance with more realistic behavioral foundations by utilizing more realistic assumptions about the behavior of economic agents. That is, behavioral economics accepts as normative economic rationality but argues that because it is unrealistic descriptively better assumptions about how people behave are needed. While the finding that “people are sometimes irrational” may not strike one as being too profound, it is a mark of progress that has been achieved only after decades of argument. </span><br />
<span style="background-color: transparent; color: black; font-family: Arial; font-size: 11pt; font-style: normal; font-variant: normal; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"></span><br />
<span style="background-color: transparent; color: black; font-family: Arial; font-size: 11pt; font-style: normal; font-variant: normal; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">The reason why behavioral economics was slow to catch on at first is because economic theory was under the spell of the representative rational agent. Standard neo-classical economic theory is based on a series of special assumptions. If the assumptions of the standard economic model were true, then there would be no need for any further psychological research since: “</span><span style="background-color: transparent; color: black; font-family: Arial; font-size: 11pt; font-style: italic; font-variant: normal; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">economic agents are rational, economic agents are motivated by expected utility maximization</span><span style="background-color: transparent; color: black; font-family: Arial; font-size: 11pt; font-style: normal; font-variant: normal; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">, </span><span style="background-color: transparent; color: black; font-family: Arial; font-size: 11pt; font-style: italic; font-variant: normal; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">an agent´s utility is governed by purely selfish concerns, in the narrow sense that it does not take into consideration the utility of others, agents are Bayesian probability operators, agents have consistent time preferences according to the discounted utility model,</span><span style="background-color: transparent; color: black; font-family: Arial; font-size: 11pt; font-style: normal; font-variant: normal; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"> </span><span style="background-color: transparent; color: black; font-family: Arial; font-size: 11pt; font-style: italic; font-variant: normal; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">[and] all income and assets are completely fungible" </span><span style="background-color: transparent; color: black; font-family: Arial; font-size: 11pt; font-style: normal; font-variant: normal; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">(Wilkinson 2008, p5). These assumptions might strike one as being somewhat unrealistic but in his </span><span style="background-color: transparent; color: black; font-family: Arial; font-size: 11pt; font-style: italic; font-variant: normal; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">The Methodology of Positive Economics</span><span style="background-color: transparent; color: black; font-family: Arial; font-size: 11pt; font-style: normal; font-variant: normal; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"> Milton Friedman (1953) famously set forth the view that the realism of the assumptions does not matter as long as the predictions generated by the model are useful. This became known as the “as if” approach. That is, it does not matter whether people actually behave in the manner postulated or whether the assumptions made are realistic since if the results in the aggregate fit the hypothesis, then it can be assumed that people have to behave “as if” they were only rationally pursuing their enlightened self-interest (that is, by taking into account all available information in order to arrive at the decision that most maximizes their subjective expected utility), because if they did not, then they would be driven from the market by rational agents who did indeed behave in the manner dictated by standard economic theory. </span><br />
<span style="background-color: transparent; color: black; font-family: Arial; font-size: 11pt; font-style: normal; font-variant: normal; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"></span><br />
<span style="background-color: transparent; color: black; font-family: Arial; font-size: 11pt; font-style: normal; font-variant: normal; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Berg and Gigerenzer (2010) raise a fundamental question that not only undermines behavioral economics’ claim of greater psychological realism but neo-classical economics’ normative claim of rationality and selfish expected utility maximisation as well: Is there any evidence that people who behave rationally in the economic sense do better than those who do not behave in a manner that conforms to the rationality of neo-classical economics? In addressing this question they point out that “</span><span style="background-color: transparent; color: black; font-family: Arial; font-size: 11pt; font-style: italic; font-variant: normal; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">[t]he discussion of methodological realism with respect to the rational choice framework almost necessarily touches on different visions of what should count as normative. It is a great irony that most voices in behavioral economics, purveyors of a self-described opening up of economic analysis to psychology, hang on to the idea of the singular and universal supremacy of rational choice axioms as the proper normative benchmarks against which virtually all forms of behavior are to be measured. Thus, it is normal rather than exceptional to read behavioral economists championing the descriptive virtues of expanding the economic model to allow for systematic mistakes and biased beliefs and, at the same time, arguing that there is no question as to what a rational actor ought to do” </span><span style="background-color: transparent; color: black; font-family: Arial; font-size: 11pt; font-style: normal; font-variant: normal; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">(Berg and Gigerenzer 2010, p23). Furthermore, what they call the tension between </span><span style="background-color: transparent; color: black; font-family: Arial; font-size: 11pt; font-style: italic; font-variant: normal; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">“descriptive openness and normative dogmatism</span><span style="background-color: transparent; color: black; font-family: Arial; font-size: 11pt; font-style: normal; font-variant: normal; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">” is interesting precisely because “</span><span style="background-color: transparent; color: black; font-family: Arial; font-size: 11pt; font-style: italic; font-variant: normal; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">almost no empirical evidence exists documenting that individuals who deviate from economic axioms of internal consistency (e.g., transitive preferences, expected utility axioms, and Bayesian beliefs) actually suffer any economic losses” </span><span style="background-color: transparent; color: black; font-family: Arial; font-size: 11pt; font-style: normal; font-variant: normal; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">(Berg and Gigerenzer 2010, p24). Most importantly, then, neither do those who deviate from rational choice theory earn any less money, nor are they any less happy or live shorter lives. This most important finding has been overlooked or disputed for too long. </span><br />
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<span style="background-color: transparent; color: black; font-family: Arial; font-size: 11pt; font-style: normal; font-variant: normal; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Berg and Gigerenzer thus point the way towards an </span><span style="background-color: transparent; color: black; font-family: Arial; font-size: 11pt; font-style: italic; font-variant: normal; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">ecological rationality</span><span style="background-color: transparent; color: black; font-family: Arial; font-size: 11pt; font-style: normal; font-variant: normal; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"> that is not only more realistic than rational choice theory but also more human. According to Rieskamp and Reimer (2007, p1) “</span><span style="background-color: transparent; color: black; font-family: Arial; font-size: 11pt; font-style: italic; font-variant: normal; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">[h]uman reasoning and behavior are ecologically rational when they are adapted to the environment in which humans act. This definition is in stark contrast to classical definitions of rationality, according to which reasoning and behavior are rational when they conform to norms of logic, statistics, and probability theory.</span><span style="background-color: transparent; color: black; font-family: Arial; font-size: 11pt; font-style: normal; font-variant: normal; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">” Thus, according to this definition, behavior is rational if it suits the purpose at hand, with the normative aspect of neo-classical economics’ rational choice theory being dispensed with, and no further sleep being lost worrying whether preferences are ordered or transitive.</span><span style="background-color: transparent; color: black; font-family: Arial; font-size: 11pt; font-style: italic; font-variant: normal; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"> </span><span style="background-color: transparent; color: black; font-family: Arial; font-size: 11pt; font-style: normal; font-variant: normal; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"> </span><br />
<span style="background-color: transparent; color: black; font-family: Arial; font-size: 11pt; font-style: normal; font-variant: normal; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"> </span><br />
<span style="background-color: transparent; color: black; font-family: Arial; font-size: 11pt; font-style: normal; font-variant: normal; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Instead of accepting as normative rational choice theory and simply characterizing the manner in which people actually make decisions as anomalies or biases a movement towards ecological rationality would mean, then, that a new standard of rationality of correspondence or fit between the demands of the situation and the behavior of the person would be set, and this new standard of rationality is not only computationally and thus energetically parsimonious, but also evolutionarily plausible and probable. By taking into account philosophy -- what is rationality -- and psychology -- how do people actually behave -- economics as a discipline will no longer be an exercise in mathematical obfuscation but will once again concern itself with people going about their business, its original intent.</span><br />
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<span style="background-color: transparent; color: black; font-family: Arial; font-size: 11pt; font-style: normal; font-variant: normal; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">References </span></div>
<span style="background-color: transparent; color: black; font-family: Arial; font-size: 11pt; font-style: normal; font-variant: normal; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"></span><br />
<span style="background-color: transparent; color: black; font-family: Arial; font-size: 11pt; font-style: normal; font-variant: normal; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Andrews, Edmund L. (2008). ‘Greenspan Concedes Error on Regulation’. </span><span style="background-color: transparent; color: black; font-family: Arial; font-size: 11pt; font-style: italic; font-variant: normal; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">The New York Times</span><span style="background-color: transparent; color: black; font-family: Arial; font-size: 11pt; font-style: normal; font-variant: normal; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"> October 23, 2008. Available at: </span><a href="http://www.nytimes.com/2008/10/24/business/economy/24panel.html"><span style="background-color: transparent; color: #000099; font-family: Arial; font-size: 11pt; font-style: normal; font-variant: normal; text-decoration: underline; vertical-align: baseline; white-space: pre-wrap;">http://www.nytimes.com/2008/10/24/business/economy/24panel.html</span></a><span style="background-color: transparent; color: black; font-family: Arial; font-size: 11pt; font-style: normal; font-variant: normal; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"> [accessed May 28, 2010]</span><br />
<span style="background-color: transparent; color: black; font-family: Arial; font-size: 11pt; font-style: normal; font-variant: normal; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"></span><br />
<span style="background-color: transparent; color: black; font-family: Arial; font-size: 11pt; font-style: normal; font-variant: normal; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Berg, Nathan and Gigerenzer, Gerd (2010). ‘As-If Behavioral Economics: Neo-Classical Economics in Disguise’ History of Economic Ideas, Vol. 18, No. 1, pp. 133-166, 2010. Available at: </span><a href="http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1677168"><span style="background-color: transparent; color: #000099; font-family: Arial; font-size: 11pt; font-style: normal; font-variant: normal; text-decoration: underline; vertical-align: baseline; white-space: pre-wrap;">http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1677168</span></a><span style="background-color: transparent; color: black; font-family: Arial; font-size: 11pt; font-style: normal; font-variant: normal; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"> [accessed May 28, 2010]</span><br />
<span style="background-color: transparent; color: black; font-family: Arial; font-size: 11pt; font-style: normal; font-variant: normal; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"></span><br />
<span style="background-color: transparent; color: black; font-family: Arial; font-size: 11pt; font-style: normal; font-variant: normal; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Friedman, Milton (1953). ´A Methodology of Positive Economics´. Ch. 7 in Hausman, Daniel M. ed. (2008). </span><span style="background-color: transparent; color: black; font-family: Arial; font-size: 11pt; font-style: italic; font-variant: normal; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">The Philosophy of Economics: An Anthology, </span><span style="background-color: transparent; color: black; font-family: Arial; font-size: 11pt; font-style: normal; font-variant: normal; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">3rd edition. New York, NY: Cambridge University Press</span><br />
<span style="background-color: transparent; color: black; font-family: Arial; font-size: 11pt; font-style: normal; font-variant: normal; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"></span><br />
<span style="background-color: transparent; color: black; font-family: Arial; font-size: 11pt; font-style: normal; font-variant: normal; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Rieskamp, Jörg and Reimer, Thorsten (2007). </span><span style="background-color: transparent; color: black; font-family: Arial; font-size: 11pt; font-style: italic; font-variant: normal; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Ecological Rationality</span><span style="background-color: transparent; color: black; font-family: Arial; font-size: 11pt; font-style: normal; font-variant: normal; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">. Max Plank Institute for Human Development, Berlin, Germany. Available at: </span><br />
<a href="http://web.ics.purdue.edu/~treimer/Rieskamp_Reimer_2007.pdf"><span style="background-color: transparent; color: #000099; font-family: Arial; font-size: 11pt; font-style: normal; font-variant: normal; text-decoration: underline; vertical-align: baseline; white-space: pre-wrap;">http://web.ics.purdue.edu/~treimer/Rieskamp_Reimer_2007.pdf</span></a><span style="background-color: transparent; color: black; font-family: Arial; font-size: 11pt; font-style: normal; font-variant: normal; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"> [accessed May 28, 2010]</span><br />
<span style="background-color: transparent; color: black; font-family: Arial; font-size: 11pt; font-style: normal; font-variant: normal; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"></span><br />
<span style="background-color: transparent; color: black; font-family: Arial; font-size: 11pt; font-style: normal; font-variant: normal; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Wilkinson, Nick (2007). </span><span style="background-color: transparent; color: black; font-family: Arial; font-size: 11pt; font-style: italic; font-variant: normal; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">An Introduction to Behavioral Economics: A Guide for Students</span><span style="background-color: transparent; color: black; font-family: Arial; font-size: 11pt; font-style: normal; font-variant: normal; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">. New York: Palgrave Macmillan</span></div>
</div>Doru Dan Lunghttp://www.blogger.com/profile/13972303952456203618noreply@blogger.com0tag:blogger.com,1999:blog-3890826976152707113.post-78117581221509080902011-07-27T02:56:00.000-07:002011-08-19T22:44:30.391-07:00Yves Smith: Debt Ceiling Extortion<div dir="ltr" style="text-align: left;" trbidi="on"><div class="separator" style="clear: both; text-align: center;"><object class="BLOGGER-youtube-video" classid="clsid:D27CDB6E-AE6D-11cf-96B8-444553540000" codebase="http://download.macromedia.com/pub/shockwave/cabs/flash/swflash.cab#version=6,0,40,0" data-thumbnail-src="http://0.gvt0.com/vi/n_yAh27O4jA/0.jpg" height="266" width="320"><param name="movie" value="http://www.youtube.com/v/n_yAh27O4jA&fs=1&source=uds" /><param name="bgcolor" value="#FFFFFF" /><embed width="320" height="266" src="http://www.youtube.com/v/n_yAh27O4jA&fs=1&source=uds" type="application/x-shockwave-flash"></embed></object></div><br />
</div>Doru Dan Lunghttp://www.blogger.com/profile/13972303952456203618noreply@blogger.com0tag:blogger.com,1999:blog-3890826976152707113.post-11751693995758055002011-07-18T09:30:00.000-07:002011-07-20T08:21:14.466-07:00Cognitive Biases Used in Propaganda Framing Deficit Debate and Wall Street Handout<div style="background-color: transparent; margin-bottom: 0px; margin-left: 0px; margin-right: 0px; margin-top: 0px;"><span id="internal-source-marker_0.3795819627121091" style="background-color: transparent; color: black; font-family: Arial; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: normal; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Everyone likes to think that they are smarter than the average person. After all, how many of us would be ready to admit that they were in some way, shape or form inferior. Even those friends of ours from high school, and most of us who did not attend private boarding schools know these people, who accorded themselves “street smarts” while telling others that they were merely “book smart,” claim to be better at some things than the average. We all want to feel that we are good at something and even if this is not necessarily the case, we hold on to the illusion that we are somehow more skilled than the average Joe or Jane. Let us call this concept overconfidence. </span><br />
<span style="background-color: transparent; color: black; font-family: Arial; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: normal; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"></span><br />
<span style="background-color: transparent; color: black; font-family: Arial; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: normal; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">In the academic literature it is called the </span><span style="background-color: transparent; color: black; font-family: Arial; font-size: 11pt; font-style: italic; font-variant: normal; font-weight: normal; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><a href="http://en.wikipedia.org/wiki/Overconfidence_effect">overconfidence bias</a>. </span><span style="background-color: transparent; color: black; font-family: Arial; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: normal; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Cognitive and behavioral psychology as well as behavioral finance and behavioral economics study the concept at length and in depth. Classic examples include asking everyone in a class to rate their driving ability as average, below average or above average. In study after study between 80 and 90 percent of respondents rate their driving ability as above average, which cannot be the case, since only slightly less than half can be above average. Other studies have repeatedly shown that when asked to rate our confidence interval in our statements, we are much more likely to state a much higher confidence level than our accuracy. Most of us like to think that we are smarter than the average, and do not wish to accept that, truthfully, we are probably by definition just about average in many of those attributes that are indeed normally distributed. Some of us might be better at some things than others, obviously, but we are not as superior as we would like to think. Nonetheless, this feeling of being superior, this confidence in our abilities, this sense that we will do better than most everyone else can lead us to take risks we normally would eschew, were it not for the nagging near-certainty that we are better, smarter and more insightful than the others, and that this time, for us, contrary to all evidence and history, things truly will be different, be it in business, investment, games or any other of the myriad activities we engage in where we are in it to win it. Think of housing and stock market bubbles, when real estate speculators and traders or money managers no doubt thought that they would be able to time the market and get rich quickly because of their superior skills and knowledge. </span><br />
<span style="background-color: transparent; color: black; font-family: Arial; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: normal; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"></span><br />
<span style="background-color: transparent; color: black; font-family: Arial; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: normal; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Standardized testing reinforces this bias by inflating the egos of those whose scores are in the upper percentiles. These are the people who get accepted to the best universities, who go on to graduate school because they had GMAT or GRE tutoring classes, and some of these people think that they are the true producers and “value creators” of society, deserving six or seven or eight figure remuneration because of their superior natural or god-given abilities. Everyone else who is not as successful is either morally deficient or intellectually limited and their plight or poverty is therefore deserved and just. </span><br />
<span style="background-color: transparent; color: black; font-family: Arial; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: normal; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"></span><br />
<span style="background-color: transparent; color: black; font-family: Arial; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: normal; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">The </span><span style="background-color: transparent; color: black; font-family: Arial; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: normal; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><a href="http://en.wikipedia.org/wiki/Fundamental_attribution_error">fundamental attribution error</a> states that the successes of one’s group, class, clan, or tribe, generally called the in-group, are due to internal factors, such as talents, morality, hard work and intelligence, while failures are due to external, uncontrollable causes; with the mirror image being perceived as the reasons for the failures of the out-group, the others: inferior intelligence, lack of talents, or simply laziness, and with the out-group’s successes being consequently simply a matter of luck and often undeserved. So the </span><span style="background-color: transparent; color: black; font-family: Arial; font-size: 11pt; font-style: italic; font-variant: normal; font-weight: normal; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">fundamental attribution error</span><span style="background-color: transparent; color: black; font-family: Arial; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: normal; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"> is to attribute success to internal and failure to external factors for oneself or one’s in-group, and the opposite for those in the out-group. </span><br />
<span style="background-color: transparent; color: black; font-family: Arial; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: normal; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"></span><br />
<span style="background-color: transparent; color: black; font-family: Arial; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: normal; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Nowhere is this phenomena more prevalent and on display than in the United States of America, where the current culture war is further being waged on behalf of the top 1%, or was it 0.1%, or 0.01%, who not only receive most of the income but also own most of the wealth in the country. The current battle about “unsustainable” government spending, government needing to live within its means, and ever-present deficit reduction hysteria, is nothing more than an ideological battle being waged by those with means who believe that they should not have to pay any money for those without means, whom they consider shiftless bums and welfare queens who refuse to work and expect “handouts” from the government. Whatever the percentage of poor who do abuse the system, however large, small or inconsequential it might actually be, this discussion is not about them, it is only being </span><span style="background-color: transparent; color: black; font-family: Arial; font-size: 11pt; font-style: italic; font-variant: normal; font-weight: normal; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">framed</span><span style="background-color: transparent; color: black; font-family: Arial; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: normal; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"> in this manner. </span><span style="background-color: transparent; color: black; font-family: Arial; font-size: 11pt; font-style: italic; font-variant: normal; font-weight: normal; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><a href="http://en.wikipedia.org/wiki/Framing_effect_(psychology)">Framing effects</a> </span><span style="background-color: transparent; color: black; font-family: Arial; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: normal; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">arise when different responses are elicited based on whether the information is presented in a positive or a negative frame. Is the man or woman in dire straits because they were laid off due to downsizing, outsourcing, or company or business failure; or is the person unemployed because they are lazy and want free money from the government. By framing the narrative to portray the less well-off, the unemployed, and the poor in general in the latter manner, stereotypes are being created and reinforced. This is a further cognitive bias at work, the </span><span style="background-color: transparent; color: black; font-family: Arial; font-size: 11pt; font-style: italic; font-variant: normal; font-weight: normal; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"><a href="http://en.wikipedia.org/wiki/Representativeness_heuristic">representativeness heuristic</a>, </span><span style="background-color: transparent; color: black; font-family: Arial; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: normal; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">which asks to what extent does A represent B, so to what extend do the poor and unemployed represent my stereotypical image of them. The </span><span style="background-color: transparent; color: black; font-family: Arial; font-size: 11pt; font-style: italic; font-variant: normal; font-weight: normal; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">representativeness bias </span><span style="background-color: transparent; color: black; font-family: Arial; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: normal; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">is thought to be an innate and omnipresent trait, presumably brought about as a function of evolution. The manner in which it is being abused, though, is that through propaganda -- there is no other way to put it -- the unemployed are portrayed as lazy, shiftless, and not wanting to work, but expecting handouts and being able to sit at home drinking or drugging on the taxpayer’s dime. If you work and pay taxes, you are being led to believe that your money is not being spent on military armaments so that the US military can continue blowing up brown people somewhere to make the area safe for liberal capitalism and Halliburton and Bechtel; or that your money is going to bail-out Wall Street; rather, the public is told that taxpayers’ money is going to pay for the immoral and lazy who do not want to work. It is forgotten that the financial system brought about a collapse of the economy bringing along the unemployment that comes with recession and depression. But by reiterating this narrative that the poor and unproductive are unjustly taking money from the rich and productive, powerful interests serving right wing wealth -- see Rupert Murdoch and Roger Ailes along with the Koch brothers, for example -- are framing the discussion to serve their interests, which are to roll back any and all social programs since the New Deal and the Great Society, to take us back to a time when capital was king and the government did not dare tax the hard earned millions or billions of robber barons, when workers knew their place, and corporations would be unhindered in their pursuit of the bottom line, the environment, and the public be damned. Some might say we are already there. </span><br />
<span style="background-color: transparent; color: black; font-family: Arial; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: normal; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"></span><br />
<span style="background-color: transparent; color: black; font-family: Arial; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: normal; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Besides always having been a right wing ideological dream, one could call it Milton Friedman’s “wet dream”, to demolish the social welfare state, to “drown it in a bathtub” as per Grover Norquist`s wishes, currently the unemployed, unions public or private, those on welfare, and all those whose lifetime of work and paying into a system of social security in the expectation of receiving benefits when they retire have seen any government program suddenly become “unsustainable entitlements.” In unison the scream is: “We must cut all social programs or we will go bankrupt,” some louder than others, but all of them singing the same song: the Tea Party, the Republicans, some Democrats, and the President himself, at first unbelievably and unfortunately, but currently obviously and to be expected now that it has become perfectly clear that Obama stands to the right of most civilized conservatives on many issues. </span><br />
<span style="background-color: transparent; color: black; font-family: Arial; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: normal; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"></span><br />
<span style="background-color: transparent; color: black; font-family: Arial; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: normal; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">The most insidious lie, however, is not only that the US is going broke because of social welfare programs, but that the US government can go bankrupt at all, after the surreal demonstration of money creation to hand over to an insolvent financial system and their investors and creditors. If one looks at the fact that a sovereign government which is in charge of its own currency can never go bankrupt, something that has long been explained and propounded by Professor <a href="http://neweconomicperspectives.blogspot.com/2009/06/meet-bloggers.html">L. Randall Wray</a>, <a href="http://www.newdeal20.org/author/marshall-mauer/">Marshall Auerback</a>, Professor <a href="http://bilbo.economicoutlook.net/blog/">Bill Mitchell</a>, <a href="http://moslereconomics.com/">Warren Mosler</a>, and many others who understand <a href="http://neweconomicperspectives.blogspot.com/p/modern-money-primer-under-construction.html">modern monetary theory</a>; and stunningly admitted by none other than “Helicopter Ben” Bernanke himself, who did indeed drop staggering amounts of <a href="http://sunbringerblog.blogspot.com/2011/06/money-creation-to-bail-out-wall-streets.html">money into the laps of the financial sector</a>; and if one finds out from the report of the Special Inspector General of the Troubled Asset Relief Program (SIGTARP <a href="http://www.sigtarp.gov/reports.shtml">report here</a>) presented to Congress by Neil Barofsky, who was in charge of SIGTARP, that up to <a href="http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aY0tX8UysIaM">$23.7 TRILLION </a> were created in guarantees, equity injections, and toxic asset purchases, along with an extensive alphabet soup of programs ostensibly created to bring the US economy back from the brink of Depression and financial Armageddon, then any talk of budget constraint and the US running out of money is ridiculous and disingenuous. </span><br />
<span style="background-color: transparent; color: black; font-family: Arial; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: normal; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"></span><br />
<span style="background-color: transparent; color: black; font-family: Arial; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: normal; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">The TARP; regulatory forbearance, which simply means that we will forget a while about bankruptcy rules which state that when you go bankrupt you are out of business, management gets fired and your assets get liquidated to pay your creditors; along with changes in mark-to-market accounting rules which allowed many to get obscenely rich during the bubble years but are now allowing insolvent institutions to hold worthless assets on their balance sheet at inflated prices, further kicking the can down the road in an exercise of extend and pretend; and letting the banking system finance itself at interest rates at 0.25%, money which is then promptly lent back to the government at several percentage points higher, might just strike informed observers as being simply gifts not only to the executives of too-big-to-fail banks for doing such a fantastic job of running their companies into the ground and helping the US economy come to the verge of Depression, but also a bailout of these companies’ bondholders and shareholders, since risk in finance was just a joke, and does not really exist due to the “Bernanke and Uncle Sam put”. </span><span class="Apple-style-span" style="font-family: Arial; font-size: 15px; white-space: pre-wrap;">“Profits are privatized and losses are socialized,” and everyone should read <a href="http://www.nakedcapitalism.com/">Yves Smith </a>for her unmatched analysis of the events of the past years. </span></div><div style="background-color: transparent; margin-bottom: 0px; margin-left: 0px; margin-right: 0px; margin-top: 0px;"><span style="background-color: transparent; color: black; font-family: Arial; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: normal; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"></span><br />
<span style="background-color: transparent; color: black; font-family: Arial; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: normal; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Once one realizes that for the US government money can simply be created and does not need to be borrowed, and that of the trillions that were created much was simply given away to the US banking and finance sectors and their bondholders, shareholders and creditors, which incidentally also bailed out a lot of foreign banks, then one might realize two things: that free market capitalism no longer exists, if it ever did anyway, when the government selectively chooses whom to rescue and how much money to give away, and that it is not the unemployed, sick and poor who have brought the country to the brink of ruin, but rather an extractive and predatory financial system that has co-opted the government to cater to its needs and not to those of the people. There is a reason it is called “<a href="http://sunbringerblog.blogspot.com/2009/07/goldmanites-in-power.html">Government Sachs</a>”. </span><br />
<span style="background-color: transparent; color: black; font-family: Arial; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: normal; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;"></span><br />
<span style="background-color: transparent; color: black; font-family: Arial; font-size: 11pt; font-style: normal; font-variant: normal; font-weight: normal; text-decoration: none; vertical-align: baseline; white-space: pre-wrap;">Because people are easily manipulated and susceptible to cognitive and behavioral biases, and because they have a short attention span and are more concerned with celebrity gossip than their own lives, not realizing that they are giving away their life energy to illusions created to keep them docile and distracted, highway robberies and sleight-of-hand such as TARP et. al. can brazenly be pulled and the biggest robbery in history does not concern citizens whose governments now have any protesters <a href="http://sunbringerblog.blogspot.com/2011/05/spanish-police-brutally-attack.html">beaten bloody by riot police</a> with batons and teargas. It is “<a href="http://en.wikipedia.org/wiki/Bread_and_circuses">bread and circuses</a>” as it has been for most of human history. But when either the “bread” or the “circus” are missing, then people are forced to think about their own existence and maybe, just maybe, see through the corporatist fascist propaganda and wake up enough to become informed, indignant, independent and irrepressible. </span></div>Doru Dan Lunghttp://www.blogger.com/profile/13972303952456203618noreply@blogger.com0tag:blogger.com,1999:blog-3890826976152707113.post-32308458381912178932011-07-07T23:52:00.000-07:002011-07-18T23:41:17.073-07:00Economists never learn: or "It is difficult to get a man to understand something when his salary depends upon his not understanding it."<span class="Apple-style-span" style="font-family: Georgia, 'Times New Roman', serif;"><a href="http://www.amazon.com/ECONned-Unenlightened-Undermined-Democracy-Capitalism/dp/0230620515/ref=as_li_wdgt_js_ex?&camp=212361&linkCode=wey&tag=sunbringer-20&creative=380733">Yves Smith</a> of <a href="http://www.nakedcapitalism.com/">nakedcapitalism.com/</a> fame has another awesome post demolishing economists' dogma. In <a href="http://www.nakedcapitalism.com/2011/07/the-sorrow-and-pity-of-economists-not-learning-from-their-mistakes.html">The Sorrow and the Pity of Economists (Like DeLong) Not Learning from Their Mistakes</a> she takes apart an argument by one of the few economists who is actually willing to admit to mistakes, and is to be respected for that, but is unfortunately stuck in a world of models that have nothing to do with the real world and misrepresent what the founder of macroeconomics said anyway. </span><br />
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</span></div><blockquote><span class="Apple-style-span" style="font-family: Georgia, 'Times New Roman', serif;">Delong says: <i>There is only one real law of economics: the law of supply and demand. If the quantity supplied goes up, the price goes down</i></span></blockquote><span class="Apple-style-span" style="font-family: Georgia, 'Times New Roman', serif;"><br />
</span><br />
<span class="Apple-style-span" style="font-family: Georgia, 'Times New Roman', serif;">Unfortunately for the discipline of economics this is not true: Steve Keen's <a href="http://www.debtdeflation.com/blogs/2010/11/11/my-lectures-on-behavioural-finance/">lectures on behavioural finance</a> are a great place to become disabused of the notion that there are any<b> laws </b>of economics and the lectures provide an enlightening and insightful introduction to a more realistic approach to economics and finance. </span><br />
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<span class="Apple-style-span" style="font-family: Georgia, 'Times New Roman', serif;">But back to Yves: </span><br />
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<blockquote><span class="Apple-style-span" style="font-family: Georgia, 'Times New Roman', serif;"><i>No, it’s NOT the law, it’s a belief and it often is not operative...DeLong then argues that he and presumably his colleagues ignored the notions of John Hicks, the English economist who formalized the idea of Keynes’ General Theory and turned it into a special case of neoclassical economics. Keynes himself repudiated it, as did Hicks in his eighties....</i></span></blockquote><br />
<blockquote><i><span class="Apple-style-span" style="font-family: Georgia, 'Times New Roman', serif;">Why would Keynes not like this treatment? Keynes, himself a successful speculator, did not think financial markets had any propensity to equilibrium, and there is separately reason to think the equilibrium assumption that the discipline has embraced to make its mathematics “tractable” is bollocks. The equilibrium assumption (more accurately, ergodicity) makes it impossible to incorporate any phenomena that are destabilizing, such as ones with positive (self-reinforcing feedback loops. Yet as we discuss short form in ECONNED (and George Cooper gives an elegant layperson treatment in <a href="http://www.amazon.com/Origin-Financial-Crises-Central-Efficient/dp/0307473457" style="color: #cc6600; text-decoration: none;">The Origin of Financial Crises: Central Banks, Credit Bubbles, and the Efficient Market Fallacy</a>), financial markets have no propensity to equilibrium. They are inherently prone to boom-bust cycles.</span></i></blockquote><blockquote><div style="margin-bottom: 0.75em; margin-left: 0px; margin-right: 0px; margin-top: 0px;"><i><span class="Apple-style-span" style="font-family: Georgia, 'Times New Roman', serif;">Even though Hicks’ story, via DeLong, bears some resemblance to Keynes’ liquidity preferences idea, it posits different causal channels that render them fundamentally different. In really simple terms, there is a “loanable funds” market in which borrowers and savers meet to determine the price of lending. Keynes argued that investors could have a change in liquidity preferences, which is econ-speak for they get freaked out and run for safe havens, which in his day was to pull it out of the banking system entirely. Hicks endeavored to show that the loanable funds and liquidity preferences theories were complementary, since he contended that Keynes ignored the bond market (loanable funds) while his predecessors ignored money markets.</span></i></div><div style="margin-bottom: 0.75em; margin-left: 0px; margin-right: 0px; margin-top: 0px;"><i><span class="Apple-style-span" style="font-family: Georgia, 'Times New Roman', serif;">But that’s a deliberate misreading. Keynes saw the driver as the change in the mood of capitalists; the shift in liquidity preferences was an effect. (In addition, Keynes held that changes with respect to existing portfolio positions, meaning stocks of held assets, would tend to swamp flow effects captured by loanable funds models.)</span></i></div><div style="margin-bottom: 0.75em; margin-left: 0px; margin-right: 0px; margin-top: 0px;"><i><span class="Apple-style-span" style="font-family: Georgia, 'Times New Roman', serif;">Making money cheaper is not going to make anyone want to take risk if they think the fundamental outlook is poor. Except for finance-intensive firms (which for the most part is limited to financial services industry incumbents), the cost of money is usually not the driver in business decisions, Market potential, the absolute level of commitment required, competitor dynamics and so on are what drive the decision; funding cost might be a brake. So the idea that making financing cheaper in and of itself is going to spur business activity is dubious, and it has been borne out in this crisis, where banks complain that the reason they are not lending is lack of demand from qualified borrowers. Surveys of small businesses, for instance, show that most have been pessimistic for quite some time.</span></i></div><div style="margin-bottom: 0.75em; margin-left: 0px; margin-right: 0px; margin-top: 0px;"><i><span class="Apple-style-span" style="font-family: Georgia, 'Times New Roman', serif;">If you want to put it in more technical terms, what is happening is a large and sustained fall in what Keynes called the marginal efficiency of capital. Companies are not reinvesting at a rate sufficient rate to sustain growth, let alone reduce unemployment. Rob Parenteau and I discussed the drivers of this phenomenon in <a href="http://www.nakedcapitalism.com/2010/07/our-new-york-times-op-ed-on-the-corporate-savings-glut.html" style="color: #cc6600; text-decoration: none;">a New York Times op-ed on the corporate savings glut last year</a>: that managers and investors have short term incentives, and financial reform has done nothing to reverse them. Add to that that in a balance sheet recession, the private sector (both households and businesses) want to reduce debt, which is tantamount to saving. Lowering interest rates is not going to change that behavior. And if you try to generate inflation in this scenario, when individuals and companies are feeling stresses, all you do is reduce their real spending (and savings power) and further reduce demand (and hence economic activity).</span></i></div><div style="margin-bottom: 0px; margin-left: 0px; margin-right: 0px; margin-top: 0px;"><br />
</div></blockquote><span class="Apple-style-span" style="font-family: Georgia, 'Times New Roman', serif;">So what Keynes thought important was to get investors to stop being "freaked out", decrease their liquidity preference, and again see the marginal efficiency of capital as sufficient to warrant further investment. </span><br />
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<span class="Apple-style-span" style="font-family: Georgia, 'Times New Roman', serif;">Back to Yves: </span><br />
<blockquote><span class="Apple-style-span" style="font-size: 14px;"><span class="Apple-style-span" style="font-family: Georgia, 'Times New Roman', serif;"><i></i></span></span><br />
<div style="margin-bottom: 0.75em; margin-left: 0px; margin-right: 0px; margin-top: 0px;"><span class="Apple-style-span" style="font-size: 14px;"><span class="Apple-style-span" style="font-family: Georgia, 'Times New Roman', serif;"><i>Marshall Auerback, by e-mail, points out that liquidity trap thinking is based on the idea that banks lend out of bank reserves. It has been shown empirically that banks lend first and reserve creation follows (that is, when needed, central banks accommodate loan creation):</i></span></span></div><blockquote style="margin-bottom: 1em; margin-left: 20px; margin-right: 20px; margin-top: 1em;"><div style="margin-bottom: 0.75em; margin-left: 0px; margin-right: 0px; margin-top: 0.75em;"><span class="Apple-style-span" style="font-size: 14px;"><span class="Apple-style-span" style="font-family: Georgia, 'Times New Roman', serif;"><i>The liquidity trap idea seems to be predicated on the silly idea that banks lend out reserves and failure to do so is symptomatic of a liquidity trap. But idea that the build up of bank reserves represent a pot of funds that the banks will eventually loan out completely misunderstands the role of bank reserves. But as Randy Wray, Bill Mitchell, Scott Fullwiler, Stephanie Kelton and a host of others have noted before banks do not loan out reserves. Reserves facilitate the payments system – that is, the system that assures the millions of transactions between banks (as customers write cheques and deposit them throughout the banking system).</i></span></span></div><div style="margin-bottom: 0.75em; margin-left: 0px; margin-right: 0px; margin-top: 0.75em;"><span class="Apple-style-span" style="font-size: 14px;"><span class="Apple-style-span" style="font-family: Georgia, 'Times New Roman', serif;"><i>Banks do not make loans on the basis of the reserves they hold. They respond to demands from credit-worthy customers and have in mind what it will cost them to make the loans under current conditions. When the transactions that follow the creation of a loan transpire it might be that the is short of reserves to ensure the payments clear. It has various options. It can seek funds from wholesale markets (other banks or other lenders), use deposits (not an overnight option really) or, ultimately, it can source the funds from the central bank.</i></span></span></div><div style="margin-bottom: 0.75em; margin-left: 0px; margin-right: 0px; margin-top: 0.75em;"><span class="Apple-style-span" style="font-size: 14px;"><span class="Apple-style-span" style="font-family: Georgia, 'Times New Roman', serif;"><i>The point is that you can get various levels of bank reserves depending on how the central bank pursues its liquidity management in order to hit its target policy rate. None of those levels have any particular operational significance.</i></span></span></div><div style="margin-bottom: 0.75em; margin-left: 0px; margin-right: 0px; margin-top: 0.75em;"><span class="Apple-style-span" style="font-size: 14px;"><span class="Apple-style-span" style="font-family: Georgia, 'Times New Roman', serif;"><i>The mainstream then argue that if the central bank mops up these reserves it will be less inflationary than if it leaves them in the system. This view is based on the spurious – banks lend reserves argument. The inflation risk associated with government spending is the same whether the government issues debt to match its deficit or not. The inflation risk arises from the impact of the spending on the state of capacity in the economy.</i></span></span></div></blockquote><div style="margin-bottom: 0.75em; margin-left: 0px; margin-right: 0px; margin-top: 0px;"><span class="Apple-style-span" style="font-size: 14px;"><span class="Apple-style-span" style="font-family: Georgia, 'Times New Roman', serif;"><i>This is why fiscal stimulus is vastly more effective than monetary policy at times like these: it has a direct impact on overall conditions, by stimulating demand. Government spending creates more income for businesses and ultimately, consumers. Everyone’s income is ultimately someone else’s spending. If government increase spending, it will increase the incomes of at least some people in the economy, and the improvement in their fortunes (if they believe the new income level will be sustained) will lead them to spend more, improving the affairs of yet more people.</i></span></span></div></blockquote><span class="Apple-style-span" style="font-family: Georgia, 'Times New Roman', serif;">So the stimulation of demand is to be achieved by an improvement in overall conditions and this can best be done through fiscal policy, the aversion to which is not a matter of <a href="http://www.creditwritedowns.com/2011/07/ideology-and-economics.html">economics but ideology</a> as pointed out by <a href="http://www.creditwritedowns.com/">Edward Harrison from creditwritedowns.</a></span><br />
<br />
<span class="Apple-style-span" style="font-family: Georgia, 'Times New Roman', serif;">But the important point is that because his General Theory was unfortunately written in a manner that few could understand too well, the wrong lessons have been drawn from Keynes and propounded all these years. It is my contention that Keynes was not only the founder of macroeconomics, but also a <b>behavioral economist</b>, and his insights into the psychology of investors and the economy are invaluable and should be taken to heart. </span><br />
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</span><br />
<span class="Apple-style-span" style="font-family: Georgia, 'Times New Roman', serif;">In my post on <a href="http://sunbringerblog.blogspot.com/2009/09/hyman-minskys-financial-instability.html">Hyman Minskys financial instability hypothesis</a> there is a long quote from Keynes's 1937 article in the Quarterly Journal of economics, where he explained his views more clearly: </span><br />
<blockquote><span class="Apple-style-span" style="font-family: Georgia, 'Times New Roman', serif;"><span class="Apple-style-span" style="color: #666666; font-style: italic; line-height: 18px;">Actually, however, we have, as a rule, only the vaguest idea of any but the most direct consequences of our acts. Sometimes we are not much concerned with their remoter consequences, even tho time and chance may make much of them. But sometimes we are intensely concerned with them, more so, occasionally, than with the immediate consequences.</span><span class="Apple-style-span" style="color: #666666; font-style: italic; line-height: 18px;"><br />
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</span><span class="Apple-style-span" style="color: #666666; font-style: italic; line-height: 18px;">Now of all human activities which are affected by this remoter preoccupation, it happens that one of the most important is economic in character, namely. Wealth. The whole object of the accumulation of Wealth is to produce results, or potential results, at a comparatively distant, and sometimes at an indefinitely distant, date. Thus the fact that our knowledge of the future is fluctuating, vague and uncertain, renders Wealth a peculiarly unsuitable subject for the methods of the classical economic theory. This theory might work very well in a world in which economic goods were necessarily consumed within a short interval of their being produced. But it requires, I suggest, considerable amendment if it is to be applied to a world in which the accumulation of wealth for an indefinitely postponed future is an important factor; and the greater the proportionate part played by such wealth-accumulation the more essential does such amendment become.</span><span class="Apple-style-span" style="color: #666666; font-style: italic; line-height: 18px;"><br />
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</span><span class="Apple-style-span" style="color: #666666; font-style: italic; line-height: 18px;">By "uncertain" knowledge, let me explain, I do not mean merely to distinguish what is known for certain from what is only probable. The game of roulette is not subject, in this sense, to uncertainty; nor is the prospect of a Victory bond being drawn. Or, again, the expectation of life is only slightly uncertain. Even the weather is only moderately uncertain. The sense in which I am using the term is that in which the prospect of a European war is uncertain, or the price of copper and the rate of interest twenty years hence, or the obsolescence of a new invention, or the position of private wealthowners in the social system in 1970. About these matters there is no scientific basis on which to form any calculable probability whatever. We simply do not know. Nevertheless, the necessity for action and for decision compels us as </span><span class="Apple-style-span" style="color: #666666; font-style: italic; line-height: 18px;">practical men to do our best to overlook this awkward fact and to behave exactly as we should if we had behind us a good Benthamite calculation of a series of prospective advantages and disadvantages, each multiplied by its appropriate probability, waiting to he summed.</span><span class="Apple-style-span" style="color: #666666; font-style: italic; line-height: 18px;"><br />
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</span><span class="Apple-style-span" style="color: #666666; font-style: italic; line-height: 18px;">How do we manage in such circumstances to behave in a manner which saves our faces as rational, economic men? We have devised for the purpose a variety of techniques, of which much the most important are the three following:</span><span class="Apple-style-span" style="color: #666666; font-style: italic; line-height: 18px;"><br />
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</span><span class="Apple-style-span" style="color: #666666; font-style: italic; line-height: 18px;">(1) We assume that the present is a much more serviceable guide to the future than a candid examination of past experience would show it to have been hitherto. In other words we largely ignore the prospect of future changes about the actual character of which we know nothing.</span></span></blockquote><blockquote><span class="Apple-style-span" style="font-family: Georgia, 'Times New Roman', serif;"><span class="Apple-style-span" style="color: #666666; font-style: italic; line-height: 18px;">(2) We assume that the existing state of opinion as expressed in prices and the character of existing output is based on a correct summing up of future prospects, so that we can accept it as such unless and until something new and relevant comes into the picture.</span></span></blockquote><blockquote><span class="Apple-style-span" style="font-family: Georgia, 'Times New Roman', serif;"><span class="Apple-style-span" style="color: #666666; font-style: italic; line-height: 18px;">(3) Knowing that our own individual judgment is worthless, we endeavor to fall back on the judgment of the rest of the world which is perhaps better informed. That is, we endeavor to conform with the behavior of the majority or the average. The psychology of a society of individuals each of whom is endeavoring to copy the others leads to what we may strictly term a conventional judgment.</span><span class="Apple-style-span" style="color: #666666; font-style: italic; line-height: 18px;"><br />
</span><span class="Apple-style-span" style="color: #666666; font-style: italic; line-height: 18px;"><br />
</span><span class="Apple-style-span" style="color: #666666; font-style: italic; line-height: 18px;">Now a practical theory of the future based on these three principles has certain marked characteristics. In particular, being based on so flimsy a foundation, it is subject to sudden and violent changes. The practice of calmness and immobility, of certainty and security, suddenly breaks down. New fears and hopes will, without warning, take charge of human conduct. The forces of disillusion may suddenly impose a new conventional basis of valuation. All these pretty, polite techniques, made for a well-panelled Board Room and a nicely regulated market, are liable to collapse. At all times the vague panic fears and equally vague and unreasoned hopes are not really lulled, and lie but a little way below the surface.</span><span class="Apple-style-span" style="color: #666666; font-style: italic; line-height: 18px;"><br />
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</span><span class="Apple-style-span" style="color: #666666; font-style: italic; line-height: 18px;">Perhaps the reader feels that this general, philosophical disquisition on the behavior of mankind is somewhat remote from the economic theory under discussion. But I think not. Tho this is how we behave in the market place, the theory we devise in the study of how we behave in the market place should not itself submit to market-place idols. I accuse the classical economic theory of being itself one of these pretty, polite techniques which tries to deal with the present by abstracting from the fact that we know very little about the </span><span class="Apple-style-span" style="color: #666666; font-style: italic; line-height: 18px;">future.</span><span class="Apple-style-span" style="color: #666666; font-style: italic; line-height: 18px;"><br />
</span><span class="Apple-style-span" style="color: #666666; font-style: italic; line-height: 18px;"><br />
</span><span class="Apple-style-span" style="color: #666666; font-style: italic; line-height: 18px;">I daresay that a classical economist would readily admit this. But, even so, I think he has overlooked the precise nature of the difference which his abstraction makes between theory and practice, and the character of the fallacies into which he is likely to be led.</span></span></blockquote><div><span class="Apple-style-span" style="color: #666666; line-height: 18px;"><span class="Apple-style-span" style="font-family: Georgia, 'Times New Roman', serif;">So this is the crux of Keynes's theory and even an ostensibly Keynesian economist such as Brad DeLong unfortunately fails to draw the correct lessons from the theory. As pointed out by Yves and many others who contribute to the current discussion of the dismal state of the dismal science, it is confidence and lack thereof that determines economic recovery or depression, and not the sacred cows of supply and demand.</span></span></div><div><span class="Apple-style-span" style="color: #666666; line-height: 18px;"><span class="Apple-style-span" style="font-family: Georgia, 'Times New Roman', serif;"><br />
</span></span></div><div><span class="Apple-style-span" style="color: #666666; line-height: 18px;"><span class="Apple-style-span" style="font-family: Georgia, 'Times New Roman', serif;">But at the end of the day: <a href="http://en.wikiquote.org/wiki/Upton_Sinclair">"It is difficult to get a man to understand something, when his salary depends upon his not understanding it!"</a> </span></span> </div>Doru Dan Lunghttp://www.blogger.com/profile/13972303952456203618noreply@blogger.com0tag:blogger.com,1999:blog-3890826976152707113.post-69405368536791944422011-06-23T12:30:00.000-07:002011-07-18T23:44:43.621-07:00Plagiarism, Privilege, and Political Promotion (!) in the County of Poets and Thinkers<div dir="ltr" style="text-align: left;" trbidi="on">It keeps getting better. After a massive public outcry over <a href="http://sunbringerblog.blogspot.com/2011/02/plagiarism-privilege-and-political.html">zu Guttenberg's plagiarized doctoral dissertation</a> which finally forced the former German defense minister and the country's most popular politician at the time to resign his post, a new plagiarized dissertation has resulted in another doctoral title being taken away from a <a href="http://www.thelocal.de/national/20110623-35847.html">popular German politician</a>. And was the result the same: did the politician have to resign? No, in fact, ex-doctor <a href="http://en.wikipedia.org/wiki/Silvana_Koch-Mehrin">Sylvana Koch-Mehrin</a> has not only not had to quit her job as European parliament representative, she has been promoted to, get this, <a href="http://www.scienceblogs.de/zoonpolitikon/2011/06/academic-fraudster-as-a-member-of-the-research-commission-of-the-european-parliament.php">the Parliamentary Commission on Industry, Research, and Energy.</a> Needless to say this is an insult bordering on the absurd, and consequently a petition calling for her <a href="http://www.scienceblogs.de/zoonpolitikon/2011/06/academic-fraudster-as-a-member-of-the-research-commission-of-the-european-parliament.php">dismissal</a> has been launched. So it seems that in "Das Land der Dichter und Denker" (The Country of Poets and Thinkers), in order to succeed politically, one does not even have to have thoughts of one's own; it suffices to copy what others have said without attribution and to claim it for oneself. The more brazen the lie, the more galling the sense of entitlement that the ruling political class displays. </div>Doru Dan Lunghttp://www.blogger.com/profile/13972303952456203618noreply@blogger.com0tag:blogger.com,1999:blog-3890826976152707113.post-13475541415759064112011-06-23T04:25:00.000-07:002011-07-18T23:27:40.809-07:00Money Creation to Bail Out Wall Street's Bad Bets But No Money For Social Security<div dir="ltr" style="text-align: left;" trbidi="on">Economist Michael Hudson has long pointed out that the US taxpayer has basically been robbed at metaphorical gunpoint by Wall Street bankers, whose bad bets gone bad have been bailed out to the tune of $13 trillion by transferring their bad bets onto the public, that is the US taxpayer balance sheet. <object classid="clsid:d27cdb6e-ae6d-11cf-96b8-444553540000" codebase="http://download.macromedia.com/pub/shockwave/cabs/flash/swflash.cab#version=6,0,40,0" height="278" width="460"><param name="width" value="460"/><param name="height" value="278"/><param name="allowfullscreen" value="true"/><param name="src" value="http://www.youtube.com/v/MdsnIYurpSM&fs=1&rel=1&showsearch=0" /><embed type="application/x-shockwave-flash" src="http://www.youtube.com/v/MdsnIYurpSM&fs=1&hl=en&showsearch=0" width="460" height="278" allowfullscreen="true"> <a href="http://therealnews.com/">More at The Real News</a> </embed></object><br />
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Here is an excerpt from a must read article explaining that the US can create money out of thin air and has done so to bail out banker's bets while claiming that there is no money for medicare, medicaid, social security etc., basically anything that would help the downtrodden, or poor, or even the middle class.<br />
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<blockquote><span class="Apple-style-span" style="font-family: Optima, Arial, sans-serif; font-size: 14px;"></span><br />
<div style="margin-bottom: 0.75em; margin-left: 0px; margin-right: 0px; margin-top: 0px;"><span class="Apple-style-span" style="font-family: Optima, Arial, sans-serif; font-size: 14px;">What has made the post-2008 crash most remarkable is not merely the delusion that the way to get rich is by debt leverage (unless you are a banker, that is). Most unique is the crash’s aftermath. This time around the bad debts have not been wiped off the books. There have indeed been the usual bankruptcies – but the bad lenders and speculators are being saved from loss by the government intervening to issue Treasury bonds to pay them off out of future tax revenues or new money creation. The Obama Administration’s Wall Street managers have kept the debt overhead in place – toxic mortgage debt, junk bonds, and most seriously, the novel web of collateralized debt obligations (CDO), credit default swaps (almost monopolized by A.I.G.) and kindred financial derivatives of a basically mathematical character that have developed in the 1990s and early 2000s.</span></div><div style="margin-bottom: 0.75em; margin-left: 0px; margin-right: 0px; margin-top: 0px;"><span class="Apple-style-span" style="font-family: Optima, Arial, sans-serif; font-size: 14px;">These computerized casino cross-bets among the world’s leading financial institutions are the largest problem. Instead of this network of reciprocal claims being let go, they have been taken onto the government’s own balance sheet. This has occurred not only in the United States but even more disastrously in Ireland, shifting the obligation to pay – on what were basically gambles rather than loans – from the financial institutions that had lost on these bets (or simply held fraudulently inflated loans) onto the government (“taxpayers”). The government took over the mortgage lending guarantors Fannie Mae and Freddie Mac (privatizing the profits, “socializing” the losses) for $5.3 trillion – almost as much as the entire national debt. The Treasury lent $700 billion under the Troubled Asset Relief Plan (TARP) to Wall Street’s largest banks and brokerage houses. The latter re-incorporated themselves as “banks” to get Federal Reserve handouts and access to the Fed’s $2 trillion in “cash for trash” swaps crediting Wall Street with Fed deposits for otherwise “illiquid” loans and securities (the euphemism for toxic, fraudulent or otherwise insolvent and unmarketable debt instruments) – at “cost” based on full mark-to-model fictitious valuations.</span></div><div style="margin-bottom: 0.75em; margin-left: 0px; margin-right: 0px; margin-top: 0px;"><span class="Apple-style-span" style="font-family: Optima, Arial, sans-serif; font-size: 14px;">Altogether, the post-2008 crash saw some $13 trillion in such obligations transferred onto the government’s balance sheet from high finance, euphemized as “the private sector” as if it were the core economy itself, rather than its calcifying shell. Instead of losing on their bad bets, bad loans, toxic mortgages and outright fraudulent claims, the financial institutions cleaned up, at public expense. They collected enough to create a new century’s power elite to lord it over “taxpayers” in industry, agriculture and commerce who will be charged to pay off this debt.</span></div><div style="margin-bottom: 0.75em; margin-left: 0px; margin-right: 0px; margin-top: 0px;"><span class="Apple-style-span" style="font-family: Optima, Arial, sans-serif; font-size: 14px;">If there was a silver lining to all this, it has been to demonstrate that <strong>if the Treasury and Federal Reserve can create $13 trillion of public obligations – money – electronically on computer keyboards, there really is no Social Security problem at all, no Medicare shortfall, no inability of the American government to rebuild the nation’s infrastructure.</strong> The bailout of Wall Street showed how central banks can create money, as Modern Money Theory (MMT) explains. But rather than explaining how this phenomenon worked, the bailout was rammed through Congress under emergency conditions. Bankers threatened economic Armageddon if the government did not create the credit to save them from taking losses.</span></div><div style="margin-bottom: 0.75em; margin-left: 0px; margin-right: 0px; margin-top: 0px;"><span class="Apple-style-span" style="font-family: Optima, Arial, sans-serif; font-size: 14px;">Even more remarkable is the attempt to convince the population that new money and debt creation to bail out Wall Street – and vest a new century of financial billionaires at public subsidy – cannot be mobilized just as readily to save labor and industry in the “real” economy. The Republicans and Obama administration appointees held over from the Bush and Clinton administration have joined to conjure up scare stories that Social Security and Medicare debts cannot be paid, although the government can quickly and with little debate take responsibility for paying trillions of dollars of bipartisan Finance-Care for the rich and their heirs.</span></div></blockquote>He also points out that things are bad if <a href="http://www.rollingstone.com/politics/news/michele-bachmanns-holy-war-20110622">Michelle Bachmann is the voice of reason.</a> The galling nature of bailing out banker's bad bets while preaching austerity for everyone else is augmented when one is made aware that <a href="http://neweconomicperspectives.blogspot.com/p/modern-money-primer-under-construction.html">the US government is not constrained in any way shape or form.</a> The Modern Money primer is a good place to start getting acquainted with the way money is created, and the implications of these facts for any discussion about government solvency, entitlement programs, benefits or austerity and "belt tightening" for everyone except financiers whose casino capitalism bad bets are being bailed out by the government.<br />
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<br />
<a href="http://www.nakedcapitalism.com/2011/06/michael-hudson-free-money-creation-to-bail-out-financial-speculators-but-not-social-security-or-medicare-or-you-know-its-bad-when-michelle.html">Full article by Michael Hudson here.</a></div>Doru Dan Lunghttp://www.blogger.com/profile/13972303952456203618noreply@blogger.com0tag:blogger.com,1999:blog-3890826976152707113.post-26717002258226645132011-05-27T08:03:00.000-07:002011-07-18T23:34:07.768-07:00Spanish Police Brutally Attack Demonstrators<div dir="ltr" style="text-align: left;" trbidi="on"><div dir="ltr" style="text-align: left;" trbidi="on">In Spain today <a href="http://www.elpais.com/fotogaleria/Desalojo/campamento/elpgal/20110527elpepunac_1/Zes/4">demonstrators protested</a> once again against 21% unemployment, 40% youth unemployment, austerity and the general economic malaise and lack of opportunity that have befallen the country that boasted a real estate bubble which could rival Las Vegas or Florida in size. Apparently, the police that were called out to disperse the protestors were so threatened by this <a href="http://www.flickr.com/photos/acampadabcnfoto/5765018458/">gentleman in a wheelchair</a> that they felt compelled to beat him with batons. He was not the only one to get to feel how an ostensibly democratic government deals with dissent: <br />
<div class="separator" style="clear: both; text-align: center;"><object class="BLOGGER-youtube-video" classid="clsid:D27CDB6E-AE6D-11cf-96B8-444553540000" codebase="http://download.macromedia.com/pub/shockwave/cabs/flash/swflash.cab#version=6,0,40,0" data-thumbnail-src="http://2.gvt0.com/vi/2_6YSm6dXKI/0.jpg" height="266" width="320"><param name="movie" value="http://www.youtube.com/v/2_6YSm6dXKI&fs=1&source=uds" /><param name="bgcolor" value="#FFFFFF" /><embed width="320" height="266" src="http://www.youtube.com/v/2_6YSm6dXKI&fs=1&source=uds" type="application/x-shockwave-flash"></embed></object></div><div class="separator" style="clear: both; text-align: center;"><iframe allowfullscreen='allowfullscreen' webkitallowfullscreen='webkitallowfullscreen' mozallowfullscreen='mozallowfullscreen' width='320' height='266' src='https://www.youtube.com/embed/W8UEOfB9qEU?feature=player_embedded' frameborder='0'></iframe></div></div>Many more pictures <a href="http://www.flickr.com/photos/acampadabcnfoto/page6/">here.</a></div>Doru Dan Lunghttp://www.blogger.com/profile/13972303952456203618noreply@blogger.com0tag:blogger.com,1999:blog-3890826976152707113.post-24485375076243515102011-03-17T00:22:00.000-07:002011-06-24T04:58:19.081-07:00Final Warning<div dir="ltr" style="text-align: left;" trbidi="on">I am stunned, mesmerized, shocked, and appalled by what is happening at the <a href="http://www.alternet.org/newsandviews/article/530223/nuclear_crisis%3A_japanese_defense_forces_begin_water_drops%3B_us_official_fears_outcome_that%27s_%22deadly_for_decades%22%3B/">Fukushima nuclear plant.</a> No one knows how this will end: <a href="http://www.zerohedge.com/article/detailed-look-spent-fuel-rod-containment-pools-fukushima">frantic efforts</a> at restoring cooling and power are underway, <a href="http://www.chrismartenson.com/blog/alert-nuclear-economic-meltdown-in-progress">worst case</a> scenarios abound that make one shiver, along with what can only be considered <a href="http://market-ticker.org/akcs-www?post=182324">willful blindness</a> by nuke cheerleaders. <br />
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If after looking at these pictures of the Fukushima nuclear plant from <a href="http://www.digitalglobe.com/index.php/27/Sample+Imagery+Gallery">digital globe</a> anyone is still downplaying the problems and the danger, he or she ought to be moved by the potential fact that <b>plutonium</b> can be released into the atmosphere from reactor nr. 3. <br />
<div class="separator" style="clear: both; text-align: center;"><a href="http://www.digitalglobe.com/downloads/featured_images/japan_earthquaketsu_fukushima_daiichi2_march16_2011_dg.jpg" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" height="369" src="http://www.digitalglobe.com/downloads/featured_images/japan_earthquaketsu_fukushima_daiichi2_march16_2011_dg.jpg" width="640" /></a></div><br />
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I am holding in my hand a book called "Final Warning: The Legacy of Chernobyl" by Dr. Robert Peter Gale. It is a first hand account of his experiences at the Chernobyl nuclear disaster, where he was invited as an expert to help with the clean up effort by the Soviet government. Here a quote from the end of Chapter two: <br />
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<blockquote><i>It's scary; a frightening game of numbers and chance. As a consequence of natural background radiation, all of us are struck by approximately fifteen thousand radioactive particles every second. What protects us is that the probability of any given particle decaying while in our body, irreparably damaging a cell, and causing cancer or some other abnormality is very low. But some particles are more dangerous than others, and some that science has created as by-products of nuclear weapons and nuclear power retain their potentially lethal properties for thousands of years.<br />
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The length of time a particular substance remains radioactive is measured by its "half-life." This is the substance's rate of decay, the time it takes half of its radioactive matter to convert to a more stable form by emitting waves and particles. For example, iodine-131 has a half-life of eight days. This means that one ounce of iodine-131 will turn into a half-ounce of iodine-131 and a half-ounce of more stable decay products after eight days. After sixteen days, a quarter-ounce of iodine-131 is left, after twenty-four days, an eight of an ounce. After 160 days (twenty half-lives), less than one-millionth of one ounce of radioactive iodine-131 remains. <br />
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However, other radioactive materials are longer-lasting. Strontium-90 has a half-life of twenty eight years, cesium-137, thirty-three. This means they arepotentially dangerous and must be <b>contained for centuries.</b> Twenty-seven different types of radioactive substances are created during the normal fissioning of uranium in a nuclear power plant reactor. <b>Plutonium</b> -- a mand-made element that dind't exist until uranium was fissioned to make nuclear weapons and nuclear power -- <b>has a half life of 24,000 years.</b><br />
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Plutonium emits alpha particles. Each atom of plutonium, if inhaled, is capable of causing lung cancer. A plutonium atom released into the atmosphere at Chernobyl will remain <b>potentially lethal for 24,000 years, a quarter until the year 50,000. No human intervention can hasten the decay process.</b> This is the inherent difference between nuclear energy andother forms of power. When primitive man extinguished his fires, they were out. Modern-day blast furnaces and jet engines can be turned off at will. Nuclear fission goes on and on. Its benefits are obvious.<b>It is also the most dangerous process known to man.</b> This much was recognized by John F. Kennedy, who, in seeking approval for a treaty that would ban nuclear testing in the atmosphere, warned: "The number of children and grandchildren with cancer in their bones, with leukemia in their blood, or with poison in their lungs is not a statistical issue. The loss of even one human life or the malformation of even one baby who may be born long after we are gone should be of concern to us all.... <b>We all inhabit this small planet. We all breathe the same air. And we are all mortal."</b></i></blockquote><br />
This is one of the most dramatic moments of our lives. Countless lives are at stake, not just those brave souls in Japan who have volunteered to continue trying to keep the rods covered with water in order to prevent further meltdowns; but also millions of affected people in Tokyo and <a href="http://www.zerohedge.com/article/un-radiation-hit-us-friday"> the US</a>, and around the world. This is not a drill. This is not panic being spread by anyone with an agenda. This is a defining moment for humanity, a time when we are humbled by nature and nature's laws, a time to reconsider our stances on nuclear power, and a time to reassess our priorities and how we live our lives.</div>Doru Dan Lunghttp://www.blogger.com/profile/13972303952456203618noreply@blogger.com0tag:blogger.com,1999:blog-3890826976152707113.post-38686385587200554182011-02-25T06:32:00.000-08:002011-06-23T12:06:17.901-07:00Plagiarism, Privilege, and Political Popularity in the Country of Poets and Thinkers<div dir="ltr" style="text-align: left;" trbidi="on">It seems that in Germany one can <a href="http://www.spiegel.de/international/germany/0,1518,747402,00.html" target="_blank">lie, cheat, plagiarize, (ab)use taxpayer money for private gain, and still get to keep one’s job.</a> The country that likes to call itself “The Country of Poets and Thinkers” (Das Land der Dichter und Denker) has a man as minister of defense who not only plagiarized his dissertation (if he did anything other than write the ridiculously pretentious preface himself), but lied to cover it up, lied to the public, lied to the press, and lied to parliament. Having brought the University of Bayreuth and academia in Germany in serious disrepute, this same man is now cracking jokes about academic titles at his appearances, where, apparently, he is still regaled as some sort of latter day messiah. Obama, they call him, charismatic, someone who gets people interested in politics, a man who says it like it is, our hero. The truly disturbing part of the entire affair is not his unrepentant arrogance and haughty sense of entitlement, not his lying and deceiving, not even the gall to turn in a dissertation in which on over 270 pages plagiarized passages have been found; no, the truly disturbing thing is that this might just make him become even more popular. More popular with whom, one might ask? Not with the press, the majority of which feel insulted by him and recognize the dangerous dynamic at play; not with those who have worked hard for their academic degrees which have suddenly become much less valuable; and not with those who think that a man who is willing to go to these lengths to dishonestly advance his career, who does not think that the rules apply to him, who until recently presumed to be a doctor of jurisprudence even though the work he turned in was for the most part the work of other authors, that such a man is not to be trusted with the armed forces of the largest European country; no, he is not popular with them, but he is popular with the masses. And it pains me to use this term, but there is no getting around it. He is popular with those who do not value the academy, those who do not see the irony in them harboring anti-”elitist” sentiments against the intelligentsia while proclaiming as savior a Baron who is married to Bismarck’s great, great granddaughter. And while at first glance there might not be much similarity between zu Guttenberg and Sarah Palin, at second glance, one does discern certain anti-intellectual, new know-nothing tendencies in their supporters that make one afraid for the fabric of our democratic societies on both sides of the Atlantic.</div>Doru Dan Lunghttp://www.blogger.com/profile/13972303952456203618noreply@blogger.com0tag:blogger.com,1999:blog-3890826976152707113.post-49035090318558494132010-03-12T01:33:00.000-08:002010-03-12T01:38:40.242-08:00ECONNED -– The Movie, Um, Video!Awsome video from <a href="www.nakedcapitalism.com">Yves Smith</a>!<br />
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<blockquote>ECONNED – The Movie, Um, Video!<br />
A very talented movie/commerical/trailer editor, who for some bizarre reason insists on going nameless (but if you want his coordinates, don’t hesitate to ping me) assisted by Ben Fisher in a major role (finding images and video clips) and Richard Smith in a minor role (extensive sanity checking) put this together.<br />
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This may inspire McLuhan-esque debates, since I wanted something true to the medium, as in visceral and immediate, rather than the usual talking head sort of piece.<br />
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Enjoy! Oh, and turn the sound up</blockquote><br />
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<noscript><a href="http://www.sociofluid.com/">SocioFluid</a></noscript>Doru Dan Lunghttp://www.blogger.com/profile/13972303952456203618noreply@blogger.com0tag:blogger.com,1999:blog-3890826976152707113.post-37475613204118245922010-02-16T00:31:00.000-08:002010-02-21T10:06:09.476-08:00Buy this book! Econned: How Unenlightened Self Interest Undermined Democracy and Corrupted Capitalism<img src="http://www.nakedcapitalism.com/wp-content/themes/nakedcapitalism-enhanced/images/econned-medium.jpg"><br />
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Make sure you get the upcoming book from my friend Yves Smith of <a href="http://www.nakedcapitalism.com"> www.nakedcapitalism.com</a> fame. <br />
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<blockquote><i><br />
<a href="http://www.nakedcapitalism.com/2010/02/countdown-3210-excerpt-from-econned.html">Countdown 3/2/10: Excerpt from Econned</a><br />
Folks, the time has come when I must start shamelessly promoting my book, Econned: How Unenlightened Self Interest Undermined Democracy and Corrupted Capitalism, which is being released March 2, 2010.<br />
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I thought the extract below would give readers an idea of what the book is about, with one caveat. Econned goes into some detail about crisis mechanisms (as in why it got as bad as it did) and has unearthed a heretofore unexamined hedge fund trading strategy that turned the subprime mania into the detonator of the global debt bomb (and yes, we have the goods).<br />
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Enjoy!<br />
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In 1776, Adam Smith published The Wealth of Nations. In it, he argued that the uncoordinated actions of large numbers of individuals, each acting out of self-interest, sometimes produced, as if by “an invisible hand,” results that were beneficial to broader society. Smith also pointed out that self-interested actions frequently led to injustice or even ruin. He fiercely criticized both how employers colluded with each other to keep wages low, as well as the “savage injustice” that European mercantilist interests had “commit[ted] with impunity” in colonies in Asia and the Americas.<br />
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Smith’s ideas were cherry-picked and turned into a simplistic ideology that now dominates university economics departments. This theory proclaims that the “invisible hand” ensures that economic self-interest will always lead to the best outcomes imaginable. It follows that any restrictions on the profit-seeking activities of individuals and corporations interfere with this invisible hand, and therefore are “inefficient” and nonsensical.<br />
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According to this line of thinking, individuals have perfect knowledge both of what they want and of everything happening in the world at large, and so they pass their lives making intelligent decisions. Prices may change in ways that appear random, but this randomness follows predictable, unchanging rules and is never violently chaotic. It is therefore possible for corporations to use clever techniques and systems to reduce or even eliminate the risks associated with their business. The result is a stable, productive economy that represents the apex of civilization.<br />
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This heartwarming picture airbrushes out nearly all of the real business world. Yet uncritical allegiance to these precepts over the last thirty years has produced a world in which corporations, especially in finance, are far less restricted in their pursuit of profit. We show in this book how this lawless environment has led the financial services industry to pursue its own unenlightened<br />
self-interest. The industry has become systematically predatory. Employees of industry firms have not confined their predation to outsiders; their efforts to loot their own firms nearly destroyed the industry and the entire global economy. Similarly destructive behavior by other players, often viewed through a distorted lens that saw all unconstrained commercial behavior as virtuous, added more<br />
fuel to the conflagration.<br />
<br />
Some economists have opposed this prevailing ideology; indeed, comparatively new lines of inquiry focus explicitly on how economic actors can fool themselves or others into making poor, even destructive, choices.<br />
<br />
But when the economics profession has used the megaphone of its authority to dominate discussions with policymakers and the public, it has spoken with one voice, and the message has been the one described here. We therefore confine our criticism to these particularly influential ideas.<br />
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Theories that fly in the face of reality often need to excise inconvenient phenomena, and mainstream economics is no exception. Idealizing the rational aspects of business decisions means refusing to notice behavior that is predatory, destructive, criminal, or simply stupid. Believing that risk is manageable through mechanical systems has required not just unrealistic assumptions but also willful<br />
blindness to clear signs of danger.<br />
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We offer here another point of view. This book lays bare both the actions leading to the credit crisis and the economic constructs that defended, facilitated, and even exacerbated this behavior. Our case makes clear that if our economic system is to harness the self-interest of individuals to achieve the general<br />
good, it must be supervised within a democratic society and responsive to criticism by outside voices of those who are unafraid to think independently.</i></blockquote><center><br />
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<noscript><a href="http://www.sociofluid.com/">SocioFluid</a></noscript>Doru Dan Lunghttp://www.blogger.com/profile/13972303952456203618noreply@blogger.com1tag:blogger.com,1999:blog-3890826976152707113.post-55318613722418186262010-01-26T14:01:00.000-08:002010-02-21T10:06:28.189-08:00Neither Keynes nor Hayek would be happySince Obama seems hell bent on doing exactly the wrong thing at the wrong time, namely proposing a spending freeze while jobs are still being lost, <a href=http://www.creditwritedowns.com/2010/01/barack-hoover-obama.html> as expounded on by Marshall Auerback </a>, here is a little background as to why this is not good by John Carney of the Business Insider:<br />
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<noscript><a href="http://www.sociofluid.com/">SocioFluid</a></noscript>Doru Dan Lunghttp://www.blogger.com/profile/13972303952456203618noreply@blogger.com0tag:blogger.com,1999:blog-3890826976152707113.post-46570156763917948042009-11-24T01:26:00.000-08:002009-11-24T01:26:03.464-08:00Reflexivity in Action<a href="http://en.wikipedia.org/wiki/Reflexivity_(social_theory)">Reflexivity </a> in action. That is all.<br />
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<iframe src="http://www.businessinsider.com/embed?id=4b0b0de60000000000ba364b&width=600&height=430" width="600" height="430" border="0" frameborder="0"></iframe>Doru Dan Lunghttp://www.blogger.com/profile/13972303952456203618noreply@blogger.com0tag:blogger.com,1999:blog-3890826976152707113.post-50684082540708310372009-11-18T00:52:00.000-08:002009-11-18T11:37:15.560-08:00The Precondition for an Economic Recovery According to Keynes and Confirmed by, of all People, GreenspanMost of the blogosphere has been skeptical of the rally in equities since the beginning, with <a href="http://www.blogger.com/%E2%80%9Dhttp://www.zerohedge.com/%E2%80%9C">ZeroHedge</a> pointing out that the rise can be attributed, basically, to free money courtesy of the Federal Reserve, and aided and abetted by <a href="http://www.blogger.com/%E2%80%9Dhttp://market-ticker.denninger.net/archives/1259-High-Frequency-Trading-Is-A-Scam.html%E2%80%9C"> High Frequency Trading</a> and the principal program trading of <a href="http://robertreich.blogspot.com/2009/10/too-big-to-fail-why-big-banks-should-be.html"> the usual suspects</a>. Now, even for those who are not conspiracy minded, charts such as these speak volumes(pun intended). <br />
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<a href="http://www.zerohedge.com/sites/default/files/images/user5/SPY%20Volume%2011.17_0.jpg">From ZeroHedge</a>.<br />
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I would like to point out one possible explanation for this phenomenon from a contentious source that I have quoted before. I maintian that Keynes is misunderstoond by many and that he is not the source of all wisdom, but, rather, someone who asked the right questions at the right time and pointed out many problems in the workings of the economy in periods of turmoil. <br />
<blockquote><i> Unfortunately a serious fall in the marginal efficiency of capital also tends to affect adversely the propensity to consume. For it involves a severe decline in the market value of Stock Exchange equities. Now, on the class who take an active interest in their Stock Exchange investments, especially if they are employing borrowed funds, this naturally exerts a very depressing influence. These people are, perhaps, even more influenced in their readiness to spend by rises and falls in the value of their investments than by the state of their incomes. With a "stock-minded" public as in the United States to-day, a rising stock-market may be an almost essential condition of a satisfactory propensity to consume; and this circumstance, generally overlooked until lately, obviously serves to aggravate still further the depressing effect of a decline in the marginal efficiency of capital.<br />
When once the recovery has been started, the manner in which it feeds on itself and cumulates is obvious. But during the downward phase, when both fixed capital and stocks of materials are for the time being redundant and working-capital is being reduced, the schedule of the marginal efficiency of capital may fall so low that it can scarcely be corrected, so as to secure a satisfactory rate of new investment, by any practicable reduction in the rate of interest. <b>Thus with markets organised and influenced as they are at present, the market estimation of the marginal efficiency of capital may suffer such enormously wide fluctuations that it cannot be sufficiently offset by corresponding fluctuations in the rate of interest. Moreover, the corresponding movements in the stock-market may, as we have seen above, depress the propensity to consume just when it is most needed. In conditions of laissez-faire the avoidance of wide fluctuations in employment may, therefore, prove impossible without a far-reaching change in the psychology of investment markets such as there is no reason to expect. I conclude that the duty of ordering the current volume of investment cannot safely be left in private hands.</i></b><i></i> <br />
</blockquote>The point of contention is, and has been, the last sentence, which raises the blood pressure of everyone involved, on both sides, like nothing else ever written about economics (save maybe Marx). I am not venturing out on a limb when I say that the powers that be have read this passage and drawn their own conclusions from it. Even <a href="http://www.blogger.com/%E2%80%9Dhttp://blogs.ft.com/economistsforum/2009/06/inflation-the-real-threat-to-sustained-recovery/%E2%80%9C"> Greenspan said </a>: <br />
<blockquote><i> The rise in global stock prices from early March to mid-June is arguably the primary cause of the surprising positive turn in the economic environment. The $12,000bn of newly created corporate equity value has added significantly to the capital buffer that supports the debt issued by financial and non-financial companies. Corporate debt, as a consequence, has been upgraded and yields have fallen. Previously capital-strapped companies have been able to raise considerable debt and equity in recent months. Market fears of bank insolvency, particularly, have been assuaged </i> <br />
</blockquote>.<br />
Juxtaposing these two quotes does not a proof of a government engineered market melt-up make, but one does have to wonder. <br />
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<noscript><a href="http://www.sociofluid.com/">SocioFluid</a></noscript>Doru Dan Lunghttp://www.blogger.com/profile/13972303952456203618noreply@blogger.com0tag:blogger.com,1999:blog-3890826976152707113.post-30966158234679007932009-11-11T09:48:00.000-08:002009-11-11T09:49:46.567-08:00The Dark Side of Planet Earth: Pink Floyd´s Dark Side of the Moon and BBC´s Planet Earth Mashup. Very Cool<object width="400" height="225"><param name="allowfullscreen" value="true" /><param name="allowscriptaccess" value="always" /><param name="movie" value="http://vimeo.com/moogaloop.swf?clip_id=1393404&server=vimeo.com&show_title=1&show_byline=1&show_portrait=0&color=&fullscreen=1" /><embed src="http://vimeo.com/moogaloop.swf?clip_id=1393404&server=vimeo.com&show_title=1&show_byline=1&show_portrait=0&color=&fullscreen=1" type="application/x-shockwave-flash" allowfullscreen="true" allowscriptaccess="always" width="400" height="225"></embed></object><p><a href="http://vimeo.com/1393404">The Dark Side of Planet Earth</a> from <a href="http://vimeo.com/user625649">allan corbett</a> on <a href="http://vimeo.com">Vimeo</a>.</p><br />
<!--SocioFluid--><script type="text/javascript" src="http://www.sociofluid.com/sf.php?widget=124320-0001030408090a0b0c0d0e11"></script><noscript><a href="http://www.sociofluid.com/">SocioFluid</a></noscript><!--SocioFluid-->Doru Dan Lunghttp://www.blogger.com/profile/13972303952456203618noreply@blogger.com0tag:blogger.com,1999:blog-3890826976152707113.post-50657637038029507142009-11-04T23:03:00.000-08:002009-11-04T23:03:03.044-08:00Robert Shiller on Inefficient Markets and Behavioral FinanceRobert Shiller is perhaps best known for his Case-Shiller home price index and for having correctly identified the previous bubble in financial markets in his 2000 book <a href="http://www.irrationalexuberance.com/"> Irrational Exuberance </a>. Shiller is concerned with risk and uncertainty in human affairs and has never been a proponent of the orthodoxy which either claims that bubbles <i> do not exist(!) </i> or that markets should be left to themselves since they instantly and efficiently incorporate all known information, something known as the <a href="http://en.wikipedia.org/wiki/Efficient-market_hypothesis">Efficient Market Hypothesis </a>. <br />
<a href="http://www.ritholtz.com/blog/2009/11/the-hubris-of-economics/">Barry Ritholz </a> discusses the hubris of economics in a must read post, and over at <a href="http://www.washingtonsblog.com/2009/11/wall-street-journal-admits-economists.html"> Washington´s Blog </a> another great post points out that economists had a <i> incentive </i> to be wrong. <br />
Now Robert Shiller´s criticism of prevailing economic orthodoxy may not be as acid but it is nevertheless a damning indictment. Below is his lecture on Behavioral Finance and a very informative article on the decline (one would hope) of the Efficient Markets Theory and the rise of Behavioral Finance. <br />
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<a title="View From Efficient Market Theory to Behavioral Finance on Scribd" href="http://www.scribd.com/doc/9706985/From-Efficient-Market-Theory-to-Behavioral-Finance" style="margin: 12px auto 6px auto; font-family: Helvetica,Arial,Sans-serif; font-style: normal; font-variant: normal; font-weight: normal; font-size: 14px; line-height: normal; font-size-adjust: none; font-stretch: normal; -x-system-font: none; display: block; text-decoration: underline;">From Efficient Market Theory to Behavioral Finance</a> <object codebase="http://download.macromedia.com/pub/shockwave/cabs/flash/swflash.cab#version=9,0,0,0" id="doc_556993949600026" name="doc_556993949600026" classid="clsid:d27cdb6e-ae6d-11cf-96b8-444553540000" align="middle" height="500" width="100%" > <param name="movie" value="http://d1.scribdassets.com/ScribdViewer.swf?document_id=9706985&access_key=key-21b4hh1o53hm8vn775vi&page=1&version=1&viewMode=list"><param name="quality" value="high"><param name="play" value="true"><param name="loop" value="true"><param name="scale" value="showall"><param name="wmode" value="opaque"><param name="devicefont" value="false"><param name="bgcolor" value="#ffffff"><param name="menu" value="true"><param name="allowFullScreen" value="true"><param name="allowScriptAccess" value="always"><param name="salign" value=""><param name="mode" value="list"><embed src="http://d1.scribdassets.com/ScribdViewer.swf?document_id=9706985&access_key=key-21b4hh1o53hm8vn775vi&page=1&version=1&viewMode=list" quality="high" pluginspage="http://www.macromedia.com/go/getflashplayer" play="true" loop="true" scale="showall" wmode="opaque" devicefont="false" bgcolor="#ffffff" name="doc_556993949600026_object" menu="true" allowfullscreen="true" allowscriptaccess="always" salign="" type="application/x-shockwave-flash" align="middle" mode="list" height="500" width="100%"></embed> </object>Doru Dan Lunghttp://www.blogger.com/profile/13972303952456203618noreply@blogger.com0tag:blogger.com,1999:blog-3890826976152707113.post-88195804251808687382009-09-21T01:58:00.000-07:002009-10-27T10:00:44.359-07:00Steve Keen on the economy: On the Edge with Max Keiser<a href="http://www.debtdeflation.com">Steve Keen </a> is one of the few economists who predicted the financial crisis and he is not at all impressed with the government response arguing that texboox economics failed to predict the crisis and are also not going to solve the problems we are facing. His outlook is less than rosy to say the least. <br />
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<object width="425" height="344"><param name="movie" value="http://www.youtube.com/v/VoqaMzBK4pc&hl=de&fs=1&"></param><param name="allowFullScreen" value="true"></param><param name="allowscriptaccess" value="always"></param><embed src="http://www.youtube.com/v/VoqaMzBK4pc&hl=de&fs=1&" type="application/x-shockwave-flash" allowscriptaccess="always" allowfullscreen="true" width="425" height="344"></embed></object>Doru Dan Lunghttp://www.blogger.com/profile/13972303952456203618noreply@blogger.com0tag:blogger.com,1999:blog-3890826976152707113.post-41434301050552216762009-09-20T21:23:00.000-07:002009-09-20T21:23:49.151-07:00Dilbert on the economy<a href="http://dilbert.com/strips/comic/2009-09-20/" title="Dilbert.com"><img src="http://dilbert.com/dyn/str_strip/000000000/00000000/0000000/000000/60000/8000/000/68017/68017.strip.sunday.gif" border="0" alt="Dilbert.com" /></a>Doru Dan Lunghttp://www.blogger.com/profile/13972303952456203618noreply@blogger.com0tag:blogger.com,1999:blog-3890826976152707113.post-80672694072828952172009-09-19T10:21:00.000-07:002009-09-20T09:25:39.124-07:00Hyman Minsky´s Financial Instability HypothesisThere is nothing like a crisis of momentous proportions to focus the mind. The intellectual edifice that was neo-classical economics came crumbling down last fall, something admitted by none other than the guru of efficient self-regulating markets himself, Alan Greenspan. <br />
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Now a well worn phrase has been that "no one could have seen this coming." Well, that is just not true; <a href="http://mpra.ub.uni-muenchen.de/15892/1/MPRA_paper_15892.pdf"> many did.</a> And what set them apart from the cheering herd and its <a href="http://en.wikipedia.org/wiki/Pangloss"> Panglossian </a> view that all is for the best in this best of all worlds is that they did not drink from the neo-classical ideological kool-aid.<br />
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<a href="http://en.wikipedia.org/wiki/Hyman_Minsky"> Hyman Minsky </a> is about the last person asset managers would want to be mentioning in their letters to their clients (I cannot recall where I originally read this, or I would attribute credit). Minsky is perhaps best known for his Financial Instability Hypothesis which is being wonderfully articulated by <a href="http://www.debtdeflation.com/blogs/"> Steve Keen at his debt deflation blog </a>, along with the good folks over at the <a href="http://www.cfeps.org/pubs/"> Center for Full Employment and Price Stability </a> and many others. <br />
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Why the resurgence in interest in Minsky? Well, he explained and expanded ideas set forth by Keynes, who did not believe that markets were efficient and self-regulating. The price of an asset was not always the correct price. <br />
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From Keynes´s article in 1937:<br />
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<i><blockquote>Actually, however, we have, as a rule, only the vaguest idea of any but the most direct consequences of our acts. Sometimes we are not much concerned with their remoter consequences, even tho time and chance may make much of them. But sometimes we are intensely concerned with them, more so, occasionally, than with the immediate consequences.<br />
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Now of all human activities which are affected by this remoter preoccupation, it happens that one of the most important is economic in character, namely. Wealth. The whole object of the accumulation of Wealth is to produce results, or potential results, at a comparatively distant, and sometimes at an indefinitely distant, date. Thus the fact that our knowledge of the future is fluctuating, vague and uncertain, renders Wealth a peculiarly unsuitable subject for the methods of the classical economic theory. This theory might work very well in a world in which economic goods were necessarily consumed within a short interval of their being produced. But it requires, I suggest, considerable amendment if it is to be applied to a world in which the accumulation of wealth for an indefinitely postponed future is an important factor; and the greater the proportionate part played by such wealth-accumulation the more essential does such amendment become.<br />
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By "uncertain" knowledge, let me explain, I do not mean merely to distinguish what is known for certain from what is only probable. The game of roulette is not subject, in this sense, to uncertainty; nor is the prospect of a Victory bond being drawn. Or, again, the expectation of life is only slightly uncertain. Even the weather is only moderately uncertain. The sense in which I am using the term is that in which the prospect of a European war is uncertain, or the price of copper and the rate of interest twenty years hence, or the obsolescence of a new invention, or the position of private wealthowners in the social system in 1970. About these matters there is no scientific basis on which to form any calculable probability whatever. We simply do not know. Nevertheless, the necessity for action and for decision compels us as<br />
practical men to do our best to overlook this awkward fact and to behave exactly as we should if we had behind us a good Benthamite calculation of a series of prospective advantages and disadvantages, each multiplied by its appropriate probability, waiting to he summed.<br />
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How do we manage in such circumstances to behave in a manner which saves our faces as rational, economic men? We have devised for the purpose a variety of techniques, of which much the most important are the three following:<br />
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(1) We assume that the present is a much more serviceable guide to the future than a candid examination of past experience would show it to have been hitherto. In other words we largely ignore the prospect of future changes about the actual character of which we know nothing.<br />
(2) We assume that the existing state of opinion as expressed in prices and the character of existing output is based on a correct summing up of future prospects, so that we can accept it as such unless and until something new and relevant comes into the picture.<br />
(3) Knowing that our own individual judgment is worthless, we endeavor to fall back on the judgment of the rest of the world which is perhaps better informed. That is, we endeavor to conform with the behavior of the majority or the average. The psychology of a society of individuals each of whom is endeavoring to copy the others leads to what we may strictly term a conventional judgment.<br />
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Now a practical theory of the future based on these three principles has certain marked characteristics. In particular, being based on so flimsy a foundation, it is subject to sudden and violent changes. The practice of calmness and immobility, of certainty and security, suddenly breaks down. New fears and hopes will, without warning, take charge of human conduct. The forces of disillusion may suddenly impose a new conventional basis of valuation. All these pretty, polite techniques, made for a well-panelled Board Room and a nicely regulated market, are liable to collapse. At all times the vague panic fears and equally vague and unreasoned hopes are not really lulled, and lie but a little way below the surface.<br />
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Perhaps the reader feels that this general, philosophical disquisition on the behavior of mankind is somewhat remote from the economic theory under discussion. But I think not. Tho this is how we behave in the market place, the theory we devise in the study of how we behave in the market place should not itself submit to market-place idols. I accuse the classical economic theory of being itself one of these pretty, polite techniques which tries to deal with the present by abstracting from the fact that we know very little about the<br />
future.<br />
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I daresay that a classical economist would readily admit this. But, even so, I think he has overlooked the precise nature of the difference which his abstraction makes between theory and practice, and the character of the fallacies into which he is likely to be led.</i></blockquote><br />
Keynes, John Maynard (1937). `The General Theory of Employment`, Quarterly Journal of Economics, 51. cited in Shaw, G.K. (198. The Keynesian Heritage: Volume I. pp.11-13<br />
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Minsky identified three types of finance: hedge, speculative and Ponzi. Once the Ponzi stage is reached, debt is taken on in the belief that asset prices will continue to rise which will enable the debt to be serviced. Needless to say, once asset prices start to fall many will default. This is what we are seeing now. From <a href="http://www.levy.org/pubs/wp_543.pdf"> Wray and Tymoigne </a>:<br />
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<i><blockquote>Minsky created a famous taxonomy of financing profiles undertaken by investing firms: hedge (prospective income flows are expected to cover interest and principle with a safe margin); speculative (near-term income flows will cover only interest, although it is expected that finance costs will fall, that income flows will rise, or that assets can be sold at a higher price later—in which case revenues will be sufficient to cover principle); and Ponzi (near-term receipts are insufficient to cover interest payments so that debt increases because the Ponzi unit borrows to cover interest payments). Over the course of an expansion, financial stances evolve from largely hedge to include ever rising proportions of speculative and even Ponzi positions. Some Ponzi positions are undertaken voluntarily (due, for example, to expectations that debt can be refinanced at much more favorable terms or that large capital gains can be realized from asset price appreciation), some are fraudulent (a “pyramid” scheme is an example, in which a crook dupes everlarger numbers of suckers to provide the funds to pay the earliest participants), and some result from disappointment (revenues are lower than expected or finance costs rise unexpectedly). Attempts to raise leverage and to move to more speculative positions can be frustrated at least temporarily: if results turn out to be more favorable than expected, an investor attempting to engage in speculative finance could remain hedge because incomes realized are greater than were anticipated. This is because as aggregate investment rises, it has a multiplier impact on effective demand that can raise sales beyond what had been expected. Later, Minsky explicitly incorporated the Kaleckian result that in the truncated model, aggregate profits equal investment plus the government’s deficit.7 Thus, in an investment boom, profits would be increasing along with investment, helping to validate expectations and encouraging even more investment. This added strength to his proposition that the fundamental instability in the capitalist economy is upward—toward a speculative frenzy (as investment generates profits), which breeds more investment. </i></blockquote><br />
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Here is an in depth look at the work and ideas of Hyman Mynsky. <br />
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<a title="View Macroeconomics Meets Hyman P. Minsky the Financial Theory of Investment on Scribd" href="http://www.scribd.com/doc/7882315/Macroeconomics-Meets-Hyman-P-Minsky-the-Financial-Theory-of-Investment" style="margin: 12px auto 6px auto; font-family: Helvetica,Arial,Sans-serif; font-style: normal; font-variant: normal; font-weight: normal; font-size: 14px; line-height: normal; font-size-adjust: none; font-stretch: normal; -x-system-font: none; display: block; text-decoration: underline;">Macroeconomics Meets Hyman P. Minsky the Financial Theory of Investment</a> <object codebase="http://download.macromedia.com/pub/shockwave/cabs/flash/swflash.cab#version=9,0,0,0" id="doc_320507257897810" name="doc_320507257897810" classid="clsid:d27cdb6e-ae6d-11cf-96b8-444553540000" align="middle" height="500" width="100%" > <param name="movie" value="http://d.scribd.com/ScribdViewer.swf?document_id=7882315&access_key=key-26te64q63k5y0xety741&page=1&version=1&viewMode="><param name="quality" value="high"><param name="play" value="true"><param name="loop" value="true"><param name="scale" value="showall"><param name="wmode" value="opaque"><param name="devicefont" value="false"><param name="bgcolor" value="#ffffff"><param name="menu" value="true"><param name="allowFullScreen" value="true"><param name="allowScriptAccess" value="always"><param name="salign" value=""><embed src="http://d.scribd.com/ScribdViewer.swf?document_id=7882315&access_key=key-26te64q63k5y0xety741&page=1&version=1&viewMode=" quality="high" pluginspage="http://www.macromedia.com/go/getflashplayer" play="true" loop="true" scale="showall" wmode="opaque" devicefont="false" bgcolor="#ffffff" name="doc_320507257897810_object" menu="true" allowfullscreen="true" allowscriptaccess="always" salign="" type="application/x-shockwave-flash" align="middle" height="500" width="100%"></embed> </object>Doru Dan Lunghttp://www.blogger.com/profile/13972303952456203618noreply@blogger.com0tag:blogger.com,1999:blog-3890826976152707113.post-68881213967229208832009-09-18T09:39:00.000-07:002009-09-18T10:10:14.948-07:00How much should we fear the "L" shaped economic recovery?Paul Willmott has an interesting blog post in which he said that he is <a href="http://www.wilmott.com/blogs/paul/index.cfm/2009/9/1/Hoping-For-One-L-Of-A-Recovery"> hoping for one L of a recovery</a> and I have to say I concur wholeheartedly. <a href="http://en.wikipedia.org/wiki/Fortune-telling#Opposing_theories">The economic prognosticators </a>, after peering into their respective crystal balls or tea leaves, have seen the future and declared it a <a href="http://www.bloomberg.com/apps/news?pid=20601084&sid=axdqhiDcbxCg"> V </a>, <a href="http://finance.yahoo.com/news/Roubini-Ushaped-recovery-is-rb-3221405059.html?x=0&.v=5"> U </a>, W, square root and other exotic shapes. Now almost all observers are in agreement that the dreaded L shape which plagued Japan is to be avoided like the pest. Not so Wilmott, the whiz of quantitative finance. He asks: <i><blockquote>"Have you any experience of Japan in the 1990s? Well I have. And it didn't seem too bad to me. Were there hordes of people begging on the subway? Not that I recall. Was it dangerous roaming the streets for fear of being mugged? No, it seemed safe enough when I was there. Was there high unemployment and general desititution? No. More on this anon.<br />
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Japan in the 1990s was, as it still is, a safe, enjoyable place, with a very high standard of living, and at the cutting edge technology wise. Not the hell hole that economists like to paint. And so I really cannot imagine what Japan would be like now if they'd had a V-shaped recovery. They'd all be communicating by telepathy and travelling via matter transporter I guess.<br />
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To me the important point about the economy is not what letter of the alphabet best represents it, nor its percentage growth. After all, is it really necessary to grow at x percent per annum in order to maintain the feeling of status quo? Like the shark, which supposedly has to keep moving forward in order to stay alive. What sort of life is that? I believe what is most important is the well being of the people, and that's not the same as GDP. It is, however, closely linked to rate of employment. And that's where Japan does remarkably well. That's what governments should focus on, to L with growth!"</i></blockquote><br />
This flies in the face of the conventional economic wisdom which repeats the words growth and consumption in a manner resembling autism, someting duly noted by <a href="http://www.paecon.net/">the post-autistic economics network </a>. <br />
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And for what ultimate purpose do we need this constant economic growth? To continue to live according to <a href="http://en.wikipedia.org/wiki/Victor_Lebow"> Victor Lebow´s encomium of consumption </a>? <i><blockquote>"Our enormously productive economy demands that we make consumption our way of life, that we convert the buying and use of goods into rituals, that we seek our spiritual satisfactions, our ego satisfactions, in consumption. The measure of social status, of social acceptance, of prestige, is now to be found in our consumptive patterns. The very meaning and significance of our lives today expressed in consumptive terms. The greater the pressures upon the individual to conform to safe and accepted social standards, the more does he tend to express his aspirations and his individuality in terms of what he wears, drives, eats- his home, his car, his pattern of food serving, his hobbies.<br />
These commodities and services must be offered to the consumer with a special urgency. We require not only “forced draft” consumption, but “expensive” consumption as well. We need things consumed, burned up, worn out, replaced, and discarded at an ever increasing pace. We need to have people eat, drink, dress, ride, live, with ever more complicated and, therefore, constantly more expensive consumption."</i></blockquote><br />
I would prefer instead to turn to Keynes: <br />
<br />
<i><blockquote>"The full employment policy by means of investment is only one particular application of an intellectual theorem. You can produce the result as well by consuming more or working less. Personally I regard the investment policy as first aid… <b>Less work is the ultimate solution</b>.” </i></blockquote>Much more on this topic can be found here at <a href="http://econospeak.blogspot.com/search/label/hours%20of%20labour"> econospeak.</a><br />
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<!--SocioFluid--><script type="text/javascript" src="http://www.sociofluid.com/sf.php?widget=124320-0001030408090a0b0c0d0e11"></script><noscript><a href="http://www.sociofluid.com/">SocioFluid</a></noscript><!--SocioFluid-->Doru Dan Lunghttp://www.blogger.com/profile/13972303952456203618noreply@blogger.com0tag:blogger.com,1999:blog-3890826976152707113.post-56872257478247143442009-09-15T07:41:00.000-07:002009-09-16T01:02:15.877-07:00J.M.Keynes on The Long Term Problem of Full EmploymentThis has been posted again and again by the good folks at <a href="http://econospeak.blogspot.com/2009/09/long-term-problem-of-full-employment.html">econospeak</a> and I will do my part to try to disseminate the "memo." <br />
<br />
THE LONG-TERM PROBLEM OF FULL EMPLOYMENT<br />
<br />
J.M. Keynes (May 1943):<br />
<br />
<i><blockquote>1. It seems to be agreed today that the maintenance of a satisfactory level of employment depends on keeping total expenditure (consumption plus investment) at the optimum figure, namely that which generates a volume of incomes corresponding to what is earned by all sections of the community when employment is at the desired level.<br />
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2. At any given level and distribution of incomes the social habits and opportunities of the community, influenced (as it may be) by the form and weight of taxation and other deliberate policies and propaganda, lead them to spend a certain proportion of these incomes and to save the balance.<br />
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3. The problem of maintaining full employment is, therefore, the problem of ensuring that the scale of investment should be equal to the savings which may be expected to emerge under the above various influences when employment, and therefore incomes, are at the desired level. Let us call this the indicated level of savings.<br />
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4. After the war there are likely to ensure [sic] three phases-<br />
(i) when the inducement to invest is likely to lead, if unchecked, to a volume of investment greater than the indicated level of savings in the absence of rationing and other controls;<br />
(ii) when the urgently necessary investment is no longer greater than the indicated level of savings in conditions of freedom, but it still capable of being adjusted to the indicated level by deliberately encouraging or expediting less urgent, but nevertheless useful, investment;<br />
(iii) when investment demand is so far saturated that it cannot be brought up to the indicated level of savings without embarking upon wasteful and unnecessary enterprises.<br />
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5. It is impossible to predict with any pretence to accuracy what the indicated level of savings after the war is likely to be in the absence of rationing. We have no experience of a community such as ours in the conditions assumed, with incomes and employment steadily at or near the optimum level over a period and with the distribution of incomes such as it is likely to be after the war. It is, however, safe to say that in the earliest years investment urgently necessary will be in excess of the indicated level of savings. To be a little more precise the former (at the present level of prices) is likely to exceed £m1000 in these years and the indicated level of savings to fall short of this.<br />
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6. In the first phase, therefore, equilibrium will have to be brought about by limiting on the one hand the volume of investment by suitable controls, and on the other hand the volume of consumption by rationing and the like. Otherwise a tendency to inflation will set in. It will probably be desirable to allow consumption priority over investment except to the extent that the latter is exceptionally urgent, and, therefore, to ease off rationing and other restrictions on consumption before easing off controls and licences for investment. It will be a ticklish business to maintain the two sets of controls at precisely the right tension and will require a sensitive touch and the method of trial and error operating through small changes.<br />
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7. Perhaps this first phase might last five years,-but it is anybody's guess. Sooner or later it should be possible to abandon both types of control entirely (apart from controls on foreign lending). We then enter the second phase, which is the main point of emphasis in the paper of the Economic Section. If two-thirds or three-quarters of total investment is carried out or can be influenced by public or semi-public bodies, a long-term programme of a stable character should be capable of reducing the potential range of fluctuation to much narrower limits than formerly, when a smaller volume of investment was under public control and when even this part tended to follow, rather than correct, fluctuations of investment in the strictly private sector of the economy. Moreover the proportion of investment represented by the balance of trade, which is not easily brought under short-term control, may be smaller than before. The main task should be to prevent large fluctuations by a stable long-term programme. If this is successful it should not be too difficult to offset small fluctuations by expediting or retarding some items in this long-term programme.<br />
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8. I do not believe that it is useful to try to predict the scale of this long-term programme. It will depend on the social habits and propensities of a community with a distribution of taxed income significantly different from any of which we have experience, on the nature of the tax system and on the practices and conventions of business. But perhaps one can say that it is unlikely to be less than 7 per cent or more than 20 per cent of the net national income, except under new influences, deliberate or accidental, which are not yet in sight.<br />
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9. It is still more difficult to predict the length of the second, than of the first, phase. But one might expect it to last another five or ten years and to pass insensibly into the third phase.<br />
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10. As the third phase comes into sight; the problem stressed by Sir H. Henderson begins to be pressing. It becomes necessary to encourage wise consumption and discourage saving,-and to absorb some part of the unwanted surplus by increased leisure, more holidays (which are a wonderfully good way of getting rid of money) and shorter hours.<br />
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11. Various means will be open to us with the onset of this golden age. The object will be slowly to change social practices and habits so as to reduce the indicated level of saving. Eventually depreciation funds should be almost sufficient to provide all the gross investment that is required.<br />
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12. Emphasis should be placed primarily on measures to maintain a steady level of employment and thus to prevent fluctuations. If a large fluctuation is allowed to occur, it will be difficult to find adequate offsetting measures of sufficiently quick action. This can only be done through flexible methods by means of trial and error on the basis of experience, which has still to be gained. If the authorities know quite clearly what they are trying to do and are given sufficient powers, reasonable success in the performance of the task should not be too difficult.<br />
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13. I doubt if much is to be hoped from proposals to offset unforeseen short-period fluctuations in investment by stimulating short-period changes in consumption. But I see very great attractions and practical advantage in Mr Meade's proposal for varying social security contributions according to the state of employment.<br />
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14. The second and third phases are still academic. Is it necessary at the present time for Ministers to go beyond the first phase in preparing administrative measures? The main problems of the first phase appear to be covered by various memoranda already in course of preparation. insofar as it is useful to look ahead, I agree with Sir H. Henderson that we should be aiming at a steady long-period trend towards a reduction in the scale of net investment and an increase in the scale of consumption (or, alternatively, of leisure) but the saturation of investment is far from being in sight to-day The immediate task is the establishment and the adjustment of a double system of control and of sensitive, flexible means for gradually relaxing these controls in the light of day-by-day experience<br />
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I would conclude by two quotations from Sir H. Henderson's paper, which seem to me to embody much wisdom.<br />
<br />
"Opponents of Socialism are on strong ground when they argue that the State would be unlikely in practice to run complicated industries more efficiency than they are run at present. Socialists are on strong ground when they argue that reliance on supply and demand, and the forces of market competition, as the mainspring of our economic system, produces most unsatisfactory results. Might we not conceivably find a modus vivendi for the next decade or so in an arrangement under which the State would fill the vacant post of entrepreneur-in-chief, while not interfering with the ownership or management of particular businesses, or rather only doing so on the merits of the case and not at the behests of dogma?<br />
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"We are more likely to succeed in maintaining employment if we do not make this our sole, or even our first, aim. Perhaps employment, like happiness, will come most readily when it is not sought for its own sake. The real problem is to use our productive powers to secure the greatest human welfare. Let us start then with the human welfare, and consider what is most needed to increase it. The needs will change from tune to time, they may shift, for example, from capital goods to consumers' goods and to services. Let us think in terms of organising and directing our productive resources, so as to meet these changing needs, and we shall be less likely to waste them."</i></blockquote><br />
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There is some serious food for thought here, especially that it <i>"becomes necessary to encourage wise consumption and discourage saving,-and to absorb some part of the unwanted surplus by increased leisure, more holidays (which are a wonderfully good way of getting rid of money) and shorter hours."</i> But this train has left the station. We picked increased consumption to leisure and kept on working ourselves to death in a neverending rat´s race to keep up with the Joneses and driven by manufactured wants. What exactly is it about the 8 hour work day that is sacrosanct? Why does the conventional wisdom insist on equating happiness or welfare with consumption? Is consumption really the be all and end all of human existence? What a poor existence that would be. Unfortunately Keynes was all too soon forgotten and those pesky vested interests he mentioned in the closing pages of his General Theory have to date not stopped trying to discredit his ideas, many of which were misunderstood, never even implemented or seriously considered. Now we are left picking up the pieces of our orgy of consumption, excess and greed that began in the 1980´s. We would do well to read Keynes once more.<br />
<a title="View The General Theory of Employment, Interest, and Money on Scribd" href="http://www.scribd.com/doc/11392072/The-General-Theory-of-Employment-Interest-and-Money" style="margin: 12px auto 6px auto; font-family: Helvetica,Arial,Sans-serif; font-style: normal; font-variant: normal; font-weight: normal; font-size: 14px; line-height: normal; font-size-adjust: none; font-stretch: normal; -x-system-font: none; display: block; text-decoration: underline;">The General Theory of Employment, Interest, and Money</a> <object codebase="http://download.macromedia.com/pub/shockwave/cabs/flash/swflash.cab#version=9,0,0,0" id="doc_353511770500907" name="doc_353511770500907" classid="clsid:d27cdb6e-ae6d-11cf-96b8-444553540000" align="middle" height="500" width="100%" > <param name="movie" value="http://d.scribd.com/ScribdViewer.swf?document_id=11392072&access_key=key-1io5aler4plmn5emydo2&page=1&version=1&viewMode="><param name="quality" value="high"><param name="play" value="true"><param name="loop" value="true"><param name="scale" value="showall"><param name="wmode" value="opaque"><param name="devicefont" value="false"><param name="bgcolor" value="#ffffff"><param name="menu" value="true"><param name="allowFullScreen" value="true"><param name="allowScriptAccess" value="always"><param name="salign" value=""><embed src="http://d.scribd.com/ScribdViewer.swf?document_id=11392072&access_key=key-1io5aler4plmn5emydo2&page=1&version=1&viewMode=" quality="high" pluginspage="http://www.macromedia.com/go/getflashplayer" play="true" loop="true" scale="showall" wmode="opaque" devicefont="false" bgcolor="#ffffff" name="doc_353511770500907_object" menu="true" allowfullscreen="true" allowscriptaccess="always" salign="" type="application/x-shockwave-flash" align="middle" height="500" width="100%"></embed> </object><br />
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<!--SocioFluid--><script type="text/javascript" src="http://www.sociofluid.com/sf.php?widget=124320-0001030408090a0b0c0d0e11"></script><noscript><a href="http://www.sociofluid.com/">SocioFluid</a></noscript><!--SocioFluid-->Doru Dan Lunghttp://www.blogger.com/profile/13972303952456203618noreply@blogger.com0tag:blogger.com,1999:blog-3890826976152707113.post-9072183028432978372009-09-09T23:30:00.000-07:002009-09-10T04:54:12.050-07:00Banks make deals with debtors; something is better than nothing<a href="http://www.washingtonpost.com/wp-dyn/content/article/2009/09/09/AR2009090903166.html?hpid=topnews&sub=AR">The Washington Post</a> reports today that many banks have taken to actually lowering the interest rate on credit card debt when someone becomes unable to pay and are also actually forgiving debt in some cases. Keeping in mind that the refusal to pay any further by the debtor in <a href="http://sunbringerblog.blogspot.com/2009/09/debtor-revolt-begins.html">the previous post</a> is probably not an isolated incident, it certainly does make sense to try working with people, thereby getting something instead of nothing. <br /><br /><i><blockquote>As more Americans lose work, many are increasingly struggling to pay their credit card bills, forcing banks to do what they had been loath to do in the past: forgive some of the debt or modify it in the cardholders' favor.<br /><br />Lenders are looking to restructure credit card accounts by lowering interest rates or minimum monthly payments for a specific period of time, waiving fees, or settling the debt by accepting less than what is owed.<br /><br />Consumer advocacy groups, however, have pointed out that credit card firms have increased interest rates and cut lines of credit in the past year in anticipation of a new law limiting their practices.<br /><br />"The card companies are giving with one hand but taking away from the other," said Ed Mierzwinski, consumer program director for U.S. PIRG, a consumer advocacy group. "The problem is the credit card companies are treating consumers randomly. A small number are getting helped. A larger number are being hurt."<br /><br />Some will approach only customers who are delinquent. Some will reach out at the first signs of trouble. Experts said other factors that might be taken into consideration are income, debt loads and payment history.<br /><br />And borrowers can pay a price if they're granted a modification. Forgiven debt could be taxable and can tarnish the borrower's credit report for up to seven years. If the bank reports to credit bureaus that it forced the borrower to close the account, that, too, could damage the credit history, jeopardizing chances for future loans. Finally, if a borrower has a lot of debt, a closed account could hurt a credit score. If the borrower has to give up his card, then a key figure used by lenders to determine creditworthiness -- the ratio of outstanding debt to available credit -- can soar, harming the credit score even further.<br /><br />Also uncertain is how the new credit card law adopted by Congress in May will affect banks' ability to modify loans. The law, parts of which took effect last month, restricts card issuers' latitude to change rates and decide in what order to apply payments when different balances have different rates.</i></blockquote><br /><br />So it seems as if the banks´ strategy is to screw over people by first raising rates up to <b>30%</b>, cutting credit lines, <a href="http://www.nakedcapitalism.com/2009/08/banks-expected-to-collect-38-billion-in.html">charging ourageous overdraft and other fees</a>, and then, if people stop making payments, to do any and everything to salvage just a bit of scraps.<br /><!--SocioFluid--><script type="text/javascript" src="http://www.sociofluid.com/sf.php?widget=124320-0001030408090a0b0c0d0e11"></script><noscript><a href="http://www.sociofluid.com/">SocioFluid</a></noscript><!--SocioFluid-->Doru Dan Lunghttp://www.blogger.com/profile/13972303952456203618noreply@blogger.com0