back to article My big reveal as macro-economics analyst: It's a load of COBBLERS

Welcome to the first Worstall at the Weekend, where I get to spout off on whatever I jolly well please: where the aim is to leave something at least potentially gravid with further thought and discussion rather than that sterile deposit one ends up with inside the barber's weekend supplies. Which brings us to the discussion of …

  1. Dave, Portsmouth
    WTF?

    Weekdays Only Please!

    Think the Reg was better when you all took a break for the weekend! As far as I can tell, this "story" is a "look at me, I knew everything, aren't I clever"... published following no particular trigger several years after the event. There's no insight, nothing new, nothing about the future. And it's not even vaguely tech related - so remind me why it's on the Reg?

    Thanks!

    1. Smitty Werbenjaegermanjensen

      And speshly for Dave

      I suggest for Daves that the TL;DR bit comes at the beginning, like some sort of Gen Y Exec Summary.

  2. Anonymous Coward
    Anonymous Coward

    And then there is politics and plain old greed

    Which get in the way of objectivity for economic theories. Say you are in government and you have theory A and B. Both sound reasonable but have conflicting results. Results of theory A favor the wealth of my group, or those that have financed my election, or those that can provide me a comfy and well paid chair somewhere when next election turn me out of government . Results of theory B does not. Guess one which I'm going to apply?

    Basic failure of macro economics is that they fail to model one basic component of human behavior: greed.

    1. Yet Another Anonymous coward Silver badge

      Re: And then there is politics and plain old greed

      Greed is the only bit of macro-economics that works - the problem is that the rest of it is politics.

      Economists make announcements based on ideology - that's why economics is not a science.

      Werner von Bran (not a lefty) and Sergei Korolev (hero of the soviet union) make a rocket engine in the same way, but ask an economist if 2% inflation is bad and it depends on which political religion they are.

      1. SDoradus

        Ah! Room for a tech angle here?

        Korolev and von Braun made a rocket engine the same way? Not bloody likely.

        Actually von Braun (via Rocketdyne) were able to solve the combustion instability problems of large-nozzle engines but Korolev (via Glushko) never did, hence the difference in design philosophy (they used multiple small nozzles, which made for reliability problems).

        On the other hand the Russians pioneered bleeding off some exhaust to power pump turbines (a so called 'staged combustion cycle') which meant another 15%, a sheer efficiency gain.

        So there!

  3. Anonymous Coward
    Anonymous Coward

    "Dean Baker (a lefty but still a good economist)"

    A comment of mock magnanimity which tells us so much more about Tim Worstall than it does about about Dean Baker.

    1. Tim Worstal

      Re: "Dean Baker (a lefty but still a good economist)"

      What it really details is my admiration for his technical skills while deploring his political ones.

      1. The Dude

        Re: "Dean Baker (a lefty but still a good economist)"

        Never take political advice from an economist. It is an occupational hazard for economists that almost all are Utilitarian and utilitarians lean left (some more than others, of course).

  4. arrbee

    The thing about QE being beneficial is that we don't know the whole story on this yet, and we wont until someone has worked out how to undo QE without breaking everything - you may have thought they'd have sorted out an exit strategy before spending 375 billion GBP on this, but apparently not.

    1. David L Webb

      "The thing about QE being beneficial is that we don't know the whole story on this yet, and we wont until someone has worked out how to undo QE without breaking everything "

      Undoing QE would be deflationary and hence counter-productive. There is no reason to undo QE - all they will do is stop any further QE. The idea that they would undo QE was a white lie to keep the markets happy by pretending that QE wasn't equivalent to printing money. Any inflation that QE produced has already been produced and just countered the deflationary effect of the deleveraging of the banks. Although it would be possible to counter any future growth in inflation by undoing QE it would be simpler and more straight forward just to increase interest rates to counter such inflation.

      1. DougS Silver badge

        QE will undo itself

        As bonds mature and aren't replaced the Fed will hold fewer of them. It will take place over a number of years, but most likely the Fed's balance sheet will resemble its pre-2008 state (around $900 bil) sometime between 2020 and 2025.

        1. veti Silver badge

          Re: QE will undo itself

          "As bonds mature and aren't replaced" - good grief, you imagine they're not going to be replaced?

          Bonds are a tax on the young, with the proceeds going to the rich. That's why politicians of all stripes love them - rich people understand the system (which is how they got to be rich...) and hence support it, and young people mostly (a) don't vote anyway, or (b) if they do, vote on unrelated (mostly social) issues.

    2. Omgwtfbbqtime Silver badge
      Holmes

      "you may have thought they'd have sorted out an exit strategy"

      Why would they have done that? Someone else will have been voted in by then, it's their problem.

  5. silent_count

    A wicked problem

    I'm paraphrasing Steve McConnell (author of 'Code Complete') - a "wicked problem" is one whose nature can not be adequately understood prior to attempting to solve the problem.

    This is what I think of whenever I look at macroeconomics. It's easy to be wise afterwards and note all of the subtle clues which could have predicted yesterday's results. Yet trying to choose which of the myriad available clues will foretell tomorrow's outcome, that's closer to voodoo than scientific methodology.

  6. LDS Silver badge

    There are a lot of studies about the US Great Depression - but how many about the German one?

    People blame Germans for their politic, but I believe German look at the crisis from a different perspective of most Anglo-Saxon economist. For the latter, the Mother of All Crisis is the US Great Depression. But Germany had its own. And there, there was no lack of money. There was plenty. Just, its value was close to zero. And it didn't help either.

    And that's one of the perspective German economists and politician look at, when someone asks to just print money to boost the economy.

    Also, they know some EU countries would take advantage of it to increase their debt, not reduce it, worsening the situation.

    I'm not saying they're right - I don't know, but they have it in their DNA. It will take more than some assertion by Anglo-Saxon economists (who fueled the actual crisis) to change their minds.

    1. P. Lee Silver badge

      Re: There are a lot of studies about the US Great Depression - but how many about the German one?

      Indeed, the Germans have an extremely vivid experience of what happens with QE. I thought the UK in the 1970's would be a timely reminder about Keynesian economics, but apparently people have forgotten that too.

      The problem is that there are many who think that money and productivity are the same. There is also a problem in that Western economies are based on this fiction: value = the amount of money someone is willing to pay.

      The problem with that idea is that willingness to pay is inherently unstable because we create markets based on speculation and the idea of ever-increasing productivity/wealth. I think it was Money magazine (I could be wrong there) which talked about an impending UK economic collapse because everyone has the idea that past growth rates must continue. The problem is that the past growth includes industrialisation and urbanisation, the introduction of power distribution, motorised transport, piped water/sewage systems. We've most recently seen globalisation made possible by the introduction of computer networks.

      Now, who thinks that there is anything like these on the horizon to drive equivalent future growth? Is twitter or facebook going to deliver these real benefits? Is SDN going to equal the productivity leap forward of putting global networks in place to start with?

      I'd suggest that we've done the great leap forward. There is little productivity to add when compared to the introduction of industrialisation, computerisation and networks. Everything from now on will be slow. What we considered normal growth in the past will be a bubble if it happens again. It could be a speculation bubble or it could be a fashion bubble, but we are already rather efficient at what we do. That is why IT is in such a bad way - it has little more to offer. Our large companies are so large that they can quickly saturate global demand, but then they struggle with over-capacity and expectations of growth which can't continue. We've seen it recently, with the IT companies hiding the drop in earnings by jacking up prices, "look demand is increasing, we've earnt more!" No, demand is falling and you'll earn less and less as we move from short-term ("we can't change anything so we'll have to pay") through long term ("some things can be changed") to very long term ("everything is changeable").

      We've confused owning knowledge and rights with being productive. What happens when a city goes bankrupt and can no longer spend police time protecting IP rights? What happens when someone decides they'll just write a note on a bit of paper and post it, rather than spending $1000 on a computer, $400 on the OS, another $400 on some software to write a letter? In fact, the a flick of a pen any country can nullify all our "ownership." While intent on promoting profits from "innovation", we have grown fat on artificial scarcity of things people really don't need.to live. It was bad enough in the 1930's when the West produced things, now almost no-one has assets or skills to produce anything. It's all very well for MS to have an Office cash cow, but if things turn out like the 1930's no-one is going to be buying. All that "value" will go up in a puff of smoke, because it isn't really "value," its merely a price. Value is a far more ephemeral concept which varies from person to person and instance to instance, especially when it refers to intangibles.

      I can't see how the future is going to be anything but messy and very unpleasant. All those poor third-world farmers shipping food to the West - they have very little to lose from keeping and eating their own crops. I suspect the escapades in Iraq will seem like a time of relative peace. In case you think it couldn't happen - it has happened before.

      1. Tom 13

        Re: we've done the great leap forward.

        That's the problem with predicting the next great leap forward though; you never recognize it until it is already underway. If you had asked the farmer with to mules what was going to improve his productivity he would have said "two more mules and another farm hand" not a horseless tractor.

        Good points about the 1970s though. Sad how quickly we forget. It wasn't just GB, we did the same things on this side of the pond. Not sure if it was a group think that encompassed the world, or whether it was just a combination of enough big countries doing it all at the same time.

      2. David L Webb

        Re: There are a lot of studies about the US Great Depression - but how many about the German one?

        You seem to be conflating two separate, if linked, events. The Weimar hyper-inflation of 1921 to 1924 and the Depression in Germany of the early 1930s which resulted from the Wall street crash.

        The first was caused by Germany having to repay war debts in hard foreign currency and resorting to printing Marks with which to buy the foreign currency. Unlike the UK today Germany wasn't experiencing any deflationary pressures to counteract this money printing. Hence this resulted in an inflationary spiral as the currency was devalued.

        See http://en.wikipedia.org/wiki/Hyperinflation_in_the_Weimar_Republic

        Germany was then hit hard by the fall out from the Wall Street Crash when America called back loans it had provided in 1924 and 1929 giving Germany just 90 days to start repaying the loans.

        Although linked back to the Weimar inflation since the loans had helped the recovery after 1924 the cause was the Wall street crash and during this period their was no large printing of money. Indeed the German response at the time was to try to cut the budget deficit by increasing taxes and cutting spending and wages - a policy which failed

        see

        http://www.historylearningsite.co.uk/weimar_depression_1929.htm

        and

        http://alphahistory.com/weimargermany/great-depression/

        QE in the UK is very different from the money printing in 1920's Germany. It isn't being used to repay debt in a foreign currency and has been used instead to counter the deflationary pressures of the Banks delevagering.

    2. Johan Bastiaansen

      Re: There are a lot of studies about the US Great Depression - but how many about the German one?

      German economists and politicians are supposed to be very clever and rational people. Now they just go with their gut feeling because "it is in their DNA". I think we have found the problem!

  7. baseh

    The problem as I see it is the lack of true and reliable data

    that is kept secret by interested parties (mainly financial institutions and bodies) so that they may profit from it.

    Not only that, but even misinformation is used to increase their gains.

    So how can an honest economist or person unaffiliated to the big ones calculate and predict economic events if the data they have is missing or even right misleading?

    And by the way, this weekend idea is great - it enables taking a step back and see and think the larger picture and rise to the more rarefied levels above the day-to-day gruel

  8. veti Silver badge

    While not disputing with the main thrust of your argument, there are some nuances I think you've missed.

    One is that "macroeconomists", as a whole, and a fortiori those who get polled for a systematic survey, are under immense (political) pressure not to predict a recession. The reasoning is: a fall in business confidence can cause a recession, predictions of recession cause a fall in business confidence: therefore, for an influential economist to predict a recession may be a self-fulfilling prophecy. Hack journalists don't have that problem - no-one would dream of taking their predictions seriously anyway.

    Another is that "macroeconomics" is not as monolithic a subject as you make out. A macroeconomist can build a model that predicts something like "If you raise interest rates by X over Y months, the impact on unemployment in 12 months' time will be Z". These models are, by nature, hard to build, harder to understand and impossible to test. But the thing to note is, it doesn't say "You must/must not raise interest rates now". It says "IF you do $ACTION, THEN $EFFECT will follow."

    Translating that into a decision (whether or not, and when, and how, to do $ACTION) is a political judgment call, not an economic one. It's like - Google Maps can tell you how to drive from Chichester to Basingstoke, and looking at the route might help you to decide whether you want to bother, but ultimately that decision is still yours - you might decide to go through with it, for reasons even Google can't guess at, despite the downside of ending up in Basingstoke.

  9. russell 6

    Alternative to QE?

    I sometimes wonder if all the money central banks had put into quantitative easing had been distributed on a household basis instead of to the banks we might not be in a better situation today.

    The banks on realizing they would not be bailed out would soon have seen that the only way for the banking sector to survive would be to cancel each others debts, which were based on financial derivatives, money that didn't really exist.

    If the $1.7 trillion given to QE in the USA had instead been divided up between the people of the USA then there would have been enough to give every individual, from baby to pensioner over $5,600. Let’s be more practical and say the money would have been better distributed on a household basis. There are just under 115 million households in the USA, if the money were divided equally then each one would have received about $14,782. Can you imagine the stimulus this would have given to the real economy as people used the money to buy goods, pay off debt or to use as a deposit on a home. The real economy would have recovered from recession rapidly and on a more secure footing.

    My 2p's worth

    1. Chris Miller

      Re: Alternative to QE?

      In the Carboniferous Epoch we were promised abundance for all,

      By robbing selected Peter to pay for collective Paul;

      But, though we had plenty of money, there was nothing our money could buy,

      And the Gods of the Copybook Headings said: "If you don't work you die."

      The Gods of the Copybook Headings - Rudyard Kipling

    2. JJS

      Re: Alternative to QE?

      The government did this in 2008 in the form of stimulus rebate payments. Unmarried people got a check for up to $600, married couples got $1200, plus $300 per child. The result was a spike in household spending when the checks arrived, followed by a drop to the previous level of activity in the following quarters.

      The BLS did a handy survey of how the money was spent. About half went to debt, 30% spent, and 18% saved. It's entirely possible the much larger payments you're talking about would have a bigger impact, but I think that in the end the money would be quickly spent on frivolities and people would go back to being poor.

    3. Tom 13

      Re: Can you imagine the stimulus this would have given

      Zip. Nada. Zero. Zilch.

      Because you first had to create the debt before handing out the dosh. Besides which, that was George W. Bush's policy, only on a grander scale. Oh, you don't remember the $500 rebates? I do. No effect on the economy what so ever. There have actually been studies done on it. What changes the macro economics of the situation is changing the expectations of future earnings. Drive down the tax rates in such a way that people expect they will have more money year after year and productivity and consumption go up. Problem the politicians have is they've been doing the whole rob Peter to pay Paul thing for so long, it doesn't matter what they say or do, everyone is waiting for the other shoe to drop.

      Right now the expectation, particularly here in the US is that real income is going to fall. I'm mere anecdote, but there are lots more like me out there. I've had decent insurance all my life. I've also made mistakes and been paying down debts. I was planning to have my last big one cleared at the end of October. After which I was going to start saving for a new car. $125, twice a month (once each paycheck) into saving until I had a decent down payment, then use that same sum for my monthly payment. Not big money, but enough to buy my first new car since 2001. Last week I got the news about my copay for my new and improved insurance. Its going to cost me an extra $180 ever paycheck. Bye-bye new car.

      1. Robin 12

        Re: Can you imagine the stimulus this would have given

        Your not like everyone else that the banks have suckered in. You don't borrow until you are so deep in debt that you cannot ever see the top of the hill.

        Good for you to try to live in your means. Now you need to go to your employer and get a pay raise.

        I know, good luck in that happening. Ask and you might even get fired.

        1. Tom 13

          Re: Your not like everyone else that the banks have suckered in.

          Not anymore, but once I was. So deep in credit card debt I actually consulted with a lawyer about filing for bankruptcy.

          That was back in the days when it would have been permanently discharged in about 7 years. Instead I took an early withdrawl from a retirement fund, paid off the overdue portion and worked out an agreement to pay over time at a more reasonable rate. It's been 20 years getting to where I'm at now. But at least I have a clear conscience about not stiffing anybody with my debts.

  10. Jesrad

    "as we can also see at present the European Central Bank isn't doing anything of this sort. They actually raised interest rates in the middle of the recession: just like the Fed did in the 1930s. They've not done any QE"

    Have you been in a coma the last few years ? Of course the ECB eased the monetary supply: it may not have directly bought treasury bonds from the EU member states, but it did indirectly have them bought by the european banks using newly created euros - which amounts to the same as what the FED did. The only difference is the FED depresses treasuries' rates (and indirectly all other bonds' rates) while the ECB is boosting bank funds' liquidity.

    In the time the FED's balance sheet grew by 2 trillion dollars, the ECB's grew by almost the same amount: 1.755 trillion dollars. How is that NOT a QE ?

    1. I ain't Spartacus Gold badge

      Because the ECB gave those LTRO loans on a two year basis. They've mostly been repaid, and are all due to be called in around February. Also, the ECB were demanding collateral. This meant that there was a shortage of assets for banks to borrow against or use. Which is why the interbank lending and repo markets are still so crap. That and the breakdown of trust between the banks.

      The ECB efforts are already mostly reversed, which is one reason why Eurozone money supply has been collapsing for the last two years. The problem with the Eurozone response to the crisis, is that not only can they not agree on solutions, but when they eventually do agree a policy, it's always short term and badly compromised. Which is why the Euro was such a rubbish idea. There is no way to achieve consensus, because there is no single dominant political institution. Nor is there an electorate back that up, and force a resolution. Nor is there a single economy, for policy to work on.

      Although funnily enough, interest rates always seem to be about right for Germany, even when that caused serious inflation in Spain and Ireland 10 years ago. And then partly caused depression in Spain and Ireland five years ago.

  11. Gary Bickford

    Complex adaptive systems

    The best working model for an economy is as a complex adaptive system - conceptually and mathematically related to neural networks, ecosystems, and other characteristically 'living' systems. An economy is composed of many, many individual nodes, all receiving information input from some large number of 'neighbors', and sending information output to an equally large number of 'neighbors'. This system is always converging toward a constantly shifting optimum - either a minimum (valley in the error space) or a maximum (peak in the energy space).

    One rather obvious aspect of this approach is recognition that such a system will _always_ adapt quickly to any external input. Taken to the limit, complex adaptive systems start looking like fluid dynamics. That may be going too far for some purposes.

    Nearly all macroeconomics today is a descendant of the basically linear models that were the only possible way to deal with things in the pre-computer past. Every model was basically "ignore these things, and set these other things to a constant, and you will get a nice line between here and there."

    Essentially every top-level economist was trained using these old models. It's time we got economists with PhDs in physics, machine learning, and systems science.

    1. Robin 12

      Re: Complex adaptive systems

      I wonder if computational fluid dynamics would be a better way of looking at economics?

  12. 100113.1537

    Humans = rational?

    "Macroeconomics is a pretty shit guide to the world because we humans are still pretty shit at macroeonomics"

    This hits the nail on the head, because people don't always do what is 'rationale' in any given situation. As populations, we suffer from lack of complete information about the current economic situation - not just because economic indicators are published after the fact but also because our information is filtered through a number of sources who have a vested interest (governments, non-governmental groups, the media) and so we probably couldn't act 'rationally even if we wanted to. As individuals, we also don't behave 'rationally' because we value some things more than we 'should' if we were truly trying to maximize profit or growth. Bottom line, you can't equate economics with physical sciences (such as chemistry) because you cannot ascribe rivers to human behaviour with any level of reproducibility. [Unless you are are Hari Seldon]

  13. The Dude

    Wow! When I studied economics in university, I thought microeconomics was interesting, reasonable and made a certain amount of sense. I thought macroeconomics was voodoo and about as scientific as consulting the oracle at Delphi. I'm happy to see it isn't just me.

    Interestingly, I received high marks even though my papers on macroeconomics were not properly respectful of the material we were being taught. Perhaps my prof secretly agreed with my assessment of the material....

    1. Tom 13

      @The Dude

      Never forget:

      If you line up 4 economists in a room, they will point in 5 different directions.

  14. Anonymous Coward
    Anonymous Coward

    Folk memory seems to matter more than macro theory

    It's funny how cultural memories of the interwar years still colour our responses to today's crisis.

    Germany remembers the wheelbarrowfuls of cash that bought loaves of bread in the Weimar republic, and soon delivered yet darker events still, and so still fears hyperinflation above all things. Their current policy response invites deflation across the Euro area.

    For the United States, in contrast, it's the deflation of the depression that is lodged in the national psyche as their rawest economic trauma: their response courts an inflationary spiral.

    Maybe it will be the other way round in another 80 years.

  15. NomNomNom

    macro means big micro means small

    i learn things

  16. Robin 12

    It is the personal debt load.

    This is an interesting view. I agree with most of it and the comments. One thing that I feel is overlooked so many times and that is the personal debt load. In the past 30-40 years, much of the growth has been through borrowed money at a personal level.

    Easy credit became available in the 70's. I remember trying to get my first credit card that I needed for work, to rent vehicles and get plane tickets for travel. It took me a few tries to do it. Even required a letter from my employer. Then it got to the point of giving credit cards to whomever applied. Heck, in the US, at least, people where getting cards for their pets. Then add in the ever increasing limits. I must still get two or three credit card applications a month.

    Mortgages have shot up in most countries. What once used to be an average 3 to 4 year gross family (single) income for a house is now up to 6 or 7 times but dual income. Much higher debt load.

    "I want it now!" society where people use credit and delayed payments to dig a deeper debt hole. New toys, as in vehicles, TV's, computers, latest cell phone, and the list goes on. Someone making a 6 figure wage and they cannot get by one month of trouble without the banks calling them about missed or late payments.

    University debt loads that are now getting to the same level as a mortgage. The need for a higher education was fed to the public and they took it hook line and sinker. Now that the economy demands university educated individuals for starting positions, the debt that these people start their lives with is massive.

    Then to top it off, wages have not kept up with real inflation. The inflation that includes all the costs that we have to deal with on a daily basis. The ones that the banks and governments prefer to leave out as they push inflation higher than they are comfortable with. Of course this fits "Basic failure of macro economics is that they fail to model one basic component of human behavior: greed."

    The greed of the executives in treating the workers as expenses instead of investments. I still remember the days when you worked for a business and they wanted to train you to improve the operation of the business. Now if you need training, you had better find the funds, time and do it on your own time.

    A few weeks ago, I heard an interview with some executive about why they were not expanding their business. His comments where that people were not spending enough money. Yet, the employees were told to take a pay cut to keep their jobs. Nice circular reasoning.

    As many of the commentators have said, people that have been given cash in the past to help stimulate the economy put it towards their priorities. One is paying down debt and the other is buying food which is becoming a bigger and bigger part of the family expenses.

  17. MyffyW Silver badge

    Interesting article Tim.

    On an only slightly tangential note Steve Keen raises some interesting arguments (in "Debunking Economics") that our current models of economics all currently fail as "the economic theory of the 21st century".

    Keen's analysis of debt led him to predict the global financial crisis sometime before 2008.

  18. Johan Bastiaansen

    You know what is also very complex?

    Predicting the weather. Really. We just don't have the computing power. Just like macro economics.

    However, we have build models that can predict the weather quite accurately.

    So when one weatherperson is able to predict the weather correct 95% of the time and another only 50% of the time, the latter would be quickly without a job.

    Not when your an economist. You can fail in predicting for decades. How is this possible?

    "It is difficult to get a man to understand something, when his salary depends upon his not understanding it!"

  19. kmac499

    Phlogiston quote

    Quite right too, Economics is not science, because it will not reject it's core theories when confronted with reality. Economists simply bemoan lack of adequate data or plead a special case.

    It barely qualifies as a study, along the lines of 18th Century Natural Historians cataloguing everything they find and then looking for traits in the collected data.

    At least Phlogiston had a smack of logic behind it until proved wrong by experiment. I'd actually draw a closer parallel with medieval physicians and the four humors theory, which had no logical backing whatsoever, just some guy with a 'reputation' saying it is so...

    1. I ain't Spartacus Gold badge

      Re: Phlogiston quote

      That's probably unfairly harsh. Sure there's politics and belief involved in people's economic theories. But they are mostly attempts to explain a very complex interplay of events, with no means for experimentation, and absolutely shockingly bad data.

      Germany had a recession last year. Did you know about this? Nope? That's OK, neither did Germany. They had something like -0.1% GDP growth in Oct-Dec 2012 and -0.3% growth in Jan-Mar 2013. But they only worked those figures out in last week's GDP figures. That's over 18 months late to effect government policy.

      The UK have been trying to puzzle out what bit of our huge government deficit is structural and what part is cyclical. So what do we need to cut in order to balance the books at the middle of the economic cycle (say around 2018)? Once the temporary effects of the recession have stopped lowering tax receipts and causing us to spend on extra out-of-work / low pay benefits. To know this, we need to know how deep the recession was (which was adjusted to be -0.5% of GDP worse only 4 months ago). We also need to know if the recession has had an adverse effect on productivity, so the Bank of England can try to predict inflation and wage growth, so they can set interest rates. Productivity has dropped, but is that because companies chose not to sack so many people this time, or because the recession has fundamentally changed the economy, neither r both?

      That's policy, which needs accurate figures. But to form theories, you can look at older data. Except each country measure everything slightly differently. And has a different type of economy, legal system, government, culture. So absolutely nothing is properly comparable. This makes economics hard.

      However, if economics didn't exist, we'd have to invent it. Politicians need a guide on how to run the economy. They've got a limited set of tools at their disposal, crap data that's always months out of date, and some very shaky theories to work with. One rule of thumb is to be very careful about the fundamentalists. People who have faith in one theory tend to ignore the good bits of the other theories. But I think we're a bit better at explaining what things correlate with other things, even if we're a hell of a lot shakier on what the actual causation is.

  20. Anonymous Coward
    Anonymous Coward

    When history is written

    In the years to come, once the financial crisis has receded, as all crises ultimately do, people are going to look at the fall of Lehman Brothers as the turning point that set in motion this lost decade.

    As those who have followed the crisis closely will know, the Fed were giving serious consideration to bailing out Dick Fulds enterprise, but could not act until Monday morning. This left them requiring a guarantor for just a few hours. The only plausible option was for that guarantor to be the Bank of England backed by the full weight of the UK treasury.

    Ultimately Gordon Brown & Ed Balls lost their nerve at the thought of risking billions of pounds of UK tax payers money to stand behind a paper guarantee that would have cost nothing in the real world, and they said no. Things could have been so different – a small financial crisis, an unpleasant bank bailout, but no real recession. A dilutive capital raising would have pushed the fiscal pain back onto the shareholders where it belonged. Certainly we’d not have suffered the economic depression the Labour party gifted to Britain.

    It’s taken 5 long years to get back to where we were economically before the depression, but it could take as little as 1 day in May 2015 to see us dragged right back into the mess, with another tax, borrow, and squander government driven by the very same people that caused the problem. All Labour governments end in deep recession or depression. They’ve never yet handed over power of a functioning economy with falling national debt and a growing tax surplus. How many more data points do people need?

    You may claim that’s politics, not economics, and you’d partly be right. Except that I was born and grew up in a red or dead region, and voted Labour all my life. Until, that is, they got into power and demonstrated admirably that they’d learned nothing from their time in the wilderness. Borrowing and spending £40Bn a year during a boom can only end badly. You don’t need to be an economist to understand that, and calling expenditure investment doesn’t make it so.

    1. I ain't Spartacus Gold badge

      Re: When history is written

      Do you have any evidence for that claim about Gordon Brown?

      My recollection of events was that Barclays were after buying out Lehman Brothers globally, but wanted some quite large treasury guarantees. Which UK government refused. Perfectly understandably, as no-one had a clue what the risk was. So in the end Barclays bought Lehman's US arm afterwards instead - taking much less of the risk.

      The US had already decided to let Lehman go bust, as a salutary lesson. A large mistake as it turned out. I'd imagine that the UK government position was why should we bail out a US bank if they're not going to?

      I remember reading subsequently about this, and noting that the US guys they interviewed were rather bitter about the Barclays deal not going through. And so blamed the Treasury. But I'm not sure if that isn't revisionism - because as I understand it the Barclays deal only came about because the US had already decided not to bail Lehman out.

      Also the crisis would still have been very serious anyway. See the Eurozone for why. The banks were totally fucked, in various ways. They'd been out of control for too long. They'd taken on too much risk, they'd been committing various frauds, the UK interest-rate swaps and PPI misselling bill is going to come to something like £20-£25 billion! Even without Lehmans, the interbank market had frozen up, because all the banks knew all the others were loaded with toxic debt. Because none of them would admit the amounts, none of them could trust each other. The Eurozone was a house of cards, waiting for a recession to destroy it, the Eurozone banking system was also fucked, although for different reasons. They'd taken on some of our and the US's crap assets, but mostly what's destroyed their banking system is cross-border lending into property markets they didn't understand, political interference with local banks (Landesbanks and Cajas in particular) and all the toxic government debt.

      Banking recessions are always going to be awful, because so many companies get finance from banks, so when they're shrinking their balance sheets it's almost impossible to kick-start recovery. Lehmans was the trigger which brought the crisis on, but in the end the banking sectors in the US, UK and Europe were teetering on the edge of collapse, and couldn't be saved without huge infusions of government cash. That meant they'd have to de-leverage, and that meant a massive recession. The rest was just timing.

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