Tweet
Re: Timmy Geithner the debt serf: Out of the pan and into the FIRE Economy - Eric Janszen
Lukester, have you ever heard of the old saying: "Talk about the pot calling the kettle black"? But I have to admire your turn of phrase... 
My problem here is twofold; Anatole Kaletsky has very consistently shown a classic economists false idea of what has happened in financial markets. He simply does not understand what has occurred. For example, it is very clear that he had no idea about the leverage going on, right beneath his proverbial nose. As a result he has been flailing about like a man drowning, grasping at straws for want of a solution.
My second reservation relates to my own thinking, that we have been "sold a pup" by the FIRE economy by being led into thinking that we have been operating within a capitalist system. That introduces the thought that, as with a computer, input junk and all you get at the other end is more of the same.
No, I am not depreciating Mandelbrot, but if we base his thinking on the self same misunderstanding about the nature of capitalism, we end up in the same mess; junk in junk out.
In my opinion, the problem is not the nature of the "market" for that is a classic red herring, it is our misunderstanding of the true nature of a feudal mercantile economy.
Chris.
Originally posted by Lukester
View Post
Work of Benoit Mandelbrot acknowledged - by Anatole Kaletsky
"Bit by bit, from a bad seed a big but sickly tree is built with glue, nails, screws and scaffolding. Conventional economics assumes the financial system is a linear, continuous, rational machine and these false assumptions are built into the risk models used by many of the world's banks. As a result, the odds of financial ruin in a free global market economy have been grossly underestimated.
By using such methods there is no limit to how bad a bank's losses can get. Its own bankruptcy is the least of the worries; it will default on its obligations to other banks - and so the losses will spread from one inter-linked financial house to another. Only forceful action by regulators to put a firewall round the sickest firms will stop the crisis spreading. But bad news tends to come in flocks and a bank that weathers one crisis may not survive a second or a third." "
This uncannily precise description of the present crisis above was not written by an economist. While some economists had warned for years about global trade imbalances, escalating house prices, of excessive consumer borrowing, none of them remotely foresaw the truly unprecedented feature of the present crisis: the total breakdown of financial markets caused by the unforced blunders by investors and banks.
Modern economists were inherently incapable of understanding such a problem because they assumed that investors were ‘rational’ and markets ‘efficient’. "These assumptions led inevitably to disaster once they were blown apart. The author who came so close to understanding the true causes of the present crisis was not an economist but a mathematician.
"Benoît Mandelbrot, a towering figure of 20th-century science, who invented fractal geometry and pioneered the mathematical analysis of chaos and complex systems, wrote the above words six years ago in his book The Misbehaviour of Markets. Mandelbrot's ideas found fruitful applications in the study of earthquakes, weather, galaxies and biological systems from the 1960s onward, but the field that originally inspired his ideas turns out, in this very readable book, to have been finance and economics.
Yet 40 years of effort by Mandelbrot to interest economists in the new mathematical methods, which appear to work far better in modelling extreme movements in financial markets than the conventional methods based on statistically ‘normal’ distributions, have been either ridiculed or ignored."
"Bit by bit, from a bad seed a big but sickly tree is built with glue, nails, screws and scaffolding. Conventional economics assumes the financial system is a linear, continuous, rational machine and these false assumptions are built into the risk models used by many of the world's banks. As a result, the odds of financial ruin in a free global market economy have been grossly underestimated.
By using such methods there is no limit to how bad a bank's losses can get. Its own bankruptcy is the least of the worries; it will default on its obligations to other banks - and so the losses will spread from one inter-linked financial house to another. Only forceful action by regulators to put a firewall round the sickest firms will stop the crisis spreading. But bad news tends to come in flocks and a bank that weathers one crisis may not survive a second or a third." "
This uncannily precise description of the present crisis above was not written by an economist. While some economists had warned for years about global trade imbalances, escalating house prices, of excessive consumer borrowing, none of them remotely foresaw the truly unprecedented feature of the present crisis: the total breakdown of financial markets caused by the unforced blunders by investors and banks.
Modern economists were inherently incapable of understanding such a problem because they assumed that investors were ‘rational’ and markets ‘efficient’. "These assumptions led inevitably to disaster once they were blown apart. The author who came so close to understanding the true causes of the present crisis was not an economist but a mathematician.
"Benoît Mandelbrot, a towering figure of 20th-century science, who invented fractal geometry and pioneered the mathematical analysis of chaos and complex systems, wrote the above words six years ago in his book The Misbehaviour of Markets. Mandelbrot's ideas found fruitful applications in the study of earthquakes, weather, galaxies and biological systems from the 1960s onward, but the field that originally inspired his ideas turns out, in this very readable book, to have been finance and economics.
Yet 40 years of effort by Mandelbrot to interest economists in the new mathematical methods, which appear to work far better in modelling extreme movements in financial markets than the conventional methods based on statistically ‘normal’ distributions, have been either ridiculed or ignored."
My second reservation relates to my own thinking, that we have been "sold a pup" by the FIRE economy by being led into thinking that we have been operating within a capitalist system. That introduces the thought that, as with a computer, input junk and all you get at the other end is more of the same.
No, I am not depreciating Mandelbrot, but if we base his thinking on the self same misunderstanding about the nature of capitalism, we end up in the same mess; junk in junk out.
In my opinion, the problem is not the nature of the "market" for that is a classic red herring, it is our misunderstanding of the true nature of a feudal mercantile economy.
Chris.
Comment