Two days ago the FBI indicted Bernie Madoff, principal of Bernard L. Madoff Investment Securities LLC, on securities fraud. Though the case has yet to run, in the indictment the FBI reported that Madoff confessed that his was “basically a giant Ponzi Scheme” that may have lost some extremely high net worth individuals over US$50 billion.
Madoff’s firm was famous for returning constant positive results, even on a month by month basis, for decades. As Henry Blodget on Yahoo’s Tech Ticker reports below, many Wall Street professionals were incredulous of these results, but invested in his firm anyway–because they thought his returns must be coming from him exploiting his “market maker” role on the Nasdaq to do insider trading.
University of Texas Economics Professor James Galbraith is a son of the great US Institutional economist John Kenneth Galbraith, and a leading non-orthodox economist in his own right. He has developed highly innovative methods to measure economic inequality that are well documented here; he is a strident critic of conventional economics; and he has been as active in the USA as an analyst of and commentator on this financial crisis as I have in Australia. His many interviews on the topic are linked from this site.
Several people have commented on the speech by Glenn Stevens (for international readers, Stevens is the Governor of Australia’s central bank, the Reserve Bank of Australia) yesterday in which he commented, inter alia, that:
“I do not know anyone who predicted this course of events. This should give us cause to reflect on how hard a job it is to make genuinely useful forecasts. What we have seen is truly a ‘tail’ outcome – the kind of outcome that the routine forecasting process never predicts. But it has occurred, it has implications, and so we must reflect on it.”
Ross Gittins finally comes aboard the debt-deflation train, with an article in today’s (December 8 2008) Sydney Morning Herald entitled “It’s not inflation that did us in, it’s the borrowing”. For non-Australian readers, Ross has been a regular economic commentator for Sydney’s leading newspaper for about forty years.
His economic position in the past could be described as predominantly neoclassical, with occasional dashes of Keynesianism, the odd infrequent jibe at the unrealistic assumptions under neoclassical economics, and a socially concerned orientation that was critical of both income inequality and excessive consumerism.
The UK Government has taken the first tentative steps towards a solution to this crisis with its decision today to give stressed borrowers an interest repayment holiday of up to two years (New scheme to help people at risk of repossession).
The scheme is limited in scope to households that suffer “a significant and temporary loss of income as a result of the economic downturn to defer a proportion of the interest payments on their mortgage for up to two years”. It also guarantees banks that the deferred payments will ultimately be made.
Dear Subscribers,
There is some technical glitch affecting the blog at present that delays approval of new posts, and often results in multiple postings from the same post. I know these would be irritating to receive, but they are the fault of either the underlying software (WordPress) or my ISP host, or both.
Once I have time to get to the bottom of this, I will repair it. In the meantime, please accept my apologies for the blog’s tendency to crowd your email inbox with spurious multiple posts.
My main research objective is to develop qualitatively accurate models of the economy’s behaviour. These are not an attempt to reproduce past economic data and make quantitative predictions for the future–which is the main purpose of most econometric work and some neoclassical modellers. The economy itself, and the models I build of it, are complex (and affected by behavioural uncertainty) and it is therefore highly unlikely that quantitative prediction will work.
This may change to some extent if and when more sophisticated models–like those used by meteorologists– are developed (though they will still suffer from the impact of uncertainty).
The Parliamentary Library arranged a debate between myself and Rory Robertson of the Macquarie Group on the financial crisis today. We had a good audience of about 70 Parliament House denizens. You can download the Powerpoint Slides slides for my presentation, and the Vissim model of Minsky’s Financial Instability Hypothesis which was part of the presentation ( Right click and choose “Save As” since this is a text file; then install the viewer, which can load the file and let you run it (I’ve also loaded the EXE file of the viewer onto my site as another way of getting the program). You can make changes too, but they can’t be saved).
If things are really grim, it helps to have an indefatigable nature, and there’s no doubt that RBA Deputy Governor Ric Battellino has that in spades—at least in the speeches he makes at public conferences. Were I being crucified, I’d like to have Ric up there with me, singing “Cheer up Brian!…”, to take my mind off the nails.
But were I still in the Garden of Gethsemane, and actually trying to avoid the Romans (and an extended Pilates session the next day), I think I’d want someone else on lookout duty.
While most of my blog readers like my analysis, the same can’t be said for the economics profession in general, let alone the so called market economists–mainly but not exclusively Chief Economists for banks (I would be curious to find out what their own “internal press” looks like!). This page will record some of the negative press I’ve received as a result–and also comments, such as ex-PM John Howard’s recent comment, that argue this isn’t a major crisis.
It should prove an interesting litmus test over time. If I am wrong, then these commentators can bask in their own “I told you so” moments. And if not…
