Of Financial Bubbles and Stumbling Blocks

Alfred Nobel has got to be rolling over in his grave.

“Paul Krugman was merely speaking up for those silent individuals whose lives have been mercilessly devastated,” said CNBC’s Martin Bashir, “by the advance of an economic theory that we now know is completely bogus.”

Here’s the best part. Are you sitting down?

“And for that alone, he deserves the Nobel Peace Prize.”

Hah! That’s a knee-slapper, right?

We’re only being semimordant. It wouldn’t surprise us if it actually came true. In fact, it surprises us that it hasn’t yet. After all, last year, the European Union won the prize…

Plus, can’t you just imagine Krugman clearing wall space next to his Nobel Prize in economics?

Recall last week when we covered our favorite Princeton egghead’s latest Times Op-Ed.

He wrote:

“In a sense, the really remarkable thing about ‘Abenomics’ — the sharp turn toward monetary and fiscal stimulus adopted by the government of Prime Minster Shinzo Abe — is that nobody else in the advanced world is trying anything similar. In fact, the Western world seems overtaken by economic defeatism.

“In America, for example, there are still more than four times as many long-term unemployed workers as there were before the economic crisis, but Republicans only seem to want to talk about fake scandals. And to be fair, it has also been a long time since President Obama said anything forceful publicly about job creation.”

It’s like Bashir said, Krugman’s speaking up for the little guy. We don’t doubt the good professor’s intention. And we don’t like it when people are out of work.

We’re just skeptical that Dr. Krugman’s intentions compensate for his poor prescriptions. Also, as we noted last week, the manner in which he does the prescribing rubs us the wrong way.

It probably has something to do with what fellow Nobel laureate F.A. Hayek called the “pretense of knowledge.”

“The failure of the economists to guide policy more successfully” Hayek explained, “is closely connected with their propensity to imitate as closely as possible the procedures of the brilliantly successful physical sciences — an attempt which in our field may lead to outright error.”

In other words, economists have physics envy in the worst way.

Dalton had to model the atom before Avogadro could posit about the molecule. That’s science — knowledge snowballs.

We needed the tech bubble to pop before we could inflate the housing bubble. That’s economics — the principles don’t change… we just keep stumbling over the same blocks.

Don’t take our word for it. Glance at some of the Fedheads’ research papers. Each one is cranked out to better tweak the world around us.

Here’s some light weekend reading for you:

“Dynamic Factor Value-at-Risk for Large, Heteroskedastic Portfolios.”

Not your bag? Here, try this one out:

“On the Discretization of Continuous-Time Filters for Nonstationary Stock and Flow Time Series.”

And how could we forget our favorite: “Jump-Robust Volatility Estimation Using Nearest Neighbor Truncation.”

“Nearest Neighbor Truncation”? We don’t even want to know…

What we would like to know is how the central bank’s men missed the financial crisis despite mountains of this gibberish.

For all of the Fed’s labyrinthine research titles, sophomores prevail.

Case in point: Joseph Gagnon, a former economist at the Fed.

Just yesterday, he explained to the Times why the Fed needs to be bolder: “It’s as if we went to the biggest fire we’ve ever seen and we poured more water on it than we’ve ever poured, and the fire isn’t completely out.”

“Well, we should try more water” he said.

Yeah…or your metaphor is wrong.


Peter Coyne
for The Daily Reckoning

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