Predictions Are Hard, Especially About the Future
One thing I never get about trying to score the quality of various prognosticators’ economic predictions is that future macroeconomic trends are not independent of people’s opinions about future macroeconomic trends. If Alan Greenspan had spent 1999-2001 worried something other than what he was worried about, he presumably would have done different things with the interest rates, in which case different things would have happened.
Which isn’t to say that everyone who’s made bad predictions should be excused. Rather, it seems to me that the issue is that nobody should be making firm predictions of this sort. Are we in for a long and painful recession? Well, it depends on what we do. Rather than say that we are or aren’t in for such a thing, much better to talk about under what circumstances we’ll face such a recession. Under current circumstances, the risk seems to me to be that, on the one hand, we’ll implement a neo-Hooverite austerity budget while, on the other hand, insolvent banks take advantage of the fact that Hank Paulson took the taxpayer out of the management loop in the banks we now co-own, to make foolish gambles that have small, bad odds of big payoffs.
Basically, with the taxpayer owning “preferred” shares in the banks, a bank with a very low value is worth nothing at all to its ordinary shareholders and its management. If it sinks even deeper into the mire, that’s no loss to current shareholders and managers. And if it becomes worth slightly more, that’s no gain to current shareholders and managers. But if it becomes worth much more that’s a lot of gain to current shareholders and managers. So bank managers may make a series of risky bets that, since Paulson got us non-voting shares, we can’t stop them from making. This could end up with the banks even deeper under water and with the whole financial landscape plagued by zombie banks that prevent recovery. If those two things happen, we could be in for a very long and painful series of economic problems.
But the point of raising these worries isn’t to predict that they’ll happen. Rather, the point is to urge people to make sure they don’t happen.
26 Responses to “Predictions Are Hard, Especially About the Future”
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October 15th, 2008 at 12:00 pm
It’s also true that at any given time, the behavior of economic and financial things is not independent of economic and financial theories about that behavior, because the people driving a lot of the behavior have studied those theories and have taken them to heart, either as guides for their own behavior or as conjectures about how others will behave.
October 15th, 2008 at 12:01 pm
future macroeconomic trends are not independent of people’s opinions about future macroeconomic trends
Shockingly, that is an idea that has occurred to economists and others in the business of forecasting future economic phenomena. Despite that, it is possible to score the accuracy of alternative models once outcomes happen. Why wouldn’t it be?
October 15th, 2008 at 12:06 pm
Just a theory, but could it be that some who are calling for austerity want to cripple an Obama administration more than anything else?
If President Obama gets to do all the things he wants to do, it’s going to cost money. Iraq withdrawal won’t pay for it all, and there will be deficits. But if he moves ahead and succeeds, then the era of big government will be back with a vengeance. Everybody will be talking about a New New Deal and how government works again after the incompetence of the Bush administration.
Republicans can’t possibly want Obama to succeed. So naturally they will rediscover their abhorrence of deficits.
October 15th, 2008 at 12:09 pm
Do we get a say regarding the boards of the banks we’ve bought into?
October 15th, 2008 at 12:16 pm
Greenspan spent 1999-2001 telling us about the dread prospect of eliminating the federal debt. George W. Bush, John McCain 2008 edition, want tax cuts when there is a surplus or recession, when the economy is strong, weak or in between. Regardless what the situation is it only makes their case stronger.
Circumstances = Pretext with these folks, they don’t honestly present their rationales to the public. The rationales shift their policies as often as rationales for attacking Iraq did. There’s no point in asking for them to elaborate on their suggestions under such circumstances.
October 15th, 2008 at 1:01 pm
In the Financial Times today, Jamie Whyte writes that the British plan to regulate bankers pay is a bad idea. He says that without offering huge money rewards and incentives to bankers who are willing to to create “innovation in incentive schemes” and take other risks we will stifle their creativity.
This has been a common theme in the Financial Times. Others have argued that unless these clever bankers are paid well they will go into other businesses or leave for Dubai.
It seems Mr. Whyte doesn’t realize that the schemes created by these bankers is what has caused the present dreadful conditions in the market. The others don’t seem to realize that perhaps we will be better off if these people do leave since their past performance is so dire.
Mr. Whyte says the government is “clearly incompetent” in this field. We don’t know that. What we do know is that the persons who have brought about the disaster were hardly competent.
October 15th, 2008 at 1:56 pm
Sure. How?
The deal has been signed. The taxpayers own preferred shares. Does Congress get into the business of managing the banks thru regulation?
I don’t actually see any way to affect their behavior.
Unless there are big enough loopholes in the “restrict executive compensation” clause of the deal that risky behavior could have serious personal consequences for affected managers.
October 15th, 2008 at 2:57 pm
We’re buying non-voting shares in bailed out banks? WTF? Who’s the idiot who thought THAT was a good plan?
October 15th, 2008 at 3:33 pm
Paulson, of course. But IIRC, the owners of non-voting shares can still sue for breach of fiduciary duty, and they have the same shareholder rights to examine the company books.
Both rights should be exercised aggressively by a non-Bush executive.
October 15th, 2008 at 5:07 pm
I almost feel sorry for McCain. Here he was, expecting to base his campaign on national security, and he gets blindsided by the worst economic crisis in living memory. I don’t know who will win, but the election will be very close.
October 15th, 2008 at 6:47 pm
Kevin Rudd, Prime Minister of Australia, has just proposed a scheme whereby banks that pay their execs vast sums in readily available cash or shares have to accept higher capital ratios. The riskier the incentives, the higher the regulation.
October 15th, 2008 at 7:30 pm
One of the best discussions of free will I have read. It’s a shame more people can’t think this clearly or at least read this blog.
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