Why central planning efforts will ultimately backfire - Anyone involved with managing projects, people or systems knows that the only thing that can be planned with absolute certainty is that things will never go 100% according to plan. History is full of examples where governments' best-laid plans failed in spectacular fashion, exacerbating the very problems they were intending to solve. Here are a few of our favorites...
Today, we bring our readers another RealVision excerpt of a reflexive "interview" in which Pal himself is in the hot seat, and goes into detail explaining the indicators he will be watching throughout 2016 that will suggest that a liquidity crisis is imminent.
A libertarian mindset looks at the same results and concludes that if people are fallible, then the absolutely last thing in the world we should do is to give them sovereignty not only over themselves but over other people as well.
It appears that a main preoccupation of economists – the self declared “behavioral economists” prominent among them – is to show how dumb people are as consumers and in assessing risks. Drawn to logical conclusion, this implies that economists, advising benevolent dictators are the solution. In ancient Greece people flocked to oracles and sought guidance.; today, Councils of Economic Advisers, IMF, OECD, Nobel prizes sustain perceptions that "macro- strology" and much else of what economists do is "science."
Americans are increasingly likely to respond positively to a placebo in a drug trial – more so than other nationalities. That’s the upshot of a recently published academic paper that looked at 84 clinical trials for pain medication done between 1990 and 2013. These findings, while bad for drug researchers, does shed some light on our favorite topic: behavioral finance. Trust and confidence makes placebos work, and those attributes also play a role in the societal effectiveness of central banks. That’s what makes the Fed’s eventual move to higher rates so difficult; even if zero interest rates are more placebo than actual medicine, markets believe they work to support asset prices.
The following is extraordinarily creepy and disturbing. It’s also extremely clever, from a jackbooted, fascist thug perspective. When massive censorship itself isn’t enough...
We’re always interested in alternative economic frameworks that can help address the sizable gaps left open by classical approaches. Behavioral economics can fill part of that void, of course, as it describes some basic shortfalls in the assumption that we’re all superhuman welfare maximizing individuals. One step beyond that is evolutionary economics, which borrows from biology rather than psychology to form models about economic behavior.
Every Fed watcher’s favorite word these days is “lift-off”. As if the Fed’s first rate increase, whenever that comes to pass, is the ignition of some giant Saturn V rocket that will inexorably carry interest rates up, up, and away. Please. This is Narrative creation … really, Narrative abuse … of the first order. The next time you read or hear someone use the word “lift-off”, I’m begging you to remember Jim Mora’s classic press conference when he was asked about the Colts’ chances of making the play-offs, because it’s a dead ringer for what Janet Yellen is saying in her heart of hearts.
"We have a problem with this, and that is central bank hubris. They now think that they are omnipotent, because, essentially the government has said we are going to pass over all control of the economy to the central banks, they say to everybody else including financial market participants that “you don’t know, you don’t understand, we have our models and they are right”. And that kind of hubristic approach is when you sow the seeds of your own destruction."
"...The negative divergence of the markets from economic strength and momentum are simply warning signs and do not currently suggest becoming grossly underweight equity exposure. However, warning signs exist for a reason, and much like Wyle E. Coyote chasing the Roadrunner, not paying attention to the signs has tended to have rather severe consequences."
Behavioral economics suggests that a little QE can change human behavior at the margins, but no amount of QE is enough to change human nature at its core. The High Priests of the IMF, the Fed, and the ECB are blind to this because all of modern economic theory – ALL of it – is based on a single bedrock assumption: humans are economic maximizers. Yes, we are maximizers of reward. But we are also minimizers of regret. We seem destined to learn the hard way... once again... that you can’t change human nature by government fiat. But individual investors and allocators can listen and learn from these old good ideas, and that’s how you survive the Golden Age of the Central Banker.
The grand central banking experiment being conducted around the globe right now will not end well. With little more than a lever to ham-fistedly move interest rates, the central planners are trying to keep the world's debt-addiction well-fed while simultaneously kick-starting economic growth and managing the price levels of everything from stocks to housing to fine art. The complexity of the system, the questionable credentials of the decision-makers, and the universe's proclivity towards unintended consequences all combine to give great confidence that things will not play out in the way the Fed and its brethren are counting on.
The distinction between the world's only two types of traders (good vs bad) has been a very vague one. Until now. According to a new study by researchers at Caltech and Virginia Tech that looked at the brain activity and behavior of people trading in experimental markets where price bubbles formed, an early warning signal tips off smart traders when to get out even as the "dumb" ones keep ploughing in and chasing the momentum wave. In such markets, where price far outpaces actual value, it appears that wise traders receive an early warning signal from their brains—a warning that makes them feel uncomfortable and urges them to sell, sell, sell.
Alan Greenspan's Modest Proposal: Fix Broken Economic Models By... Modeling Irrational "Animal Spirits"Submitted by Tyler Durden on 01/02/2014 15:26 -0400
We leave it to everyone's supreme amusement to enjoy the Maestro's full non-mea culpa essay, but we will highlight Greenspan's two most amusing incosistencies contained in the span of a few hundred words. On one hand the former Chairman admits that "The financial crisis [...] represented an existential crisis for economic forecasting. The conventional method of predicting macroeconomic developments -- econometric modeling, the roots of which lie in the work of John Maynard Keynes -- had failed when it was needed most, much to the chagrin of economists." On the other, his solution is to do... more of the same: "if economists better integrate animal spirits into our models, we can improve our forecasting accuracy. Economic models should, when possible, measure and forecast systematic human behavior and the tendencies of corporate culture.... Forecasters may never approach the fantasy success of the Oracle of Delphi or Nostradamus, but we can surely improve on the discouraging performance of the past." So, Greenspan's solution to the failure of linear models is to... model animal spirits, or said otherwise human irrationality. Brilliant.
The financial crisis is surely a touchy subject at the Fed, where the biggest PR challenge is “bubble blowing” criticism from those of us who aren’t on the payroll (directly or indirectly). But Foote, Gerardi and Willen are, of course, on the payroll. They tell us there’s little else that can be said about the origins of the crisis, because any “honest economist” will admit to not understanding bubbles... " Unfortunately, the study of bubbles is too young to provide much guidance on this point. For now, we have no choice but to plead ignorance, and we believe that all honest economists should do the same." This smells to us like a strategy of gently acknowledging criticism (of the Fed’s interest rate policies), while at the same time attempting to neutralize it.