ZeroHedge’s post on the apparent breakdown of Okun’s “Law” highlights the ongoing tragicomedy of how the science of central economic planning eventually confounds, and then consumes itself. Economics is, after all, a social “science”, an elaborate study of human beings and, most importantly, human interactions. Robert Okun, for his part, merely observed in 1962 that when “output” (whatever statistical measure is en vogue) rises by 3%, the unemployment rate seems to fall by 1%. For some reason, economics assumes that if it is true in the past, it will be true forever, so it was written into the canon of orthodox economic practice. Economics has inferred causation into that relationship, giving it a layer of permanence that may not be warranted. Econometrics has always had this inherent flaw. The science of modern economics makes assumptions based on certain data, and then extrapolates them as if these assumptions will always and everywhere be valid. There is this non-trivial postulation that correlation equals causation. In the case of Okun’s Law, it seems fully logical that there might be causation since it makes intuitive sense – more economic activity should probably lead to more jobs, and vice versa. But to assume a two-variable approach to something that should be far more complex is more than just dangerous, it is unscientific. In fact, Okun’s Law has already been adjusted somewhat, most famously by Ben Bernanke and Andrew Abel in their 1991 book. It was upgraded to a 2% change in output corresponding with a 1% inverse change in unemployment. Apparently with the economic “success” of that period, Okun needed a re-calibration.
Not only is the large bank-GSE cartel preventing millions of Americans from refinancing, but these same cartel players are also thwarting Fed monetary policy and hurting all our economic prospects.
As expected in the aftermath of the concluded S&P ratings action on European sovereigns, the next action is for the rating agency to go ahead and start cutting related banks and insurers, as we noted over the weekend with many of the main European banks anticipated to see one or two notch cuts potentially as soon as today. Which is why the just released report "How Our Rating Actions On Eurozone Sovereigns Could Affect Other Issuers In The Region" will be read by great interest by many to get a sense of when the next shoe is about to drop. Here is what it says on that topic.
And Back To Greek Downgrade Triggers: Moody's Puts AAA Rating Of Most Greek Structured Finance Products On Downgrade ReviewSubmitted by Tyler Durden on 02/19/2010 11:25 -0400
Moody's has just placed $27 billion of AAA-rated bonds backed by Greek loans on review for possible downgrade due to increasing stress in the domestic economy. In essence thiscovers all Greek structured finance and covered bond transactions. Which is odd because Papandreou for the 1,485,384,495.4th time has just said that Greece is not looking for bailouts. Just this once, we will take Moody's word over someone else's.
The presentation below from Ann Rutledge is recommended almost exclusively for credit and structured finance fanatics. It does a very good job of capturing the morphing face of credit products and the (un)packaging of risk, especially over the past two decades.