Systemic failure of economics methodology

What I’ve been thinking for some time. Economics, particularly the mainstream analyses, has lost it’s way. The failures of the current crisis point out failures of economic advice and policy making. Those policies were based on models & theories that have a flawed methodology. The “positivist” methodology of economics and it’s accompanying physics envy dating from the mid-2oth century has led us astray.

Assumptions do matter and the realism of those assumptions matters, too. Highly recommend reading:
“The Financial crisis and systemic failure of economics” – Mark Thoma.

The Financial Crisis and the Systemic Failure of Academic Economics, by David Colander, Hans Föllmer, Armin Haas, Michael Goldberg, Katarina Juselius, Alan Kirman, and Thomas Lux: [From the conclusion] …”We believe that economics has been trapped in a sub-optimal equilibrium in which much of its research efforts are not directed towards the most prevalent needs of society. Paradoxically self-reinforcing feedback effects within the profession may have led to the dominance of a paradigm that has no solid methodological basis and whose empirical performance is, to say the least, modest. Defining away the most prevalent economic problems of modern economies and failing to communicate the limitations and assumptions of its popular models, the economics profession bears some responsibility for the current crisis. It has failed in its duty to society to provide as much insight as possible into the workings of the economy and in providing warnings about the tools it created. It has also been reluctant to emphasize the limitations of its analysis. We believe that the failure to even envisage the current problems of the worldwide financial system and the inability of standard macro and finance models to provide any insight into ongoing events make a strong case for a major reorientation in these areas and a reconsideration of their basic premises.”

Failing arithmetic

The furor over AIG bonuses, while justified and right, is further evidence that the US media, public, and politicians have failed their math and arithmetic.  The REAL story should be the $140 Billion in AIG bailout money paid to counterparties like Goldman Sachs and Deutsche Bank.  Instead we get the outrage over 0.1% of that amount.

How did banking get so screwed up?

One of the best articles I’ve found on how the banking industry & Wall St got so screwed up that they could take down the world’s economy. It’s very long, but an easy and engaging read – you don’t have to be an economist to understand it.  Warning to the sensitive: it’s from Rolling Stone, so some of language is a bit salty.  Check it out here at: The Big Takeover.

Wall St and Uncle Sam

Wall Street on the Tundra | vanityfair.com

Excellent, though long, article on the current economic crisis and Iceland.  Iceland is a small country that joined the globalized finance and banking bubble in a big way in the last 10 years.  The credit crunch and US housing price declines of 2007-09 have brutally punished this small northern Atlantic country.

Read all about it here at Wall Street on The Tundra from Vanity Fair. Here’s their intro.

Iceland’s de facto bankruptcy—its currency (the krona) is kaput, its debt is 850 percent of G.D.P., its people are hoarding food and cash and blowing up their new Range Rovers for the insurance—resulted from a stunning collective madness. What led a tiny fishing nation, population 300,000, to decide, around 2003, to re-invent itself as a global financial power? In Reykjavík, where men are men, and the women seem to have completely given up on them, the author follows the peculiarly Icelandic logic behind the meltdown.