worst global economic crisis since the 1930s

I will have more to say on Tuesday at the LCC Global Perspectives Conference, but it’s not pretty.  The planet’s in trouble.

Both the IMF and World Bank are now forecasting an outright fall in global output in 2009, with a larger contraction than previously forecast in the advanced economies and sharply lower expected growth in the emerging world. I am not sure that even Nouriel Roubini was forecasting an outright fall in global output a year ago. Anything below 2% is generally considered a global recession.

The most visible manifestation of the scale of the downturn continues to come from Asia — with the sharp fall in Asian exports to the world mirroring the sharp fall in global demand. Japan’s exports are now down 50% from last February. The IMF is now forecasting a 6% of GDP contraction in Japan in 2009. That is a contraction of magnitude as emerging economies experience during their crises.

via Brad Setser: Follow the Money » Blog Archive » “This is unquestionably the worst global economic crisis since the 1930s”.

‘Goodbye, homo economicus’: Apparently economics is thin-skinned

Anatole Kaletsky indicts the modern economist profession for the current crisis  in the Prospect:

Was Adam Smith an economist? Was Keynes, Ricardo or Schumpeter? By the standards of today’s academic economists, the answer is no. Smith, Ricardo and Keynes produced no mathematical models. Their work lacked the “analytical rigour” and precise deductive logic demanded by modern economics…. If any of these giants of economics applied for a university job today, they would be rejected. As for their written work, it would not have a chance of acceptance in the Economic Journal or American Economic Review….

….The truth is even worse than this rhetorical question suggests: not only have economists, as a profession, failed to guide the world out of the crisis, they were also primarily responsible for leading us into it.

via Features: ‘Goodbye, homo economicus’ by Anatole Kaletsky | Prospect Magazine April 2009 issue 157.

I have long shared held the views expressed by Kaletsky.  Perhaps that’s why I’m not in some research school and writing in the major Econ journals.  Alas, it appears that economists (the current reigning crop of “leading mainstream academic economists” are rather thin-skinned.  Kaletsky’s critique was generally not well received by the PTB in the profession.  Witness Mark Thoma and more Thoma and yet more Thoma and  Krugman. Methinks they doth protest too much.  They take great offense at the Kaletsky’s supposed attack on “math”, when in fact Kaletsky is attacking the methodology and thinking that limits itself only to math, that will not question assumptions, and then raises the math outcome to the status of “truth”.  Economics left the study of the real economy and real people behind in the era 1950-1980.  It fell into the grip of MMMM ( modern math model mania).

Some of my own thoughts and reactions to Thoma’s reaction to Kaletsky below the fold:

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Calling All Suckers: Big Banks Pull off the Ultimate Bait & Switch

Market manipulation is alive and well on Wall Street.  Calling all suckers:

Submitted by Rolfe Winkler, CFA, publisher of OptionARMageddon

We’re not quite as healthy as we thought we were. Oops. (WSJ)

J.P. Morgan Chase Chief Executive James Dimon said…that March was a little tougher than the first two months of the year….Bank of America…CEO Kenneth Lewis also said that March had been a tougher month for his bank. [Convenient that they decided to dump this information on Friday afternoon, and at the close of a very good week].

Readers may recall that a few weeks ago, those two CEOs—along with Citi’s Vikram Pandit—said the first two months of the year had been very good:

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Grandpa Smith Knows Best

Robert Waldmann reminds us of what that sage Scotsman told us 234 years ago:  (via Angry Bear.)

“All for ourselves and nothing for other people, seems, in every age of the world, to have been the vile maxim of the masters”

Adam Smith (1776) “The Wealth of Nations.” Book III Chapter 4.

Of course as Tom Wolfe observed (and as Wall St itself proudly proclaimed in recent years):

On Wall Street he and a few others – how many? three hundred, four hundred, five hundred? had become precisely that… Masters of the Universe

On the new god: ‘the Market’

Paul Krugman writes:

But it has become increasingly clear over the past few days that top officials in the Obama administration are still in the grip of the market mystique. They still believe in the magic of the financial marketplace and in the prowess of the wizards who perform that magic.

The market mystique didn’t always rule financial policy. America emerged from the Great Depression with a tightly regulated banking system, which made finance a staid, even boring business. Banks attracted depositors by providing convenient branch locations and maybe a free toaster or two; they used the money thus attracted to make loans, and that was that.

via Op-Ed Columnist – The Market Mystique – NYTimes.com.

Although Krugman limits his analysis to finance, the overall theme is similar to one I’ve been working on for a decade.  Namely, that in the last generation, American culture, politics, and business has begun to reify “the market”.  Once “the market” became reified and came to thought of as actual functioning super-being of sorts, it loosed all kinds of havoc.  Instead of “the market” being an abstraction of economists to describe the process by which actual people buy and sell actual stuff, “the market” became the super-being that guided society.  Phrases like “the market says…” and “the market dictates…” and “the demands of the market….” entered our discussions.

Once reifyied, people began to deify the market.   Ethical concerns are abandoned – our god “the market” requires us to behave this way.  People gave into unbridled greed and pursuit of wealth simply for the sake of accumulating wealth.  I’m not talking about the accumulation of wealth that hard-working lower and middle class people do in mid-life as a reasonable way to insure themselves against the uncertainties of the future or old age.  I’m talking about the monstrous accumulation of wealth that says the 3rd and 4th house are necessary, the 10 and 20 and 30 million dollar bonuses are necessary every year even if it means making the subordinate workers work longer hours for less pay.  People absolved themselves of any ethical concerns because their idol, the “market”, made them do it.

Personally I noticed the shift in the mid-1990’s as a business strategic planning consultant.  At that time I became acutely aware that corporate managements were less and less concerned with how to build an ongoing business or strengthen the long-term viability of a production process or even how to improve products/services.  Instead attention increasingly shifted to playing games that would increase the stock price.  Divest this unit, buy those firms, leverage it, spin the PR, and dump it for more $.  The rationale given in the meeting rooms increasingly shifted to “the market is forcing us to do this”.

We have lost our way and raised a new idol.  Unfortunately (and I am ashamed to say it) economists (most mainstream, not all)  have had a large part in this.  We reified our models.  Then, we promoted the concept of the market as some magical force that fixed all things while government was corrupt.  The roots of our current crisis lie here.  We need to right the direction of the ship.