Showing posts with label efficiency. Show all posts
Showing posts with label efficiency. Show all posts
12 May 2009
An amazing insight into the Agency and Incentives problem at Banks; Deutsche Bank in this instance
What I have discovered is an ever-developing, very intricate story, with potentially substantial ramifications not only for one specific company's internal corporate policy and potential abuses thereof, but additionally having significant political implications, as well as explaining a lot in terms of recent oddities in terms of Mark-To-Market, mainstream media interactions with sensitive Wall Street clients, and lastly, shedding some much needed light on that most thorniest of recent subjects - the commercial real estate bubble.
First some background. Mr. Moorjani, contrary to what Zero Hedge represented, is still technically an employee of Deutsche Bank Japan, specifically their Commercial Real Estate department, despite being already involved in several years of litigation with the company. We provide his relevant biography compliments of The Huffington Post:
Deepak Moorjani is an employee and shareholder of Deutsche Bank AG. The views expressed herein are his own and do not necessarily represent the views of Deutsche Bank AG. As disclosure, he is presently involved in litigation as a plaintiff and as a defendant with Deutsche Securities Inc, a subsidiary of Deutsche Bank AG.
The reason Mr. Morjani is still employed at DB Japan is that in Japan the concept of at will employment does not exist. His status as an employee would end when either (i) he resigns or (ii) the courts officially recognize a valid termination by the company. So far, neither has happened. Indeed, DLA Piper chimes in on the topic: "Japanese labor laws tend to be very labor friendly, especially when compared to the labor laws from other Asian jurisdictions and countries such as the United States. There is no concept of "at-will" employment in Japan and the employer's right to terminate, transfer and discipline employees is limited by statute, case law and custom."
As some more background, in April 2007 Mr. Moorjani sent a due diligence report to DB's head of global banking, Michael Cohrs, in which he detailed numerous observations from a whistleblower's perspective. The company's retort was the pursue litigation against Mr. Moorjani, which has since escalated over the past two years. I will not focus as much on the details of the lawsuits, however I do provide links to documents which are public domain and have been filed in Japanese court for whoever desires to conduct additional an drill-down on this topic. A full overview of the background of the Moorjani-case can be gleaned from the following set of documents, posted by Mr. Moorjani on his Scribd account.
http://zerohedge.blogspot.com/2009/05/zero-hedge-exclusive-one-whistleblower.html
19 April 2009
Signs of life: The real survivalists take root
By Judy Keen, USA TODAY
When the economy started to squeeze the Wojtowicz family, they gave up vacation cruises, restaurant meals, new clothes and high-tech toys to become 21st-century homesteaders.
Now Patrick Wojtowicz, 36, his wife Melissa, 37, and daughter Gabrielle, 15, raise pigs and chickens for food on 40 acres near Alma, Mich. They're planning a garden and installing a wood furnace. They disconnected the satellite TV and radio, ditched their dishwasher and a big truck and started buying clothes at resale shops.
PHOTO GALLERY: A survivalist family
"As long as we can keep decreasing our bills, we can keep making less money," Patrick says. "We're not saying this is right for everybody, but it's right for us."
Hard times are creating economic survivalists such as the Wojtowicz family who are paring expenses by becoming more self-sufficient.
Reviving "almost lost" skills and preparing for tough days make people feel more in control, says Charlotte Richert, consumer sciences educator for Oklahoma State University's Extension Service in Tulsa County.
Karen Gulliver, MBA program chair at Argosy University in Eagan, Minn., expects the movement to grow as the sour economy forces people to reassess priorities. People are asking, "Do I really want to be 100% vulnerable with no self-sufficiency skills if something happens?" she says.
Some signs of the trend:
•Stockpiling. When the stock market drops, orders surge for freeze-dried food, survival kits and emergency supplies, says Nitro-Pak president Harry Weyandt. One best seller: a $3,375 food reserve that feeds four people for three months.
•Gardening. Sales of vegetable seeds and transplants are up 30% from 2008 at W. Atlee Burpee, the USA's largest seed company. The National Gardening Association says 7 million more households will grow food this year than in 2008 — a 19% rise. A book on building root cellars is the top seller at Johnny's Selected Seeds in Winslow, Maine, supervisor Joann Matuzas says.
•Canning. Jarden Corp. says sales of its Ball and Kerr canning and preserving products are up more than 30% from 2008. Sonya Staffan, owner of The Jam and Jelly Lady commercial cannery in Lebanon, Ohio, is offering twice as many classes this year.
•Sewing. More people are learning to sew so they can mend clothes and make home décor, says Rachel Cohen, spokeswoman for SVP Worldwide, owner of sewing-products makers Singer and Husqvarna Viking.
•Relocating. Steve Saltman, general manager of LandAndFarm.com, a national real estate company, says more customers want to "live simply in a less-expensive place." Jonathan Rawles of SurvivalRealty.com says more people moving to rural areas "are specifically worried about economic and social instability."
Patrick Wojtowicz's family decided to transform their lives when his paycheck began to shrink last year. A truck driver, he was spending more time on the road, paying his own expenses while waiting for loads. He disliked being away from home for weeks at a time and worried about losing his job. Melissa Wojtowicz is self-employed and works from home.
Their dual paychecks allowed them to live comfortably, but they weren't satisfied, Patrick says. "We would basically buy stuff to feel good," he says. "When that stuff stopped filling the voids we had, we started analyzing what it was that we were really missing. We were missing being around each other."
The Wojtowiczes made a list of the things they could give up if Patrick quit his job and they relied on Melissa's income. They already lived in a house on property Patrick inherited from his father a few years ago.
Gabrielle "put up enough resistance to qualify as being a teenager," Patrick says, but soon she was reminding her parents to turn off lights to save electricity.
Steps such as that, and keeping the thermostat set on 63 degrees this winter, cut monthly electric bills from $300 to $150, Patrick says. He hunts deer and turkeys. Instead of buying books and going to movies, they visit the library weekly. For Christmas, they got canning gear so they can preserve the food they grow.
"The earn, spend, earn era has come to an end for us," he says on truenorthfound.blogspot.com, their blog. "The idea of living a fuller, more satisfying life seems simple to us now. ... Money, cash, credit, maybe they don't matter. Maybe, just maybe, it is those things that impede our ability to be truly happy."
Whatever happens to the economy, the Wojtowicz family hopes to remain self-sufficient. Instead of spending their tax refund, as they usually did, they used it to pay down debt. They stopped using credit cards and they're trying to build up savings. "I'm working harder than ever," Patrick says, "but it's more satisfying work and ... it's much easier to sleep at night."
http://www.usatoday.com/news/offbeat/2009-04-14-survivalistsinside14_N.htm
When the economy started to squeeze the Wojtowicz family, they gave up vacation cruises, restaurant meals, new clothes and high-tech toys to become 21st-century homesteaders.
Now Patrick Wojtowicz, 36, his wife Melissa, 37, and daughter Gabrielle, 15, raise pigs and chickens for food on 40 acres near Alma, Mich. They're planning a garden and installing a wood furnace. They disconnected the satellite TV and radio, ditched their dishwasher and a big truck and started buying clothes at resale shops.
PHOTO GALLERY: A survivalist family
"As long as we can keep decreasing our bills, we can keep making less money," Patrick says. "We're not saying this is right for everybody, but it's right for us."
Hard times are creating economic survivalists such as the Wojtowicz family who are paring expenses by becoming more self-sufficient.
Reviving "almost lost" skills and preparing for tough days make people feel more in control, says Charlotte Richert, consumer sciences educator for Oklahoma State University's Extension Service in Tulsa County.
Karen Gulliver, MBA program chair at Argosy University in Eagan, Minn., expects the movement to grow as the sour economy forces people to reassess priorities. People are asking, "Do I really want to be 100% vulnerable with no self-sufficiency skills if something happens?" she says.
Some signs of the trend:
•Stockpiling. When the stock market drops, orders surge for freeze-dried food, survival kits and emergency supplies, says Nitro-Pak president Harry Weyandt. One best seller: a $3,375 food reserve that feeds four people for three months.
•Gardening. Sales of vegetable seeds and transplants are up 30% from 2008 at W. Atlee Burpee, the USA's largest seed company. The National Gardening Association says 7 million more households will grow food this year than in 2008 — a 19% rise. A book on building root cellars is the top seller at Johnny's Selected Seeds in Winslow, Maine, supervisor Joann Matuzas says.
•Canning. Jarden Corp. says sales of its Ball and Kerr canning and preserving products are up more than 30% from 2008. Sonya Staffan, owner of The Jam and Jelly Lady commercial cannery in Lebanon, Ohio, is offering twice as many classes this year.
•Sewing. More people are learning to sew so they can mend clothes and make home décor, says Rachel Cohen, spokeswoman for SVP Worldwide, owner of sewing-products makers Singer and Husqvarna Viking.
•Relocating. Steve Saltman, general manager of LandAndFarm.com, a national real estate company, says more customers want to "live simply in a less-expensive place." Jonathan Rawles of SurvivalRealty.com says more people moving to rural areas "are specifically worried about economic and social instability."
Patrick Wojtowicz's family decided to transform their lives when his paycheck began to shrink last year. A truck driver, he was spending more time on the road, paying his own expenses while waiting for loads. He disliked being away from home for weeks at a time and worried about losing his job. Melissa Wojtowicz is self-employed and works from home.
Their dual paychecks allowed them to live comfortably, but they weren't satisfied, Patrick says. "We would basically buy stuff to feel good," he says. "When that stuff stopped filling the voids we had, we started analyzing what it was that we were really missing. We were missing being around each other."
The Wojtowiczes made a list of the things they could give up if Patrick quit his job and they relied on Melissa's income. They already lived in a house on property Patrick inherited from his father a few years ago.
Gabrielle "put up enough resistance to qualify as being a teenager," Patrick says, but soon she was reminding her parents to turn off lights to save electricity.
Steps such as that, and keeping the thermostat set on 63 degrees this winter, cut monthly electric bills from $300 to $150, Patrick says. He hunts deer and turkeys. Instead of buying books and going to movies, they visit the library weekly. For Christmas, they got canning gear so they can preserve the food they grow.
"The earn, spend, earn era has come to an end for us," he says on truenorthfound.blogspot.com, their blog. "The idea of living a fuller, more satisfying life seems simple to us now. ... Money, cash, credit, maybe they don't matter. Maybe, just maybe, it is those things that impede our ability to be truly happy."
Whatever happens to the economy, the Wojtowicz family hopes to remain self-sufficient. Instead of spending their tax refund, as they usually did, they used it to pay down debt. They stopped using credit cards and they're trying to build up savings. "I'm working harder than ever," Patrick says, "but it's more satisfying work and ... it's much easier to sleep at night."
http://www.usatoday.com/news/offbeat/2009-04-14-survivalistsinside14_N.htm
10 November 2008
Thinking the unthinkable
By Serge Halimi
So, everything was possible after all. Governments could take radical action in the financial sector. The constraints of the European stability pact could be forgotten. Central banks could kowtow to governments and stimulate the economy. Tax havens could be blacklisted. Everything was possible because the banks had to be rescued.
For 30 years, any suggestion that the liberal order might be amended to improve the living conditions of ordinary people, for example, met with the same stock responses: the Berlin wall has gone, didn’t you notice?; that’s all ancient history; globalisation is the order of the day now; the coffers are empty; the markets won’t stand it.
And for 30 years, “reform” went ahead – in reverse. This was the conservative revolution, handing over increasingly substantial and lucrative swathes of national assets to the money men, privatising public services and transforming them into cash machines to “create added value” for shareholders. This was liberalisation, with cuts in wages and social security, forcing tens of millions of people to borrow in order to maintain their purchasing power, and “invest” with brokers and insurance agents in order to cover the cost of education, healthcare and pensions.
Falling wages and social security cutbacks naturally led to financial excesses. Creating risks encouraged people to take steps to protect themselves. Speculation boomed, fuelled by the ideology of market forces, and housing became a prime target for investment. Attitudes changed, people became more selfish, more calculating, less public-spirited. The 2008 crash is not just a technical hitch that can be put right by “learning lessons” or “putting a stop to abuses”. The whole system has broken down.
The would-be repair men are already at work, hoping to restore it, plaster over the cracks, give it a fresh coat of paint, all ready to commit yet another offence against society. The wiseacres who now pretend to be disgusted with the reckless results of liberalism are the very ones who provided all the incentives – budgetary, regulatory, fiscal and ideological – for the ensuing spending spree. They should feel disqualified, but they know an army of politicians and journalists are eager to do a whitewash job.
So we have Gordon Brown, whose first act as Chancellor of the Exchequer was to “liberate” the Bank of England, José Manuel Barroso, president of a European Commission obsessed with “competition”, and Nicolas Sarkozy, who invented the “fiscal shield”, introduced Sunday working and privatised the post office: all, it seems, busy “rebuilding capitalism”.
Their effrontery marks a strange hiatus. What has happened to the left? As for the official left, it just wants to turn the page as quickly as possible on a “crisis” for which it is jointly responsible. This is the left that went along with liberalisation, Democratic president Bill Clinton deregulating the financial sector, François Mitterrand ending index-linked wages, Lionel Jospin and Dominique Strauss-Kahn privatising public services, Gerhard Schröder axing unemployment benefit. So be it. But what about the other left? Will it be content, at a time like this, to dust off its most unambitious projects, the serviceable but terribly timid plans for the Tobin tax, an increase in the minimum wage, a “new Bretton Woods Agreement”, wind farms? In the Keynesian era, the liberal right thought the unthinkable and took advantage of a major crisis to impose it. Friedrich Hayek, intellectual godfather of the movement that spawned Ronald Reagan and Margaret Thatcher, stated the case in 1949: “The main lesson which the true liberal must learn from the success of the socialists is that it was their courage to be Utopian which… is daily making possible what only recently seemed utterly remote.”
So will someone now call free trade into question, free trade which is the very heart of the system (1)? “Utopian”? But everything is possible when it comes to banks…
link
So, everything was possible after all. Governments could take radical action in the financial sector. The constraints of the European stability pact could be forgotten. Central banks could kowtow to governments and stimulate the economy. Tax havens could be blacklisted. Everything was possible because the banks had to be rescued.
For 30 years, any suggestion that the liberal order might be amended to improve the living conditions of ordinary people, for example, met with the same stock responses: the Berlin wall has gone, didn’t you notice?; that’s all ancient history; globalisation is the order of the day now; the coffers are empty; the markets won’t stand it.
And for 30 years, “reform” went ahead – in reverse. This was the conservative revolution, handing over increasingly substantial and lucrative swathes of national assets to the money men, privatising public services and transforming them into cash machines to “create added value” for shareholders. This was liberalisation, with cuts in wages and social security, forcing tens of millions of people to borrow in order to maintain their purchasing power, and “invest” with brokers and insurance agents in order to cover the cost of education, healthcare and pensions.
Falling wages and social security cutbacks naturally led to financial excesses. Creating risks encouraged people to take steps to protect themselves. Speculation boomed, fuelled by the ideology of market forces, and housing became a prime target for investment. Attitudes changed, people became more selfish, more calculating, less public-spirited. The 2008 crash is not just a technical hitch that can be put right by “learning lessons” or “putting a stop to abuses”. The whole system has broken down.
The would-be repair men are already at work, hoping to restore it, plaster over the cracks, give it a fresh coat of paint, all ready to commit yet another offence against society. The wiseacres who now pretend to be disgusted with the reckless results of liberalism are the very ones who provided all the incentives – budgetary, regulatory, fiscal and ideological – for the ensuing spending spree. They should feel disqualified, but they know an army of politicians and journalists are eager to do a whitewash job.
So we have Gordon Brown, whose first act as Chancellor of the Exchequer was to “liberate” the Bank of England, José Manuel Barroso, president of a European Commission obsessed with “competition”, and Nicolas Sarkozy, who invented the “fiscal shield”, introduced Sunday working and privatised the post office: all, it seems, busy “rebuilding capitalism”.
Their effrontery marks a strange hiatus. What has happened to the left? As for the official left, it just wants to turn the page as quickly as possible on a “crisis” for which it is jointly responsible. This is the left that went along with liberalisation, Democratic president Bill Clinton deregulating the financial sector, François Mitterrand ending index-linked wages, Lionel Jospin and Dominique Strauss-Kahn privatising public services, Gerhard Schröder axing unemployment benefit. So be it. But what about the other left? Will it be content, at a time like this, to dust off its most unambitious projects, the serviceable but terribly timid plans for the Tobin tax, an increase in the minimum wage, a “new Bretton Woods Agreement”, wind farms? In the Keynesian era, the liberal right thought the unthinkable and took advantage of a major crisis to impose it. Friedrich Hayek, intellectual godfather of the movement that spawned Ronald Reagan and Margaret Thatcher, stated the case in 1949: “The main lesson which the true liberal must learn from the success of the socialists is that it was their courage to be Utopian which… is daily making possible what only recently seemed utterly remote.”
So will someone now call free trade into question, free trade which is the very heart of the system (1)? “Utopian”? But everything is possible when it comes to banks…
link
29 October 2008
We can't live on moonbeams and air ~ Feil
Or the orthodoxy of Equilibrium theory.
WE OFTEN believe that proverbs are true. "We learn from our mistakes" is an obvious example of a proverb that is demonstrably untrue in the rarified atmosphere of modelling for market economic policy development.
The depression of 1930, the credit squeeze of the early 1960s, the recessions of 1987 and 1991 and the current world economic meltdown all have one thing in common. They happened after a boom that people thought would never end. They resulted from market excesses and levels of consumer spending that ignored fundamental concepts such as living within your means.
The world economy in 2008 is a direct consequence of the view that markets should not be influenced by governments. The market and the consumer had to be free to make their own product development choices and consumer decisions.
Free-market economics has been the cornerstone of the Productivity Commission's philosophy for the past 30 years. At the same time Reserve Bank economists were also captured by free-market ideology. This led to their conclusion that the RBA should not intervene in the market except to manage the level of inflation.
Since then the RBA has had no role in managing Australia's foreign debt, which now stands at $650 billion.
This view followed the assumption that the debt was a consequence of transactions freely entered into by parties behaving rationally. Accordingly, the debt outcome was an efficient transaction decision.
For more than 20 years the RBA has focused its attention on inflation. This has been regarded by the past three governors of the Reserve as its fundamental task because inflation would result in higher prices, reduced consumer demand and a downturn in economic activity.
This is not really a large enough role for it. The Reserve's record of correctly guessing the right time to increase or decrease interest rates is not impressive.
In any case this is not a large enough role for the bank's high-powered staff.
The Reserve employs hundreds of clever economists and econometricians who have written a large number of erudite and well-researched papers on several issues relevant in the Australian economy. The papers are freely available in the publications section of the Reserve's website.
The Productivity Commission also employs hundreds of economists in what has become an almost inquisitorial commitment to free-market economics. They have burnt rent-seeking heretics for 30 years. They will not tolerate backsliders in their own ranks.
Many readers cannot follow the gist of the RBA and commission's research papers because they include substantial econometric analysis to model the outcomes from the data collected by the author.
Econometric modelling is a fundamental analytical tool of all professional economists. It operates on the basis that some assumptions are necessary to permit the modelling to proceed in an ordered and controlled manner.
The assumptions and conclusions should be tested empirically against outcomes and market behaviour.
Rational market behaviour is a key assumption in free-market theory. The theory is that if consumers act rationally then they will determine, through an unfettered price mechanism, the optimal way of allocating scarce resources in the market.
This theoretical assumption is wrong.
In his second edition of The Age of Turbulence, Alan Greenspan includes a new chapter on the current credit crisis. His discussion begins by patronising the reader.
"I feel sufficiently strongly about such modelling that I will pause here to address the issue. If you are not that interested in econometrics you are still welcome to read along or to meet me on the other side when the main discussion resumes on page 522."
The essence of what Greenspan says is on pages 520-521. "The essential problem is that our models - both risk models and economic models - are still too simple to capture the full array of critical variables that govern global economic reality. A model is an abstraction from the real world.
"Business cycle and financial models still do not adequately address the innate human responses that result in swings between euphoria and fear and repeat themselves generation after generation with little evidence of a learning curve.
"But forecasters' concerns should not be whether human response has been rational or irrational, only that it is observable and systematic. This to me is the large missing explanatory variable in both risk management and macroeconomic models."
The level of empirical research into Australian industry and markets by the Reserve and the commission has diminished in the past 30 years. This is because management has decided that they have arrived at some sort of eternal truth regarding the operation of the market and appropriate government policy for the Australian economy.
They justify their position by econometric models that are generally unintelligible to the rest of the population.
The models assume markets should be free of government intervention except in the case of market failure.
They have not measured the costs of such failure and they have not examined the types and levels of consumer irrationality that have persisted for decades in Australia.
For example, is it rational to have a credit card debt that requires an interest payment of 20.74%? Is it rational to waste the amount of money on alcohol, cigarettes, gambling and excessive imported consumer goods that we do?
Has it been rational to rack up deficits created by the excess of imports over exports for the past 20 years? We owe $700 billion and much of that is in US dollars.
Even more frightening is the other debt that banks, financial institutions, multinational subsidiaries and others owe overseas. These debts relate to loans not reflected in our current account data, which only covers merchandise trade and payments of interest, income and net imported services and intellectual property.
The reaction to this from the free-market economists may be to say that Greenspan is wrong. Not so long ago he had an aura of economic infallibility that was close to the papal level for religious encyclicals.
The only alternative to dismissing Greenspan's conclusion is not very palatable but is appropriate. Economists, like those in other professions, have to continue to inquire, learn and change.
They have to get out and test their hypotheses. It is too easy to sit back in the office or university and join the tribe of like-minded people. The free thinkers should not be marginalised and eliminated.
We are in a big hole but we will get out of it. We need to learn the lessons of the world meltdown. Lesson one is that we cannot make moonbeams and fresh air and live on them. The financial sector should confine its activities to storing, counting and helping us invest our money. It is not an engine of growth by itself. We have to make tangible things.
Lesson two is that we must resuscitate honest, intellectual scientific inquiry. It is absolutely necessary to develop a thesis about economic behaviour. It is then absolutely necessary to test empirically the thesis and to retest it as time passes.
Economists stopped that process of fundamental intellectual inquiry. It was much easier to recite the jargon and use the modelling that others had developed. Now is the time for some new thinking. Our best and brightest economists need to get their hands dirty.
Martin Feil is a tax and industry policy consultant and a former director of the Industries Assistance Commission.
WE OFTEN believe that proverbs are true. "We learn from our mistakes" is an obvious example of a proverb that is demonstrably untrue in the rarified atmosphere of modelling for market economic policy development.
The depression of 1930, the credit squeeze of the early 1960s, the recessions of 1987 and 1991 and the current world economic meltdown all have one thing in common. They happened after a boom that people thought would never end. They resulted from market excesses and levels of consumer spending that ignored fundamental concepts such as living within your means.
The world economy in 2008 is a direct consequence of the view that markets should not be influenced by governments. The market and the consumer had to be free to make their own product development choices and consumer decisions.
Free-market economics has been the cornerstone of the Productivity Commission's philosophy for the past 30 years. At the same time Reserve Bank economists were also captured by free-market ideology. This led to their conclusion that the RBA should not intervene in the market except to manage the level of inflation.
Since then the RBA has had no role in managing Australia's foreign debt, which now stands at $650 billion.
This view followed the assumption that the debt was a consequence of transactions freely entered into by parties behaving rationally. Accordingly, the debt outcome was an efficient transaction decision.
For more than 20 years the RBA has focused its attention on inflation. This has been regarded by the past three governors of the Reserve as its fundamental task because inflation would result in higher prices, reduced consumer demand and a downturn in economic activity.
This is not really a large enough role for it. The Reserve's record of correctly guessing the right time to increase or decrease interest rates is not impressive.
In any case this is not a large enough role for the bank's high-powered staff.
The Reserve employs hundreds of clever economists and econometricians who have written a large number of erudite and well-researched papers on several issues relevant in the Australian economy. The papers are freely available in the publications section of the Reserve's website.
The Productivity Commission also employs hundreds of economists in what has become an almost inquisitorial commitment to free-market economics. They have burnt rent-seeking heretics for 30 years. They will not tolerate backsliders in their own ranks.
Many readers cannot follow the gist of the RBA and commission's research papers because they include substantial econometric analysis to model the outcomes from the data collected by the author.
Econometric modelling is a fundamental analytical tool of all professional economists. It operates on the basis that some assumptions are necessary to permit the modelling to proceed in an ordered and controlled manner.
The assumptions and conclusions should be tested empirically against outcomes and market behaviour.
Rational market behaviour is a key assumption in free-market theory. The theory is that if consumers act rationally then they will determine, through an unfettered price mechanism, the optimal way of allocating scarce resources in the market.
This theoretical assumption is wrong.
In his second edition of The Age of Turbulence, Alan Greenspan includes a new chapter on the current credit crisis. His discussion begins by patronising the reader.
"I feel sufficiently strongly about such modelling that I will pause here to address the issue. If you are not that interested in econometrics you are still welcome to read along or to meet me on the other side when the main discussion resumes on page 522."
The essence of what Greenspan says is on pages 520-521. "The essential problem is that our models - both risk models and economic models - are still too simple to capture the full array of critical variables that govern global economic reality. A model is an abstraction from the real world.
"Business cycle and financial models still do not adequately address the innate human responses that result in swings between euphoria and fear and repeat themselves generation after generation with little evidence of a learning curve.
"But forecasters' concerns should not be whether human response has been rational or irrational, only that it is observable and systematic. This to me is the large missing explanatory variable in both risk management and macroeconomic models."
The level of empirical research into Australian industry and markets by the Reserve and the commission has diminished in the past 30 years. This is because management has decided that they have arrived at some sort of eternal truth regarding the operation of the market and appropriate government policy for the Australian economy.
They justify their position by econometric models that are generally unintelligible to the rest of the population.
The models assume markets should be free of government intervention except in the case of market failure.
They have not measured the costs of such failure and they have not examined the types and levels of consumer irrationality that have persisted for decades in Australia.
For example, is it rational to have a credit card debt that requires an interest payment of 20.74%? Is it rational to waste the amount of money on alcohol, cigarettes, gambling and excessive imported consumer goods that we do?
Has it been rational to rack up deficits created by the excess of imports over exports for the past 20 years? We owe $700 billion and much of that is in US dollars.
Even more frightening is the other debt that banks, financial institutions, multinational subsidiaries and others owe overseas. These debts relate to loans not reflected in our current account data, which only covers merchandise trade and payments of interest, income and net imported services and intellectual property.
The reaction to this from the free-market economists may be to say that Greenspan is wrong. Not so long ago he had an aura of economic infallibility that was close to the papal level for religious encyclicals.
The only alternative to dismissing Greenspan's conclusion is not very palatable but is appropriate. Economists, like those in other professions, have to continue to inquire, learn and change.
They have to get out and test their hypotheses. It is too easy to sit back in the office or university and join the tribe of like-minded people. The free thinkers should not be marginalised and eliminated.
We are in a big hole but we will get out of it. We need to learn the lessons of the world meltdown. Lesson one is that we cannot make moonbeams and fresh air and live on them. The financial sector should confine its activities to storing, counting and helping us invest our money. It is not an engine of growth by itself. We have to make tangible things.
Lesson two is that we must resuscitate honest, intellectual scientific inquiry. It is absolutely necessary to develop a thesis about economic behaviour. It is then absolutely necessary to test empirically the thesis and to retest it as time passes.
Economists stopped that process of fundamental intellectual inquiry. It was much easier to recite the jargon and use the modelling that others had developed. Now is the time for some new thinking. Our best and brightest economists need to get their hands dirty.
Martin Feil is a tax and industry policy consultant and a former director of the Industries Assistance Commission.
14 October 2008
The golden age lies ahead
I have to agree with London Banker, a more community minded soceity focused on effiency and local production lies ahead...
I was reminded yesterday that the vast bulk of “wealth” created during the Greenspan/Bernanke bubble years accrued to the very top percentiles of population – with many in the OECD middle class and lower class either stagnating or getting poorer as they mired themselves in unsustainable debt. While opportunity and employment grew strongly in emerging countries, there too the elites gained disproportionately as income inequalities surged. The crash of global financial markets therefore will have disproportionate effect on the elites, impoverishing them to a far greater extent, although it will be felt throughout society as employment, pensions, investments and public services contract.
Once we hit bottom of this downturn, some years hence in all probability, we may experience a democratisation of wealth and opportunity like none seen since the end of World War II when education reforms and unionisation laid the groundwork for the rise of the American and OECD middle classes. Those who have lost economic and political power during the boom years, are likely to organise and retake authority within economic and political systems during the bust years. The collapse of concentrated wealth in Wall Street will spur more collaborative capital formation and investment throughout the economy. This could provide reorientation of economic progress toward more equitable, sustainable and democratic outcomes in coming generations. I hope so, it’s the only bright spot of the week.
London banker
I was reminded yesterday that the vast bulk of “wealth” created during the Greenspan/Bernanke bubble years accrued to the very top percentiles of population – with many in the OECD middle class and lower class either stagnating or getting poorer as they mired themselves in unsustainable debt. While opportunity and employment grew strongly in emerging countries, there too the elites gained disproportionately as income inequalities surged. The crash of global financial markets therefore will have disproportionate effect on the elites, impoverishing them to a far greater extent, although it will be felt throughout society as employment, pensions, investments and public services contract.
Once we hit bottom of this downturn, some years hence in all probability, we may experience a democratisation of wealth and opportunity like none seen since the end of World War II when education reforms and unionisation laid the groundwork for the rise of the American and OECD middle classes. Those who have lost economic and political power during the boom years, are likely to organise and retake authority within economic and political systems during the bust years. The collapse of concentrated wealth in Wall Street will spur more collaborative capital formation and investment throughout the economy. This could provide reorientation of economic progress toward more equitable, sustainable and democratic outcomes in coming generations. I hope so, it’s the only bright spot of the week.
London banker
12 July 2007
Does neo-classical Economics make sense?
July 11, 2007
In Economics Departments, a Growing Will to Debate Fundamental Assumptions
By PATRICIA COHEN
NY Times
For many economists, questioning free-market orthodoxy is akin to expressing a belief in intelligent design at a Darwin convention: Those who doubt the naturally beneficial workings of the market are considered either deluded or crazy.
But in recent months, economists have engaged in an impassioned debate over the way their specialty is taught in universities around the country, and practiced in Washington, questioning the profession's most cherished ideas about not interfering in the economy.
“There is much too much ideology,” said Alan S. Blinder, a professor at Princeton and a former vice chairman of the Federal Reserve Board. Economics, he added, is “often a triumph of theory over fact.” Mr. Blinder helped kindle the discussion by publicly warning in speeches and articles this year that as many as 30 million to 40 million Americans could lose their jobs to lower-paid workers abroad. Just by raising doubts about the unmitigated benefits of free trade, he made headlines and had colleagues rubbing their eyes in astonishment.
“What I've learned is anyone who says anything even obliquely that sounds hostile to free trade is treated as an apostate,” Mr. Blinder said.
And free trade is not the only sacred subject, Mr. Blinder and other like-minded economists say. Most efforts to intervene in the markets — like setting a minimum wage, instituting industrial policy or regulating prices — are viewed askance by mainstream economists, as are analyses that do not rely on mathematical modeling.
That attitude, the critics argue, has seriously harmed the discipline, suppressing original, creative thinking and distorting policy debates. “You lose your ticket as a certified economist if you don't say any kind of price regulation is bad and free trade is good,” said David Card, an economist at the University of California, Berkeley, who has done groundbreaking research on the effect of the minimum wage.
Most economists are still devoted to what is known as the neoclassical model. Philip J. Reny, chairman of the economics department at the University of Chicago — the temple of free-market economics — said the theory and methods were “taught to avoid personal biases and conclusions that aren't found in the data.” Like any science, he said, the field changes course slowly: “It requires evidence, and if evidence is there, it will accumulate and positions will move.” He added, “I personally have a lot of faith in the discipline.”
But as issues like income inequality, free trade and protectionism have become part of the presidential candidates' stump speeches, more thinkers have joined the debate. In addition to Mr. Blinder, other eminent economists like Lawrence H. Summers and the Nobel Prize-winner George A. Akerlof have pointed out what they see as the failings of laissez-faire economics.
“Economists can't pretend that the consensus for free markets and free trade that existed 30 years ago is still here,” said Robert B. Reich, a public policy professor at Berkeley who served in President Bill Clinton's cabinet.
Part of the reason is the growing income inequality and dislocation that global markets and a revolution in communications have helped create. Economists who question the free-market theories “want to speak to the reality of our time,” Mr. Reich said.
Meanwhile, critics have also pointed out the limits of standard cost-benefit accounting to measure items like the cost of inequality or damage to the ecosystem.
The degree to which economists wander from the mainstream varies widely.
Dani Rodrik, an economist at the Kennedy School of Government at Harvard, for instance, said, “I fall into the methods of the mainstream, but not the faith,” which he defines as the belief that more markets and free trade are always good and government regulation is always bad. Thinkers like these may come up with controversial ideas but are hardly marginalized. Other economists, however, go much further, and try to chip away at the field's underlying theoretical foundations. So while Mr. Blinder, Mr. Card and Mr. Rodrik might be considered mere heretics, this second group has earned the label “heterodox.”
Although the meaning of the term is slippery, Frederic S. Lee, an economist at the University of Missouri-Kansas City who edits the Heterodox Economics Newsletter, says it refers to those who reject the neoclassical model, which Milton Friedman helped create, and which Ronald Reagan championed when he took over the White House.
Mr. Reny and others point out that the increasing popularity in the mainstream of behavioral economics, which looks at people's complex psychological reactions to events, has offered a fuller picture of how consumers operate in the marketplace. Still, Mr. Lee criticizes neoclassical economics for maintaining that the market, if left alone, would ultimately find a happy balance. He also takes the discipline to task for relying on abstract theories and mathematical modeling instead of observation and sociological analysis.
In Mr. Lee's view, for example, oil companies — not the natural workings of the market — determine gas prices, and the federal deficit is a meaningless term because the federal government prints money in the first place.
According to his estimates, 5 to 10 percent of America's 15,000 economists are heterodox, which includes an array of professors on the right and the left (post-Keynesians, Marxists, feminists and social economists).
Heterodox economists complain that they are almost completely shut out by their more influential neoclassical colleagues who dominate most American university departments and prestigious peer-reviewed journals that are essential to gaining tenure. There are a few university departments where these iconoclasts are welcome, like Amherst in Massachusetts, the New School in New York and Professor Lee's home, the University of Missouri-Kansas City, but these are exceptions.
The experience of Mr. Card's graduate students suggests how the process can work. Mr. Card is by no means on the fringe, but he said his research on the minimum wage in New Jersey “caused a huge amount of trouble.” He and Alan B. Krueger, an economist at Princeton, found that contrary to what free-market theory predicts, employment actually rose after an increase in the minimum wage.
When Mr. Card's graduate students went on job interviews, he said other economists would ask questions like “What's wrong with your adviser? Has he started drinking?”
This is why Mr. Blinder said he advises graduate students “not to do what I do” when it comes to challenging the standard model.
Criticizing the approach that currently dominates the field, Mr. Blinder said economists must look more closely at the real world instead of modeling it in the lab. “Economics is insufficiently scientific,” he said. “Mathematics may be useful, but mathematics is not scientific. It doesn't generate refutable hypotheses.” In a recent issue of The Nation, Christopher Hayes spurred an energetic debate on the Web by suggesting that some precepts of heterodoxy were being incorporated into the mainstream — even if many heterodox economists were not.
Max B. Sawicky at the Economic Policy Institute in Washington, a nonprofit research organization that is a bulwark of heterodoxy, wrote in a discussion on tpmcafe.com that, “The duty of orthodoxy is clear: deny departmental positions and resources to inferior research programs and purify the top journals of incorrect thinking, all understood as maintaining high standards.”
This is the point where Mr. Rodrik, who has written extensively on the downside of globalization, departs from both Mr. Sawicky and Mr. Blinder. Although he acknowledged that inflexible rules about how one makes an argument and what counts as evidence can create blind spots, but insisted that once those rules were accepted, there was tremendous openness inside the academy.
The problem is outside, where economists are expected to “regurgitate ideas” about the glories of the free market. Most mainstream economists think that voicing any skepticism or doubt provides “ammunition to the barbarians,” he said, and allows narrow-minded people to “hijack any argument to suit their purpose.”
Mr. Rodrik said he used to worry about this until he realized that “on any issue, there are barbarians on both sides,” so there was no point in shading an argument to “suit one set of barbarians over the other.”
“And I've slept a lot better since.”
In Economics Departments, a Growing Will to Debate Fundamental Assumptions
By PATRICIA COHEN
NY Times
For many economists, questioning free-market orthodoxy is akin to expressing a belief in intelligent design at a Darwin convention: Those who doubt the naturally beneficial workings of the market are considered either deluded or crazy.
But in recent months, economists have engaged in an impassioned debate over the way their specialty is taught in universities around the country, and practiced in Washington, questioning the profession's most cherished ideas about not interfering in the economy.
“There is much too much ideology,” said Alan S. Blinder, a professor at Princeton and a former vice chairman of the Federal Reserve Board. Economics, he added, is “often a triumph of theory over fact.” Mr. Blinder helped kindle the discussion by publicly warning in speeches and articles this year that as many as 30 million to 40 million Americans could lose their jobs to lower-paid workers abroad. Just by raising doubts about the unmitigated benefits of free trade, he made headlines and had colleagues rubbing their eyes in astonishment.
“What I've learned is anyone who says anything even obliquely that sounds hostile to free trade is treated as an apostate,” Mr. Blinder said.
And free trade is not the only sacred subject, Mr. Blinder and other like-minded economists say. Most efforts to intervene in the markets — like setting a minimum wage, instituting industrial policy or regulating prices — are viewed askance by mainstream economists, as are analyses that do not rely on mathematical modeling.
That attitude, the critics argue, has seriously harmed the discipline, suppressing original, creative thinking and distorting policy debates. “You lose your ticket as a certified economist if you don't say any kind of price regulation is bad and free trade is good,” said David Card, an economist at the University of California, Berkeley, who has done groundbreaking research on the effect of the minimum wage.
Most economists are still devoted to what is known as the neoclassical model. Philip J. Reny, chairman of the economics department at the University of Chicago — the temple of free-market economics — said the theory and methods were “taught to avoid personal biases and conclusions that aren't found in the data.” Like any science, he said, the field changes course slowly: “It requires evidence, and if evidence is there, it will accumulate and positions will move.” He added, “I personally have a lot of faith in the discipline.”
But as issues like income inequality, free trade and protectionism have become part of the presidential candidates' stump speeches, more thinkers have joined the debate. In addition to Mr. Blinder, other eminent economists like Lawrence H. Summers and the Nobel Prize-winner George A. Akerlof have pointed out what they see as the failings of laissez-faire economics.
“Economists can't pretend that the consensus for free markets and free trade that existed 30 years ago is still here,” said Robert B. Reich, a public policy professor at Berkeley who served in President Bill Clinton's cabinet.
Part of the reason is the growing income inequality and dislocation that global markets and a revolution in communications have helped create. Economists who question the free-market theories “want to speak to the reality of our time,” Mr. Reich said.
Meanwhile, critics have also pointed out the limits of standard cost-benefit accounting to measure items like the cost of inequality or damage to the ecosystem.
The degree to which economists wander from the mainstream varies widely.
Dani Rodrik, an economist at the Kennedy School of Government at Harvard, for instance, said, “I fall into the methods of the mainstream, but not the faith,” which he defines as the belief that more markets and free trade are always good and government regulation is always bad. Thinkers like these may come up with controversial ideas but are hardly marginalized. Other economists, however, go much further, and try to chip away at the field's underlying theoretical foundations. So while Mr. Blinder, Mr. Card and Mr. Rodrik might be considered mere heretics, this second group has earned the label “heterodox.”
Although the meaning of the term is slippery, Frederic S. Lee, an economist at the University of Missouri-Kansas City who edits the Heterodox Economics Newsletter, says it refers to those who reject the neoclassical model, which Milton Friedman helped create, and which Ronald Reagan championed when he took over the White House.
Mr. Reny and others point out that the increasing popularity in the mainstream of behavioral economics, which looks at people's complex psychological reactions to events, has offered a fuller picture of how consumers operate in the marketplace. Still, Mr. Lee criticizes neoclassical economics for maintaining that the market, if left alone, would ultimately find a happy balance. He also takes the discipline to task for relying on abstract theories and mathematical modeling instead of observation and sociological analysis.
In Mr. Lee's view, for example, oil companies — not the natural workings of the market — determine gas prices, and the federal deficit is a meaningless term because the federal government prints money in the first place.
According to his estimates, 5 to 10 percent of America's 15,000 economists are heterodox, which includes an array of professors on the right and the left (post-Keynesians, Marxists, feminists and social economists).
Heterodox economists complain that they are almost completely shut out by their more influential neoclassical colleagues who dominate most American university departments and prestigious peer-reviewed journals that are essential to gaining tenure. There are a few university departments where these iconoclasts are welcome, like Amherst in Massachusetts, the New School in New York and Professor Lee's home, the University of Missouri-Kansas City, but these are exceptions.
The experience of Mr. Card's graduate students suggests how the process can work. Mr. Card is by no means on the fringe, but he said his research on the minimum wage in New Jersey “caused a huge amount of trouble.” He and Alan B. Krueger, an economist at Princeton, found that contrary to what free-market theory predicts, employment actually rose after an increase in the minimum wage.
When Mr. Card's graduate students went on job interviews, he said other economists would ask questions like “What's wrong with your adviser? Has he started drinking?”
This is why Mr. Blinder said he advises graduate students “not to do what I do” when it comes to challenging the standard model.
Criticizing the approach that currently dominates the field, Mr. Blinder said economists must look more closely at the real world instead of modeling it in the lab. “Economics is insufficiently scientific,” he said. “Mathematics may be useful, but mathematics is not scientific. It doesn't generate refutable hypotheses.” In a recent issue of The Nation, Christopher Hayes spurred an energetic debate on the Web by suggesting that some precepts of heterodoxy were being incorporated into the mainstream — even if many heterodox economists were not.
Max B. Sawicky at the Economic Policy Institute in Washington, a nonprofit research organization that is a bulwark of heterodoxy, wrote in a discussion on tpmcafe.com that, “The duty of orthodoxy is clear: deny departmental positions and resources to inferior research programs and purify the top journals of incorrect thinking, all understood as maintaining high standards.”
This is the point where Mr. Rodrik, who has written extensively on the downside of globalization, departs from both Mr. Sawicky and Mr. Blinder. Although he acknowledged that inflexible rules about how one makes an argument and what counts as evidence can create blind spots, but insisted that once those rules were accepted, there was tremendous openness inside the academy.
The problem is outside, where economists are expected to “regurgitate ideas” about the glories of the free market. Most mainstream economists think that voicing any skepticism or doubt provides “ammunition to the barbarians,” he said, and allows narrow-minded people to “hijack any argument to suit their purpose.”
Mr. Rodrik said he used to worry about this until he realized that “on any issue, there are barbarians on both sides,” so there was no point in shading an argument to “suit one set of barbarians over the other.”
“And I've slept a lot better since.”
7 June 2007
China's energy blackhole: Buildings
Buildings account for nearly 30 percent of China’s energy use and are responsible for about a quarter of the nation’s greenhouse gas emissions, according to the latest assessment on China’s energy development. The report, the 2007 China Energy Blue Book, concludes that inefficient buildings and homes waste a tremendous amount of energy each year.
The report notes that nearly 95 percent of existing buildings in China are energy intensive, while more than 80 percent of new buildings built each year—covering some 2 billion square meters in area—fail to meet efficiency rules. China typically spends two or three times as much energy per unit of building area as most industrialized countries.
In 2005, energy required for heating, cooling, ventilating, and lighting China’s 40 billion square meters of buildings accounted for nearly a third of the nation’s total energy consumption, up from roughly 10 percent in the 1970s. Heating and cooling systems alone use nearly 55 percent of this total. As much as 30 percent of the heat generated from conventional heating systems is lost directly, while another 7 percent leaks out through windows opened by residents who are unable to control room temperatures themselves.
Most Chinese buildings are also water inefficient, with sanitary facilities requiring 30 percent more water than those in industrialized countries. Each year, some 20 percent of the water carried via municipal supply networks is lost to leaks, representing almost 10 billion cubic meters of wasted tap water each year, or more than is currently targeted for delivery under China’s massive new south-to-north water transfer project [1].
Office buildings in China use 10 times as much energy as most residential buildings. Government buildings, in particular, waste significant amounts of energy in the absence of consistent government standards on energy use, the report says. Electricity consumed by Chinese government departments and agencies accounts for 5 percent of the nation’s total use.
The report suggests that some 135 million tons of standard coal could be saved each year if all existing and new buildings in China were renovated or designed to meet 50-percent energy savings standards.
Jianqiang Liu is a senior investigative journalist with China Southern Weekend and a visiting scholar at Peking University. Outside contributions to China Watch reflect the views of the author and are not necessarily the views of the Worldwatch Institute.
The report notes that nearly 95 percent of existing buildings in China are energy intensive, while more than 80 percent of new buildings built each year—covering some 2 billion square meters in area—fail to meet efficiency rules. China typically spends two or three times as much energy per unit of building area as most industrialized countries.
In 2005, energy required for heating, cooling, ventilating, and lighting China’s 40 billion square meters of buildings accounted for nearly a third of the nation’s total energy consumption, up from roughly 10 percent in the 1970s. Heating and cooling systems alone use nearly 55 percent of this total. As much as 30 percent of the heat generated from conventional heating systems is lost directly, while another 7 percent leaks out through windows opened by residents who are unable to control room temperatures themselves.
Most Chinese buildings are also water inefficient, with sanitary facilities requiring 30 percent more water than those in industrialized countries. Each year, some 20 percent of the water carried via municipal supply networks is lost to leaks, representing almost 10 billion cubic meters of wasted tap water each year, or more than is currently targeted for delivery under China’s massive new south-to-north water transfer project [1].
Office buildings in China use 10 times as much energy as most residential buildings. Government buildings, in particular, waste significant amounts of energy in the absence of consistent government standards on energy use, the report says. Electricity consumed by Chinese government departments and agencies accounts for 5 percent of the nation’s total use.
The report suggests that some 135 million tons of standard coal could be saved each year if all existing and new buildings in China were renovated or designed to meet 50-percent energy savings standards.
Jianqiang Liu is a senior investigative journalist with China Southern Weekend and a visiting scholar at Peking University. Outside contributions to China Watch reflect the views of the author and are not necessarily the views of the Worldwatch Institute.
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