Why Listen to Economists That Didnt See The Crash Coming?

dixiefly

The following is a quote from Jim Power from Friend's First in the Quarterly Economic Outlook of July 2008 when things had started to deteriorate in our economy.

The Irish economy is not returning to the dark days of the 1980s. The fundamentals of the economy today are much stronger than in the past. Employment is still at record levels, Government debt levels are very low and the economy now has a much stronger base of wealth than in the past. The key vulnerability is that excessive public sector debt in the 1980s has been replaced with excessive personal sector debt today.

https://www.friendsfirst.ie/artman/uploads/quarterly_economic_outlook.pdf

Jim Power is still coming out on the radio giving his opinions on our economic prospects. There are others like him that were still talking up the economy when it was obvious to even people like me that things were going pear shaped.

My question is: why are the radio stations etc. persisting with these guys? Surely their opinions are totally discredited?

ei.sdraob

My question is: why are the radio stations etc. persisting with these guys? Surely their opinions are totally discredited?

same reasons Bertie told a few of them to go commit suicide

either wishful thinking
or planned asset bubble pumping

by the government, media and some economists

mind you the independent ones were spot on about alot of things, its the ones who are tied to banks (notice how that pdf is on friendsfirst site, who u think pays his wage?) or have own books to sell etc that i dont trust much


to tar all economists with same brush is wrong, the likes of Morgan Kelly have proven to be correct

tho one thing i dont understand, since when is science about etrapolating and predicting the future? this applies to both economic "prophets" and current global warming predictions, if the data coming into the models is wrong or incomplete so will the resulting "prediction"

View

It depends on which economists you are talking about.

Bodies such as the OECD spent most of the last decade calling for the introduction of a property based tax system like is used in the overwhelming majority of other countries.

That would have meant that the cost of property ownership would have gone up - making it a less attractive investment. Instead, government policies had tax breaks which reduced the cost of property ownership (as they allowed people to reduce their income tax bills). These tax breaks made property an attractive investment, thus artifically inflating demand for it.

Sand

Theres the ex Ulster Bank hired gun, Pat McArdle who was also found to be a little overly optimistic on the economys prospects back in the day.

Too high expectations cloud strong growth June 2007

There is a feeling abroad that the economy is in the doldrums. This view has little enough basis in reality .... This caused house price inflation to
slow, in turn, generating some wild speculation of a collapse in house prices.

And theres more, oh theres so much more.

Myth of credit-fuelled spending splurge is hard to buy into May 06

Increasingly, we are regaled by leading columnists and “economic” commentators, about the imminent perils and dangers of our credit-fuelled consumer boom. Anyone who cares to study the monthly credit statistics will recognise this for what it is – a modern day media myth.

So what was his reward for such foresight and insightful commentary? A gig with the Irish Times as their economics commentator in chief. Where, surprise surprise, he reckons everything is on the up, NAMA is going to work, and everything is under control. Well, I am reassured.

Probably the most disturbing thing is that these economists, who were hired by the banks to relay unrelentingly positive spin to fuel the boom, were given platforms in the media as if they were independant commentators.

As McArdle sneers about "economic" commentators in the above, it is worth remembering that many economists did cite the dangers facing the Irish economy but they were ignored by policy makers and drowned out by the likes of McArdle.

johnnyskeleton

Rather than say that the likes of Jim Power, Austin Hughes etc are discredited and wrong for all eternity because they failed to predict the crash, I would prefer if people instead required a higher standard of analysis from professional economists and were prepared to look behind what they say.

So as a response to the Jim Power report which basically says "everything is fine" we should neither dismiss it out of hand (because he was wrong in the past) but nor should we take it on trust that he's right.

By the same token, we shouldn't believe Morgan Kelly, David McWilliams etc blindly because they did predict the crash. Instead, we should hold them all up to scrutiny.

Taxipete29

Ecomomics is far from an exact science and you will have as many economists telling you one thing as you do telling you the exact opposite. The fact is that an economist is no more likely to be correct than a well educated, well informed lay person.

Taking predictions or lack thereof in isolation when deciding the credibility of an economist is wrong. Most economists genuinely believe in what they are saying. Its just there is no way to prove how credible it is until its too late.

Sand

I think there are two breeds of economists - You have the guys hired by organisations to dress up press releases that suit their employers agenda, and you have independant analysis offered by others not hired to deliver good news.

The former can be ignored, as they have been told what the conclusion should be and are simply looking for evidence to support it. The latter arent right by default - I think the quote is that economists dont make predictions because they know the future, its because they are asked to. If those predictions are based on a sound grasp of the evidence and a well argued case then they deserve to be listened to by policy makers. Otherwise not.

The only disturbing thing is that its the former, press release type of economist that has dominated the media and played a big role in shaping peoples understanding of the economic prospects - they may even have convinced government, given its clear the Dept of Finance and various TDs are no more sophisticated than the man on the street.

As far as Jim Power goes, the OP is a little harsh: Power has been honest enough to admit that he faced constant interference in his work as an economist at Bank of Ireland and got a dressing down from his bosses for daring to opinion that "social partnership was becoming a mere vehicle for public sector unions" [Correct] and he got the heave ho the day after he told the House of Lords that he believed the Irish government could not manage an economy within a currency union [Correct]. So got to give him credit for that bit of honesty and prophetic visions. However, it underlines why you cant trust any economist representing a major economic actor like the banks.

Riskymove

Sand wrote: »

I think there are two breeds of economists - You have the guys hired by organisations to dress up press releases that suit their employers agenda, and you have independant analysis offered by others not hired to deliver good news.

thats it really

Jim Power and his ilk are employed by financial oprganisations and will spin events to suit their needs, they are not looking out for us

A lecturer once said that these guys report to the Markleting side of things in their institutions.

P. Breathnach

It would be nice to think of econometrics and economic forecasting as straightforward -- that it is all about data and processing the variables properly, something like calculating the stresses on a bridge. But it ain't. It's more like weather forecasting, with more variables in play than we can compute, even than we can recognise, and with new events occurring all the time.

So what is an economist to do? The usual response is to attempt to forecast using a subset of the relevant data, and also using judgement. That's like weather forecasting without satellite data and the latest generation of powerful computers: the reliability is reduced somewhat. Whether the reduction in reliability matters depends on the use to which the prediction is to be put.

And that is where we might have a problem with some economists who enter the popular domain: they do not acknowledge that the forecasts they are making are of limited reliability; often they do not state their assumptions, which might be subject to contest; their conclusions often serve to support whatever cause is dear to their hearts or their pockets.

But it is not always dishonest. These guys usually convince themselves. They might be wrong, but they believe that they are right.

In considering a proposition in physics, I would not need to ask what values a physicist has; in considering a proposition in economics, I would be foolish not to consider the values of the proponent.

jmayo

View wrote: »

It depends on which economists you are talking about.

Bodies such as the OECD spent most of the last decade calling for the introduction of a property based tax system like is used in the overwhelming majority of other countries.

That would have meant that the cost of property ownership would have gone up - making it a less attractive investment. Instead, government policies had tax breaks which reduced the cost of property ownership (as they allowed people to reduce their income tax bills). These tax breaks made property an attractive investment, thus artifically inflating demand for it.

Ah but the property party were in power and that was never going to happen.
Anyway the vested interests : builders, developers, bankers, EAs, auctioneers, lawyers, funrishing store owners, etc are very powerful lobby group and the "we will do anyhting to be re-elected" party always put it's own interests ahead of those of the long term viability of the country.

Sand wrote: »

As far as Jim Power goes, the OP is a little harsh: Power has been honest enough to admit that he faced constant interference in his work as an economist at Bank of Ireland and got a dressing down from his bosses for daring to opinion that "social partnership was becoming a mere vehicle for public sector unions" [Correct] and he got the heave ho the day after he told the House of Lords that he believed the Irish government could not manage an economy within a currency union [Correct]. So got to give him credit for that bit of honesty and prophetic visions. However, it underlines why you cant trust any economist representing a major economic actor like the banks.

True didn't he part company with BOI because he actually did say some discouraging things. Wasn't he replaced by we will grow forever Dan McLaughlin ?

P. Breathnach wrote: »

It would be nice to think of econometrics and economic forecasting as straightforward -- that it is all about data and processing the variables properly, something like calculating the stresses on a bridge. But it ain't. It's more like weather forecasting, with more variables in play than we can compute, even than we can recognise, and with new events occurring all the time.

So what is an economist to do? The usual response is to attempt to forecast using a subset of the relevant data, and also using judgement. That's like weather forecasting without satellite data and the latest generation of powerful computers: the reliability is reduced somewhat. Whether the reduction in reliability matters depends on the use to which the prediction is to be put.

And that is where we might have a problem with some economists who enter the popular domain: they do not acknowledge that the forecasts they are making are of limited reliability; often they do not state their assumptions, which might be subject to contest; their conclusions often serve to support whatever cause is dear to their hearts or their pockets.

But it is not always dishonest. These guys usually convince themselves. They might be wrong, but they believe that they are right.

In considering a proposition in physics, I would not need to ask what values a physicist has; in considering a proposition in economics, I would be foolish not to consider the values of the proponent.

I think you are being a bit insulting to weather forecasters :mad:
Some of the predictions being made by the hired mouthpieces were fanciful and made wild assumptions that anyone with a bit of cop on could see were stretching the bounds of possibility.
It didn't take an economist to forecast that we were loosing productive enterprises, all the while being replaced by non sustainable short term enterprises that depended on availability of cheap credit sources.
That allied to fact that house prices were reaching crazy levels should have been ringing alarm bells.

If the likes of David McWilliams, Morgan Kelly, George Lee, Alan Aherne could see it why couldn't the others ?
Answer: most of them were in the pay of the vested interests and he who pays the piper calls the tune.

Rujib1

Predicting a bust is a no brainer. If an economy (any economy) is in a boom, it will dive into at a minimun deep recession if not total bust at some time in the future.
There have been untold numbers of property bubbles and busts throughout the world going back centuries!!
Likewise with various comodoties and equities!!
Dot com!!

Seems to me if you are in any form of economic boom, it follows that it will turn to bust in the not too distant future.

No need to have soundbite McWilliams, or Jim Power or any other learned economist tell us. The real trick is to predict the timing of it fairly accurately.

Of course McWilliams, has been predicting this every day, of every week, of every month, of every year for the past 10 years, knowing absolutely full well that it had to come true one fine day. Bah humbug!

SkepticOne

jmayo wrote: »

I think you are being a bit insulting to weather forecasters :mad:
Some of the predictions being made by the hired mouthpieces were fanciful and made wild assumptions that anyone with a bit of cop on could see were stretching the bounds of possibility.
It didn't take an economist to forecast that we were loosing productive enterprises, all the while being replaced by non sustainable short term enterprises that depended on availability of cheap credit sources.
That allied to fact that house prices were reaching crazy levels should have been ringing alarm bells.

If the likes of David McWilliams, Morgan Kelly, George Lee, Alan Aherne could see it why couldn't the others ?
Answer: most of them were in the pay of the vested interests and he who pays the piper calls the tune.

They weren't all hired mouthpieces. Some of them, like Hurley of the Central bank was supposed to be independent. At the the very height of the boom he thought that the housing market, for example, was overvalued by a mere 15%. After the market had crashed and prices had gone down by 15% he thought that that the market was then correctly valued.

To be fair I think the tools that would allow economists to correctly identify a bubble simply aren't there. The mistake Hurley (or the economists working for him) made was to include demographics and other factors until the models support whatever view of reality you believe to be the case. As someone said on another forum, "Bubbles are very clear ex-post".

SkepticOne

Rujib1 wrote: »

Predicting a bust is a no brainer. If an economy (any economy) is in a boom, it will dive into at a minimun deep recession if not total bust at some time in the future.

However the mistake that was commonly made was made was that the fundamentals had changed, that it was not merely a boom based on unsustainable speculative activity.