I was one of the only economists who predicted the financial crash of 2008 – in 2017 we need to make urgent changes The Independent

Economics is driven by ideology – it is ideology, not science, which drives them to assert that bank bailouts are tolerable but policies that protect the poor aren’t. Unsurprisingly, these flawed theories and models are a great comfort to financial elites – which is why so many economists are hired and funded by big banks, corporations and the wealthy

As someone who correctly predicted the financial crisis (first in 2003 and later in a 2006 book) I support Andy Haldane’s assertion that the economics profession is “to some degree in crisis”.

Source: I was one of the only economists who predicted the financial crash of 2008 – in 2017 we need to make urgent changes | The Independent

What’s the point of economists?

Just had to reference this article from Economia – the magazine for Chartered Accountants.

It starts off by saying that economists only get things right about 4 times out of 10.  If I have read the grade boundaries issued by one of the exam boards correctly that would have been enough to get a grade F at GCSE economics units 11 and 12.  And if we use the lower mark “3 or 4 times” offered later in the article it is barely even enough for a grade G.

It then goes on to say economics is not a black and white science – but then what is?  Even the physics of light has to take account of colour.

The profession is likened to a sports coach who cannot guarantee a win even by putting out the best team possible.  Except that economists do not seem to get the sack for repeated poor performance.

Or economists should be likened to medics who would not be able to predict when you are going to get ill but should be able to advise you how to get better.  Except that economists do not seem to be able to agree on a course of treatment – should we spend our way out of recession or should we cut back on public expenditure to balance the books.  Or should we do a George Osborne and try a bit of both – cut back on public expenditure till it hurts and still borrow more.

And then the article talks about the benefit of hindsight giving us 20/20 vision.  But again I am not sure that it does, as economists don’t seem to be able to agree whether they should have been expected to predict the 2008 financial crisis.

But perhaps I am biased in my thinking that economics is not science if we follow the Oxford dictionaries definition:

The intellectual and practical activity encompassing the systematic study of the structure and behaviour of the physical and natural world through observation and experiment

It is included as a social science:

The scientific study of human society and social relationships

which attempts to use scientific methodology but is severely limited because it is not easy (or even legal) to experiment on human society and relationships – so that it is limited to observation without being able to test any theories about how economics works.

Macroeconomics — totally messed-up

Until a few years ago, economists of all persuasions confidently proclaimed that the Great Depression would never recur. In a way, they were right. After the financial crisis of 2008 erupted, we got the Great Recession instead. Governments managed to limit the damage by pumping huge amounts of money into the global economy and slashing interest rates to near zero. But, having cut off the downward slide of 2008-2009, they ran out of intellectual and political ammunition.

For more click on the link below

macroeconomics totally messed up

It was the cartoon that really got me!

Cartoon - I want to be an economist

It’s not just me

It can be difficult deciding what to write next.  Everything seems to have been said already.

And then along comes the weekend newspaper.  The Times Saturday June 27 and Philip Aldrick.  If you have a subscription you can read his article We ought to be scared: too much debt is being combined with too much blind faith.

In simple terms what he was saying was that some important economic indicators are heading the same way they went before the big crash – the  2008 disaster brought about by banks lending too much to people who could not pay them back.

So – money is cheap thanks to Quantitative Easing and very low (or zero) interest rates.

Probably as a result, lots of borrowing has been going on – according to the article $57 trillion in 7 years – which is massively more than the economic growth in the same period.

So debt is now 286% of GDP.  Is this worrying?  Well it was less than that – 269% of GDP – before the crisis.

And where is the money being lent?  “Emerging markets” seems to be the answer – Latin America, the Middle East and Africa are all running deficits borrowing from Western economies.

As I see it, the problem is simply our debt-ridden system.  Because of low interest rates in the Western economies, bankers need to find someone else to lend money to who will pay high rates of interest.  Germany is financing Greek debt at higher interest rates than it can get elsewhere in the EU, but even this is not enough to produce returns for the financial sectors in the West.

As a result money is lent at higher risks to countries which offer a much higher rate of return.  This means money in junk bonds and frontier bonds.  Or put another way in risky companies and risky countries.

Some risky investments will go bad and the question is whether the financial gurus have got it right this time and balanced the risk with the return or whether, as happened before 2008, they went for return at all costs and ended up offloading the risk onto governments who did not dare to let the banking system (and therefore the banks) collapse and so underwrote the debts in massive bailouts.

My answer is simple.  If commercial debt is outlawed, then bankers and other financiers cannot do this to us again.

This is not an easy fix, because we have been brought up on the present system and imagining a different world is difficult.  And bringing in a ban on commercial debt will require considerable planning and ruthless implementation (because any loophole will be exploited because the financial sector is all about exploiting situations – such as different interest rates in different countries – to make a profit).

Is this a crazy idea?  Possibly, but we have tried for years to bring the banking sector under control in the UK and we keep on ending up with scandals – PPI and other misselling scandals, LIBOR and foreign exchange rate fixing, helping launder drug and terrorist money…

So let’s try something new!