economists are idiots

I think we need a refresher course here... Quantitative Easing Explained (a knee-slappin' classic)

Cheers, James Arthur

Are there math models for greed and fear and hype and speculative bubbles? For wild investment in companies that have no path to profitability?

Obviously not, since economists can't predict the state of the economy 6 months ahead, any better than meteorologists can predict the weather 6 months ahead. Worse, actually.

The problems

Not a lot of economists are rich.

You should. They are by no means stupid.

I agree. Although there *were* one or two notable economists saying that it will all end in tears ahead of the event governments much prefer to hear optimistic predictions. Bankers are always reassuring.

Cassandra is cursed to be right but never believed.

I have met the guy who designed the UK's 3G spectrum auction. His brief was to maximise the governments income from the sale (nothing else).

He did this perfectly but in the process very nearly bankrupted the entire industry since the bid methodology he devised resulted in hard nosed businessmen overpaying to such an extent it was ludicrous. The deployment of UK 3G infrastructure was hugely delayed as a result and there was a spectacular collapse of mobile telecoms share prices. (not helped by the dotcon bubble implosion about the same time)

I have seen this guy auction a single pound coin to testosterone fuelled management high flyers for over 3x its face value.

I agree that they were caught buying s*it wrapping in the thinnest layer of gold foil imaginable but they were "just doing their job" which is in effect gambling on the market going ever upwards.

The trick to bubble markets is getting out before the bubble bursts.

The top insiders make a killing and everyone else gets fleeced. The Chairman of Lloyds of London referring to how they allocated new naive investors to cover the syndicates with huge asbestos losses summed it up beautifully with a phrase to the effect that "If God had not meant for them to be sheared, he would not have made them sheep.".

You only have to look at the present London housing bubble to know that it is unsustainable with prices at the top end now rising +20% pa. But still the "smart" money piles in expecting this return. The *VERY* smart money will quietly exit into gold or government bonds shortly leaving the suckers to carry the can when values drop by a big factor.

Suppose you were the government how would you stop super rich people from paying insane cash on the nail prices for houses in central London?

Irrational exhuberance is everywhere.

I can't be the only one who has seen something being offered secondhand on an eBay auction selling for more than it's new price on Amazon.

You can test it by injecting fake stories or spurious trades into the market and seeing how the market responds. Done right you have first mover advantage. Someone I know was done for manipulating a minor currency by trades and rumour mongering long before it was commonplace.

With the right patter you can persuade people to do stupid things and once the roller coaster ride starts it is hard to get off. The London house price boom will be one of those spectacular boom busts soon but governments are powerless to prevent them. Willing buyer willing seller and all that. If someone is daft enough to pay way over the odds... (they erroneously believe that the 20% gains will go on forever)

How would you stop the London housing boom from becoming a bust? (there is no good answer to this question)

Actually it is predicting how changes in the interest rates will pan out on the 6 to 12 month timescale that is what the models are actually good at. Meterologists do have somewhat of an advantage that depending on the season they can be pretty sure what the climate will be like in six months time.

What they are very bad at is handling extremely rare high impact events that were not included in the original model. LTCM was taken down by the Russian bonds default but had Warren Buffet been answering his phone it might well have been rescued. Fate sometimes plays a part.

They had made a killing the year before and were typically "too big to fail" so as ever the tax payer ends up paying for it. This was also the infamous one that traded on their Economics Nobel Prize credentials.

Very few scientists and mathematicians are rich too but that says nothing at all about the validity or otherwise of their arguments.

Beancounters and lawyers are overpaid and far too often in government and they exist largely to perpetuate their stranglehold by enacting ever more complicated legislation. The next big UK computer scandal will be the governments Universal Credit scheme. This is now so far behind schedule, over budget and fundamentally flawed that its risk category is the unique "Reset" rather than Red, Amber or Green.

Basically it is a flagship project floating upside down in the water with its legs in the air awaiting the coup de grace.

ip

No model is perfect, but some are better than others. In the 1980's, in Tha tcher's Britain, the British Treasury was constrained to use Chicago School monetarist models, which start off by assuming that the free market is per fect.

At that time Will Hutton, who is a Keynesian, or - more precisely - someone on good terms with the Kenysian economists at Cambridge - was the economic s editor of the Guardian. He had a habit of reporting that the UK Treasury was doing x in the monetarist expectation that it would create effect y, wh en Keynesians would predict z. Six months later he would point that z was w hat had actually happened.

Monetarist economic models are good for just one thing - justifying economi c changes that suit people with a lot of money. Their predictive value is l ow .

Keynesian models are a whole lot better. They aren't perfect - every mathem atical model is necessarily an over-simplification of reality - and they d on't encourage policies that the Tea Party likes, so you don't see them in the newspapers you like to read and on the websites that you pay attention to, but they work a whole lot better than models based on the assumption th at the free market works perfectly.

If there's a Big Lie in there anywhere, it is in the claim that the free ma rket can work perfectly. Daniel Kahneman in

spelled out why this isn't so, but it doesn't say flattering things about r ich Republicans, so you probably haven't read it.

Keynes was. Kings College in Cambridge got a lot richer when he was Bursar, but in that role he had more capital to invest.

n-solution did.

Because it wasn't remotely large enough to make any difference at all.

ouldn't trap people or businesses in zones of negative incentive to be prod uctive...which most government policy now does.

, many of them churches, to do that. Plus many individuals do it simple and direct.

Even the dimmest right-wing nitwit recognises that it makes sense to redist ribute some income to the army, the police, the justice system and the road

-builders.

As illustrated by Scandinavia and Germany, it also pays to redistribute to get effective education, health care and social security.

The problem with the US approach to these problems is that they don't redis tribute enough money to fund effective education, health care and social se curity for the poor, so they end up spending a lot more on imprisoning the people that they didn't turn into employable workers when they had the chan ce.

It's Hoover's inadequate stimulus program all over again. Doing very little doesn't make any perceptible difference, so you want to believe that doing enough couldn't possibly work, even though it seems to work pretty well in other - less penny-pinching - advanced industrial countries.

es

Not true. Government can invest in projects that do create wealth. Building better roads, and bridge in the right places is the classical example.

Investing in educating more of the population to a higher level pays off ev en more generously, but over a longer term. The Germans are the world leade rs at this - they get more of their population some kind of tertiary qualif ication (including trade certificates and apprenticeships) than anybody els e - and the export figures bear witness to the effectiveness of this approa ch.

It's usually necessary to thrown in universal health care and social securi ty - sick and under-nourished kids don't do well at school - but the German s do well out of paying out a lot more in taxes than Americans do.

Of course, but socialists apparently can't distinguish between the various uses of other people's money. Hiring people for needed services is fine.

That's not what's meant by "redistribution of wealth."

Redistribution is taking generally from people with more, to give to those with less. Marx's maxim.

E.g., on taxes hikes for the rich: "I think that when you spread the wealth around it's good for everybody," or "I mean, I do think at a certain point you've made enough money."

Cheers, James Arthur

neers off Craigslist. I still have better circuits and better products.

ng the capital invested from the sales they'd make into the rather small ma rket that you exploit.

rket you've made your own. It may help your sales to pretend that what you make it "insanely good" and you may even be silly enough to believe your ow n propaganda, but there's not much objective evidence that you are anything more than competent (but that's rare enough).

ive market - can support much more careful design and optimisation than can anything aimed at the scientific instrument market.

And understood some of it. It often takes a while before you can figure out precisely what the original designer had in mind.

From what he posts here, it could be fuller. Recently he posted about a pro blem that he had getting a +/-1% inductor.

Several of the people who post here regularly pointed out that there was an old-fashioned solution to the problem - that has been around for at least three decades. You buy a heavily gapped ferrite pot-core, with a central ho le into which you can screw an adjustor.

Because the pot core is heavily gapped, the inductance per turn squared is reasonably predictable - +/-3% in the absence of the adjustor.

So you wind a coil that is going to have an inductance which is - say - 4% low without the adjustor, then screw in the adjustor until you've got the i nductance you want. It's old-fashioned stuff, but you can still buy the par ts off-the-shelf from Digikey.

John wasn't grateful for the suggestion, perhaps because Jim Thompson was o ne of the people making the suggestion. He wanted to be able buy his induct or off the shelf ...

But a little simpler than it might be, and probably not serving as many pot ential markets as a better-informed engineer might.

I certainly appreciate and envy it, but I do have this persistent suspicion that he could do better, if he knew more.

His "highly demanding customers" publish their ideas of high-performance el ectronics in Review of Scientific Instruments, in papers refereed by other physicists, and even John has noticed that the electronics that gets publis hed there isn't always up to the state of the art. I've got five comments p ublished there criticising specific examples.

There's quality, and there's quality - John's stuff is obviously good enoug h, but I've got the suspicion that he could have done better if he'd paid m ore attention to his lecturers when he was an undergraduate, or read more w idely in the instrument literature once he'd graduated, or though harder ab out what he was doing.

s non-solution did.

ding

t shouldn't trap people or businesses in zones of negative incentive to be productive...which most government policy now does.

ties, many of them churches, to do that. Plus many individuals do it simpl e and direct.

distribute some income to the army, the police, the justice system and the road-builders.

And you don't need education, healthcare and social security?

You personally don't - you already know everything you think you need to kn ow and have enough money of your own to pay for your own health care and so forth. It would be to your long term advantage if your poorer neighbours had bette r healthcare and social security, and their kids had access to better educa tion, but one of the things you "know" is that the government can't provide these services at a reasonable price. The Scandinavian and German governme nts can, but the US is so totally crippled by it's antiquated constitution that there's no way that this could ever be true of the US.

That's not what you want to understand it to mean.

Redistribution in the reverse direction is thoroughly destructive.It can be argued that you have been practising that in the US for the last decade or so, and it does seem to be creating problems.

asserts that your first proposition is absolutely correct. It even helps th e people who are paying the extra tax, though not as much as it helps the p eople further down the pecking order.

Your second proposition is consistent with marginal income tax rates of 95% on the highest tranches of high incomes. Both the British and the Swedes h ad that for quite a while after WW2, and the US had a 92% maximum marginal rate. Franklin Roosevelt - in 1942 - explicitly said that no American ought to take home more than $25,000 per year ($323,208 in today's money), albei t only while you were fighting WW2.

Nobody sees the sense in confiscatory marginal tax rates any more, and marg inal income tax rates peak at about 60%. Raise the marginal rate any higher , and the rich start spending heavily on tax avoidance, so it's a waste of effort, even if the occasional left-wing nitwit fancies it for ill-founded ideological reasons.

Was he an economist?

Taxes could be used to damped unstable systems. Like, a 0.1% tax on stock transactions, or a tax on real estate that is flipped quickly. Or a time delay on either type of transaction. Control theory could be applied to unstable economic systems, but it isn't. We have quasi-periodic booms and crashes and policy makers just let it happen, and usually cite the booms as perpetual, when they never are.

Economists are idiots.

When central banks force interest rates by massive intervention in financial markets, it's not difficult to predict interest rates. Predicting unintended consequences is more difficult.

No a barrowboy (stock trader). But economists have analysed most of the more amusing delta function trading cockups accidental and deliberate.

Your solution to the London housing boom would be most enlightening.

Presently the super rich are all piling in and expecting the boom to go on forever with 20% pa returns. The only thing that is certain is that when the adjustment finally comes a lot of people will get burned.

A rough heuristic is that even in markets with sound fundamental valuations that *should* be obvious to anyone with a pencil, paper and a brain can still run 3-5x their true market value once bidding frenzy gets a hold and irrational exuberance is let rip. Really bad ones can go up a couple of orders of magnitude above true market value. The fall is almost instantaneous once someone notices the Emperor has no clothes.

So are people who spout off about system theory when they don't understand the Routh stability criterion. Damping can in some cases make the sort of stochastic instabilities in stock markets worse!

The only thing I can see that would dampen the London housing market would be a supertax on non resident buyers. Even then it may already be too late to avoid a lot of people being trapped in negative equity.

Banks don't have a lot of choice at the moment. If they tried to raise interest rates even modestly a lot of home owners would be in negative equity and no longer able to pay them back or support their loan.

The central banks are walking a tightrope at present.

The usual one is to stop banks lending against the current value of the pro perty. Banning 100% mortgages can be a good start - restricting borrowers t o loans of 80% or 90% of the current valuation of a property would go a bit further.

transactions, or a tax on real estate that is flipped quickly. Or a time d elay on either type of transaction. Control theory could be applied to uns table economic systems, but it isn't. We have quasi-periodic booms and cra shes and policy makers just let it happen, and usually cite the booms as p erpetual, when they never are.

In fact we had a long period where playing with the central bank interest r ate was enough to damp booms and busts before they ran away. The dot.com bo om and the sub-prime mortgage disaster both happened after the US governmen t had dismantled most of the restraints on US bankers.

There was a serious bust in 1973, when the Arabs got together to quadruple the price of oil, but there's not a lot that economists could have done abo ut that.

was published at about the same time, and E. F. Schumacher was quite consci ous of the risks posed by the Western world's ever-increasing demand for oi l.

Schumacher wasn't. Larkin doesn't know much, so he won't be able come up wi th any other counter-examples. In fact there are quite a few of them.

Actually, they can - just not all that precisely. Long distance weather for ecasting is impossible more than 10 days in advance, so economists can do m uch better.

Wrong

on the 6 to 12 month timescale that is what the models are actually good at. Meterologists do have somewhat of an advantage that depending on the se ason they can be pretty sure what the climate will be like in six months time.

Climate isn't weather. To predict weather you need to predict when it will rain. To predict climate, you need to predict only how much it will rain in spring, which is much more heavily constrained by thermodynamics.

ial markets, it's not difficult to predict interest rates. Predicting unint ended consequences is more difficult.

More difficult if you are a monetarist rather than a neo-Keynesian. At leas t the neo-Keynesians aren't constrained by the ideological requirement to t reat the free market as perfect, which makes the mathematics a lot easier, but wrecks the predictive power.

That won't stop the current London boom which is from non-resident cash rich buyers jumping into the market in the expectation of 20% annual returns. They are buying for cash on the nail with no mortgages at all.

GREAT!

joe

property. Banning 100% mortgages can be a good start - restricting borrowe rs to loans of 80% or 90% of the current valuation of a property would go a bit further.

That's a fraction of the buyers. Put a damper on the domestic demand, and t he prices won't rise anything like as fast. And in any case, nobody sane ex pects 20% annual rises to be sustained. The clearest indicator of a bubble market is when your neighbours start telling you that you should get into i t - what had been a misapprehension limited to people who should have known what they were doing has spread into the general population, where it grow s like a pyramid scam. When your neighbours start trying to recruit you int o the pyramid, the scam has clearly almost run out of recruits, and is abou t to collapse.

In London the pyramid seems to contain a relatively high proportion of cash

-rich foreign buyers who haven't got a clue about the likely long-term valu e of the stuff they are buying. Cutting back the domestic demand might be a ll it takes to let a little reality into the scene.

it seems to me that such a thing could be encouraged. when it collapses they'll leave with less than they entered the game holding. for a net gain to London. The only issue is mitigating the damage they are doing, and will do, to London.

That fraction is currently 70% foreign buyers or 50% non UK resident. A very big factor in making London housing completely unaffordable.

Same sort of scheme (scam) as has them buying into sawn through sharks in formaldehyde, unmade beds and other modern art "investments".