Stop Gambling Society on Doctoral Theses
Calculated Risk makes the following observations about past recessions:
Usually New Home sales bottom during the recession and start to increase 3 to 6 months before the recession ends. Therefore New Home sales are usually a good leading indicator of an economic recovery.
This is interesting information. It is important for speculators to find and use such data to speculate on the future more effectively.
Speculate where risk is isolated, but do not place speculators at the helm of the global economy. Bernanke, Paulson, Krugman and many, many others all believe that they can reduce emotional, irrational human behavior down to a formula. They then try to optimize society around this speculative information.
The formula for this data: get housing prices to rise. As soon as they believe ending the recession happens after housing prices to rise, they do not care how many variables they destroy in order to achieve that result. If sending 25% of people to unemployment, gas to $5 per gallon and duplicating away the value of your life savings happens to be the most efficient way to get there? So be it.
Society should reject these types of “solutions” to our problems. Half baked solutions run rampant in today’s economy:
Summary of [Federal Reserve Bank of San Francisco President] Yellen’s Proposal
1)Yellen wants to “pull out all the stops to ensure an extended period of stagnation does not occur”
2)Yellen wants to do this even though the “approaches are experimental, and there is a great deal of uncertainty concerning their likely effects.”
3)To top it off, Yellen admits that an extended period of stagnation will occur anyway: “Even with vigorous Fed action to restore credit flows, an extended period of economic weakness is likely
People who want to command the value of variables to a more satisfactory answer are misguided. Those variables are our lives, our jobs, our hopes and dreams, our retirement. How can they decide whether or not it is worth ruining one person’s business and another’s marriage in order to save a third person’s mortgage and a fourth’s income?
They cannot even promise the ideas will work. They cannot even measure the risks:
mathematician Benoit Mandelbrot learned that cotton had an unusually long price history (100 years of daily prices). Mandelbrot cut the data, and no matter what time period one used, the results were NOT normally distributed. His findings were initially pooh-poohed, but they have been confirmed repeatedly. Yet the math on which risk management and portfolio construction rests assumes a normal distribution!
[...]
Rather than attempting to develop sufficient competence to enable them to have a better understanding of the issues and techniques involved in risk management and measurement (which would clearly require some staffers to have high-level math skills), regulators instead take false comfort in a single number that greatly understates the risk they should be most worried about, that of a major blow-up.
Life is complicated enough without needing to discount the risk that some economist decides to destroy hundreds of millions of people’s retirement planning in order to test the validity of his untested, unproven doctoral thesis.