Friction a non Socratic dialogue
Robert Waldmann
John Q. Policymaker is driving a minivan. Maynard Keynes is in the passenger seat, Ed Prescott and Robert Lucas are in the second row of seats and Eugene Fama and John Cochrane are in the back seats.
John Q: We are heading for a cliff !
Maynard: slam on the brakes.
Prescott: I don’t see how brakes work. Alan Greenspan has had fewer traffic accidents, since he stopped using brakes. I know some people still teach about friction in third rate departments, but they aren’t really advancing the science. You’ll go just as fast whether you slam on the brake or not. In modern bicycle theory it is assumed that there is no friction so the concept of “braking” is meaningless.
Maynard: Don’t listen to him. Slam on the brake pedal. We’re all about to die.
John C: Yes this is a stressful situation and in stressful situations it is tempting to turn to the fairy tales of our childhood.
Maynard: It’s not a fairy tale. It’s a brake. It’s worked before.
John C and Eugene in unison: Brakes are supposed to work because the disk spins under the brake shoes. If the disk is spinning we are going forward. Therefore brakes can’t slow us down. There is a logical contradiction between saying we should brake and that we shouldn’t keep going forward.
John Q: You guys in the back seats, don’t just tell me Maynard is wrong. Tell me what to do to avoid going over the cliff.
Robert L: Serious analysis is a difficult process and requires a step by step approach, starting with simple frictionless models. We expect to have a useful model in roughly thirty years.
Robert W: If you think I’m exaggerating explain exactly what is overstated in the above dialogue.
“Robert W: If you think I’m exaggerating explain exactly what is overstated in the above dialogue.”
1) That economists know how to drive?
2) Try the steering wheel, but that doesn’t work without friction either.
3) We don’t want to go off the cliff?
TADA! We got the real world answer. The EU and ECB have spoken. It is….drum roll…..QE WORKS EVERYWHERE AND ANYWHERE!!!!
Combined with sterilization, short term facilities for banks, and Ben has currency swap lines for sale.
From Calculated Risk:
Excerpt:
“1.To conduct interventions in the euro area public and private debt securities markets (Securities Markets Programme) to ensure depth and liquidity in those market segments which are dysfunctional. The objective of this programme is to address the malfunctioning of securities markets and restore an appropriate monetary policy transmission mechanism. The scope of the interventions will be determined by the Governing Council. In making this decision we have taken note of the statement of the euro area governments that they “will take all measures needed to meet [their] fiscal targets this year and the years ahead in line with excessive deficit procedures” and of the precise additional commitments taken by some euro area governments to accelerate fiscal consolidation and ensure the sustainability of their public finances.
In order to sterilise the impact of the above interventions, specific operations will be conducted to re-absorb the liquidity injected through the Securities Markets Programme. This will ensure that the monetary policy stance will not be affected. “
http://www.calculatedriskblog.com/2010/05/ecb-to-intervene-in-euro-zone-debt.html?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+CalculatedRisk+%28Calculated+Risk%29
TADA! We got the real world answer. The EU and ECB have spoken. It is….drum roll…..QE WORKS EVERYWHERE AND ANYWHERE!!!!
Combined with sterilization, short term facilities for banks, and Ben has currency swap lines for sale.
From Calculated Risk:
Excerpt:
“1.To conduct interventions in the euro area public and private debt securities markets (Securities Markets Programme) to ensure depth and liquidity in those market segments which are dysfunctional. The objective of this programme is to address the malfunctioning of securities markets and restore an appropriate monetary policy transmission mechanism. The scope of the interventions will be determined by the Governing Council. In making this decision we have taken note of the statement of the euro area governments that they “will take all measures needed to meet [their] fiscal targets this year and the years ahead in line with excessive deficit procedures” and of the precise additional commitments taken by some euro area governments to accelerate fiscal consolidation and ensure the sustainability of their public finances.
In order to sterilise the impact of the above interventions, specific operations will be conducted to re-absorb the liquidity injected through the Securities Markets Programme. This will ensure that the monetary policy stance will not be affected. “
http://www.calculatedriskblog.com/2010/05/ecb-to-intervene-in-euro-zone-debt.html?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+CalculatedRisk+%28Calculated+Risk%29
TADA! We got the real world answer. The EU and ECB have spoken. It is….drum roll…..QE WORKS EVERYWHERE AND ANYWHERE!!!!
Combined with sterilization, short term facilities for banks, and Ben has currency swap lines for sale.
From Calculated Risk:
Excerpt:
“1.To conduct interventions in the euro area public and private debt securities markets (Securities Markets Programme) to ensure depth and liquidity in those market segments which are dysfunctional. The objective of this programme is to address the malfunctioning of securities markets and restore an appropriate monetary policy transmission mechanism. The scope of the interventions will be determined by the Governing Council. In making this decision we have taken note of the statement of the euro area governments that they “will take all measures needed to meet [their] fiscal targets this year and the years ahead in line with excessive deficit procedures” and of the precise additional commitments taken by some euro area governments to accelerate fiscal consolidation and ensure the sustainability of their public finances.
In order to sterilise the impact of the above interventions, specific operations will be conducted to re-absorb the liquidity injected through the Securities Markets Programme. This will ensure that the monetary policy stance will not be affected. “
http://www.calculatedriskblog.com/2010/05/ecb-to-intervene-in-euro-zone-debt.html?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+CalculatedRisk+%28Calculated+Risk%29
I only hit the post once.
And from Ives Smith, here’s the EU conrtibution. 250B Euro from the IMF too! So they got the whole $30B of the US IMF money too. How about them olives?
“The EU announced a €750 billion salvage operation, funds to shore up economies in economic difficulty, with the program consisting of €440 billion of loans from eurozone nations, €60 billion from an EU emergency fund, and €250 billion from the IMF.”
http://www.nakedcapitalism.com/2010/05/is-the-eurozone-shock-and-awe-enough.html?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+NakedCapitalism+%28naked+capitalism%29
The policy maker seems to have had a sex change. 🙂
Lucas: “We expect to have a useful model in roughly thirty years.”
Lucas was saying that thirty years ago. Today’s macro guys are saying the same thing.
Eg. Kocherlakota:
“… macroeconomics has made important advances in recent years. Those advances—coupled with a rededicated effort following this recent economic episode— position macroeconomics to make useful contributions to policymaking in the future.”
Frikken Hilarious!!
If only it werent so true.
It’s funny and minimally unfair I think. Somehow, it seems like there should be other passengers. Milton Freidman (“I’m not in favor of no brakes ever, but first, maybe we could all try dragging our feet?”) Ayn Rand (“Every man for himself …. Out of my way you creeps … Geronimo o o o”) and Karl Marx (“If you hadn’t bought a vehicle made by capitalists there would be no need for brakes. And there wouldn’t be any cliff either”)
today it’s more like the car has stopped and they are arguing whether or not to take their foot off the brake.
http://www.moslereconomics.com
http://www.moslerforsenate.com
Maybe the first mistake of the analogy is the assumption that economists are in control of the vehicle. First think passanger/freight train instead of minivan. How much control does the engineer up in the control booth have over the train. There is also a brakeman who needs to work with the engineer to keep the entire contraption on its rails. But they both take orders from the conductor. So who’s really in charge of the run a way trian? The conductor seems to have the passengers’ asfety at heart, but even he takes his orders from the owners of the line.
… on the other hand……
Funny.
Merton: Our models show that this high a cliff can only occur once in 100,000 years. Therefore, this isn’t happening.
Taleb: This was a predictable catrastophe, hence not a Black Swan. I will be vindicated by my hedge in level terrain default swaps.
Print more road.
To be some what more to the point. Markets and market makers do not follow the theoretical prognostications of economists. Quite the other way around. That is those in charge of market making (manipulation?) promote the economists they most admire, or that most admire them. Remeber the song about the mutual admiration society?
http://www.youtube.com/watch?v=m90jQZo9lqk&feature=related
That pretty much describes the situation. is there any economic concept that can’t find wide support with the appropriate funding?
Warren!
Been lurking long?
You need to come and comment over here more. Some of these folks over her need some edikatin’.
“Markets and market makers do not follow the theoretical prognostications of economists. Quite the other way around. That is those in charge of market making (manipulation?) promote the economists they most admire, or that most admire them.”
Another very large point made in Talebs book. We dont do predicting well at all, we tell post fact stories which seem to explain what occurred and present it as a prescription for the future. After the fact it is obvious (to you) all the things that pointed you in the direction you ended up.
“Maybe the first mistake of the analogy is the assumption that economists are in control of the vehicle.”
The analogy does not assume that economists are in control of the vehicle. They are advisors. The error is to assume that anyone is in control of the vehicle.
jonathan
hard to tell what your point is. are you one of those who say we should just let an invisible hand drive the car?
It’s hilarious that Fama has absolutely nothing to say. : )
Yes actually Lucas said that a bit more than 30 years ago. They said 30 years (it’s hard to get links to quotes from over 30 yars ago but they did). No one seems to have noticed when the clock ran out. 30 years later, they still talk about what models are “plausible starting points” http://online.wsj.com/article/SB123258618204604599.html
” much more plausible starting point is a multiplier of zero.”
If we had listened to them, we’d be over the cliff while they were still getting started.
Good clean fun. But I have the feeling that economists in academia are out of the van since long ago.
But what’s really needed is an invisible foot.
But how could Adam Smith have known about those back in 1776?
Sufferin’
That’s an interesting point that is too often forgotten by the lovers of the hand. Smith’s economy was agrarian. Manufacturing was minimal and primarily artisan. Ship building a possible exception to that description. How do we now even think to transfer the ideology of that distant and primitive economy to the present and expect it to make any sense?
eli
you don’t mean
economists are in their offices advising the car makers that they could increase their profits by building cars without brakes. after all, the customers want power, brakes are only a drag. by definition they don’t help you go anywhere.