Mystery Economic Theater 2010

[cheesehead]

"Tiny house movement thrives amid real estate bust"

http://news.yahoo.com/s/ap/us_tiny_houses

Originally Posted by Terence Chea

GRATON, Calif. – As Americans downsize in the aftermath of a colossal real estate bust, at least one tiny corner of the housing market appears to be thriving. To save money or simplify their lives, a small but growing number of Americans are buying or building homes that could fit inside many people's living rooms, according to entrepreneurs in the small house industry.

Some put these wheeled homes in their backyards to use as offices, studios or extra bedrooms. Others use them as mobile vacation homes they can park in the woods. But the most intrepid of the tiny house owners live in them full-time, paring down their possessions and often living off the grid.

"It's very un-American in the sense that living small means consuming less," said Jay Shafer, 46, co-founder of the Small House Society, sitting on the porch of his wooden cabin in California wine country. ...

Another manufacturer: Katrina Cottages ( http://katrinacottagehousing.org/ ) "A dignified alternative to the FEMA trailer."

[ewmayer]

Originally Posted by cheesehead

"Tiny house movement thrives amid real estate bust"

Just in time for the holidays, also available in gingerbread.

They had a piece on this on the local news a few days ago - frickin' incredible.

[Uncwilly]

Originally Posted by ewmayer

Just in time for the holidays, also available in gingerbread.

They had a piece on this on the local news a few days ago - frickin' incredible.

Shameful waste of potential foodstuffs and money.

[S485122]

Originally Posted by ewmayer

My Comment: I think Mr. K. may have intended "...is worse than a mistake; it`s a crime" in that last sentence.

Mr. K. probably wrote what he intended : from a Wikipedia article

Either Antoine Boulay de la Meurthe[2] (deputy from Meurthe in the Corps législatif) or Napoleon's chief of police, Joseph Fouché,[3] said about his execution "C'est pire qu'un crime, c'est une faute", a statement often rendered in English as "It was worse than a crime; it was a blunder." The statement is also sometimes attributed to French diplomat Charles Maurice de Talleyrand-Périgord. Sometimes the quote is given as, "It was worse than a crime; it was a mistake."

Jacob

[ewmayer]

Originally Posted by S485122

Mr. K. probably wrote what he intended : from a Wikipedia articleJacob

Ah ... so the saying is meant ironically in the "the only offense worse than a crime is a blunder" sense - thanks for the reference.

In other news - this broke yesterday - Wikileaks founder Julian Assange tells Forbes that he has some "interesting" material on one of the biggest U.S. banks, with popular sentiment pointing toward Bank of America.

I find it interesting that it took the U.S. Department of Justice over 2 years since the start of the subprime-mortgage implosion and ensuing events to begin looking into Wall Street (and notice that the probe announced yesterday is into insider trading, which is surely big business, but dwarfed by the mortgage/securitization/ratings fraud which helped blow the housing bubble), but it took them all of one *day* to start a criminal investigation into the diplomatic-cables leaks. Bit of a double standard there, boys?

---------------------------------

Failed Economists Try Modeling Careers:

[I apologize in advance for the level of sardonicism in my comments below, but reading articles which portray economics even remotely as any sort of "rigorous quantitative science" bring out the derisive, hooting, -throwing primate in me]

Economists' Grail: A Post-Crash Model

Physicist Doyne Farmer thinks we should analyze the economy the way we do epidemics and traffic.

Psychoanalyst David Tuckett believes the key to markets' gyrations can be found in the works of Sigmund Freud.

Economist Roman Frydman thinks we can never forecast the economy with any accuracy.

My Comment: Is it just me, or do the two sillier-sounding suggestions of the three (well, one silly, the other amounting to an admission of "my profession is useless") correlate with the two fields having the most dubious claims to the title of "sciences"?

Disparate as their ideas may seem, all three are grappling with a riddle that they hope will catalyze a revolution in economics: How can we understand a world that has proven far more complex than the most advanced economic models assumed?

Complex? Depends on your definition. Any untrained layperson could have looked at a chart of Case-Shiller historical home price trends starting around 2004 and told you something looked out of whack. Yet most "exsert economists" including Messrs Greenspan and Bernanke (who were in no small paret responsible for the hockey-stick-shaped distortion in that data series) resolutely deny that "bubbles can be spotted in real time". Comlecity, or willful blindness on the part of the modelers. Of course most anything one`s pet model excludes by fiat is going to appear troublesome and "complex".

[ewmayer]

[feces-flinging primatological commentary continued from above]

The question is far from academic. For decades, most economists, including the world's most powerful central bankers, have supposed that people are rational enough, and the working of markets smooth enough, that the whole economy can be reduced to a handful of equations. They assemble the equations into mathematical models that attempt to mimic the behavior of the economy. From Washington to Frankfurt to Tokyo, the models inform crucial decisions about everything from the right level of interest rates to how to regulate banks.

In the wake of a financial crisis and punishing recession that the models failed to capture, a growing number of economists are beginning to question the intellectual foundations on which the models are built. Researchers, some of whom spent years on the academic margins, are offering up a barrage of ideas that they hope could form the building blocks of a new paradigm.

Aw crap, you just had to pull out the oh-so-overused "new paradigm" trope. News flash: 100-[a tiny fraction of 1]% of the time, when a bunch of folks in a particular pursuit say "we need a new paradigm", what they really mean is "we are grossly incompetent and should all be fired and forced to get day-laborer jobs".

"We're in the 'let a thousand flowers bloom' stage," says Robert Johnson, president of the Institute for New Economic Thinking, launched last year with $50 million from financier George Soros, a big donor to liberal causes who has long been a vocal critic of mainstream economics. The institute so far has approved funding for more than 27 projects, including efforts by Messrs. Farmer and Tuckett aimed at developing new ways to model the economy.

Is that the same as the "abuse a thousand metaphors in the pursuit of self-aggrandizement" stage?

Some of academia's most authoritative figures say the new ideas are out of the mainstream for a good reason: They're still very far from producing a model that demonstrably improves on the status quo.

In my decidedly out-of-the-mainstream opinion, monkeys throwing darts at a corkboard of randomized economic predictions improves on the status quo.

"I guess I'll wait until I see these models and what they can and cannot do," says Robert Lucas, an economist at the University of Chicago who won the Nobel Prize for his work on "rational expectations," the concept at the very heart of modern orthodoxy.

I rationally expected you would say just such a thing, professor.

New York University's Mark Gertler, who with now-Federal Reserve Chairman Ben Bernanke did ground-breaking work in the 1980s on how financial troubles can trip up the economy, says economists already have many of the tools they need to fix the current models.

Let me guess: Turn the dartboard upside down? Blindfold the monkeys and spin them around a few times before letting them throw? By the way, Chairman Bernanke has done more recent work on "how financial troubles can trip up the economy" ... problem is, he`s switched from pure theory to "applied research".

"It strikes me as not productive to say that all we have done is a complete waste," he says.

It may not be "productive", but that does not make it "false".

"The profession is extremely competitive. If you have a better idea, it's going to win out."

"Competitive" in what sense? "Handful of equations voted 'most likely to succeed' by one`s like-minded ivory-tower cronies?"

Today's models emerged from a revolution of their own. In the 1970s, economists were struggling to figure out how policy moves, such as raising taxes or cutting interest rates, could change how people behave. They were also eager to subject their own reasoning to the unforgiving judge of mathematical logic.

Translation: What economists refer to as the "Unforgiving judge of mathematical logic" is more commonly known as "the equals sign".

So they populated their models with rational people who can calculate the value of various possible moves and choose the optimal path. A person deciding whether to buy a car, for example, would take into account the potential return on investing the money, the probability that car prices will rise, and the chances that an increase in tax rates will cut into her disposable income.

Perhaps if you stopped trying to be oh-so-politically-correct and added a 'him' to your models, you`d see the problem - No matter how rational the 'hers' of the world may be in isolation, once you include the 'hims' in the mix, you get a bunch of 'uses', followed by little 'thems', marital bliss, martial strife, messy divorces, 'exes', alimony, lawyers, 'her' irrationally selling 'his' Jaguar on Craiglist for a 'song' just to spite 'him', 'him' shacking up with a different 'her' who is a realtor and getting into the 'flip this house' line of trade, then having that go bust, getting hooked on crystal meth and sinking into a downward spiral of drugs and crime ... in short, all the messy things that make for a *real* economy.

By translating peoples` preferences into equations, and finding the point at which they meet those of firms and other players, the models forecast an exact trajectory for the economy. That feature makes them very attractive to economists, who can plug in a change in interest rates and see precisely how the move might affect an entire country`s output for the next few years.

Ah, so it`s an exact science - known equations, precise inputs, combine to get precise outputs. Just like weather forecasting!

The problem, says Mr. Farmer, is that the models bear too little relation to reality. People aren`t quite as rational as models assume, he says. Advocates of traditional economics acknowledge that not all decisions are driven by pure reason.

I "Kant imagine" why that would be...

Mr. Farmer sees a perhaps greater flaw in the models` mathematical structure. A typical "dynamic stochastic general equilibrium" model—so called for its efforts to incorporate time and random change—consists of anywhere from a few to dozens of interlinked equations, which must agree before the model can spit out a solution. If the equations get too complex, or if there are too many elements, the models have a hard time finding the point at which all the players` preferences meet.

Well, I can tell you up front that my preference is for a "free lunch". Problem solved. See, you didn`t even an existence proof for that one.

To keep things simple, economists leave out large chunks of reality. Before the crisis, most models didn`t have banks, defaults or capital markets, a fact that proved problematic when the financial crisis hit. They tend to include only households, firms, central banks and the government.

Well, OK, for folks who insist on making things more complicated than they need to be in order to justify the creation and maintenance of entire academic departments of endowed-chair econo-blowhards, we have some useful simplifications now, since in the post-crisis model there is just the central-bank/governmental "central scrutinizer", which is the political arm of the firms. What were formerly called "households" are now simplified to "pool of forced labor".

The field of economics has already borrowed from psychology to help explain the sometimes irrational behavior of people and markets. Psychologist Daniel Kahneman shared a Nobel Prize in 2002 for his work identifying the ways in which humans systematically overestimate or underestimate risk.

Mr. Tuckett goes one leap further. Extensive interviews with money managers have led him to posit that because certain financial instruments are so volatile and hard to value, they trigger humans` tendency to fantasize. Borrowing language from Sigmund Freud, he calls such financial assets "phantastic objects," which people see alternately as capable of fulfilling their dreams of wealth and power or utterly worthless and repulsive.

Yeah, like "homes", you mean? I admit mine was looking a bit repulsive last weekend, until I did a thorough cleaning, took out the garbage and did the laundry.

Snarkiness aside - again I apologize, I needed to get my recommended daily allowance of that just now - there is some genuinely interesting stuff in the article. My overall take is this: Any economic model which fails to allow for irrational expectations and decidedly nonequilibrium economic states (just as there are many physical phenomena which cannot be described by classical equilibrium thermodynamics), is doomed to fail.

I find it especially hilarious that central-bank economists continue to deny the pervasiveness of irrationality and disequilibrium. After all, blowing nonequilibrium bubbles and encouraging irrational expectations is something central banks - especially the U.S. Fed - are expert at. Yet their very own models refuse to admit of that which they themselves create. The lunatics truly are running the asyla.

[cheesehead]

I just came across #131 of Frank Jacobs's blog Strange Maps (now at bigthink.com):

"131 - US States Renamed for Countries With Similar GDPs"

http://bigthink.com/ideas/21182

It's slightly out-of-date (2007), but it might be interesting for envisioning various EU countries in financial trouble as the US states with similar GDP (or vice versa, for Europeans).

Iceland -> (not shown) somewhat more than Wyoming
Greece -> Connecticut
Ireland -> Nevada
Portugal -> Kentucky
Spain -> (not shown) between Texas(Canada) and New York(Brazil)
Italy -> (not shown) somewhat less than California(France)
UK -> (not shown) somewhat more than California

- - -

(apparently, this is one of the most-viewed strange Maps items)

[cheesehead]

But see this update:

"135 - Update On the GDP Map of the USA"

http://bigthink.com/ideas/21186

[Fusion_power]

Economic modeling: is a lot like trying to model the path of a ship in a hurricane with human ballast in the hold that insists on randomly moving from side to side of the ship whenever an especially strong gust of wind hits.

Come to think of it, I better patent this idea. It might just work!

DarJones

[R.D. Silverman]

Originally Posted by ewmayer

[feces-flinging primatological commentary continued from above]



The question is far from academic. For decades, most economists, including the world's most powerful central bankers, have supposed that people are rational enough, and the working of markets smooth enough, that the whole economy can be reduced to a handful of equations. They assemble the equations into mathematical models that attempt to mimic the behavior of the economy. From Washington to Frankfurt to Tokyo, the models inform crucial decisions about everything from the right level of interest rates to how to regulate banks.

One thing missing from virtually every model is what is known as catastrophe
theory. They fail to model the drastic results that follow from an outlier
event occurring. The penalty functions applied to outlier events
UNDERVALUE the cost and consequences of these outlier events. As a
result, overall risk is under-evaluated.

In the wake of a financial crisis and punishing recession that the models failed to capture, a growing number of economists are beginning to question the intellectual foundations on which the models are built.
Ah, so it`s an exact science - known equations, precise inputs, combine to get precise outputs. Just like weather forecasting!

Quote:
The problem, says Mr. Farmer, is that the models bear too little relation to reality. People aren`t quite as rational as models assume, he says. Advocates of traditional economics acknowledge that not all decisions are driven by pure reason.

BINGO!!! We have a winner!!!!

Traditional economics also fails to acknowledge and model reality in another
way: insider trading. They do not model insider trading and fail to
acknowledge its consequences. Oh hell! They fail to acknowledge its
very prevalent existence.

To keep things simple, economists leave out large chunks of reality.

DOUBLE BINGO!!!

Snarkiness aside - again I apologize, I needed to get my recommended daily allowance of that just now - there is some genuinely interesting stuff in the article. My overall take is this: Any economic model which fails to allow for irrational expectations and decidedly nonequilibrium economic states (just as there are many physical phenomena which cannot be described by classical equilibrium thermodynamics), is doomed to fail.

AMEN.

[garo]

The government here is utterly incompetent. As a wag here said, when they went to the EU to negotiate the bailout it was the boys from Offaly and Tallaght versus the heirs of Richelieu and Bismarck. The markets correctly think that this "bailout" does no favours to Ireland and it remains a high sovereign default risk.

Three very good pieces by Barry Eichengreen, Wolfgang Münchau and Kevin O'Rourke.

http://www.irisheconomy.ie/index.php...irish-bailout/
http://www.irishtimes.com/newspaper/...284564382.html
and here