I don't know what will be more sad, watching the conservatives who shout and shout and shot to no avail or the conservatives who marshal such meek arguments in voices that lose amplitude by the day. But the sadness of that Kristol editorial certainly seems to signal the shape of things to come. "Come on guys, we don't need to pass the Democratic agenda! The Republican agenda didn't work, what makes you think the Democratic one will. We're all bozos on this bus, don't tell me."

Kristol: "I’ve worked in government. It’s hard to do much thinking there at all, let alone thinking anew."

"working in government" isn't the problem there, buddy. sorry ta break it to you.

the word i'd use to describe this Kristol column is PATHETIC. he admits outright that he has no fuckin' clue what he's talking about, or any idea what to do next. Which we already knew, but usually the wizard doesn't pull back the curtain on himself so nakedly.

i never thought i'd say this, but i think maybe things have gotten so bad that even Kristol the Propagandist can't keep up appearances anymore. I picture him with that smarmy grin wiped straight off his face, staring glumly into a bottle of merlot, mumbling angrily about wall street bankers and sarah palin.

well, maybe not.

I would guess that most economists know what a mortgage-backed security is, although they might not have realized the extent to which these and derivatives were being used as leverage.

"I would guess that most economists know what a mortgage-backed security is, although they might not have realized the extent to which these and derivatives were being used as leverage. "

From my conversations with economists over the last year, I'd say that most knew what a Fannie/Freddie mortgage backed security was, but not a private sector one, and certainly not a CDO, SIV, CPDO or CDS. Hopefully a lot more know these things now, and realise the importance of undertanding the details of financial markets.

As for Kristol's article, there certainly aren't many academic economists on Wall Street (apart from the professional economists, of course). Most of the financial models were built by maths PhDs. Part of the problem was that the economic models were actually too simple, making many unjustified assumptions for the sake of easier computation.

I tend to agree with Ginger - if Kristol's got it wrong (and he kind of does), it's in believing that Wall Street gets the economics better than Washington; both don't entirely know what they're talking about. But in terms of giving, say, Schumer a hard time for pulling a gigantic number out of his nether regions, I'd say Kristol is dead on: Paulson's $700 billion, we now know, was pulled from thin air... and so will the "new bailout" number, and the underpinnings of the plan are mostly hope, not expertise. The fundamental problem we're facing, I'm convinced, is the deflated value of a key asset to most people: the value in their homes. A "stimulus" package may, possibly, stave off some elements of disaster... but I don't think it's the magic bullet any more than Paulson's ever evolving TARP is. And I know you like to defend economics, Ezra, but the reality remains close to what Kristol's criticizing: economists do a lovely job of evaluating what's just happened... they're much worse at figuring out what to do about it.

Kristol's column, in its admission that the matter is so complicated as to be beyond simple slogans, is so much more honest than the crap I heard from Axelrod yesterday (and lose that damn combover if you are gonna be on tv man!) we have to take care of main street first, not wall street.... [and demagogues on] It's no longer the campaign dude and simplistic electioneering slogans don't inspire confidence.

I was roommates with a Wall St. Finance guy who back in 2004/2005 described his CDO/MBS/CDS profession. It scared the crap out of me as an econ grad student(it seemed obvious that it was a house of cards waiting to fall) and I ran to my econ professors to ask them if they thought the same thing.

Their response?

"I have no idea what a CDO or CDS even is."

Economists, for the most part, were no more informed about Wall St.'s mess than anyone else. Not everyone was so in the dark, but most were.

Its like saying a farmer and a chef are the same thing because they both deal with food.

Kristol linking the current crisis to the science of economics reminds me of a story from my childhood. When I was about 7, I asked my mom, a chemist, whether she felt guilty about being a chemist. The environment, afterall, was getting crappy because all sorts of chemicals that humans produce. It seemed logical that chemistry should be blamed for something like that. Makes sense, right? Yes, to a 7-year old, for sure.

To a grown man, writing in the Times, not so much.

I can still vividly remember 2005 running from the business school where a finance professor had just explained some aspect of the derivatives market to me, back over to the econ department, hoping to get their quick before I forgot the details. Then, getting some ideas of the economists, and running back to the finance people to ask a followup question.

After successfully capturing the attention of 2 macroeconomists for a few weeks, I eventually had an IMF report on financial market outlooks shoved in my face where the IMF pretty explicitly said that these developments had spread (and diffused) risk and that CDO's and CDS's were good things.

The basic line from my professors was, "ok, that was an interesting distraction for a little while, but the IMF says not to worry, so I wont and neither should you. Now get back to your studies."

This really bothered me because there were many passages in that IMF report where, if you read through the technocratic babble, they were basically saying they had no idea how these financial markets would react to bad credit/liquidity conditions, but they were pretty sure things would be ok (without a single justification of why they concluded that).

When things did start to go bad, while all the other economists were taking crash courses in modern financial markets, these guys were able to position themselves as the go-to guys on the topics within the local academic community. Both got a big boost to their reputations.

I got a bunch of nice emails, but I really feel like I should have pushed them more, but I was a first year grad student and who was I to question them?

But, my old roommate was actually on Wall St. so I knew things that real economists didn't and I'm sad I didn't stick to my gut and push the topic more.

Kristol linking the current crisis to the science of economics reminds me of a story from my childhood...

Great story. It also reminds me of the time on Arrested Developement when the housekeeper Lupe accidentally killed Buster's bird, and Buster then trashed the kitchen, believing it was where Lupe lived.

Come to think of it, Buster and Bill do share the same idiot-man-child incessant grin...

Wall Street may not be academic economists, but most of them have been educated by academic economists. Many of the guys running Goldman or Citi, and certainly most of the people at the Federal agencies, have higher degrees in some branch of economics or from business schools where their classes were being taught by guys with econ PhDs. The point is, the dogmas of the free market and ideas about how businesses work are all permeated by the idea of "homo economicus," a fiction concocted by economists about a certain type of "rational" self-interested behavior -- and this idea underlies a huge array of mathematical models of how basic economics works. So academic economists may not be to blame directly for mortgage-backed securities, but the deregulatory structure that allowed such BS to proliferate is very much a result of, and a repudiation of, both the central dogmas of their discipline, and many of their specific micro-economic theories.

Nylund,

I do not know where you were, but there were economists who were warning about the situation, but their voices were largely drowned out by the general buzz that risk was being efficiently spread, which was easy to believe for many. In a sense the problem was that the mathematicians and physicists (not so much finance Ph.D.'s) who were writing the contracts did not pay much attention to the simplistic economic assumptions that they were making for their contracts to work, or if they knew, they assumed they would hold (there will always be a counterparty!).

To weboy above: The numbers being floated for a stimulus package are not simply being pulled out of someone's ass. For example, Krugman on his blog gave a rough calculation of how much was needed -- he said at least $600 billion. See here: http://krugman.blogs.nytimes.com/2008/11/10/stimulus-math-wonkish/

Obviously, you can challenge the assumptions, but the number is not simply being pulled out of Krugman's ass, he has a rationale for it.

Just because you and Bill Kristol have no clue what you're talking about doesn't mean no one else does.

ole Billy Kristol Meth seems to relish his role of chief of ignorance. He's like a dry drunk, except he's only dry in public, and alcohol still allows for some rational thoughts, but the meth doesn't.

I wonder if he has ever actually, you know, researched some before writing the random but consistently wrong crap wherever he appears.

Well, there have been times when people have put together very mathematically complex forecasting tools, and used them to run hedge funds essentially as robots, slaves to the math. This has, indeed, tended to end in disaster.

It's not what this crisis was about, though, so maybe if Kristol time machines this column into the past or future to one of those crises, it'll all work out.

Ezra,

You're talking out of ignorance. Most of the staff on Wall Street has been either through undergraduate economics or business degrees (and the undergraduate business degree heavily features straight economics courses) or graduate business degrees (same thing).

Finance academia IS effectively the same thing as economics academia - yes, the focus is narrower, but almost all finance academics are pretty much exclusively trained in economics. I actually never encountered a finance prof at my graduate business school who either didn't have an economics doctorate outright (and most of them in fact did) or had a doctorate in finance which was nearly exclusively studying economics.

Further, actual operating finance is hugely impacted by economic / finance theory. Donald MacKenzie's An Engine, Not a Camera is really good here.

But, my old roommate was actually on Wall St. so I knew things that real economists didn't and I'm sad I didn't stick to my gut and push the topic more.

Dude, this mess is all your fault.

Ih ave to agree with JD and burritoboy. Defending academic economists just because the attacker is such an ignorant asshole is the wrong reflex. Economists are deep into this trouble. You can point to a handful that warned against the excesses that led to the current crisis but they are exceptions. As a profession, economists share a large responsibility for what's happening and there is absolutely no reason to trust them.

I hate to admit it, since it indicts my profession, but a lot of those economic models were created by people who aren't economists at all. They were unemployed physicists, turning their numerical modeling ability to markets. Trouble is, physicists think (for good reason) that their models embody underlying, inviolable and irrevocable physical law. The sequel follows from that.

Just a second, it wasn't us finance people who were saying everything was alright (though some of us were) a lot of this high-powered finance analytics was being done by mathematicians and physicists who were hired to put more rigor into financia l models along with a few economists.

Case in point - at one firm I interviewed at that traded ABS, I was invited to join an analytical team made up of 2 math people, 1 physicist, 2 economists...

I would have been the only one with a finance Ph.D.

And I was scared silly by the risk assessment I saw...

Most economists didn't know what a mortgage-backed security was.

It strikes me that that is quite an indictment of economists -- if finance isn't part of economics, it should be. There are relatively few people who are capable of telling people what's going on in the economic / financial world, and you'd think that economists would be some of them.

Especially because everybody in finance, or almost everybody, was either keeping their mouth shut about what was going on, or else lying, because they had their own personal stake in the disaster, and because their duty to their clients outweighed their duty to the citizens.

Kristol's column is shit, like everything he's ever done of any kind, but it's not because he mistrusts economists.

In a sense the problem was that the mathematicians and physicists (not so much finance Ph.D.'s) who were writing the contracts did not pay much attention to the simplistic economic assumptions that they were making for their contracts to work

etc, etc.

To be fair, I think many of them were merely delivering the product desired by their employers. They probably noticed they were assuming spherical cows, but when the only point was to provide justification and obfuscation for bovine over-leveraging (or "cow tipping"), what difference did it make? Until the moosic stopped.

Think of Kristol's column as the latest in a continuing series of commentaries on stuff he doesn't know about. How much longer before he's consigned to the dustbin of punditry?

"I hate to admit it, since it indicts my profession, but a lot of those economic models were created by people who aren't economists at all. They were unemployed physicists, turning their numerical modeling ability to markets. Trouble is, physicists think (for good reason) that their models embody underlying, inviolable and irrevocable physical law. The sequel follows from that."

But there's very little reason to think that if the models had been done by people with advanced degrees in economics that the results would have been significantly different. Not only does economics have huge physics envy (which fuels much of Mirowski's oeuvre), a huge percentage of economists have undergraduate or even graduate degrees in physics, math or engineering (quite a few economics grad students never took a single class in economics as undergraduates but were admitted to econ grad school based exclusively off their mathematical abilities).

Especially because everybody in finance, or almost everybody, was either keeping their mouth shut about what was going on, or else lying
This suggests a possible cause for the academic economists' lack of understanding of the situation.

They don't have an economic CIA that gives them data on what everyone is really up to, you know. They have to work from published data and if someone is hiding their dodgy accounting practices or the weakness of their debt, academic economists won't see it any more than the general public.

Academic economists and the bankers themselves are without a doubt equally to blame for the current crisis. Just ask Dean Baker, who considers the failure of most economists to predict the crisis to be a colossal failure of the economics profession. I agree with JD and burritoboy that the main source of their failure is their belief that their mathematical models, designed on the assumption that human beings are inherently rational and selfish, scientifically prove that unfettered capitalism is self-regulating and the ideal mode for organizing human relations. Unfortunately, their faith in these models resembles, in my opinion, fundamentalist religion much more than science. Just look at Greenspan's confession before congress back on October 28th:
“I made a mistake in presuming that the self-interest of organizations, specifically banks and others, were such as that they were best capable of protecting their own shareholders and their equity in the firms." Can't you just see it? For his whole life, he and many other economists convinced themselves they were living in an Ayn Rand novel. Reality, however, is not so simple.

*Correction, he made that statement on October 24th.

What I found particularly awful about that piece is that it was a deliberate attempt to shiv Krugman, who wasn't there on the op-ed page. And it was done either in ignorance, or a deliberate conflation of finance and economics.

As others have said, the trading models were put together by maths and physics PhDs earning more in the financial sector -- I know a couple of people who did just this -- than they could in academia or industrial science/maths.

Kristol's Monday memos are designed to throw bullshit into the political debate. Presumably, it'll get quoted -- and not properly refuted -- on the cablenets.

"Unfortunately, their faith in these models resembles, in my opinion, fundamentalist religion much more than science."

Not quite. Fundamentalist religion believes in sin, or alt, "human error." In economics everything is like a weather event, sans human culpability.

"They don't have an economic CIA that gives them data on what everyone is really up to, you know. They have to work from published data and if someone is hiding their dodgy accounting practices or the weakness of their debt, academic economists won't see it any more than the general public."

No. You simply don't understand how economists in academia work. They're entirely uninterested in real economies in real time - a real-world breakdown is interesting only insofar as it can produce fodder for potential future papers. They aren't paid and certainly not encouraged to monitor current economic events (anymore than they need to stay current with quips or anecdotes for the beginning of today's class session - where their comments are often just as trivial as any random person reading the front page of the WSJ that morning would be). Indeed, they would be unfavorably talked about if they did spend considerable amounts of time monitoring the real-world economy. Their methodology can only work from a subset of very large, very complete, very carefully collected datasets - except for datasets mostly produced by governments and by the most liquid and most advanced capital markets, these datasets don't exist in private industry. You can't get these datasets in real-time as an academic (some economists working at well-funded capital markets firms can get more real-time information, but that research is never released to the public until the data is stale).

So, it's not that they wouldn't see through falsifications, it's that, unless they could get a paper published about it, they would largely refuse to do such a thing and often wouldn't have the skills or training to do so even if they didn't refuse (economists often have very little understanding of accounting, for instance).