The N.Y. Times ran an interesting pair of articles Sunday regarding how economists “got it wrong.”
Conflict of Interest
Ben Stein (in “The Long and Short of It at Goldman Sachs“) comments on the economic analysis conducted by economist Jan Hatzius of Goldman Sachs. Dr. Hatzuis concludes that the sub-prime mortgage ‘crisis’ will not only hurt the stock market, but adversely affect overall growth. Is Dr. Hatzius’ doomsday scenario going to happen?
Mr. Stein believes Dr. Hatzius’ assertion “…is a conclusion that is an estimation based upon a guess.” Economists, especially macro-economists, have had a very poor track record predicting the future. This is likely because the entire U.S. economy is extremely complex and even if it were to be modelled, it would be non-linear in nature and subject to the consequences of chaos theory.
More troubling, is Mr. Stein’s hypothesis of why Dr. Hatzius’ analysis is gaining prominence:
Perhaps as a token of Dr. Hatziusâs genuine intelligence, which is fine. But to me, his paper seemed like a selling document in the real Wall Street sense of selling â namely, selling short. (Dr. Hatzius notes that he has long been bearish on housing, since faraway 2006, but I respectfully note that that is a lot different from predicting a credit catastrophe. The spokesman for Goldman also noted the companyâs bearishness on housing since 2006. He also noted that in the recent past, Goldman Sachs has moved to a considerably larger short posture and that the firm is net short.)
…But what leaps out at me from this story is that Goldman Sachs was injecting dangerous financial products into the worldâs commercial bloodstream for years.
My pal, colleague and alter ego, the financial manager Phil DeMuth, culled data from a financial Web site, ABAlert.com (for âasset-backed alertâ?), that Goldman Sachs was one of the top 10 sellers of C.M.O.âs for the last two and a half years. From the evidence I see, Goldman was doing this for years. It might have sold very roughly $100 billion of the stuff in that period, according to ABAlert…
…The point to bear in mind, as Mr. Sloan brilliantly makes clear, is that as Goldman was peddling C.M.O.âs [Collateralized Mortgage Obligations], it was also shorting the junk on a titanic scale through index sales â showing, at least to me, how horrible a product it believed it was selling.
Dr. Hatzius likely honestly believes in his analysis, but one can not doubt that there is a serious conflict of interest being that Goldman Sachs pays his–likely very large–salary.
Do-gooders gone wrong
- World Bank Economists advised Malawi “…to adhere to free market policies and cut back or eliminate fertilizer subsidies, even as the United States and Europe extensively subsidized their own farmers.”Â The result was Malawi has been dependent on food aid from rich nations and international organizations.
- Malwai’s solution was to begin subsidizing fertilizer to increase crop yield.Â The result is that “… this year, a nation that has perennially extended a begging bowl to the world is instead feeding its hungry neighbors. It is selling more corn to the World Food Program of the United Nations than any other country in southern Africa and is exporting hundreds of thousands of tons of corn to Zimbabwe.”
Some claim that that the recent positive result was due to good rains over the last 2 years.Â Nevertheless, the results are indisputable.Â While I am generally in favor of more freer markets, here is one example of where economists got it wrong again.Â Most World Bank economists are idealistic and want to improve the world for the poorest of the poor.Â However, it seems that an international bureaucracy–despite having some of the smartest minds in the world on its payroll–is not doing a great job.
What should we take from these stories?Â First, is that one must always be on the lookout for conflicts of interest that may bias a given piece of economic analysis.Â Any one piece of economic analysis should not be sufficient to persuade you of the veracity of a theory; multiple analyses who reach the same conclusion are needed in order to have an adequate degree of reliability.Â Secondly, top-down governing does not work, even if the people enacting policy are extremely bright economists.
This leads us to a new motto: Don’t always believe your local economist…except the Healthcare Economist, of course.