By Dan Kervick, who does research in decision theory and analytic metaphysics. Cross posted from New Economic Perspectives
The Fed did something on Wednesday: it announced a new program of open-ended quantitative easing, and it announced that it likely won’t pull back on the new round of monthly asset purchases once the economy begins to recover more strongly, but will keep the purchases going for some indefinite period of time afterward. After what exactly was left unsaid. The Fed apparently has a target it intends to overshoot, but hasn’t said exactly what the target is. But whatever it is, we have been given forward guidance that the reaching of that unspecified target won’t stop the asset purchases – at least not right away.
This announcement has greatly pleased all of those people who have been calling for the Fed to do something. Critics of Ben Bernanke have been deeply frustrated by the terrible lack of somethings emanating from the Fed. If only something would be done, the economy would grow and jobs would come back. The economy has been suffering from a something deficit! Where is the doing that needs to be done?
Well something has now been done. Hallelujah. And many of Bernanke’s critics appear to have undergone a religious experience as a result. Bernanke has been transfigured in their eyes from diffident nebbish into brave something-doer: an explorer of uncharted monetary territory boldly doing where no Fed has done before. So the doing has been done – and it’s really something, isn’t it?
Yet when one reads accounts of how these asset purchases are supposed to accomplish their aim of generating a stronger recovery, one gets a lot of conflicting theories. It’s almost as though the mere doing of something – anything – is thought to be more important than the actual nature of the something that is done. But there is a common core running through most of these explanatory accounts: expectations. The economic policy globe, it seems, turns upon the axis of our expectations, and the Fed is the master of those expectations.
Here’s how it works in theory: Suppose there is something X the Fed would like to see happen. The Fed is supposed to make X happen by announcing that it intends to make X happen and that it is doing some other thing Y that is aimed at making X happen. The hope is then that a significant number of people think that there is a causal connection between Y and X, and that Y causes X. They thus start to believe, on the basis of the announcement, that Y will in fact make X happen. And as a result of these beliefs, they then start to behave in ways that depend on the expectation that X will happen. And it is their behaving this way that in the end actually makes X happen – if the trick works.
So what is important, the defenders of this approach say, is that people believe quantitative easing will cause a stronger recovery. They will then start to invest in production, hiring and consumption more readily because they are expecting improved conditions. And by doing these things, people will actually generate the desired stronger recovery. It doesn’t really matter what quantitative easing would have accomplished on its own if people didn’t have these beliefs.
If this approach to governing a society seems strongly familiar to you, that’s because it is an ancient one. It is the way some shamans operate.
The shaman, let’s say, wants the people to plant more crops and work harder in the fields to make the crops grow. So the shaman does a fertility dance to petition the fertility goddess for her favors. The people believe the fertility dance will make the crops grow. They get excited, and start planting with more alacrity. They also work extra hard and put in longer hours in the fields because they now believe the fertility goddess is on their side. And the crops grow! The dance worked; the prayers have been answered. The shaman might believe in his own magic; or he might be a manipulative cynic. It doesn’t matter. The desired outcome occurs either way.
Notice that the effectiveness of shamanistic economics, if and when it is effective, does not depend on what X and Y are. They could be almost anything. It could be that X is a reduction in the unemployment rate and Y is a program of Fed asset purchases. Or it could be that X is an increase in iPad sales and Y is an auction of relics from Steve Jobs’s house. All that matters is that apart from whatever actual causal connections exist between X and Y that operate independently of expectations, there are also a lot of popular beliefs about the connection between X and Y that cause people to act with the expectation that Y will cause X.
Shamanistic economics, when it becomes a routine way of life, debases and undermines our democracy. Its continued efficacy depends on the perpetuation of false and superstitious beliefs among the public, which corrupt public understanding and the capacity for rational public deliberation. It also encourages, and even depends to some extent for its operation, on an attitude of deferential awe toward the central bank and its leadership. And it encourages policy makers themselves to adopt an operating stance of aloof and frequently deceitful control of the masses, rather than a posture of open and accountable public service to the citizenry. The shamanistic policy maker is not a public servant; he is a magus.
It seems deplorable that professional economists are willing to participate in this antithesis of democracy, and replace informed democratic self-government with a primitive and archaic form of governance. To be fair, some of the people calling for more quantitative easing have offered defenses of the program that depend on more firmly grounded and resilient causal mechanisms – non-shamanistic mechanisms that do not depend on the fickle vacillations of popular beliefs and delusions. And even some of those calling for quantitative easing based on the shamanistic path aren’t arguing for the employment of shamanistic economics all the time. Instead, they just seem desperate. They would prefer more concrete actions from the US Congress, but believe it is impossible to get Congress to act. It’s hard to blame them in their despair. The current Congress is one of the most incompetent, malevolent and cynical groups we have ever had sitting in Washington. And the President, with his misguided emphasis on long term deficit and debt reduction hasn’t been that much better – although he has called for more spending up front, with the deficit reduction to be put off until later.
But there are other people – for some reason more prominent in the blogosphere than elsewhere – who defend full-bore shamanistic economics as the preferred way of doing the country’s macroeconomic policy business all the time. They believe the Fed should steer, direct or conduct the economy, playing the expectations of the frequently deluded and grossly untutored masses like an instrument, and managing all with its fertility dances and awe-inspiring pyrotechnics. A certain kind of mind seems drawn to the shamanistic approach. They seem to be mostly white; mostly male; mostly young; mostly college educated. They don’t seem to like democracy very much – and the fact that the shamanistic system keeps politicians and citizens out of the picture, and concentrates power in the central bank and the major financial institutions it coordinates and conspires with, is appealing to them.
There is an alternative version of the expectations model of Fed policy that some would say excuses the expectations-oriented macroeconomist from the charge of shamanism. On this view, we are to imagine the world consisting entirely of a thought leader surrounded by people who watch and listen to everything the thought leader does and says, and who form their expectations accordingly. They all know that everyone else is watching and listening to the thought leader, and is also forming their expectations in accordance with the leader’s powerful words. But since they all know these facts about how they and their companions are forming their expectations, then when they do change their expectations of the future in response to the thought leader’s statements, they are behaving rationally. Mass conformity, coupled with mass knowledge of mass conformity, renders the expectation of continued conformity rational. It’s not magical or superstitious at all.
How delightfully clever!
But here is the problem with the applicability of this philosophical thought experiment. In the real world, very few people are really paying much attention to the Fed and its illustrious Chairman, much less forming their expectations in the light of his words. If you work in an ordinary place of business, filled with a broad cross section of folks, try asking a few random co-workers what they thought of Ben Bernanke’s press release or press conference on Wednesday. And for those among them who listened, and can say something non-vague about it, go on to ask them how they are changing their behavior in response.
What the popularity of this cramped expectations conformity model among some economists really shows is that the people who are attracted to it believe that the Fed guides the economy because it guides the actions of the only people who matter – the big players in the asset markets, who hang on the central bank’s every statement, whose moving and shakings shape the world, and whose profits then trickle down on the rest of us. It’s a top-down view of economic reality. These financial and asset market giants are the true masters of the universe. (They are also often the guys the shamanists went to college with.) Macroeconomic policy should be geared toward feeding them with profits and keeping them happy, not toward building an economy from the ground up. Boost big finance, keep the meddling masses out of the decision-making, and let some of the overflow trickle down.
Will quantitative easing work? I’m skeptical. But who can say for sure? Perhaps business people are excited enough by Bernanke’s fertility dance to start planting their economic fields again and begin investing more heavily in work and production. Maybe there are enough suckers believers out there to drive the economy forward with their new zeal over this confusing Fed something. Or maybe we’ll just get a brief asset rally followed by nothing – or even another dangerous and unproductive bubble blown up by short-term profit seekers who will accelerate the QE hype just long enough to make a buck for themselves before cashing out.
But if the expectations magic does work a bit that is in itself worrisome. The continued practice, and occasional success, of shamanistic economics will add to the vanity of the elites who are drawn to this way of thinking about macroeconomic governance. They will argue for even more transfers of economic policy power away from the elected, political branches of government to the central bank. They will be more convinced than ever before that they are in the possession of special magical powers or wisdom, and even more strongly convinced of their divine right to govern. They will redouble their commitment to top-down, plutocratic economic governance. And transitory successes in shamanistic economics will increase the superstitious tendencies and political passivity of others who don’t know any better, and who assume that the elites always know best.
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The Fed’s announcement has already brought certain classes of mortgage rates down to record lows.
Is it your argument that low mortgage rates, inducing more construction and more home sales won’t help the recovery and is thus “shamanistic”?
There will be no housing based recovery. Real people are deleveraging, and zero percent interest rates probably wouldn’t induce a reversal. This is just more free money for those who already have so much money that they can’t spend it.
If you wanted a housing recovery, using this new money to pay off peoples mortgages, buying homes for the poor, etc, might help.
Slightly cheaper rates for a lifetime of debt are not much of a deal, and not much motivation.
Deleveraging is largely over – in fact it is overdone by historic standards:
http://research.stlouisfed.org/fred/series.php?sid=FODSP
U.S. population is growing at a healthy rate and young couples need a new place.
Life does not stop just because we had a bad crisis.
In any case, all this is a far cry from “shamanistic” transmission channels…
That link should have been:
http://m.research.stlouisfed.org/fred/series.php?sid=FODSP
“young couples need a new place”
But can they afford one?
Mainly depends on the mortgage rate and on whether they have a job. Many don’t have a job but even more do – and life does not stop.
Houseshold formation rates are down, particularly among young people. They can’t afford to get mortgages due to 1. Student debt load which make them ineligible and 2. Un-under employment. In addition 3. Some recognize they don’t have stable enough employment prospects over the long term even among those that have a job (average duration of a job for recent college grads was UNDER TWO YEARS before the crisis) that they are correctly concerned that they won’t be able to meet their mortgage commitments even if they can get a mortgage. In addition, if you think you might have to move to stay employed, buying a house is nuts. You have 5-6% transaction costs every time you move v. your 20% equity. I grew up in a household where we moved frequently, and my father often lost money on his house precisely because we moved every 2 years on average (in those days, big employers made you whole, that beenie is LONG gone for anything other than top execs or highly sought after recruits).
In addition, you have 4. Adverse demographics, impact of boomers retiring more than offsetting any household formation among the young and 5. Most of the deleveraging has been involuntary, meaning foreclosures and bankruptcies. Those people have severely restricted access to credit at reasonable rates for the following 7 years.
Finally 6. Most of the impact historically of lower rates is refis. Talk to any mortgage weenie. The same creditworthy people refi over and over. This does provide some lift, but not anywhere as broad-based as Ben and Co. hope, particularly since those people almost without exception have already refied in the low rate environment (as in they’ve already gotten most of the benefit of super low rates).
And that’s before you get to 7. The number of REOs being held off the market for bulk sales and the 2.8 million households that are now severely delinquent and pretty much certain to face foreclosure. Once those are converted to rentals, you’ll see lower rental rates in many markets due to relief on the supply side. The price pressure on rentals is due in large measure to foreclosures (people still need a place to live) + houses held off the market by servicers manipulating inventories.
Put it another way: top mortgage analysts (Laurie Goodman and Josh Rosner) have been and still are negative on the prospects for housing, and for reasons that won’t be blunted much by the Fed’s action.
On top of that, if the Rs get control of Congress, you will see continued if not accelerated shrinkage of the Fannie and Freddie balance sheets AND restrictions put on FHA loans. There is not private mortgage market now ex some on balance sheet lending by Wells (Wells’ aggressive posture has the normally complacent OCC freaked out and Chris Whalen predicting a train wreck for them in a couple of years). There is no private mortgage securitizaiton market thanks to lack of reforms, and if the Rs restrict FHA loans, which they’ve noised they might do, it doesn’t matter what rates are, credit will be too restricted for the rate break to have any impact.
Oh, so we should get excited about a fall in interest rates in “certain classes of mortgage products”? Looks like noise.
“The average rate on a 30- year fixed mortgage held at 3.55 percent in the week ended Sept. 13, near a record-low of 3.49 reported July 26 in data dating to 1971, according to McLean, Virginia-based Freddie Mac.”
http://www.bloomberg.com/news/2012-09-16/homebuilding-probably-climbed-with-sales-u-s-economy-preview.html
Beppo has it right, per your initial premise. Or, as StreetTalkLive put it in “Bernanke’s Folly Part 1”, “Despite trillions of dollars of liquidity, support programs and ‘forgiveness’ for every criminal act in the book, there has yet to be a real recovery in housing. The most recent upticks, primarily due to speculative investor demand for rental properties . . . If you couldn’t spur a massive house buying binge with the lowest mortgage rates in recorded history – what will another quarter point, or so, actually accomplish?”
After four years of counterfeiting, QE3 won’t stimulate a housing recovery or employment any more than QE1&2 or Operation Twist did. It was never designed to. Buying more toxic MBS from insolvent banks is plainly another bankster bailout, very thinly-disguised as shamanistic monetary policy. It is dishonest and will only hurt those it purports to help by inflating costs for shleter, food and gasoline while doing nothing for employment. This is the ugliest kind of fraud.
Wouldn’t it be better if lenders looked out at the general and local economy and thought “since there is so much strong business activity and growth, there will be a lot of good jobs for years to come and people will have adequate income to buy homes, therefore the risk of default is low, so I can make money on these loans even at low rates.”
Instead of “well, this economy is crappy, people continue to lose jobs and wages continue to fall, but hey, not to worry, benny’s got my back. He’s going to buy mbs’s by the crap load and drive down interest rates, and there is no risk to me if the buyer defaults. Let them default and let the government hound them to their grave. I got mine, guaranteed”.
The Fed is acting to prevent a collapse of asset prices, nothing else. Loading up its balance sheet with more worthless MBS means enriching the speculators who now own them or the banks now stuck with them and marking them to fantasy in the hope that nobody will notice they are really insolvent. The real economy has a different problem. Consumers have reached a leverage limit. Too many of them cannot buy houses at any price (particularly prevailing prices which are far too high relative to existing income levels). Many cannot maintain historic consumption levels, cannot absorb price increases in food and energy, cannot service student debt, credit card debt, mortgage debt, auto debt. Preserving the sanctity of individual debt insures there will be no economic recovery, but we may get another asset bubble or two before the gigantic collapse which now seems inevitable unless something is done about the sanctity of individual debt. Steve Keen looks smarter every day.
He certainly does. Along with Joebhed, F. Beard, the resurrected and validated Chicago Plan, Kucinich’s Need Plan and Iceland. The federal reserve system and the “free” market have had a good run and now it is over. The Fed cannot stimulate a market which has devolved into nothing more than a bazaar just by keeping interest rates low. It can only keep the banks from folding. We need to take credit creation away from the big banks asap, and spend our national treasure ourselves in our own behalf. A difficult fight lies ahead because, to quote Kervick: “The current congress is one of the most incompetent, malevolent and cynical groups we have ever had sitting in Washington.” And they are always on the take.
A very interesting article. Shamanistic economics is a quite apt name but a more useful one would be post-modernist economics, because it would put the situation you are describing into the more general context of the end of the past century and beginninf of this one. This phenomoneon once again highlights the distance of economics from the hard-core rational sciences.
“but a more useful one would be post-modernist economics”
No, don’t encourage him. He already thinks he’s a “researcher in analytic metaphysics,” whatever that’s supposed to be.
I agree with the analysis; well represents what is been occurring for the past 40 years. Which represents boom and bust cycles, unemployment for the masses, debt for the nation, and great wealth created out of thin air, representing no real product.
Okay. How is this post “an analysis”?
It is an analysis of what still manages to perpetuate this “system.”
I actually thought the argument was excellent:
– no one knows what to do
– we have the most incompetent, pathetic, gridlocked Congress in memory and they can’t get a damn thing done, plus
– the President tried his damnedest to work with the incompetents in Congress (and brought some bad economic advisors on board in his first term), so
– with the rest of government unable to act, everyone turns to Ben — who seems to be the only one capable of doing the Magical Economic Fertility Dance, since Congress is too inept and the President is too constrained.
And who is shouting most loudly for the Magical Economic Fertility Dance? Why the financial sector, of course — because the rest of us are going to get on with our lives, no matter what happens.
But for the financial elites, the Magical Economic Fertility Dance provides more evidence that only Central Bankers and hierarchical structures work, and that they control them.
Lather, rinse, repeat while the feedback loops continue to reinforce each other, creating an ever more unstable so-called ‘economy’.
I thought it was a terrific post.
At least, as I understood it.
RoTL,
Your plain English language summary of the post represents the conventional wisdom about QE-x amongst “white collar males in the blogosphere.” I don’t disagree with this conventional wisdom.
The question is, why does Kervick need to dress up the conventional wisdom of “white collar males in the blogosphere” in all this rhetorical spin doctoring, pretend the ordinary non-philosopher or non-economist doesn’t actually possess this conventional wisdom– or as if he weren’t himself a “white collar male in the blogosphere”– and publish it at New Economic Perspectives as if it were some sort of deep insight delivered from on high by Plato Himself?
Maybe I just find pretension particularly annoying this Sunday morning, but this is annoying.
Thanks for the summary ReaderofTeaLeaves! I think that pretty well captures it.
Lol. Yeah I noted now the thing about “analytic metaphysics”.
In means I’m a researcher in analytic metaphysics.
http://en.wikipedia.org/wiki/Analytic_philosophy
Nice post, Dan. You obviously hit a nerve among some of the Faithful, given the snarkiness of a few posts above.
You must admit that a top-down, mystical, model of economic management would indeed seem rather appealing to would-be members of an educated social elite. I imagine the attraction might be most strongly felt among those who have borrowed most heavily for their initiation to the priesthood–the would-be’s have the most at stake in the process.
This is actually a rather “shamanistic” post, given its staring into the author’s personal crystal ball nature.
Take the contention that there are “white collar males” in the blogosphere** who are fans of QE-whatever number this is.
Honestly, I haven’t seen this. It seems to me that the QE strategy has been viewed with skepticism, if not held as an object of ridicule, across the ideological and professional spectrum.
From what I’ve seen “white collar blogospherians” generally regard QE as a means of blowing a bubble in the stock market that does not reflect the actual value of the stock market in a recession.
Are there people who will try to take advantage of this and– successfully or unsuccessfully– time the market? Yeah. And?
Unless their names are the “modern monetary theorists” who run money on the side, I don’t want to hear about it from the MMT-fanboy and “researcher in analytic metaphysics,” a claim far more precious than the mere donning of white collar any day of the week.
Seriously. Nobody talks like this about themselves unless they actually do think they’re Merlin.
And, no, I am not going to illustrate my contention that there is broad based QE-skepticism across the ideological and professional spectrum, because this is a blog comment, not a blog post with hubris of a journalistic by-line attached to it.
Feh.
Merlin did correctly call the crash of 1121.
This was preceded by an announcement from the King’s Tally Stick maker that he intended to make an unlimited number of Tally Sticks.
Merlin also correctly called the Crusade of 1121.
I’m not sure what axe you are grinding here, but my dissertation was on issues in analytic metaphysics, and when I am not writing things about contmporary economic issues, that subject are – and also research on the philosophy of David Hume – are still what I spend most of my time doing. If the byline is distracting, I’d be happy to have it dropped. When I started posting at NEP, I was asked to write a brief description of my interesats for the contributors link, and that’s what I thought was the best description.
Sorry about the typos – hopefully clear enough.
Dan,
I agree completely with your analysis. Of course, we’ve been paying more and more attention to the Shaman, and less and less attention to what really matters economically, for forty years. One cannot ignore the total absence of demand, because consumers are overladen with debt, under-employed or jobless, and companies sitting on tons of cash because they can’t sell what they already produce, and still expect to understand the economy. Yet, the ‘supply siders’ have been telling us to do this for years. In other words, it doesn’t matter how many times you f**k in the furrows, the field will not be productive if you haven’t planted, watered or cultivated by giving real people the power to buy what is produced.
This one came out for the last QE2 but at 5.3 million hits it has a loyal fan base:
http://www.youtube.com/watch?v=PTUY16CkS-k
I enjoyed the post. But are you sure that our latest shamanistic appeal isn’t simply to aovid calling QE by it’s true name–Another banker bailout.
Certainly could be that. But I’ll give the benefit of the doubt to all of those people in the economics profession and the economics blogosphere that have been calling for more QE – and for other approaches to managinthe economy from the central bank through the channels it controls (like NGDP level targeting) – that they are not simply calling to bail out bankers. They attempt to give principled reasons for their views, and I’m trying to go after the Fed-centered approach by meeting those people on their own ground and criticizing them.
Shun the Shaman… pass the Charmin…
Here’s how it works in theory: Suppose the sociopathic Xtrevilist self anointed elite gangsters would like to see the disgruntled masses feel like they have some control over their lives. They announce that they intend to make that happen by announcing that they want the people to have control over their lives and they are going to hold elections so that they, the people, can and will empowered. The hope is then that a significant number of people think that there is a causal connection between the elections and their empowerment, and that the elections will cause them to be empowered. They thus start to believe, on the basis of the announcement, that elections will in fact make them be empowered. And as a result of these beliefs, they then start to behave in ways that depend on the expectation that their empowerment will happen. And it is their behaving this way that in the end actually insures that their FEELING of empowerment actually happens – if the trick works.
The trick always does work because there is another dimension to this deception that the author of this article leaves out. In order for the deception to work the people must validate and legitimize the deception with their attention. This is called the Dominant Attention Trap; as you intently watch the shells whirl around on the con man’s table you do not notice the pick pocket accomplice in the crowd lifting everyone’s wallets. The author himself even engages in this when he then says, “Will quantitative easing work? I’m skeptical. But who can say for sure?”, and thereby legitimizes and validates the FED, a wealthy elite legacy corruption that should be eliminated and never have been allowed to come to fruition in the first place.
So shun the shaman, pass the Charmin, and wipe all of those validating and legitimizing evil dis-empowering fantasies from your mind. Focus instead on the aberrant sociopathic Xtrevilist rich pigs that pay the hacks to constantly deflect your attention from the fact that these rich pigs have totally screwed you over, misdirected the use of the planet’s resources, and have selfishly cornered the best of the planets resources for themselves. Worse, they are now intent on eliminating you.
You could instead be organizing election boycotts and rewriting the Constitution. Or, if that does not strike your fancy, spend some time on calculating the exact date of Banker Freedom Day.
Deception is the strongest political force on the planet.
Bingo, Warren. Keep your eye on the ball and the pickpocket, not the whizzing shells. Monetary theorizing and the confidence game are merely a distraction for just another rip-off — and ensuring that Obama prosecutes his second term agenda.
I don’t like the post. It insinuates that no one sees through the Bernank and his QE rain dance except this author’s own “modern monetary” seers (at New Economic Perspectives), which is simply not reflective of reality.
Thus, the post is driven by unwarranted hubris, while inadvertently revealing a lot about the author, which is really the only content of note here.
I don’t see where you come up with the the idea that I think the only people who aren’t hornswoggled by central bank shamanism are MMTers. I didn’t even mention MMT in the post, or any of its central ideas. The post is a criticism of the central bank expectations management approach to macroeconomic policy, and is completely independent of MMT so far as I can tell.
If you don’t like me and my byline, fine. But don’t let that get in the way of evaluating the post on its own ground.
The point is that this post does not back up its rhetorical spin in any way, which I find reflects your nonsensical byline
well.
Wow.
FWIW, I didn’t read it this way at all.
I didn’t sense Kervick stating that he has the sole corner on Truth, nor that he is the only one who sees through Bernank.
I read it as an attempt to think about a bigger system, in which ‘the economy’ in the eyes of some people (like those in Finance, Congress, and too much of the government) relies on models about money and central banking.
Underneath Kervick’s analysis, I thought that I saw an implied sense that this is **not** necessarily what an economy ‘is’. And I think that’s a conversation that needs to be engaged, and this is one step toward doing that, to wit:
I figure that Bernanke is doing his damnedest in a confusing world. He has the information that he possesses, but it is not complete, perfect information and it is skewed by the institutions in which he has spent his working life. Personally, I have no beef with the man and figure he’s doing his damnedest while we have an incompetent Congress, a badly constrained President, and a SCOTUS that is basically a tool of corporate power.
Within that context, it is worth pointing out that the economic mumbo jumbo that crosses our screens, our radios, our podcasts, and our video streams is mostly about top-down economics, and is driven by the financial sector and the financial elites.
I didn’t see any claims by Kervick (who I don’t know, and don’t expect to ever meet) that he is the only person who sees this: I suspect that plenty of us see this, but we don’t take the time to think it through by committing it to words as a blog post.
A little less personal insult please, and more focus on the integrity of Kervick’s analysis; in my own case, I found it both enlightening, and a breath of fresh air.
But Ben really is clueless.
Once again, I am not debating the conventional wisdom that is presented here. I am questioning the need to present it as anything other than the conventional wisdom.
We’ve already established that certain monetary economists do not share the views of the rest of us about what “the economy” actually consists in.
The world is full of gullible ignorant drones. In that setting his analysis is anything but a “conventional wisdom.”
Dan: before writing about this stuff, you really did ought to think about the difference between:
1. A system with multiple equilibria (aka “sunspot equilibria”) where befiefs about intrinsically irrelevant events can change which equilibrium is the outcome. (e.g philosopher Lewis’ book on conventions.)
2. A dynamic system with a unique equilibrium time path, where beliefs about that future equilibrium path are part of what determines the current outcome.
And a little bit of knowledge of game theory might help too, where players’ beliefs about off-equilibrium path play (counterfactual conditionals) are part of what determines the equilibrium.
Typical obfuscation. None of this “nuance” touches Dan’s main point, which is that questionable econo-psycho theorizing is being used to cover over the fact of yet another give-away to the already over-monied few.
When, oh when, will economists realize that we live in a REAL WORLD, not a model? All the sophistic rationalizations merely distract us from the fact that there are plenty of a$$-holes in our society who will game the system for their own benefit at any and every opportunity. We ignore this basic FACT of life at our peril.
For me, the most shamanistic part of Bernanke’s speeches is the bit about extending ZIRP to 2015 in order to make everyone feel that the markets will be stable. He’s hoping against hope that everyone will see that nothing will disturb the banks’ reverie until 2015. Voila!
Nick, I think in the post I implicitly acknowledged the a priori possibility that widespread beliefs about causal connections between intrinscially irrelevant events could be responsible for the behavioral outcome – i.e. in the Steve Jobs example.
I even accepted later that there are possible worlds in which, if there is sufficient mutual knowledge of the beliefs of the other players, then even if the there is no expectations-independent causal connection between the policy anction and the desired effect, there could be an expectations based causal connection between the action and the desired effect, and the beliefs about the outcome might even turn out to be rational.
But my challenege is not to the a priori conceivability of the kinds of worlds you market monetarists, and others, entertain in your theorizing. My challenge is about whether you folks have an adequate unbderstanding of the world we actually live in, and how its various parts are put together. My claim is that the announcements of the central banker, and modifcations of central bank asset purchasing policies, do not play nearly the role that you guys think it does in our actual economy. That’s the question. The question is not whether there are possible world in which these actions do play a dominant role. It’s an empirical challenge, not a theoretical challenge.
Lewis’s book is about defending the philosophical coherence of certain forms of convention, rules, norms, conformative behaviors and signaling phenomena. But whether and where the possible phenomena he brilliantly clarifies are instantiated in the real world, the actual world we live in and those that are closely accessible to it via available actions, is an empirical question requiring close familiarity with contingent, grubby and empirically ascertainable facts and social realities.
You guys in economics are supposed to be empirical scienctists, not philosophers. You are supposed to develop the a priori elements of your science only so that you can produce empirically testable models of the real world, and then bring those models to bear on the world we actually live in. You are also supposed to help develop techniques that are relevant to decision-making and govenment policy in having predictable outcomes. You need to map the terrain of the actual world in detail, so you can help others navigate through it. To the extent you want to give policy advice that deserves to be taken seriously, your focus needs to be on contingent reality, not a priori possibility.
My criticism is that an awful lot of the policy advice we are getting lately is from theorists who are lost in the clouds of a priori models, and who don’t have a clear understanding of the structure of the actual economic order we live in, based on the functioning of actual, highly contingent and specific economic and political institutions.
If you are trying to navigate your way through a mountain range, you don’t ask a geologist; you ask a guide who has explored the mountain range in detail. If the guide has geological knowledge that can definitely help, but the geological knowledge itself is not sufficient to guide people through the terrain. If you want to fix a broken airplane engine, you don’t ask a theoretical thermodynamicist, you ask an engineer. The engineer’s knowledge of thermodynamics can help, but the thermodynamical knowledge itself is not sufficient to know how to fix an airplane engine.
It is not enough for you to desciibe logically coherent possible worlds with possible sets of beliefs about possible equilibria and possible time paths to those equilibria, where possible statements, and possible ections have possible effects as a result. You need to show we live in such a world – and this is a task for which you don’t seem to have much patience. When challenged on the score of institutional facts, you have repeatedly retreated back into the contruction of other models and thought experiments.
My other challenges are moral and political. I have held that even if the shamanistic expectations magic of the central banker is actually effective in this and that circumstance, in a democratic society of self-governning people with equal dignity, that is not the kind of governance we should want or accept. And the channel through which central bank shamanism operates, IF it operates, is a channel in which the immediate influence and main benefits go to relatively wealthy people, with other benefits trickling down and out to others in an an inefficient and inadequate way after the main benefits are felt by the wealthier people that economists seem to thing are *the only people who really count*.
Your Federal Reserve did release a paper a couple of months ago announcing that either Q2 or Twist(I have trouble keeping up) was a great success.
I didn’t bother reading it because it was one of those econometric thingies with DSP models and “counter-truths”, or whatever they call that.
To me the whole thing sounds like asking your Ouija board what your magic 8 ball would have said, had you not embarked on your successful plan.
So I was content with Charles Biderman’s assessment of the report when he said, “Of course they did.”
So the thing that has me confused is how come no one has identified the transmission channels or means of actually directly measuring them*, but then they continue to bet the future of the world on this…well, shamanism?
*To my knowledge anyway. But yes, I have heard economics called a science. The humors are out of balance and such….
Dan,
Perhaps if you would have stated this at the outset instead of equating what Bernanke is doing with shamanistic behavior your piece would have been better received.
Shamans and/or priests – knowledge workers – who understood the movement of the sun and its relationship to planting crops and life itself were grounded in observation and knowledge acquired over generations. Stonehenge and many other structures testify to these empirically-based belief systems.
Does belief in the “invisible hand” hold up to such scrutiny? Is it rational to believe in something that is “invisible” and insist that it results in the best of all possible outcomes – a value judgment subject to definition?
I think you owe Shamans past and present an apology and need to research what makes shamans much more preferable to “economists” – the high priests of a more recent secular religion rooted in the 18th Century. Indeed, if not for the shamans and high priests would we even be here to discuss “shamanistic economics” – an oxymoron if there ever was one?
Now, I’m going out into my garden to worship the invisible hand of that hydrogen-laden sphere/orb in the sky that enabled me to grow food for the coming winter and make it to next planting season to do it all over again. Is it the “shaman” in all of us or the economist in some of us that beckons. Who would you believe?
I don’t really see the need to be overly generous in praising shamans, wizards, sorcerers, brahmins, priests and other kinds of spirtual leaders and thought leaders in traditional societies. I know these folks had various kinds of solid knowledge of astronomy, seasonal cycles and the medicinal properties of various plants, for example. But their guidance of their societies was also based on the employment of theatrical ritual performances that was designed to control the behavior of their people by convincing those people that the priests had some ability to control nature and the deities. I think the modern central bank, and the style of leadership that goes with it, are not far different. People have all sorts of bizarre belifs about what the central bank actually does and the societal role it plays, and some policy makers and economists recommended exploiting those beliefs to practice economic governance by ongoing expecatations manipulation.
My view is that these people are mostly wrong about the ability of the Fed to control expectations, but that to the extent they are right, this is a dangerous and undemocratic form of government that we should deplore, not seek to perpetuate.
oops. More research on shamanism is needed.
I know what you go through with the razzing Dan. No worries. I’m a Profeser of Contemporary Analysis, which nobody knows anything about and people make fun of me too. They say I’m just making it up, in my imagination. I admit that, but then if they’re a professor of nonsense at Yale, they also are just making it up. the only difference is that they have others who buy into their delusion while I am in my delusion alone, but at least I know it .
My form of research is basically staring out the bus window or getting drunk on red wine and taking a few xanax and seeing what happens in my head. I try to make sense of things that way. I have read alot that gives me a foundation, but it’s sort of an eccentric body of other people’s thoughts. It’s like a telescope, but I see for myself.
The notion of “research” in analytical metaphysics may strike some people as a bit muscular sounding and that might be the thing that ticks them. Probably when you do research ryou read what other people wrote and then see if it makes sense to you in your head. After a while, you probably don’t even care what other people wrote, and you just do it in yourhead. In other words, you make it up. So do I. I don’t feel it compromises my credibility at all. But I realize not everybody will defer to my authority. I don’t care. The way that bird materialized in my window, that makes me really wonder. Nothing is what it seems like it is, so I just ignore the critics and press ahead with my research, mostly by channeling. I find that to be the most reliable method.
You’re not alone, craazy.
Thought this might be a good place to insert a plug for a paper by Charles Whalen that I really liked: “Post-Keynesian Institutionalism after the Great Recession”.
http://www.levyinstitute.org/pubs/wp_724.pdf
Ah yes, here we go. This is the one where we replace the two faulty control knobs on the printing press – inflation and employment – with a proper great big control panel.
I hope it can place orders and drop ship them to my house.
I sure hope Ben sets the gas price knob to $3.00. That would help.
It gives shamans a bad name. Real shamans can do some weird juju. Not this cheap hokus pokus.
So true.
The first time that Bernanke targeted unemployment was before the Bush tax cuts were extended.
The message was effectively that the Fed’s economic stimulus would create jobs. It didn’t happen. But it *DID* provide substantial political cover for extending the tax cuts.
Now, again, the Bush tax cuts are supposed to expire at the end of this year.
The “confidence fairy” of Krugman captures, in a concise, clever phrase, verbose paragraphs of “shamanistic” economics. Actually, there are several confidence fairies, QE being one manifestation. As Yves has stated many times, banks will not make bad loans because they don’t believe in fairies. Risk-free looting, yes.
If QE3 turns into trying to push a string of wet spaghetti. The next move will be Keynes/Roosevelt public works projects coast to coast.
Of course that will be governed by politics and public opinion. Public works could well be perceived to be creeping socialism European style. If that is the case then military expansion and tax cuts will pave the road to further decline.
The beauty of America is the uncertainty, it truly is the wild west.
Ya, just when the Fed AND the Treasury will have to sell bonds at the SAME time.
They’d only be perceived as ‘socialism’ if the economic pretentions and errors of a Glenn Hubbard or neoclassicals are presumed to describe what an economy ‘is’.
The Hubbardites all seem to assume that an economy ‘is like’ a car engine: tweak this, tweak that, put in better fuel and you’ll get good performance.
I see that as an inept, and dangerous analogy.
An economy is much more like a forest or a garden; what Glenn Hubbard might disdain as ‘waste’ to me is ‘compost’. If you never have any leftover compost that you can use to enrich next year’s soil, you’ll never have a really productive garden. One reason that forest ecologies are so productive is because of the role of fungus and other lifeforms that break down the existing ‘waste’ so they can be recycled and thereby renew the forest.
But the Hubbardites have no concept of biological processes that renew and restore themselves, so for them everything is about one-way inputs and outputs and ‘equilibrium’: they’re trapped in a short-term, profit-driven, mechanistic conceptual framework in which the idea of ‘waste’ is some kind of Dire Threat To the System. In contrast, in natural systems, ‘waste’ (i.e., compost) is critical to long term sustainability.
There’s no ‘equilibrium’ in my garden.
But it’s an incredibly fertile place, and year by year, it gets better and better because over time, with lots of ‘waste’ (which I call ‘compost’) the nutrients continue to build and cycle through the soil and the plants.
And — although I’m sure it would give the Hubbardites collective heart attacks to recognize the simple fact — ‘waste’, recycled as compost and placed back into the soil, is a key feature of its overall productivity over the years.
It’s an open system, not a closed one.
And I would argue that a vibrant economy is an open system.
But the Hubbardites might not know that, because they spend their lives caught up in theory, with too little practical, life experience to provide correctives to their false ideas.
Sorry, didn’t make clear: I think of an economy as a **living system**.
In that framework, public works are not viewed as wasteful, nor as socialism. In that framework, they’re closer to the kinds of soil-building, long-term-sustainable activities that are productive over time. It would elicit not claims of socialism, but a kind of ‘doh’ reaction that one has when one thinks about putting compost in the garden to build up soil.
Our false metaphors get us into no end of woe.
Yves, I don’t doubt the theory of this post.
But I would say that, based upon the previous QEs and how the price of oil has risen concurently with fed activity over the last 3 years, this is another move to keep wage inflation down via increasing product price inflation. If prices are going up, due to fuel costs skyrocketing, then employers can argue to keep wages under control as this economy barely grows.
In fact, I don’t think that prices have gone up as much as the fed had hoped, even with gas prices as the pump now at $4 a gallon. So they are performing another round of QE to jack prices even more. This puts the squeeze on the average hard working American, continuing to extract all they can, thus bleeding the patient dry. And, this keeps the dollar high, which helps our Chinese and european friends, who are starting to have problems.
Again, I don’t doubt that this is more a psychological move, for the benefit of us commoners. But they also always do things to benefit their wealthy friends.
BofA economists just put out a prediction for $190 oil and $3600 gold by 2015 based on QE3.
The Fed isn’t overtly trying to make us poorer. They always say we can afford it…food and gas is such a small part of the American consumers budget – richest country on Earth and all that.
Really!
Very good! I think the idea that the Fed works on the Shaman theory is exactly right,point of fact Economics is mostly that way.
I agree with this post,and think it puts it’s point across just fine.I don’t see the reason for the criticism that it pretends to be anything.It just accurately describes the “hope” effect,these policies are going after..bernanke’s hail Mary pass….and we all know,just because something may not be real,doesn’t mean a lot of people’s actions won’t make it real.Which I do agree,will be another bad thing,as well as a good thing…a good thing to get a bump in a better economy,life will be easier. For a while.a bad thing,because the screws will gleam more gravitas and will be ramping up to screw us some more.I also agree That this is just to push up assets and commodities that are on the books of those who have money now.It is the candy that may make you feel fed for a moment,but just rots your teeth and deprives you of a nutritious meal.and screws up your blood sugar
We need a real diet,
I agree with Susan the other, we should go toward the real fixes to our money problem as with Kucinich’s NEED ACT,and the revival of the old chicago plan ideas….joebhead is right.IMO
As far as what we really need for the countries economy! It is rational energy reform,election reform,healthcare reform,trade reforms”..and monetary reform
I don’t see why we need to re-write the constitution.we just need to re-create legal precedence.the constitution could work,if it wasn’t so perverted to corporate benefit for the last 150 years.
Sure, the Chairman is a confidence man, conjuror, and smoke-and-mirrors sorcerer, the bald wizard behind the curtain and a charlatan faith-healer, but this is not primarily about that, not really. All the speculation about monetary theory mechanics is so much reading of chicken bones and goat entrails, which only disguises what this really is — exactly what it appears to be — a blatant robbery in broad daylight, another bailout heist, and pre-election stop-gap to ensure Obama’s second term.
It’s not about jobs, never was. It’s yet another open-ended QE wealth transfer, electioneering and further consolidation of elite power.
I liked the internet better when it was full of cats.
Of course there is little demand for more credit. An economy that creates few jobs, most of them low wages creates correspondingly low demand for everything.
Also new family formation is not going to help grow the economy, the US birth rate is at an all time low (lower than the 30’s) and the baby bump of 2006 won’t hit peak income for at least 15 years.
They will also be measurably less well off for a variety of reasons as well.
And so yes the Shaman’s can bless the crops 24-7 unless they plant some seeds ain’t gonna help.
Here’s how it works in theory: Suppose there is something X the Fed would like to see happen. The Fed is supposed to make X happen by announcing that it intends to make X happen and that it is doing some other thing Y that is aimed at making X happen. The hope is then that a significant number of people think that there is a causal connection between Y and X, and that Y causes X. They thus start to believe, on the basis of the announcement, that Y will in fact make X happen. And as a result of these beliefs, they then start to behave in ways that depend on the expectation that X will happen. And it is their behaving this way that in the end actually makes X happen – if the trick works.
Umm… Dan, I believe they most of us knuckle draggers refer this to by its more widely accepted name – confidence game – which, amazingly enough, is also the one commonly used for the whole western capitalist “flim flam” (now THERE’s a technical term for ya!) in general. It’s funny how the more we think we know about anything, the less we actually know about anything. Economics is like that. I’m afraid to say, academics are too. Imagine that!
In interest of minimizing confusion (Oops! I’ll bet that’s exactly what this latest round of tom-foolery was meant to do!) I still prefer the “oldy but a goody” description “trickle down economics.” Who would have ever guessed that going on 32 years after the coronation of King Ronnie I (God Bless his sorry aristocratic ass!) that the American polity would still be enamored with such unmitigated tripe? And under a pseudo-“Democratic” administration no less? Oh well, if you live long enough you’ll see everything they say. Looks like “they” were right once again. I guess the only proper response on the part of the poor is, “Prime THIS pump for once, bitchez!”
Shamanistic economics does work in the sense of influencing things in the short term – this is one of the points made by Keynes. I don’t believe that it has any impact on long term economic growth, which is governed by fundamentals. What it does affect is deviations from the mean in the short to medium term, either by exaggerating boom/bust cycles or smoothing them out depending on whether it’s used pro-cyclically or counter-cyclically.
Bernanke seems to believe he is doing it counter-cyclically – i.e. that fundamentals are stronger than current economic performance would indicate and the problem is irrational pessimism on the part of consumers. We’ve seen plenty of evidence in the last few years that the establishment takes this view. It’s at odds with the prevailing view at NC and in much of the blogosphere, which is that the economy continues to have fundamental and deep-seated issues that were not resolved during the last crisis, that the recent bounce is a bubble rather than a true recovery, and that the underlying problems are likely to get worse.
If Bernanke is right, his actions will eventually work and the economy will correct itself. If NC and the blogosphere are right, then they won’t work, and we can expect multiple rounds of increasingly drastic and desperate action as he tries to paper over the (unaddressed and worsening) real problems by trying to blow a big enough bubble to compensate. Looking at the years of ZIRP and multiple rounds of quantitative easing in comparison to key economic indicators, you could make an argument that this has already happened. Unfortunately economists (unlike scientists) don’t abandon failed theories simply because they consistently fail to predict reality.
Lots of theories here. Shamamistic? Waiving wands, speaking in tongues… Yeah, whatever. The Fed can certainly move the market when it wants to. And they speak in their own econo-speak so it can be hard to discern their intentions – and even harder to fathom their motivations.
Seems to me, though, its best to follow the money.
1) Bush tax cuts are expiring.
2) Banks now have lots of housing inventory that they are keeping off the market, and…
3) Lots of housing dreck that they haven’t had to mark to market.
This move is brillent in that:
1) It provides political cover to extend – or make permanent – the Bush tax cuts many of those “job providers” will be the ones scooping up housing assets, after all (creating jobs? No so much);
2) Puts housing on sale (combo of low mortgage rates and future inflation makes a compelling case to BUY!)
3) Takes crappy mortgage securities off bank’s hands – probably at a price that is very favorable to banks.
We don’t need Fed ‘shamanism’ to explain this. Just need to pay attention. The Fed’s move probably WILL provide a ‘pop’ to the economy. The questions to ask are: who benefits? will it last? is it just setting us up for a bigger fall? how does it affect other politically contentious issues like ‘entitlement reform?’ how does this affect the dollar (trade)? etc.
Insightful post, thank you. In addition to the realities noted by several respondents above, sweet behavioral psychology. Makes one wonder what would occur if Mr Bernanke had instead said that the FOMC believes that the economy and de-leveraging are progressing in a satisfactory manner (based on Anon’s responses — first, third and fourth comments to this post at this hour), and further stated that as a result the Fed will soon begin to increase interest rates to address inflationary pressures that are adversely impacting the Fed’s dual mandate.
“…as a result the Fed will soon begin to increase interest rates to address inflationary pressures..”
Good thought experiment. My guess is the stock market wouldn’t take it well, but my answer to that is so what? Maybe we finally find out that stock market PE ratios have nothing to do with the economy.
The Fed may start withdrawing liquidity, but they would have to pull out a whole lot to even make short rates rise. Then the bond market would still have their “inflation expectations anchored”, as the fed likes to say, and longer term rates would tend to stay low.
Then they still have the luxury of inching rates up slowly – they know fast is bad because that will probably touch off another financial crisis if they change rates just a tad too much with banks and derivatives in the screwed state they are.
Contrast that with QE3 till say 2015 and then they announce we now own $5 Trillion in bonds and , due to inflationary pressures, we would like to sell them to the private sector…..and everyone dumps whatever they still have and head for the hills to get out of the way of the avalanche.
What makes Dan’s post even more of a zinger is that many of the shamanists he critiques are people who have heavily invested themselves in the notion of their secular rational humanistic-hood, the “Enlightened West” that their college canon taught them is the eternal worldwide source of all Hope and Change.
And now Dan shows them that despite it all, they’re just so many more abject worshippers of some sort of Flying Spaghetti Monster, after all. LOL.
Yes, thanks Roland. Part of my criticism of the present-day obsession with monetary policy is that it reveals that superstition and authoritarian, priestly power structures are alive and well in our society, even among people who think they are enlightened and secular.
Of course, a lot of the clever set think they are the specially chosen initiates who are “in on it”, and that their job is to help the master manipulate the ignorant rubes in the faithful flock.
Aside from the monetary policy issues, it seems to me that a similar style of thinking came out of the fascination of the elites with “behavioral economics” – which seemed to provide them with a whole new bag of tricks for (supposedly) understanding and manipulating the behavior of others – through “nudges” and whatnot. Of course the tricks only work if the technocratic elite that employs them does not tell everyone what they are doing. They have to tell lies in other words.
Newfangled techniques or not, the impulse behind this style of thinking is one of the oldest impulses around: the desire to be part of a special, select group that controls everyone else. It’s profoundly undemocratic. That was the point I concluded with in the essay. Even if the shamanistic techniques work from time to time, we should resist these forms of governance in a democracy. Having a Fed chair “conducting” the economy by exploiting confusion, ignorance, popular superstition, or deferential habits of mass conformity to an authority figure in order to mold expectations and behavior is no way for a democratic country to run its economy.
Dan, I thank you for your article. I find your thesis astute and well grounded. Also your engagement with your audience was further enlightening. I find your communication style direct and comprehensible. Cheers, tawal
The economy is now permanently on life support! The money goes mainline into the banks and then into the whole circulatory system – treasuries, mortgage backed securities,commodities, stocks,balance sheets…with nothing actually going to create jobs or re-inflate the real estate market.Luckily this fix doesn’t stop – Bernanke said this time the fix goes on forever. http://youtu.be/pTUi5qB9LKE
Shaman doodoo =
– tendency to monopoly
– default to regulation
– money + politics
What a shame you link voodoo economics at this latter stage to some level of a shaman’s role in society. An unfortunate analogy from an anthropological point of reference.
Voodoo economics (as supply side failure and profiteering is all about deception and corruption; about collusion and power; about class warfare and domination under false pretenses and about crony capitalism writ large. Your attack would probably fall upon deaf ears if you attacked the false economy of the popular “psychology” of markets…and “spirits” within Stock Market mentality (another popular version written into the script of the money mange infestations of the flea bitten dog…but that’s another story…)…perhaps better suited for Wall Street Shamans and Frauds in an economic “World View” counter-balancing between irrational markets and rational choice theory…whitch craft more than Shamanism!).
But let me digress from the distraction of the frame to get to the core of the matter.
This is “asset seizing” behavior as sure as “land grabs” exist around the world …and financed by fiat money that has been fueling the buyout of American infrastructure…a product of aggressive and run away privateering…private equity…legitimating itself and sustaining its profiteering heights like a mafia tribal power lineage. After bankrupting the system…The 15 Trillian dollar seepage from the Occult (assymetrical information in action) Federal Reserve…coupled with the now normative machinery of counterfeiting finance under “bailouts” with money that has no real “asset” value…and for what?…of course to secretly BUY UP the real assets so that down the road the foundation for elite supremacy will be successfully secured!
You call this Shamanistic Economics…? This is high civiliztion at its corrupt best…conquest at occult financial machanations of the currency controls; and perhaps best seen as co-opted public wealth by tactical covert ops at the mass control fraud levels.
The world is being made safe for capital controls and atrocities covered by stealth and austerity measures to manage unsustainable wealth with intensive billionaire stages of restructuring society.
Your article is interesting and valid, but for the wrong reasons.