As readers know all too well, there is so much obviously half-baked economic research that this site could turn itself over to shredding examples and only scratch the surface. But we have established the Frederick Mishkin Iceland Prize for Intellectual Integrity to highlight outstanding examples of economic shillery in which the attempt at analysis is obviously cooked so as to produce a pre-determined outcome.
In case you are not familiar with Fredrick Miskin’s distinctive contributions, the Academy Award winning documentary Inside Job depicted how the fish has rotted from the head in the economics academy, using former Harvard dean Larry Summers, former Fed vice chairman Frederic Mishkin and Columbia Business School dean Glenn Hubbard as object lessons.
Despite our publication of Academic Choice theory, which provides more formal support for the Inside Job observations, we’ve seen perilous little in the way of a change in attitudes from within the academy. So to make a wee additional contribution on this front, we created the Frederic Mishkin Iceland Prize for Intellectual Integrity.
Our first recipient, a paper defending the early 2011 mortgage servicer settlement, which not only helped perpetuate a broken servicing model (with the most recent confirmation the slow-motion implosion of Ocwen), but also devised the disastrous, costly fiasco known as the Independent Foreclosure Review. Established readers may recall that we published an in-depth series, based on the input of nine whistleblowers, documenting in gory detail how the entire process was intended to be a cover-up.
Our assessment of our first Mishkin Prize winner, “The Economics of the Proposed Mortgage Servicer Settlement,” by Charles Calomiris, Eric Higgins, and Joe Mason:
First and foremost is that this article goes well beyond the normal boundaries of shilldom, which is generally confined to cherry picking of data and artful framing. There are multiple, gross distortions, which call into question either the writers’ honesty or their knowledge of the basics in the mortgage servicing arena. But that level of inaccuracy is necessary to create the simulacrum their patrons desire, that of a parallel universe in which servicers are virtuous, borrowers are scheming, and the rule of law operates only for the benefit of corporate interests.
Another one of its distinctive contributions is the multiple layering of what mere mortals would call “stupid”. For instance, this paper cites earlier work on strategic default and mortgage mods that is analytically dubious. So it creates a steaming edifice of garbage but via its extensive citations, it hews to the form of normal academic output, making it look legitimate to those who don’t know the terrain.
The second Miskhin Prize went to Promontory Financial’s whitewash of MF Global’s risk controls. Our overview:
A direct analogy to the Mishkin paper praising Iceland’s financial system is reviews produced by private consultants acting as supposedly independent reviewers, or what amounts to an outsourced regulatory function. The glaring problem with this construct is that the reviewers are hired by the companies that need to get a clean bill of health in the end….Now to the immediate example, Promontory Financial. The firm is deeply involved in the OCC foreclosure reviews and also the author of a glowing report on MF Global’s risk controls in May of 2011, a mere five months before the firm failed.
While the initial award recipient, the Calomiris, Higgins and Mason paper, was an impressive confection of dissimulation, our third recipient distinguishes himself through his brazenness, specifically, his willingness to openly rest his entire argument on a bogus assumption. This is garbage in, garbage out writ large.
Specifically, the paper, The Growth Consequences of Dodd-Frank by former CBO director Douglas Holtz-Eakin, attempts to quantify the costs of Dodd Frank. The very language of the paper broadcasts how strained it is. As Dave Dayen noted yesteerday:
Regardless of what you think of Dodd-Frank, this is one of the most hackish things I’ve seen in quite a while. Doug Holtz-Eakin, who used to consider himself a moderate, pulls a number out of his posterior that even he knows is fake. “Clearly, such a computation is subject to large uncertainties,” he says. “It doesn’t change the growth rate dramatically—it’s not even a percentage point,” he adds. “Everyone should take this all with a grain of salt… I have no belief that I’ve nailed it.” And then WSJ runs it anyway with a big headline including the number that Holtz-Eakin spends the entire article disavowing. Shorter version: “This is a meaningless number, but it is big, and therefore important.”
Holtz-Eakin manages to come up with a 10 year cost of $895 billion “or $3.346 per working age person.” Notice the effort at precision when Holtz-Eakin repeatedly has to concede that his analysis is reliable at best to an order of magnitude. So we already have dishonest rhetoric in giving a false impression of exactitude in an at best crude estimate.
Gee, but isn’t insurance supposed to cost money? Isn’t Dodd Frank supposed to protect against financial crises? How does this cost guesstimated compare to the benefits? Let’s turn to a paper by Andrew Haldane of the Bank of England, whose early estimates of the cost of the crisi, in terms of lost output, has proven to be pretty accurate:
….these losses are multiples of the static costs, lying anywhere between one and five times annual GDP. Put in money terms, that is an output loss equivalent to between $60 trillion and $200 trillion for the world economy and between £1.8 trillion and £7.4 trillion for the UK. As Nobel-prize winning physicist Richard Feynman observed, to call these numbers “astronomical” would be to do astronomy a disservice: there are only hundreds of billions of stars in the galaxy. “Economical” might be a better description.
It is clear that banks would not have deep enough pockets to foot this bill. Assuming that a crisis occurs every 20 years, the systemic levy needed to recoup these crisis costs would be in excess of $1.5 trillion per year. The total market capitalisation of the largest global banks is currently only around $1.2 trillion. Fully internalising the output costs of financial crises would risk putting banks on the same trajectory as the dinosaurs, with the levy playing the role of the meteorite.
To put it another way, Haldane’s low end estimate of output losses of one times GDP is now generally accepted. The CBO projects notional GDP for 2020 to be $23 trillion. For simplicity, we’ll use this as a proxy for that time period. $23 trillion (the cost the one-in-twenty year crisis) divided by 20 (the amortized annual cost) is $1.15 trillion. Multiply that by 10 (the time frame of Holtz-Eakin’s forecast period) and you get expected output losses of $11.5 trillion. Holtz-Eakin’s $895 billion looks like a bargain by comparison.
Of course, that assumes that Dodd Frank works, and more important, that his numbers are anything other than sheer fabrication. And where does he start? With a model whose first assumption is invalid:
The starting point is the observation that national saving finances national investment
As readers know well, loans precede deposits. Savings don’t “finance” investment. Banks create money and the central bank provides reserves to the banking system as needed to maintain its policy rate. This mechanism has been discussed at length by the Bank of England and former Treasury official Frank Newman, and acknowledged by Alan Greenspan and Ben Bernanke.
The Wall Street Journal’s economics blog cited other objections to the Holtz-Eakin “analysis”:
Americans for Financial Reform also argued the study was based on several assumptions that exaggerated the costs of financial regulations.
One assumption is that the regulations will subtract from investment in the economy. In fact, they argue, Dodd-Frank requires banks to make significant investments in information technology and data reporting.
Another assumption is that higher compliance costs lead to reduced lending, AFR said, but some of those costs will be absorbed by lower compensation for executives or other cost-cutting measures. They study also assumes the costs of implementing the new rules will extend for at least the next decade, when in fact some of those costs will only last a few years, they said.
So Holtz-Eakin’s entire analysis is the economic equivalent of snake oil. But as we’ve discusses in previous posts, the CBO dispenses quite a lot of that. It should come as no surprise that Holtz-Eakin has found new customers for a well-honed skill.
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In the video, Hubbard says “there would be significant professional sanction for doing that.”
AFAICT, the economic profession has proven itself totally incapable of any meaningful regulation of its own.
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Thank you Yves for the sanity check.
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Didn’t happen?! I’m in “shocked disbelief.”
Reduce executive compensation? Aye, thar’s the rub. We mere mortals can no more reduce bankster largess than we can move the stars in the sky. Once you accept that truth, the truth of all those hinky economic analyses you decry becomes easy to see. The Iceland Chamber of Commerce got their money’s worth. Unfortunately, the Icelandic peasants seem to see a different truth.
cat jump on the keyboard here?
Let’s turn to a paper by Andrew Haldane of the Bank of England, whose early estimates of the cost of the crisi, in terms of lost output, has proven to be pretty accurate:
….these losses are multiples of the static costs, lying anywhere between one and fivevbbbbbbbbbbbbbbbbbbb times annual GDP.
It might be a rasberry :) It would be fitting.
I saw the headline and burst out laughing.
I am still laughing.
It’s been claimed that you can infer intent from predictable results. If this is true, then these “papers” can be viewed as convenient alibi’s for banksters…and these so called “academicians” can be viewed as aiders & abettors, nowhere close to being “intellectuals”, much less honest.
Then the corporate media moving lips chime in, to obscure the claim of ‘predictable’ by seemingly endless repetition of some variation of “who could have possibly known?” Then, of course, obscuring and assuming away the growing number of outcasts and the effects of the “new normal”. Which seems it’ll soon be the ‘new-new’, with new rounds of “who knew?”…until enough is enough…
It would be a good idea to give out awards to supporting economic intellectuals as well so we can make it a real gala event.
God bless you for embedding the Inside Job video. I actually can’t see it, weird computer, but I remember Mishkin and Hubbard so well still from seeing the movie and that’s what I instantly thought of when I saw your title. Also h/t Professor Outis Philalithopoulos, I remembered him too.
I loved Inside Job’s opening credits too — hope this link still works (seems to still be up): https://www.youtube.com/watch?v=1505DBTp2eE — applause to Charles Ferguson.
The only thing I’m wishing for is the red carpet award ceremony and the naming of the competition. They say the nomination is the award, and I would love to see your list and hear the names announced.
Yves writes: Notice the effort at precision when Holtz-Eakin repeatedly has to concede that his analysis is reliable at best to an order of magnitude.
I strongly suspect even order-of-magnitude is unduly generous — rather, were Mr. H-E honest about his numerology he would say something along the lines of “there are likely roughly 50/50 odds that I have the sign of the number right, assuming all the huge assumptions I made are indeed correct”.
In other words, far worse odds than a coin-flip even with regard to the sign. “Maybe if he reran his numerical models using double precision”, LOL.
You write: “This mechanism has been discussed at length by the Bank of England and former Treasury official Frank Newman, and acknowledged by Alan Greenspan and Ben Bernanke.”
Please give links to the acknowledgements by Alan Greenspan and Ben Bernanke.
Bernanke’s famed helicopter speech and his mention, more than once, that the Fed has a printing press is acknowledgement that spending, both private and government, do not come from pre-existing savings. Greenspan has said the same thing (see here: https://www.youtube.com/watch?v=h3cY6_z0ceg). I thought these remarks were so widely publicized as to not need references.
See here for a longer discussion of both Bernanke and Greenspan:
http://neweconomicperspectives.org/2012/03/where-did-the-federal-reserve-get-all-that-money.html
With retrospect, I was not clear or precise in my question. No doubt the Federal Reserve can create un-limited amount, trillions of dollars with a single keystroke. However, my question is on money creation by commercial banks, NOT by the Central bank.
I am familiar with the paper of the Bank of England, and I quote: “This article explains how the majority of money in the modern economy is created by commercial banks making loans.
I am looking for links to acknowledgements by Alan Greenspan and Ben Bernanke on money creation by commercial banks, that commercial banks create money out of thin air. Or that they agree with the statement that the majority of money in the modern economy is created by commercial banks making loans.
Also — links in original
The Iceland Prize is a good idea with many worthy candidates. Too many probably. It’s either the Nobel or the Iceland Prize for a lot of those people (I’d say dudes but there’s no doubt ladies whose brains have been bent by academic economics into a manly numerical narcosis and suffer from the same disorder to the same degree and with the same result). Frankly it’s hard to tell the difference — Nobel or Iceland Prize — when you look at the nonsense they spout.
The other prize that I think may be meritorious of serious consideration for inauguration as an internationally recognized award conferring both prestige and glamour upon the recipient is what I would call “The Golden Asteroid.” The Golden Asteroid can be awarded annually in recognition of excellence in the concoction and presentation of theatrically hysterical and alarmist Doomer & Gloomer economic screeds. These could include forecasts of hyperinflation, global economic breakdown and social chaos, stock market collapses on the order of 80% or 90%, currency collapses and other traumas that only the most perceptive economic analysts, capable of looking reality squarely in the face, can identify. One would have to be careful not to let the Gold Bugs win too many Golden Asteroids, or the Austrians, or certain bloggers. The bloggers would certainly wish to win simply for the publicity value, so they may be incentivized to exaggerate and amplify even beyond their customary hyperbole.
The Nobel Prize, the Iceland Prize and The Golden Asteroid. That about covers all the bases for economic thought. Oh, wait, one more. You’d have to come up with one for the optimists and humanists. Like the MMTers who think you can just print and we’ll all get along, Rodney King style. What would be a good prize for that? I don’t know, maybe something like The Tinkerbelle — it could be a silver bell mounted on a trophy base and when they lift it up it rings — because all they have to do is click their heels three times and close their eyes and it’ll all work out. OK, that’s not as good as I hoped it would be, but I’ll keep thinking.
I remember taking my dad to see “Inside Job” in the theater. I didn’t really learn anything new, but hopefully he did. :)