Wednesday, November 11, 2015

Williamson versus the world

The World:

The Queen of England was standing in a hall at the London School of Economics looking a little perplexed. The date was Novem­ber 4, 2008, and she had arrived to open a new building on campus...

The event was supposed to be a celebration of academic achievement, but the timing was poignant. Two months earlier, the financial crisis had erupted in London and many other parts of the West, leaving hordes of economists and pundits scurrying to provide analysis. As the Queen toured the build­ing, Luis Garicano, one highly regarded economist, pre­sented her with some charts that purported to show what was going on in finance.

The Queen peered at the brightly colored lines. “It’s awful!” she declared, in her clipped, upper-­class vowels. “Why did nobody see the crisis coming?”

The Queen asked the question everyone was asking. And hordes of economists were trying to figure out what happened. Meanwhile, Steve Keen pointed to two studies that between them found a total of 16 economists who saw the crisis coming:

A majority of the 16 individuals identified in Bezemer (2009) and (Fullbrook (2010)) as having anticipated the Global Financial Crisis followed non-mainstream approaches ...

And not even Alan Greenspan anticipated the crisis, though Congress thought he ought to have:

Committee Chairman Henry Waxman, (California Democrat) said to those present: The reasons why we set up your agencies and gave you budget authority to hire people is so you can see problems developing before they become a crisis. To say you just didn't see it, that just doesn't satisfy me. Finally, Greenspan told the lawmakers that regulators could not predict the future ...

Stephen Williamson, however, sees things differently. He sees not only "the" future, but all possible futures -- and he knows what is likely, and what is not:

In principle, the current state of the economy determines the likelihood of all potential future states of the economy.


1 comment:

The Arthurian said...

Stephen Williamson: "In principle, the current state of the economy determines the likelihood of all potential future states of the economy."

Roman Frydman: "As different as they are, rational expectations and behavioral-finance models represent the market with what mathematicians call a probability distribution – a rule that specifies in advance the chances of absolutely everything that will ever happen." (Quoted by Lars P. Syll)