Friday, November 15, 2013

Mark Buchanan — Actually, Economists Can Predict Financial Crises

Economists have long argued that they shouldn’t be expected to predict crises, such as the one that almost sank the global economy five years ago.
That depends on how you define the word “predict.”...
The answer is that predictions can be useful without being quite so precise. Scientists make valuable predictions all the time that have little to do with foreseeing the future, but develop our understanding of cause and effect....
In this sense of a causal relationship, quite a few people did foretell the financial crisis....
The challenge for economists is to find those indicators that can provide regulators with reliable early warnings of trouble....
One problem has been “physics envy” -- a longing for certainty and for beautiful, timeless equations that can wrap up economic reality in some final way. Economics is actually more like biology, with perpetual change and evolution at its core. This means we’ll have to go on discovering new ways to identify useful clues about emerging problems as finance changes and investors jump into new products and strategies. Perpetual adaptation is part of living in a complex world.
Bloomberg
Actually, Economists Can Predict Financial Crises
Mark Buchanan, theoretical physicist
(h/t Mark Thoma at Economist's View

6 comments:

Matt Franko said...

FDR, Dec 7, 1941: "We're going to war, buy war bonds!"

GWB, Sept 11, 2001: "We're going to war, go shopping!"

All you needed to know in order to predict what eventually happened is the relevant difference between these two statements.

(TIP: And "fraud" is NOT involved.)

rsp,

paul meli said...

It's easy to predict financial crises…take a look at this graph…

https://dl.dropboxusercontent.com/u/33741/FGEXPND.png

Every time the red line gets too near the green line we've had a crisis…check it out.

…with the last one the red line crossed the green line for the first time since WWII (probably for all history).

If that doesn't mean we are screwed I don't know what does.

Tom Hickey said...

Paul, send it to Mark Buchanan.

buchanan.mark@gmail.com

Detroit Dan said...

That's a great article. Thanks for the reference...

Matt Franko said...

Two flatlines in the govt's topline Paul,

Looks like 1953 to 1955 (consumption probably sustained by spending down the war bond savings) and currently (no war bonds in savings, GWB recommended 'shopping' instead.)

Again no 'fraud' here, rather we have morons....

rsp,

paul meli said...

Matt, shopping is fine...just don't use credit, or at least pay the balance off monthly.