Politics and Media Headlines 12/28/08
A faraway people, of whom we know nothing (by Michael J. Smith at Stop Me Before I Vote Again)
US blames Hamas for Gaza attacks (The Australian)
THE United States has blamed the Islamist group Hamas for breaking a cease-fire and urged the Jewish state to avoid civilian casualties after Israeli air strikes killed more than 200 people in Gaza… There was no immediate comment on the Israeli air strikes from Mr Obama, who is vacationing with his family in Hawaii, or his staff. [Emphasis added.]
Hope Chest (by David Shribman)
[A]mid the seaspray on his Hawaiian holiday and his Blackberry conversations with friends and advisers, Obama surely recognizes that hope is both a tool and a burden. He is well-versed in the use of that tool; more even than Franklin Delano Roosevelt he used it with brilliance and effectiveness in his presidential campaign… The conventional wisdom is that Obama's first chores are to prepare for national-security challenges and to deal with the economy… But the truth is that Obama's first chore is not to manage diplomacy or the economy. His first chore is to manage hope… [N]ow that we have put aside "A Christmas Carol" for another year and while we move from Bleak House to Great Expectations, Obama is facing the question of how to satisfy all those expectations, great and small…
One of the things he must indicate, on Jan. 20 and beyond, is that hope may be the overture for the Obama years, but it cannot provide the lyrics.
I think Obama’s success with the hopey-changey message is closely related to the syndrome that gave us the dot com bubble. And the housing bubble. And all the other bubbles. Don’t forget Granny Bee’s commentary from last January, Bubbleheads. But can Americans overcome their predilection for bubble-iciousness? See below.—Caro
Boom, Bust, Repeat (by Daniel Gross)
[Panic: The Story of Modern Financial Insanity, edited by Michael Lewis] is to a large degree a chronicle of the capacity of highly paid professionals for self-delusion. This volume could just as easily have been titled “Complacency.” As Lewis shows, there’s something distinctly Ameri can in our propensity to blow bubbles until they pop, spend a few months licking our wounds and then hit replay. “Yuppies’ Last Rites Readied,” declared the headline on a New York Times article of Oct. 21, 1987, which documented how the stock market crash was causing materialist, money-soaked urban dwellers to reduce conspicuous consumption and focus more on human relationships. Of course, that moral awakening lasted only as long as the downturn. And the same business publications that do such a great job of dissecting the bubbles once they’ve popped are the same ones that help promote and sustain the next one. What drives this? It’s not simply greed, or stupidity, but a kind of learned naïveté. We convince ourselves, over and over again, that nothing can go wrong, and that even if it does the smart ones among us will be insulated from any ill effects.
Missing Minsky (by John Tepper Marlin , thanks to Economist’s View)
Martin Wolf, at FT.com, wrote on December 24 that Keynes offers us the best way to think about the financial crisis: “The ghost of John Maynard Keynes, the father of macroeconomics, has returned [and] that of his most interesting disciple, Hyman Minsky.” I first heard Hy Minsky talk in the 1960s. His main message I summarize as follows:
1. Financial systems have a built-in tendency to euphoria. The financial market does not tend toward stability. The opposite is true. Bankers and other financial actors borrow more and more heavily, making the system increasingly vulnerable to panic. Lenders start after a scare by being conservative, hedging their bets. But eventually confidence returns and speculation takes hold again. Then investors get to the Ponzi phase – manic use of credit, a euphoria or bubble.
2. The credit cycle tends to manic, ends with panic. The Ponzi phase continues until some investors exit with their profits, or the central bank raises interest rates to reduce investor euphoria, and then a financial institution runs into difficulty. The failure causes a bankers' panic. Turning points in the five stages of the cycle are called “Minsky moments”.
3. The system tends to instability and must be regulated. Fashions in monetary theory have moved from a belief that Keynesian sophisticates could “fine-tune” the economy, to fear that the Fed had lost control of the ability to contain inflation, to a belief that markets work best with minimal interference. Hy rejected all these ideas, preaching consistently about the need for regulation and the importance of leaning against the excesses of what Keynes called the animal spirits of investors.
Economics learns a thing or two from evolutionary biology (by Massimo Pigliucci, thanks to Economist’s View)
[H]ow it is possible that so many smart people in the financial sector made irrational decisions over a period of years, despite clear data showing there was a problem, and eventually leading to a worldwide economic crisis that is at the least poking at, if not shaking, the foundations of capitalism itself. Part of the answer is to be found in the persistent idea in economics that “markets” work because people are rational agents who act in their own self-interest and have perfect, instantaneous access to relevant information about the businesses they are considering investing in…
But now there is a new kid on the block: “behavioral finance” takes seriously the idea that people act somewhat rationally some of the time but can spiral into downright panic at other times… The old “efficient markets hypothesis” underlying classical models is being replaced by the “adaptive markets hypothesis,” where Adam Smith’s invisible hand becomes more directly analogous to natural selection. As evolutionary biologists have found out, natural selection is not an optimizing process, but a satisficying one, meaning that it produces whatever outcome happened to be achievable at a particular historical moment and that works “well enough” for the problem at hand. Moreover, it does so while “wasting” a lot of resources and often marching straight into dead ends (just think that over 99% of the species that ever existed went extinct). The emerging picture is much more realistic than the rationalist paradigm, but it sure is a lot more messy too.
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