Tucker and Bagehot at Hoover

I had the pleasure last week of attending the conference on Central Bank Governance And Oversight Reform at Hoover, organized by John Taylor.

Avoiding the usual academic question of what should the Fed do, and the endless media question will-she-or-won't she raise rates, this conference focused on how central banks should make decisions. Particularly in the context of legislation to constrain the Fed coming from Congress, with financial dirigisme and "macro-prudential" policy an increasing temptation, I found these moments of reflection quite useful.

Some of the issues: Should the Fed follow an "instrument rule," like the Taylor rule? Should it have "goal," like an inflation target, but then wide latitude to do what it takes to attain that goal? What structures should implement such a rule? Implicit in a rule that the Fed should do things, like target inflation and employment, is an implicit rule that it should ignore others, like asset prices, exchange rates and so on. (I think this is much too often overlooked. As financial reform should start by delineating what is not systemic, and hence exempt from regulation, monetary policy rules should start by saying what the Fed should ignore.) Should that limitation be more explicit? What's the right governance structure? Should we keep the regional Feds? How should Fed meetings be conducted? Is "transparency" the enemy of productive debate? How much discretion can an agency have while remaining independent?  And so on.

I was going to post thoughts on he whole conference, but John Taylor just posted an excellent summary, so I'll just point you there.

My job was to discuss Paul Tucker's (ex Deputy Governor of the Bank of England) thoughtful paper, "How Can Central Banks Deliver Credible Commitment and be “Emergency Institutions" Paul's paper starts to think deeply about independent regulatory agencies in general, and monetary and fiscal policy together. My discussion is narrower. I'll pass on the discussion (pdf here) as today's blog post, as it might be interesting to blog readers.

Comments on “How Can Central Banks Deliver Credible Commitment and be “Emergency Institutions” By Paul Tucker

May 21 2015

Let me start by summarizing, and cheering, Paul’s important points.

The standard view says that perhaps monetary policy should follow a rule, but financial-crisis firefighting needs discretion; a big mop to clean up big messes; flexibility to “do what it takes”; “emergency” powers to fight emergencies.

I think Paul is telling us, politely, that this is rubbish. Crisis-response and lender-of-last-resort actions need rules, or “regimes,” even more than monetary policy actions need rules. At a basic level any decision is a mapping from states of the world to actions. “Discretion” just means not talking about it.

More deeply, you need rules to constrain this mapping, to pre-commit yourself ex-ante against actions that you will choose ex-post, and regret. Monetary policy rules guard against “just this once” inflations. Lender of last resort rules guard against “just this once” bailouts and loans.

But you need rules even more, when the system responds to its expectations of your actions. And preventing crises is all about controlling this moral hazard.

To stop runs, our governments guarantee deposits and other loans; they bail out institutions and their creditors; they buy up assets to raise prices, and they lend like crazy. But knowing this, financial institutions take more risk than they would otherwise take, and investors lend without monitoring, making crises worse. Institutions that can borrow at last resort don’t set up backup lines of credit, don’t watch the quality of their collateral, and don’t buy expensive put options and other insurance, making crises worse. Investors who know that the Fed will stop “fire sales,” don’t keep some cash around for “buying opportunities,” making fire sales worse. “Big banks are too complex to go through bankruptcy,” the mantra repeats. But why do people lend to them, without the protections of bankruptcy? Because they know creditors, if not management and equity, will be protected.

“The world is ending. A crisis is no time to worry about moral hazard,” bankers and government officials told us last time, and will tell us again. But the world does not end, and actions taken in this crisis are exactly the cause of moral hazard for the next one.

This isn’t theory. When the Fed and Treasury bailed out Bear Stearns, and especially its creditors, markets learned “Oh, Fed and Treasury won’t let an investment bank broker-dealer go under.” Lehman turned down capital offers, and Reserve Fund losses on Lehman paper were enough to cause it to fail in a run. (This is an update: see below.)

The severe crisis and recession coincident with Lehman’s failure, together with the massive and improvised response — many flavors of Tarp, auto company bailouts, and so on — have arguably created the “rule” in participants’ minds about what will happen next time.

Plans, self-imposed rules, promises, guidance, and tradition are not enough. Given the power, every one of us will bail out. We won’t risk being the captain of the Titanic, and we’ll let the next guy or gal deal with moral hazard. A central banker facing a crisis is like a father holding an ice cream cone, facing a hungry three-year old. Sure, Mom’s rule says dinner always before dessert. We know what’s happening to that ice cream cone.

The central bank and Treasury must not be able to bail out what they should not bail out, to lend where they should not lend, to protect creditors who should lose money. That’s the only way to stop it. More importantly, it’s the only way to persuade the moral hazarders that all the fine words in the boom will not melt quickly in the emergency.

Two central quotes summarize the Tucker view, and I entirely agree.

Prerequisites for any such regime are that its terms should mitigate the inherent problems of adverse selection and moral hazard; be time-consistent; and provide clarity about the amount and nature of ‘fiscal risk’ that the central bank is permitted to take on the state’s behalf.

At a schematic level, a money-credit constitution for today might have five components: inflation targeting plus a reserves requirement that increased with a bank’s leverage plus a liquidity-reinsurance regime plus a resolution regime for bankrupt banks plus constraints on how the central bank is free to pursue its mandate.

***

Now, let me offer a gentle critique.

How are we doing towards the Tucker regime? Not well.

The Dodd-Frank and Basel “regime” has no serious limits at all. Ask yourself, what institutions are not “systemic” and cannot become so designated? What institutions or creditors won’t be bailed out; can’t be bailed out? What are the securities the Fed or Treasury won’t and can’t  buy or lend against? What are the asset prices prices that they won’t and can’t prop up?

Paul points out the difficulties. Yes, “constraints” are good. But just what constraints? We can channel Bagehot, “against good collateral,” to “illiquid but not insolvent” institutions. Except, as Paul reminds us, what’s good collateral, when noone will take anything but Treasuries? How do you tell illiquid from insolvent when prices have tanked and markets are frozen? It’s not so easy.

More deeply, the Bagehot rules are flawed. If it were clear who is illiquid and who is insolvent, there wouldn’t be a crisis. Private lenders would happily support the clearly solvent. And runs happen at institutions that investors fear are insolvent. If you want to stop runs you have to prop up at least the creditors of potentially insolvent institutions. Bagehot’s rules may constrain the central bank; they may be good rules for a prudent investor, they may address moral hazard. But they are not obviously optimal rules to stop crisis or to prevent them from occurring in the first place.

Worse, when we figure all this out, how do we write binding laws or regulations that will effectively constrain bailout-hungry officials?  For example, Paul Volcker proposed a fine clear rule, “thou shalt not finance proprietary trading with deposits.” Which, 600 pages and counting later, is utter mush.

So here we are, 6 years after our crisis — or 82 years after 1932, or 113 years after 1907, or, heck, 300 years after 1720— and as eminent a thinker and practitioner as Paul still needs to invite future thought on what these rules ought to be, let alone just what legal restrictions will actually enforce them and communicate that expectation.

I fear that the next crisis will be upon us long before Paul has figured it out, and a century before he gets the Basel committee, the Fed, ECB, FSOC, Congress, Parliament, SEC, and so on to go along.

***

So, I agree with pretty much all Paul has to say. but I infer the opposite message. If this is what it takes to rescue the house of cards, then we need a different house, one not made of cards. We need to stop crises from happening in the first place.

To its credit, that is the other half of our contemporary policy response: This time, finally, the army of regulators and stress testers will see the crisis coming; with their Talmudic rules and interpretations, and their great discretion, they will stop any “systemically important” financial institution from losing money, despite the moral hazard sirens, and without turning that financial system into something resembling the Italian state telephone company circa 1965.  Good luck with that.

Consider an alternative: Suppose banks had to fund risky lending by issuing equity and long-term debt. Suppose mortgage-backed securities were funded by long-only, floating NAV mutual funds, not overnight repo. Suppose all fixed-value demandable assets had to be backed 100% by our abundant supply of short-term Treasuries. Then we really would not have runs in the first place. And a lot of unemployed regulators.

Why do we not have such a world? Originally, because you can’t do it with the financial, computational, and communications technology of the 1930s or 1960s.  But now we can. More recently, I think, because moral hazard so subsidizes the current fragile system. But now we can change that.

Paul mentioned this possibility, but gave up quickly, conditioning his remarks on a view that society has decided it wants fractional reserve banking. Well, maybe society needs to rethink that decision.

Really, just why is it so vital to save a financial system soaked in run-prone overnight debt? Even if borrowers might have to pay 50 basis points more (which I doubt), is that worth a continual series of crises, 10% or more downsteps in GDP, 10 million losing their jobs in the US alone, a  40% rise in debt to GDP, and the strangling cost of our financial regulations?

***

A last point. Paul unites financial with monetary and fiscal policy. That’s crucial. The last crisis raised US national debt from 60% to over 100% of GDP. The next one will require more. At some point we can’t borrow that much.

But take this thought one step further. The next crisis could well be a sovereign debt crisis, not a repetition of a real estate-induced run. Crises are by definition somewhat unexpected, and come from unexpected sources.

To be concrete, suppose Chinese financial markets blow up, surprise, surprise discovering a lot of insolvent debt. The stress is too much for the IMF and Europe, so Greece goes, followed by Italy Spain and Portugal, half of Latin America and a few American States. Pair that with war in the middle east — Isis explodes a dirty bomb, say — requiring several trillion dollars.

Now Governments are the ones in trouble. They won’t be able to borrow trillions more, bail out banks or lend of last resort.   In a global sovereign debt crisis, even Paul’s regime would turn out to be a superb Maginot line. The current regime wouldn’t be that strong.

A financial system deeply dependent on the government put would be finished.  This is the lesson of Europe. A southern government default would have little consequences if its banks were not so embroiled in government finances.

But a financial system uncoupled from government finances would survive.

***

In sum, I cheer pretty much everything Paul said. But It’s an outline for a plan that will take decades to fill in. And all in the service of keeping the house of overnight debt cards going.

So the lesson I take is that instead, we should finally take seriously the other centuries - old, simple alternative: equity-funded banking, government-provided interest-paying money, mirroring that great 19th century innovation, government-provided banknotes, and a purge of run-prone assets.

 ***

PS:

• Thomas Humphrey writes an interesting  history of Bagehot's rules in the Richmond Fed Review, Averting Financial Crises: Advice from Classical Economists. 
• Renee Haltom has an excellent short article in the same issue, Last-Resort Lending for the 21st Century summarizing current views.
• A spate of news articles came out last summer suggesting Lehman might have been "solvent" after all, here, here, here. Of course "solvent" at ex-post prices selects on one state of the world. Same comment for how much money the government and Fed made on bailout deals. 
• One interesting point came up at the conference (I forget who said this). If the central bank lends against "good collateral," that takes away important assets that rightfully belong to debt-holders, and makes them more likely to run.   

** Update: I originally wrote incorrectly that the Reserve Fund had 40% of its assets in Lehman. A correspondent corrected me and pointed me to McCabe, Holscher, Cipriani, and Martin's BPEA paper whose footnote 27 states

The Primary Fund’s losses were caused largely by its $785 million in holdings of Lehman debt obligations (1.3 percent of the fund’s assets) at the time of Lehman’s bankruptcy. RCMI, the adviser to the fund, announced at about 4 pm on Tuesday, September 16, 2008, that the NAV of the fund’s shares had dropped by 3 percent, to 97 cents, presumably because large redemptions had further eroded the NAV. 

The correspondent adds that money funds can’t have that much  exposure to one counter-party because of limits in rule 2a-7.  1.3 / 3 is about 40%, which must be the number Im remembering -- 40% of the losses, not the assets, came from Lehman. This is even more interesting, because it suggests a run on the fund, rather than large actual losses, was the central problem.  Moral, check your numbers, even ones you think you remember really well.  

Bailout barometer

The Richmond Fed updated its "bailout barometer," at left. Post here and longer report here. (WSJ coverage here)

I found the numbers and the table from the longer report interesting as well. Guaranteeing more than half of financial sector liabilities is impressive. But most of us don't know how large financial sector liabilities are. GDP is about $17 Trillion. $43 Trillion is a lot.

This is only financial system guarantees. It doesn't include, for example, the federal debt. It doesn't include student loans, small business loan guarantees, direct loan guarantees to businesses, the ex-im bank and so on and so forth. It doesn't include non-financial but likely bailouts like auto companies, states and local governments, their pensions, and so on.

Guaranteeing debt subsidizes things off budget. Of course, the chance that the government will have to simultaneously pay all these claims at once in full is small. But the chance that substantial debt guarantees might have to be paid is no longer vanishing.

Excerpts from The Call of the Trance

 

 Among the perspectives about contemporary life in The Call of the Trance (2014) is author Catherine Clément's declaration "The possessed today are singers . . ."  Nowadays 'possession' is associated with the word 'demon' or 'demonic' connoting evil as a superstitious derivative of the Latin/Greek 'daemon'/'daimon.'  A point of reflection for Clément was a reviewer's comparisons of a rap singer's movements to those of animals.

 

2014 TV image

 

The Call of the Trance was translated to English by Chris Turner.  Catherine Clément's writings include essays on anthropology and psychoanalysis.  Contemplating some of the occurrences mentioned in the book, I recalled circumstances documented in case studies of visions, trance mediumship and channeling (topics of many previous blog articles).
 

Garabandal (1960s) is one of the sites where people experienced visionary trances that are now known categorically as cases of 'Marian apparitions.'  ("Ecstatic Marches" video)
 

Trance medium Mina Crandon (1881-1941)

 

In addition to trances, other phenomenal experiences are occasionally mentioned in the book, including: "the 'super nature' within which the shamans move," prophecy, 'intestinal rumblings,' losses of voice, visions, haunting smells, omen, healing, ecstasy, 'ecstatic sleepers,' reincarnation, 'multiple personalities,' ascetics, immortality, disequilibrium, sneezing, "rain can even be summoned," purification, "'supernatural' voices," compulsion, metamorphoses . . .

The inclusion of commentary about some popular fictitious works reminds the reader of vicarious aspects of life in societies with ensconced commercial traditions of entertainment.

 

The following excerpts are some of the noteworthy passages from The Call of the Trance.

From the chapter "Changing Life"

The scene takes place at Dakar [Africa] at the turn of the twenty-first century.  It's nightfall.

 

They call the trance that possesses them 'dancing.'

 

They belong to the global masses who live on less than two dollars a day.

 

But when they are in a trance, each evening as night falls, these women are queens for two hours.

And we are too, sometimes.  The trance is universal.

 

Elsewhere, the spirits are called djinns, angels, demons, devils, rock music, love, anger, madness or, quite simply, God.  Here in the Dakar region, they're called rab . . .

 

That evening at Dakar, a cook from Mali fell down suddenly, without warning.  Often mistreated by the trance-mistress, her boss, she wasn't one of the official group but among the onlookers.  Yet the spirits are no respecters of class distinctions . . . A sudden jolt and off she went.  She was on all fours, growling fiercely.

 

I saw her up close.  Her eyes, crazed with worry, rolled in all directions, while her breathing grew panicky and her mouth opened and roared involuntarily while her every limb trembled.

 

We're all like these women.  We all need dancing and breaks, times of silence and absence, withdrawals that may take the form of illness.  We all need a sudden escape, a refreshing bath, a thrill that brings no lasting consequences, life without commitment or promise, disorder, holidays without beginning or end.

From Chapter 4

Popularized by films in which special effects perform their wonders, shamanism now forms part of the Western imaginary landscape.

 

In 2002, studying the trances induced by the tromba spirits on the island of Mayotte, the anthropologist Bertrand Hell set to work with specialists on hypnosis and found that, in this very closely trance-related phenomenon, 'loss of control' expresses itself in changes in the anterior cingulate cortex, the brainstem and the thalamus, changes made visible through neuro-imaging techniques.

From Chapter 5

Loudon, a fortified town and a solid Protestant fortress which the Catholic powers have designs on, has in the middle of the seventeenth century fourteen thousand inhabitants.

In 1632, plague suddenly breaks out, killing more than three thousand between May and September.

 

The plague epidemic is coming to an end when another epidemic breaks out in late September.  Erotic frenzies in a convent.

 

That the nuns are in love with the priest is something all can divine.  But caterwauling in their shifts in the trees spells such disorder that the devil must have a hand in it.

The exorcisms begin immediately.

 

The abbé d'Aubignac's conclusion was that the whole performance was merely 'deceit, fakery, abomination and sacrilege.'  But when the trickery was unmasked, what remained in the excellent abbé's account that was inexplicable?  Those thick, black, stuck-out tongues among all the possessed.

And a sublime moment when Élisabeth Blanchard, whom the exorcist told that she must obey God because she is God's—tu Dei es.  She replied, quick as a flash, "To be sure, I am God."  The exorcist corrects her but Élisabeth replies with verve, "You think I didn't hear you, but you're wrong, for you're saying that I'm God's and I'm saying that I am God."

It is she who is right.  Mystics attest to this—at Baghdad, in 922, the great Sufi al-Hallaj died on the cross for similar remarks.

 

The possessed today are singers of both sexes who offer up their tattooed muscles, their bound, corseted bodies, their boots, sweat and exhaustion for public veneration.

From Chapter 7
 

The girls you see screaming and waving their arms in the air at the feet of singers are often called 'hysterical.'  Hysterical fans. 

The term 'hysteric'—an offshoot of the sorcerer's trance and the convulsions of Saint-Médard and also the soil from which, around the year 1900, psychoanalysis emerged—is a classic one in psychiatry.

 

In India, they say that yogis, who have entered a state of voluntary catalepsy, have been buried for a month—locked up in chests, under surveillance—and come out alive. Catalepsy, giving the outward appearance of death, is a silence of the organs, the merest murmur of life, with the heart operating in slow motion.

From Chapter 8

Laughter, perturbing and short-circuiting the mind, is a little trance; it is uncontrollable, coming in involuntary bursts and clouding the brain.

From Chapter 12

In his home between Chennai and Madurai in southern India, I met a man who, in a state of trance, was a woman.  Nothing about his appearance was feminine.  He had a little moustache, a pot belly, a white loincloth and a deep voice.  He was married with four children in an exemplary Indian family—well-turned-out children, a self-effacing wife.

Seated on a bed of sea-buckthorn leaves, that sacred tree with its therapeutic properties, Our Mother spoke in a woman's voice.  When she comes out of her trance, she returns to her man's body, but for the rest of the time 'he' is Our Mother.  And, in this latter persona, She has built a temple, a university, a hospital and numerous hotels.

Chapter 14

In 1966 . . . in a little room at the Sainte-Anne psychiatric hospital in Paris, I saw a girl assume the hysteric's 'crab position.'  "Her head was touching the ground and she was on the tips of her toes with her body thrown backwards as an arc," as the physicians treating the nuns of Loudon put it.

If I hadn't seen the incredible phenomenon with my own eyes, I wouldn't have sought high and low for the meaning and function of trance states.  Had it not been for that disturbing sight, I wouldn't have written this book.

 

We have epidemics specific to girls today.  Anorexia has taken the place of hysteria—ninety per cent of anorexics are girls.

They're obsessed with the idea of beauty and want a body without an ounce of fat.  The means employed to lose weight are simple and violent: starving themselves, forcing themselves to vomit after eating, taking laxatives or enemas.  In health terms, the results may be catastrophic . . .

 

The violent coming and going of the alimentary bolus inside the body is a trance.  Filling and emptying one's internal plumbing violently, making the abominable 'things' enter and leave one's body is an imposed trance.

 

Chapter 16

In an initiation, work is done on the skin [in some unmodernized countries]. 
 

The bodily manufacture of belonging [in modernized cultures], without initiation, reconnects with some old models.  This is the case is prisons, where 'families' are created, or with Stephanie Meyer's new vampires.  You change species, you're another type of human.   

 

They [the punks whose doings were recorded by Ralf Marsault] invented their own rite—a drunken dance in which one of them, throwing him- or herself from a stage, surfed from arm to arm above an ocean of heads, incurring no bodily harm.  They assisted one another as a group and help was available.
 

  

We've seen this burning desire for initiation everywhere.

 

To mutilate yourself by cutting strips of flesh from your skin; to knock yourself out massively and hurriedly with alcohol so that you fall straight into the state so well described as 'dead drunk'; to gather together, with music and drugs, so as to form one single body with a host of other people—these are wildcat initiations, manufacturings of fears bereft of the attendant knowledge.

 

Binge drinking—getting hugely, instantaneously drunk—is a dangerous eclipsing of life.  Otherwise, it's not done right and it's not an eclipse.  The subject has to disappear and the trance state must prevail.  But there's no safety-net to this dangerous activity.

The eclipse may suddenly occur as raptus, when consciousness is abruptly snatched away.  It happens, indeed, that people kill themselves by eclipsing themselves from life.  It's even crossed my mind at times that the harrowing mass phenomenon of suicides in the workplace, caused by excess of authority and the hounding of employees—particularly at the Renault factories—has to do with these eclipses from life. 

 
. . . A compulsion to throw oneself over a guard rail, to hurl oneself from a great height, to fall out of life.

 

After living among the Achuar Indians of the Jivaroan group, the ethnologist Philippe Descola calls the animals and plants that share the world with humans 'non-humans.'  In the shaman's trance, they're not external, alien beings but alter egos that are 'invited to lend their aid' . . . .

 

Homo economicus or homo paleas?

Or at least that's how Google translate renders "straw man."

Dick Thaler is in the news, with a long review of his book in the Wall Street Journal  and a thoughtful opinion piece in the New York Times, earning plaudits from Greg Mankiw no less.

The pieces are nice reference points to think about just where psychological economics is. (That's a better adjective than "behavioral" since we are all students of behavior.)

Bottom line: People do a lot of nutty things. But when you raise the price of tomatoes, they buy fewer tomatoes, just as if utility maximizers had walked into the grocery store.

Homo paleas

Dick spends the first half of his precious space in the New York Times and much of the WSJ review complaining about homo economicus, the dispassionate rational maximizer of economic theory.

Economists discount any factors that would not influence the thinking of a rational person

Econs do not have passions; they are cold-blooded optimizers

This is a straw man, and we all know it. As the joke goes, physics studies massless elephants on frictionless sandpaper. All sciences and engineering make simplifying assumptions appropriate to the problem at hand. If you want to figure out the effect of prices on tomato demand, the absurdly simplified rational maximizer approach gives a darn good answer. If you want to figure out where to put the signs advertising a tomato sale, or what color to draw them, let me suggest some psychology.

To jump from the fact that economists often study simplified models focusing on "rational" decision making, to say that economists uniformly deny that any other principle is useful for understanding any human behavior is absurd. And where in rational maximizing does it state that rational maximizers have no feelings about what they're doing? The experience of rational maximization carries immense feeling.

And even if we are all wrong, that doesn't make Thaler right.

One could just as easily make fun of psychologists and sociologists for ignoring the rationality of much human decision-making, and price incentives in particular. Gary Becker made a splendid career out of that fact.  We could easily write parallel opeds saying all of psychlogy is wrong because they omit the fact that sometimes people do in fact add two and two to get four. But "rationalists" respect logic and their reader's intelligence too much to do that: Psychologists' omissions and simplifications likewise do not invalidate their observations about other aspects of behavior.

Stories vs. achievements

Dick tells good stories. Of 20 paragraphs in the New York Times piece, Dick spends 6 on how his students were happier by rebasing exams to 137 points. Just happier, there is no actual behavior here other than a reduction in "grumbling." Then 5 more paragraphs of stories, like why do non-economist spouses want presents on anniversaries.

Only on paragraph 16 do we get a real observation about real behavior: Employers have found that people tend to take the default retirement plan, so if that default plan includes more saving, people are likely to save more. And that this incentive works better than some complex tax deduction that even economics professors often can't figure out. One might complain that it shouldn't take a PhD in psychology to figure this out, but peace, it's a good observation.

Paragraph 19 has a second real-world observation: The Obama administration chose to send taxpayers a $100 per month extra rather than a lump sum $1200, in an effort to nudge the taxpayers to spend it rather than pay down debt.  This one is also concrete, but he doesn't give us any evidence that it actually worked as claimed.  More deeply, is psychological economics about changing taxpayers' behavior or about selling programs to government officials?

Most of the Wall Street Journal review passes along Thaler's of complaining about how people resisted his early ideas. Really, now, complaining about being ignored and mistreated is a bit unseemly for a Distinguished Service professor with a multiple-group low-teaching appointment at the very University of Chicago he derides, partner in an  asset management company running $3 billion dollars, recipient of numerous awards including AEA vice president,  and so on.

Note that the inflammatory quotes:  “pure heresy” "blood boiling” "Chicago School’s libertarian beliefs" are his. "This was `treacherous, inflammatory territory,' he writes." He writes.  An objective history of behavioral finance this is not. And news flash, we ask sharp questions at Fama's seminars too.

The nudge for saving experience is good and solid. But the skeptical reader, who does not sing in the choir,  wonders: you've been at it three decades, and this is all you've got?

Decisions

Actually, no, and it's a shame Dick spent all this bandwidth on straw men, stories, and whining about his early reception. Psychological insights are quite useful for helping people to make more rational decisions.

This may surprise some blog readers, but I'm actually quite a "behavioralist," in my hobby life as a competition soaring pilot. We read a lot of sports psychology, and it makes a big difference. When pilots are low over inhospitable terrain in a glider, we are prey to all sorts of unhelpful emotions. "Darn why can't I fly anymore" is common; self-pity combined with ego defense. We train by visualizing a healthy set of emotions, a mental patter, as well as the actual series of decisions that must be made quickly. Better racing performance and better safety demonstrably result.

Psychology has a lot to say about how people make quick decisions in environments of information overload and scarce time.  Traditional economics is not really at fault for assuming "rationality" whatever that may mean. Traditional economics ignores information gathering and processing costs, because they are usually second-order.  Homo economicus got devoured by a lion while working out the dynamic program of how fast to run away.

Behavioral marketing, for example, is a cornerstone of the business school curriculum. I presume Dick's class "Managerial decision making" (syllabus sadly not available) covers a lot of how to use psychology to become more rational. Behavioral finance is excellent marketing for active investment strategies, that's for sure.

Cuteonomics?

When it gets to economics, though -- market outcomes, not individual decisions --  a common complaint is that "behavioral" approaches study small-potatoes effects. OK, some asset might have a price 10 basis points off. OK, Dick knows how to rebase exams to get a bit better teaching ratings. OK, so your non-economist spouse wants roses on Valentine's day. But really, in the big picture of growth, unemployment, inequality, climate -- you name it -- has this risen past cuteonomics? How do I use psychology to study the practical problems of everyday economics, say How much does progressive taxation hinder innovation and growth; How do I separate the risk premium from expected inflation in reading long-term bonds; How much carbon would a tax reduce, and so on?

That's an interesting debate. We could have it. We should have it. There are good points on both sides. Too bad Dick chose not to address it at all.

That is why “economic models make a lot of bad predictions”: some small and trivial, some monumental and devastating.  

says the Wall Street Journal. Too bad it does not list a single "monumental and devastating" prediction, made wrong by conventional economics, and convincingly made by psychological economics. I underline prediction: explanations after the fact ("there was a 'bubble' which you guys can't explain) which could go either way don't count.

Libertarian Paternalism

You know why the Times loves this stuff.

One article directly attacked the “core principle underlying the Chicago School’s libertarian beliefs,” namely consumer sovereignty: “the notion that people make good choices, and certainly better choices than anyone else could make for them.” By empirically demonstrating that consumers often do precisely the opposite, because rationality and self-control are bounded by human perceptual distortions, their paper undercut this principle. This was “treacherous, inflammatory territory,”

The first is flatly untrue. The case for the free market is not that each individual's choices are perfect. The case for the free market is long and sorry experience that government bureuacracies are pretty awful at making choices for people. "Empirically demonstrating" that some people do silly things does not empirically demonstrate that other people, organized into the US regulatory agencies, can make better choices for them. This is another simple failure of basic logic.

And psychological, social-psychological, sociological, anthropological, and sociological study of bureaucracies and regulatory agencies, trying to understand their manifest "irrationality," rather than just bemoan it as libertarians tend to do, ought to be a tremendously interesting inquiry. Where is behavioral public choice? (More in a previous post.)

(And accusing your colleagues of "beliefs" and viewing a paper as "treacherous" is ungracious at least. The Chicago school's prime belief, if there is one, is to let data speak, and hire quality and impact no matter what the answers. That's why that very Chicago school hired him.  Attacking motivations of those who disagree with you is not particularly scientific or "rational," though it is common behavior, especially at the Times. )

The hard nut: Government bureaucracies are staffed by the same homo psychologicus that makes bad private decisions. Except that social psychology is full of lessons ("groupthink" for example) on just how people, organized into committees, not subject to the discipline of competition, make truly awful decisions. And if you want stories of awful bureaucratic decisions, just open the pages of the Wall Street Journal, or the Cato or Hoover webpages.

Let's go back to that great success, the Obama administration's choice to send taxpayers a $100 per month extra rather than a lump sum $1200, in an effort to nudge the taxpayers to spend it rather than pay down debt.  Hmm, is getting the average consumer to go down to Walmart and buy a bunch of stuff they don't need, rather than pay down some debt, put off foreclosure or car reposession, such a great idea? Didn't the last paragraph just tell us how effective enrollment defaults are at getting people to increase savings? Along with a host of other Federal incentives like IRAs and 401(k)s? Just how infinitely rational is all this nudging?

There is a little offering here:

No matter how often they added that bureaucrats are Humans, with their own biases, their critics wouldn’t listen, even when Mr. Sunstein kept repeating that they were not pro-paternalism but rather “anti-anti-paternalism.”

This critic has been listening a lot, and not hearing or seeing any serious psychological study of the perfect rationality of government bureaucracies.

The central problem with Libertarian Paternalism as an alternative to Homo Economicus, is ubi est pater? Where is this hyper-rational Pater who will guide things for us better than the admittedly shoddy job we often do for our selves, and the somewhat less shoddy job that private institutions designed to help us make decisions can do?

The WSJ article takes up the issue

“Could we use behavioral economics to make the world a better place? And could we do so without confirming the deeply held suspicions of our biggest critics: that we were closet socialists, if not communists, who wanted to replace markets with bureaucrats?” Yes, he argues, and yes. Because people make predictable errors, we can create policies and rules that lower the error rate, whether it has to do with reducing driving accidents, getting men who use public urinals to aim better or enticing people to save for retirement—and do it in a way that makes people themselves happier with the results.

"We." Well, at least it is better than the usual passive, "people can be made better off." But just who is this "we, " and how did that "we" avoid all the chaos coming from federal bureaucracies trying to regulate behavior?

The problem, Mr. Thaler argues, is that although economists “hold a virtual monopoly” on giving policy advice, ...

Ah, the benevolent bureaucrat is just getting bad advice. This isn't socialism or communism. It is aristocratism; us the bien-pensant experts, immune from behaviorism and over emotional decision-making (a trait not terribly on display in these articles) can guide the benighted masses, if only the government would listen to us.

Always just over the hill

One would think that after 30 years, one would be looking back at a long string of solid successes. But despite 30 years of trying, both pieces keep promising a golden future, just over the next hill.

By injecting economics with “good psychology and other social sciences” and by including real people in economic theory, economists will improve predictions of human behavior,

Any day now. Well, keep trying. And I'll keep listening. I hope 30 years from now there is a string of solid successes to report, and less  straw men, antagonist-vilification, and funny classroom stories.

Feldstein on inflation

Martin Feldstein has an interesting Op-Ed in the Wall Street Journal, "Why the U.S. Underestimates Growth."

The basic idea is that inflation may be overstated, because it doesn't do a good job of handling new products. As a result, real output growth may be a bit stronger than measured.  Marty runs through a lot of sensible conclusions.

He doesn't talk about monetary policy, but that's interesting too. So what if inflation really is (say) 3% lower than we think it is, and therefore real output growth is 3% larger than it really is?


That would mean we are a lot closer to "normal" of course.

It would mean that we really have 0% nominal interest rates, 1.5% deflation rather than 1.5% inflation; +1.5% real rates rather than -1.5% real rates. That is about the ideal monetary policy. Flat nominal wages, so we don't have wage stickiness problems, slight deflation matching productivity increases and a positive but low real rate of interest. We live the Friedman optimal quantity of money. In addition, it means no inflationary distortions and fewer intertemporal distortions in the tax code -- no taxing interest.

The labor market is pretty much back to normal except for the labor force participation rate. The main sign of weakness is real output growth, and Marty suggests that might not even be there.

How should the Fed react? News that real output growth is stronger than the Fed thinks would be an argument to raise rates. News that inflation is weaker than the Fed thinks is an argument to lower rates. At conventional Taylor-rule parameters of 1.5 times inflation plus 0.5 times output gap, news that inflation is 1% lower and output is 1% higher means the lowering effect wins. So, in fact this is an argument to keep rates where they are and to continue basking in the Friedman optimal quantity of money for a while.

In fact, this strikes me as the main conclusion. As Marty points out, if real growth is stronger than we think, that doesn't mean it couldn't be stronger still. If real wages are really rising, that doesn't mean they couldn't be rising more. Weak labor force participation and total factor productivity are not much influenced by inflation measures.

Metaphysical Pop Songs: Gods of Aquarius

"NunSexMonkRock" (1982) is Nina Hagen's earliest English language album.

 

 



Listening to any song, there will be an instantaneous effect upon one's mood; however, I must admit that there are few 'hit' radio songs that hold my attention these days — a time of media conglomerates, iHeartRadio and 'heavy rotation'.  One surprise in recent years was the inclusion of the lyrics "Welcome to the New Age" in the Imagine Dragons song "Radioactive."  When I'm in my car, I usually prefer to listen to the non-profit classical music radio station.  The worst thing about listening to contemporary pop music on the radio is the commercials, which have become ridiculously incessant.

Back in the 1980s—a remarkably eclectic time for popular music—I commuted from Pasadena to the Hollywood Hills and listened to New Wave music, etc.  People my age probably recognize much of the pop music that I do from past decades but I'm not sure that everyone remembers the innovative recording artist Nina Hagen (born in East Germany 1955) who has shown a joyful preoccupation with metaphysical themes throughout her career. 

Nina's songs played regularly on my local station.  The song from her first English album that caught my attention is "Born in Xixax", which shows Nina's delight with her unusual vocal range.  Her singing is hard to describe yet easy to experience upon listening to her songs on YouTube.  I listened to "NunSexMonkRock" this afternoon and noticed the influence of the 'punk' movement (not my forte) with a postmodern sensibility.  Hearing "Dr. Art" in particular was a little startling.  Nina has always expressed adoration of Jesus while occasionally using her peculiar vocal abilities and sometimes even her facial make-up to satirize superstitious conceptions of the 'demonic.’ 

I discovered a fascinating five minute video clip of Merle Ginsburg interviewing Nina: "1984 Nina Hagen Interview English".  Nina talks about her perspective of God, a transcendental 'voice hearing' incident, and she relates an experience that is an instance of what I have called the 'Michael' Pattern in previous blog articles.  In the video clip, some EVP messages are audible: "NO" at 3:00, 3:10 and 4:36; and "YOU KNOW" at 5:07.

 

Nina Hagen's second English language album is the disco-influenced "Fearless" (1983).  A producer of the album is Giorgio Moroder, one of the many successful recording artists associated with electronic music during the '80s.  The LP includes "New York New York" (not a cover version of the Liza Minnelli song), "Flying Saucers", "The Change", "What It Is" and "Zarah".

 

In "Nina Hagen in Ekstasy" (1985), Nina's third English language album, the song "Gods of Aquarius" presents the full scope of Nina's optimistic and cosmically expectant outlook.  Other songs include "Universal Radio", "Spirit in the Sky" and "The Lord's Prayer".

"Gods of Aquarius" Lyrics

Music: Nina Hagen, Karl Rucker / Lyrics: Nina Hagen 

The Gods of Aquarius are coming with UFOs

They love me and they love you

And what they have to say is true

The good old communication with Holy Spirits of God's creation

Is true but our church denies it

God, when will they realize it

Oh God, we need the big solution

We can't stand atomic pollution

Man, it would be such a shame

If we won't stop the devil's game

Telepathic communication leads to physical transformation

When at the end of night human race is filled with light

Love love never get enough

If you don't love hey, hey, hey too tough

Voices, visions some go in trance

Holy Ghost talks to His fans

I really don't want no more fighting

What I want is automatic writing

Oh my God, the Heavenly Host sends us down His Holy Ghost

The Golden Age of Aquarius the second coming of the glorious

Love, love, never get enough

If you don't love hey, hey, hey too tough . . .

Writing this article and observing some of Nina's interviews for the first time, I am reminded that people have different life experiences and relationships with 'God' based upon their awareness, perceptions and also circumstances involving what might be simply expressed as 'karma'.

Autumn Wedding Jewelry Ensemble

This past autumn, I had the honor of designing a jewelry set for five bridesmaids!

The color theme was reds and golds, with hints of pearl and green. Each of the girls would be wearing a different dress in the same color, and each girl had different jewelry requirements (pierced/non-pierced ears, short/long necklace, etc). 

The necklace shape is also adjustable-- since I created a braided base, it could be gently pinched into a pointed shape, or a flat, or rounded style. If you look closely at the pictures of the bridesmaids, you'll see that each necklace is worn differently!

The bride wore a thick lace veil with a bright, bold wreath of red and gold flowers and leaves on top, and the jewelry was designed to coordinate with her style.

It goes without saying that these five sets were a fair bit of work! Each necklace had a braided base that looks very similar to my braided circlets. Beads and glass leaves of all kinds were woven on in matching patterns, and beads adorned the adjustable golden chain.

These are the earrings and ear cuffs designed for the bridesmaids!

The ear cuffs were beautifully decorative; the bride loves fairytale styles so I had fun going overboard with the sparkly bling!

One of the girls had double piercings and wore two sets of dangles! I'd never really heard of that kind of pairing before, but wouldn't you agree that it is a lovely combination?



The other girls all wore variations of my Enchanted Forest Earrings in gold and red.

I also created a pair of barefoot sandals for the bride! The picture below is with shoes from our outdoor photoshoot, but these "fairy sandals" work well barefoot, too!

This is the entire set of jewelry, representing a couple weeks of work!

I didn't photograph the rings very well, but in this picture you can see the leaf flower ring and the gold-and-red wirewrapped rosette ring on the maid of honor!

This was one of the most unique weddings I've attended, style-wise, and I had a blast designing jewelry for such lovely girls!

I've created many pieces of jewelry for various brides, and I've even designed an entire set of jewelry for a bride, bridal party, and mother-of-the-bride, but this was the first time creating wedding pieces for someone I knew! I am also friends with all of the bridal party, so I had the opportunity to take their personal styles into consideration.

In addition, I also helped out last minute by being the second shooter at the wedding! I wound up taking over three hundred pictures of the ceremony, photoshoot, and reception.

It's not a fairytale wedding with friends until you do a hilarious gag photo, is it?

The park we took photos had at these awesomely weird concrete frogs...

So... I did mention that this was a group of my friends from high school and that everyone involved are fantastic geeks, yes? While the main photographer was off taking sweet pictures of the bride and groom, the bridesmaids and groomsmen posed with my Lord of the Rings weaponry.

Aren't they just too cute?

Best wishes and lots of prayers for the new Mr. and Mrs.!