As with most econometricians of late, he ignores policy (or, as some do, provides cover for his preferred version), and toes the stats line.
Earlier in his career, along with Professor Sims and especially with Professor Sargent, he provided some of the mathematical underpinnings for what is known as the rational expectations theory -- the notion that people use all available information in making economic decisions.
Nonsense. Capital, in particular, makes decisions based on gaming the rules of engagement. To posit otherwise is foolish. If they really were "rational" there'd never have been a Great Recession, since no rational Bankster or CDO insurer would have touched those mortgages with a ten-foot pole. The mortgage companies wouldn't have made them, either, since such instruments were bound to fail. While the macro folks in New York and Washington might have willfully ignored the fantastic unsticking of median house price to income ratio, local real estate agents couldn't. The numbers were in their faces every day. Early on in the run up to the crash, I read/saw some reporting in which the reporter asked one of these how the buyer could possibly carry the mortgage he just sold them. His response: "I don't care". He didn't care because he'd gotten his gelt, and from then on the problem belonged to someone else. Such a country!!
One might, and some have, argue that everyone from the local real estate agents on up to the CEOs of Merrill and AIG and so on rationally expected to get a Washington bailout when it all imploded. But that's both specious and tautologous. No one who hews to the homo economicus myth can argue that it is rational to depend on welfare.
It suggests that people may not "be fooled by policy makers" into making decisions against their own self-interest, he said -- for example, by spending all the proceeds of a one-time tax cut if they understand that the windfall is only temporary.
This is an astonding assertion, and is contradicted by actual behaviour. Folks used these "one time" gains in house appreciation as ATM withdrawls, particularly as median income continued to stagnate. And people do so every spring, with that tax refund they get. Never mind that 99.44% of those getting a refund have no clue that they've lent the money to Uncle Sugar at 0% interest. Come on!!
Prevailing economic models do not adequately explain the financial crisis, the severe recession or the weak global recovery, he said. "Systemic risk" is a buzzword for politicians and financial regulators, he said, but "the truth is, we really don't know how to measure it or what exactly it is."
Again, more willful ignorance. The data were out there and available to modelers. But, just as the Banksters took the notion of musical chairs ("while the music plays, we all have to keep dancing"), or Russian roulette, with the real economy, so too did a large proportion of quants who claimed to be analyzing the economy objectively. Since the behaviour didn't square with both their bias and models, i.e. house prices are always correct, they made no attempt to incorporate conflicting data. And so we got a black swan event. Except that it wasn't.
As my Momma used to say, "what would the world be like if everybody behaved like you?" Ignorance of this question remains the flaw in the "macro is just the aggregate of all the micros" approach to all of economics, both theory and quant. It ain't, just as a local water supply can't be sustained if all residents treat all the water as all theirs. The fact that this remains unspoken by the micro folks just means it will happen again. Most quants, be they econometricians or hedgies, earn their pay from entities which ignore or actively dissemble the externalities they create. If Adam Smith (the real one) were right, then there would be no unpaid externalities. No fracking way, of course.
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