One can spend forever talking about How you can finesse fiscal and monetary policy, which is Why I like this Post from Stephan Gordon. He insinuates, though never stating it, that it is functional folly to worry about attempting to make people money, as the funds disappear like water in the desert. The goal should be in building a sound safety net for the people who fail. I agree with that proposition, knowing that business itself is much like Gambling; every enterprise having a temporary Run of great luck, then falling before the ravages of Age. It is only a matter of Time before a successive business is found with a more viable format. What We need to worry about is the concept of standing the Losers up, and starting them over once more; the later being defined by people, rather than business outlines. I have seen successful Social Security programs, and I have seen failures of such systems; but I have never witnessed any long-term success of a business incentive program. I would concentrate upon the former, under these conditions.
Arnold Kling criticizes model studies, basically because they are all observation studies; pray do not think I disagree. Models are constructed to prove what the modeler would like to have proven, never the inverse; this makes the choice of data extremely variable and highly erratic. You can be assured that any model which requires constant adjustments tell you relatively nothing; as they have to be adjusted to reflect real world economic functioning. Strip such adjustments from any modeling system, and you have a backward-looking formula which only explains past performance; the later often quite distant from the Present. Like old Generals, We are often fighting the last War. The Military is still building a war machine to fight a series of ‘set-piece battles’ only found in WWII, while guerillas are destroying them. Economists are still trying to fulfill tenets of Ronald Reagan.
Read this Preface by Robert Litan. He would try to justify the direction of financial instruments, in counter to Paul Volcker’s assessment. The Paper, which I did not read, might do so; but he has undertaken a real task. I would assert he is trying for too great a Reach, as some of this stuff is most definitely bad; it consisting of only insertion of middleman Costs within the Production function, without even raising the Capital necessary for Production. It’s record on the Consumption side raised the Cost of that Consumption seriously, and disallows Consumption with the same constraints after further debt is assumed; simply placing the Consumer in worse position than formerly before the debt. Understand that development of these financial structures were for the benefit of the financiers, with little care for the Consumers of such structures. One cannot describe them as alternate forms of Ponzi schemes, but one also cannot grant them the sanctity of contracts either. lgl