A huge problem in medicine is the failure to see where problems will come from, even when those problems appear to be obvious in hindsight.
The field of economics shares this problem. A perfect example is the recent release of the transcript from the August 2007 Federal Reserve Board meeting. This is 136 pages of stuff that even I am not interested enough to do more than skim through. There is too much good medical research, and some good books, already on my to do list. However the New York Times paid someone to look through this and these are some of the insi
However, there is a lot to think about in just the press release. This was about a year and a half after Alan Greenspan had stepped down as the inscrutable, indecipherable (but not inconceivable), philosopher king of government financial oversight. The Maestro.
President George W. Bush presents the Presidential Medal of Freedom to Alan Greenspan, on November 9, 2005 in the East Room of the White House.
The markets did well. Few understood what Chairman Greenspan was saying and it appeared that opacity was the goal. People looking for cause and effect assumed that the cause of the success of the markets was Alan Greenspan.
His successor was Ben Bernanke, who did try to make policy less obscure, but otherwise tried to carry on the Greenspan traditions.
Economic growth was moderate during the first half of the year. Financial markets have been volatile in recent weeks, credit conditions have become tighter for some households and businesses, and the housing correction is ongoing. Nevertheless, the economy seems likely to continue to expand at a moderate pace over coming quarters, supported by solid growth in employment and incomes and a robust global economy.
The market was looking good at the time. The Standard & Poor’s 500 index is one of the best indicators of the state of the market. Here is where the market was at the time of the meeting.
Image credit. Click on images to make them larger.
There were already serious problems with the economy – mortgage defaults (especially sub-prime), falling housing prices (which the government subsidies helped raise), and recent multi-trillion dollar losses in various markets.
Chairman Bernanke had some odd things to say for someone who is supposed to understand the economy.
On the positive side, the repricing of risk and the reevaluation of underwriting standards seem appropriate.
The price of risk was completely out of line, so a move in the direction of something rational would be appropriate, if it were more than a token move.
It is an interesting question why what looks like $100 billion or so of credit losses in the subprime market has been reflected in multiple trillions of dollars of losses in paper wealth. So it’s an interesting question about what is going on there.
When s huge section of the investing community has invested heavily in one area, eventually they will have nobody left to sell to – or even worse, they start believing that what they have been selling is really worth what they have been telling people it is worth. The only bank to not lose a lot of money was Goldman Sachs, but that appears to be because some of their people copied the trades that John Paulson was buying from them.
Obviously, the markets right now are not functioning normally.
And the chart below shows what happened after the meeting (big red dot) up until January 13, 2013.
Was the experts’ unanimous endorsement of steady economic expansion over the coming year, or two, at all close to what happened?
Did the experts understand the economy or the many factors affecting the markets?
How could the experts forecast steady economic expansion as we were entering an economic collapse?
From around 1,500 at the time of the meeting, down to under 700 a year and a half later, then taking almost four years to slowly return to where the market was at the beginning of this continuing gradual expansion.
The market was cut in half. Then it lost some more.
We like to deceive ourselves.
Nassim Taleb wrote about this in a book that did a much better job of anticipating the collapse, and he published that book months before this meeting, while things were looking much better –
We attribute our successes to our skills, and our failures to external events outside our control.
True of many in medicine.
It has been more profitable for us to bind together in the wrong direction than to be alone in the right one.
That is also a problem in medicine.
You cannot ignore self-delusion. Lack of knowledge and delusion about the quality of your knowledge come together-the same process that makes you know less also makes you satisfied with your knowledge.
Again, true in medicine.
Well, a gentleman called Alan Greenspan, the former chairman of the U.S. Federal Reserve Bank, went to Congress to explain that the banking crisis, which he and his successor Bernanke helped cause, could not have been foreseen because it “had never happened before.” Not a single member of congress was intelligent enough to shout, “Alan Greenspan, you have never died before, not in eighty years, not even once; does that make you immortal?”
We only seem to consider what we have already seen – as if that is somehow a limit beyond which no bad things can happen. So we are surprised when this imaginary limit, that only exists in our heads as an anchoring effect, is exceeded.
Science alone of all the subjects contains within itself the lesson of the danger of belief in the infallibility of the greatest teachers in the preceding generation … Learn from science that you must doubt the experts. As a matter of fact, I can also define science another way:
Science is the belief in the ignorance of experts.
- Richard Feynman.
This is echoed by Nassim Taleb –
The problem with experts is that they do not know what they do not know.
When experts discourage us from questioning them, and do not provide good evidence to support their positions, those experts deserve criticism.
 Meeting of the Federal Open Market Committee on August 7, 2007
Released Jan. 18, 2013
Free Full Text Download in PDF format from the Federal Reserve Board.