Monday, July 19, 2010

How Bad is the Economics Profession Really?

Don't Ask.

The authors write:
"There is a fundamental flaw in the way central banks set official interest rates. This flaw has created what might be called the “low-interest-rate trap”. Low rates induce excessive risk taking, which increases the probability of crises, which in turn, requires low interest rates to keep the financial system alive. The flaw behind all this is the failure of central banks to take account of the probability of financial crises when setting interest rates."
What garbage. The trap we're in now is that the Fed is simply too stupid or uncaring to do anything about below-target inflation and above-target unemployment. Not that low rates are inducing increased risk taking and increasing the probability of future crisis. Yes, the Fed might have kept interest rates too low which helped feed the housing bubble, and now they are low b/c the economy is still depressed, but I don't see where the trap comes into play in this sense. The only trap is that Bernanke should be doing more QE and he isn't.

1 comment:

  1. As a non-economist, I suspect that the problem is that economics is so ideologically loaded that assumptions are chosen based on what results are wanted.

    When I took a microeconomics course the professor explained a mathematically lovely theory about when people would work more, and when they would work less. At the end, she asked for questions, and my hand went up.

    "Since when do people get to choose how many hours they work?" I said. "They give you a schedule, and that's what you work."

    "You're right" she said. The most basic assumption behind this is BS.

    That and epistemic closure.