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Alan Greenspan: What Went Wrong
Wall Street Journal ^ | October 19, 2013 | Alexandra Wolfe

Posted on 10/20/2013 5:58:48 AM PDT by Cincinatus' Wife

"............[SNIP]..........."I've always considered myself more of a mathematician than a psychologist," says Mr. Greenspan. But after the Fed's model failed to predict the financial crisis, he realized that there is more to forecasting than numbers. "It all fell apart, in the sense that not a single major forecaster of note or institution caught it," he says. "The Federal Reserve has got the most elaborate econometric model, which incorporates all the newfangled models of how the world works—and it missed it completely." He says JP Morgan had put out a forecast three days before the crisis saying the economy was on the rise. And as late as 2007, the International Monetary Fund also said that global risk was declining. "A few days [after the crisis hit], I run into an article, and it is titled, 'Do we economists know anything?' " he says. .............[SNIP......."

(Excerpt) Read more at online.wsj.com ...


TOPICS:
KEYWORDS: academics; easymoney; economy; modeling
Garbage in.

Garbage out.

For further evidence, look how modeling is used to predict Global Warming "science."

1 posted on 10/20/2013 5:58:48 AM PDT by Cincinatus' Wife
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To: Cincinatus' Wife

What went wrong Herr Greenspan, is that we put you in charge of our economy and allowed your b!tch ass wife Andrea to spew her biased invective nightly on the television.


2 posted on 10/20/2013 6:05:11 AM PDT by Gaffer
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To: Cincinatus' Wife

The Fed Reserve model apparently works as well as the climate change model.

Remember, when one works in the gubmit, it is most probably because industry wouldn’t touch them with a ten foot pole.


3 posted on 10/20/2013 6:08:29 AM PDT by Da Coyote
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To: Cincinatus' Wife
"...not a single major forecaster of note or institution caught it," he says

The more Greenspan talks the more folks will remember him for the buffoon he was.

4 posted on 10/20/2013 6:09:37 AM PDT by AndyJackson
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To: Gaffer

Socio-economic modeling never works, and can never work. I picked that much up from Vidar Ringstad, perhaps the prime modeler in Europe.

It’s like training wheels.


5 posted on 10/20/2013 6:13:29 AM PDT by Hardraade (http://junipersec.wordpress.com/2013/10/04/nicolae-hussein-obama/)
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To: Cincinatus' Wife

Lemmie see, now.....

....what goes up.......

....WILL CONTINUE GOING UP FOREVER AND EVER, AMEN.

That was about it, wasn’t it?


6 posted on 10/20/2013 6:15:14 AM PDT by Flintlock ("The redcoats are coming" -- TO SEIZE OUR GUNS!!--Paul Revere)
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To: Cincinatus' Wife
But after the Fed's model failed to predict the financial crisis, he realized that there is more to forecasting than numbers.

Any first year economics students knows that economics is about human behaviour, which is very unpredictable. That's why it's classified as social science, not mathematics.

And this guy was the Federal Reserve chairman? What an idiot.

7 posted on 10/20/2013 6:19:12 AM PDT by Jess Kitting
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To: Cincinatus' Wife

One thing that stays in the back of my mind is the timing of the crash — soon before the ELECTION.

It wouldn’t surprise me if there were a few elitist liberal Wall Streeters that knew it was coming and thought they may as well go ahead and get it out there to help influence the election.

I know the left likes to make it look like everyone on Wall Street is republican but the truth is more Wall Street executive dollars went to Obama.


8 posted on 10/20/2013 6:20:17 AM PDT by boycott
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To: Cincinatus' Wife
So someone withdrawing $250B from money markets September 2008 had nothing to do with it? It was a setup for people like George Soros to make fortunes of the “misfortune” of the masses. The government spending $13.4T for pork out of the social security funds was the fault of baby boomers?
9 posted on 10/20/2013 6:23:26 AM PDT by mountainlion (Live well for those that did not make it back.)
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To: Cincinatus' Wife
"It all fell apart, in the sense that not a single major forecaster of note or institution caught it," Multiple warnings were out there, not single, so statement is true.
10 posted on 10/20/2013 6:24:51 AM PDT by Java4Jay (The evils of government are directly proportional to the tolerance of the people.)
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To: Cincinatus' Wife
Hmmm ... government models were wrong ... how could that be ... they're government models ...

NOW what'll we do ?

11 posted on 10/20/2013 6:25:44 AM PDT by knarf (I say things that are true ... I have no proof .... but they're true)
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To: Cincinatus' Wife
What went wrong is not as complicated as they want you to believe.

When you are spending more than you take in you go broke. And the creditors in our case would be calling long before you hit the 17 Trillion dollar mark.

12 posted on 10/20/2013 6:28:04 AM PDT by DeepInTheHeartOfTexas
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To: AndyJackson

Buffoon? Come on. If you want to see buffoons, hang out at Walmart. You simply can’t get to a position like the Chairman of the Federal Reserve by being a buffoon.

What Greenspan is is a highly intelligent guy who has totally compromised whatever core beliefs or principles he once had for political expediency. He was once a follower of Ayn Rand — my guess is that he knows what is right, he just doesn’t have the courage to do it. He also can’t take responsibility for his mistakes—which is why he STILL can’t admit any culpability for the Housing bubble.

I suspect he knows his legacy has gone to crap and this is his last, lame attempt to save it. Epic fail, Alan—epic fail.


13 posted on 10/20/2013 6:29:38 AM PDT by rbg81
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To: Cincinatus' Wife

Greenspan is like the airline pilot that announces to the passengers in flight that he never really knew how to fly the plane or how it got into the air but he going to parachute down to ask someone about it.

“I was actually flabbergasted,” he says. “It upended my view of how the world works.”

But don’t worry folks, he’ll have a soft landing.


14 posted on 10/20/2013 6:33:09 AM PDT by count-your-change (you don't have to be brilliant, not being stupid is enough)
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To: Cincinatus' Wife

President George W Bush knew the housing loan problem was going to be serious. He knew that SS was a problem in the making.

The Queeah from Massachusetts thought other wise and forced the legislation.

Greenspan still has it wrong. The Fed could not overcome the Queeah


15 posted on 10/20/2013 6:35:32 AM PDT by bert ((K.E. N.P. N.C. +12 ..... Travon... Felony assault and battery hate crime)
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To: Cincinatus' Wife

I’m not sure how someone could be married to Andrea Mitchell, and NOT spoil like raw meat left on a counter too long.


16 posted on 10/20/2013 6:36:35 AM PDT by moovova
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To: Gaffer

All the “major forecasters of note” have been created by the MSM, and they will all repeat the exact same thing.

Where I’m from, when someone is proclaimed to be an expert but doesn’t have the slightest clue what they are talking about but simple repeats what someone else has said, we call them BS artist.


17 posted on 10/20/2013 6:37:11 AM PDT by IMR 4350
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To: Cincinatus' Wife

Greenspan: “It all fell apart, in the sense that not a single major forecaster of note or institution caught it,”

but there was this institution sounding warnings:

http://mises.org/daily/1533


18 posted on 10/20/2013 6:39:12 AM PDT by MulberryDraw (That which cannot be paid, won't be paid.)
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To: knarf
Every "fix" from the Obama administration has made the situation worse. Entitlement spending including food stamps has had to grow to keep people in the cities calm. Now Obama wants to take more money from the people by increasing taxes and refusing to reduce out of control spending.

It almost seems like a deliberate plan to lead us into severe confrontations with bankrupt state, federal, and local governments while forcing the people to earn less while listening to the rancor, name-calling, and malice from democrats, media, and progressives.

19 posted on 10/20/2013 6:47:18 AM PDT by Rapscallion (What he calls "transforming" is actually destroying.)
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To: Gaffer
Alan Greenspan: What Went Wrong

What Went Wrong: Alan Greenspan

20 posted on 10/20/2013 6:50:17 AM PDT by Common Sense 101 (Hey libs... If your theories fly in the face of reality, it's not reality that's wrong.)
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To: MulberryDraw

H.S. Katz, “Modern economics claims to be a science. This is a sham and a fraud. When it fails to predict future events it does not act like the scientist, disregarding false theories in search of the truth; it acts like the Indian Medicine Man who has failed to make rain. It equivocates, rationalizes and tries to make minor adjustments.”


21 posted on 10/20/2013 6:50:21 AM PDT by Vehmgericht
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To: MulberryDraw

He used to know the truth, before he was seduced.

“Gold and Economic Freedom”

Alan Greenspan, 1966

http://www.321gold.com/fed/greenspan/1966.html


22 posted on 10/20/2013 6:55:34 AM PDT by Travis McGee (www.EnemiesForeignAndDomestic.com)
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To: rbg81

Greenspan even contributed an artcie to one of Ayn Rand’s books in which he argued in favor of the gold standard. How’s that for irony.


23 posted on 10/20/2013 6:56:30 AM PDT by Yardstick
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To: Cincinatus' Wife

“Gold and Economic Freedom” by Alan Greenspan, 1966

An almost hysterical antagonism toward the gold standard is one issue which unites statists of all persuasions. They seem to sense - perhaps more clearly and subtly than many consistent defenders of laissez-faire - that gold and economic freedom are inseparable, that the gold standard is an instrument of laissez-faire and that each implies and requires the other.

In order to understand the source of their antagonism, it is necessary first to understand the specific role of gold in a free society.

Money is the common denominator of all economic transactions. It is that commodity which serves as a medium of exchange, is universally acceptable to all participants in an exchange economy as payment for their goods or services, and can, therefore, be used as a standard of market value and as a store of value, i.e., as a means of saving.

The existence of such a commodity is a precondition of a division of labor economy. If men did not have some commodity of objective value which was generally acceptable as money, they would have to resort to primitive barter or be forced to live on self-sufficient farms and forgo the inestimable advantages of specialization. If men had no means to store value, i.e., to save, neither long-range planning nor exchange would be possible.

What medium of exchange will be acceptable to all participants in an economy is not determined arbitrarily. First, the medium of exchange should be durable. In a primitive society of meager wealth, wheat might be sufficiently durable to serve as a medium, since all exchanges would occur only during and immediately after the harvest, leaving no value-surplus to store. But where store-of-value considerations are important, as they are in richer, more civilized societies, the medium of exchange must be a durable commodity, usually a metal. A metal is generally chosen because it is homogeneous and divisible: every unit is the same as every other and it can be blended or formed in any quantity. Precious jewels, for example, are neither homogeneous nor divisible. More important, the commodity chosen as a medium must be a luxury. Human desires for luxuries are unlimited and, therefore, luxury goods are always in demand and will always be acceptable. Wheat is a luxury in underfed civilizations, but not in a prosperous society. Cigarettes ordinarily would not serve as money, but they did in post-World War II Europe where they were considered a luxury. The term “luxury good” implies scarcity and high unit value. Having a high unit value, such a good is easily portable; for instance, an ounce of gold is worth a half-ton of pig iron.

In the early stages of a developing money economy, several media of exchange might be used, since a wide variety of commodities would fulfill the foregoing conditions. However, one of the commodities will gradually displace all others, by being more widely acceptable. Preferences on what to hold as a store of value, will shift to the most widely acceptable commodity, which, in turn, will make it still more acceptable. The shift is progressive until that commodity becomes the sole medium of exchange. The use of a single medium is highly advantageous for the same reasons that a money economy is superior to a barter economy: it makes exchanges possible on an incalculably wider scale.

Whether the single medium is gold, silver, seashells, cattle, or tobacco is optional, depending on the context and development of a given economy. In fact, all have been employed, at various times, as media of exchange. Even in the present century, two major commodities, gold and silver, have been used as international media of exchange, with gold becoming the predominant one. Gold, having both artistic and functional uses and being relatively scarce, has significant advantages over all other media of exchange. Since the beginning of World War I, it has been virtually the sole international standard of exchange. If all goods and services were to be paid for in gold, large payments would be difficult to execute and this would tend to limit the extent of a society’s divisions of labor and specialization. Thus a logical extension of the creation of a medium of exchange is the development of a banking system and credit instruments (bank notes and deposits) which act as a substitute for, but are convertible into, gold.

A free banking system based on gold is able to extend credit and thus to create bank notes (currency) and deposits, according to the production requirements of the economy. Individual owners of gold are induced, by payments of interest, to deposit their gold in a bank (against which they can draw checks). But since it is rarely the case that all depositors want to withdraw all their gold at the same time, the banker need keep only a fraction of his total deposits in gold as reserves. This enables the banker to loan out more than the amount of his gold deposits (which means that he holds claims to gold rather than gold as security of his deposits). But the amount of loans which he can afford to make is not arbitrary: he has to gauge it in relation to his reserves and to the status of his investments.

When banks loan money to finance productive and profitable endeavors, the loans are paid off rapidly and bank credit continues to be generally available. But when the business ventures financed by bank credit are less profitable and slow to pay off, bankers soon find that their loans outstanding are excessive relative to their gold reserves, and they begin to curtail new lending, usually by charging higher interest rates. This tends to restrict the financing of new ventures and requires the existing borrowers to improve their profitability before they can obtain credit for further expansion. Thus, under the gold standard, a free banking system stands as the protector of an economy’s stability and balanced growth. When gold is accepted as the medium of exchange by most or all nations, an unhampered free international gold standard serves to foster a world-wide division of labor and the broadest international trade. Even though the units of exchange (the dollar, the pound, the franc, etc.) differ from country to country, when all are defined in terms of gold the economies of the different countries act as one-so long as there are no restraints on trade or on the movement of capital. Credit, interest rates, and prices tend to follow similar patterns in all countries. For example, if banks in one country extend credit too liberally, interest rates in that country will tend to fall, inducing depositors to shift their gold to higher-interest paying banks in other countries. This will immediately cause a shortage of bank reserves in the “easy money” country, inducing tighter credit standards and a return to competitively higher interest rates again.

A fully free banking system and fully consistent gold standard have not as yet been achieved. But prior to World War I, the banking system in the United States (and in most of the world) was based on gold and even though governments intervened occasionally, banking was more free than controlled. Periodically, as a result of overly rapid credit expansion, banks became loaned up to the limit of their gold reserves, interest rates rose sharply, new credit was cut off, and the economy went into a sharp, but short-lived recession. (Compared with the depressions of 1920 and 1932, the pre-World War I business declines were mild indeed.) It was limited gold reserves that stopped the unbalanced expansions of business activity, before they could develop into the post-World Was I type of disaster. The readjustment periods were short and the economies quickly reestablished a sound basis to resume expansion.

But the process of cure was misdiagnosed as the disease: if shortage of bank reserves was causing a business decline-argued economic interventionists-why not find a way of supplying increased reserves to the banks so they never need be short! If banks can continue to loan money indefinitely-it was claimed-there need never be any slumps in business. And so the Federal Reserve System was organized in 1913. It consisted of twelve regional Federal Reserve banks nominally owned by private bankers, but in fact government sponsored, controlled, and supported. Credit extended by these banks is in practice (though not legally) backed by the taxing power of the federal government. Technically, we remained on the gold standard; individuals were still free to own gold, and gold continued to be used as bank reserves. But now, in addition to gold, credit extended by the Federal Reserve banks (”paper reserves”) could serve as legal tender to pay depositors.

When business in the United States underwent a mild contraction in 1927, the Federal Reserve created more paper reserves in the hope of forestalling any possible bank reserve shortage. More disastrous, however, was the Federal Reserve’s attempt to assist Great Britain who had been losing gold to us because the Bank of England refused to allow interest rates to rise when market forces dictated (it was politically unpalatable). The reasoning of the authorities involved was as follows: if the Federal Reserve pumped excessive paper reserves into American banks, interest rates in the United States would fall to a level comparable with those in Great Britain; this would act to stop Britain’s gold loss and avoid the political embarrassment of having to raise interest rates. The “Fed” succeeded; it stopped the gold loss, but it nearly destroyed the economies of the world, in the process. The excess credit which the Fed pumped into the economy spilled over into the stock market-triggering a fantastic speculative boom. Belatedly, Federal Reserve officials attempted to sop up the excess reserves and finally succeeded in braking the boom. But it was too late: by 1929 the speculative imbalances had become so overwhelming that the attempt precipitated a sharp retrenching and a consequent demoralizing of business confidence. As a result, the American economy collapsed. Great Britain fared even worse, and rather than absorb the full consequences of her previous folly, she abandoned the gold standard completely in 1931, tearing asunder what remained of the fabric of confidence and inducing a world-wide series of bank failures. The world economies plunged into the Great Depression of the 1930’s.

With a logic reminiscent of a generation earlier, statists argued that the gold standard was largely to blame for the credit debacle which led to the Great Depression. If the gold standard had not existed, they argued, Britain’s abandonment of gold payments in 1931 would not have caused the failure of banks all over the world. (The irony was that since 1913, we had been, not on a gold standard, but on what may be termed “a mixed gold standard”; yet it is gold that took the blame.) But the opposition to the gold standard in any form-from a growing number of welfare-state advocates-was prompted by a much subtler insight: the realization that the gold standard is incompatible with chronic deficit spending (the hallmark of the welfare state). Stripped of its academic jargon, the welfare state is nothing more than a mechanism by which governments confiscate the wealth of the productive members of a society to support a wide variety of welfare schemes. A substantial part of the confiscation is effected by taxation. But the welfare statists were quick to recognize that if they wished to retain political power, the amount of taxation had to be limited and they had to resort to programs of massive deficit spending, i.e., they had to borrow money, by issuing government bonds, to finance welfare expenditures on a large scale.

Under a gold standard, the amount of credit that an economy can support is determined by the economy’s tangible assets, since every credit instrument is ultimately a claim on some tangible asset. But government bonds are not backed by tangible wealth, only by the government’s promise to pay out of future tax revenues, and cannot easily be absorbed by the financial markets. A large volume of new government bonds can be sold to the public only at progressively higher interest rates. Thus, government deficit spending under a gold standard is severely limited. The abandonment of the gold standard made it possible for the welfare statists to use the banking system as a means to an unlimited expansion of credit. They have created paper reserves in the form of government bonds which-through a complex series of steps-the banks accept in place of tangible assets and treat as if they were an actual deposit, i.e., as the equivalent of what was formerly a deposit of gold. The holder of a government bond or of a bank deposit created by paper reserves believes that he has a valid claim on a real asset. But the fact is that there are now more claims outstanding than real assets. The law of supply and demand is not to be conned. As the supply of money (of claims) increases relative to the supply of tangible assets in the economy, prices must eventually rise. Thus the earnings saved by the productive members of the society lose value in terms of goods. When the economy’s books are finally balanced, one finds that this loss in value represents the goods purchased by the government for welfare or other purposes with the money proceeds of the government bonds financed by bank credit expansion.

In the absence of the gold standard, there is no way to protect savings from confiscation through inflation. There is no safe store of value. If there were, the government would have to make its holding illegal, as was done in the case of gold. If everyone decided, for example, to convert all his bank deposits to silver or copper or any other good, and thereafter declined to accept checks as payment for goods, bank deposits would lose their purchasing power and government-created bank credit would be worthless as a claim on goods. The financial policy of the welfare state requires that there be no way for the owners of wealth to protect themselves.

This is the shabby secret of the welfare statists’ tirades against gold. Deficit spending is simply a scheme for the confiscation of wealth. Gold stands in the way of this insidious process. It stands as a protector of property rights. If one grasps this, one has no difficulty in understanding the statists’ antagonism toward the gold standard.

###

Alan Greenspan
[written in 1966]


24 posted on 10/20/2013 6:56:32 AM PDT by Travis McGee (www.EnemiesForeignAndDomestic.com)
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To: knarf

In general, the Fed does not have a good track record with its economic forecasts. In fact, its terrible.

Its forte is money printing.


25 posted on 10/20/2013 7:04:51 AM PDT by Starboard
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To: Cincinatus' Wife

I don’t mind same story posts, even the same source. But the exact same identical article posted immediately after the same one? Did you even other o do a search before posting? I think not.


26 posted on 10/20/2013 7:06:02 AM PDT by lbryce (Obama:The Worst is Yet To Come)
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