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You Can’t Cure What You Don’t Understand

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Many people talked about a housing "bubble" before it "popped", but none (to my knowledge) warned about the credit and economic contraction that would follow. Nevertheless, no one is shy about being wise enough to offer radical policy prescriptions now that the downturn is here.

That’s Peter Gordon, with a sound warning about the advice of experts. And Cassandra (via Naked Capitalism) calls into question the ability of those experts to even recognize the target:

Thumbing through the sell-side research from their multitudes of Strategists, I notice some recurring phrases, small and innocuous as they may be, that trouble me. Time and again, they repeat, in various contexts, the mantras: "when things return to normal", "when markets return to normal", and "when x, y or z normalizes" with "normal" implied to be that which has been common over the past decade-or-so in respect of liquidity, leverage, asset prices, equity risk premiums, speculative activity, growth.

And Russ Roberts explains that what was taken for normal was a combination of huge distortions:

There are four factors that helped drive up the price of real estate in the United States and create the housing bubble: The GSEs (Fannie and Freddie), the Community Reinvestment Act, expansionary monetary policy starting in 2001, and the 1997 Taxpayer Relief Act that for the first time let people avoid capital gains on home price appreciation without having to rollover the gains into a bigger house.

Pharmaceutical ads always advise us to tell our doctors about all our current prescriptions and conditions before taking the advertised drug, or harmful side effects may occur. The doctors of the economy (with their degrees in law and political science) have been writing new scrips for years without any comprehensive info about our current health. How can anyone give an effective prescription for a return to normal now that we’ve learned “normal” was an illusion for at least a decade?

The US economy—ignoring the rest of the world—has a few hundreds of millions of individual agents. Each is a cell in our economic body, interacting and mutating as they grow and replicate. The whole is more complex, and more slippery, than a single human organism. Imagine an MD trying to treat a person who shared a circulatory system with 10,000 other unidentified people, and who shared an endocrine system with a different 10,000 others. You couldn’t be sure that even aspirin was safe.

MDs, as the jokes go, may think they’re gods. But they quite often watch their patients die. Medicine does not understand human biology and biochemistry well enough to avoid catastrophe. It is simply ludicrous to suggest there is a prescription, or a regime of prescriptions, that will insure a return to economic health. And we do not even have a sound definition for “economic health”.

The arrogance and/or wrecklessness of our pseudo-doctors have left the economy crippled and bleeding. Unfortunately, I fear that the next Congress is ready to apply another jar of leeches. Much of medicine, like the cure for the common cold, is about getting out of the way and allowing the body to heal itself. There is more wisdom in the system than in the doctors. With economic doctors like Barney Frank and George Bush, isn’t that blindingly obvious?