Posted by: kenwbudd | August 4, 2009

The Ups, Downs and Wonders of Living in a Parallel Universe

In recent months economists, and even economics as a discipline, have received an unprecedented amount of negative publicity. They have been attacked by governments, bankers, unions, industrial corporations, and the press.

They have even been attacked by their own peers from the world of academia, possibly to divert attention from them. Economists have been accused of ineptitude for not predicting the current crisis and its magnitude.

Some have, of course, suggested that the dismal science was never intended to help predict where the economy was going to go in the future and that in fact it was established to help manage economies in a more efficient manner but, of course, those who have spent anything more than a few seconds with anyone considering themselves to be an economist would have experienced that the first thing they would do to prove their knowledge would be to make a prediction about some economic variable.

The problem is that given the magnitude of information necessary to make any kind of prediction about anything that needs aggregate economic data it is literally impossible to make guess-timates that are even remotely accurate.

The recent bad economic news in the U.K. and the U.S. was a perfect example of that. Not only had the economists missed the first stages of the crisis they also misread or misinterpreted how the economy was recovering but, of course, it never stopped any of them from predicting that we have turned the corner as soon as we had all got used to the fact that the economy is in a bad state.

The Property Market
The same seems to be happening in the property market. Economists at major U.K. building societies have started suggesting the many people were sitting on mountains of cash waiting for a sign that the economy has turned a corner before starting their buying spree. Hence, they suggest cautiously that there is a chance that house prices in the U.K. could end 2009 in the positive territory.

Waiting for a Sign
The problem is that even if it was true that these investors were simply waiting for a sign of economic recovery before they started buying why have they started buying now? After all, the latest signs are that the economy is doing much worse than expected. Consequently, if anything, they should have delayed their purchases even further.

Mass Re-possessions
It seems that since building societies need house prices to rise in order to avert the risk of mass repossessions their economists somehow arrive at more than positive data. If prices do rise they can also reduce the amount of capital they need to keep against bad debts and hopefully increase the amount of mortgages they issue.

Unfortunately, the reality is that most people find it very hard to get mortgages, especially since few can afford the 20% or 25% deposits that most lenders demand. Add to that the ever increasing numbers of unemployed and you can get an idea of just how far from reality these predictions are.

A Parallel Universe
Based on the recent experience with economists, and those working for building societies in specific, it seems that they somehow live in a parallel universe to the rest of the world. Looking at useless data seems to give either a false sense of doom or growth.

It somehow seems as if they never actually have human contact with those who buy homes or spend money shopping. It is a wonderful cocoon to live in, completely oblivious to the rest of the world or they are trying to maintain the charade.

Published Reports
The only problem is that their outlandish predictions are actually published by leading news agencies. If the press stopped giving such predictions the amount of attention that they are, I am sure that they would also not feel compelled to publish data that while newsworthy are in no way related to what is happening in the real economy.

Perhaps it is time that the press also learn to ignore such predictions, like the rest of us have done for years.


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