Archive for April 23rd, 2009

Fashionably Frugal

Abercrombie’s not as cool as it used to be…

This spring, spending by teenagers, a closely studied but rarely understood segment of the population, is off by 14 percent, a direct reflection of the economy, according to a report this month by the investment bank Piper Jaffray. And that is having a profound effect on an already unraveling mall culture, where deep discounters and stores known for heavy promotions are suddenly the popular destinations and aspirational brands are struggling to fit in.


During years of rampant consumerism, where teenagers shopped was often more closely tied to what was happening in the pages of US Weekly or InStyle than their families’ financial circumstances. Empires like Abercrombie & Fitch were built on the premise that their products, even $80 jeans and $30 T-shirts with provocative graphics, would be perceived as luxury items if they were sold in the right way. But as teenagers’ priorities rapidly shift away from brands they now perceive as too expensive, the pecking order of mall stores has changed.

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Richard Wolff lecture series on Open Lens Media


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Ouch and from Business Week too. The author forgives economists of their collective failure to predict the future, “The world is simply too complicated for that”, but does not excuse the confusion over a proper stimulus, “And when disaster strikes, they ought to know what to do”. Coy proceeds to say that:

“the rap on economists, only somewhat exaggerated, is that they are overconfident, unrealistic, and political. They claim a precision that neither their raw material nor their skill warrants. Too many assume that people behave like the mythical homo economicus, who is hyperrational and omniscient. And they take sides in quarrels that freeze the progress of research. Those few who defy the conventional wisdom are ignored.

Additionally “Economists’ models are just awful. They completely forget how important the human element is.”

He continues his beratment, quoting Roger E.A. Farmer of the University of California at Los Angeles “The time is absolutely right for new ideas to come in, much as they did in the 1930s and the 1970s,”

However, instead of highlighting some alternative ideas, ones that seek to correct the “awful” models and account for the “human element”, he only proceeds to review the historic battle between Keynesian fiscal policy and Friedman’s monetarists. Finally he concludes with:

“What, then, is the way forward? Once this crisis is past, the next agenda for macroeconomists will be to help make the economy far more robust—enough to survive the blunders of politicians, bankers, and economists of the future. Taleb, the scholar of unpredictability, notes that nature achieves robustness through a redundancy that economists would consider wasteful: two hands, two eyes, etc. Blake LeBaron of Brandeis University suggests preventing huge crises by tolerating small disturbances, the way foresters use controlled burns to eliminate flammable underbrush. Perhaps out of the ashes of failure will emerge a better macroeconomics profession.

If he wants signs of new life, new economics, to emerge from this crisis, Coy should stop making the same mistake he criticizes economists for, that of ignoring, “those few who defy the conventional wisdom” and seek out new voices to bring to the discussion. Maybe the additional viewpoints present will achieve the “robustness” Taleb suggests.

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Mark Thoma:

I want to amend remarks I made in the past. I have said that there is no single villain in this crisis, no one person, not one change in the law, etc., that caused this. It was a combination of things. But as I think about it more and more, I’m not so sure. The reason? According to the story I’ve been telling about why the crisis happened, there were incentive failures at just about every step in the process…

Looking at this at first, I concluded that it was all of these things, and more, that caused the crisis, and that it could have been stopped at any one of these steps…

But what should we make of the fact that every singe step in the process is compromised? Every market that was supposed to self-regulate failed? Does every single market in the chain fail at the same time through some highly unlikely coincidence? What are the chances that, on their own, independently, each and every step in the chain would have been subject to a market failure that just happened to let the bubble keep inflating? Whatever it took to keep the money flowing through the system seems to have come to pass.

So more and more I’m starting to thing there may be a single explanation after all, that the regulators of these markets were captured by powerful forces that wanted the game to continue. The power of regulators, and the will to enforce the regulations, must match – in fact exceed – the will and power of those being regulated to resist having constraints placed on their behavior.

This view leads to a policy solution that a number of commentators propose, including rising blogosphere star Simon Johnson. Thoma again:

So long as we allow huge, clearly over-sized financial institutions to exist, this problem will potentially be present.

Therefore, if the current anti-trust legislation is adequate to the task, then yes, let’s give regulators the power to enforce it, and ensure we have people in place with the will to do so. But as I said above, I think current law may have glaring legal holes that need to be closed before we can use this section of the law effectively. If so, then it’s time to get started crafting new legislation that is up to the task, and I hope Simon Johnson is successful in getting movement in this direction. He has my support.

I think the most salient point is the one I’ve placed in bold. This point mirrors what John Kay has argued (which I post about below), that a utopian push to deregulate has “succeeded.” It’s success, of course, is now mainfested in a crisis of capitalism. This crisis, then, requires a response rooted in practicality and aimed at stability. If breaking up the big banks is the answer, then I’m all for it.

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