Nobel name dropping

One of Guambat's mentors recently related to him a long held secret: he recognized a bit late that he had too much propensity to be awed by brushes with famed names, such as Nobel prize-winning associates.

But he shouldn't be too hard on himself. As socialized creatures, we're designed to go along with consensus leaders. Guambat wonders how many lemmings, for instance, even bother to curse their leaders when they're half way down the cliffside. Most probably never even bother.

It's only the survivors who complain, and that is how we ended up with term limits for legislatures and executives; at least in the public sector.

Another example of one with this propensity is Alan Greenspan, as reported by Floyd Norris in a recent NYT blog post:

The former chairman of the Federal Reserve Board — the man who kept telling us that there was no need to regulate credit default swaps because the banks could do a fine job of it themselves — even cites the Nobel prize committee in his defense:

“In recent decades, a vast risk management and pricing system has evolved, combining the best insights of mathematicians and finance experts supported by major advances in computer and communications technology. A Nobel Prize was awarded for the discovery of the pricing model that underpins much of the advance in derivatives markets. This modern risk management paradigm held sway for decades. The whole intellectual edifice, however, collapsed in the summer of last year because the data inputted into the risk management models generally covered only the past two decades, a period of euphoria. Had instead the models been fitted more appropriately to historic periods of stress, capital requirements would have been much higher and the financial world would be in far better shape today, in my judgment.”

Mr. Greenspan is right on one thing. The “whole intellectual edifice” collapsed. But he is wrong to blame it solely on the wrong inputs. It is too bad that Mr. Greenspan never appreciated the work of Hyman Minsky, who understood that stability is destabilizing, and that there will come times when the very calmness of markets, and lack of apparent risk, causes investors to take ever greater and greater risks.

What was missing was a regulator who understood markets, rather than worshiped them.

Guambat reckons the problem with economics and its financial modeling spin-offs is that it keeps trying to force a roundish human peg into a square economic hole.

Like other morality-driven institutions, holding sway as some fount of religion or other righteousness, economics fails to take account for humans as they are found.

They forget that "should" is a precatory notion.