Models, maths and macro: A defence of Godley

Critical Macro Finance

To put it bluntly, the discipline of economics has yet to get over its childish passion for mathematics and for purely theoretical and often highly ideological speculation, at the expense of historical research and collaboration with the other social sciences.

The quote is, of course, from Piketty’s Capital in the 21st Century. Judging by Noah Smith’s recent blog entry, there is still progress to be made.

Smith observes that the performance of DSGE models is dependably poor in predicting future macroeconomic outcomes?precisely the task for which they are widely deployed. Critics of DSGE are however dismissed because?in a nutshell?there’s nothing better out there.

This argument is deficient in two respects. First, there is a self-evident flaw in a belief that, despite overwhelming and damning evidence that a particular tool is faulty?and dangerously so?that tool should not be abandoned because there is no obvious replacement.

The second deficiency relates…

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Bank of Canada’s surprise rate cut seen hurting Canadian banks’ profits

Expect the squeeze on Net Interest Margins and the deterioration of loan books to signal lower profitability and (eventually) job cuts.

Financial Post

The surprise rate cut by the Bank of Canada on Wednesday is expected to contribute to a dampening profit picture for Canada’s banks, according to an analyst at Moody’s Investors Service.

“Persistently low rates create profitability headwinds which combined with lower consumer credit growth will dampen the profit picture for Canadian banks in 2015,” said David Beattie, senior vice-president in the financial services group at Moody’s.

He said low rates would compress the closely watched net interest margin, which measures the difference between interest income earned by the banks and the amount of interest paid out to their customers including depositors, relative to the amount of their interest earning assets. As for the banks’ cost of capital, the rate cut “will not move the dial,” Mr. Beattie said.

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The central bank shocked markets Wednesday morning by cutting the overnight rate to 0.75% from 1%, the first movement in…

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Everything you were Taught About Risk is Wrong

They way we are taught to think about risk is wrong as this post illustrates in its MPT takedown. How about articulating ‘regret’?

Wall Street and Beyond

In my experience, “Risk” is the single most misunderstood concept in finance. Volatility, risk and uncertainty are all terms that are used interchangeably on Wall Street. The confusion is in no small part due to the strong influence of “Modern Portfolio Theory”, which continues to live on despite the fact that it makes no sense. At the core of MPT is the (flawed) idea that risk is equivalent to price volatility. It’s remarkable to me that so much complex math has been built on the back of such a dumb assumption.

Risk = Volatility?

The willingness of the financial community to accept this assumption is astounding. Any reasonably intelligent person who stops to think about this for 5 minutes will realize how nonsensical it is:

  1. Volatility measures the extent to which a stock price has fluctuated historically, both upward and downward over an arbitrary time period (e.g. a month). Risk

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Why Canadians can expect low interest rates for longer — much longer: Morgan Stanley

Should be of no surprise to anyone who follows real people working in the real economy where our growth has been a mirage rather than those who think it acts as a metronome and can be propelled by over reliance on the resource sector and household indebtedness.

Financial Post

Don’t look for another interest rate hike for two more years; in fact, there is a one in three chance the Bank of Canada will actually cut rates before the end of this year, Morgan Stanley predicts.

The latest forecaster to take a stab at the impact of plunging oil prices on Canada’s economy, the American bank stands out for its bearish take.

The bank not only pushed its forecast for the first rate hike to 2017, it predicted others would soon follow suit.

“The fall in oil is undisputedly negative for Canada’s economy,” the bank wrote in its report Wednesday “Canada Outlook: Sands through the hourglass.”

“Rate differentials should continue to move against Canada, if, as we expect, the market pushes out expectations for tightening from the Bank of Canada into 2017, reflecting a later closing of the output gap.”

Until Tuesday, most economists have expected a rate increase…

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Do we need Business Innovation – or Common Innovation? By Peter Swann

From Peter Swann’s post:
Many business-enhancing innovations are organisational innovations, outsourcing innovations, restructuring innovations or financial innovations. They are very valuable to the innovator, and the financial services industry, but do little or nothing of value to the end-user.

The advent of globalisation meant that many towns dependent on a traditional manufacturing industry saw their income and employment decline as production was relocated to lower-wage economies. This led to many social and economic problems in depressed towns.

ElgarBlog from Edward Elgar Publishing


What is the best way to create and share prosperity in a society? Professor Peter Swann argues that common innovation is about ordinary people creating the wealth of nations, and that business has no monopoly over innovation or wealth creation.

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Canadian (un)employment – the worst is yet to come

Here are the Canadian employment numbers courtesy of Statistics Canada that tell the story of 2014. Jobs losses were 4,300 with full time employment increasing 53,500 and part-time decreasing 57,700. For the year, employment rose by 185,700.

Canadian Labour Force (month/month and year/year)

Let’s keep in mind, however, that employment numbers are a lagging indicator. The drop in oil prices and the knock on effects in oil sands jobs will be reflected in the coming months. This is in turn should also see a multiplier effect in the form of housing and jobs dependent on growth in the resource sector.

Reasoning not permitted — we’re arguing

The tangled web of social media is replete with bloviating blowhards, sophomoric sycophants, and establishment shills eager to argue that there is nothing wrong with what they do or how they think yet there is everything wrong with alternative modes of thinking and doing, however reasoned. In the heat of an argument all of us, except the most reasonable, rational and logical, may be accused to stooping to the logical fallacies seen in the graphic below.

Logical Fallacies

Source: PACTISS – Philosophers and Critical Thinkers in Senior Schools: Resources for Educators

Markets and exploitation

occasional links & commentary


Do markets determine the unequal distribution of income under capitalism?* Well, yes and no.

The answer depends, of course, on the theory of income distribution one uses. Neoclassical economists focus exclusively on market exchanges and the idea that each factor of production (labor, capital, and land) receives a portion of total output in the form of income (wages, profits, or rent) according to its marginal contributions to production. In this sense, neoclassical economics represents a confirmation and celebration of capitalism’s “just deserts,” that is, everyone gets what they deserve.

Many other economists criticize this aspect of neoclassical theory and use an alternative approach. Stiglitz, for example, focuses on “rent-seeking” behavior—and therefore on the ways economic agents (such as those in the financial sector or CEOs) often rely on forms of power (political and/or economic) to secure more than their “just deserts.” Thus, for Stiglitz and others, the distribution of income is more unequal than…

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