Generational Dynamics: Forecasting America's Destiny Generational
 Forecasting America's Destiny ... and the World's


Generational Dynamics Web Log for 11-Feb-2009
Treasury Secretary Timothy Geithner bombs with analysts and investors

Web Log - February, 2009

Treasury Secretary Timothy Geithner bombs with analysts and investors

It's obvious that Geithner has no idea what he's doing.

Tuesday was the day of the long-awaited details of the $800 billion spending plan that's supposed to save the world.

Treasury Secretary Timothy Geithner speech was slightly different in tone from Obama's press conference on Monday evening. Both of them started from the assumption that everything that the Bush administration did was wrong. Obama used his press conference to warn of worldwide disaster if Republicans didn't get on board with Geithner's coming proposal.

Geithner's speech on Tuesday was used to say what we'll do to avoid disaster. In commanding tones, he rattled off a list of things that his spending programs will accomplish.

He said that everything that the Bush administration had done was completely wrong and had failed, and that Obama wouldn't make the same mistakes. He said that President Roosevelt in the 1930s, and Japan in the 1990s, had done the right thing -- a big spending program -- but the reason that both of those spending programs failed is because they were launched too late, and they weren't big enough.

The question that was left unanswered by both Obama's and Geithner's speeches was this: If everything that the Bush administration failed, how can you possibly be certain that what you're doing won't fail?

In other words, if you're saying that Bush was full of crap, then how do we know that you aren't full of crap?

They only gave reasons why past attempts failed. Hoover didn't act in time. The Japanese in the 1990s didn't act in time. We're going to act in time, so this time it will work.

Well, why? You're doing fundamentally the same things they did. What makes you think that doing the same things they did, only faster, is really going to work?

That question was not answered.

The markets were flat before Geithner's speech, and immediately went down afterwards, ending the day down 4.5-5%.

According to Michael Feroli of J.P. Morgan Chase, the proposal was "A major disappointment. The new plan discussed some of the ideas that have been floated in the media over recent days, and delivered some cosmetic re-labelling of existing programs, but many of the fundamental questions that former Secretary Paulson encountered last Fall remain unanswered."

Goldman Sachs said, "The speech and accompanying fact sheet leave open many questions about the timing of these interventions and the terms of asset purchases and recapitalization. Much of the program clearly remains to be worked out over the coming weeks and months."

Analysts that I heard all said the same thing: Geithner didn't really say anything, didn't provide any details.

Geithner's speech confirmed what I said about Obama's speech on Monday: These two guys are just babbling. They have no idea what they're doing. They have no idea what they're saying. They just read from a script, and pray that something will work.

From the point of view of Generational Dynamics, nothing will work, as I've described many times, most recently in my "The outlook for 2009."

A web site reader has called my attention to some research by Ulrike M. Malmendier, Associate Professor of Economics at University of California.

In her August, 2007, paper, "Depression Babies: Do Macroeconomic Experiences Affect Risk-Taking?" (PDF) (with Stefan Nagel), she analyzes existing data about the investing habits of people born before, during and after the Great Depression of the 1930s.

Her conclusion? People who lived through the Great Depression are more risk-averse than people born afterwards.

Now, this is a perfectly obvious conclusion, and one that I've stated hundreds of time on this web site. But it's a conclusion that's completely foreign to mainstream economists.

Malmendier herself says the following:

"Our findings suggest that individual investors’ willingness to bear financial risk depends on personal history. This behavior could be explained either with endogenous preferences, where risk aversion depends on the risky asset payoffs experienced in the past, or with learning, where current beliefs depend on the realizations experienced in the past. In the latter case, learning from personal experience would lead to beliefs that do not converge across overlapping generations, even in the long- run. Such belief heterogeneity is a departure from standard learning models, in which all agents at a given point in time have access to and make use of the same history of past data.

Our paper connects to several strands of literature. While there is NO PRIOR LITERATURE, to the best of our knowledge, documenting empirically the effect of experienced macro-economic shocks such as the Great Depression, several papers in macroeconomics and public finance analyze the impact of age and demographic composition." (My emphasis)

Can you believe this? There hasn't been a single study on the risk-aversion of Great Depression survivors. The only thing that economists look at is the differences by age or race or income level.

Mainstream economists assume that a 50-year-old white male in the 1970s is the same as a 50-year-old white male in the 1990s, and they don't even consider the possibility that the fact that only one of them survived the Great Depression is an important factor.

That's why mainstream economics has been a total failure for the last ten years, and why mainstream economics did not see, and can't explain the current mess we're in. (See "System Dynamics and the Failure of Macroeconomics Theory," and "Brilliant Nobel Prize winners in Economics blame credit bubble on 'the news'."

A contribution to the Generational Dynamics forum called my attention to a CNBC video called "Predicting Crisis: Dr. Doom & the Black Swan, How to predict a financial crisis and the five signs of a bear, with Nouriel Roubini, RGE Monitor and Nassim Taleb, The Black Swan author."

I strongly urge all web site readers to take the time to watch that video, and see what horse's asses the CNBC anchors turn into when Roubini and Taleb try to tell them what's really going on. Just watch those bleating CNBC clowns for a few minutes, and you'll see for yourself what pathetic hands our country is in.

"Insanity in individuals is something rare - but in groups, parties, nations and epochs, it is the rule." -- Friedrich Nietzsche

(Comments: For reader comments, questions and discussion, see the President Barack's news conference 2/9/2009 thread of the Generational Dynamics forum.) (11-Feb-2009) Permanent Link
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