Sunday, January 30, 2011

The Financial Crisis Commission Report

Causality is a funny thing, especially in the social sciences. A may cause B, but what about the factors that cause A? Shouldn't they be included in the causes of B as well? I believe the answer is found by an appeal to art and to taste, not to science. The length of the majority report means not too many people will read it, I for one. I did look at the minority report, which is readable. I saw Douglas Holtz-Eakin on TV talking about the report, which intrigued me enough to have a look.

It is not bad, but in my opinion misses some things that really are important in the telling. There is a fundamental question that goes unanswered. If we are caught up in a bubble, do we know that while the bubble is happening? If we don't know, why not? With the stock market bubble of the late 1990s, there was something real happening in the economy - the move to much activity on the Internet and the adjustment in business processes as a consequence. This real change had a substantial impact on productivity growth. Knowing what is real and what is simply speculation feeding on itself is a hard thing to determine. When it is only speculation it should be easier.

There was also something real behind the housing bubble - the aging of the population and the southern migration of the population as seniors looked to warmer climate for their retirement. And there is also that most of the target states for this migration - Florida, Arizona, and Texas, are no income tax states. This fueled the rapid growth in housing and the concomitant rise in housing prices. I believe these factors should have been in the Minority report, but alas they weren't.

There is one further point, that I hope becomes more of a focus in future discussions about the economy - the decline in the personal savings rate. Individuals being highly leveraged became socially acceptable. There is a strong ethical issue with this. In the keeping up with Joneses world we live in it is that much harder to be responsible about your own personal finances when everyone else seems on a spending spree. But in reports like this there is a tendency to blame others, not ourselves. Unfortunately, it means we won't learn as much from the reflection on the experience.

No comments: