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Old 31 May 2014, 11:36 PM
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Johnny Slick Johnny Slick is offline
Join Date: 13 February 2003
Location: Phoenix, AZ
Posts: 11,628

Originally Posted by jimmy101_again View Post
I think there is a logical fallacy or two in there somewhere.

If you can predict an event, and that event is bad, and there is anything you can do to avoid that event, then the act of predicting tends to be a self-cancelling prophecy. The prophecy is always wrong since people move to correct things before the event happens.
1. Unless those parties in the position to be able to predict the bad event will benefit from it. For instance, the head of AIG had to have known that his act of taking out all those little bets guaranteeing the safety of so many packages of loans would, when those packages inevitably went south, not only bankrupt his company (at the time of their death, AIG had a bet-to-asset ratio north of 20:1, meaning that if only 5% of the crappy loan packages they were guaranteeing failed, they would be wiped out) but, because his company was guanteeing such a large portion of the market, the global economy would be savagely rent as well. He didn't care. He got his cash and still has nearly every penny of it.

That's kind of the point of how capitalism works: everybody competes to try to eke out the most money they can. Unfortunately, the system broke down the past time because much of the information which would have, for instance, stopped the housing boom in its tracks was obscured from investors.

I feel like I've gone off enough on this tangent but the point is this: the theory behind there being "no such thing as recessions" is basically that in an information-rich environment, any time the market collectively sees what looks like an economic slowdown, it will almost automatically adjust to it on its own long before the actual slowdown even occurs. In the case of the last recession, saying that it couldn't have existed is an argument based on a faulty premise; the obscured loan tranches, the dark traders, the bogus ratings given by ratings agencies apparently so far in the bag of Wall Street that they don't even know what corruption is anymore, and so on combined to restrict the flow of information to the market in unprecedented and unforseen ways (and, arguably, ways that would have been undoable if not for the deregulation of the markets under Reagan and Clinton).

2. All that being said about the *last* recession, I am not even making the claim that recessions are predictable. Right now, for whatever reason, they are not. Whether that's because of politics or a lack of knowledge or because they are somehow inherently unknowable in advance is an interesting question but besides the point of this. I am saying that they exist.

Secondly, the act of predicting (and publicizing or acting on that prediction) changes the system in a way that cannot be modeled very well. The classic example of this in financing are stock market prediction programs. If someone develops a highly accurate model that correctly predicts past behaviors (this has been done many times) and then applies that model to the current market then the current market is no longer the same as it was when the model was developed. Predicting and then acting on that prediction invalidates the model. You have to now develop a new model that takes all the previous factors into account plus the existence of the prediction system. Of course that second generation model also affects the system and is now also incorrect. Repeat until you can no longer convince anyone that modeling is a good idea.
This would be another reason why recessions might exist even though economists can't predict them, sure.
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