Bank Politics Is Not About Bank Policy

Pundits are falling all over themselves to advise us on the banking crisis.  Politics Is Not About Policy predicts that politics in this crisis is also not about policy.  It says that since we will mainly pick the policy recommended by the highest status coalition of advisors, each pundit will rise in status if the policy we choose is similar to the one he suggested.  So pundits are eager to offer reasonable seeming advice.  We listen because we want to see who will win this status battle, and maybe shift the coalition we support a bit to better position ourselves in such conflicts.

You might say we are using status as a clue to policy, since higher status advisors on average suggest better policies.  But if we were serious about getting the most effective policy advice we’d be collecting pundit prediction track records.  Yet I doubt the few who actually did predict this crisis will be listened to more on what we should do about it.  And while pundits etc. are spending fortunes now to push their views, we still won’t spend the million it would take to create a good (e.g., prediction market) system to collect and track pundit banking predictions.

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  • marc

    with the current financial meltdown how come no mentions the effects if Social Security had been privatized?

  • I’m sorry but I’m confused. I thought that “[a](e.g., prediction market) system to collect and track pundit banking predictions.” is one of the very things we are trying to keep from falling further… the stock market itself! In fact those who are perhaps best informed in this market are no longer able to continue making their “predictions” because the rules have been changed on an ad hoc basis and shorting of financial sector stocks is no longer allowed. Clearly this is about politics not policy, otherwise there wouldn’t be a 7 day scramble for 700 billion dollars (“In fact, some of the most basic details, including the $700 billion figure Treasury would use to buy up bad debt, are fuzzy. “It’s not based on any particular data point,” a Treasury spokeswoman told Tuesday. “We just wanted to choose a really large number.””) and no provisions for long term problems or even a transparent and complete plan. Even Paulson himself is not informed of all of the “details” if his testimony is to be believed.

    So In short you are right, but what makes you think “prediction markets” are really the best way to collect and track pundit banking predictions?

  • Nominull

    I think you’re too in love with the observation that people seek status and are blinded to the fact that people seek other things, e.g. to avoid starting the next Great Depression.

  • Robin, let’s see some design thoughts explicitly put down on such a system. We need some form of wikipedia++ that goes a step further than an encyclopedia towards outlining solutions for challenging problems. Call up Clay Shirky! Get to work!

  • Tom Breton (Tehom)

    [Politics Is Not About Policy] says that since we will mainly pick the policy recommended by the highest status coalition of advisors, each pundit will rise in status if the policy we choose is similar to the one he suggested. So pundits are eager to offer reasonable seeming advice.

    Last sentence doesn’t follow. There’s a big jump from “advice similar to whatever policy they predict will be chosen” to “reasonable seeming advice”.

    In any case, you are reading very different pundits than I. The ones I am reading are saying as strongly as they can “Don’t do the bailout”. They see very little chance of their advice succeeding, but they offer it forcefully. So for at least some, the theory fails. Perhaps I am selecting for less status-seeking ones than you.

  • Roga, a stock market is not a prediction market in the sense I mean.

    Tom, pundits should also be eager to reassure their faction of loyalty to them.

    Aron, given a higher prospect of a customer I’d put more effort into crafting a proposal for them.

  • Robin: I, too, think you’re going too far in assuming all punditry is self-serving in the trivial sense (seeking status or reassuring one’s faction of loyalty).

    I’m not sure whether I should consider myself as a member of “pundits” who you say have been “falling all over themselves” to post advice on the banking crisis. I have posted such advice, but I’m not sure if I qualify in that group. Perhaps I have insufficient qualifications, or perhaps I have insufficient readership.

    In my case, however, I perceive my position to be a contrarian one, and risky to make. This is not because I want to be contrarian, or want to take risky positions. I am uncomfortable continually expressing positions that no one at The Economist will pay attention to, and I *am* a person who appreciates, and desires, the peace of mind that arises when I and the rest of the world are in agreement. Unfortunately, though, the fact remains that I see real problems in other people’s prevailing positions, and I feel the need to point them out, even at some risk of hurting myself in the process.

    The reason I’m explaining this at length is because, in *my* experience, posting about stuff is inherently a risky undertaking, one which I engage in for idealistic and long-term reasons: partly because I hope that there’s some possibility that my posts are going to encourage, influence or enlighten someone; and partly because I want to have a track record of where I stood, and what I thought, when I grow old.

    Now, I tend to assume that others are like me, and post their thoughts for similar kinds of non-short-term-self-serving reasons.

    Are you claiming that I’m wrong in that assumption; that my motivations are exceptional, and that most pundits actually write for biased, short-term-self-serving reasons?

    Or are you saying that I’m deluding myself about my own motivations, in which case your argument starts to resemble Freudian analysis, where any excuse is sought to find a way to blame anything and everything on the patient’s relationship with his mother?

  • Alexei Turchin

    For a lonf time I am readin Pr. Nouriel Roubini’s Global Eco monotor and he has predicted all this since 2006.

  • Lord

    And if yours is a low status policy you probably don’t want to ask the high status of opinions on it.

  • Some of the people who I have come across who have been predicting the current crisis (some of them have been predicting this for a long time):

    Peter Schiff
    Mike ‘Mish’ Shedlock
    Jeremy Grantham
    Jim Rogers
    Marc Faber
    Nouriel Roubini
    Eric Sprott
    Dean Baker
    Stefan Karlsson & other Austrian school guys who right at
    Steve Keen (Ozzie)

    There may be others. An article pointed out that there were many economists who warned about Fannie and Freddie for a very long time.

    Most of the people I’ve listed I believe hold to the Austrian school of economics, or are at least in the libertarian camp. This is not my area of expertise, but it immediately raises red flags – it makes me suspicious of the capabilities of main-stream economists.


    PS – first post. Hello Robin et al, thanks for the blog.
    PPS – make this my first rough edit for that prediction market wiki

  • Nominell, I think Robin has a better appreciation that we’re apes with ape aesthetics than you do. I think it’s reasonable to say that most pundits you’ve heard of care more about their status increasing 1 year from now, than whether or not we avoid a Great Depression. However, indirectly you do raise a good criticism of Robin. Robin, for all your talk about status, you seem to be doing little to innovate a more rigorous metrics and vocabulary to discuss it, and how it warps decision making.

  • Wei Dai

    Robin, what is your view on credit default swaps? They are essentially prediction markets on whether certain entities will default. It’s widely reported that the CDS market is “unregulated”, and I haven’t seen any complaints that CDS’s are mispriced due to government interference. But they don’t seem to have helped to prevent the current credit crisis, and are actually being blamed for contributing to it. Are there any lessons here for other prediction markets?