Tuesday, November 26, 2013

An advocacy

I have been following a few MOOCs in coursera.org for the last few months, and I have observed something really bleak. Two courses by Prof. Mehrling (here) in Coursera examine an alternative approach to the origins of the 2007-2008 turmoil, which has been rather enlightening. A lot of ardent discussions have taken place in these courses' forum; discussions, and some comments in them, that, more or less, accuse economists and financial markets of the current state of affairs. I do not blame these critiques... Yet, I admit they leave a dismal feeling. Mistakes have been made, but economists are not gods; none of us is. I will not argue for who should be blamed, either (I have done so, already). There are only two remarks I would humbly like to make. 

First of all, in addition to blaming economists one has to appreciate their contribution before the global financial crisis. Hitherto, they had conduced to successfully alleviating the effects of business cycles in our income, and, hence, in our lives. If you check the following graph you may see what I mean. Although, there is a lot of dissonance in economics, since John Maynard Keyne's time in 1929-1932 until 2007, none of the recessions was that catastrophic. Did that happen by accident? I believe not! Was it the invisible hand? No!!! It was the Invisible... Economist! Economics (such as, the Mundel-Fleming model, and Keynes' Theory) were guiding the stabilization policies during all this time. So, economists should be blamed for what is happening now, and, certainly, not all of them; but while scrutinizing Economics, please pay attention to both their virtues and their sins.

Secondly, we have to distinguish financial markets and instruments from the people that operate in and with them. The former offers a great variety of hedging and funding instruments that have proven to be indispensable for the development of modern economies. How could an exporter, for instance, find indemnity against devaluation of his home currency against that of his oversees partner without a derivative in foreign exchange? How could an investor protect his savings against price fluctuations without derivatives? How could a firm pay his workers now, while expecting revenue from its sales a few months later without a bank loan? The answer is simple: there is no alternative. But, who takes the other side of the derivatives transactions? Most likely, a speculator, but, again, there is no alternative. Similarly, we need the banks. 

Obviously, the market institutions are not only essential (unless, of course, we move on to Socialism, which is impossible, for now), but utterly beneficial, as well. On the contrary, the individuals operating in these institutions may misuse the market instruments, perhaps by gluttony or greed. Is that the financial markets' fault? Take a rock, for example: one can use it to build, while another can use it to smash one other's head. It is not the rock to blame. If you argue that without the rock the killer could not have killed, please, try to think a alternative building material that could not be used in killing... Therefore, if we separate the actors from the instruments we can clearly see who has to be blamed. Accordingly, a safe-net should not serve to protect the public against markets, per se. Instead, a safe-net must guard citizens against the misapplications of the market participants. 

Overall, it is crucial to separate the markets from their, perhaps greedy, agents, and to take under consideration both the merits and the demerits of the Science of Economics. Admitedly, the coursera MOOCs' discussion forums do not represent an adequate sample to assess wheter a larger fraction of public has became incredulous to Economics scientists, but, given how things have evolved over the last five or six years, that might be sadly a fact...

(In my defence, the first remark -second paragraph - was initially made in a post graduate Stochastic Calculus lecture by a non-economist, non-finance professional, and mathematician J. Spiliotis. Errors, naturally, mine!)