Interesting article from the Wharton School asking why economists didn’t spot the glaring flaws in the global financial system.

Of all the experts, weren’t they the best equipped to see around the corners and warn of impending disaster?

Indeed, a sense that they missed the call has led to soul searching among many economists. While some did warn that home prices were forming a bubble, others confess to a widespread failure to foresee the damage the bubble would cause when it burst. Some economists are harsher, arguing that a free-market bias in the profession, coupled with outmoded and simplistic analytical tools, blinded many of their colleagues to the danger.

“It’s not just that they missed it, they positively denied that it would happen,” says Wharton finance professor Franklin Allen, arguing that many economists used mathematical models that failed to account for the critical roles that banks and other financial institutions play in the economy. “Even a lot of the central banks in the world use these models,” Allen said. “That’s a large part of the issue. They simply didn’t believe the banks were important.”

Over the past 30 years or so, economics has been dominated by an “academic orthodoxy” which says economic cycles are driven by players in the “real economy” — producers and consumers of goods and services — while banks and other financial institutions have been assigned little importance, Allen says. “In many of the major economics departments, graduate students wouldn’t learn anything about banking in any of the courses.”

But it was the financial institutions that fomented the current crisis, by creating risky products, encouraging excessive borrowing among consumers and engaging in high-risk behavior themselves, like amassing huge positions in mortgage-backed securities, Allen says.

As computers have grown more powerful, academics have come to rely on mathematical models to figure how various economic forces will interact. But many of those models simply dispense with certain variables that stand in the way of clear conclusions, says Wharton management professor Sidney G. Winter. Commonly missing are hard-to-measure factors like human psychology and people’s expectations about the future, he notes.

This theme about credulity towards models is surfacing again and again. The Wharton article points to another report by a group of mainly-European economists which makes the same point:

The paper, generally referred to as the Dahlem report, condemns a growing reliance over the past three decades on mathematical models that improperly assume markets and economies are inherently stable, and which disregard influences like differences in the way various economic players make decisions, revise their forecasting methods and are influenced by social factors. Standard analysis also failed, in part, because of the widespread use of new financial products that were poorly understood, and because economists did not firmly grasp the workings of the increasingly interconnected global financial system, the authors say.

They go on to say that

“The economics profession appears to have been unaware of the long build-up to the current worldwide financial crisis and to have significantly underestimated its dimensions once it started to unfold,” they write. “In our view, this lack of understanding is due to a misallocation of research efforts in economics. We trace the deeper roots of this failure to the profession’s insistence on constructing models that, by design, disregard the key elements driving outcomes in real world markets.”

Quite so.

Thanks to DianeC for the original link.

Andrew Sullivan has done a neat analysis of the way the NYT has in recent years favoured Cheney-style euphemisms for torture.

The latest NYT euphemism for torture is “intense interrogation,” another plausible translation of the Gestapo term, “verschaerfte Vernehmung”;, for torture that broke no bones, drew no blood and left no permanent marks. The NYT has even tried to turn “waterboarding” into a twilight zone, calling it a technique merely that critics call torture.

But if you check the Nexis archives of the NYT, you will find that their terminology has not always been so supine and vague. The classic techniques used by Cheney – sleep deprivation, cold cells, hypothermia, stress positions, forced nudity and “walling” – were described by the NYT in the past very plainly, using the term “mental torture,” or in the recent obit (obviously written before Cheney p.c. came in) of an American airman, captured by the Communist Chinese, simply “torture.” In reporting on the similar techniques used Agabuse by the British in Northern Ireland in 1972, the NYT called them “torture and brainwashing”‘ which is exactly what the Cheney techniques are designed to accomplish. In 1996, the NYT ran a story on reports of “torture” in Brazil, which included “being kept naked in a cold cell,” the Gestapo specialty that Cheney made standard procedure for the US. In 1997, in reporting on the CIA’s record in training torturers in Latin America in the early 1980s, the NYT used the terms “psychological torture” and “mental torture” to describe long-time standing, stress positions, “deep exhaustion”, and solitary confinement.

In 1998, the NYT reported on the CIA’s training of Palestinian security forces. The Times reported that the CIA had dropped all last-resort use of physical torture in 1985, but also what they called “mental torture.” In discussing allegations of torture by the Palestinian security services, the NYT noted a relevant fact as support for the claim: 18 prisoners had died in custody during interrogation. Even after a hundred deaths have now been recorded under the Cheney torture regime, the NYT refuses to call it torture. In 1999, in contrast, the NYT reported on “allegations of torture” in China that amounted to “beatings and solitary confinement”.

Perhaps one clue to their shift can be found in their treatment of the case of Israeli torture in the 1990s….

Great piece, worth reading in full. The takeway: torture is what the other guys do; all we do is “intense interrogation”. Interesting also to note that the NYT’s taste for euphemism seems to have surfaced around the time that the Israelis ramped up their er, interrogation techniques.

Arthur Fromm is incandescent.

Until this week, the 450-some-odd travel bookstores operated in Great Britain by W.H. Smith & Co. were reliable sources of a large variety of both popular and profound travel books and travel guides. This week, W.H. Smith has become something else — a “thing” so unattractive that I don’t trust myself to describe it, I must first calm down.

It has been announced that this major chain, found — among other places — in every airport and major railroad station of the British Isles, will no longer stock or display any travel guides other than those published by Penguin (which include the DK Guides, Rough Guides, and Alastair Sawday’s). Receiving a large advance cash payment from Penguin, as well as an unprecedented 72% discount off the cover price of the books, W.H. Smith, in effect, will become a one-publisher travel bookstore chain. A travel bookshop in the information business, which means it is in the Freedom of the Press business, will deliberately deny its customers access to anyone else’s travel books. The public utilizing a W.H. Smith travel bookstore, often the only bookstore in its particular travel-related locations, will have access to only one travel outlook, one brand of travel publication.

Last year, according to reliable accounts, Penguin travel books accounted for only 18% of the travel books sold by W.H. Smith. The public, by an overwhelming margin, opted to choose travel books published by others. In travel bookshops of W.H. Smith, they will no longer find the books that used to account for over 80% of their choices.

He’s right. It’s ludicrous. It must have looked like a great deal to Penguin; but it’s lousy for consumers. And I think Penguin will live to regret it. And it reinforces the urgency of breaking up BAA.

Michael Palin is also pissed off about it.