College of St. Scholastica (yes, I’m aware of the irony)

Economists behaving badly (by Paul Krugman)
Ouch. The WSJ’s Real Time Economics blog has a post linking to Raguram Rajan’s prophetic 2005 paper on the risks posed by securitization — basically, Rajan said that what did happen, could happen — and to the discussion at the Jackson Hole conference by Fed vice-chairman Kohn and others. The economics profession does not come off very well.

Two things are really striking here. First is the obsequiousness toward Alan Greenspan. To be fair, the 2005 Jackson Hole event was a sort of Greenspan celebration; still, it does come across as excessive — dangerously close to saying that if the Great Greenspan says something, it must be so. Second is the extreme condescension toward Rajan — a pretty serious guy — for having the temerity to suggest that maybe markets don’t always work to our advantage. Larry Summers, I’m sorry to say, comes off particularly badly. Only my colleague Alan Blinder, defending Rajan “against the unremitting attack he is getting here for not being a sufficiently good Chicago economist”, emerges with honor.

A Bear Saw Around the Corner (by Steven Kotkin, New York Times)
THE long economic boom passed many people by, but the bust has nailed nearly everyone. The carnage has also made a clairvoyant of James Grant, the founder of Grant’s Interest Rate Observer and a perennial market bear. In “Mr. Market Miscalculates” (Axios, $22), Mr. Grant serves up an edifying anthology of his previously published — and prescient — editorials and speeches from his much-read industry publication. Read them now and weep…

Lucid essays from well before the 2008 meltdown captured the toxicity of the mortgage market and the investments known as collateralized debt obligations (stacks of debt). Other writings celebrated Karl B. Hill, an unconventional banker who muses that it would be convenient if all the McMansions built with financial flows from Asia could now be exported to improve America’s foreign trade balance. (The alternative is for the Asian holders of American debt to move into the houses and employ the insolvent nominal homeowners as household staff.)

We’ve been here before. Technology stocks, Mr. Grant writes in the anthology’s foreword, were absurdly overvalued in early 2000, just before the tech bubble burst, “but, then again, they were only a little less overvalued in 1999 and 1998.” Ditto for 1997, and 1996. “I myself,” he adds, “thought the market was a little overvalued in 1992.”

Sam Huntington Was Plainly Correct (by Rod Dreher, a conservative)
If 2008 taught us anything, it was the danger of listening to people who tell us what we want to hear. Anybody with a lick of sense should have seen that we were living inside a bubble of Panglossian optimism that had little basis in observable fact. But as George Orwell quipped, "To see what is in front of one's nose needs a constant struggle." Samuel P. Huntington, the eminent Harvard political scientist who died on Christmas Eve, was used to being derided for his ability to see what was in front of our collective nose and to describe it to people who didn't want to hear… But then, great men rarely run with the herd.
Or great women.—Caro

Darwin and the terrible games of Homo sapiens (by Paul Seabright, Economists’ Forum, Financial Times, U.K.)
[M]any primates do not adapt well to life in zoos, and Wall Street is the biggest and strangest zoo of them all… Faced with evidence that a housing boom can’t continue forever, we do not unravel it back to the beginning but try to ride the boom till the very end, to do just a little better than the very best of the others. Those differences in status, you see. Faced with the arithmetic certainty that a chain letter, or a Ponzi scheme, cannot give us an expected gain, we nevertheless calculate two or three steps ahead and give it a punt… [W]hen the maths gets too tough we seek reassurance from the powerful groups to which we belong. If it is okay to them that is fine by us; the group will protect us if things go wrong. We have to trust someone: modern life would collapse if we did everything alone.

So we trust those who seem most like us, which means we trust the folks they trust, and so on in another long chain that stretches our strategic reasoning capacities to the limit.
Trouble is, most folks either trust the members of their group too much or lack the courage to stand out from the crowd.—Caro

On Groupthink: Part I (by vastleft at Corrente)
Recently, No Blood for Hubris suggested I look to Irving Janis's 1982 book Groupthink (as the second edition of Victims of Groupthink is called) to shed some light on the kind of mass delusions and biased analysis I often critique… In the Introduction, Janis defines groupthink thusly: “..a mode of thinking that people engage in when they are deeply involved in a cohesive in-group, when the members' strivings for unanimity override their motivation to realistically appraise alternative courses of action… Groupthink refers to a deterioration of mental efficiency, reality testing, and moral judgment that results from in-group pressures.” He concludes the Introduction with a description of his “central theme”": “The more amiability and esprit de corps among the members of a policy-makng in-group, the greater is the danger that independent critical thinking will be replaced by groupthink, which is likely to result in irrational and dehumanizing actions directed against out-groups.”

Could this shoe, perhaps, fit in-groups like The Village, organized religion, the aptly named "Dittoheads," and Progressive Blogosphere 1.0? Various partisans in Israel / Palestine debates? Golly, that's a tough one.
Can we add the inability to criticize Obama to the list? For the danger that groupthink poses to the world as we know it, see below.—Caro

Jared Diamond: Why Societies Collapse (The Big Picture, thanks to Economist’s View)
Why do societies fail? With lessons from the Norse of Iron Age Greenland, deforested Easter Island and present-day Montana, Jared Diamond talks about the signs that collapse is near, and how — if we see it in time — we can prevent it. Note that he mentions the conflict of interests — when Elites “insulate themselves from the consequences of their decisions, advancing their own short term interests against the interests of overall society.”
Click through to watch a 2003 video of Diamond discussing his book Collapse.—Caro

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Carolyn Kay
MakeThemAccountable.com