December 01, 2010

Zombie Economics ..

‘Zombie Economics’ Stalks Planet Bloomberg
World Of Finance

Picture Ben Bernanke as a zombie in a horror film. Staggering
slack-jawed through the bullets, he groans a terrifying phrase:

“Great Moderation, Greeeeeeat Moderaaaaaation!”

Erroneous economic ideas resemble the living dead, writes John Quiggin
in his smart new book, “Zombie Economics.” They are dangerous yet
impossible to kill. Even after a financial crisis buries them, they
survive in our minds and can rise unbidden from the necropolis of

Consider the undying notion that booms and busts can be tamed in a New
Era of endless prosperity. The latest incarnation of this zombie idea
-- the Great Moderation popularized by Federal Reserve Chairman
Bernanke -- died in a storm of bailouts and foreclosures. Yet the
Great Moderation endures in academia, says Quiggin, an economics
professor at the University of Queensland in Australia.

“Research projects based on explaining, measuring and projecting the
Great Moderation were not abandoned,” he writes. “The intellectual
commitments on which those projects are based have proved tenacious.”

Zombie ideas are legion, ranging from trickle-down economics to
Dynamic Stochastic General Equilibrium modeling, Quiggin says. Taken
together, they form a bundle of theories, policies and catchphrases
that he terms “market liberalism,” seeking a neutral name instead of
pejoratives such as Thatcherism and Reaganism.

“Unlike other monsters like werewolves and vampires, zombies always
come in mobs,” he writes. “Individually, they seem easy enough to
kill, but in a group their strength can be overwhelming.”

One of the more vulnerable zombies is the strong form of the Efficient
Markets Hypothesis, which postulates that it’s impossible to beat the
market because stock prices already incorporate all information held
by traders. Though this zombie should have perished in the dot-com
bust, its advocates “went on as if nothing had happened,” Quiggin
says. Only the Great Credit Crackup drove home the lesson that markets
can be mispriced and downright irrational.

A little humility wouldn’t hurt, as Quiggin writes. “The Global
Financial Crisis gives the economics profession the chance to bury the
zombie ideas that led the world into crisis, and to produce a more
realistic, humble and above all socially useful body of thought.”

Until then, expect endless reruns of “Night of the Living Dead.”

“Zombie Economics: How Dead Ideas Still Walk Among Us” is published by


The Star February 2010 Voodoo Economics

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