In April 2008, Nassim Taleb was becoming a household name criticizing the quant dominance in finance. Bear Stearns had just failed and the entire edifice of mathematical order was still breaking down, as the last bastions of credit default swap “supply”, the monoline insurers, were still rumored to be heading for insolvency (while the nightly news focused on whether that would impair muni bond prices rather than affect, almost terminally, wholesale operation throughout the globe). According to the models, this was a once-in-a-thousand-year event which somehow, despite the advance of three and a half decades since Black-Scholes rendered quant mainstream, supposedly came up out of nowhere.

When asked to comment on Taleb’s assertions, pretty damning given that time period, Myron Scholes acted like a religious zealot whose god had just been found quite mortal:

Mr Scholes, the 1997 winner of the Nobel Prize for his work on the equation, does not think Mr Taleb’s theories are up to much. “I don’t want to glorify him by refuting what he says,” said Mr Scholes at a recent conference. He dismisses Mr Taleb as someone who simply “popularises ideas and is making money selling books”, arguing that academics do not take him seriously because he does not cite previous literature.

In other words, Taleb doesn’t bow to the same worshipful adherence to the orthodox academy on all things financial and economic. Since he doesn’t publish in all the “right” journals, with impenetrable (needlessly) jargon laced and saturated with all manner of regressions ARCH, GARCH and all the rest, he isn’t to be taken seriously – even when a once-in-a-thousand-years event is followed, by only six months, by a once-in-ten-thousand-years event. The Panic of 2008 was really two, and the models completely and totally missed both.

Some parts of the academic apparatus at the center of authority took a more, if only on the surface, repentant attitude. The Federal Reserve’s academic body fessed up to the utterly useless nature of its math almost right away; but it did so in the service of furthering the same efforts and ideology. The models got it wrong because, among other problems, recency bias due to the lack of panic in the historical data series. Now that one showed up, the models could be calibrated, so the economists claim, to incorporate what was learned. That supposedly means the orthodoxy would be quite ready for the next one as if it were all that simple (so long as it looks exactly like the last, the unspoken caveat of this kind of effort, and even then predictability is only marginally improved).

For the most part, the downside of the panic in 2008 has been swept from reckoning. Economists have acted as if nothing much significant happened since “everyone” was wrong, so nothing significant should alter the dominant theories that still try to run pretty much everything. In many parts of the policy domain, orthodox practitioners remained completely defiant about their role if completely silent on how that role was 180 degrees in opposition to reality in 2007 and 2008. In other words, the Great Recession and its panic were anomalies and everything should just go back to the pre-crisis versions as if nothing altered global existence.

That attitude has been prevalent, of course, in the US policy machine, but perhaps even more so apparent in Europe. As the recovery has been weak to non-existent in the US, it has been markedly worse there; and despite that, the ECB remains undeterred as to everything it has done along the way. Some on this side of the Atlantic tell it as reticence and reluctance on the ECB’s part which explains the economic divide in terms of the difference between just bad economic performance and purely awful, but that simply isn’t the case. The ECB has been far from absent this whole time; only different in the form of its executions.

There was an SMP in place before Bernanke ever got to QE2, with the purpose of that original 2010 plan to forestall re-recession while the FOMC was still figuring out what was happening (an unrequited search to this day). That was followed by acronym after acronym, a list too long to recite here, but including two major OMT’s, nearly a trillion euros in two LTRO’s and not one but now three covered bond buying programs (where banks buy their own liabilities funded by the central bank, a violation and censure of true money behavior as ever has been conceived under this utterly elastic monetary arrangement). The ECB has been such a constant feature in the European banking system as to no longer be quite discernable as a separate entity.

And so the theory remains operative there: control marginal economic direction through credit. To control credit, there must be “liquidity.” In order, then, liquidity to debt to recovery. The problem is thus quite obvious, as there is none of the last, none of the middle and the former is highly arguable in actual operation outside of some numbers on the ECB’s balance sheet. In short, pretty much none of that theory has worked out over the past five to seven years. And now QE.

Quantitative easing is quite deceptive in how it implies precision through objective, mathematical science; there is none. The LTRO’s were really QE without all the mess over hogging all the usable repo collateral in the first place. The LTRO’s were at least simple which would be far more consistent with the general economic theory that prevails here, but instead QE is all that is left to uphold credibility so the ECB must go through the endeavor of trying not to buy “too much” of government bonds. Almost from the moment it was unleashed, bond yields in Europe have gone in the “wrong” direction.

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That is as much repo complications as other problems, as repo rates in Europe persist negative – as do many unsecured interbank rates such as Euribor tenors (out to 3-months) and Eonia. Orthodox economists decry the zero lower bound as an “unnecessary” impediment to their grand mathematical designs, quantitatively spelled out if only in the most sterile and highly stylized of computer settings, but in the interbank market for “money”, such that it exists in the wholesale system, negative rates are in effect right now. It has always been assumed that money markets would not find anything terribly atypical on the other side of zero, but recent history suggests there is, indeed, asymmetry where orthodox math once more assumes none. In other words, negative nominal rates may not simply be the same as positive nominal rates with nothing but a switched sign.

That would be quite condemning, again, for the liquidity part of the economic formula right from the start. But the dominant theme will be Greece. In the end, it doesn’t really matter, as negative nominal rates or Greece finding itself suddenly outside of the euro both are actual rejections of orthodox theory. The first SMP all the way back in early 2010 was meant to fix Greece – yet here we are half a decade later and still contemplating exactly the same scenarios as were regressed and modeled by the ECB back then. Liquidity to debt to recovery simply didn’t happen in Greece (nor Europe), and so nothing changed except the nurturing of asset inflation and a whole new generation of potential Greater Fools – this time in government bonds rather than “risky” stocks and more speculative classes.

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Shrugged shoulders and recency bias cannot be the extent of accountability here, for as long as this depression languishes in not small countries but really the entire world the more dangerous everything becomes; history is conclusive upon that subject and correlation. Economists love their station and their Nobel Prizes so they will not willingly accept the pure scientific rejection that has been offered, based not on math, models or even theory but actual and repeated (to the point of absurdity now) observation. Mario Draghi and Janet Yellen, as Ben Bernanke has been already, want to be on the cover of Time as Person of the Year no matter how absurd the rationale for getting there (hey, the world didn’t end so Bernanke must have been a hero, never mind that panic he said was impossible and his central bank was perfectly positioned to forestall happened – twice). You can’t become a celebrity by being relegated to studying the unconditioned effects of unregulated trade terms in South America.

Economists don’t have any answers, they never have, only a religious devotion to a system of beliefs that approach reality less and less with every discrete application – one in which they are atop the pyramid, perched upon an intellectual pedestal of quite unnecessary complication and complexity. In the end, the complex math isn’t really about making a better policy or fostering greater understanding, it is simply a barrier protecting their priestly reign. That is the main conclusion of all of this experimentation, which is why each every one of those experiments “has” to be bigger and bigger. Karl Popper said in 1972, “Whenever a theory appears to you as the only possible one, take this as a sign that you have neither understood the theory nor the problem which it was intended to solve.” Myron Scholes and the rest would deny that maxim unless it cited, specifically, several past regression “studies” published in orthodox journals and containing at least twelve equations verifying how it didn’t break heteroskedasticity.

If it wasn’t for all the indecipherable verbiage and the complex mathematics, all of these people would have been exposed as charlatans early on in the panic, probably in that first phase. Instead, they continue to dominate and the world continues to spin further and further in the wrong direction. Economists own Greece now; it is their work on full display. And that is especially true of the global “recovery” as it falters further and “unexpectedly” further “despite” all the “stimulus.” Trillions and trillions attempted at liquidity in order to ignite more trillions in debt intended for aggregate demand with, in the end, relatively nothing of “demand” anywhere. There is no math required for any of this, and that is the problem.

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