Wednesday, February 10, 2010

Newsnight, Stiglitz and the insufferably arrogant Hugh Hendry

[update 29Oct] I see many are coming here after Hugh Hendry's turn on Question Time last night. The piece below was written after a previous appearance. In my opinion, last night he was less arrogant and more beardified. Maybe his confidence is deflating a bit. Anyway, he gave a competent analysis of the situation, and was distinctly fuzzy about the chances of economic recovery. Oh, and he also endorsed torture. Now read on.]

Newsnight last night: the fragrant yet steely Emily Maitlis discusses the Euro crisis with Joseph Stiglitz, (Nobel prize winning economist), the Spanish Ambassador, and one Hugh Hendry, a hedge fund manager.

At issue is the Euro-PIGS problem - the credit crisis affecting Portugal, Italy, Greece, and Spain. All regular options to deal with the crisis - devalue, lower interest rates, or buy up debt - are blocked by EU rules. Stiglitz, speaking on behalf of Greece, wants the EU to stand by Greece, and
"teach the speculators a lesson".

The main thing that came across was Hugh Hendry's arrogant attitude. He led by suggesting the Nobel Laureate sitting in front of him was an idiot. "Hello? Can I tell you about the real world?"
His solution is to let Greece and the Euro crash. Leave it all to the market. He admitted that some hedge funds would make profits from this process. He identified the problem as the unsustainable debt burden. This from a supporter of the system that creates all money out of debt, and insists on maintaining its monopoly on that process.

'I antagonise people,' says Hugh Hendry. 'It's part of my skill set.'

Hendry's body language, his sneering laughter, and his interruptions betrayed a sense of total dominance over representatives of two sovereign nations sitting with him.
Power in our world has passed beyond elected governments to the mega-rich private corporations.

We need to rein them in.

The key question is - "What is the real world?" Is it Stiglitz' economic studies, or Hendry's frenetic activity on the trading floor? Answer - neither, and both. Stiglitz tries to study the whole field of human economic activity. Insofar as he is an orthodox economist, he is way off, because the conventional economy is a dys-economy, since it is divorced from ecology. Insofar as he is critical of globalisation, free market fundamentalism, the World Bank and the IMF,  and dared to put the cost of the Iraq war at three trillion dollars, his view is worth study and respect. 

Hugh Hendry is a hedge fund manager. He deals in the future, betting on what he believes will go up and what will go down. By his own admission, there is no knowledge of the future, so he deals in what he imagines the future will be. Profit confirms his imaginings; losses refute his imaginings. His supporters will say that his wealth and success testifies to a net correctness to his views. However, the field in which he operates is rightly called the "casino economy" - a world of betting on guesses - as opposed to the real economy, where people satisfy their needs for water, food, shelter, energy and waste disposal. It is real, because food will get you through times of no money better than money will get you through times of no food.

This is why Hendry's insulting "Hello? Let me tell you about the real world?" line is not just rude: it is also plain wrong.


Anonymous said...

Hendry's point on another show was that why bail out he Greeks when they're so clearly on the take (by not paying taxes, etc).
That's what he must mean by real world.

DocRichard said...

Yes, clearly there were bad decisions that led them into this state, and the remedy will have to make sure these mistakes are not made in future. Just as happened with the banks. Not.

Anonymous said...

I have to agree that I thought Hugh Hendry came across as the most vile, rude, arrogant bully I have seen on TV during the whole financial crisis. His demeanour was that of someone clearly so far up his own backside that he has no concept of the "real world" at all. I truly hope the Greeks sort themselves out, if only to give the hedge funds a bloody nose for taking short positions.

VonMises said...

Hugh Hendry lives in the 'REAL WORLD' whereas academics like Stiglitz prognosticate on the results of their economic policies. The problem with Keynesian thinking is that it is completely wrong. Deficit spending never worked, it just created inflation and more debt.

We should leave it to the market, because the market has been usurped by central bankers and academic economists who don't know how the market works. The market punishes bad behaviour e.g. Greece, and rewards good behaviour e.g. Germany (prior to 07'). The reason that economists use German bond yields when discussing spreads is because Germany has a fiscally responsible government. The markets tried to call time on this course of events several times, but the Greenspan put delayed it. Ever studied Austrian economics?

Stiglitz is a very clever man, but he has never tested his intelligence in the bullpit of the trading floor, whereas Hendry has.

DocRichard said...

Well hello, Mr von Mises

It all depends how you define reality, does it not? For some, reality involves something called living, which is a complex process involving air, water, food, shelter, energy, waste disposal, and having fun. Hugh Hendry lives a world where you get rich or poor by making guesses. He has a place in the great scheme of things, but what he does is less real than that which the farmer does. Food will get you through times of no money than money will get you in times of no food.

Stiglitz is an economist, and much the same applies to him. The fact that he has been given a Nobel Prize suggests to me that he knows more about economics than most economists. He certainly knows more about economics than me, or you, or Mr Hendry.

"The problem with Keynesian thinking is that it is completely wrong".

I see. Thank you for sharing that exquisitely elegant piece of argumentation.

"Deficit spending never worked, it just created inflation and more debt".

Does this mean no-one should ever borrow? Or just that Governments should never borrow?

"We should leave it to the market, because the market has been usurped by central bankers and academic economists who don't know how the market works".

So it was the central bankers and academic economists who brought us the Credit Crunch? Stupidly, I was under the impression that it was a systemic failure of the financial sector. I agree that the central banks and academic economists (with the exception of Minsky) failed to see what the market was up to, but please explain how they were solely to blame, and not the market.

"The market punishes bad behaviour e.g. Greece, and rewards good behaviour e.g. Germany (prior to 07')."

I fully support punishing the individuals who brought about the Greek collapse. It would be very helpful if you could list them here. I have said many times on this blog that the debt they created should be annihilated by declaring them bankrupt.

We are interested in saving the Greek
people for having to pay for the mistakes of their leaders. So far as possible.

"Ever studied Austrian economics?"

No. Have you ever studied green economics?

"Stiglitz is a very clever man, but he has never tested his intelligence in the bullpit of the trading floor, whereas Hendry has".

This reads as if market traders are the most intelligent people on the planet.
This is not the case.

On the other hand, George Soros hasn't done too badly, has he?

Tod said...

Anon at 1.25 has a good point. Surely Greece's problem is not just a bad decision or two - it's institutional. Hardly anyone in Greece pays tax, so no wonder they've run up a massive deficit. There was an interesting "From our own Correspondent" piece on it recently.

In addition to the PIGS we now have the STUPID countries too, apparently, and Britain's one of them.

DocRichard said...

STUPID? Spain, Turkey, U? Portugal Italy D?

I wonder if it is the conservatives who avoid tax? They are famous for that, it's what they like doing best of all. But maybe I'm prejudiced.

Moral Hazard to rescue them, but if no rescue, collapse of stout party. Hope for green phoenix economy to rise out of ashes?

Interesting times...

weggis said...

U - UK?
S - Sweden?
D - Denmark?
P - Poland?

DocRichard said...

Reminds me of a circle of five people who were all blackmailing each other. In the end one of them cracked and went to the police. The others turned on him and said "Why'd you do that? We were doing so well"

DocRichard said...

Here's STUPID from today's Grauniad: Spain, Portugal, UK, Italy (I would alternate with Ireland,Dubai.

VonMises said...

I'm sorry it has taken so long to respond DocRichard... however, as you have granted me the courteousy of a reply, I shall respond with due courteousy...

Hugh Hendry's business is built on risk. Most of life is built around risk. According to Greg Mankiw, one of the 10 principles of economists is that the 'cost of something is what you give up to get it.' There is always a risk that one ends up losing more than one intended. When we leave the house, we risk being hit by a bus. When we work with electrical machines, we risk it malfunctioning and giving us a potentially fatal shock. When hedge funds decide to 'short' a stock, they risk the value of that stock rising instead of falling. When Mr Soros bet against sterling in 1992, he couldn't know for certain that the europhiles around Major would force him to maintain the ERM parity. Academic economics on the other hand is not based on risk. Stiglitz has a job for life, regardless of whether his theories are complete balderdash. Hendry must maintain a reputation, otherwise he won't be able to survive in the marketplace. So Hendry's position is more representative of society as a whole than Mr Stiglitz.

The Nobel Prize is about as useful as herpes. When President Obama receives the peace prize when he commits himself to an escalation of the war in Afghanistan, it makes a mockery of the pseudo-socialist committee that decides who wins the prize. And this may go against your view, but giving the prize to Al Gore completely destroyed what credibility it may have had (I am a global warming denier, and an environmentalist just for the record). However, Milton Friedman won the Nobel Prize for his work on stabilization policy and monetary theory. Friedrich Hayek won the Nobel Prize for his work on the trade cycle, so by your logic you must accept their views must have some credibility if the Nobel Gods accept they do.

If you wish, I shall send you an essay I wrote several months ago on the efficacy of Keynesian economics. It is too long to post here, but if you are interested, I will be happy to post it.

Governments should never borrow. Individuals can do what they want because they have to face the consequences of their actions. Governments do not have the problem of moral hazard. Governments do not own money. They get money from taxation, and if they borrow it, more must be raised from taxation to pay it back. Also, there are several economic arguments against deficit financed public spending e.g. crowding out private investment, Ricardian equivalence etc.

VonMises said...

Market participants do what they can with what they have. Fractional reserve banking systems allow banks to create money and credit out of thin air. One of the fundamental tenets of Austrian economics is private property. The money we work for is OURS and nobody elses. When we deposit it, banks have no right to lend it out without our permission. The systemic failure of the financial system was a consequence of the central bank induced recession. The exchange rate protectionsm of China enabled massive flows of capital from China to America, which drove down real interest rates. If the market had been allowed to determine exchange rates, capital flows would have been more subdued, and thus interest rates would have been higher. Also, central banks stimulated a housing boom through low interest rates and rapid M4 and M3 growth. If somebody throws money at a poor man, the poor man will spend it. The 1977 Communties and Reinvestment Act forced Fannie Mae and Freddie Mac to lend to poor people, the NINJA's (No Income, Job or Assets).

The politicians are responsible, as are the people who decided to run up such stupid debts.

Of course I have studied green economics. I have studied everything from the crackpot theories of the Keynesians, Post Keynesians and New Keynesians, along with the equally stupid theories of the New Classicals and the Efficient Markets Hypothesis and Rational Expectations theory. Pigovian taxes anyone? Now perhaps you could answer whether you have studied the works of the Austrian School e.g. Von Mises, Bohm-Bahwerk, Menger, Hayek and Rothbard?

That is your inference from what I said. I never said it however. I was making the point that Stiglitz' intelligence is not applicable to 'the real world' whereas Hendry has intelligence applicable to 'the real world.'

I apologise for the length of this post.

Von Mises

DocRichard said...

on mises
Thank you for your interesting posts. This has the makings of a stimulating debate, and today, I will just deal with some salient points.

Nobel Prize: Agreed, it does not confer infallibility, but it does confer a degree of respect. There is a list here. You may not agree with the worthiness of some, and I may not agree with others.

Risk: sure, scientists are always insisting that journalists and the general public should have a better understanding of risk. Risk assessment is at the core of the argument for decarbonisation. Se for example here, halfway down.

I accept that market traders perform a service with their risk-based trading. What we find utterly unacceptable is that they have kept the profits from their risky decisions, and have off-loaded the losses on to the taxpayer, who has had to borrow to bail the banks out. You refer to moral hazard in connection with government actions, but the same should apply to private individuals, should it not?

Am I right in guessing that the Austrian school would have allowed the banks to crash last year?

I am interested to read "The money we work for is OURS and nobody elses. When we deposit it, banks have no right to lend it out without our permission."

Am I right in inferring that this implies 100% - or approaching - fractional reserve. Correct me if I have got the term wrong. Some on our side are behind that idea. I lean towards ~50% variable, with the
Peoples' banks and private corporations competing with each other to create new money.

I distrust statements that rely on "crackpot theories... equally stupid theories". Is this ad hom debating style intrinsic to individualists? It certainly seems to be. I have experienced it with dogmatic leftists also, but individualists seem to use it as stock in trade. I suspect that it is a symptom of the ego-grounded world view.

Green philosophy, as you probably know, is system based, viewing the whole horizon as best we can (given our human limitations), so that we are able to integrate views which are antithetical in a narrower frame. In a word, we can strip the -ism off the various schools, and use the useful insights of all.

No, I have not read the Austrian school, nor on the other hand have I read Marx. My discipline is medicine, and even there, most of the useful stuff I know I have learned from people, not books. In some ways, this is a weakness, in other ways, (notably in being able to get an over-view) it is a strength.

"Governments should never borrow". There we have it. Individuals and corporations may borrow, but not governments. Is this perhaps because they have no legitimacy in the Austrian view? Is there perhaps no such thing as society?

Again, there is a grain of truth in what you say, but I do not think you will agree. I am uneasy at govts having to borrow from private corporations. Why borrow, when they could create? Historically, governments did this, and a vestige remains in the issue of notes and coin. The corporations have arrogated to themselves the monopoly of money creation. It is now time to bring things back into balance.

Thanks for the stimulating debate.

Rupert said...

A lovely proof of how wrong von Mises is is present in Polanyi's masterwork, THE GREAT TRANSFORMATION. Heartily recommended to all.
Stiglitz is of course actually very middle of the road. I'd rather have Daly, any day.

VonMises said...

Of course. I believe the phrase is 'corporate welfare.' It would be hypocritical of me to criticise moral hazard for governments and not moral hazard for private individuals. The Austrian School has been dubbed the 'liquidationist school' by its Keynesian detractors. If I am stupid enough to bury myself in debts, I have to take responsibility for my actions.

Yes, Austrian economists have said we should let banks fail. Keynesians and the crackpots of Chicago have said this would be suicidal and destroy the global economy. However, between 1920-21, America suffered a depression that was as severe as the Great Depression in output loss. President Warren Harding didn't enact monetary or fiscal stimulus. He cut government spending by 33% and cut the federal government by 50%. He also cut taxation on all income levels. The depression lasted a year, compared to 14 years for the Great Depression, characterised by fiscal and monetary expansionism. Bad banks were purged, and new banks took their place.

I am interested to read "The money we work for is OURS and nobody elses. When we deposit it, banks have no right to lend it out without our permission."

My view is that we should have a 100% reserve banking system, with a clear distinction between retail and investment banking. A gold standard will contstrain excessive credit creation and contain any inflationary pressures. Banks cannot have a free rein to credit money out of thin air. Fiat currency should be abolished. Confidence is key to a private enterprise system, but how can one have confidence in a 'funny money' system?

I am aggressive in debate because in my experience I have had to be. I have debated George Galloway on his TalkSport show and wasn't able to speak much because he kept interrupting me. I decided that if socialists can get away with a very aggressive style of debating, then so can I.

You say you have gained more experience from people rather than books. This is the case with the Austrian School of Economics. It is based on praxeology. I call the New Classicals and Monetarists etc crackpot because they rely on computers to model human behaviour. We cannot predict the future. Austrian economics is marginalised because it rejects textbook and computer models in favour of logical deduction.

I don't believe in government borrowing because governments get their money from the people. That is one of the reason fiscal stimulus is useless, because for governments to spend £1, it must take £1 out of private hands. There is no new spending, it has merely been redistributed. Governments do not have the problem of moral hazard, whereas we the people do.

Thanks for the stimulating debate.

DocRichard said...

Von Mises
We have some areas of overlap, and some of difference.
I am interested that th Austrian School prefers logical deduction from an axiomatic base, rather than the numerical (or should that be pseudo-numerical?) approach of orthodox economists.
What is your axiomatic base?

Green economics is based on these axioms:
1 Real economics is based on ecology
2 It is impossible to expand forever into a finite space
3 It is impossible to take forever from a finite resource.
4 Everything on the planet is inter-related.


VonMises said...

Again DocRichard, I apologise profusely for the lateness of my reply. I hate computers because they always break, or perhaps I am cursed with machinery. I wish I had a typewriter...


The beauty of Austrian economics (it is more a socio-economic theory rather than pure economic theory) is that it dosen't make assumptions about human behaviour like the Rational Expectations theorists do, who implicitly suggest we construct Bell Curves to measure probability distributions for every conceivable event.

It is based on the concept that free people should be free from coercive forces, whether governmental or corporate. For environmentalists like me who reject AGW (I apologise again) it is perfect.

Basically, in a world of finite resources and scarcity, the allocative effect of a free market is the most efficient method of distribution and exchange. Friedrich Hayek explains it better than I can. If you have the time, read 'The Use of Knowledge in Society.' It is available over the internet.

DocRichard said...

So is it fair to say that your basic axiom is that people should be free from coercive forces, whether governmental or corporate?

I am ok with that, so long as you accept that there are biological and ethical constraints on our behaviour. The biological ones being the axioms I qoted above, and the social constraints being that in exercising our own freedoms, we must not limit others' freedoms. Basic ethics.

Amen to no coercing of peoples' freedoms by corporations - see my tag on corporations.

Greens are more positive about the exercise of power by "good" government, and highly critical of misguided exercise of power by non-good government. By "good" government, we mean an institution representing the interests of the people, who are the source of sovereign power. This is an ideal, in that all existent governments fall short of rectitude, and it is the business of politis to steer government towards serving the interests of the people.

The problem of our time is that the corporations have more power than many smaller governments, and have undue influence over the most powerful governments.

In haste, I am at the Green Party Conference.

Currency Trader said...

The nobel prize has been worthless since Kissinger was awarded it.

Also Hugh Hendry stands vindicated all these months later.

Looks like you backed the wrong horse Doc.

DocRichard said...

Hi Currency Trader

I would suggest that you take a look at the Biased Sample fallacy,
and decide whether it applies to your Nobel/Kissinger argument.

I cannot see how arrogance can ever be valid. In which way do you think Hendry's argument is valid?

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