DSGE Dilettantes v. ADM God Devotees


New Economic Perspectives has the article DSGE Dilettantes v. ADM God Devotees.

The truly exceptional thing about ‘modern macroeconomics’ devotees is not that they are so consistently and horrifically wrong or that they persist in their errors – but their exceptional combination of arrogance and disdain for those who have dramatically better records and broader and more relevant expertise.

I don’t know if this can be considered part of failure of the DSGE “scientific” method. But here is something I observed about the collapse in 2008/2009. The back testing of the financial derivatives used the historical fact that mortgage defaults never rose above a certain level when responsible mortgage underwriting practices were employed. The banks then dumped all responsible mortgage underwriting principles and assumed that the safety of their back testing would still apply.

Before the age of these derivatives were ushered in based on the safety “intuition” from the mathematical model, it had never been profitable to make mortgage loans based on loose and deceptive underwriting principles. So the derivatives that supported the bubble ushered in the very conditions that had never existed when the mathematical model were derived under the assumption that these would never exist, based on past history.

I don’t know what kind of degree you have to get to be able to make such illogical assumptions and inappropriate fancy math. What is more surprising is that these people don’t even think about this obvious blunder that made such an epic fail to occur.

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