AM21 M&S Ch 1& 2

On Monday May 6th, I gave a 55m lecture on Chapter 1 of House Debt -- I explained that the basic premise -- Sherlock Holmes -- you must collect data BEFORE theorizing is wrong. In fact, theories guide you to the type of data you want to look at. But if the data does not confirm theory, then data guides you to REVISIONS of theory. After revising theory you go back to data to see if the new theory fits better. This is what I call ENTANGLEMENT, and has been discussed in a previous lecture (see AM18B). This lecture is linked below.

The second part of the lecture was 45m presentation by Umer Kiani on parts of Chapter 2 of House of Debt. This was good presentation, and informative for me. Some of the concepts he discussed were not clearly explained, but it was clear that he had done a lot of reading and had achieved a high level of understanding. Both video lectures are linked below, and also the ppt presentations.

Starting from Monday 6th May, students should start their presentations on one chapter each. We can take time to discuss the chapters if they finish early. That way we can have the discussions, Q/A sessions that have been missing from class earlier.

In your presentations, I want you to pay attention to Bloom's Taxonomy, which is summarized and discussed in many places. See for example:

https://cft.vanderbilt.edu/guides-sub-pages/blooms-taxonomy/

Here are the authors’ brief explanations of these main categories in from the appendix of Taxonomy of Educational Objectives (Handbook One, pp. 201-207):

• • Knowledge “involves the recall of specifics and universals, the recall of methods and processes, or the recall of a pattern, structure, or setting.”

  • Comprehension “refers to a type of understanding or apprehension such that the individual knows what is being communicated and can make use of the material or idea being communicated without necessarily relating it to other material or seeing its fullest implications.”

  • Application refers to the “use of abstractions in particular and concrete situations.”

  • Analysis represents the “breakdown of a communication into its constituent elements or parts such that the relative hierarchy of ideas is made clear and/or the relations between ideas expressed are made explicit.”

  • Synthesis involves the “putting together of elements and parts so as to form a whole.”

  • Evaluation engenders “judgments about the value of material and methods for given purposes.”

In your presentation, I would like to see the HIGHER levels of learning.

KNOWLEDGE just means repeating what is written in the book. You can demonstrate UNDERSTANDING by showing the use of the causal relationships that the book mentions. Explain the THEORY (or the higher level understanding) that the book is trying to develop, to EXPLAIN the facts the were observed. For example, the first chapter sets out a scene of economic devastation, and the rest of the book is an attempt to EXPLAIN WHY it happened.

The Third Level is Application. Once you understand a theory, then you can apply the theory to try to understand OTHER PHENOMENA, not mentioned in the book. When you do this, you will demonstrate the THIRD level of learning - relationship between THEORY and many different types of EVENTS.

The FOURTH level involves seeing the inter-relationships between several different theories. For example, we have been studying MMT and Minsky all semester. You can try to relate Mian and Sufi Theories to this earlier theoretical framework. See if it matches or if there are conflicts and contradictions between the two different analyses. The Fourth level involves the inter-relationships between different theories.

The FIFTH level involves SYNTHESIS -- this means developing a FOREST level analysis -- a BIG PICTURE into which all of the theories and facts fit together. This will usually be broad perspective, which may or may not be present in the Mian and Sufi book. For example, several ideas of MMT and Minsky are NOT present in Mian and Sufi, but it may be possible to organize what is being discussed using these ideas.

The SIXTH level requires judgment and evaluation of competing theories. Theories are compared with each other in light of the facts on the ground. One can decide which one provides a better explanation of the facts. It is possible that both theories have strengths and weaknesses, or perhaps one of the theories dominates the other in terms of explanatory power. Usually, making such an assessment requires some detective work -- it is not immediately obvious. Mian and Sufi spend a lot of time comparing two theories and showing that one works better than the other, so you can get some idea of how this job is done.

Remember that all presentations are INDIVIDUAL basis - the groups are just there to provide feedback to each other. Each presentation should be 15 to 20 minutes. Groups of size 3, if they do 20m each will finish in one hour, leaving half hour for discussion. Groups of size 4 can take from 1 hr to 1 hr 20m. If the material in the book is insufficient, FIND additional relevant material. Look at the REFERENCES given in the book, and use the different levels of understanding to go beyond what is present in the book.

This presentation will be treated as the Midterm. I will grade according the Bloom's Taxonomy - I will try to assess the level of understanding displayed by the student, and judge the different levels to see if they are there or not in the presentation.

In addition, I will ask all students to grade the presentation on a LIKERT scale 1 to 5. 3 is the NORMAL score which represent AVERAGE. The students should try to answer ONE QUESTION about the presentation -- How much did the presentation ADD to their understanding of the material. If they learned an average amount of stuff within the time of the presentation, then they should score it as 3. If they learned NOTHING new, either because of lack of clarity, or because the presenter just repeated what was in the book without adding anything, then they should score it as a 1 point for the WORST score. If you learnt a LOT from the presentation you should give it a 5. If you learnt more than average than it is a 4, and less than average is a 2. In general you should try to ensure that the typical score is 3 -- that is the baseline score which everyone starts with. If they do better than average you can add 1 or 2 points depending on how much better. If they do worse than average you can subtract 1 or 2 points depending on how much worse.

Nisa will collect the scores and compile them for the student presentation.

Questions:

1. M&S HoD starts by stating that we must collect data, before we start studying theories. Explain why this approach is not valid - data must be collected to differentiate between competing theories. It cannot be collected independently of any theory. Show how the "data" presented in the Chapter is actually data which supports their own theory of levered losses, and which goes against the standard theories used by economists to explain the GFC.

ANSWER: The writers of the book are economists and they are well aware of the existing theories which explain the economy of the nations. For example the Fishers debt deflation theory which relates level of debt in a country and its impact. Also there are theories, those of the traditional or orthodox economists who don’t believe in any relationship between the debt, amount of money and that of credit. These theories provide a holistic or broad theoretical frame work, or say this is a view of forest which has so many trees in it, which are counted as facts and figures.

M&S, while already having knowledge of Fisher’s Deflation and other theories, encounter the increase in the debt to GDP ratio during the GFC preceding years. These facts or trees matched exactly what was explained by the Fisher’s theory, so the trees of the forest were found and supported what had already been theorized. Once a relationship was determined, they further investigated the causes of the increase in debt and so on, which further strengthened their point of view and helped them present it. On the other hand, the debt to GDP ratio and associated facts are not supported by theories like General Business cycle theory, and therefore all the facts which could support it have not been searched and or discussed.

Keeping in view above arguments, it is sound to say that the facts are collected to support our prior beliefs and ideology. No facts by themselves can help us understand social phenomena unless some abstract thought process is involved in the background to explain it. That is the Forest-tree approach of going specific from general or abstract.

2. Keynes noted the sharp decline in Aggregate Demand. Show that this is common to GFC 2007 and GD 29. Keynes did not pick up on the role of debt (although Fisher's Debt-Deflation theory did). Show that data suggest important role of debt in both crises.

ANSWER:

According to Atif Mian and Amir Sufi, debt is the main cause of GFC and GD. Due to huge debt burden in these crisis times the people purchasing power capacity became low and aggregate demand started to decline and due to this decline, the production capacity effect, businesses shrink as they lowered their supply and to manage their cost they start downsizing or lower wages. This unemployment and lower wages cost more reduction in aggregate demand. A study conducted in the USA from 2000 to 2007 there was a huge increase in debt from 1.4 to 2.1 % in only 7 years. similarly, David Beim conducted a research in which he examines the data from 1920 to 1929 and the debt ratio increase triple times than before. These data show that the main culprit of these crises is a huge level of debt.

3. Explain the three competing theories for why the GFC occurred, and the role of Debt and Aggregate Demand in these theories. What does the data say about these three theories.

ANSWER:

Fundamentals View: An economics recession may occur due to sharp changes in the fundamentals of the economy like Employment, Inflation, Natural disaster, Political change or false high expectations etc. Take example of inflation. During high inflation, purchasing power of people will decline, they will be able to acquire less commodities and so inventories will start rising. Businessman will curtail production partly due to accumulated inventories and partly because raw material will be expensive. GDP will decline along with employment. Nominal interest will rise causing rise in national debt. Similar effects may be observed in case of natural disaster such as earth quack, flood or even a war.

Animal Spirits View: Economics recessions may occur due to insane, irrational and volatile beliefs, which basically were not formed by any rational process. This term was first of all used in Economics by J. M. Keynes in his 1936’s famous book. His original words are, “Even apart from the instability due to speculation, there is the instability due to the characteristic of human nature that a large proportion of our positive activities depend on spontaneous optimism rather than mathematical expectations, whether moral or hedonistic or economic. Most, probably, of our decisions to do something positive, the full consequences of which will be drawn out over many days to come, can only be taken as the result of animal spirits—a spontaneous urge to action rather than inaction, and not as the outcome of a weighted average of quantitative benefits multiplied by quantitative probabilities.”

Animal spirit is due to psychological and emotional factors which lead the investors to immediate decisions when they observe volatility in capital markets. Due to animal spirit investors take pessimistic decision which drops down the otherwise promising market. Investment consumption and GDP may decline due to pessimistic decisions of the people which were made in an uncertain environment. We may relate it to 2008 GFC in the sense that people were expecting house prices to rise for ever which logically was not true. When prices fell a little bit, people immediately lost confidence in investing in housing industry. Their fear caused a further sharp decline in prices. Leveraged loans on the basis of mortgage produced further problems and whole of the economy went into recession.

Banking View: According to banking view hypothesis, if financial or banking sector stops to give loans to people then the recession starts. Before recession banks go on disbursing credit which causes accumulation of assets in economy. Paul Beaudry, Dana Galizia and Franck Portier (June 2014) have gathered data to show that there is a very strong positive correlation between capital over-accumulation prior to a recession and then subsequent severity of the recession. In the fact durables and houses too accumulate before recession due to easy bank credit. Then suddenly something wrong happens and downturn starts. Banks find it difficult to recover previously disbursed loan. They stop further lending causing the problem to become more severe.