Macro Economist Simon Wren-Lewis provided five signs to identify fraudulent economic arguments.  It is amazing what happens when you apply these five signs to the response to the Great Financial Crisis endorsed by macro economists.

Let’s walk through the five signs one by one.

The first sign that the wool is being pulled over your eyes is wildly exaggerating your opponents case. It is so much easier to attack a straw man.

We don’t even have to exaggerate the case.  The consensus view of macro economists was we were facing a second Great Depression.

Was this true?

No.

Commonsense suggested the policymakers who lived through the Great Depression would have taken steps to ensure we couldn’t repeat that experience.  Commonsense was right.  As Nobel prize winning economist Paul Krugman discovered a decade after the acute phase of the crisis, what prevented another depression were automatic stabilizer programs.  These programs were initially put in place in the 1930s and expanded in the 1960s.  Barring repeal of these programs, a depression wasn’t possible.

A second sign of a fraudulent argument is to focus on a single study that supports what you want to say, and ignore all the rest.

Who can forget “This Time is Different”?  This fundamentally flawed single study was cited in support of numerous bad policy responses to the acute phase of the Great Financial Crisis.  Perhaps no place was this study more influential than in the choice to bailout the banks.

Consider for a moment the study’s biggest flaw.  It claims to have looked at 8 centuries of financial crises and missed the fundamental changes in how a crisis should be responded to that occurred after the Panic of  1907 and during the Great Depression.  After the former, the Federal Reserve was created with responsibility to act as a Lender of Last Resort.  During the latter when the Fed balked at this role in the early 1930s, the FDR Administration added deposit insurance.  What deposit insurance did is make the taxpayers an insolvent bank’s silent equity partner.  As a result, the Fed could act as a lender of last resort regardless of whether a bank was solvent or not.

This represented a significant break from the past and opened up an entirely new way of ending a financial crisis.  That way was to keep the losses in the financial system rather than put the burden of these losses on the real economy.

This was first done successfully by the FDR Administration in 1933 and by Sweden in the 1990s.  The result in both cases was a self-sustaining recovery (in the US, this recovery was stopped in 1935 by the Fed raising interest rates and triggering another recession).

Of course, the single study hid this fundamental change in how a financial crisis should be responded to.  In doing so, it made bailing out the banks look like an acceptable, even good idea.

This leads to a third tactic: tar academic work that goes against what you say with some broad assertions that have only a grain of truth.

This is a frequently used strategy of the Opacity Protection Team.  In my book, Transparency Games, I have 60+ categories of claims that contain a grain of truth, but are actually false.  For example, the Opacity Protection Team including many macro economists likes to say too much disclosure will confuse investors.  Is this true?

If JP Morgan disclosed all of its current exposure details, would Bank of America be able to assess its risk?  Would JP Morgan be able to assess Bank of America?

If these banks couldn’t assess the other bank, this isn’t a bug, but rather a feature of transparency.  It suggests these banks are too big and need to be shrunk in size until an investor could know what they own.

One of the reasons banks providing transparency into their current exposures was needed was to ensure they recognized all their losses on their bad debt exposures (see above for keeping losses in financial system and not putting burden on real economy).  Naturally, this was inconsistent with bailing out and foaming the runway for the banks.

Another tactic that if you see being employed you should start to worry is to impugn the motives of your opponents….Being good academics they instead question the model he uses (e.g. no gravity) and how he uses it.

Macro economists still get defensive when you bring up the Queen of England’s 2008 question of how come they didn’t see the crisis coming.  The truth is by design their models didn’t allow a financial crisis to happen.

But more importantly, throughout the acute phase of the financial crisis and its aftermath, macro economists continued to make policy recommendations.  Why would anyone think having missed seeing the crisis coming their policy recommendations would be helpful?  They wouldn’t.

So what would be the motive for macro economists to open their mouths and effectively drown out the voices of people who did see the financial crisis coming and who had an idea what it would take to end successfully?

To this day, macro economists still do not know what caused the crisis, how to respond to the crisis or how to prevent the next crisis.  At least that is what the Financial Times’ Martin Wolf said when he suggested what the macro economics profession has to work on a decade after the acute phase of the crisis.

The fifth is less obvious to the non-expert, which is to inconsistently use lots of broad brush statistics that do not get the heart of the issue, or which are problematic for other reasons.

I really like this one and the macro economists’ focus on GNP.   I think the following quote perfectly encapsulates what is wrong with this focus:

In 1959, noted American economist Moses Abramovitz cautioned that “we must be highly skeptical of the view that long-term changes in the rate of growth of welfare can be gauged even roughly from changes in the rate of growth of output.”

Oops.  We have had since 2008 a massive disconnect between the section of the real economy devastated by not having the banks absorb losses on debt that could never be repaid and the rate of growth of output.  You can see this disconnect in the rise of populism in the UK (see Brexit) and US (see Trump).

Despite this macro economists want to say their recommendations have been helpful.  When in reality, they have been fraudulent and caused a great deal of harm.