It’s not the economy, wise guy!

According to my friend Howard, economists have it all wrong, and none of their econometric models include the most important variable in the equation: stupidity (of the investing community). Most particularly, he claims, in the good old USA , where the Keynesian assumption of rationality is, more often than not, absent.

I met Howard two years ago in a chat room of a Dutch newspaper. A professor of mathematics at a German gymnasium, his interest in the stock market runs hand in hand with his love for economics, field in which he holds a graduate degree from an Ivy League school.

For an American expatriate married to a German girl, and raising a family in an emerging EU, what has happened in America during his two decades of exile is far beyond Howard’s comprehension. Or so, he says, when referring to the changes which have taken place in the business-financial sphere. And he reiterates those feelings to me with example after example in his weekly epistles by e-mail.

Howard spends many a Bavarian evening watching CNBC, and reels at what he calls the oftentimes inane commentary from its broadcasters. He cannot understand how easily these folks can be conned, and how often they have been conned. “They are,” he says, “the eternal optimists with intermittent pauses to allow for the surfacing of indisputable reality, as was the case with the bubble bursting for internet stocks, or the fraudulent behavior in the management of some high profile, pseudo-successful firms.” To my friend, these broadcasters are not true financial journalists but, at best, a cheerleading group, desperately searching for any reason to bring the bulls to the arena. In reality, perhaps these individuals represent the ever present optimism that has always permeated the American psyche. Or perhaps, as he puts it, they represent the economic ignorance in the American investing community at large.

“It is the insatiable corporate greed, defended by en ever-increasing, more money-dependent, political system, that is turning American values upside-down,” Howard contends, ”but these guys at CNBC don’t buy that.” As an example, he cites the recent interview granted Arianna Huffington to promote her book, ‘Pigs at the Trough.’ She was drilled as a purported heretic before Torquemada, and her free-enterprise beliefs put to a test. Howard does not only agree with Arianna in substance, but quantifies the problem that surfaced with Enron, WorldCom et al to be of pandemic proportions; not so much in the fraudulent aspects, but in the anti-public and anti-stockholder attitudes of management.

With dismal results in my most recent investments in the stock market (1999), I thought that any financial advice from my friend, even in general terms, might give me a little confidence to get back in the market. Unfortunately, his pronouncement on “the state of the market” was not exactly what I wanted to hear. For Howard, both the Dow Jones and the NASDAQ indexes are still 10-20% higher than they ought to be, if the representative stocks that comprise these indexes were judged by the same standards as those in the DAX or other, more conservative, international indexes. Not having the desire to go through the trials and tribulations of prior experiences which saw my wealth decimated, I will remain in the sidelines.

We seem to have elevated economics to the same level as that of an exact science, erring in so doing. It will probably serve us better if we keep economics as a social science, which is a way of saying that it remains an art… with mathematical coatings to give it an appearance of scientific respectability. As long as there is no uniform view, or collective wisdom, among economists, we should not act as if we are dealing with scientific principles. The clues that we get when we hear economists talk about the difficulty in calibrating fiscal policy, or the difficulties in exercising fiscal restraint, are indicative of how far we need yet to go in economics before the horizon opens to the scientific method.

Two days ago, the venerable Greenspan made his appearance before the congressional Joint Economic Committee in his customary tunic of non-inflammatory eloquence, saying little and offending none. Using the same restraint of years back, when he offered a mild accusation for the market excesses (exuberance, indeed!), he could not bring himself to criticize the administration’s proposed tax cut, and expressed only some fear for the danger in lack of fiscal restraint after the surpluses recently experienced. Perhaps someone should tell the Chairman of the Federal Reserve that temperance is no virtue in this case, and that better advice seems to be coming out of non-economists on this issue, such as billionaires Buffett and Soros, than from the expert himself. Well, the folks at CNBC will stay happy, and so will Bush & friends. The tax cut is now a done deal."

Perhaps the alert level in our pocketbooks should also go to orange, if not red, as we see our representatives in Congress redistribute wealth so as to make us a more downward-mobile society. Anyone care to remind our leadership in Washington, both of the legislative and executive variety, that the American dream was based on an upward-mobile society? As my friend Howard would say: “It’s not the economy, wise guy!”