Analytical and political sins of Reinhart and Rogoff

I read Reinhart and Rogoff's book "This Time is Different..." Very good piece of empirical work.

As a graduate student, I also enjoyed the now classic textbook by Obstfeld and Rogoff when it was still in manuscript form. I learned that the Keynesian ideas were alive and well even with a rigorous micro-foundation supplied to it.

But I would agree that Reinhart and Rogoff did commit an analytical sin in their 2010 paper about growth and debt, that 90% debt-to-GDP is somehow a clear marker for dramatic slower growth. It turned out there was an Excel error and an unconventional weighting scheme that caused the result.

Paul Krugman has been merciless in criticizing Reinhart and Rogoff position regarding 90% debt level, mainly because their paper had provided the wrong intellectual support for austerity policies. At times like post financial crisis of 2008, economists have the responsibility to provide sound economic advice based on sound empirical and theoretical work. When you mis-led in a critical way, you've done so much more harm than in other times. This is not the usual academic discourse, it is political with immense economic consequences.

In their latest response, it looks to me they didn't really address the analytical and political sins pointed out by Krugman many times on his blog. The way I read it, Krugman never sees it as a personal matter, it has always been about policy response to the crisis.

When you've committed a coding error like that, what should you do? They should really go back and clear up the wrong messages that have been sent by economists and politicians based on their mis-leading result. They didn't do that. So the sins remain.

Of course, Reinhart and Rogoff are not the only ones to blame for claiming that 90% debt level is the alarming threshold. Commentators and politicians bear even more responsibilities seizing on this highly debated piece of sloppy work as "proof" that austerity was the right response to the crisis.

Don't fight the Fed

Ignore the typos, get the point, and don't fight the Washington Whale.

Is it really just that simple? A lot of hedge funds aren't getting the macro picture right and losing billions? It's quite plausible.

Driven to be stupid

This is just unbelievably stupid: 

Harvard's Niall Ferguson Apologizes for Keynes Remarks.

The guy has been wrong so many times about debt, about Keynes, about austerity..., yet he is so driven by his ego that he just has to prove to the world that he is indeed very very sincerely stupid. 

Ferguson's Epic Fail.

Awesome Failure of Some Well-known Economists including Lucas, Fama, Taylor.

Why does this thing matter? Well, it's really about who you should completely ignore despite profound-sounding words and impressive credentials he may be giving you regarding macro and investment. And who you should pay close attention to.

Ignore Martin Feldstein if you can. Ignore Charles Plosser and Richard Fisher even if you cannot.

Win against the charging herd

Institutions have been selling AAPL shares like mad over the last six months. Fidelity's Contrafund is a prime example, along with many large hedge funds.

Danoff was hardly alone in trimming his Apple position. Some 870 institutional investors pared their Apple holdings in the most recent reporting period, while 419 sold off their entire positions, according to Thomson Reuters data. That compared with 254 investors initiating Apple positions and 1,185 adding to existing holdings.

The charging herd drove the shares all the way down to $385 on April 19. They always overshoot. And that's when it's a great time to average down. Looks like many smaller investors did just that. Not a bad way to win over the longer horizon than a couple of quarters.