Common Sense and The Perils of Predictions

Guest essay by Michael R. Smith, C.C.M.

PredictionsForDisaster

Forbes, “Absolute Return” column, April 21, 2008, page 246:

Here’s another name you should own, Freddie Mac ($29 per share)Freddie is cheap at 1.1 times book [value].

Less than five months later, Freddie Mac’s stock was worth 25¢ per share, a loss of 99%.  It has since recovered to 70¢ per share, so the loss is “only” 97.6%.

A forecast of a stock of a single company five months into the future seems easy.  The company had government backing (federally sponsored corporation).  What could go wrong?

Yet, the forecast published by Forbes, short of an outright bankruptcy, could not have been more inaccurate.  It is worth examining how a situation that seemed rock solid (government-backed securities!) became catastrophic to see if there are any lessons that might apply to the atmospheric sciences.

The assumptions that Freddie Mac (and other financial stocks) were low risk was primarily a result of computer models.  As one expert stated (using pseudonym at http://blogs.zdnet.com/Murphy/?p=1265 ),

The problem is inherently complex – imagine being asked to value a portfolio of 10,000 residential mortgages issued to a total of something like 17,652 individuals. Each mortgage balances some issue amount against some payment stream; each has had zero or more payments recorded against it, each has an initial interest rate; an interest computation method; zero or more early payment opportunities; some mention of late or missed payment penalties and conditions, and an expiry, renegotiation, or call date.

While I do not doubt that is “complex,” the level of complexity is miniscule when compared to the complexity of the earth-atmosphere-ocean system and their interactions. Yet, faith in these model valuations led to a prediction that Freddie Mac stock was “cheap” when a meltdown of the financial system, largely due to the incorrect valuations and risk estimates by computer models, was less than 180 days away.

After the meltdown occurred, a second Forbes article stated, “All existing models for calculating risk, he [Nassim Taleb] says, should be thrown out because they underestimate extreme price swings. ‘The track record of economists in predicting events is monstrously bad,’ he says.”  (February 2, 2009, p. 21)  Of course, we learn this after our home values and values of our 401K’s are wrecked.

Given the failure of these models to predict the implosion six months hence, would you invest the remainder of your 401K on what the same model predicts for the next six years or, if you are in your 20’s, what it predicts for sixty?  I don’t know what your answer might be, but common sense would indicate applying the forecasts from these models to your portfolio with extreme caution.

June 1, 2009, we learned from The New York Times that “Models’ Projections for Flu Miss Mark by Wide Margin.”  The model predicted, according to the Times, “by the end of May, there would only be 2,000 to 2,500 cases in the United States…  On May 15, the Centers for Disease Control and Prevention estimated there were upwards of 100,000 cases in the country…”

Just six months earlier, the models’ predictive capability were touted because of real time input from Google (www.cidrap.umn.edu/cidrap/content/influenza/panflu/news/nov1308google-jw.html ).  Now, the flu has been declared a “Pandemic” by the World Health Organization (/www.pandemicflu.gov/ ) in spite of the modest number of cases projected to be in existence by June, 2009, by the models. Another critical short-term modeling failure.

Question:  If the model predicts low risk for the next six months, would you decide to forego a flu shot?  Again, your answer might be different, but common sense would dictate getting the shot.

How do these examples relate to climate modeling and policy?

We currently have climate models that have missed the fact that atmospheric temperatures peaked 11 years ago and that oceanic heat content has, at best, failed to increase. See: http://climatesci.org/2009/03/04/large-uncertainty-in-the-simulation-of-the-global-average-surface-temperature-by-the-ipcc-models-a-study-reported-on-the-weblog-the-blackboard/ , http://climatesci.org/2009/02/09/update-on-a-comparison-of-upper-ocean-heat-content-changes-with-the-giss-model-predictions/ , among many others.

Given the inadequate performance of these models over the last 5 to 10 years, why do we believe we can make accurate, highly specific forecasts 50 to 100 years in the future? Is it because we are so close to the problem we are blinded to the dangers like the economists who did not see the meltdown coming?

Almost no one familiar with meteorology or climate models would disagree that they are more complex than the mortgage valuation or influenza prediction models.  The basic processes of the earth-ocean-atmosphere are incompletely understood and we barely understand many of their interactions.

We also know that forecasting the weather beyond five days is dicey at best.  Then why are we making 29,000-day weather forecasts? Don’t think we are doing that?  Consider the following:

“By the period 2080-2099, devastating heat waves of the kind that killed more than 700 people in Chicago in 1995 will occur three times per year.”  (USCCP, p. 119, citation below)

That is a weather forecast – a forecast of specific meteorological conditions at a specific time and place.  The document is filled with similar predictions, along with recommendations based on those predictions.

We are sometimes told that climate forecasts can be made because the “weather” errors will be cancelled out because they are “random.”  Here is what was said about the mortgage computer models,

Now, because you can predict roughly the probable range for most of these assumptions but not the actual values the variables involved will have for each of the time periods you have to consider, what you do is write a monte carlo simulation in which you try tens of thousands of value combinations and plot the results to see what, on average expectations, the portfolio might be worth.

Notice, that at this point even something as large as 0.0005% error in the outcome would be completely insignificant – so randomization error should have no effect, right?  (op. sit.)

It was believed by most the mortgage instruments were safe because the errors (i.e., a higher default rate of subprime lenders) would cancel out (because the risks were spread) and because, if desired, default insurance could be purchased from institutions like AIG.  Of course, AIG used similar models to determine its risk.  We just learned how well that worked.

In spite of these spectacular failures of less complex computer modeling in economics and public health, the atmospheric sciences seem to be making similar miscalculations. If your common sense would lead you to disregard these models’ forecasts when planning your portfolio and whether you get a flu shot, I would suggest we adopt a much more modest approach to the use of climate models. While they are useful research tools, the numerous uncertainties (cloud feedback, particulates, volcanic ash, the current quiet sun, etc.) are so great we cannot claim to have forecast skill decades into the future.

Otherwise, when I read, during a period of falling temperatures and ocean heat content,“Global warming is unequivocal,”* I hear, “Freddie Mac is cheap.”

Michael R. Smith is CEO of WeatherData Services, Inc., An AccuWeather Company, and a Fellow of the American Meteorological Society.  This weblog represents his personal opinion. AccuWeather’s Global Warming Blog can be accessed at: http://global-warming.accuweather.com/ .

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80 thoughts on “Common Sense and The Perils of Predictions

  1. Thanks, Michael.
    Its a good analogy with the financial systems. In the finance world we know ALL the physics, and ALL the maths. We know the actors involved and we know the range of possible actions. Yet we still get it totally wrong.
    We can make similar parallels with the Kyoto / Copenhagen ideas. The idea that we can have a world committee that will stop the world’s climate from ever changing for the rest of time. Why not start off with a much simpler project like world peace ?

  2. Predicting is hard. But some have more foresight than others. Trouble is, you never know who is making the best prediction until after the fact. And since they tend to be “flexible” predictions are always far removed from testable hypotheses. And given the obvious tendency of prophets to fail, it is puzzling that so many believe them…

  3. O/T. Space site has sunspots 12 but says on picture caption that sun is blank i.e.: spotless. What’s up with that?

  4. Every model that works, works until it doesn’t. What separates the working models from the failed models is the range of conditions that went in to building it and the understanding of the relationships among the contributors. Any chaos-rich system, be it climate, finance, organization or health, can be properly modeled only by those who approach their topic with extreme humility. Truth is not only stranger than fiction, it is far stranger than recent history.
    Because so much data became available with the advent of satellite measurements in 1979, near the end of the mid-century cooling trend that had climatology students like me writing papers on the coming ice age, I believe that many modelers have put too much credence into the available rich satellite data instead of the existing but less-available contemporary accounts of temperature from non-satellite sources. The only things that started in 1979 (besides maybe Rickie Lee Jones “Chuck E’s in Love”) were satellite measurements of temperature and ice extent. How many references do we read to “Highest Ever” (temperature) or “Lowest Ever” (ice extent) as if history began with the new data?
    Financial models fail when the real world behaves in ways that are beyond what the model anticipated. Massive mortgage defaults were never allowed for in the financial system. What has not been allowed for in GCMs?

  5. I predict that, at the end of their lives, everyone will die. Beyond that, everything about the future is speculative wishing and hoping, whether arrived at via séance or supercomputer (though the séance is cheaper).

  6. Don’t forget we have all ready run out of natural resources (Club of Rome). The Kuwaiti oil fires from Desert Storm will prove Nuclear Winter models are correct. Soviet style Marxist economies are superior to capitalism and will never fail. And so it goes…

  7. Well, to be fair, the models were assuming “normal” market conditions. What we had was a system greatly skewed by government manipulation. How would climate models hold up in the face of some sort of intentional manipulation by human beings?
    In the financial markets where had a situation where Congress mandated that Freddie Mac and Fannie Mae have at least 50% of their loans with the “underprivileged”. This forced them into a situation where they were forcing the loan originators into absolute lunacy in order to get the quotas met. Washington Mutual, for example, with their “Power Of YES” program had given up even doing income verification. If you could walk into the branch, you got a loan. It eventually became almost a sort of ponzi scheme where bringing all these people into the housing market inflated demand for housing which inflated prices. As prices rose, the resulting equity in the loans acted to lessen the “risk” in the models because what was a 100% “no down payment, interest only” loan now had 15% or 20% equity.
    Then things REALLY started going stupid. They started giving “reverse amortization” loans. These are where you not only don’t pay anything on the principal of the loan, you don’t even pay all the due interest. The idea being that appreciation equity would outpace the growth in the balance due to accumulated unpaid equity. So you get a 6% loan but pay only 4% interest with the other 2% going onto the loan balance. As long as the property appreciated at greater than 2% a year, everybody wins. AND they were betting on property values increasing forever. And thanks to the Sarbanes/Oxley “mark to market” requirements, when values went up on a new home sale, the lenders could mark up the value of ALL their loans in that market. But that turned out to be a double-edged sword.
    Then two things happened. First they reached the bottom of the barrel. There were fewer and fewer people to give loans to. Everyone that wanted one had one. Then interest rates went up. When rates went up, adjustable mortgages adjusted up. Marginal borrowers began to default. Foreclosures appeared on the market selling for bargain prices. Now because of Sarbanes/Oxley, when a house sold at below market, they had to mark DOWN all their investments in that market. That forced them to have to come up with more reserves meaning take the money they would otherwise lend out and hold it in the vault as reserves against defaults. They were holding minimum reserves because a guy named Geithner at the New York Federal Reserve ruled that since the values of the underlying assets were increasing, they could consider the loans practically “riskless” as long as they carried default insurance. AIG was selling the default insurance. They were insuring “riskless” loans and collecting a monthly premium for it. A giant cash cow.
    Now once property values began to defauly, AIG had to pony up the “default insurance”. Declining median prices forced the lenders to mark down all the assets in these markets, stop lending, and build up reserves. Now that the loans were no longer “riskless” and no longer had any appreciation equity (and likely “under water”) AIG’s reserve requirements for premium insurance went through the roof. That program when from a cash cow to a cash sponge practically overnight. There wasn’t enough capital in the markets to provide AIG with what it would need. So the whole string of dominoes collapsed.
    But the real tragedy is that the people who created that whole mess are now in charge of cleaning it up and so far they have done so by shoveling money at the problem.
    I don’t think we have so many positive feedbacks in the climate going unmodeled as we had in the financial markets. TARP was supposed to be a circuit breaker by buying up the toxic assets easing reserve and insurance requirements but so far not a dime of TARP money has been used to buy up those toxic assets it was billed as being for. Instead it has quite literally gone into the reserves of the lenders, pockets of supporters and used to leverage out executives who are not cronies.
    This collapse was brought to you by government manipulation of the markets. They were warned in 2005 and in 2007 that this exact scenario was coming. YouTube has video of Maxine Waters and Barney Frank saying that those warnings were figments of the imagination of their political opposition.
    Expect the same thing to happen when government starts trying to manipulate climate.

  8. OK, this is a good summary of Mr Smith’s opinion. But, it is a waste of bandwidth when it is a personal opinion.
    As a Fellow of the Amer Met Soc, what is Mr. Smith doing about getting an official pronouncement from the Society about this?
    Or at the very least, getting any official statements from the Society about AGW withdrawn.

  9. observer (20:41:02) :
    O/T. Space site has sunspots 12 but says on picture caption that sun is blank i.e.: spotless. What’s up with that?

    Sunspot group 11020 had a quickie display; looks to be gone now. Even that group’s earlier spots were hard to see from SOHO. Though SWPC listed an event as being observed Friday, their report made no mention of it. See:
    http://www.swpc.noaa.gov/forecast.html

  10. Fany Mae, Freddy Mac, Managed on the basis of State Directives, selling mortgages to those who could not afford them and those who speculated with real estate, triggering the real estate crises that turned into the financial crises and now into a depression.
    How much more State meddeling can we afford?
    After this debacle the State is burning money at a rate never seen in history.
    How can people who grab for power with a track reord of mismanagement make responsible policies in regard to our climate and our economy?
    Although they state otherwise….they can’t!
    The bigger the Government, the bigger the ambitions, the higher the taxes,
    the bigger the mess.

  11. On May 15, the Centers for Disease Control and Prevention estimated there were upwards of 100,000 cases in the country…”
    As of yesterday, June 12, the CDC was reporting 17,855 known cases in the United States.
    http://www.cdc.gov/h1n1flu/update.htm
    The World Health Organization reports 29669 cases world wide but are reporting only 13,217 cases for the United States, substantially under-reporting, but this is probably due to lag-time for the reports getting into the system.
    http://www.who.int/csr/don/2009_06_12/en/index.html
    I haven’t looked to see what the projection on likely unreported cases is, but the confirmed cases are substantially under the number suggested in this post. It would be nice to see documentation of provenance for these figures.

  12. Your argument is flawed in its basic premise; you are using logic and reason. It’s like bringing a knife to a gun fight. Your opponents are politicians of every stripe that smell tax money to be made from AWG and greens, environmentalists and other anarchists who won’t be satisfied until we are all living in mud huts. Neither use logic or reason and it’s senseless to combat directly them that way.
    We live in the era of “the short attention span”; be thankful for it. Ideas that took decades or centuries of thought to digest in the past now pass through the body public in a few months to a few years. AWG is well on its way past the peak of the curve and is starting its downward slide on the backside.
    Your opponents used fear and uncertainty to push their cause; emotion is a far more powerful weapon than reason. What offended me was twisting science into becoming their handmaiden; science was the last pure and unpoliticized respected authority and it was whored-out into buttressing the unsupportable pro AWG viewpoint. Particularly vile was the parade of 10,000 scientists thing as if science depended on consensus.
    The first sign-post of trouble in the AWG camp was the assertion “the science on this subject is settled” comment. In effect, that statement said no further arguments would be brooked. It struck me as being hysterically defensive and uncharacteristic of an assured and defensible belief. It was then that the tide turned.
    The public does have a short attention span. Its focus is helped by the current economic downturn to concentrate on the essentials instead of esoteric matters better afforded when times are good. Secondarily, the growing weight of recent experience helps as well; summers are cooler and winters are colder than before. They have been for a decade. Everyone notices that and throws this practical experience against the arguments to the contrary.
    My guess is the AWG fad has passed its zenith. Watch out for the politicians though, they will be the last to give it up once they have gotten the scent of money.
    Mariss

  13. I just noticed the following Google Ad showing up under this article:
    Ads by Google
    SALE – The Great Warming
    with Keanu Reeves and Alanis Morissette – only $9.95
    http://www.thegreatwarming.com
    How many hits on that do you think they’ll get from WUWT readers? LOL.

  14. Liberals don’t understand that the financial crisis was created by REGULATION as Crosspatch explained above. It was the stupid fools that regulated and forced these idiotic loans upon our society. Fannie Mac and Freedie Mae demanded that loans be made that would never have been made in a Free Market, but they had to be. Very similar to the thousands of windmills being constructed, every single one of them mostly with government money. The government makes it a riskless investment mandating that our old fashion electrical companies buy their erratic, intermittent, undependable power that is mostly produced at the wrong time of the day and the wrong season of the year. Then the electrical companies get on the teet, they workforce actually grows to handle this intermittentcy, they charge more and become more powerful and realize playing along has its’ benefit. Of course, all along being led and pushed by the wide-eyed speculators who will stop at nothing to take our civilization down. The graduation party goes on downstairs, what kind of world will these young adults try to make their way in? On with 80% less energy based on some computer theory? No instead, they will just PAY PAY PAY.

  15. Leon Brozyna (21:02:28) :
    I predict that, at the end of their lives, everyone will die. Beyond that, everything about the future is speculative wishing and hoping, whether arrived at via séance or supercomputer (though the séance is cheaper).
    You wrong… I’m eternal… 🙂
    Seriously, I don’t know why the WHO dictated that flu is now a pandemic. Flu is everywhere each year! The difference is that statistics are now of public domain when, before this scare wide campaign, the NHID was sharing information only with members.

  16. The article does not mention Long Term Capital Management, a computer driven hedge fund (based on the ideas of two of its directors who shared a Nobel prize) that went bust.
    Scientific and engineering models may be have more forecasting ability than economic models because economic and financial future events depend on human action, and people do not always react the same way. Some of us know some history and we don’t repeat the mistakes of the past…we make our own mistakes.
    Crosspatch….models do not assume normal conditions…economic models assume that there are relationships between variables and time lags which are true. The model then blows up when the relationship is not true. And I generally agree with the rest of your post.
    Take a look at this site which shows actual unemployment vs the council of economic advisers forecast with and without the stimulus as a current example of model gone wrong.
    http://michaelscomments.files.wordpress.com/2009/06/stimulus-vs-unemployment-may-corrected.gif

  17. Lets get back to environmental management. Engineers traditionally use a factor of safety ( also known as the factor of ignorance ) to cover for all possible uncertainty in their calculations, the actual operating conditions, the quality of constrction materials, etc. As the knowledge base expands and the uncertainty is reduced, the factor of safety is correspondingly adjusted. While the trend has been to smaller factor of safety, it is not unusual for the factor of safety to increase with increasing risk.
    But lets face it, while environmental management would like to project an image of being scientifically based the real stimulus is really by politicians meeting frequently in international conventions, meeting of parties, UN meetings etc. At the end of those meetings a result has to be provided to the public often called a declaration, minister’s statement, etc. As each politician goes to the meeting with their own national interest first and foremost, it is really difficult to come up with a specific agreement so the declarations often ends with vague and high sounding sales slogan. The factor of safety is replaced by vague words like ” precautionary principle”. Dont worry about trying to establish some range of factor of safety –if the potential impacts is hgh enough then act. In other words — the expected value is the prduct of zero and infinity. So in climate change, the proponent of AGW is harping at the infinity term or near infinity with the other party looking at the near zero probability.

  18. Alas, there is nothing common about having sense enough to see the obvious when all the rent seekers surrounding you are screaming about the end of the world.

  19. Climate modeling suffers from more than complexity. Lackof accurate boundary conditions, insufficient understanding of key variables i.e, air pollution and aerosols and most of all wrongheaded assumption about the existence of positive feedback. There are plenty of arguments against existence of positive feedback, the workof Drs. Lindzen and Spencer, paleoclimatic data and the fact that any system controlled by positive feedback is inherently unstable.
    There are only two things there that support positive feedback.
    One, the rather childish assumption that increasing temperature will result in more atmospheric water vapor concentration and increased greenhouse effect. Implied in this assumption that the water vapor will just stay there and will not move, precipitate aor contribute to cloud formation.
    Secondly, the much more solid knowledge that without assumption of positive feedback, the whole edifice of global warming will come crashing down leaving its proponents without a government grant to support their lifestyle.

  20. crosspatch (21:11:17) :
    Expect the same thing to happen when government starts trying to manipulate climate.
    ————-
    Remember this one from the G-8 global warming deal. Oh how we laughed:
    “Merkel and Blair also suggested a target of keeping global temperature increases to less than 2 degrees Celsius by 2050, which is not part of the deal.”
    I remember it like it was yesterday but it was, in fact, June 8th, 2007. I had visions of some great big German climate contraption with, of course, stainless steel dials and knobs, and blue, make that green, lights. Of course, the climate temperature setting would be a dial about three feet in diameter, with the temperature settings in big white letters around it, and the photo op would be Angela turning the dial to whatever temperature the very important Committee had decided was to be the global setting.
    The real scary thing though is that they actually believed it.

  21. You could make quite an impressive list of these “Government Experts Say” stories.
    AIDS, SARS, Avian Influenza and our latest Porcine Bogeyman.
    We in the UK are now told that our Swineflu epidemic will now strike in the Autumn, when the educational institutes are full of students (Funny, most are still full now)

  22. “O/T. Space site has sunspots 12 but says on picture caption that sun is blank i.e.: spotless. What’s up with that?”
    You aren’t the only one confused:
    sc24.com: “The sun received a sunspot number of 12 today as Sunspot 1020 re-appeared. I was at work all day long and it looks like I missed the 2 small speck show. I dont know how it received a sunspot number, but it did.”
    This isn’t really OT, because as you know all the ‘experts’ have been predicting a massive sc24 and now that this isn’t happening they are claiming it will be near average. So, to keep their prediction on target, the spots must follow the curve! The prediction graph indicates and uptick must start now, so they number every spot regardless of how long it lasted. But hey, at least if there is a Dalton minimum repeat we will know that even a cycle that has been recorded as “average” can produce the same phenomena experienced 200 years ago! 😉

  23. “After the meltdown occurred, a second Forbes article stated, “All existing models for calculating risk, he [Nassim Taleb] says, should be thrown out because they underestimate extreme price swings. ‘The track record of economists in predicting events is monstrously bad,’ he says.” (February 2, 2009, p. 21) Of course, we learn this after our home values and values of our 401K’s are wrecked.”
    Michael Smith is unfair to Nassim Taleb. He has been pointing out the perils of prediction for some years. His book “Fooled by Randomness” was published in 2004 and “The Black Swan” was published in 2007.
    A major problem for our society is the inappropriate use of models in many fields. For example in my small home town a planning application has recently been submitted for a new supermarket. The town is notorious for its traffic delays and tailbacks during peak hours. Typical queue lengths at junctions are 60 to 70 cars. The supermarket has employed transport consultants to analyse traffic conditions. The consultants carried out a simple traffic count but did not measure queue lengths. They fed the data into ARCADY, a reputable model developed by the UK Transport Research Laboratory, and concluded that maximum queue lengths during peak hour are 2.65 vehicles long. This is a dramatic error!. The consultants, who clearly have failed to visit the town, have concluded that there is virtually zero queuing and ample capacity for more development.
    In the British armed forces there is a saying, “Bullshit Baffles Brains”. The public official charged with assessing the consultants’ hugely flawed analysis has written: “The Marlow Society base their objection on what is considered to be a flawed computer analysis. It must be remembered that Arcady is only a tool and cannot model how people actually drive. Therefore the figures [that] are produced are theoretical and show the delays that would occur if all available road space was used. The important thing is that the increase in queue lengths, no matter how they are derived, is minimal. I accept Mr Post’s comments on the existing queue lengths but I would suggest this is due to the way people drive rather than a lack of capacity.”
    So, if you visit our beautiful riverside town ever, be warned, Marlow-on-Thames drivers drive differently and fail to use all their available road space!
    Forgive this off-climate deviation, but it seems to me that models, or more importantly, model users are a huge problem in all areas of society from climate change to pensions. Nassim Taleb is a prophet who should be lauded. If Michael Smith had thought to read Taleb before the recent financial meltdown, he would have been forewarned. As Yogi Berra famously said: “Prediction is very hard, especially about the future.”

  24. When I am told by ‘believers’, of these predictions made from computer models, I ask them to imagine themselves in Edwardian England on a lovely summers day in May 1914 and please outline history to the year 2000. No one is game to make such a prediction although all the data is there. How can you predict any chaotic system to be modelled accurately ?

  25. tom (23:02:43) :

    There are only two things there that support positive feedback.
    One, the rather childish assumption that increasing temperature will result in more atmospheric water vapor concentration and increased greenhouse effect.

    I like the choice of words. What do “adults” think will happen?

    Secondly, the much more solid knowledge that without assumption of positive feedback, the whole edifice of global warming will come crashing down leaving its proponents without a government grant to support their lifestyle.

    What does this have to do with lifestyle? I actually have curiosity about what will happen in the future. Oh wait, if the climate is cooling does that mean we won’t be able to apply for grants?

  26. All real scientists know that it is futile to model multi-dimensional chaotic systems. like our climate, and expect to get accurate forecasts of future trends. However, use of models which illustrate the outcome you want to see is a very effective propaganda tool for scaring people into accepting a political agenda which you wish to pursue.
    I think that many climate modellers are similar to astrologers – they both use pseudo-scientific mumbo-jumbo to produce their forecasts, which tell their customers what they want to hear.

  27. Has there EVER been a simulation model of a complex system which was long term accurate?
    I doubt it, because you (1) you never each aspect of the system completely accurately — there is always a little uncertainty; and (2) such uncertainties tend to multiply and grow over time.
    If a butterfly in China can cause a storm in New York, why can’t that storm in New York cause a Little Icea Age?

  28. All Earth Science models are subject to the non-uniqueness principle. It’s not uncommon for multiple models to explain a particular set of observations equally well.
    In the Gulf of Mexico, “bright spots” – seismic amplitude anomalies – are often associated with hydrocarbon accumulations. But, there are a lot of things besides hydrocarbons that can cause bright spots. Models are helpful; but they are far from conclusive. It’s very easy to build a model that predicts that bright spots are indicative of pay in sands where pay has no bright spot signature. These models, though honestly and competently constructed, are fatally flawed because they are predicting something that is highly unlikely and usually could have been ruled out by analogy.

  29. “Well, to be fair, the models were assuming “normal” market conditions. What we had was a system greatly skewed by government manipulation. How would climate models hold up in the face of some sort of intentional manipulation by human beings?”
    And this is characteristic of the failure of many (most?) modeling systems – they can’t accommodate the anomaly that places data outside the errors bars and yet cannot be removed as an outlier because the entire system has been perturbed by its presence.
    Decades ago, Sir McFarlane Burnet was quoted as saying “the only thing you can be sure about in Biology, is that you can’t be sure about anything.” His reference spoke to the inability in biological modeling systems to both fully identify and control variables, most especially will. Chaos rules, and until you can predictably model unpredictable chaotic events, models will never accurately predict beyond the pre-pertubation ground state. Stated another way, the only thing they have some ability to do is model the inter-perturbation period.
    Climate models aren’t predicting anything. They only project a time-linear consequence based on some of yesterday’s information. This is nothing more than navel-gazing raised to a high art.

  30. From Junk Science
    UAH MSU +0.05 °C. Rank: 16/31
    Warmest May in this series was in 1998.
    Average last 12 months: 0.14 °C.
    GISTEMP +0.55 °C. Rank: 5/130
    Warmest May in this series was in 1998.
    Average last 12 months: 0.49 °C.
    RSS MSU +0.09 °C. Rank: 16/31
    Warmest May in this series was in 1998.
    Average last 12 months: 0.18 °C.
    http://junkscience.com/MSU_Temps/Warming_Look.html
    Still waiting for the HadCRUT figure

  31. Common sense is far too complex a thing to reproduce in a computer model so the results of computer models have to go through our own common sense filter. Problem is its an individual thing which can not be described or justified on paper so is often ignored by large organisations.

  32. I predict that someone will predict our predictive model success rate to improve by 99.9% when the first projected prediction comes true.

  33. Crosspatch – re your (21:11:17)
    Very many thanks for that superbly clear explanation of how the crash came about. With your permission, I’d love to “cut and paste” it to a whole bunch of friends, some of whom still believe it was all down to greedy bankers. The fact that the party that was in power in the US when the whole house of cards was set up, is back with both Houses and the Presidency wrapped up should be worrying a lot of people.
    Tim Bromige

  34. “observer (20:41:02) :
    O/T. Space site has sunspots 12 but says on picture caption that sun is blank i.e.: spotless. What’s up with that?”
    It sublimated. It was predicted, so therefore space must be filled.
    I cannot find a GONG, SOHO or UCCLE image of it.
    Nobody drew it (Mt. Wilson, Catania, Uccle)
    These spot phantoms keep popping up, like failed financials.
    There are millions of pores on the Sun, and you can always count on one of them to be your ‘sucker born every minute’.
    So, you can fake spots all day long by counting pores, but when you go outside tomorrow and project the Sun, you will see the reality of the situation. You cannot hide the Sun, it’s an Astronomical object with Equal Opportunity, anymore than you can fake the catastrophic Ocean rise.
    Credit DeSpot Swap.

  35. Fannie and Freddie were known to be tipping into failure. Congress was warned about it and disregarded the warning.
    The economist like Peter Schiff, Marc Faber, Jim Rogers that predicted this correctly made a fortune shorting the financials.
    Of course it is true that the consensus of economist missed the whole meltdown and now they are wrong again in predicting a quick recovery.
    Here is Congress being warned about Fannie and Freddie.
    In response they berate the person correctly predicting the coming failure.
    http://blog.beliefnet.com/reformedchicksblabbing/2008/09/maxine-waters-we-do-not-have-a.html
    Peter Schiff was right.

  36. philincalifornia (23:43:52) :
    Remember this one from the G-8 global warming deal. Oh how we laughed:
    “Merkel and Blair also suggested a target of keeping global temperature increases to less than 2 degrees Celsius by 2050, which is not part of the deal.”
    Armed with this new insight, the Global Thermostat is just months from reality:
    http://www.physorg.com/news163861421.html

  37. Nasif Nahle (22:24:48) :
    Seriously, I don’t know why the WHO dictated that flu is now a pandemic
    You are a biologist and you know what you say on this issue, so:Are they making a prediction as the other UN agency IPCC?
    “Unless we announce disasters no one will listen.”
    – Sir John Houghton,
    “We need to get some broad based support, to capture the public’s imagination…So we have to offer up scary scenarios, make simplified, dramatic statements and make little mention of any doubts…
    Each of us has to decide what the right balance is between being effective and being honest.”
    – Prof. Stephen Schneider, Stanford Professor of Climatology,
    lead author of many IPCC reports
    http://www.green-agenda.com/

  38. Another failed alarmist prediction:
    http://blogs.news.com.au/dailytelegraph/timblair/index.php/dailytelegraph/comments/rain_denied/
    Tim Blair
    Saturday, June 13, 2009 at 04:57am
    A Tim Flannery prediction from 2008:
    The water problem is so severe for Adelaide that it may run out of water by early 2009.
    We’ve hit 2009’s midway point, and Adelaide’s water supply is currently at 54 per cent of capacity. That’s more than 100,000 megalitres, with yet more to come:
    South Australia is in for a wet weekend, including possible floods, as significant rainfall is forecast in all districts south of Port Augusta.
    Up to 30mm of rain could fall in southern agricultural areas, including Adelaide, but up to 50mm is forecast in the Mount Lofty and Southern Flinders Ranges by the end of Tuesday.
    Flannery’s been blown out of the water, so to speak, as is usual when he claims Australian cities are about to run dry. So how does Flannery respond?
    Australian scientist and campaigner Tim Flannery, one of the conference organisers, said climate change was harming his home country. “Water resources have dried out to the point where they’re now affecting the future of some of our cities.”
    Flannery is a rain denialist.
    UPDATE. Flannery addresses the “carbon imbalance of the planet”:
    Look at the link to see his BS speech.
    This is the sort of speech for which Flannery once claimed to charge $50,000.

  39. My pastor told a c-store clerk when gas was 4 dollars last july, it would be below 2 dollars before Christmas. The clerk said it would be 6 dollars at Christmas. He also on Wednesday night said fear was of the Devil in reference to global warming. He is a degreed engineer.
    We have what he said last July on some audio tapes.
    I of course said almost the same for 3 different reasons.
    We had 3,500 oil tankers offshore waiting for crude to go up a dollar a day. They hustled to unload during hurricane season. Inventory figures were low because so much oil was not offloaded.
    I also had learned some short positions that speculators had and knew it was a price inflated by speculation.
    This is a great site and facts really take away emotionally jacked up fear. I sat in Mobils internation exploration conference room and was told in 1981 that we had 12 years oil left. We can’t do without oil consumption so that is qwhy they tax it. The excuse they give is it hurts our health.

  40. Excellent article. I too am puzzled by the “random weather events will even out over time” shtick. Surely weather events are not “random” at all, no matter how much it seems that way to the average Joe. Things seem random when we don’t understand the way they work. If we understood weather enough to predict what it would be like in 2100, I don’t think it’s too much to ask that we be notified where and when hurricanes, tornadoes and severe thunderstorms will be forming in the next year. If we can’t even predict those sorts of things — at all! — how can we say temperatures will increase by 2 degrees in the next 100 years?

  41. How many hits on that do you think they’ll get from WUWT readers?
    Lots… I click on the WeCanSolveIt button every time… The irony that Al Gore & his band of believers could be paying Anthony is too delicious to pass up…
    REPLY: Thanks for the thought, there’s no need. Unless you clear your cookies, or have them set not to accept, it counts as a re-view, not a fresh one. I think the cookies are 24 hours to expire. So a click a day, that’s all I ask. – Anthony

  42. don’t tarp me bro (07:36:40) :
    My pastor told a c-store clerk when gas was 4 dollars last july, it would be below 2 dollars before Christmas. The clerk said it would be 6 dollars at Christmas. He also on Wednesday night said fear was of the Devil in reference to global warming. He is a degreed engineer
    ———————-
    Number of protons in carbon 6
    Number of neutrons in carbon 6
    Number of electrons in carbon 6
    666 is the number of the beast, and he’s infiltrated all of us sinners !!

  43. Trouble arises when there is the need to make predictions become true no matter how hard it is, and finally arriving to the conclusion that, at the end of the day, what matters is that at least a “paradigmatic reality” is created.
    So, for example, “global warming” has life of its own, and as such a hundred or a thousand of blogs like WUWT won´t make it disappear.
    [snip – no references to WWII propagandists, I’ve warned you about this before- Anthony]

  44. As a layman, I wondered about the distinction between “weather” and “climate”. I was told that the reason global warming can be predicted is because “climate” is not the same as weather. As a layman I would be interested to hear the evidence for this, because as far as I can see, that distinction is just completely made up.

  45. Speaking of positive or negative feedback within a model – I still say that the same group that wants to bring down capitalism is pushing the AGW ideology. The simple problem with this is if capitalism isn’t around and healthy enough to underwrite the billions (maybe trillions) necessary to enact the drastic measures called for to save us from AGW, the movement will expire.
    Simply said – the world is not economically healthy enough to play this (AGW) game. Whether natural or by coincidence the model is providing negative feedback to AGW alarmism.

  46. With regard to the subprime/economic meltdown; another major regulatory failure was the repeal of the 2nd Glass-Steagal act that seperated retail and investment banking. Introduced in the early 1930s to prevent the reoccurence of speculative losses by large financial institutions, they were repealed, after much lobbying by the banking sector, in 1999 by Clinton. Both Finance and Government share the blame for this one.

  47. Tim (22:10:58) :
    I just noticed the following Google Ad showing up under this article:
    SALE – The Great Warming
    with Keanu Reeves and Alanis Morissette – only $9.95
    http://www.thegreatwarming.com

    On following this link I found an interesting excerpt by the author of the underlying book, journalist Lydia Dotto. Dotto, like so many other warmists, insists that the issue is the precautionary principle:
    “The real question, therefore, has little to do with proof. It has to do with the precautionary principle-in its simplest terms, “better safe than sorry”-or, more precisely, our willingness and ability to embrace it.”
    http://www.thegreatwarming.com/stormwarning.html
    This now is the heart of the AGW position. Even IF all the predictions and alarms have no firm proof, should we not buy the insurance?
    Well, we might ask if a person living in Arizona should buy hurricane insurance? Or earthquake insurance? We buy insurance when there is a body of demonstrable evidence indicating the phenomena we’re insuring against – actually exists and has caused damage.
    What is truly alarming is how the alarmists seem incapable of snatching success from the phantom burning building. They cling to demonizing CO2 – even as it it shown daily to be the most “greening” trace gas in our atmosphere. Yet, if they simply dropped demon CO2 and went with the Energy Independence campaign – they could build windmills, brew biofuels, manufacture hybrids and sell EVs to their heart’s content. But will they own up to their AGW blunders? No. Too much pride apparently. And pride for the religiously circumspect, is one of the seven deadly sins!
    Time for new management alarmists?

  48. http://www.spaceweather.com/ Is usually very up to date with sunspot numbers ect..
    The flu upgrade is because they think once real flu season hits H1N1 will turn to a deadlier strain much like the one around the 1900’s did. The fact that it is persisting into non-flu season is what has them worried. But it is a great excuse to halt stuff like tea parties like the ones scheduled to happen on the 4th of July.
    Model or not.. who didnt honestly see that housing was in an unnatural bubble? I lived in Las Vegas during its height… we wondered then why people were willing to buy homes at outrageous prices with variable contracts in an area whose only real industry is gambling. LOL It went on till no one was willing to buy the properties any more then the banks cried foul? Where did all the money made on these properties go? Was that subtracted when the bubble burst? I doubt it. See it was fine when it was making everyone money, but a tragedy and an emergency when it wasnt. To compound that.. our congressional oversite IS apparently bought and paid for.
    As for the whole AGW agenda: It does not reduce pollution in air, water or land. It does not even reduce Co2 with its Cap and Trade agenda. It does not promote learning or scientific advancement, it stagnates it. It will not protect our resources, land or any creature that would dare stand in its way. Protect the polar bears but its ok to kill the raptors:0 Save the rainforests, but level the mountain ridges and desert floors. I have stopped trying to convince people who believe in AGW models not believe it. Instead I ask them to look at what the current plans for its cure are actually really doing. It is an eyeopener for most, who like myself consider themselves a friend of the Earth. Enron was just a test run. We decide if we are going to let them do it on a global scale.

  49. OT but: As a retired lawyer with securities law experience, the lead part of this post about Freddie Mac and Fannie Mae caught my attention. Independent forecasters like Forbes have no legal liability for being wrong. However, both Freddie and Fannie are federally sponsored enterprises subject to special oversight by a specific federal agency and both the House and Senate banking committees. There is irrefutable evidence that Barnie Frank and Chris Dodd, Chairs of the Congressional banking committees, along with current and former Freddie and Fannie executives deliberately mislead the public and shareholders about their financial condition . I am amazed that no one has considered suing Freddie and Fannie executives under SEC Rule 10(b)5 for damages resulting from misrepresntations and and false reporting to the SEC.
    Sadly, I suspect that members of Congress are immune from liability when acting officially.
    For sure, it would be fun to depose Frank, Dodd and current and former CEOs of Freddie and Fannie under oath about all of the misrepresentations, non-disclosures and large political contributions made to keymembers of Congress. They are all personally responsible for the enormous losses suffered by shareholders.

  50. Well, predicting is hard work. One has to be consistent and persistent. Here is a great example of just that kind of dedication:

  51. The ads here sometimes are masterpieces of irony: This time I was offered a “Psychic forecast for 2009” 🙂
    REPLY: Well when you see such absurd irony, be sure to click on it to find out what it is about. – Anthony

  52. Mariss Freimanis: We live in the era of “the short attention span”; be thankful for it. Ideas that took decades or centuries of thought to digest in the past now pass through the body public in a few months to a few years. AWG is well on its way past the peak of the curve and is starting its downward slide on the backside.
    This strikes me as being perfectly true. But why?
    Well, in the past not too many people had the idle time to think about stuff like this, and so new ideas were slow to process. There just weren’t that many people thinking about it all. But economic growth gave a lot more people the idle time in which to chew over new ideas, and that has resulted in ideas being picked apart far faster than ever before.
    This website is in itself a testimony to that. The volume of comments far outstrips the post that first prompted them. There are a lot of people thinking about these things.
    My guess is the AWG fad has passed its zenith.
    That’s probably true too. Once they started claiming that “the debate is over”, everyone who was watching knew that it wasn’t over at all. Once an attempt is made to close down a debate, it means that something is badly wrong somewhere.
    Watch out for the politicians though, they will be the last to give it up once they have gotten the scent of money.
    And that’s probably true also. The political classes will be the last people to let go of this wonderful tax opportunity. But it won’t be the first time in human history that the people will have confronted their supposed political representatives. And this time the people will be far more powerful than they ever were before.
    On the downside, we can expect future contention to happen even faster, and issues that once took centuries to resolve will be dealt with in days or hours. They’ll happen so fast that many people simply won’t know they ever happened.

  53. Jack Hughes (20:24:09) :
    Why not start off with a much simpler project like world peace ?
    That’s the point of the exercise, World governance = World peace!
    Don’t see it happening that way though!
    DaveE.

  54. “The ads here sometimes are masterpieces of irony: This time I was offered a “Psychic forecast for 2009″ :-)”
    Perhaps we should submit “Mother Earth” and get a complete forecast for 2009. I bet it would be just as accurate as the climate models.

  55. Many of the above comments refere directly or indirectly to human bevavior, which can be group-irrational and impossible to model.
    There is a beautiful example from Scandinavia, reported by World Nuclear News –
    “Denmark trades power in the same Nord Pool, which has announced that from October the spot floor price for surplus power will drop from zero to minus EUR 20 cents/kWh. In other words, wind generators producing power in periods of low demand will have to pay the network to take it. Nord Pool said that “A negative price floor has been in demand for some time – especially from participants trading Elspot in the Danish bidding areas. … Curtailment of sales may give an imbalance cost for the affected seller and thus creates a willingness to pay in order to deliver power in the market.” This is likely to have a negative effect on the economics of wind power in the region, since a significant amount of Denmark’s wind power production is affected. ” WNN 1/4/09, Nord Pool 4/2/09.
    This is a lovely example of the type of human behaviour that modellers consistently fail to include in their models – because they cannot.
    My take is that power suppliers who had to subsidise windmills have been getting their own back, which is a natural reaction. Cost that into your wind and solar projections and see what comes out the end.

  56. Stoic (01:30:13) :
    If you’re talking Marlow BUCKS, just off J4 on the M40, I know it well.
    Cross motorway traffic from the M4 to the M40 can extend back to the A404 Marlow junction regularly. It’s truly horrendous!
    DaveE.

  57. crosspatch (21:11:17) :
    Best and most logical explanation yet of the financial mess we are in. Thank you.

  58. Got this from comments in Jennifer Marohasy’s blog:
    The Scientific method – here are the 8 steps according to Wikipedia:
    1. Why does the climate change?
    2. Collect climate data and mathematical formulae that can be adapted. Thermodynamics is one very productive area.
    3. Search for something that correlates with climate change over a human lifetime. Hypothesize that this is the cause. Note that it must seem to be controllable and be produced more by affluent humans. CO2 is ideal for this purpose.
    4. Create a computer program with the formulae and run. Tweak parameters to make sure it correlates to the data you have collected. You can do anything here since you can block anyone else seeing what you did, see 7.
    5. Does it correlate with data? If not, change parameters step 4.
    6. Extend hypothesis into distant future. If no end of the world disasters change the parameters step 4 otherwise conclude that humans are causing it since we have chosen something humans produce. Demand more funding for research into this imminent danger.
    7. Keep method and data secret, we don’t need criticism we are perfect.
    8. Get others to create same computer program and see if they copied your program well enough. Here the opinions of politicians and economists will add to the correctness of your theory.
    http://jennifermarohasy.com/blog/2009/06/agw-is-just-a-theory/?cp=2#comments

  59. DaveE (20:22:49) :
    “If you’re talking Marlow BUCKS, just off J4 on the M40, I know it well.
    Cross motorway traffic from the M4 to the M40 can extend back to the A404 Marlow junction regularly. It’s truly horrendous!”
    That’s the one!

  60. MikeN (10:05:45) :
    Joe Romm’s Climate Progress has a guest blogger talking about by 2050 he will be retiring underwater or on fire. When I called on this, all the other commenters agreed.
    But there were dissenters taking this unusually harsh approach:
    “Is should also be obvious that the worst environmental crime anyone can commit in the industrialized world is to have children, for those kids will almost certainly consume disproportionate amounts of available resources, and do disproportionate damage to the environment.”

  61. There’s a wonderful Ramirez cartoon. How can I insert it in a comment to show it to you all?
    REPLY: You can’t, but just port the complete URL and it will automatically generate a link. – Anthony

  62. To view the cartoon I spoke of, you have to click on the red-robed poo-bahs. Btw, Michael Ramirez recently won a Pulitzer Prize for his work.

  63. Weather prediction is getting more accurate over the years, thanks to supercomputing being used to go predicting. This is because there are numerous variables that are required to be considered for prediction. The weather predictions that we are getting from weather department now are pretty accurate.
    However, economic predictions have more to do with human interests which changes with factors, both within and outside the subject.
    Tony Smith
    http://www.aafter.com

  64. Financial Modeling almost invariably tucks in an assumption that “6 sigma events” happen very rarely. And that’s true. The thing is, in chaotic systems, particularly markets where “positive feedbacks” are the norm, you don’t really have a normal distribution of adverse events. In fact, markets are such that adverse events often INCREASE the likelihood of more and worse adverse events. This is due to a number of man-made factors such as leverage, fear, greed, and occasionally fraud.
    Any old-timer from the stock side of the business knows that those “rare, six sigma events” are almost an inevitability sooner or later. They just plan on it. That’s why you’ve not had a stock market related failure of a brokerage house in 70 years (give or take). Old timers in the bond and mortgage business were replaced by pointy headed MBA’s and modelers with little understanding of how markets really work.
    Now, with climate modeling, we know that we have a chaotic system. We also know that there is order in chaos, but that like markets they tend to be self correcting. Actually, more so, since climate isn’t effected by emotion nor leverage. The problem lies in that in addition to being chaotic, climate is vastly more complex and still poorly understood, at least in places.
    That the modelers are so arrogant as to assert confidence in prediction isn’t surprising. That smart people believe that they can reliably predict climate, however, is.

  65. After the meltdown occurred, a second Forbes article stated, “All existing models for calculating risk, he [Nassim Taleb] says, should be thrown out because they underestimate extreme price swings. ‘The track record of economists in predicting events is monstrously bad,’ he says.”
    It wasn’t economists who made that prediction. Finance is the field that deals with individual securities and MBAs in Business are the ones who do the product creation and packaging. Economists are peripherally involved (mostly in broad market theory and long term economic forecasts along with interpretation of what any given government report means to the economy at large).
    It took a fair bit of work for me to shake off my economics mindset and learn to think like a finance guy. They teach very little (nearly none) about securities markets and stock behaviour to economists, and that is largely restricted to the history of the various market crashes and a great deal about what the central banks and Treasury dept. do with bonds and interest rates. (I really wanted a “finance” degree, but my school only offered Economics or Ag. Econ. While the Ag. Econ. degree was closer to a business / finance major, I didn’t want to be explaining the “Ag.” part for the rest of my life…)
    The bottom line was that I had to find creative ways (often outside of the classes I was taking) to learn the “Finance” part and stocks in particular.
    In retrospect that was likely “a feature” in that “The Efficient Market Hypothesis” was all the rage then (and still is now, I think). I would have believed it and then been convinced that you can’t beat the market. (And I’d have not made my house payment this month… since it’s impossible for me to have done so 😉 I’d have had all the creativity and insight “educated out of me”…
    In defense of the quote, however, I must add that “Econometric Modeling” was just taking hold then. It is possible that some finance guys took a class in Econometric Modeling or maybe even an Economic Modeling guy went over to the Finance side and brought his toys with him. But everyone on the Economist side of things that I’ve ever met has known from a deep visceral center that the models were just that: toy models to inform our ignorance. (Guess where I got the attitude about the models… Yup, in my Economics schooling… from the Profes. who were trying to get something, anything, useful out of them… and working out the giant Kinks and yawning gaps in them.)
    So my guess is that someone here is trying to sidestep the blame by shoving it at an ill defined “economists”…
    There had to be particular people who made the claim that a basket of mediocre mortgages were somehow transformed into AAA by putting them all in a basket together. THEY are the root cause, not econometric modeling. IIRC it was at Drexel (that later got pulled into Bear Stearns) that the original “leap” was made and it was not from an Economist. (I read the history of this about a year ago and could have Drexel wrong… I’ll research it some more a bit after dinner…) That then got put in computer models and cranked out endless error…

  66. BarryW (21:05:31) : Don’t forget we have all ready run out of natural resources (Club of Rome).
    Yeah, one of the first “Computers Gone Wild” fantasies from the Club of Rome (via “Limits To Growth” by Meadows et.al.) My response to it (after kicking around in my head for a mere 30 years 😉
    http://chiefio.wordpress.com/2009/05/08/there-is-no-shortage-of-stuff/
    http://chiefio.wordpress.com/2009/03/20/there-is-no-energy-shortage/
    I have seen an assertion that The Club Of Rome is behind both AGW and the Limits To Growth computer fantasies. The style is the same. The method is the same. The outcome (centralized control and reduction of wealth in the hands of common folks) looks to be the same. (i.e. you get less “stuff” and less “energy” while AlGore and friends fly the private jets in peace…)
    I have no idea of the veracity of the claim, but it looks plausible on the surface. Worth exploring sometime.
    “Limits” is one of the other pillars of my “suspect all computer models” mantra… It was heavily promoted in the ’70s based on the notion that their computer predictions had to be right, they were computerized! It was also the start of the “It isn’t a prediction, it’s a “projection”… When, a few years later, all their “end of life as we know it” doom and gloom running out of everything computer predictions didn’t happen, they published “Limits the Sequel” or “Limits To Growth, the Rewrite” or whatever they titled it and have been squawking every since that they didn’t actually make any real predictions so they couldn’t be wrong. They were only “projections” of what would happen if nothing changed, and, well, something changed…
    (Having read Limits too many times – Required in my Econ 136(?) class; I can tell you that when they said “we run out of natural gas in 10 years!” it was certainly presented as a prediction, complete with the dire consequences that would inevitably follow. Since we now have a glut of natural gas and likely will for 50 years to come, I think their computer prediction was broken… whatever you call it.)
    At the end of the day, my take on it all is simple: If The Club Of Rome is involved in something, it is highly suspect and most likely both very wrong and very likely to move your wealth into the hands of the power elite. No, o proof. Just a “projection” 😉

  67. Since this has popped up again and sent me back to my log files to dig out this reply from a prior thread, I’ll probably make a formal posting of it so I can just put a link here. But until then, this is my take on the “subprime mess”:
    Per the ‘talking dirt’ about Economics being mostly mumbo jumbo: It isn’t. It does have soft edges as do most social sciences, but it has a numeric core.
    I have an econ degree, so maybe I’m biased, but micro econ makes significant use of linear programming (algebra) and other sub fields use a modest amount of calculus. It’s not all supply and demand curves after you get past Econ 1 for non-majors…
    On the housing bubble: The CDO’s and CDS’s were sold world wide. It was started in the US and caused by the broken notion that we could make houses affordable to all. We then packaged up the mortgages in sausage casings and sold slices world wide. When these became suspect, it impacted financial companies world wide.
    When our financial institutions went bust, the value of their stock, bond, and preferred stock issues went bust. All the financial institutions world wide that had sucked up trillions of dollars of these other ‘assets’ suddenly had balance sheet issues. Fanny & Freddy preferred stock were some of the most widely held by banks world wide. This was the way our housing issue went global.
    Also, the ‘mark to market‘ rule was adopted across much of the world. This was one of the key feedback loops on the path to destruction. Every stock trader knows the wise phrase: “The market can remain irrational longer than you can remain solvent’ as a warning about the way bear markets can price things to ‘crazy low’ prices. Accountants are now learning this with your money.
    Mark to Market forced banks to take massive paper losses because no one wanted to buy a paper asset in huge dollar numbers Right Now. There was about a 5% default risk, but the security was marked down 50% to 80%. This then made the bank ‘insolvent’. Just bogus.
    They could hold the mortgages to maturity and get the 90+%, except MtoM said they couldn’t. They had plenty of money in hand and plenty of securities making cash flow, but the accountants said they were broke via paper losses.
    We institutionalized the irrationality of market panic pricing into determining the solvency of our banks. The EU is now reconsidering the lunacy of mandating a MtoM when no market exists…
    The housing bubble started with the CRA of 1977, but was of manageable scale. The modifications of 1999, signed by Clinton, took it open loop. The ACORN et. al. political push to get everyone a home even if unqualified sent it over the edge. Freddy and Fanny pushed massive money at the (mostly Democratic) congress for political favors adding fuel to the heap. Then the Republicans decided to join in and let the Financial Reform Act of 1999 remove Glass Steagall and set the stage for the financial sausage making of CDOs and CDSs.
    The Democrats lit the fire in the basement and started breaking up the furniture for kindling, then the Republicans ran around shutting off the fire sprinklers and smoke alarms. A pox on both their houses.
    It took until now to blow up because so much foreign money was willing to fund the scheme. That caused the linkage to the rest of the world and drug them into the crisis.
    The unfortunate side effect of all that global money filtered through CDO’s into our housing market was that prices went bubble high. Simple economics. More money chasing a single product drives the price ever higher. This made housing unaffordable for all the poor folk who the Democrats wanted to help via their silly housing Ponzi scheme of mortgage buy downs.
    The root cause was (a mostly Democratic) political movement that thought houses could be made cheaper by increasing the demand and buggering prudent mortgage standards. The (mostly Republican) addition of gasoline to the fire was the deregulation mantra that let banks, insurance companies, and stock brokers play in each others pond; BUT kept the banks with access to The Fed discount window and limited to 12:1 leverage while it left brokers with no lender of last resort (no Fed window) and with functionally unlimited leverage.
    Lehman or Bear Stearns with 40:1 leverage made more money just until the (inevitable) business cycle downturn came. Then they had no lender of last resort when various predatory short sellers started a run on the “bank” and started the cascade failure of other institutions holding Bear and Lehman securities and CDS’s.
    The Republican administration has ownership of the removal of the “uptick” rule that let the shorts conduct old fashioned “Bear Raids” of a type not seen since the 1930’s. The argument that the uptick rule would not work in a world with penny prices is bogus. When stocks were priced in 1/4 or 1/8 dollar increments it worked, so just make the ‘new uptick rule’ based on a 25 cent or 12 cent “uptick”. The SEC is either incredibly stupid on this point or wants the bear raids to be done. Take your pick. Malice or stupidity.
    Finally, the CDS is a kind of life insurance on a financial asset. That they were forbidden to be regulated is a crime. It lets anyone, even a predatory short seller, write ‘life insurance’ in unlimited quantities on their target backed up by no assets, then short their target into insolvency. Wouldn’t you like to be able to take out life insurance on anyone you didn’t like and then go shoot them?
    Now roll this all together and you get what we have now. A free fire zone for hedge funds and shorts to take out life insurance on investment banks, then short them in classical bear raids until their stock drop and rising CDS rates caused rating agencies to downgrade their debt, then the run on the bank begins and they have no lender of last resort and the implosion is guaranteed. This then sets up the failed stock and bond collateral of the next target. Repeat until all investment banks are gone. Golly, come to think of it, the are all either gone or converted to ‘regular’ banks now…
    And we owe it all to the CRA as amended in 1999 and the ‘financial reform’ of 1999, seasoned with the SEC removing the uptick rule and letting shorts run wild.
    From start to end this problem was caused by stupid government behaviors. Period.

  68. Ah, found it. From:
    http://www.bloomberg.com/apps/news?pid=newsarchive&sid=ajs7BqG4_X8I
    Michael Milken, the junk bond king, created the first CDO in 1987 at now-defunct Drexel Burnham Lambert Inc., says Das, author of `Credit Derivatives: CDOs & Structured Credit Products’ (John Wiley & Sons Inc., 850 pages, $120). Until the mid-1990s, CDOs were little known in the global debt market, with issues valued at less than $25 billion a year, according to Morgan Stanley.
    Drexel and other investment banks realized that by bundling high-yield bonds and loans and slicing them into different layers of credit risk, they could make more money than they could from holding or selling the individual assets.

    From the wiki: http://en.wikipedia.org/wiki/Michael_Milken
    After he was sent to prison on finance-related charges, his detractors cited him as the epitome of Wall Street greed during the 1980s, and nicknamed him the Junk Bond King.
    The wiki has an oddly defensive tone to it…
    At any rate, we have a CDO device created by a (now) felon. We have a government that is shoving the banking industry kicking and screaming into making loans they KNOW are no good. It’s a match made in heaven.
    In order to palm off the “junk” they turned to the trick invented by the “junk bond king” and packaged their sausage just like he did. Worked great until it didn’t…
    Frankly, IMHO, the only place that computer models came into it was as a Financial Ponzi Scheme cover story. The FINANCE guys (not Economists) cooked up a computer model to show that the risk was dispersed, so was not relevant any more.
    Other than the rocks tossed at Economists, that I think ought to be tossed at Finance peddlers, by Michael R. Smith, the article is generally good. But I might be biased… one Michael Smith to another 😎

  69. Mark Young (04:33:31) :
    Now, with climate modeling, we know that we have a chaotic system. We also know that there is order in chaos, but that like markets they tend to be self correcting. Actually, more so, since climate isn’t effected by emotion nor leverage. The problem lies in that in addition to being chaotic, climate is vastly more complex and still poorly understood, at least in places.
    Complexity and chaos are at the frontier of research in many disciplines, from physics to biology.
    Unfortunately, contrary to expectations the knowledge of the chaotic nature of climate is given lip service in the IPCC used models. The GCM models themselves use numerical methods and boundary condition assumptions appropriate to solutions of well behaved equations in what in the end is a perturbative expansion method.
    The lip service to chaos is given by the spaghetti graphs in the report plots: they vary the input/starting parameters so as to “simulate” chaos. It is not errors that those spaghetti graphs show, but the stability of the solutions. Considering the wrong premise used, that the solutions are expandable, it is not wonder that after a number of time steps, the models diverge: the higher order terms kick in.
    This does also happens with weather predictions, which use the parent models of the climate CCMs , and we see that they cannot be given for more than a week. Climate, with larger time steps and broader assumptions diverges after a few years.
    That the modelers are so arrogant as to assert confidence in prediction isn’t surprising. That smart people believe that they can reliably predict climate, however, is.
    Unfortunately, modeling, like video games, tends to be addictive, and addiction does not look to intelligence.

  70. >>Australian scientist and campaigner Tim Flannery<<
    Tim Flannery is not a scientist, he is a pseudo scientist. He believes in "Gaia", which is unscientific nonsense and also believes that "our intelligence is here for a pupose." (I have seen him say that on a TV program that he made.) No person that believes that "our intelligence is here for a pupose." can properly be called a scientist.

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