Homeopathy! Apply Directly to the Recession!

"Insanity: doing the same thing over and over again and expecting different results."
- Albert Einstein

"[Groucho] My diagnosis never fails,
I know just what to do,
Whenever anybody ails,
I'm sympathetic too,
My heart within me melts...
[choir] His heart within him melts...
[Groucho] No matter what I treat 'em for,
they die from something else."
- From "Dr. Hackenbush", by Bert Kalmar and Harry Ruby.

A close examination of seeming unrelated topics often reveal some surprising connections. For example, the other night I was looking at youtube videos featuring James Randi, the famed magician and debunk-er of pseudoscience. One of Randi's more popular videos was his explanation of homeopathy, a form of medical quackery that produce the headache medicine Head-On, promoted by one of the most annoying TV commercials of all time. One of the basic principles of homeopathy is the law of similars, which holds that substances that cause healthy people to get symptoms can cure diseases that have these symptoms. For example, a homeopathic cure for a headache would be based on a substance that would induce the a headache in a well person. Who knows, maybe Head-On would work better if its ingredients included a portion of the Head-On ad.

Dr. Stephen Barrett, expert on medical quackery, dismisses the law of similars as a form of "sympathetic magic" without any scientific basis. In the interest of fairness, arguments for homeopathy can be found here.

Both James Randi and Dr. Barrett make a convincing case that the law of similars is rather silly. But the very night I saw the Randi video, I read this Bloomberg opinion piece on the Frank-Dodd housing reform bill. The author of this opinion piece, mortgage finance consultant Edward Pinto, criticizes the bill's list of criteria for prudent underwriting for not including a required minimum down payment nor a good credit history. It is easy to see the political motive for this bill; there is considerable pressure to increase home sales. But wasn't the current housing crisis caused by watered-down lending requirements that caused homeowners to take on excessive risk? The Frank-Dodd bill is basically applying the law of similars applied to the housing market: the policies that produced a downturn in a healthy economy will reverse the downturn in a recession. This is economic homeopathy, and hence economic quackery.

Why do people fall for medical quackery? All too often, the victims of medical frauds suffer from ailments for which there is no remedy. That is a hard prognosis to accept, and hence patients will accept any other alternative, no matter how shaky its scientific foundation.

The same can be said about why voters fall for economic quackery. Many home owners desperately want housing prices to return to the level they were at the height of the bubble. But it is unrealistic to expect housing prices to go that high again, since they far exceeded the value of the house. The cold, hard truth is that there is little that can be done to avoid the economic pain caused by our past mistakes. And no, the pain will not be lessened by an application of Head-On.

For more on the causes of the recession, I strongly recommend the documentary "Overdose: The Next Financial Crisis". In order to understand how the current financial crisis came about, the film makers talked to those few economists who foresaw the housing bust. These same economists warn that our current financial remedies will lead to another, even worse crisis.