#finance Feed

Are Deniers of the Tulipmania Rational?: Hoisted from the Archives

Hoisted from the Archives: Are Deniers of the Tulipmania Rational?: Extraordinary Popular Delusions and the Madness of Crowds Weblogging https://www.bradford-delong.com/2013/10/are-commenters-on-the-tulipmania-rational-extraordinary-popular-delusions-and-the-madness-of-crowds-weblogging.html: To claim that the tulip market between September 1636 and March 1637 was not a bubble-and-crash—that the market was "impressively price-efficient [and] fundamentally-driven"—is itself yet another striking example of extraordinary popular delusions, and the madness of crowds.

Efficient markets are those in which prices move far and fast only when fundamentals change a lot. And fundamentals change a lot only when a lot of information—information that changes rational assessments of fundamentals—arrives in a very short time. With respect to the seventeenth-century rare tulip market, the fundamentals are the patterns made by the tobacco mosaic virus on infected tulips, human aesthetic preferences, and the biology of tulip reproduction. Those are not fundamentals about which much information can arrive quickly.

Without any such information arrival, attempts to claim that the tulipmania bubble and its collapse was a rational event are not, themselves, examples of human rationality…

Finance the cheaters

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I do not see anyone inside the Trump administration understanding how the international monetary system works. And I see no sign that Steve Mnuchin—whose brief this is—is willing to spend any time trying to learn. But if he were, he would be listening to Barry Eichengreen. Right now COVID-19 is administering a disastrous health shock to the world. Following that is the less deadly but still important negative supply shock to our economies. Behind that is a manageable but as yet unmanaged knock-on domestic demand shock. And behind that is the rapidly-apporaching international financial crisis with its global negative demand shock that, as of yet, nobody is seriously trying to manage:

Barry Eichengreen: Managing the Coming Global Debt Crisis https://www.project-syndicate.org/commentary/managiing-coming-global-debt-crisis-by-barry-eichengreen-2020-05: ‘These countries’ private companies borrow in dollars.... When it comes to the stabilizing use of monetary and fiscal policies, emerging markets are hamstrung. Which is why we are back to Baker Plan 2.0...

...suspend[ing] interest payments... private creditors... roll[ing] over an additional $8 billion worth of commercial debt. That, at least, is something. But, to borrow the baseball apostle Yogi Berra’s line, it is also “déjà vu all over again.” The Baker Plan likewise proceeded on the premise that the shock was transient and that a temporary debt standstill would be enough....

By 1989, seven unproductive years after the onset of the crisis, the Baker Plan finally was superseded by the Brady Plan.... Debts were written down. Bank loans were converted into bonds—often a menu of securities from which investors selected their preferred terms and maturities. Advanced-economy governments facilitated the transaction by providing “sweeteners”.... Today’s crisis is also being treated as temporary, with a moratorium on interest payments and a promise of commercial credits remaining valid only through the end of the year. The reality is different. Weak global growth and depressed primary commodity prices will persist. Supply chains will be reorganized and shortened, auguring further disruptions of trade. Receipts from tourism and remittances will not pick up anytime soon. And unless the debt overhang is addressed, capital flows will not resume… #finance #internationalfinance #macro #noted #2020-05-27

Weekend Reading: John Maynard Keynes: On Speculation, from The General Theory of Employment, Interest and Money


Weekend Reading: John Maynard Keynes: On Speculation, from The General Theory of Employment, Interest and Money https://www.bradford-delong.com/2015/02/weekend-reading-john-maynard-keynes-the-general-theory-of-employment-interest-and-money-by-john-maynard-keynes-1.html: 'The professional investor is forced to concern himself with the anticipation of impending changes, in the news or in the atmosphere, of the kind by which experience shows that the mass psychology of the market is most influenced. This is the inevitable result of investment markets organised with a view to so-called ‘liquidity’. Of the maxims of orthodox finance none, surely, is more anti-social than the fetish of liquidity, the doctrine that it is a positive virtue on the part of investment institutions to concentrate their resources upon the holding of ‘liquid’ securities. It forgets that there is no such thing as liquidity of investment for the community as a whole. The social object of skilled investment should be to defeat the dark forces of time and ignorance which envelop our future. The actual, private object of the most skilled investment to-day is ‘to beat the gun’, as the Americans so well express it, to outwit the crowd, and to pass the bad, or depreciating, half-crown to the other fellow...

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Weekend Reading: Charles Kindleberger: Anatomy of a Typical Financial Crisis

Weekend Reading: Charles Kindleberger: Anatomy of a Typical Financial Crisis: From Charlie Kindleberger, A Financial History of Western Europe:

p. 90 ff: No discretion was allowed in the issuance of bank notes, however.... Sir Robert Peel, the Prime Minister, first contemplated allowing a relaxing power in the 1844 legislation, but ultimately decided against it.... Peel protected himself... in a letter from Windsor Castle, written on 4 June 1844: "My confidence is unshaken that we have taken all the precautions which legislation can prudently take against a recurrence of a pecuniary crisis. It may occur in spite of our precautions; and if it does and if it be necessary to assume a grave responsibility, I dare say men will be found willing to assume such a responsibility (BPP 1847 [1969], Vol. 2, p. xxix)"...

The difficulty in making the note issue inelastic... is that it became inelastic at all times, when the requirement in an internal financial crisis is that money be freely available...

The Bank of England came to the rescue of the South Sea Company... belatedly, and at a punishing price... to dispose of a dangerous rival. Its recognition of its responsibilities in preventing, or at least mitigating, financial crisis in the public interest took more time. There was a lag in understanding the need to have the money supply inelastic in the long run but elastic in the short. A further question was whose task it was to serve as lender of last resort...

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Reflections 11 Years After the Crash

Idle factories in 2010 Google Search

1) If there hadn't been any of the kind of panic we got post-Lehman, how severe you think the U.S. recession would have been? Would it have been like a slightly worse S&L crisis, or is that underselling it?

I think the smart money in June 2008 was that the recession was or was about to be over. Housing investment had already rebalanced: the construction sector was back to a sustainable share of GDP. There were only about 500 billion of mortgage losses to be distributed around the world or to be bailed out by governments—really, trivial amounts in a world economy with 80 trillion of traded financial assets. And with Bear-Stearns the U.S. government had guaranteed the debt but not the equty of too big to fail institutions. Banks were still having trouble raising equity. But as long as people were confident that the 500 billion of bad mortgage debt would ultimately land on somebody who could absorb it, the only thing that would make a bad recession was if people anticipated a bad recession. And with no Lehman panic—if Bernanke, Paulson, and Geithner had not caused everybody to say quote what the fuck is going on" by allowing Lehman's bankruptcy uncontrolled and then justifying their actions by claiming that they were forbidden by law to support a too-big-to-fail institution that was insolvent and not just illiquid... Without that, no reason to fear even as bad as the S&L crisis.

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Note to Self: The question is whether our current market values are in fact "Pangloss" values, and are going to come back to earth at some point, with the shock provided by that return to earth providing a nasty expectational shock that will cause a depression—but with that return to earth delayed long enough to plausibly reelect Trump—or whether current values are appropriate given underlying fundamentals, and are in fact about the only thing keeping us out of a depression right now...

My sense is that "we need to raise reserve requirements in a boom" is very good policy; but that "we need to pop this bubble" is almost always very bad policy.

And we do not appear to have any (large) equity bubble. The weirdness is all in bond prices:

S P 500 PE Ratio 90 Year Historical Chart MacroTrends

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DeLong Smackdown Watch: Yield Curve: Hoisted from the Archives from 2006

Ooh boy. Was I wrong in 2006. I am not betting against the yield curve again:

From 2006: DeLong Smackdown Watch: Yield Curve: Worthwhile Canadian Initiative thinks I'm wrong when I write: Yes, we should be worrying about the US yield curve: This inversion of the yield curve, however, is generated not by domestic investors' thinking that a recession is on the way, but by foreign central banks' desires to keep buying lots of dollar-denominated bonds in order to keep their currencies from appreciating. Thus while an inverted yield curve is usually a sign that a bunch of people are trading bonds on their belief that a recession is likely, that is not what is going on in this case...

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Weekend Reading: The Downfall of Mother Bank

Jackson bank veto Google Search

The Downfall of Mother Bank

Draw'd off from Natur by Zek Downing, Neffu to Major Jack Downing

Printed & Publd by H.R. Robinson, 52 Courtlandt St., N. York

President Andrew Jackson: Major Jack Downing. I must act in this case with energy and decision. You see the downfall of the party engine and corrupt monopoly!!

Order for the Removal of the Public Money Deposited in the UNITED STATES BANK

Jack Downing: Hurrah! Feneral! If this don't beat skunkin I'm a nigger; only see that varmint Nick how spry he is. He runs along like Weatherfield Hog with an onion in his mouth.

No more fees to be obtained here! I move we adjourn, sine die!


Daniel Webster: There is a tide in the affairs of men, as Shakespeare says, and so my dear Clay, look out for yourself.

Henry Clay: Help me up! Webster! Or I shall lose my stakes!


Burrow under the Mammoths here, Sila!

Boston Courier, ALbany Gazette Evening Star, Columbian Sentinel, Journal of Commerce, Commercial Advertiser, New York American, Pennsylvanian, United States Gazette, National Gazette

Nichols Biddle: It is time for me to resign my presidency

Salary 6000, Preointing expenses 80000, Courier and Enquirer 52000

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On "On Falling Neutral Real Rates, Fiscal Policy, and the Risk of Secular Stagnation:

I have been thinking about this by Łukasz Rachel and Lawrence H. Summers this week: On Falling Neutral Real Rates, Fiscal Policy, and the Risk of Secular Stagnation.

It says an awful lot of true things. The average "neutral" 10-year safe real interest rate consistent with full employment in the Global North does look like it has fallen from 4% per year in the 1990s to -0.5% per year today. That does pose a huge problem for central banks that seek to use monetary policy s as the principal depression-fighting tool: a small negative shock that reduces this rate by only a little bit more would drive an economy into territory where the central bank cannot do its job. During this period of decline, increased government debts have put perhaps 2%-points of upward pressure on the neutral rate: the actual decline has been 6.5%-points.

But I find myself uncertain on what conclusions to draw from their paper. They focus on only one of what I think are three key interest-profit-discount rates in play here:

  1. There is the (short or long) real safe interest rate on the securities of governments that issue reserve currencies and thus possess exorbitant privilege. This is down to today's -0.5% from 3% 20 years ago and 4.5% 40 years ago.

  2. There is the long-term real risky discount rate at which the cash flows accruing to owners of capital are discounted in the market—the expected return on financial investments in stocks. This is at to 5% today, up from 4% 20 years ago, down from 12% 40 years ago, and down from 6% 50 years ago.

  3. There is the societal profit rate earned by new investments in physical or intellectual capital. This is ??? to today's ???, from ??? 20 years ago and from ??? 40 years ago.

This third social profit rate is in some sense the fundamental opportunity-benefit-of-investment ground out by the real economy of production and distribution on top of which the financial superstructure is built.

The second is the quotient of profit flows over the market value stock, and takes the societal profit rate returns to society's capital and adds to them the amount of monopoly rents captured by enterprises, subtracts from them labor rents and spillover benefits, both organizational and technological, that are not captured by those who undertake the actions that generate those spillovers, and then values those cash flows at the long-term risky discount rate.

The first of safe interest rate is the second minus the liquidity and safety terms that lower the required rate of return on safe assets.

Https www brookings edu wp content uploads 2019 03 On Falling Neutral Real Rates Fiscal Policy and the Risk of Secular Stagnation pdf

Łukasz Rachel and Lawrence H. Summers focus on rate (1): the (short or long) real interest rate on the safe securities of governments that issue reserve currencies and thus possess exorbitant privilege. The problem is that the wedge between this (1) safe interest rate and the risky discount rate (2)—the rate at which risky cash flows are discounted—is worse than poorly understood by economists: it is not understood at all.

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Debt-Derangement Syndrome: No Longer Fresh at Project Syndicate—Long Version

Debt Derangement Syndrome by J Bradford DeLong Project Syndicate

Debt-Derangement Syndrome: Standard policy economics dictates that the public sector needs to fill the gap in aggregate demand when the private sector is not spending enough. After a decade of denial, the Global North may finally be returning to economic basics.

For the past decade the public sphere of the Global North has been in a fit of high madness with respect to its excessive fear of government debts and deficits. But this affliction may be breaking. In the past two weeks I have noted two straws in the wind.

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Continuing to make slow progress on understanding how to add information and behavior diffusion to economics: Leonardo Bursztyn, Florian Ederer, Bruno Ferman, Noam Yuchtman: Understanding Mechanisms Underlying Peer Effects: Evidence from a Field Experiment on Financial Decisions: "When someone purchases an asset, his peers may also want to purchase it, both because they learn from his choice ('social learning') and because his possession of the asset directly affects others' utility of owning the same asset ('social utility'). We randomize whether one member of a peer pair who chose to purchase an asset has that choice implemented... Then we randomize whether the second member of the pair: (1) receives no information... or (2) is informed of the first member's desire to purchase the asset and the result of the randomization.... This allows us to estimate the effects of learning plus possession, and learning alone.... Both social learning and social utility channels have statistically and economically significant effects.... Investors report updating their beliefs about asset quality after learning about their peer's revealed preference... report motivations consistent with 'keeping up with the Joneses' when learning about their peer's possession of the asset. These results can help shed light on the mechanisms underlying herding behavior...

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Still Haunted by the Shadow of the Greater Recession...

key: https://www.icloud.com/keynote/0UtILjGfChXSFFUBSCJ3PTf1g
pages: https://www.icloud.com/pages/0eLbd_zXINsC-YRNSL1zQxIdA
html: http://www.bradford-delong.com/2019/02/haunted-by-the-shadow-of-the-greater-recession.html

#highlighted #presentations #greatrecession #macro #economicgrowth #economichistory #economics #finance #monetaryeconomicss

It Is Saturday Morning, and Joe Weisenthal Is Trying to Start a... Symposium... on Twitter

It is Saturday morning, and Joe Weisenthal is trying to start a... symposium... on Twitter.

Make mine Professor Cornelius Ampleforth’s navy-strength bathtub gin:

Joe Weisenthal: @TheStalwart: "Should I do a tweetstorm on what I think mainstream Keynesians like @paulkrugman @Nouriel and @ObsoleteDogma get wrong about Bitcoin?... I think most Keynesian types see Bitcoin as a horribly inefficient medium of exchange, whose loudest advocates include many scammers, charlatans, misanthropes, and Austrian economics adherents. And tbh, this is basically all true. But...

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This Is Nuts. When's the Crash?

The highly-estimable FT Alphaville has long had a series: This is nuts. When's the crash?. That is my reaction to learning that Hoover Institution senior fellows are now crypto...

It is not at all clear to me whether they are grifters or griftees here...

I had known about John Taylor, but had thought that was a strange one-off. And now Niall Ferguson. Is anybody even pretending to have a business model other than pup-and-dump? I think the only appropriate response is here:


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Barry Ritholtz: More Noise, Less Signal: "What would happen if you purposefully tried to assemble a “How-to” list to pursue the exact opposite goal—how to get more noise, and less signal? In other words, what are the exactly wrong things to do as an investor? I took last week’s list, and updated it to be the anti-list...

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Note to Self: Trying and failing to gain conceptual clarity about and work my way through the algebra involved in a minor point in Blanchard's excellent and stimulating presidential address: Public Debt and Low Interest Rates: https://nbviewer.jupyter.org/github/braddelong/WS2019/blob/master/Thinking_About_Blanchard%27s_Presidential_Address....ipynb?flushcache=true...

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The Economic Forecast: Commonwealth Club Non-Public Event Opening Statement

3 Month Treasury Bill Secondary Market Rate FRED St Louis Fed

Because of the shutdown, we are flying much more blind than we would like to be. We are not getting the normal data flow. Thus there is more than the usual level of uncertainty.

Given that:

  • I believe there is something like an 80 percent probability that Europe is now in a small recession.
  • The Chinese government continues to say that all is well.
  • But somehow six percent fewer cars were bought in China in late 2018 than in late 2017.
  • Over the past half century the reliable recession signal has been yield-curve inversion—since 1965 eight inversion signals: one false (1998), one near-recession (1966), and six recessions.
  • There have been no recessions not signaled by a yield-curve inversion.
  • The Federal Reserve currently plans are to invert the yield curve in June.
  • Neither Steve Moore nor I understand why the Fed thinks that this is a good thing to do.

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Trying to blame poor nonwhite people and social democratic governance for the faults of Wall Street seemed to me several bridges too far back a decade ago. Yet Steve Moore and Larry Kudlow seem to have gained rather than lost influence on the right from their eagerness to do so. They very sharp Barry Ritholtz takes exception: Barry Ritholtz (2016): No, the CRA Did Not Cause the Financial Crisis: "Two of Donald Trump’s economic advisers, Lawrence Kudlow and Stephen Moore... lay the blame for the credit crisis and Great Recession on the Community Reinvestment Act, a 1977 law designed in part to prevent banks from engaging in a racially discriminatory lending practice known as redlining. The reality is, of course, that the CRA wasn’t a factor.... Showing that the CRA wasn’t the cause of the financial crisis is rather easy. As Warren Buffett pal Charlie Munger says, 'Invert, always invert'...

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It was back in 1924 that it was first generally recognized that diversification was the equity investor's biggest friend. A properly-diversified portfolio of equities would outperform bonds by huge amounts with very high provability over long-enough horizons. The problem is that while "diversification" might have been reasonably accomplished with ten well-chosen stocks back in the mid-twentieth century, in the past generation it has required more like fifty. And if we truly are moving into more of a winner-take all economy, in the future it may take 100: Terry Smith: Busting the myths of investment: Do equities outperform bonds?: "The degree of concentration of returns is still startling. Just five companies out of the universe of 25,967 in the study account for 10 per cent of the total wealth creation over the 90 years, and just over 4 per cent of the companies account for all of the wealth created.... The study also looks at returns decade by decade and reaches more or less the same conclusion: that the decade returns for most equities are lower than those earned by investment in Treasury bills...

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Increasing attention to leverage cycles and collateral valuations as sources of macroeconomic risk seems to be very welcome. Leverage and trend-chasing are the two major sources of demand-for-assets curves that slope the wrong way: when prices drop demand falls, either because you need to liquidate in order to repay now-undercollateralized loans or because you do not want to be long in a bear market. And there is every reason to think the government need to take very strong steps to make effective demand curves slope the proper way: Felix Martin: Will there be another crash in 2019?: "One important detail is that this effect is achieved not only directly, by adjusting the cost of borrowing, but also indirectly by making assets cheaper or more expensive...

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Brad DeLong (2007): On Robert Barro's (2005) "Rare Events and the Equity Premium" and T.A. Rietz's (1988) "The Equity Risk Premium: A Solution": Our habit of using the Lucas-tree model of Lucas (1978), "Asset Prices in an Exchange Economy" as a workhorse has turned out to be a trap. The Lucas-tree model has neither production nor accumulation. This makes it easy to solve. But this makes its responses perverse. There are no scarce resources to be allocated among alternative uses. There are only asset prices which must move so as to make agents unwilling to try to reallocate resources. It is, I think, not surprising that an economic model in which resource allocation plays no role is a dangerous tool to use in trying to understand the world...

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Costs and Benefits of International Capital Mobility: Reply to Bhagwati: Hoisted from 20 Years Ago

Needless to say, time has left me a lot wiser: We need to design economies so that they can operate without disaster even when deregulatory clowns like those of the George W. Bush or the Donald J. Trump administrations are in control of the levers of policy at key moments. How to do that is not so clear. What is clear is that only a fool today would think that our political economy would support a clever technocracy so that we might have our cake and eat it too. Indeed, the most likely scenario seems to be that we will be unable to eat our cake, and then the kleptocrats will steal it out from under our noses so that we will not have it either. In short: I should have listened harder to Jagdish 20 years ago...


Hoisted from the Archives: Reply to Bhagwati: "I open my May/June [1998] issue of Foreign Affairs to discover myself pilloried in an article by Jagdish Bhagwati between Paul Krugman and Roger C. Altman (excellent company to be in, by the way: much better than I am used to) as a banner-waving proponent of international capital mobility, guilty of "assum[ing] that free capital mobility is enormously beneficial while simultaneously failing to evaluate its crisis-prone downside."

I rub my eyes in surprise. I had not thought of myself as a banner-waving proponent of international capital mobility.

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Ray [REDACTED]: Gather Round, Kids, While I Tell You About What I Call.. "The Greatest S---show in Crypto": "Many of you will be surprised to learn that there is a thriving industry of paid advice on buying and selling cryptos assets, including newsletters, telegram groups, and subscriber-only emails. Until very recently, one of the most popular paid services was something called Standpoint research, seen here on CNBC with Mr. Wonderful from SharkTank. In February of 2018, Standpoint Research recommended that its subscribers buy an unknown asset known as $DIG, because the owner of Standpoint thought there was insider trading going on. You read that right. He suspected fraud, so he issued a 'buy' recommendation. The coin then subsequently grew from a fraction of a penny to 16 cents per token, as buyers rushed in to acquire this asset. For the craziest reasons you can imagine. The coin itself claims to be backed by $15 billion (not a typo) in Gold Bullion. Their website, if you are curious, is http://arbitrade.io ...

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Yes, it was a mistake for the Federal Reserve to raise interest rates last month: Chris Matthews: Dow Tumbles 650 points as Apple News, Manufacturing Data Spark Fears of Global Slowdown: ".S. stock indexes closed sharply lower Thursday, after a survey of American manufacturers showed the sector growing at its slowest pace in two years, and after a sales forecast cut by Apple Inc AAPL, -9.96% intensified fears of a slowing Chinese economy. The Dow Jones Industrial Average DJIA, -2.83% fell 661.58 points, or 2.8%, to 22,684.66, the S&P 500 index SPX, -2.48% , shed 62.18 points, or 2.5%, to 2,447.87, while the Nasdaq Composite COMP, -3.04% tumbled 202.43 points, or 3%, to 6,463.50...

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Blum Hall B100: Plaza Level: 2 PM: Bill Janeway: The Digital Revolution and the State: The Great Reversal


Bill Janeway: Doing Capitalism in the Innovation Economy 2.0 https://books.google.com/books?isbn=1108471277: "The innovation economy begins with discovery and culminates in speculation. Over some 250 years, economic growth has been driven by successive processes of trial and error: upstream exercises in research and invention and downstream experiments in exploiting the new economic space opened by innovation...

...Drawing on his professional experiences, William H. Janeway provides an accessible pathway for readers to appreciate the dynamics of the innovation economy. He combines personal reflections from a career spanning forty years in venture capital, with the development of an original theory of the role of asset bubbles in financing technological innovation and of the role of the state in playing an enabling role in the innovation process. Today, with the state frozen as an economic actor and access to the public equity markets only open to a minority, the innovation economy is stalled; learning the lessons from this book will contribute to its renewal...

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Over on EconSpark, I think this is wrong: Ben Bernanke: How Important Was The Financial Panic As A Cause Of The Great Recession?: "The collapse of the housing bubble was certainly a primary cause of the Great Recession.  The unwinding of the bubble (1) depressed aggregate demand through its adverse effects on consumer wealth and residential construction, and (2) triggered a financial panic...

The unwinding of the bubble set the table for the financial panic, but it did not trigger it. The bubble had already been unwound before the panic. The triggers of the panic lay elsewhere: in the events in financial markets that produced a sudden, discontinuous boost in the demand for safe assets. One picture I have always found very illuminating is this one:

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Is There Any Reason to Fear Low Interest Rates?

Il Quarto Stato

Paul Krugman tells us: Paul Krugman: @paulkrugman: "The American Economic Association has a new discussion forum set up by Olivier Blanchard. First up is the question of whether low interest rates are leading to excessive risk-taking https://www.aeaweb.org/forum/311/have-low-interest-rates-led-to-excessive-risk-taking..." So I mossed on over and left three comments: one on the forum, one on secular stagnation, and one on whether there is any reason to fear low interest rates:

Is There Any Reason to Fear Low Interest Rates?: Have low interest rates led to excessive risk taking?: I suspect that the right way to make the accurate point that this line of discussion is hunting for is to focus not on the amount of risk but on, rather, who is bearing the risk...

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Anthills have minds. Anthills have minds that can fall victim to positive-feedback bubbles: Bob Holmes: The mind of an anthill: "The creatures’ hive-mind nature led Stephen Pratt, a behavioral biologist at Arizona State University in Tempe, to see if he could study the behavior of ant colonies the same way psychologists study human behavior, such as with experiments forcing the ants to make difficult decisions and trade-offs...

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Wisdom from the office down the hall: claiming that you will tether your cryptocoin to the dollar does not, in fact, make it much less stupid as something for others to invest in. Cryptocurrencies are stupid investments. Investors in them are grifters or fools. A fool can make money if they eventually find a bigger fool to sell to. And the biggest fool of all is the person who sees that fools have made money in stupid investments and thinks that is a reason to imitate them: Barry Eichengreen: The Stable-Coin Myth: "Mania for cryptocurrencies... so-called “stable coins”... Tether, Basis, and Sagacoin... rigidly tied to the dollar...

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Tail Risks

Stegosaurus jpg 700×455 pixels

Tail risks. Can we afford right now to think about tail risks? Probably not: right now what were our tail risks have become head risks, and given them and our day jobs we are all fully absorbed. But if we are going to be spending even a little time thinking about tail risks, the big worry has to be that something happens to cause the Global North to stop investing, as it did in 2008-2009.

Cast your minds back to ten years and two months ago. Back then people were patting themselves on the back; The United States had wound down from its over-the-top overcommitment to housing construction, and had done so without a recession. The Federal Reserve had handled the unpleasantness of mortage-firm, structured-product, and Bear-Stearns bankruptcy. In doing so the Federal Reserve had effectively guaranteed the unsecured debt of every systemically-important commercial and investment bank in and out of New York. The forecast—at least among those who were not close students of Hyman Minsky, an who had not paid attention to Paul Krugman's The Return of Depression Economics—was for at most a small recession, with the balance of risks such that the major risk to the economy—at least in the minds of the Federal Reserve's Open Market Committee—was an increase in core inflation.

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This is, I think, both right and wrong. China has an... interesting property-rights system—your property is secure not through title deeds and such but through networks that link you to party and government officials. It's hard to argue that it does not work. It is easy to argue that it shouldn't work. But it does work, and this does, I think, have something to do with China's stabilization policy success. China has Keynesian demand management—and is willing to use it. China has interest rate tools, but they are in general effective at boosting only exports and construction. And China has effective financial repression, with which it appears to do a lot to manage banking and investment and thus the flow of aggregate demand. I have not seen a good analysis of how China's credit-based stabilization policy really works. I would like to see one. But fiscal policy and monetary policy ought—away from the zero lower bound at least, be powerful enough tools to do the job, and in all likelihood better tools to do the job: Noah Smith: China Invents a Different Way to Run an Economy: "The nation has avoided a recession for a quarter-century. Few countries can make the same claim...

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Monday DeLong Smackdown/Hoisted: Greenspanism Looking Pretty Good...

Oy: This was perhaps the biggest thing I got most wrong in 2008. It's not saved by the weasel-words at the end: "If the tide of financial distress sweeps the Fed and the Treasury away--if we find ourselves in a financial-meltdown world where unemployment or inflation kisses 10%--then I will unhappily concede, and say that Greenspanism was a mistake...: Greenspanism Looking Pretty Good...: Martin Wolf is gloomy:

A year of living dangerously for the world: It is now almost a year since the US subprime crisis went global. Many then hoped that the repricing of risk would be no more than a brief interruption.... Such hopes have been disappointed.... So where is the world economy now? And where might it go? Here are some preliminary answers to these questions.

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But are we sure that our debts are in dollars? Would we know it if the big New York banks had been trying to boost their earnings by selling unhedged dollar puts, in the (probably correct) belief that if they all do this together they do not have a problem, the rest of us have a problem?: Paul Krugman: Opinion | Partying Like It’s 1998 - The New York Times: "Those of us who devoted a lot of time to understanding the Asian financial crisis two decades ago were wondering whether Turkey was going to stage a re-enactment. Sure enough...

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Ten Years Ago: A Federal Reserve Not Understanding the Situation at All

The Ahistorical Federal Reserve by J Bradford DeLong Project Syndicate

Occurrences in August 5, 2008, FOMC Meeting Transcript:

322: Inflation
029: Liquidity
029: Spreads
028: Unemployment
011: Crisis
001: Solvency
000: Minsky
000: Lehman
000: Bear-Stearns

A Federal Reserve looking in exactly the wrong direction ten years ago: Federal Reserve: FOMC Meeting Transcript: BERNANKE: "On inflation, I do have concerns, as everyone else does.... We will continue to see that high level of prices being passed through into the core...

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The Ahistorical Federal Reserve: Live at Project Syndicate

The Ahistorical Federal Reserve by J Bradford DeLong Project Syndicate

The Ahistorical Federal Reserve: The most effective–and thus the most credible–monetary policy is one that reflects not only the lessons of history, but also a willingness to reconsider long-held assumptions. Unfortunately, neither attribute is much in evidence at today's Federal Reserve: BERKELEY–Economic developments over the past 20 years have taught–or ought to have taught–the US Federal Reserve four lessons. Yet the Fed’s current policy posture raises the question of whether it has internalized any of them... READ MOAR at Project Syndicate

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Sunday Morning Twitter: Functional Finance/A Better World Is Possible Tweeting...

Preview of Sunday Morning Twitter Functional Finance A Better World Is Possible Tweeting

A better world—a better twitter—is indeed possible...

Suresh Naidu: I will stake my fancy economics job on this: Nothing in @Ocasio2018's policy program is inconsistent with a 2018 understanding of economics.

Wojtek Kopczuk: I missed it before, by my favorite colleague to disagree with. Congratulations on tenure @snaidunl!

Suresh Naidu: Sigh you drew me out. Tell me which policy is infeasible and not addressing some market failure?

Wojtek Kopczuk: They are inconsistent with the government budget constraint. And her MMT support is definitely inconsistent with mainstream economics.

Suresh Naidu: MMT is totally consistent with lots of mainstream macro when the economy is demand constrained (and fiscal theory of the price level when its not). it is unfortunate its adherents dont see that. And budget constraints are endogenous.

Ivan Werning: What do you have in mind?

Suresh Naidu: Oh crap a real macroeconomist. I think stripped of mysticism, MMT is really boils down to "fiscal mutipliers greater than 1", which could be true in demand constrained economy.

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Aspen—Maroon Bells

Aspen: Multilateral Institutions and International Collaboration: Back when I was in the Clinton administration, I remember pressing the Treasury International people on how better funding and more substantive independence for multilateral institutions ought to be a much higher priority—and their response was: "We want to keep them on their leashes so we can run the show. We are the US. We are the boss".

And then, lo and behold, Bob Dole unleashes Al D'Amato to make trouble about the Mexican financial crisis and the fallout from that leaves the US hobbled when 1997-8 comes around, and there was a general current of: "yeah, it would have been better if a much more well-funded and truly independent IMF had been able to handle both on its own."

US politics now are obviously so fraught and dysfunctional that it seems to me we should be ceding power over multilateral institutions as fast as possible, while also beefing up their financial resources. What roads are available to accomplish that?...

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