2. There is no map of the Alps.
3. Ben Casnocha's humor tag.
4. Is European bank leverage overstated?
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The interesting thing about the Kahneman anecdote is the implicit value of having a map of the Pyrenees whilst traveling the Alps. To my thinking, by falsely recognizing possible landmarks with iterated optimism, they were able to use the map to travel to the most likely location for a human settlement, relative to the topology and hydrology of any particular mountain range.
It would be nice if this gave further nuance to the analogy, but I suspect it just ruins it.
Ok Spencer. Here’s my response: The Posner/Solow critique is bad, bad, bad, bad.
Your turn.
Sigh, you try to give people a break and it’s assumed to be admission of defeat.
http://www.politico.com/news/stories/0409/21393.html
“We know that an economy built on reckless speculation, inflated home prices and maxed-out credit cards does not create lasting wealth. It creates the illusion of prosperity, and it’s endangered us all,†
That’s The Prez. Air Force One hizzelf. He gets the Austrian diagnosis right, but, like Posner gets the prescription wrong.
And look another politician gets the critique of the prescription right, throwing in a little behavioral economics and public choice theory to boot.
“It’s just human nature to let the good times roll,† said former House Financial Services Committee Chairman Mike Oxley, a Republican. “And politicians are human like everybody else. You don’t want to be in a position of throwing a wet blanket on this stuff.†
You could say, “look, all this stuff that has worked, we’ll just keep doing that” and that would ‘work’ I guess. What you can’t do is say the government will regulate new financial products intelligently. You cannot regulate financials like drugs or like CO2. Unlike drugs and like CO2, the products aren’t dangerous until they are too successful and pervade the system. However, unlike CO2, once people know they are dangerous, they don’t want them anymore, which causes the crash, and removes any need to regulate them after the fact.
Here’s something else that struck me. It is the “too interconnected to fail” that get the bailouts. Interconnected, as in, owing each other money. So, it is the leveraged that caused the problem and the leveraged that are protected from the problems they cause. The government, through FDIC and “stress tests,” decides which banks must fail. Banks don’t want to lend to each other because noone knows who is solvent. None of them are solvent because banks always borrow short and lend long, and the government protects this system through insurance and regulation. This is not even so subtle and nuanced as a moral hazard. It is a rigged game of musical chairs where the government brings out new chairs with names on them, and then, surprise, takes away the unnamed chairs in an instant.
k Spencer. Here’s my response: The Posner/Solow critique is bad, bad, bad, bad.
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