The need for reliable information

I very much agree with this sentiment of Mark Thoma’s:

There has been much debate about whether the financial crisis is driven
by lack of liquidity or from fears about lack of adequate capital and
solvency, but I’m starting to think a third component is important as
well, the complete breakdown of traditional information flows, and a
loss of confidence in the models used to evaluate that information.
Markets need information to work properly, and the information
financial markets need is not available.

Here is more.  I do not wish to suggest that we abolish currency and T-Bills, but the deeper (and less stable) the private demand for these assets the harder it is to generate socially useful information from the trade in other assets.  Maybe today we’re in a world where the 1980 Grossman-Stiglitz paradox of information partly holds.  It’s not that the status quo price is already efficient, but rather no one gathering information feels they could benefit from swapping with the noise traders and so in turn not enough information is gathered.

Comments

In the crisis of 1907, J.P. Morgan demanded that the heads of the major companies bring their books to his house, where Morgan's smart young men pored over them and determined what each company was really worth.

We need something like that now for all these "securitized" (actually, "secretized") mortgage-backed securities and the more complex instruments based upon them.

I'm not sure what he means.

This financial crisis is different from any other in that we have a truly enormous amount of free high-quality information on the Internet, particularly from the blogosphere. The only shortage is time and human attention span. The ordinary retail investor is better informed today in many ways than the bigshot plutocrat of yesterday.

Pedro - I don't think that is quite it. The problem is we have been too willing to give money to corporations we don't understand. This is a problem beyond the bailout and the reason banks share prices seemed to have fallen so fast.

You're way over theorizing this, as you often do.
[Keynesians avert your eyes here.] When the Fed jimmies interest rates, the single most important signal in the economy is distorted, with all sorts of bad consequences, which have been coming home to roost since August 2007.
When the government taxes profits earned by successful firms, subsidizes weak banks and other businesses, and otherwise distorts price signals, information flows, particularly those embodied in profits and losses, are impeded and distorted; and resources are directed to unprofitable ventures and away from profitable ones.
This is happening in every sector that is being bailed out or continuing to be subsidized (e.g., ethanol producers and "green" manufacturers).
I think most economists, including the latest Nobel laureate, know this; but for some reason a lot of them are in denial about how markets actually work, and think that we need Big Daddy Diddly Gub'ment to come to the rescue, even though Big Daddy (1) caused the problem; and (2) can't even get its own books straight, never mind about the socialist calc problem of, oh, is $500 bill. the right number of Other People's money to spend (you can't call it investment), and is 2.5 mill. jobs the right number for Big Daddy Diddly to "create" when Team Obama takes power?

Btw, the current (Dec. 8) issue of Business Week has a scary series of articles on what's going on. "Can Obama Keep New Jobs at Home" points out that Hoover's last act as prexy--his last shot at the American economy, his last criminal act--was to sign a "buy America" act, which is still wreaking havoc.

And a small point about information flows.
The rating agencies had models of mortgage-backed securities, which assumed that housing prices would never fall. If private firms get this wrong (admittedly, the rating agences are a government-protected oligopoly and their issuers pay-business model doesn't make much sense), don't expect Big Daddy Diddly to get it right, expecially having prevented competition in the industry to begin with.
The article on Green Jobs also has to be read to be believed.

Every investor needs a reliable financial information. Though rewards are always associated with risk, it is necessary that we always have the choices and alternatives in investing our money, depending on the current economic situation. A particular investor will make a choice depending on his stock of financial knowledge and understanding...and ultimately depending on the risk he can take for that aimed reward.

The ratings agencies failed. People were taking more
risk than they thought because they trusted the ratings
agencies.

From what God's eye perspective can we say that they are
no not taking enough risk? Is it because we think they
would take more risk if they trusted good ratings agencies
now?

Getting rid of currency sounds like a good idea.

Maybe a currency suspension for the duration is appropriate.

T-bills aren't a problem as long as their yields can
go as negative as necessary. (And insured deposits, etc.)

Let the spread for risky financial instruemtns rise. Just
keep the level of interest rates low enough to maintain
aggregate expenditure growing at an appropriate rate.

Some parts of the economy will expand and others shrink.
Macroeconomic policy should never try to do more than to
keep the shortages and surpluses roughly matched. Trying
to make sure that the proper of amount of risky projects are
financed amounts to efforts at central planning.

Someone or other -- I've misplaced the name -- coined a law that measurements lose informational content over time as the assumptions they are based on cease to apply to actual practice. The speed with which they lose informational content is proportional to the amount of money (or time or prestige or utility generally) that people have riding on them, as this creates incentives to find new and exciting ways to game them.

One interpretation of a crisis caused by an informational breakdown is that important measurements (bond ratings, sarbox accounting disclosures, econometric aggregates, whatever) have decayed more quickly than one would have expected. The obvious reason for this is that they have become more important, that people have more money or whatnot riding on them. This would be consistent with the view that several people have expressed (Tyler here and Arnold Kling over at econlog spring to mind) that accounting standards, ratings requirements, and other such bookkeeping institutions have played a big role in getting us here.

How do you do that? "Give me $100,000 dollars today, and I will gladly give you $94,000 next Tuesday."

You could tax the alternatives. Better to lose 6% on a T-bill than 28% on a commercial bond

thanks so the article

"The only shortage is time and human attention span"
Spam all. oh :/

thanks you admin

thank you ..

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