Assorted links


UC Berkeley econ department getting some attention on MR today. I had DellaVigna for microeconomics and DeLong for economic history.

How Bill Gates _worked_. The article is from 2006. I was wondering why would he allow to be pictured with Windows XP when they have a new OS just released.

And, as if you aren't responsible for your own education during your program as well.

Oh, and back to the importance of economists working on panic versus heterogeneous capital, as a fledgling stock trader you look at where sentiment is today, but it is hard to predict future sentiment. Wasn't it mostly micro-analysts that predicted the crisis?

Someone can do this, by the way, a meta-analysis of all the publications that predicted economic problems and what schools they are from. Has someone done it?

The Keynesians seemed to be predicting the crisis, but they predicted and prescribed it for years, including the oft-forgotten real 1st (Bush) stimulus checks. Thinking back, The Fed was worried about inflation, but unbeknownst to everyone the horse was out of the barn. He'd in fact flipped the barn and was heading to the bank to close his savings account.

1. "Fact is, the world of business in general is not very interesting to most people. Including, sadly, most journalists."

That's the best news I've heard all year.

DeLong evidently thinks that the recent boom and bust played out in the housing industry alone. While there was more malinvestment in real estate than in other sectors, the business cycle was hardly confined to that market. Commodities, stocks, bonds, private equity, and art boomed as well.
Real estate is a lot bigger than housing. It includes both land and commercial real estate, which both boomed and then sank. Hardly a day has gone by recently when the financial press hasn't reported on distressed commercial real estate, and on both the restructuring of commercial real estate loans and new equity investments in commercial real estate, frequently by hedge funds. All of this points to the heterogenity of capital, and why it matters for understanding what's going on.

He also claims that malinvestment doesn't produce a depression, citing the dot com bust, which produced merely a recession (he doesn't mention the r word in the context of that). What he overlooks, again cue the capital heterogeneity chorus, is that the dot com boom was financed exclusively by equity capital, not by debt. Banks didn't overleverage their balance sheets in the dot com boom; neither did Mom and Pop when they took flyers on Netscape and the Sock Puppet (may he RIP on Ebay). The real estate boom, on the other hand, was heavily financed by debt, with only a sliver of equity in many cases, particularly in the subprime market. Banks overleveraged their balance sheets, as did Mom and Pop, with more than a dollop of help from Easy Al Greenspan and Comrade Ben ("We did it"; oh, wait a second, "it was lack of regulation, not the Fed.")

In order to understand the heterogenity of capital and why it matters for economic analysis, especially of business cycles, he should study Hayek instead of the people he mentions in a list.

A related point I forgot to make is that real estate is far more capital intensive than the investments that went into the dot coms, as are many other sectors, including commodities.
I don't know if four times as much capital flowed into the dot com run up than into the recent boom; frankly that number doesn't pass the smell test. But even if it's true, it's also very misleading because a large fraction of the dot coms were grossly overvalued either at the date of their IPO, or a day or a week or a month later. Their publicly quoted market values were proportionately far more overvalued than real estate prices, even when the latter were overpriced. And because the dot com runup was equity-based, the liablity side of corporate (and individuals') balance sheets were not nearly as swollen as they were during the recent boom; so they didn't require the deleveraging that we've seen lately.
To miss the difference in these cycles is not to understand either finance 101 or capital-based macroeconomics, as Roger Garrison puts it.

Tyler, you link to J. Hamilton's post on inflation in China. On Monday, I made some comments on JH's post arguing that he's wrong about a monetary-induced boom in China. Now let me add that he's also wrong about what is going on today in China. Indeed, what the Chinese government did in the past 18 months is to invest a larger share of the FLOW of people's savings with state banks in loans to enterprises and government agencies. Rather than increasing sharply budget expenditures, the government has preferred to divert a larger part of that flow to finance domestic expenditures rather than additional accumulation of "international reserves". JH refers to what's going on in a few markets to support his idea of an inflationary boom. But as anyone familiar with the history of inflation in the past 60 years in Latin America and other developing areas of the world, relative prices are changing all the time for a number of reasons that provided the foundation for the so-called structuralist theory of inflation. But as Julio Olivera showed in the 1960s, for changes in relative prices to transform into inflation the government has to follow a very accommodative monetary (=currency) policy. And this is not happening in China. Yes, government officials like to blame garlic (or potatos, or beef, or sugar, or whatever is important in CPI) for a TEMPORARY increase in the price level--but by definition this is not inflation, it's just a shortcoming of our estimates of inflation.
In sum, there is nothing yet to argue that the Chinese inflation may accelerate in the near future, and as long as people's savings continue to flow into the state banks, the government will have the resources to finance both the additional accumulation of "international reserves" and the higher level of domestic demand. As in the late 1990s, the fate of the Chinese economy depends heavily on this flow of savings.

Odd that Bill Stepp above tries to discredit DeLong by focusing on the credit flow differences between the NASDAQ bubble and the real estate bubble - the NASDAQ bubble involved almost no credit flows, just capital, while the real estate bubble involved almost no capital, and almost entirely easy credit flows.

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