Assorted links

1. Russ Roberts on causes of the financial crisis.

2. Hyperinflation interactive site.

3. Have we reached peak “adult education”?

4. The romantic appeal of savers (speculative).

5.  Very good Paul Krugman post on Latvia.  It deserves its own post but it is not that easy to excerpt, so read the whole thing.

6. But on the liquidity trap, John Cochrane is essentially correct.  He has worked through some of the key details, and it’s time to lay that one to rest.

7. The one-man economist war against international cartels.


#2) the inflation percent get so ridiculous towards the end that it becomes meaningless. I think a more valuable graphic would be to show how fast your savings got reduced to 0. For example, if you had 1,000$ at the start, how soon will it be worth 1 cent? when you are down to 0, further inflation becomes meaningless to you.

If you were a producer, your prices would rise with inflation, and then you could see how often you would have to double your prices.

Re #3. It's possible that some adult education is moving into channels that traditional data sources cannot (yet) capture--like MOOCs. Actually, I think MOOCs as adult-enrichment education (rather than credentialing) may be a fairly important source of enrollments in them. Although I'm still unable to see how MOOCs can survive financially...

I liked Tyler's retweet yesterday, via Stephen Landry, leading to "The iTunes of Higher Education" by Gabriel Kahn (whew, exhausting hat-tips). The central idea is that MOOCs and etc might be fragmenting education from the 4-year degree standard. Good news, IMO.

Until we replace it with the "you can never have enough signaling" standard :(

1. Was it impossible to short those bundles of securitized mortgages? If not, I don't understand why incentives to take excessive risks led nearly every trader to be on the long side of that market. If so, there's your problem.

CDS provided a mechanism for shorting. Later in the game you could short the ABX indicies, I think.

Then the problem wasn't excessive risk taking. Or is shorting a "bubble" seen as playing it safe? In reality it sounds like there were too few risk takers on Wall Street. Maybe we should blame a "culture of trend followers" for the financial crisis.

There's plenty of blame to go around. Clearly most people involved (regulators, bankers, investors, home buyers) thought house prices were going to continue to rise for some time.

If you introduce a way to bring another million buyers into the housing market, something will happen. What made that possible? Changes in underwriting, extraordinarily low interest rates, a way to sell local mortgage exposure, government policies that encouraged all three. Wall Street has always had an attraction to high risk instruments because there is money to be made, as long as you don't lose it. Junk bonds were an example. The securitized model made it possible to take on very high risk while presenting it as low risk. What killed the Wall Street banks was not that they sold a bunch of trash, but that they had the trash on their books. Folks that were aware of the ugliness of the MBS market were unaware of how much of these things were counted as assets in the large Wall Street firms. That is why the cry in late 2008 to the Treasury was to find a way to buy all this trash from them, hence TARP, troubled asset relief program, along with the MBS (and treasury bond) purchases by the Fed. Later in the process, when housing prices had already peaked, the secondary market in derivatives took off, and things got utterly detached from reality. I suspect by that time the only rational strategy for a very over extended wall street bank that had a bunch of MBS' that were based on stagnant or dropping housing prices was to go all in and build the extraordinary CDS and other synthetic (a nice word for made up) derivatives.

For a regulator, a Fed chairman, or Treasury secretary, or someone in the finance committees in Congress, if they had done something to put an end to the stupidity in 2006 they would have been pilloried, and there would have been blood as the housing market dropped. So they didn't, and they watched it get worse and more stupid, until what could have been a 20% catastrophic housing price decline turned into 50% plus with a loss in the banking sector close to $5 trillion.

What has struck me is the utter lack of curiosity of how it all worked and how it all came about. There is plenty of blame to go around, and if everyone who was a fool was driven from the business, regulators or seats of power, there wouldn't be anyone left. Literally. Except for folks like Ron Paul.

You redefine the risk as diversification, create complicated financial instruments, and sell the risk to someone who doesn't know it's risky. Get a AAA rating put on the bad debt and sell it to pension funds. Make fees in the process. The Big Short by Michael Lewis is my only reading on it, but that seemed to be the theme.

The recent story on an investment bank being castigated for creating a synthetic mortgage bond portfolio specifically for the purpose of being shorted by another investor demonstrates why the mortgage bubble grew so large. Basically people don't like shorters. But in actual fact, creating a short opportunity is exactly what the market is supposed to do. The more people who were doing this, the more likely that the bubble would have collapsed earlier. We should praise the investment bank that did this, not demonize them.

Re #7, Connor says "My numbers tend to show that the fines that have been imposed historically have been too low to deter cartels."

I have my students read Connor and then Lawrence White on the lysine damages, and the overwhelming majority come down on White's side. Maybe that's why it's a one-man war.

@#7 - this is nothing more than how a expert legal witness can get rich off of litigation. What the reader should realize is that intentional price fixing is a so-called "per se" antitrust violation meaning, like statutory rape, once you can establish the facts there's no defense. Once you establish that there was an intentional attempt to fix a price between two suppliers--no matter how innocent, and, get this, even if the attempt would have failed (because the suppliers, together, had no market power or monopoly), then the plaintiff automatically wins the antitrust claim. It's a easy "slam dunk" and that's why everybody (even judges) like this sort of claim--you get rid of the antitrust suit, which can otherwise be a pain to decide. It's akin to destroying evidence after a court tells you to not shred any documents--another "automatic win" for the opposing side. Hence this gentleman is highly compensated, because of his ability to persuade juries, as a expert witness (but not a fact witness) that his scenario of a price fix is plausible. Good on him for developing an expertise that makes him handy for the plaintiffs. I don't necessarily believe though that society was really harmed by the price fixing in every case.

If it's a class action, even a per se case can get quite messy (i.e., require expensive economic experts), at least at the class cert stage.

#4 abstract read: "Saving up to make a particular purchase also enhances one’s romantic appeal, as long as the planned purchase is not materialistic."

I was confused on that also. Save up for a trip maybe?

As I was reading I also was conflicted by the advice given by "pick up artists" to cultivates a look - often involving nice clothes, fitness, material things, and having interesting experiences. It's difficult to show off a paid-off mortgage. Pick-up-artist advice is rarely "start saving more."

That hyperinflation interactive site is a lot less useful than I had hoped. For example it gives the duration of German hyperinflation as 17 months, which is pretty much nonsense.

The German Mark was 20 to the Pound Sterling in 1914, and had already fallen to 200 to the Pound by 1918. Germany increased tis money supply by a factor of ten, from 2.7bn Marks in 1914 to 27bn in 1918, and not surprisingly, a ten times increase in the money supply got them a ten times, or 1000%, inflation.

Visitors to Berlin in 1918 noted that Germans had already lost faith in the Mark, and were busily trading their cash for real estate, stocks and shares, gold and silver, and foreign currency.

In other words, the actions of ordinary Germans were pro-cyclical, and ensured that inflation accelerated. By 1921, with the Mark round 700 to the Pound, inflation was at such a level that by the time people paid their taxes, the real value of taxes was very low, and the Government printed to fund its expenditure.

The bottom line is that the final 17 months were not an event in itself, but simply the blow-off phase of an excessive and accelerating inflation that had been in place since 1914. If you miss that, you go off looking for a "cause" for 1923, when the real cause of 1923 is 1914-22.

RE: #5

That was the most rational, coherent Krugman post I've read, maybe ever.

Granted, I'm not a Krugman reader. But whenever I visit his blog, it's not been that levelheaded. I like the new Krugman.

"Ladies and gentlemen of this supposed jury, if there ain't liquidity, that's just stupidity." - Johnny Cochrane

"If the profits are Hell, you know it's a cartel."--Johnny Cochran

6. There are a lot of reasons to be skeptical of NK liquidity trap models, but there are just as many reasons to be skeptical of Cochrane's conclusions. All he really does here is show that if you change the assumptions of a model, you get different results. Shocker. Doubly shocking that his preferred assumptions show that our economic problems are mostly supply side. It seems much more likely to me that if nominal growth had been higher since 2008 -- either through monetary or fiscal stimulus -- then our current output would be significantly higher. Where are the signs that our economy is currently near capacity? Where is the evidence that in 2007 we were in a significantly overheated economy? What made our structural problems so much worse in the past 5 years that 4% fewer of the population is working and we don't think there is any productive way to employ them? Until Cochrane (or anyone else) gives coherent answers to these questions, they're just repeating their prior assumptions.

"7. The one-man economist war against international cartels."

Fascinating article about retired Purdue economist John Connor who has gotten rich as an expert witness against multinational cartels. Economists used to be obsessed with anti-trust, but now there is so little academic interest in the evils of cartels that Connor has largely cornered the market.

Meh. Cartels are inherently unstable. It's not clear to me that the heavy hand of litigation is preferable to letting transitory 'cartels' run their course.

Transitory, yes, but the empirical evidence is that many cartels are not transitory. It's not just Connor - have a look at Levenstein and Suslow 2006. Many last for less than a year, but the median duration is seven years or so, and there are some that last for decades. Those are just the ones that got caught...

And there's the deterrent effect too. There are probably lots of minor thefts and other crimes that really aren't worth the heavy hand of prosecution. But we do it, because we know there would be even more if we didn't.

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