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Firedoglake » It Takes The Village To Raze the Economy: Some Notes On Krugman and the Return of Keynes
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So far, so good. Except, there's a hole. That hole is that the Fed hasn't followed the simple "Taylor rule." In fact, there's been a significant gap between Taylor rule and interest rates. Or more exactly, two of them.
The first was between 1994 and 1998 -- the Fed was consistently above the Taylor rule. This lead several more left-leaning economists to call for lower interest rates to get more growth. The second was between 2001 and 2008 - the Fed was consistently below the Taylor rule. What a coincidence. So the argument that the Fed was a transparent carrier of the economic demand for funds breaks down. The other point is that there is a simple explanation for all three - short term rates, inflation, and budget deficits moving in tandem over the last 10 years, namely that they represent the same thing, not a market that is clearing, but three different forms of the same thing, namely, risk aversion.
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The reality is that Federal Reserve interest rates, government bond auctions, and federal budget deficits all have one thing in common: they aren't markets in the sense of "many independent actors making independent decisions." The Fed's decision is in the hands of a few people, most of the buyers of government treasuries is a small number of large players, and of course, the Federal budget deficit is written by a few hundred people and their staff members. These are not large markets, but small ones. Hillary was pilloried for saying that it takes a village to raise a child; but the evidence here -given that the results of the last 10 years have been a market crash, a terrible recovery, and a massive global downturn- is that it took "The Village" to raze the economy.
Filling the Financial Regulatory Void « The Baseline Scenario
I would argue that the fundamental flaw in financial regulation is that it is based on the assumption that regulators are not self-interested individuals like the rest of us. We think about regulation only in terms of how to engineer the incentives of the regulated and ignore the fact that regulators themselves rarely have a stake in doing their job well, which in any other occupation would limit the motivation and types of individuals a position attracts.
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It is unlikely that consumers will ever hold much influence over the realities of the financial regulatory process because they are not organized in comparison to the financial industry, which concentrates significant resources in the creation of inefficient regulators. By and large, consumers are not well-informed about what they have at stake in the regulatory process and, even if they were, that would not be the sole determinant of how they define themselves politically.
Adding another layer of guards to guard the existing guards ultimately results in an infinite regress. I do not think it is cynical to suggest that, absent an actual paradigm shift with respect to accountability in the financial industry, we are just going to have more of the rent-seeking that has gone on to date and the economic calamities that ensue. For my part, I would propose opening up financial regulation to a small group of social entrepreneurs. Let people establish for-profit companies that can compete for government contracts to stress test the holdings of financial institutions independently and audit their records.
Book Review - 'The Myth of the Rational Market,' by Justin Fox; and 'The Sages,' by Charles R. Morris - Review - NYTimes.com
THE MYTH OF THE RATIONAL MARKET A History of Risk, Reward, and Delusion on Wall Street.By Justin Fox
THE SAGES Warren Buffett, George Soros, Paul Volcker, and the Maelstrom of Markets By Charles R. Morris
Goldman Sachs, the lords of time By Julian Delasantellis Asia Times Online :: Asian news and current affairs
Good explanation of Wall Street trading and impact of high frequency trading.
Ah, Wall Street. Seeing the real you at last. » New Deal 2.0
Financial innovation was presented to us in a way that suggested that great things were happening for mankind. The presentations were usually vague. To understand them, we had only the power of our own imaginations, or perhaps, failing that, our awe in the face of this powerful expertise, confidently propelling us to a greater future....
Malarky. This is all code for defer to the wishes of those who make money from these techniques.
After Peak Finance: Larry Summers’ Bubble « The Baseline Scenario
There are three kinds of “bubbles” - a term often used loosely when asset prices rise a great deal and then fall sharply, without an obvious corresponding shift in “fundamentals“.
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- A short-run bubble. Think about 17th century Dutch Tulip Mania: spectacular, probably disruptive, but not a major reason for the decline of the Netherlands as a global power.
- A distorting bubble. In this case, the increase in asset prices contributes to a reallocation of resources across sectors. Think of the Dot-com Bubble: fortunes were made and lost, the collapse was scary to many, and – at the end of the day – you’ve built the Internet and some good companies.
- A political bubble. Here rising asset prices generate resources that can be fed into the political process, through bribes, building politicians’ careers, and lobbying of all kinds. Bubbles in Emerging Markets often generate resources that impact the political process, sometimes in good ways – but most often in bad ways, which eventually contribute to a collapse.
Felix Salmon » Blog Archive » Financial innovation | Blogs |
I think that the case for the positive effects of financial innovation is yes pretty strong if you roll back the clock to 1200 or 1900 or 1950. But over the past 25 years or so, the claim is much harder to make stick.
Matt Taibbi - Taibblog - The real price of Goldman’s giganto-profits - True/Slant
Taibbi gives a good rant on the subsidies that boosted Goldman Sachs profits to record levels.
Paranoids have enemies too | TPMCafe
There is no lack of irrationality on offer in the behavior of those who make up "the market." And the consequences certainly entail chaos. But the historical record of bubbles is too long and repetitive to ascribe behavior to individual deficiencies...
What's missing from the meliorist framework of my fellow bloggers is the concept of Power. We're getting progressivism when we need populism.
FT.com / Comment / Opinion - Orwellian accounting cannot damp economic cycles
An equally, or perhaps even more, dangerous argument now gaining currency is that accounting should be given an explicit role in promoting financial stability, rather than its traditional role of providing information useful to investors in their decision-making. The implication of this view is that accounting measures that show volatility should be adjusted to create an impression of stability.
Michael Lewis on A.I.G. | vanityfair.com
profile of AIG FP and speculations on why it failed, especially the personality of Joe Cassano.
[0902.0878] The backbone of complex networks of corporations: Who is controlling whom?
We present a methodology to extract the backbone of complex networks in which the weight and direction of links, as well as non-topological state variables associated with nodes play a crucial role. This methodology can be applied in general to networks in which mass or energy is flowing along the links. In this paper, we show how the procedure enables us to address important questions in economics, namely how control and wealth is structured and concentrated across national markets. We report on the first cross-country investigation of ownership networks in the stock markets of 48 countries around the world. On the one hand, our analysis confirms results expected on the basis of the literature on corporate control, namely that in Anglo-Saxon countries control tends to be dispersed among numerous shareholders. On the other hand, it also reveals that in the same countries, control is found to be highly concentrated at the global level, namely lying in the hands of very few important shareholders. This result has previously not been reported, as it is not observable without the kind of network analysis developed here.
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