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Lucas roundtable: Ask the right questions | Free exchange | Economist.com
But all the tools in the world are useless if we lack the imagination needed to build the right models. Models are built to answer specific questions.
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We need to take a close look at how the sociology of our profession led to an outcome where people were made to feel embarrassed for even asking certain types of questions. People will always be passionate in defense of their life's work, so it's not the rhetoric itself that is of concern, the problem comes when factors such as ideology or control of journals and other outlets for the dissemination of research stand in the way of promising alternative lines of inquiry.
I don't know for sure the extent to which the ability of a small number of people in the field to control the academic discourse led to a concentration of power that stood in the way of alternative lines of investigation, or the extent to which the ideology that markets prices always tend to move toward their long-run equilibrium values caused us to ignore voices that foresaw the developing bubble and coming crisis. But something caused most of us to ask the wrong questions, and to dismiss the people who got it right, and I think one of our first orders of business is to understand how and why that happened.
Don't Dismiss Taibbi : CJR
Mainstream financial journalism is doing its level, eye-rolling, heavy-sighing best to stuff Matt Taibbi back into the alt-press hole he came from, but he’s not going along with it, and the mainstreamers in any case are making a big mistake.
The Rolling Stone writer cemented his status as the enfant terrible of the business press with “The Great American Bubble Machine,” a 10,000-word excoriation of Goldman Sachs, a muckraker’s-eye view of Goldman history, exploring the bank’s and Wall Street’s contributions to various financial disasters
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The Atlantic’s Megan McArdle, who doesn’t lay a glove on Taibbi in this attack, is unintentionally revealing of a certain strain of financial journalism thinking:
Taibbi is a gifted narrative journalist, whose verbal talents I greatly admire. But financial meltdowns don’t offer villains, for the simple reason that no one person or even one group is powerful enough to take down a whole system.
“Financial meltdowns don’t offer villains?” Does anyone believe that?
And wait a minute: Are we really so sure that “one group,” Wall Street, was not central to this crisis and that its increasing influence over government at all levels—what gives, for instance, with ex-Goldmanite Neil Levin deciding as New York State banking commissioner in 2000 not to regulate credit default swaps as insurance?—was not decisive? And isn’t Goldman Wall Street’s leading firm?
FT.com / Investor's notebook - Insight: The threat of a return to thrift
Pessimism on consumer led economic growth.
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The result was that people gave up saving. Why save from income if rising asset prices did your saving for you while you slept? Why not consume more than you earn if you can borrow cheaply using your constantly rising wealth as the asset to borrow against?
When Volker walked into the Fed 30 years ago, the US national savings rate had been relatively static for decades at around 20 per cent of GDP and total US debt to GDP was about 160 per cent. Household debt was 47 per cent of national income. When the credit bubble burst in August 2007, the national savings ratio had fallen to 14 per cent of GDP and debt had risen to 350 per cent with household debt at just under 100 per cent of GDP. Even today, household debt in the US, although now contracting, still exceeds the level at the beginning of this crisis.
The disinflationary forces that drove the switch from thrift to leverage are over. This means the next decade will be one of replacing leverage with thrift. That will hurt retail spending.
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This will set off feedback loops between the real economy and financial one, in the opposite direction to that we have been experiencing. It will cause consumer incomes and employment to deteriorate, along with the real economy, giving rise to increased defaults on consumer credit, commercial real estate and other loans, as well as, of course, housing mortgages. The default ratio on prime mortgages is already well above the US treasury’s stress test limit set for the banks. And the default rates on consumer debt, including credits, are rising very fast. The credit crisis hit to banks’ balance sheets is far from over.
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.
The Way We Live Now - The New Joblessness - NYTimes.com
The U.S. economy is not only shedding jobs at a record rate; it is shedding more jobs than it is supposed to. It’s bad enough that the unemployment rate has doubled in only a year and a half and one out of six construction workers is out of work. What truly troubles President Obama’s economic advisers is that, even adjusting for the recession, the contraction in employment seems way too high.
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In the 1960s, Arthur Okun, a prominent economist, claimed to have discovered a mathematical relationship between the decline in output (that is, goods and services produced) and the rise in unemployment. It held up pretty well until recently. But this time around, although the decline in output would have predicted a rise in unemployment to 8 percent, the actual jobless rate has soared to 9.5 percent. So this recession is killing off jobs even faster than the things — like automobiles, houses, computers and newspapers — that jobholders produce.
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Explanations for the collapse of the great American job machine begin with the marked absence of what is called labor hoarding. Usually during recessions, firms keep most of their employees on the payroll even as business slows, in effect stockpiling them for better days. In the current downturn, hoarding seems to have gone into reverse. Not only are firms laying off redundant workers, but they seem to be cutting into the bone.
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FT.com | Willem Buiter's Maverecon | Islamic finance principles to restore policy effectiveness
Ideas about converting debt to equity.
Reserved Place: Is this really a great global recession?
In contrast, this post presents an unconventional indicator of global economic activity that shows no sign of truly global recession yet. This indicator is the seasonally adjusted atmospheric carbon dioxide concentration at Mauna Loa, Hawaii. Admittedly, the rate of carbon dioxide emission varies between different industries, and atmospheric carbon dioxide concentration is affected by natural variables such as sea surface temperature, making it a noisy indicator of economic activity
Economic Perspectives from Kansas City: A Message to President Obama: Stop Priming the Pump, Hire the Unemployed
So, when the government is called to action, the economic profession has replaced Keynes’s “fiscal policy via public works” with a “leaky bucket pump-priming mechanism.”
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The truth is that no one really knows how fast GDP needs to grow and how large government spending needs to be in order to bring the unemployment rate down. To a large degree, this is because we don’t know how leaky the bucket is. Will indebted households save or spend their tax cuts? Will the unemployed spend much of their unemployment insurance on mortgage payments? How long would layoffs and other cost-cutting measures last before private firms fix their own balance sheets and start hiring? How large a government injection into the private sector is necessary to improve profit expectations and employment conditions?
All of this is rather uncertain, which is why Keynes, never had any “leaky bucket” or “pump priming” idea in mind. For him “the real problem fundamental yet essentially simple…[is] to provide employment for everyone” (Keynes 1980, 267) and the most bang for the buck from fiscal policy would be achieved via direct job creation. This he called “on the spot” employment via public works. -
useful to think of Keynesian fiscal policy, not as aggregate demand management, but as labor demand management. Yes, Keynes believed that priming the pump would prevent severe depressions, but it couldn’t be counted on to bring the economy to full employment. This is in part because it tends to push prices and erode income distribution once the economy begins to recover. To dodge these problems, in all circumstances, government spending had to be targeted to the unemployed themselves. He urged that when the government couldn’t take the worker to the contract, it should bring the contract to the worker.
Debt, Class Warfare and Entrepreneurship
We became indebted, in large part, because of a structural imbalance in society, one that skewed incomes, redirected wealth, and encouraged companies and individuals to lever up instead of seeking out and earning higher incomes. At the same time, our unwillingness to say no to great society programs, without raising taxes to pay for them, meant that we became beholden to the bond market for funding ongoing operations, this creating an elevated base of required income to service our rising debt.
Desmond Lachman -- Welcome to America, the World's Scariest Emerging Market - washingtonpost.com
Off the Charts - A Recession That Is Already Setting Records - NYTimes.com
on the Index of Coincident Indicators. Current recession worst than every other since WW2, except 1973-5. Employment losses already the worst in post-war period.
Cognitive Edge - Opportunity Recognition in a Recession
Walter Derzko is looking for examples of businesses that have started in the recession or have seized opportunities.
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