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January 23, 2015

Latest Posts from Economist's View

Latest Posts from Economist's View

Paul Krugman: Much Too Responsible

Posted: 23 Jan 2015 12:24 AM PST

Europe's self-indulgent "archons of austerity" and "doyens of deflation":

Much Too Responsible, by Paul Krugman, Commentary, NY Times: The United States and Europe have a lot in common. Both are multicultural and democratic; both are immensely wealthy; both possess currencies with global reach. Both, unfortunately, experienced giant housing and credit bubbles between 2000 and 2007, and suffered painful slumps when the bubbles burst.
Since then, however, policy on the two sides of the Atlantic has diverged. In one great economy, officials have shown a stern commitment to fiscal and monetary virtue, making strenuous efforts to balance budgets while remaining vigilant against inflation. In the other, not so much.
And the difference in attitudes is the main reason the two economies are now on such different paths. ... No, it's not morning in America... Recovery could and should have come much faster, and family incomes remain well below their pre-crisis level. Although you'd never know it from the public discussion, there's overwhelming agreement among economists that the Obama stimulus of 2009-10 helped limit the damage..., but it was too small and faded away far too fast. ...
Europe, on the other hand ... did almost everything wrong. On the fiscal side, Europe never did much stimulus, and quickly turned to austerity ... despite high unemployment. On the monetary side, officials fought the imaginary menace of inflation, and took years to acknowledge that the real threat is deflation. ...
Monetary policy got much better after Mario Draghi became president of the European Central Bank in late 2011. ... But it's not at all clear that he has the tools to fight off the broader deflationary forces set in motion by years of wrongheaded policy. ...
The terrible thing is that Europe's economy was wrecked in the name of responsibility. ... In a depressed economy..., a balanced-budget fetish and a hard-money obsession are deeply irresponsible. Not only do they hurt the economy in the short run, they can — and in Europe, have — inflict long-run harm, damaging the economy's potential and driving it into a deflationary trap that's very hard to escape.
Nor was this an innocent mistake. The thing that strikes me about Europe's archons of austerity, its doyens of deflation, is their self-indulgence. They felt comfortable, emotionally and politically, demanding sacrifice (from other people) at a time when the world needed more spending. They were all too eager to ignore the evidence that they were wrong.
And Europe will be paying the price for their self-indulgence for years, perhaps decades, to come.

Links for 01-23-15

Posted: 23 Jan 2015 12:06 AM PST

Interview of Donald Kohn

Posted: 22 Jan 2015 11:09 AM PST

From an interview of Donald Kohn by Cecchetti & Schoenholtz:

Interview: Donald Kohn: ... Where should we be looking now for financial stability risks given this experience?
Vice Chairman Kohn: The response of the authorities to the crisis has concentrated on banks, especially large banks, and other systemically important financial institutions, including insurance companies, investment banks, etc. I think those financial institutions that have been the target of the authorities' attention are in much better shape, and I don't think they constitute a risk to financial stability today. So I don't think that what nearly brought the system down before, a Lehman Brothers kind of collapse, is currently a risk.
There could be mispriced bonds. People have pointed to junk bonds and dollar-denominated emerging market bonds and asked whether the risk in those bonds has been accurately valued by the market.  With regard to the consequences of a price adjustment, I would contrast the dot-com boom and bust with the housing boom and bust. The difference was the participation of intermediaries. Most price adjustments are fine. There could be quite a bit of volatility in the market as prices adjust. But I don't see it having the same kind of risk characteristics that the subprime market had in the United States. ... I would look at ... the markets and the pricing of risks, including liquidity risks...
Also, I would look at what remains of the shadow banks. In the tri-party RP [repurchase] markets, the money markets funds and other cases, there have been some fixes. But I do think we need to be careful that – as we put more restrictions on banks and other systemically important institutions – if their activity migrates to other places, it doesn't do so in a way that has systemic risk associated with it. I don't see that today, but I think it's something we have to be careful about in the future.

Tri-party repo (where we saw a run on the shadow banking system during the crisis, a vulnerability that still exists) is what worries me the most.

'Not Seeing Luck'

Posted: 22 Jan 2015 10:29 AM PST

Chris Dillow at Stumbling and Mumbling:

Not seeing luck: I claimed the other day that those of us who are in the global 1% are apt to under-estimate our good fortune. There is, in fact, quite robust evidence from other contexts that we tend to under-rate luck and over-rate skill and causality. ...

This is probably because of a self-serving bias... However, other research shows that people also see skill where none in fact exists even in other people. ... This sort of behaviour has been confirmed in laboratory experiments. ...

I suspect that this is part of an older-attested phenomenon - that people under-rate randomness and over-rate causality, which is one reason why we draw overconfident inferences from noisy data. ...

You might see this as an echo of David Hume's claim, that our ideas about causality result merely from custom and habit and so are fallible.

It also, I suspect, helps explain a claim made by Hume's good friend. If we over-rate causality and under-rate luck, we will exaggerate the extent to which the wealthy deserve their fortune. As a result:

We frequently see the respectful attentions of the world more strongly directed towards the rich and the great, than towards the wise and the virtuous. We see frequently the vices and follies of the powerful much less despised than the poverty and weakness of the innocent...The great mob of mankind are the admirers and worshippers, and, what may seem more extraordinary, most frequently the disinterested admirers and worshippers, of wealth and greatness. (Theory of Moral Sentiments, I.III.29)

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