TADOW! International Politics and Markets

I used to be skeptical about using monetary policy...

2009-04-07T20:49:00.000-07:00

I used to be skeptical about using monetary policy to prick asset price bubbles but have since come to believe this to be necessary. It may be useful for monetary authorities to take the steam out of a booming asset market when overall indebtedness exceeds a certain level. In doing so they might induce a small contraction in order to work the excesses out of the system. This may be the best way to avoid major buildups of debt which are necessarily followed by a huge crash of the kind we are now witnessing.

I'll check out "The Costs of Capitalism" - thanks for the recc.

I just finished reading "The Cost of Capitalism," ...

2009-04-07T11:53:00.000-07:00

I just finished reading "The Cost of Capitalism," which provides a nice overview of Minsky. My only exception to the author's thesis is his view that asset bubbles must be pre-empted by the central bank. Of course, it's nearly impossible to target a specific asset class. Further, asset bubbles don't really matter as long as they aren't being funded by financial intermediaries.

I would point out that the Austrian school first espoused the view that the expansion and contraction of money and credit drives the cycle. The only problem with the Austrians is that they want to blame the Fed for the "cluster of errors," as if private bankers can do no wrong. Apparently they're unfamiliar with the panics of 1893, 1907, etc.

Thanks Jimmy. There's a sizable literature that es...

2009-04-06T22:53:00.000-07:00

Thanks Jimmy. There's a sizable literature that espouses this view that the expansion and contraction of money and credit lie at the root of financial booms and busts. It started with the economist Hyman Minsky and, more recently, Charles Kindleberger and George Cooper. Minsky, in particular, was a renegade economist who challenged the (still) prevailing view that markets are (a) efficient and (b) change only in response to exogenous forces. He sought to show that dynamics internal to the market can cause large and self-perpetuating market movements that feed on themselves. Minsky remains largely ignored by the profession, but his theory has gained increasing attention of late.

Neil-

Nice piece. I am of the conviction t...

2009-04-06T02:46:00.000-07:00

Neil-

Nice piece. I am of the conviction that the marriage of money and credit (i.e., fractional-reserve banking) and the re-leveraging of financial assets are the heart of all systematic volatility.

thanks for the informative posting. i am glad i d...

2008-11-30T17:29:00.000-08:00

thanks for the informative posting. i am glad i did not have to actually read a book to learn this, however, i certainly would have appreciated some more insight from the "news" networks covering the carnage. thanks as always.

Thanks Jimmy. While I've heard about Soros' conce...

2008-09-23T15:36:00.000-07:00

Thanks Jimmy. While I've heard about Soros' concept, I must admit I haven't actually read his own explication of it. In the industry I believe it is known as "trader effects" - i.e. enough traders start trying to exploit the same opportunity, thereby making the opportunity disappear. I'd be very interested to hear how you think it would apply to the current situation.

Neil- Good summary of the recent chaos.

A...

2008-09-23T13:49:00.000-07:00

Neil- Good summary of the recent chaos.

Although Taleb goes a commendable job exploding the myth of the normal distribution in markets, I find Soros' concept of "reflexivity" to be the most useful framework for interpreting recent events. Soros points out that once investors discover the returns distribution, they invest accordingly, believing that they can control the attendant risk. In fact, the investments they make based on this historical distribution of returns actually changes the ex-ante distribution. He says that this reflexivity is what differentiates social sciences from natural sciences- i.e., the observer is also the participant in the system.