Thursday, May 28, 2009

More linkfest on the crisis

1. Excerpts from a symposium on the economic crisis presented by The New York Review of Books and PEN World Voices on April 30, 2009, which involved the former senator Bill Bradley, Niall Ferguson, Paul Krugman, Nouriel Roubini, George Soros, and Robin Wells. They debate what caused the crisis, how far are we along recovery road, end of leverage, Treasury View, global savings glut, structural changes in the economy.

2. Economists and scientists debate the shortcomings of neo-classical economics, how it led to the adoption of practices and recommendations that caused the crisis, and whether science and its tools can help save the world from such crisis. The scientists draw from compelxity science to focus on developing a scientific conceptualization of economic theory and modeling that is reliable enough to be called a science. Economists are not impressed.

3. Wired magazine explores the secrets of Googlenomics and its mentor, Hal Varian.

4. Lectures on econometrics.

5. Atul Gawande joins the debate on health care reforms (specifically, the choice between a single-payer system or a more competitive mixture of public and private insurance) and examines the cost of health care in a Texas town.

6. CEPR has this excellent list of economists who have described the second US stimulus as too small and have called for a third orund of fiscal stimulus in the US.

7. Larry Elliot compares the old and new economics and talks of a vacuum in modern day macroeconomics. Steve Levitt weighs in contending that macroeconomics is handicapped by the relative absence of data (in comparison with micro), which drives economists to mathematical models.

8. Critique of the efficient market hypothesis. But I liked this one from Burton Malkiel, "If you are leveraged 33-1, and you’re holding long-term securities and using short-term indebtedness, and then there’s a run on the bank — which is what happened to Bear Stearns — how can you blame that on efficient market theory?"

9. Reviewing Richard Posner's new book "A Failure of Capitalism", Brad De Long feels that it reflects the eclipse of the ideologies and techanigs espoused by the Chicago School. About the ongoing crisis, he writes, "we need to change the culture of Wall Street by changing how top-earning financial professionals are paid, changing the assets they trade to make the markets less opaque, and changing the risks they run by taking capital requirements very seriously once again. If we accomplish all three, there’s a chance that the next Minsky Moment that comes along will be a minor disturbance rather than a globe-shaking catastrophe for 100 million people. The key irrationality was a private-sector failure on the part of the shareholders and top managements of the banks to make sure that their traders had an appropriate stake in the long-run survival of the bank and not just in constructing a portfolio that would be marked-to-market at a high valuation on Dec. 31. And the government needs, for all our sakes, to compensate for this private-sector irrationality."

10. Fed Chairman Ben Bernanke's speech (full text here) to the Federal Reserve Bank of Kansas City’s Annual Economic Symposium in Jackson Hole, Wyomoing, which analyses the reasons for the crisis and claims that the economy is at the cusp of recovery.

11. Gary Gorton has this explanation of the financial crisis. He writes,

"All bond prices plummeted (spreads rose) during the financial crisis, not just the prices of subprime- related bonds. These price declines were due to a banking panic in which institutional investors and firms refused to renew sale and repurchase agreements (repo) – short-term, collateralized, agreements that the Fed rightly used to count as money. Collateral for repo was, to a large extent, securitized bonds. Firms were forced to sell assets as a result of the banking panic, reducing bond prices and creating losses. There is nothing mysterious or irrational about the panic. There were genuine fears about the locations of subprime risk concentrations among counterparties. This banking system (the "shadow" or "parallel" banking system) – repo based on securitization – is a genuine banking system, as large as the traditional, regulated and banking system. It is of critical importance to the economy because it is the funding basis for the traditional banking system. Without it, traditional banks will not lend and credit, which is essential for job creation, will not be created."

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