the rational post

the great recession: act ii

As Canadians sparred over fake lakes, budget-busting security, and the global capitalist conspiracy, the world’s twenty most influential leaders convened in Toronto this past June to negotiate a response to the worst financial crisis in generations. At issue was an age old debate between two economic philosophies: stimulus as a life vest versus stimulus as a straitjacket. The pro-life camp was championed by consumerist America and its global supply chain. The pro-restraint camp was led by conservative Germany and its regional demand chain. At risk were millions of jobs, trillions in debt, and quite possibly the fate of our modern political economy.

With so much on the line, the G20’s vague and non-committal communique was particularly troublesome,…

behavioral bias

As evidence continues to mount that established models of rational decision-making are dangerously out of date, behavioral science has embraced human irrationality in all of its deceptively predictable forms. At the forefront of the field is Duke University professor Dan Ariely, whose simple experiments into human bias have shed light on everything from the fallacy of supply and demand to the problem of procrastination.

In a recent interview with NPR, he turned his gaze toward the growing debate about rampant health care costs and their potentially behavioral origins. To contextualize the issue, he describes an experiment in which different groups are asked to order pizzas. One group is presented a menu where the default is…

oil slick = euro trick

Stopping the spread of financial contagion is deceptively similar to plugging a ruptured deep-sea oil well: the cost is epic, the risk of failure is catastrophic, and expectations of success may be more hopeful than realistic. Recent efforts to address both crises share so many elements that a few tweaks to the following report on the Gulf catastrophe also freakishly describes efforts by the Eurozone to head off the risk of cascading sovereign defaults…

[European Central Bank] to [inject $1 trillion] to stop flow from [Club Med economies]
Adapted from an article on guardian.co.uk Friday 7 May 2010

The [$1 trillion facility] that remains [Europe's] best hope of containing the disaster in [Greece, Spain and

…

a dose of reality

Armies of bulls and bears are camped out on either side of the great debate over the future of the global economy. Armed with the latest statistics and plenty of financial incentive, both sides are engaged in massive media campaigns to rally anyone left on the fence — principally retail investors who were either burned in the great collapse of 2008-09 or sat out the fast and furious rally over the past 14 months. As the rhetoric heats up, it becomes increasingly difficult to choose sides. A careful examination of these competing wagers provides a more holistic perspective for anyone brave enough to join the fight.

Victory lap

Having survived the worst correction in generations, major indices are now…

failure by design

Churchill argued that democracy is the worst form of government, except for all the others. With capitalism now falling under similar fire, modern politicians, businesspeople and academics are once again questioning both the failures of free markets and the failures of government. As pundits gather on either side of the debate — casting blame and contempt across the regulatory divide — one often overlooked explanation for all the recent chaos is the time-honored tendency for human society to self-destruct. Behavioral economists and psychologists are having a field day watching our worst decision-making biases play themselves out in political and capital markets. But few in the legislative capitals of the world have taken…

turning a new leaf?

Mr. Dollar testified before the Financial Crisis Inquiry Commission today about the challenges of a self-regulating market and the dangers that lie ahead. While his belief in free market capitalism remains unshaken, Greenspan’s warnings about the key attributes that should underpin a stable banking system — adequate capitalization, liquidity, and regulatory oversight — cast a surprising shot across the bow of modern banking giants who have grown a little too comfortable with their bailout blanket and artificially low interest rates.

Whether the economy tips back into chaos or not remains to be seen, but the rare regulatory prudence recommended in the Maestro’s testimony is a welcome conservative voice in the growing chorus to…

complexity and collapse

From daily solar cycles to quarterly seasonal changes to the 130,000-year lapse between Ice Ages, our world is filled with natural ebbs and flows. Those that try to forecast the future by studying these longer sweeping patterns are often accused of being out of touch, relying on the distant past for established wisdom rather than embracing contemporary optimism that “this time is different“. In this essay in Foreign Affairs, Niall Ferguson reminds us that America is just as vulnerable to collapse as the many great civilizations that preceded it — maybe even more so given the increasing complexity of our modern global economy…

Complexity and Collapse
Empires…

market makers

As ideological battles are waged over the benefits of free markets, the challenges of financial regulation, the inefficiency of policymaking, and the design of a sustainable path forward, pundits often attack one another without a fundamental understanding of the mechanics of our modern financial system. This primer helps to explain the unique roles that banks and capital markets play in the efficient (and sometimes painfully inefficient) functioning of of modern society. While it won’t settle any debates, it certainly reminds us how little we may know about the way the economy works…

Did the Capital Markets Fail Us?
By Karen Johnson | Thursday, March 25, 2010

Amid the debate about excessive bonuses and inadequate risk management, it…

the spanish prisoner

“Zapatero is not a good driver. It’s like a boat, which in calm waters steers fine, but when it gets bumpy, they are not prepared.” The same could be said for many of the world’s C-level leaders, so it’s perhaps not surprising that both companies and countries are finding out the hard way that credit can dry up when the sea gets choppy…

Not a bull in sight as the bears go after Spain
From the nosebleed seats of the E.U., government cries out ‘We are not Greece’

By Barbara Kollmeyer, MarketWatch

MADRID (MarketWatch) — Eduardo Fernandez Agudo is old enough to have lived through other economic crisis in Spain, but the current one has…

if piigs could fly

The markets whipsawed in volatile trading last week as war was waged over key technical levels in the Dow (10,000) and S&P (1050). The backdrop was bitter sweet: trouble among the perennial sick men of Europe (Portugal, Italy, Ireland, Greece and Spain) on the one hand, and upbeat earnings in Corporate America on the other. With all the uncertainty over the short-term trajectory of the economy, it would be tough to fault political leaders for at least preaching that the glass is still half full. That said, it’s almost criminal for the Secretary of the Treasury to tell the American people — on their holiest of sporting days — that…

one island, two worlds

It isn’t surprising that so-called “ambulance economics” has gained mass policy appeal as the global economy descends into madness. The battlefield, after all, is no place for quiet research and careful study. But even the most pressing humanitarian disasters could use a little “clinical economics” to help decision-makers better chart out the way forward. Recent poverty relief efforts in Haiti, for instance, should certainly focus first on the bare essentials of sustenance, sanitation, and security. Once politicians and development professionals are able to stop the bleeding, however, the really critical work actually begins in terms of supporting the long-term prosperity of the country. In that spirit, any path forward should take into consideration the unique historical,…

volcker rules

A perennial hot ticket on the lecture circuit at economic clubs and grad schools around the planet, Paul Volcker‘s influence is finally starting to resonate where it counts: at both ends of Pennsylvania Avenue. As his testimony in front of the Senate Banking Committee looms, the broader premise of a more responsible financial services sector pursuing sustainable, profitable growth needs to get out in clear journalistic prose from a messenger untarnished by the last 18 months of political and economic triage. This Sunday NYTimes op-ed attempts to do just that, despite the complexity of the topic. Unfortunately, it falls a little short for those either too stubborn or greedy to…

christianity and the crash

“America’s mainstream religious denominations used to teach the faithful that they would be rewarded in the afterlife. But over the past generation, a different strain of Christian faith has proliferated—one that promises to make believers rich in the here and now. Known as the prosperity gospel, and claiming tens of millions of adherents, it fosters risk-taking and intense material optimism. It pumped air into the housing bubble. And one year into the worst downturn since the Depression, it’s still going strong.”

Did Christianity Cause the Crash?
by Hanna Rosin in The Atlantic Monthly

IMAGE CREDIT: MARK PETERSON/REDUX

LIKE THE AMBITIONS of many immigrants who attend services there, Casa del Padre’s success can be measured by upgrades…

calculated terror

In the 400+ years since the birth of modern statistics, data has been collected on everything from life expectancy and planetary motion to little league batting averages and micro-loans in rural Bangladesh. As technology catches up with the world’s desire to better predict the future and understand the past, applications have expanded to include dynamic models of the global economy and more recently the probability of a terrorist attack. The danger with relying on this methodology, of course, is that the same statistical biases that contributed to the recent financial chaos may cause more harm in the real world than they ever did on…

trouble on the homefront?

As rare proof that not all ex-Goldman bankers are great vampire squids wrapped around the face of humanity, Bank of Canada Governor Mark Carney turns his gaze toward households as the holidays approach with some keen macro observations and their implications for micro decision-making. Though the central bank recently raised flags about Canadian household finances and talk of a real estate bubble has begun to resurface, this public address seems measured both in its observations and its conclusions, and reflects well on the current poster child of responsible 21st century monetary governance…

Remarks by Mark Carney, Governor of the Bank of Canada
at The National Forum (Canadian Club of Toronto…