As capital markets continue to increase in scale and scope, there is a natural tendency to believe that they have also become more accurate at valuation. Scores of “rational” investors acting in their own self-interest, based on their own proprietary information along with anything publicly available, make their best guess about the value of a particular security – from a simple common share of IBM to a bet on the amount of rainfall next April. Those who believe the future looks bright will buy, and those who think better days are behind will sell.

As speculative euphoria once again grips financial markets and investors emerge from their fallout shelters in search of higher yield, it is entirely possible that we failed to learn anything from the last 12-18 months of market volatility. After the markets bottomed out on March 9, our valuation anchors were rebased. Could our economic prospects really be that grim? Could all that leverage – all that cash – simply vanish from the financial system overnight? Of course not, went the refrain, and the markets have since pared back almost half of their 2008 losses during one of the largest bear market rallies since the 1930s.

Armchair financial quarterbacks would do well to tune out the mass media every so often and tune into the real global dialogue on the nature of the recent crisis and our prospects for a sustainable recovery. It is no coincidence that those whose perspective is truly global consider the fundamental nature of our modern political economy in terms of decades not days, systems not statistics, and welfare not wealth.

In this speech, given just weeks before the March 2008 arranged marriage of Bear Stearns and JPMorgan, this banker to central bankers dissects the credit crisis of 2007 and calls attention to dangerous fault-lines that presaged the apocalyptic deleveraging of the next 18 months…

In the midst of a global financial pandemic, private enterprise finds itself under the public microscope yet again — as it did during the 1930s after a century of unbridled growth and later in the 1970s after decades of stifling regulatory oversight. With this 21st century changing of the guard, the theoretical bases for free market capitalism are now under academic and legislative review. At the heart of the debate is the accuracy of the economic models taught to college students around the planet as though they were immutable physical laws.

Scientists and market commentators have long been aware of the susceptibility of the markets to any single investment philosophy. The rise of early program trading contributed to the historic one-day loss of nearly 23% on Black Monday in 1987. Recent experiments with risk securitization may cost trillions of borrowed dollars to unwind and decades to fully digest.

Faith in the underlying mechanics of portfolio theory and market efficiency has certainly contributed to humanity’s recent leap forward in wealth, productivity, private innovation, and global integration. But that same numerology has since crippled our aging financial system and triggered the worst global recession in nearly a century. Perhaps it’s time to reassess the value – and the logic – of bleeding edge finance.

As Professor Janeway points out in the following interview, treating securities like molecules, subject to the same variable distributions, “random walks”, differential equations, and reductionist math simply compounds the short-sighted actions of a few scientists-turned-gamblers. Not only does it greatly overstate the predictive power of econometric analysis, but it also understates the tremendous dangers of financial…

Keynesian reflections from 1919 on the first era of true globalization, complete with bountiful trade, unparalleled upward mobility, liquid labor markets, secure international travel, and a blissful ignorance of the fragility of this new 20th Century World Order…

What an extraordinary episode in the economic progress of man that age was which came to an end in August 1914! The greater part of the population, it is true, worked hard and lived at a low standard of comfort, yet were, to all appearances, reasonably contented with this lot. But escape was possible, for any man of capacity or character at all exceeding the average, into the middle and upper classes, for whom life offered, at a low cost and with…

Even market cheerleaders are struggling to find good news to rally around these days. With labor, capital, finance, real estate, and consumer markets all reeling from a half-decade of credit-fueled gluttony, and commodities markets cresting near all-time highs, it might seem a bit clichéd to highlight yet another bearish commentator — unless that bear is David Rosenberg, one of the few bulge-bracket economists to voice frequent and convincing skepticism about the “resilience” of modern capital markets and highlight the irrational optimism of the average investor.

It’s no surprise that financial crises – like intercourse, pro sports, and agriculture – run in alternating cycles of boom and bust. Classical economic theory suggests that such cyclicality can be overcome through innovations in resource use, factor productivity, and leverage. Classical history suggests otherwise. In the following rant, celebrity economist Jeff Sachs tackles the two-headed plague of stagflation — part stagnant economic growth, part inflation — and offers the 1970s as an illustrative case study in how to keep a resource-hungry, debt-ridden, war-wearied hegemon from spinning its economic wheels…

An excerpt from the mid-term “problem set” in ENR-302…

3. The country of Xanadu is dependent of the use of domestically produced methanol for 100% of its energy needs. The price of methanol is set by a competitive market and the fuel is priced at $2.50 per gallon. Two large companies supply 80% of the market and each has costs of $1.50 per gallon. The opposition party and most of the national labor unions argue that these two companies are making obscene profits. They demand that the President place a mandatory price cap of $2.00 on the price of methanol to prevent “this abuse of market power.”

Assume that the elasticity of demand is 0.4 and…

In this recent Times OpEd, Rochester economics professor Steve Landsburg points out how easily John Q. Public overlooks cause and effect in 21st century markets.

Let’s review: 1) goods and services require labor and capital to produce; 2) the price of labor and capital impact an item’s ultimate price; 3) factors of production are much less expensive in the developing world; 4) a decades-long public war on inflation in the developed world has prevented the price of goods from increasing in step with wages; however, 5) wage growth is now slowing and inflation has reached a 17-year high; thus 6)…

November 23, 2006—More dour news about the coming financial apocalypse, this time by noted economic strategist Dr. Gary Shilling. The augur, once again, is a hyper-inflated housing market, driven principally by excessive leverage, scandalous consumer spending, and inexhaustible financial optimism. “And why not?” you might ask. Everyone and their uncle has made money in real estate over the past five years, from the slummiest crack house to the most decadent penthouse. The more money everyone has, the more money everyone spends, and most developed economies have profited handsomely from that arrangement.

To get a sense of why the experts are now tempering such myopic enthusiasm, and why these so-called “speculative episodes” are inherently not in the economy’s best…

Imagine learning for the very first time — contrary to public opinion and centuries of contemporary science — that the world was actually round. Imagine being that first group of scientists (regents and spiritual leaders) or politicians (again, regents and spiritual leaders) or shell-shocked shepherds who grazed for thousands of years through the countrysides of the known world, convinced that if they wandered just a little too far, they might, in fact, fall right off the edge of the planet.

Life in those days was distinctly two-dimensional. There were the heavens, and there was the earth, and never the twain should meet. Stars were but holes in a giant celestial blanket while various pagan deities pulled the moon and the sun…