"If money isn't loosened up, this sucker could go down" - George W. Bush warned in September 2008

Thursday, March 18, 2010

Really great links - M3 - equity risk premium - Sumner responds to Krugman - Industrial Revolution

Macro Market Musings - M3 - The Correct Money Supply Measure for This Crisis

Aswath Damodaran - equity risk premium has returned to pre-crisis levels - "How do we explain this rapid back tracking to pre-crisis premiums? While some view it as irrational, there is a rational explanation. One component in the equity risk premium is the fear of catastrophe. What is a catastrophe? It is that infrequent event, which if it occurs, essentially puts you under water as an investor for the rest of your investing life. The Great Depression was a catastrophe for the US: an investor in US stocks in 1928 would not have recovered his principal for almost 20 years. The Japanese market collapse in the late 1980s was a catastrophe. Investors who had their investments in the Nikkei in 1989 will not make their money back in their lifetimes. In good times, that fear recedes and investors are lulled into complacency; stocks go down, but it assumed that the long term trend is always up. In fact, we hear nonsensical stories about how stocks always win in the long term; if these stories were true, the equity risk premium should be zero for really long term investors. In crisis times, the fear of catastrophe rises to the top of all concerns and drowns out all other information. In December 2008, there was the real possibility of a complete financial meltdown and the equity risk premium reflected that. In January 2010, that fear had dropped off enough that people were reverting back to the pre-crisis premiums. It is entirely possible that we over estimated the likelihood of catastrophe in December 2008 and are under estimating it now, but I think that it is the only explanation that I can provide."

Scott Sumner - Krugman, round two - "If the central bank is doing its job, then Chinese policies that look mercantilist to the average voter or average politician, will be nothing more than a source of low cost capital for the US economy."

Tyler Cowen - Industrial Revolution - "More generally, extended periods of economic growth require that technologies of defense outweigh technologies of predation." - "Building a strong enough state to protect markets from other states is very hard to do; at the same time the built state has to avoid crushing those markets itself. That's a very delicate balance. "

No comments:

Post a Comment

The Money Demand