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

Thursday, May 20, 2010

Really great links - Bernanke and inflation - Greece - Return expectations and volatility

Nick Rowe - Bernanke and inflation - "There’s a true paradox here. Bernanke wants (or ought to want) people to fear inflation. Yet he also wants to argue that the risk of inflation is very low, which is why he needs to keep interest rates low. His only way out of the paradox is to make an argument which is very convincing to people inside the Fed, and is seen by outsiders to be very convincing to people inside the Fed, but is at the same time totally unconvincing to people outside the Fed. Not an easy task."

John Cochrane - Greece - " We're told that a Greek default will threaten the financial system. But how? Greece has no millions of complex swap contracts, no obscure derivatives, no intertwined counterparties. Greece is not a brokerage or a market-maker. There isn't even any collateral to dispute or assets to seize. This isn't new finance, it's plain-vanilla sovereign debt, a game that has been going on since the Medici started lending money to Popes in the 1400s. People who lent money will lose some of it. Period.
        Saving the banks. We're told that Greece must be bailed out, or large banks will fail. Savor the outrageous irony of this claim. Apparently, two years after the great mortgage meltdown, Europe's army of bank regulators missed the fact that large, "systemically important" banks had made firm-threatening bets on Greek debt. So much for the idea that more regulation will keep complex banks out of trouble."

Eric Falkenstein - Return expectations and volatility - "Steve Sharpe and Gene Amromin actually got around this objection by looking at survey data, and found that in questionnaires investors tended to have higher return expectations when they forecast volatility as being relatively low, and lower return expectations when they forecast higher volatility. Exactly the opposite of what they should be thinking. This isn't a missing a constant in the second decimal, rather, screwing up the sign."

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