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

Thursday, July 8, 2010

Really great links - Macroeconomic tail risks - Keynes and Geithner

Brad DeLong - Macroeconomic tail risks - "What is the "macroeconomic tail risk" which, Gabaix claims, it is individually rational for businesses to fear, and hence makes it collectively and socially rational for businesses to save and refuse to invest?
        Gabaix never says.
        Is it a fear that we will suddenly forget the past generation of progress in technology and organisation, and that only businesses with cash will be able to regroup and survive and evolve business models that will fit our reversion to the technologies of the 1970s? No. Is it a fear that workers will suddenly develop a very strong taste for leisure and that as a result real wages will have to rise massively, and that only businesses with cash will be able to regroup and evolve new business models that will fit the new higher-real-wages economy? No. Yet those are the only two "macroeconomic tail risk" shocks I can think of that would make it socially and collectively rational for businesses as a group to refuse to invest in new capacity right now—for, after all, whatever new capacity we build will be unusable if we forget our technological knowledge, and unprofitable if the real wage rises massively. Thus I believe that Professor Gabaix is hopelessly confused when he claims that "macroeconomic tail risk" makes it socially and collectively rational—"optimal" is the word he uses—for businesses to save rather than invest.
        The macroeconomic tail risk that businesses today fear is not a Great Forgetting of technology and organisation or a Great Vacation on the part of the North Atlantic labour force. The macroeconomic tail risk that businesses fear is another breakdown of the credit channel: a situation in which banks dare not lend because they cannot themselves raise funds, and they cannot themselves raise funds because every possible source fears that the bank itself is underwater—has no skin in the game of intermediating the flow of funds and every incentive to gamble for resurrection by playing a game of "heads I profit, tails you pay" with its creditors. Asset price declines that impair the capital of financial intermediaries greatly magnify the principal-agent problems of finance, and it is that magnification of principal-agent problems and consequent cutoff of their own access to additional funding when they need it that underpin business desires to boost their holdings of safe, high-quality financial assets at the expense of their ownership of real physical capital."

John Hussman - Keynes and Geithner - "The Keynesian view is that government spending is simply a monolithic letter "G." Keynes cared little about the productivity or lack thereof to which public resources were devoted, even writing " If the Treasury were to fill old bottles with bank-notes, bury them at suitable depths in disused coal-mines which are then filled up to the surface with town rubbish, and leave it to private enterprise on well-tried principles of laissez-faire to dig the notes up again... there need be no more unemployment." The only difference between Keynes and Tim Geithner is evidently that Geithner prefers to place the bottles a bit closer to Wall Street."

No comments:

Post a Comment

The Money Demand