Market Discussions

Images for the more complicated equations coming up

http://imgur.com/tkQCoo7

finally worked from imgur but
both their web and app interface were updated and the upload function modified

+ I don't remember my account data (to log in)


+ #5 is not exponential but a simple multiplication of a fraction result (so, simple, and not complex).

Well...micro economics has a pretty good theory. Macro on the other hand is just bull****. Ask any macro economist, "Are incentives important?" and the answer will almost undoubtedly be, "Yes, of course." Then ask, "Where are incentives in modern macro models?" and he'll probably be a bit peeved at you. There is zero incentive theory in macro models. Macro also treats things like capital (plant and equipment) as being infinitely malleable, that capital can be moved from one type of production to another nearly instantly.

You think that macro is a static discipline, while in fact is not. You do not like the models you are taught? Make better ones!

Actually, several people have, in particular the the one named in my signature tried it...and gave up. He and Keynes were contemporaries basically working on different theories of the business cycle and Keynes published first (The General Theory) and Hayek never did publish his work. Many who have read Hayek and studied his works have concluded that Hayek felt that a single unified theory of the business cycle would be...well intractable.

Another example of the problem with macro economics is the work of Edward Leamer who has noted that of the recessions since the end of WWII about all but 2 were as a result of a real estate. Or more accurately they were preceded by a decline in the real estate market, then a decline in the consumer durable market, followed by a decline in the consumer non-durables...then a decline in business expenditures on software and other short term expenditures and finishing with long term business expenditures (plant and equipment). That is the business cycle is actually a consumer spending cycle. Which completely makes sense when one considers that Personal Consumption Expenditures make up about 65-70% of GDP (at least in the U.S.). But macro-economists continue to ignore this...even after the Great Recession.

Macro-economists ignore the effects of moral hazard on the economy as well, which is astonishing considering the Great Recession. What does "too big to fail" imply? What does the "implicit" backing of the government for Fannie and Freddie imply? Any potential moral hazard problem? What about deposit insurance? Any moral hazard problem with insurance? Yes?

All of the problems with the Great Recession were MICRO economic problems, mostly relating back to incentive problems, yet every asshat in the debate were talking about interest rates, stimulus spending, and other irrelevant bullshit.

Macro economics is nonsense. Mental masturbation. Useless. It was all micro economics, pretty much perverse incentives across the board that lead people to take on way, way too much risk. And the response was...to guarantee/bail out everything which merely kicks the can down the road meaning yet another similar crisis, but probably even bigger and worse.

So it isn't about making better macro models. It is about ignoring that stupid crap and looking at what the real problem is. To paraphrase the Clinton (Bill, not Hillary) campaign slogan, "It's the incentives stupid".

It is precisely our lack of knowledge when it comes to macro that makes it such a problem.

And I'll note you have precisely zero substantial response to my points about why macro is so horrible.

Macro economics, basically, forgets it is a field about human behavior/choices. Change things like taxes, interest rates, regulations, and you change people's behavior/choices. But macro ignores these things almost entirely.

And macro economics is a "separate" field simply because Keynes wrote a book (one of his worst, that is compared to his other writings it is muddled and confused) on the business cycle thus creating a separation where prior to that none really existed.

The trouble with macro-economics is not the lack of knowledge. We know all we need to know and can know. The problem is attempting to make it a positivist discipline. Mises has said as much.

Although I agree that our, at least my, knowledge of the business cycle is far from ideal, I must also say we know quite a bit.

Same goes for how to use macroeconomics, which is not a surrogate of micro, but a totally different way of looking at the economy, "it is the aggregate level, idiot!".

Also, there will hopefully be financial institutions which will be too big to fail. That because our system to progress needs leverage. That, because we must assume that more productivity will translate in debts repayments and the furthering of the debt cycle. It seems unquestioned that the financial leverage is a factor of growth. It also appear unquestionable that interventions on failures must be made and monitoring of the leverage done.

This because of microeconomics arguments.

See... Macro and micro are two different ways. Cannot have a complete picture without the other.

Unfortunately I do not have time to write more and prove to some that mine is not sophistry (nice word), but I hope to have sketched the picture FYI.

And reveals different information.


Economy of scale.


I agree, then your final point is a good provocation in this direction.


It all relies in the quality of risk measurement and the technology of finance, that must be bettered.


Financial contracts are a service, thus a good. Contractions in their markets are not nominal shocks, but real ones.

Yes, but with many economic aggregates you cannot dis-aggregate the data. So it is the hidden information that can bite you in the posterior. Also, economic aggregates are man made--i.e. it is not clear that they in fact have any actual economic significance. Remember the economy is of human action, but not of human design.



There are also diseconomies of scale as one gets bigger, and too big to fail comes with a moral hazard problem. When you have enough too big to fail then you have systemic risk--i.e. it all blows up at once.



And factor in things like adverse selection as well. Was there a concerted push in the U.S. for home ownership? I'd say yes. I'd also say it was bi-partisan (so lets try not to drag in the Right-Left/Democrat-Conservative thing).

For example, it used to be that to buy a home you had to have a 20% down payment. This brought stability to the housing market and to the securitized mortgage markets. Home owners had "skin in the game"--i.e. housing prices would have to fall substantially before a home owner would "walk away". The shift to 10%, 5%, 0% and no-doc loans (i.e. sub prime loans) brought systemic instability to the housing and securtized mortgage market. And everything looked fine...why? Because mortgage default rates go down in an up market. Rising housing prices also mean lower default rates. But it also meant that borrowers who are higher risk will also be taking out loans as well. And even borrowers who would normally be good risk may take on more risk (i.e. a bigger house with a variable rate, which is fine if prices are going up, but when they aren't.....).

And to make markets Fannie and Freddie had to securtize sub prime loans as well. And securitizing meant that Fannie or Freddie had to buy back the non-performing loans. This also can create systemic risk which is why Fannie and Freddie stuck to prime conforming loans--i.e. loans that satisfied their requirements and had a 20% down payment. In this situation the securitization market worked fine. But lowering standards basically introduces more and more risk into the system.

These are all micro economic phenomena. All of them. And they involve both nominal and real assets.



That is another problem as well. The whole issue of fat tailed events. Systemic risk, IMO, brings in fat tailed events--i.e. where everything blows up in your face at once and because of leverage the effect is economy wide.

For example, the push for housing via lower lending standards and loose monetary policy combined with mortgage securitization basically gave us systemic risk and a fat tailed event.



That is an interesting view but not the standard one, IMO. Lots of people see finance as a nominal issue and thus are puzzled by how it impacted the real economy. To me it is where the nominal meets the real. Financial instruments might be nominal, but they are also ways of putting real goods into the economy. In the case of the financial crisis it was a way to get more housing. Alot more housing. And while housing is good, it is not a productive asset (like a factory or the like). You do not invest in a house and get more cars, refrigerators, computers, or lathes. They do not increase long term employment much either or if they do it is indirect and rather a poor mechanism for doing so (i.e. some home owners might hire a contractor whereas others will fall into the do-it-yourself category). So, we had a huge mal-investment into housing...which means we invested less in productive capital. Meaning our future growth rates will be lower, employment in housing construction will be lower for years given the durable nature of housing and the large stock we currently have.

And yet a substantial number of macro economists argued vehemently for stimulus spending. But stimulus spending cannot unwind our over-investment in housing. Switching jobs is not instantaneous either so construction workers in housing likely face a long spell of unemployment or switching career paths and taking a permanent hit to their income stream.

And quite a bit of the stimulus spending was bone headed. For example, some of it went to high level health care/medical research. How much unemployment do you think there is in that field? Probably damn little, so all that spending would do is drive up wages and benefits. That increase in costs for employers might have exactly the opposite effect of reducing employment elsewhere for little to no gain and maybe even a loss.

The stimulus spending was bad economic policy. In fact, I'll go even further, we do not have bad economic policy by accident, we have it on purpose.

And look, all these things I've written about...not one will be found anywhere in a standard macro model.

There may be macro economic events, but there are only micro economic solutions, IMO.