Economics has met the enemy, and it is economics

[Sava]

jon, you can't reason with psychotics
they have no morals
and hopefully, they will burn
in this world and the next

[Jon Miller]

Jon, what do you think volatility means? What is your model, and what is its transmission mechanism for "more volatility -> less production of goods and services"?

Because volatility allows those with high information levels to extract wealth from the rest of society. There are strong wealth effects, and people being without work and income creates a lifetime loss/misallocation of human capital ( seen via lifetime/future decreased earnings for those who look for work in a recession/depression) and so are less productive. But even more importantly, people are hurting and depressed and unhappy.

Despite KH's claims, these are not my original ideas. They are the ideas of economists (just not his favored ones). Most recently: http://www.bankofengland.co.uk/publi.../speech525.pdf

JM
(And occasionally, they are me misunderstanding them. Usually not though.)

[Kidlicious]

Oh, and while you may be able to come up with examples of excess concentration of wealth causing various social ills, etc., I can come up with many more where the expropriation of wealth led to far worse poverty.

Have you ever even expropriated anything from a rich person? I didn't think so.

[MikeH]

Would stealing toys from his brother count?

[Kidlicious]

Do you really think that talking to jon rationally will help him understand anything? He's demonstrated time and again willful stupidity and intellectual dishonesty on this subject.

Kuci isn't helping anyone understand anything, even his rationalizations.

[Kuciwalker]

Because volatility allows those with high information levels to extract wealth from the rest of society.

No.

Asset mispricing allows those with private information to extract wealth from other owners of that asset, in return for revealing the private information. Volatility is completely orthogonal to this process.

There are strong wealth effects, and people being without work and income creates a lifetime loss/misallocation of human capital ( seen via lifetime/future decreased earnings for those who look for work in a recession/depression) and so are less productive. But even more importantly, people are hurting and depressed and unhappy.

None of this has anything to do with volatility.

Despite KH's claims, these are not my original ideas. They are the ideas of economists (just not his favored ones).

No, Jon, I'm pretty sure they are your own misinterpretations of other economists' ideas.

(And occasionally, they are me misunderstanding them. Usually not though.)

The best lack all conviction...

[Jon Miller]

Have you read the speech? I am not misinterpreting his ideas with regards to volatility.

The lifetime loss/misallocation of human capital due to recessions has great experimental support. Unless you choose to believe that those who just happen to be graduating college in a recession are much less valuable to society/less capable/etc than those who just happen to graduate college during a boom.

This is me connecting ideas (the negative effects of volatility, which he does not dwell upon).

And it is not my own misinterpretations of other economists ideas. Some of the things that KH has called me a '****' for are me directly repeating ideas.

JM

[Jaguar]

Jon: Volatility refers to the variation (typically shorter-term) of individual asset prices - for example, tech stocks are more volatile than utility companies.

The phrase you are looking for is Business Cycle.

[Jon Miller]

According to the speech I referred to (and how I know the word is used in other contexts), volatility is the correct term.

JM

[Jaguar]

According to the speech I referred to (and how I know the word is used in other contexts), volatility is the correct term.

JM

If you're referring to the speech Haldane gave three days ago, he used the term correctly, and you interpreted it to mean something entirely different.

[Jon Miller]

I was not saying that bubbles/recessions are examples of volatility.

I am saying that the large bubbles/recessions are a result of a very volatile market, a product of the high levels of risk taking/etc. He didn't say this in a sentence (I think), but (my understanding of) his speech says this as a whole.

JM
(And yes, I am referring to it.)

[Kuciwalker]

I am saying that the large bubbles/recessions are a result of a very volatile market

No.

[Jaguar]

Bubbles are, by definition, asset mispricing, not volatility. Asset mispricing is very painful for the economy and should be avoided.

Asset mispricing can be fought through things like transparency, speedy flow of information, and the presence of many traders studying the asset's price.

[Jon Miller]

At the very least he is claiming that this recession is.

First on volatility:
"It is not difficult to see why shorter-term investors in bank equities stand to gain from volatility. Institutional
investors in equities are typically structurally long. They gain and lose symmetrically as returns rise and fall.
Many shorter-term investors face no such restrictions. If their timing is right, they can win on both the
upswings (when long) and the downswings (when short). For them, the road to riches is a bumpy one – and
the bigger the bumps the better. As in Merton’s model, all volatility is good volatility. "

"What we have, then, is a set of mutually-reinforcing risk incentives. Investors shorten their horizons. They
set ROE targets for management to boost their short-term stake. These targets in turn encourage short-term
risk-taking behaviour. That benefits the short-term investor at the expense of the long-term, generating
incentives to shorten further horizons. And so the myopia loop continues.
These incentive problems do not stop with owners. Under joint stock banking, ownership and control are
divorced. This generates what economists call a principal-agent problem: managers (agents) may not do
what owners (principals) wish. In an attempt to solve it, shareholders have sought over recent years to align
managerial incentives with their own. That has meant remunerating managers in equity or using
equity-based metrics such as ROE."

Linking it to longer term behavior (and current problems):
"
The previous sections identified four forces which have shaped risk-taking incentives for over a century.
Each will have tended to boost bank risk appetite above its socially optimal level. While satisfying the
short-term demands of shareholders and managers, this structure has left many others short-changed.
These distortions make a case for policy intervention. These interventions are best directed at incentives
themselves. Otherwise risk-taking is likely to be simply displaced, rather than curbed, by reform efforts. "

"These studies are technically complex. A simpler way of posing the question is to ask what it might take to
avoid a repeat crisis performance under the new rules. The average risk weight for a global bank is 40%.
This means that a 10% capital ratio in risk-weighted terms translates into bank leverage of 25 times equity.
So even once Basel III is in place, an unexpected loss in the value of a bank’s assets of 4% will be sufficient
to render it insolvent; much less than that to render it illiquid. "

"
Second, conversion needs to take place well ahead of bankruptcy. Doing so avoids the deadweight costs of
default which, for too-big-to-fail institutions, are likely to be too large to be tolerable by the authorities. That is
what undermined reserve liability in the 20th century. It is also what risks jeopardising the effectiveness of
so-called bail-in debt in the 21st. "

How the risk is bad for the crisis:

"For a time, extended liability seemed to strike a reasonable risk-taking balance. But entering the 20
th century, that balance was again about to tilt. Consolidation was underway in banking. Between 1825 and
1913, the number of English and Welsh banks fell from over 600 to around 70.
10 As the industrial structure of banking adapted, vetting of shareholders became impractical. In an echo of today, it was argued that
these larger institutions were better able to diversify away their risk.
Extended liability had also shown itself to be ineffective in dealing with banking failure. In crisis, exercising
the capital option had heightened panic, not diminished it. As the Bank of England’s Deputy Governor
remarked, “today a bank could not in a crisis make a call on shareholders without aggravating the crisis”
(Turner (2009)). By the end of the 1930s, there were only six British banks left with reserve liability. "

And there is a lot more.

So my understanding (summary):

The public policy setup and practice encouraged high volatility markets, which allowed highly knowledgeable people to be big winners. The high levels of risk and public policy setup which allowed them caused 2008 financial crisis (which is part of, but 'worse' than the standard boom/bust business cycle).

Please read the speech, it does a better job than I can easily summarize.

JM

[Jon Miller]

I guess I should be clear (since I Was a bit confused earlier today, this is not my field afterall).

He is not saying that volatility causes these negative things (the crisis), he says that volatility + asymmetric incentives + high levels of risk encouraged by public policies is what caused the crisis.

Please don't get pedantic about me being confused about one or two points and ignore the thrust of his point (which is the harm caused to society by public policy, particularly tax deductible interest/etc).

JM