Credit Writedowns

Below is a framework that delineates the ideology and economics of two groups of economic thought that are much talked about in the wake of the Credit Crisis: the Chartalists and the Austrians. These two groups are considered outside of the mainstream and this is important because many economists and market pundits in both camps predicted the global credit crisis while almost no mainstream economists did. The questions are why and what separates them from mainstream Keynesians and Monetarists and from each other?

George Soros makes the case for economics as a social science using his theory of reflexivity. Here are some additional thoughts to help understand why markets fail.

Fred Sheehan argues that it is unlikely that Ben Bernanke will raise rates. He says either the market or a successor will do so. He adds that there are several similarities between current trends and those in 1994, a year when many institutions were left destitute. Historical analogies can help us imagine what might happen, but identification of differences should be noted too.

By Claus Vistesen The past week has shown the dark side of media coverage and the analysis of current events. It is a test on just how much information you stuff down the public’s throat. In the narrowness of my own world, the financial industry has a tendency to produce an extra amount of hyperbole in situations of geo-political tensions [...]

By L. Randall Wray The following is a paper given at the ASSA conference in Denver this past week for a panel organized by James Galbraith, titled Pressures on the Paradigm, sponsored by Economists for Peace & Security. The Queen famously asked her economists why none had seen the global crisis coming. Obviously the answer is complex, but it must [...]

This is me thinking out loud (on paper). Comments are appreciated. During crisis we often see economics come toe-to-toe with ideology because government becomes a more openly active player in our lives. This crisis has been no different. It is one reason I saved a space in my credit crisis timeline to outline government action (see the part labelled "Government [...]

By Marshall Auerback and Edward Harrison. Marshall’s view Ed has asked me to deal specifically with the issue of Ricardian equivalence, the theorem used by anti-government proponents to argue that fiscal deficits are counterproductive and that cutting deficits in the middle of a recession will actually be good for the economy.  It suggests that when a government tries to stimulate [...]

“When data contradicts theory in a discipline like physics, there is excitement amongst scientists […]. When data contradicts theory in finance, there is dismissal.” Robert Arnott Big shift to passive Active management in the equity field is a notoriously difficult art. In fact so difficult that more and more investors give up and go passive instead. If you can’t beat [...]

The following is the text of a James K. Galbraith’s written statement to members of the Senate Judiciary Committee delivered this May. Original text is here. Chairman Specter, Ranking Member Graham, Members of the Subcommittee, as a former member of the congressional staff it is a pleasure to submit this statement for your record. I write to you from a [...]

Marshall Auerback here with some further thoughts from the Institute for New Economic Thinking’s recent kick-off conference at Cambridge University. It might appear ironic to commence a conference ostensibly centered on new economic thinking with a discussion of two economists who did their greatest work more than 70 years ago. But it speaks both to the rich and varied ideas [...]

Most of us have about 20 years to secure our retirement – from our mid 40s to our mid 60s. That has been an absolute disaster for my generation, with inflation-adjusted returns on a global equity portfolio being down about 23% over the past decade. The problem confronting us is that we continue to be stuck in a structural bear market which we define as a market where returns are low because valuations (P/E levels) are under pressure.

Unfortunately, this is likely to continue for several years more. Following the liquidity crisis of 2008, we have entered a so-called balance sheet recession. When that happens, the first priority becomes to minimise debts at the cost of pretty much everything else. As both households and corporates change their mindsets about debt, governments may be forced to pick up the slack; otherwise we would enter a very deep recession. Therefore we’d better get used to many more years of large government deficits.

James Montier, a member of fund manager GMO’s Asset Allocation Team, examined whether we learned anything from the market declines of 2008 and early 2009. His answer is, as you would expect, not a lot. Below, is an outline of the ten lessons not learned followed by a link to the full paper. It’s a good read. Lesson 1: Markets [...]