Knowing and Making

Tyler Cowen's book has finally arrived and I'm devouring it. Full review later. My bubble detection proposal was mentioned by Scott Sumner on TheMoneyIllusion this week, and there's also an interesting discussion of it on Baseline Scenario today. The Walker Review was published today, in interim form. You can read the report here and our submission to the process here . Some of the points on the moral hazard of limited liability, and the externalities imposed by the financial sector, echo our comments. Some of our other suggestions, for example that banks should use standardised product definitions to enable transparency of their asset mix and better decision-making by their creditors, have not been taken up but we may make another submission during the consultation period. As part of its "where economics went wrong" feature this week, The Economist has an interesting analysis of the efficient markets hypothesis and some departures from it, including the impli...

Pointing out a speech by William C. Dudley, president of the New York Fed, Simon Johnson says : Dudley says that the Fed can pop or prevent asset bubbles from developing. This would represent a major change in the nature of American (and G7) central banking. It’s a huge statement - throwing the Greenspan years out of the door, without ceremony. It’s also an attractive idea. But how will the Fed actually implement? Senior Fed officials in 2007 and 2008 were quite clear that there is no technology that would allow them to "sniff" bubbles accurately - and this was in the face of a housing bubble that, in retrospect, Dudley says was obvious. But is that true? If we define a bubble as "overvaluation of assets relative to their future returns" then to spot one, we would need to compare asset prices with future returns. But although asset prices are measurable, future returns are not - and this is why people generally think that bubbles are unspottable. We wouldn't...

Just discovered a site I wasn't aware of before: Baseline Scenario . They have a nice summary of Daron Acemoglu's paper which has a focus on behavioural (mental/perceptual) reasons for the financial crisis. I have written on this subject recently and will post a link to the paper here if and when it is published.