Knowing and Making

One move this week dominates all others. If you've had a glance at the word cloud already, you might have seen it (just above and left of centre). That single move is the astonishing rise from position 460 (with 110 occurrences) last week, to position 7 (with a stunning 1,027 occurrences) of - drum roll please - AIG! I guess I'm behind the curve as I have not mentioned it at all since...well, actually three times this month. Still, I'm below average (the figures average out as 2.5 times per blog in the last week). Perhaps I'm not choked up with anger enough. Related movements: bonuses  straight in at number 37 after not featuring at all in previous weeks (and bonus  singular similarly in at 287). American , International  and Group  are all reasonably strong, though American  is actually down, so must have been appearing in some other context last week. Other movements at the top of the charts: financial is down one to 3, government  up three to 4, US  up four to 5, m...

This is a word cloud from all economics blog postings in the last week. I generate this every Sunday so please subscribe using the links on the right if you'd like to be notified each time it is published. It has been constructed from a list of economics RSS feeds from the Palgrave Econolog and other sources, and uses Wordle to generate the image, the ROME RSS reader to download the RSS feeds, and Java software from Inon to process the data. You can also see the Java version in the Wordle gallery . If anyone would like a copy of the underlying data used to generate these clouds, or if you would like to see a version with consistent colour and typeface to make week-to-week comparison easier, please get in touch. Update : Analysis here . See if you can guess the (by far) fastest-increasing word of the week.

I was very pleased to see the FT's leader today, " Maths and markets ". It robustly defends mathematicians from responsibility for the financial crisis (an odd assertion of Lord Turner's). Not only that, but it also points to an interesting behavioural question: But financial mathematics has been underfunded, given its economic importance, and both private and public sectors must commission more research in the field. For instance, we need to know more about the way human psychology affects market models – and about the scenarios in which models break down. The need to blend psychology and mathematics is not often recognised, and it's good to see the FT coming around to it. I absolutely agree with this, needless to say - both Intellectual Business and Inon continue to work on mathematical modelling of human decision-making and working out its consequences at the market and macroeconomic level. That sentence does contain a subtle kicker at the end: " the sc...

Robert Peston is in a bad mood this morning . He claims that the National Audit Office's report on Northern Rock shows that Brown and Darling "didn't make adequate preparations for the possible collapse of banks", "didn't expect a recession" and "had a hopelessly naive view" about the Rock's 100% loans. It makes a nice story. The problem is, it isn't really true. I've read the NAO's summary of the report. Here's a notable phrase from it: This report does not consider: the causes of Northern Rock’s problems Indeed, all that the report does consider is the response of the Treasury to the problems that arose in late 2007, and whether it made the right choices and managed things in the right way. And on those counts, it mostly gives its seal of approval. Some exceptions are: The Treasury's worst case scenario planning was not quite bad enough. Instead of a base case loss of £270 million, Northern Rock lost £585 million last...

Martin Wolf's article on Lord Turner's review is a good one (by which I mean, of course, that he agrees with me). He identifies irrationality as "the main analytical conclusion" of the report, but he doesn't take the next step of suggesting that it can be directly regulated. There are a range of interpretations of Turner's report. Some think his diagnosis was that banks are too thinly capitalised. Some that he condemns financial innovation. I think Martin Wolf has found the most important part: his conclusions about irrationality, both collective and individual. But while Turner has diagnosed the right disease, he doesn't propose a workable cure. To combat irrationality, he suggests a set of tools that work through rational means. Counter-cyclical capital requirements, leverage ratios, remuneration and centralised CDS clearance are perfectly sensible measures, but - like interest rates, the main tool of existing counter-cyclical policy - they work by mark...

Lord Turner's report " A regulatory response to the banking crisis " was released yesterday. One of the key findings is that markets, and market participants, can be irrational. This can lead to problematic outcomes such as bubbles in asset prices and massive mispricing of derivatives such as CDOs and CDSs. However, Turner's recommendations barely address this problem. There are several valid recommendations about procyclical reserves and a hint at a power to intervene in momentum trading (such as short-selling which feeds on itself). But this only dances around the edges of the problem. He also recommends technical training or qualifications for bank executives. But that's not where the irrationality is. Indeed, many bankers have been all too rational throughout this crisis - extracting rents for themselves at the expense of shareholders and creditors. Turner does recognise this principal-agent problem and some of his recommendations deal with it. However it is n...

Menzie Chinn and James Hamilton at Econbrowser keep on impressing with some really useful, insightful charts and empirical analysis of the current and projected economic situation. For example: graphs here of the components of GDP (consumption, non-residential and residential investment) and their performance during the current and previous recessions. Or this chart of log-graphed GDP growth over the last 141 years. Hamilton occasionally reveals some political opinions which distract me from the economics, but I guess we all do that from time to time. Blogs are always just a bit  self-indulgent.