On VoxEU today, The Myth of the Riskometer (catchy title), by Jon Danielsson. Interesting througout; excerpt:
In physics, complexity is a virtue. It enables us to create supercomputers and iPods. In finance, complexity used to be a virtue. The more complex the instruments are, the more opaque they are, and the more money you make. So long as the underlying risk assumptions are correct, the complex product is sound. In finance, complexity has become a vice.
We can create the most sophisticated financial models, but immediately when they are put to use, the financial system changes. Outcomes in the financial system aggregate intelligent human behaviour. Therefore attempting to forecast prices or risk using past observations is generally impossible.
Whaddya think -- is he right?
Paul Krugman of Princeton...
Other things equal, public investment is a much better way to provide economic stimulus than tax cuts, for two reasons. First, if the government spends money, that money is spent, helping support demand, whereas tax cuts may be largely saved. So public investment offers more bang for the buck. Second, public investment leaves something of value behind when the stimulus is over.
...meet Ed Glaeser of Harvard:
The country needs to invest steadily and wisely on infrastructure, not rush hundreds of billions of dollars out the door. Really expensive projects, like [Boston's] Big Dig, can take many years to plan, permit, and build. Our roads require ongoing maintenance, not a big push. Moreover, fairness and economic efficiency dictate that infrastructure should generally be paid for by users, not general tax revenue. It is appropriate that gas taxes pay for federal highway aid. Using general revenues to build highways means more subsidies for carbon-emitting cars. The country should take infrastructure investment seriously, but infrastructure spending is unlikely to be sound stimulus.
My favorite quote from a very quotable article:
The Madoff scandal echoes a deeper absence inside our financial system, which has been undermined not merely by bad behavior but by the lack of checks and balances to discourage it. “Greed” doesn’t cut it as a satisfying explanation for the current financial crisis. Greed was necessary but insufficient; in any case, we are as likely to eliminate greed from our national character as we are lust and envy. The fixable problem isn’t the greed of the few but the misaligned interests of the many.
An even better variation on this theme goes something like this: Blaming greed for financial crises is akin to blaming gravity for plane crashes.
From Sunday's Meet the Press:
MR. GREGORY: Is this a trillion-dollar stimulus, do you expect?
SEN. REID: It's whatever it takes to bring this country back on a fiscal footing that is decent.
You know, we don't want to do a little bit and say, "Well, we should have done more. Let's come back and do it again." We want to do it right the first time. If we do it right the first time--as, as reported in The New York Times yesterday, a group of economists, blue ribbon they're called, they said, "If they do a very strong stimulus package, the economy will start recovering in July." And that's what Paul Krugman says, who's a Democrat; that's what Mark Zandi, who was one of, one of John McCain's advisers, said. We need to spend some money. And we have to make sure it's spent wisely, that we watch that money, how it's spent, there is oversight, there is transparency. And I hope--and we--I expect that we can do that.
And if that's not enough for you, here's San Francisco Fed president Janet Yellen:
If ever, in my professional career, there was a time for active, discretionary fiscal stimulus, it is now. Although our economy is resilient and has bounced back quickly from downturns in the past, the financial and economic firestorm we face today poses a serious risk of an extended period of stagnation—a very grim outcome. Such stagnation would intensify financial market strains, exacerbating the problems that triggered the downturn. It's worth pulling out all the stops to ensure those outcomes don't occur.
Yet what passes for consensus on the Sunday talks may be only skin-deep. From MarketWatch:
A pickup sometime after June is still the Federal Reserve's quasi-official forecast. And leading institutional forecasters surveyed by the Blue Chip Economic Indicators are optimistic.
But that forecast seemed woefully out of touch to many experts who spoke at the annual meeting of the American Economics Association...
"We don't know what to do. It's really a throw-the-kitchen-sink-at-the-problem strategy. It is hard to argue with it in the middle of the crisis, but you can bet everyone will 10 years from now," said Kenneth Rogoff, a former chief economist at the International Monetary Fund.
 Rarely is a year rung out with as little nostalgia as 2008's impending exit will evoke. Is there anyone, financial journalists excluded, who will miss the past 12 months? You might think this would be easy for a place wth "dismal" in its name, but just finding the vocabulary to describe it all has been a real challenge: Dreadful, dire, dour, sour, plunging, plummeting, crashing... you pick the indicator, it's been bad.
But seasons turn, and now that we're past the winter solstice even Druids have something to look forward to. Not that 2009 is likely to be a romp in the woods—the trough of the global recession may still be ahead of us, and for many families and firms, the next 12 months will include some painful readjustments.
Yet we begin the year in hope, as always. We understand some things that weren't clear 12 months ago—about the financial system, about global linkages, even about human frailty—and these we can build on as we grope, uncertainly, towards recovery.
Peaceful holidays.
Brad Setser crams in a year's worth of misery:
– The US experienced its worst financial crisis since the Depression. The Fed dramatically expanded its balance sheet, becoming the world’s lender of last resort and the United States’ lender of almost every resort.
– Capital flows to the emerging world reversed. Inflows turned to outflows
– High carry currencies tumbled. So did the pound. The dollar rallied even as the US financial system teetered on the edge of collapse, then slid as the Fed cut rates to zero.
– Global trade, and I would guess global economic activity, started to contract. Just look at fall in Japan’s exports in November …
– Oil prices fell. A lot. Several oil-exporters that were on top of the world with oil at $145 are now looking at serious financial trouble.
Now he's a syndrome...
From the NYT:
"The book is very much a first draft of history. It doesn’t attempt historical sweep or dramatic narrative. But it is an impressively lucid guide to the big issues — akin to a slim encyclopedia."
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