Sunday, November 10, 2013

Bubbles

Fama

I think most bubbles are twenty-twenty hindsight. Now after the fact you always find people who said before the fact that prices are too high. People are always saying that prices are too high [..]

[It is easy] to say after the fact that things were wrong. But at the time those buying them didn’t think they were wrong. It isn’t as if they were naïve investors, or anything. They were all the big institutions—not just in the United States, but around the world. What they got wrong, and I don’t know how they could have got it right, was that there was a decline in house prices around the world, not just in the U.S. You can blame subprime mortgages, but if you want to explain the decline in real estate prices you have to explain why they declined in places that didn’t have subprime mortgages. It was a global phenomenon. Now, it took subprime down with it, but it took a lot of stuff down with it [..].

What happened is we went through a big recession, people couldn’t make their mortgage payments, and, of course, the ones with the riskiest mortgages were the most likely not to be able to do it. As a consequence, we had a so-called credit crisis. It wasn’t really a credit crisis. It was an economic crisis [..].

People don’t walk away from their homes unless they can’t make the payments. That’s an indication that we are in a recession.

Interesting

Fama defends his rational market theory - so during 2008 crisis the actors behaved rationally (no animal spirits, no 'markets gone bad', no deluded CEOs), based on the information they had. I tend to agree. In most recent AI / data analysis competitions, we've been seeing that in many problems a "collection of experts" approach beats any single expert algorithm trained, coded in a certain way. Diversity is a good thing - this is something we already knew. If the market is a collection of many actors, then the "price decision" can be near rational. Also, it seems to me people who claim that "housing prices were too high" right before crisis need to explain why they keep using "housing prices returning to pre-crisis levels" as an indication of economic recovery.

* [In response to question "what caused the recession if it wasn’t the financial crisis?"] That’s where economics has always broken down. We don’t know what causes recessions.

At least he is honest

Still Fama

[To the question "despite his advocacy of smaller government, Hayek believed in a social safety net. Do you?] Yes, he did, and I have a similar view.  I think we need Social Security, things like that.

M. Friedman would agree

MF's position was that the government can give money to its citizens, which they could use in whatever way they want. In this scheme, there'd be little or no government programs, just cold hard cash (or digital money transfer :-P) from gov to its citizes. Pricing signals still work.  

This is not the same thing as tax cuts. For tax cuts to "work" you would have to be employed first, plus, tax cuts will favor the rich. The rich needs to be taxed at higher rates. Then the money is "given" to others. And free markets. This scheme would be better than government trying to provide this or that service because.. well, this is the government, so they would ultimately mess things up anyway, so it's best they steer clear of "providing" business. Just looking at the Obamacare debacle proves this point amply IMO (even if it is "providing" a Web site to collect information from citizens).

Administration officials

[White House claims with Obamacare] Americans would be better off in the long run with new insurance.

In the long run, we are all dead, right? 

Sorry. Could not resist.