"Thus I find myself becoming more Paleokeynesian by the hour, as the world keeps hitting me on the head with a brick, pausing after each blow to say: "Now do you understand?!" "

"Due to its simplicity and familiarity, the Gaussian copula is popular in calculating risk in collaterized debt obligations, but it imposes asymptotic independence such that extreme events appear to be unrelated. This restriction might be innocuous in normal times, but during extreme events, such as the housing crisis, the Gaussian copula might be inappropriate. This paper explores various copula specifications and finds that the degree to which housing prices are related based on the Gaussian copula is too small compared with real housing price data."

"Another way of putting this idea might be to say that the individuals who got things wrong—the ones who saw few problems in financial deregulation, anyone who thought derivatives eliminated risk, anyone who counted on markets to police themselves—were “one of us.” There can be no consequences for them because they merely expressed the consensus views of the time. Like John Maynard Keynes’s “sound banker,” they might have failed, but they failed in the same way that the rest of “us” failed. To hold them accountable for what they said and did would expose the rest of “us” to such judgment as well. And obviously that can’t happen.
"A résumé filled with grievous errors in the period 1996–2006 is not only a non-problem for further advances in the world of consensus; it is something of a prerequisite. Our intellectual powers that be not only forgive the mistakes; they require them. You must have been wrong back then in order to have a chance to be taken seriously today; only by having gotten things wrong can you demonstrate that you are trustworthy, a member of the team."

"When the Financial Times's Martin Wolf asked former U.S. Treasury Secretary Lawrence Summers what in economics had proved useful in understanding the financial crisis and the recession, Summers answered: “There is a lot about the recent financial crisis in Bagehot...”. “Bagehot” here is Walter Bagehot’s 1873 book, Lombard Street. How is it that a book written 150 years ago is still state-of-the- art in economists’ analysis of episodes like the one that we hope is just about to end? There are three reasons. The first is that modern academic economics has long possessed drives toward analyzing empirical issues that can be successfully treated statistically and theoretical issues that can be successfully modeled on the foundation of individual rationality. But those drives are disabilities in analyzing episodes like major financial crises that come too rarely for statistical tools to have much bite, and for which a major ex post question asked of wealth holders and their portfolios is: “just what were they thinking?”. The second is that even though the causes of financial collapses like the one we saw in 2007-9 are diverse, the transmission mechanism in the form of the flight to liquidity and/or safety in asset holdings and the consequences for the real economy in the freezing-up of the spending flow and its implications have always been very similar since at least the first proper industrial business cycle in 1825. Thus a nineteenth-century author like Walter Bagehot is in no wise at a disadvantage in analyzing the downward financial spiral. The third is that the proposed cures for current financial crises still bear a remarkable family resemblance to those proposed by Walter Bagehot. And so he is remarkably close to the best we can do, even today."

"This article analyzes the role in the credit crisis of the processes by which market participants produce knowledge about financial in- struments. Employing documentary sources and 87 predominantly oral history interviews, the article presents a historical sociology of the clusters of evaluation practices surrounding ABSs (asset-backed securities, most importantly mortgage-backed securities) and CDOs (collateralized debt obligations). Despite the close structural simi- larity between ABSs and CDOs, these practices came to differ sub- stantially and became the province (e.g., in the rating agencies) of organizationally separate groups. In consequence, when ABS CDOs (CDOs in which the underlying assets are ABSs) emerged, they were evaluated in two separate stages. This created a fatally attractive arbitrage opportunity, large-scale exploitation of which sidelined previously important gatekeepers (risk-sensitive investors in the lower tranches of mortgage-backed securities) and eventually mag- nified and concentrated the banking system’s calamitous mortgage- related losses."

"We examine the importance of what we term ‘Fisher dynamics’- the mechanical effects of changes in interest rates, growth rates and inflation rates on debt levels independent of borrowing -for the evolution of household debt in the U.S. over a long time horizon (1929- 2011). Adapting a standard decomposition of public debt to household sector debt, we show that these factors have been important in explaining rising debt levels, especially in the past thirty years. We identify and describe three broad regimes in the growth of household debt and several shorter episodes, distinguished by the distinct roles played Fisher dynamics and borrowing behavior in the evolution of household debt. We then provide some counterfactual trajectories of debt burdens that suggest how important financial changes beginning around 1980 have been in contributing to household debt, independent of any changes in household behavior. Specifically, if average rates of growth, inflation and interest remained the same after 1980 as before 1980, household debt burdens in 2011 would have been roughly the same as they were in the early 1950s, despite the sharp increase in borrowing in the early 2000s. We then discuss the difficulties involved in deleveraging. Under scenarios involving even substantial reductions in household expenditure, returning to debt levels of the 1980s could take decades. If lower private leverage is a condition of acceptable growth,then in the absence of a substantial fall in interest rates relative to growth rates, large-scale debt forgiveness of some form may be unavoidable."

That was not one of Noah's better performances, no.

"As Clawback opens, an assassin has begun shooting the country’s worst-performing financiers. A bottom-ranked investment manager; a hedge fund partner down ninety percent; a rotten banker. Someone’s slogan seems to be, “Don’t bail them out, take them out!”

"A coalition of banksters hires a fixer, the sort of contractor whose job description opens with “total deniability” and ends with “unlicensed machine guns.” As bodies fall and markets plunge, he ranges the Greenwich-Midtown axis with an equalizer and an attitude – only to realize he’s become a target himself."

I'm reading his book, and finding it surprisingly agreeable.

One of those essays which would really be much clearer, and easier to judge, as a mathematical model.

A normal-shaped recession of unusual size?

"These top economists discuss future directions for monetary policy, fiscal policy, financial regulation, capital account management, growth strategies, and the international monetary system, and the economic models that should underpin thinking about critical policy choices. Among the new realities they consider are the swing of the pendulum toward regulation; the need for new theoretical approaches, incorporating advances in agency theory, behavioral economics, and understanding of credit markets and finance based on theories of imperfect information; and the importance for macroeconomic policy to target not just inflation but also output and financial stability."

"Turner argues that the faults of theory and policy that led to the crisis were integral elements within a broader set of simplistic beliefs about the objectives and means of economic activity that dominated policy thinking for several decades. This dominant discourse cast economic growth as the objective, markets as the universally applicable means of achieving it, and inequality as inevitable and necessary. Turner takes on these assumptions point by point, arguing that more rapid growth should not be the overriding objective for rich developed countries, that inequality should concern us, that the pre-crisis confidence in financial markets as the means of pursuing objectives was profoundly misplaced, and that these conclusions have broad implications for the case for economic freedom, for specific areas of public policy (including financial regulation and climate change), and for the discipline of economics itself."

"So we’re having an economic crisis. I say “having,” not “had,” because we have by no means recovered. Financial panic may have subsided, stocks may be up, but employment remains far below pre-crisis levels, and unemployment — especially long-term unemployment — remains disastrously high. And while you can make the case that the economy is slowly on the mend, slowly is the operative word. We have already been through two years of economic purgatory, and there's no end in sight.
There is a real sense in which times like these are what economists are for, just as wars are what career military officers are for. OK, maybe I can let microeconomists off the hook. But macroeconomics is, above all, about understanding and preventing or at least mitigating economic downturns. This crisis was the time for the economics profession to justify its existence, for us academic scribblers to show what all our models and analysis are good for.
We have not, to put it mildly, delivered."

Shorter Lancherster: We're fucked.

"I imagine that every day Kocherlakota interviews people – from banking, from the top 1%, from the corporate offices of our largest firms – who will kindly explain to him that the problem in the economy is that they just don’t get their demands answered quickly enough.  If only they paid even less in taxes, if only regulations were weakened further, if only every pet demand they ever wanted was granted, then they would allow the economy to take off.
How often does he hear the opposite?  How often do the unemployed disrupt his speeches, chanting about how they aren’t on a magical vacation but instead desperate to find a job?  How often do students show up in huge numbers in his office explaining they they are terrified of entering this terrible job market, a job market likely to scar their careers for decades, instead of apathetic losers who’d rather just play on facebook all day enjoying their “z”?   Maybe it is time that changed."

(If only.)

"I stand before you repentant..."

Shorter DeLong: fucked is the new normal.

But Brad does not answer his question! Where oh where are the centrist technocrats?

"Knowing that the market is good, their task is to figure out why a good market has decreed that employment in America needs to fall by 8 million relative to trend. (It's not unlike grappling with a just and all-powerful God who doesn't mind a tsunami every so often.)

The workers-have-no-productive-skills explanation is the only one that makes sense, if we first start from the premise that the market is all-good. Never mind that we have a lot of evidence that the market is not good — that we have been periodically suffering from these finance-driven grand mal seizures of the body economic that we call the industrial business cycle for 185 years.

Nevertheless, you can shut your eyes — and economists are very good at doing so. It was Joseph Schumpeter, one of the smartest economists of three generations ago, who began a lecture with: "Gentlemen! A depression is a healthy shock! It is like an ice-cold douche!""

"Bhide warns us that modern finance is on a collision course with the true heart of capitalism: innovation and entrepreneurship. Deepening this disconnect is the growing complexity of banks, which habitually fail to hold bankers accountable for their mistakes, while blatantly subverting the tough banking rules established in the 1930s. As Bhide makes clear, the erosion of these rules displaced traditional relationship-based lending in favor of liquid, anonymous securities, which ultimately succeeded in depriving large banks (and other publicly traded companies) of oversight by investors with first-hand knowledge of the business or its managers. Identifying this lack of monitoring as a fatal flaw that destabilized the economy and helped trigger the financial crisis, Bhide pushes for tough, straightforward limits on the activities of commercial banks and financial instruments such as money market funds."

ETA: review: http://bactra.org/reviews/bhide-contra-finance.html

Unintended consequences of hubristic social engineering by ideologues (with finance degrees), vol. CCXIV.

"While the other side was making these predictions, people like me were saying that classical economics was all wrong in a liquidity trap. Government borrowing did not confront a fixed supply of funds: we were in a paradox of thrift world, where desired savings (at full employment) exceeded desired investment, and hence savings would expand to meet the demand, and interest rates need not rise. As for inflation, increases in the monetary base would have no effect in a liquidity trap; deflation, not inflation, was the risk. ... The 10-year bond rate is about 2.5 percent, lower than it was when Ferguson made that prediction. Inflation keeps falling. The attacks on Keynesianism now come down to “but unemployment has stayed high!” [but] if you took a Keynesian view seriously,... given what we knew in early 2009 ... the stimulus was much too small to restore full employment."

But surely the _scientific_ answer is that we all continue to have a much higher preference for leisure than we did in 2007!

"Narayana Kocherlakota (who the bankers of Minnesota, Montana, North Dakota, South Dakota, northwestern Wisconsin, and the Upper Peninsula of Michigan have selected to exercise important public functions) certainly knows more about economics than me. So when he says “[m]ost of the existing unemployment represents mismatch that is not readily amenable to monetary policy” I’m prepared to defer to him or to leave the job of explaining why he’s wrong (if he is wrong) to other people. But ... as a reason to avoid monetary stimulus this makes no sense, and is just a piece of misleading rhetoric that distracts people from the real issue. ... Say that of that 5.1 percentage point increase [in unemployment], 2 ... are due to inadequate demand and 3.1 ... are due to structural factors... monetary expansion could reduce the unemployment rate by 2 percentage point ... [which would be] a big deal. ... we’d alleviate a substantial quantity of human suffering up to and including suicide."

"Wouldn’t it be awesome if the Fed and other government agencies took advantage of domestic Nobel Prize winning economists? For christ sake- someone google “Krugman+lost+decade” and tell me how many hits you come up with. He’s done just about everything except tattoo it on his chest and back and then do a pay-per-view boxing match with Tonya Harding." --- Would that work, I wonder?

Solow's prepared remarks for testifying before Congress about modern macro.  To put it in "shorter" form: "I helped invent macroeconomics, and let me assure you that this was not what we had in mind."

I am only surprised he doesn't end this "This has been another edition of Simple Answers to Easy Questions".

"But knowing their hypocrisy, he said unto them, "Why are you putting me to the test? Bring me a dime and let me see it."

And they brought one. Then he said to them, "Whose head is this -- FDR's or Herbert Hoover's?"

They answered, "Roosevelt's."

And he said unto them, "Right. So shut up. Have you morons already forgotten the 20th Century? When the choice is between imitating what worked and what really, really didn't work, why are you pretending it's terribly complicated?"

And after that, no one dared to ask him any question."

It says something that a man who was taking these insane risks, and engaging in massive deceptions to take these risks, is admitted even by the prosecutors to have NOT personally profited from it (beyond the usual bonuses, presumably), but rather left all the money with the organization. Now THAT is social control.

UK's chief bank regulator: "The banking industry is ... a pollutant. Systemic risk is a noxious by-product. Banking benefits those producing and consuming financial services – the private benefits for bank employees, depositors, borrowers and investors. But it also risks endangering innocent bystanders within the wider economy – the social costs to the general public from banking crises."

Indeed.

When the IMF (the IMF!) calls for a tax specifically targeted at the financial sector, you know it's too big.

"In that sense, this time really is different: while the first great global financial crisis was followed by major reforms, it’s not clear that anything comparable will happen after the second. And history tells us what will happen if those reforms don’t take place. There will be a resurgence of financial folly, which always flourishes given a chance. And the consequence of that folly will be more and quite possibly worse crises in the years to come." --- I wonder, does Krugman read Ken MacLeod? If not, someone should send him a copy of The Fall Revolution.

Stiglitz expounds on the current crisis, under the pretense of reviewing a book about Keynes.

Huge PDF. Looks interesting.

Yes. This has been another edition of easy answers to simple questions.

Draft Krugman!

I am happy to see Krugman's synopsis of the crisis agrees with my half-assed speculations.

The Rajan book sounds interesting.

"I hereby deny, abjure, and repent my previous allegiance to the gospel of "Greenspanism." I reject Greenspan, and all his works, and all his empty promises.

I will strive now to walk in the light."

Review of Tett's _Fool's Gold_. But this scene is NOT in my copy - what gives? "Fool’s Gold begins in a conference room in Nice in spring 2005. Tett admits that at that point she was baffled by the technical language – ‘Gaussian copula’, ‘attachment point’, ‘delta hedging’ – used by the participants. However, before joining the FT she had conducted fieldwork in Soviet Tajikistan for a PhD in social anthropology, and the ethnographer in her was now reawakened. The conference reminded her of a Tajik wedding. Those attending it were forging social links and celebrating a tacit world-view – in this case, one in which ‘it was perfectly valid to discuss money in abstract, mathematical, ultra-complex terms, without any reference to tangible human beings.’"

Hear, hear.

This is, I think, the only appropriate tone to take.

Tett on how the idea of free and competitive markets was used as ideological cover for rent-seeking. (I do not think that phrasing this in terms of "silences" and Bourdieu was helpful.) The bit at the end about need to actually pay attention to power structures is, however, absolutely right on.

Claim: banks used securitization (specifically, CDOs) to increase their leverage --- making a larger volume of loans on the same base of equity. Banks largely ended up buying the securities of other banks. Not 100% sure the incentives work out the right way here for buying banks; should try reading Shin's actual paper (linked at end) with pen in hand.

Holy shit.

Who are you, and what have you done to Martin Wolf? (And could you maybe see about replacing more business columnists with pod people?)

I think this is slightly unfair to the 17th century Jesuits. It is not at all unfair to the Chicago School; if anything it is still too kind.

"You know, in every movie I've seen about the end of the world, civilization collapses because of something wicked cool happening - an asteroid hits, nuclear war, a supervirus, an ape revolution, whatever. If civilization collapses over credit default swaps I an going to be pissed."

This will be an... interesting experiment. (For instance, can they really turn MBAs into math teachers in 3 months?)

Credit default swaps as an instrument of state capture. (In the immortal words of Patrick Nielsen Hayden, "I have personally felt like I was living in a Ken MacLeod future since sometime not long after 9/11, and I wish he'd CUT IT OUT.")

Barry Eichengreen on what is (and what is not) wrong with economics.