AEI reviews the Big Short
03 Mar 2016 Leave a comment
in business cycles, Euro crisis, global financial crisis (GFC), macroeconomics
% industrialised countries at zero or near zero central bank interest rates
04 Feb 2016 Leave a comment
in business cycles, currency unions, Euro crisis, global financial crisis (GFC), great recession, inflation targeting, macroeconomics, monetarism, monetary economics Tags: central banks, liquidity trap, monetary policy
Review of #TheBigShort including of the movie
02 Feb 2016 Leave a comment
in applied price theory, business cycles, economic history, entrepreneurship, financial economics, global financial crisis (GFC), great recession, macroeconomics, monetary economics, movies Tags: bank runs, financial crises
About the only time the Hollywood Left oozes with patriotism is when getting stuck into Wall Street. Hollywood must get its revenge for all those times investors did not back their film pitches, trimmed budgets and get the lion’s share of merchandising royalties and syndication profits. As Larry Ribstein explained:
American films have long presented a negative view of business…. it is not business that filmmakers dislike, but rather the control of firms by profit-maximizing capitalists… this dislike stems from filmmakers’ resentment of capitalists’ constraints on their artistic vision.
The Big Short is still a good film despite the left-wing populism, worth going to see. Its limitations in not discussing the monetary policy of The Fed or regulations that encouraged lending to high risk borrowers are justified poetic license and editing.
The film is already 120+ minutes long despite frequent resorts to breaking the fourth wall to explain technical terms, who was what and what they were doing, past and present. The Big Short is a film designed it make money at the box office, not a semester long documentary.
The Big Short is well acted, funny, insightful and still a good story despite the documentary element that was impossible to do without.
The Big Short highlights that its protagonists had skin in the game. They were investing in mortgages or shorting the same in the expectation of a crash. There were no windbags and armchair critics in The Big Short talking gloom and doom on the horizon without investing their own money to profit from their forecasts. That said, the protagonists betting on a sub-prime mortgages crash, bar two of them, were a little bit nutty.
I do not know any of the critics of the economics of the film’s explanation of the sub-prime crisis who suggested how they could fix these gaps in its economics without making the film much, much longer.
These critics fall into the exact same trap that the Big Short was not about. The Big Short was about investors to put their money where their mouth is. The critics of the film should put their script doctoring skills where their mouths are at least of The Big Short.

Source: What ‘The Big Short’ Gets Right, and Wrong, About the Housing Bubble – The New York Times.
Getting stuck into the role of the Fed and regulatory mandates on the banks regarding their level of sub-prime mortgages is for another film. Plenty of people warned of dark days ahead. An essay anyone can read with profit is Ross Levine’s “An Autopsy of the U.S. Financial System: Accident, Suicide, or Negligent Homicide?“
Other films, correctly documentaries, place the blame for the sub-prime crisis and the Great Recession directly on the Fed:
The financial mess we’re still climbing out of can be laid directly at the feet of the Fed, whose misguided advocacy, under Greenspan, of a borrow-and-spend economy rather than a focus on savings and investment has created a situation where, as the title implies, money is disconnected from any underlying value.
There are plenty of points that could be added to the economics of The Big Short if it was a film of more or less unlimited length:
Krugman and friends like the film because it leaves out any discussion of the main culprit behind the financial crisis, which was not Wall Street “greed” but bad monetary and credit policies from the Federal Reserve and the federal government. The movie barely hints at any exogenous factors behind the boom or bust. (This FEE report by Peter Boettke and Steven Horwitz fills in the missing information.) So the pro-regulation crowd is cheering. Viewers are given no understanding of the real causal factors and hence fill in the missing data with a feeling that banks just love ripping people off. To be sure, if you approach this movie with some knowledge of economics and monetary policy, the rest of the narrative makes sense. Of course Wall Street got it wrong, given Washington’s policies on mortgage lending!
To add to the brew, Edward Prescott points out the Great Recession can be explained through productivity shocks. Specifically, a collapse in investment and in particular investment in intangibles such as intellectual property in 2007 in anticipation of more taxes and more regulation.
The Great Recession had many of the same features of the 1990s technology boom but in reverse. The boom in the 1990s and bust in 2007 were somewhat inexplicable because major sources of volatility were unmeasured, specifically, investment in intangible capital.
V.V. Chari also points out that the extent of the financial crisis was overstated. This is because the typical firm can finance its capital expenditures from retained earnings so it was hard to see how financial market disruptions could directly affect investment.
What Chari disputed was that bank lending to non-financial corporations and individuals has declined sharply, that interbank lending is essentially non-existent; and commercial paper issuance by non-financial corporations declined sharply, and rates have risen to unprecedented levels.
John Taylor argues that we should consider macroeconomic performance since the 1960: There was a move toward more discretionary policies in the 1960s and 1970s; A move to more rules-based policies in the 1980s and 1990s; and back again toward discretion in recent years.
These policy swings are correlated with economic performance—unemployment, inflation, economic and financial stability, the frequency and depths of recessions, the length and strength of recoveries. Less predictable, more interventionist, and more fine-tuning type macroeconomic policies have caused, deepened and prolonged the current recession. Robert Hetzel puts it this way:
The alternative explanation offered here for the intensification of the recession emphasizes propagation of the original real shocks through contractionary monetary policy. The intensification of the recession followed the pattern of recessions in the stop-go period of the late 1960s and 1970s, in which the Fed introduced cyclical inertia in the funds relative to changes in economic activity.
Finn Kydland considers fiscal policy to be at the heart of the slow recovery. Instead of restructuring and investing more prudently, Western countries faced with budget shortfalls will seek to increase taxes:
- The U.S. economy isn’t recovering from the Great Recession of 2008-2009 with the anticipated strength.
- A widespread conjecture is that this weakness can be traced to perceptions of an imminent switch to a regime of higher taxes.
- The fiscal sentiment hypothesis can account for a significant fraction of the decline in investment and labor supply in the aftermath of the Great Recession, relative to their pre-recession trends.
- The perceived higher taxes must fall almost exclusively on capital income. People must suspect that the tax structure that will be implemented to address large fiscal imbalances will be far from optimal.
Now imagine trying to incorporate all the above points into a film and keeping it at its current two-hour length?
Share market losses during previous financial crises in the USA and UK
31 Jan 2016 Leave a comment
in business cycles, economic history, fisheries economics, global financial crisis (GFC), great depression, great recession, macroeconomics Tags: banking crises, financial crises, sovereign debt crises, sovereign defaults
% global GDP with negative central bank interest rates
30 Jan 2016 Leave a comment
in economic history, global financial crisis (GFC), monetary economics
The modern macroeconomics of the Global Financial Crisis
02 Dec 2015 Leave a comment
in applied price theory, budget deficits, business cycles, economic growth, economic history, economics of regulation, Euro crisis, fiscal policy, global financial crisis (GFC), great depression, great recession, macroeconomics, monetary economics Tags: adverse selection, bank panics, bank runs, banking crises, deposit insurance, economics central banks, financial crises, moral hazard, sovereign defaults
British post-war productivity growth
17 Nov 2015 Leave a comment
in economic growth, economic history, global financial crisis (GFC), labour economics, macroeconomics Tags: British economy, British history
Much higher house prices and the political sustainability of a return of inflation
13 Sep 2015 1 Comment
in business cycles, economic history, global financial crisis (GFC), inflation targeting, macroeconomics, monetary economics, politics - New Zealand, urban economics Tags: expressive voting, housing affordability, inflation rates, median voter theorem, mortgage belt, mortgage rates, rational ignorance, rational rationality
Mortgage interest rates were last in the double digits in the late 1980s and early 1990s. Since then, housing prices have exploded in New Zealand and barely paused for the recession in the wake of the Global Financial Crisis.
Source: International House Price Database – Dallas Fed; Housing prices deflated by personal consumption expenditure deflator.
With house prices and mortgages several times what they used to be, the ability for any household income to absorb the sudden return of high mortgage interest rates because of a return of even moderate CPI inflation and double-digit mortgage rates is well-nigh impossible, politically.
Source: Reserve Bank of New Zealand Mortgage rates and Bryan Perry, Household Incomes in New Zealand: trends in indicators of inequality and hardship 1982 to 2014 – Ministry of Social Development, Wellington (August 2015) Table C.5.
The chart above shows that the number of 25 to 44-year-olds in New Zealand who have more than 30% of their income going to housing expenses has doubled since 1988 to nearly a third of all households. The number of 45 to 64-year-olds who pay more than 30% of their income in housing expenses has quadrupled to 20%. That is a lot of voters who would be offended by mismanagement of monetary policy.
None of these households would have much left over to absorb an increasing mortgage interest rates. That is very different political arithmetic too the last time both mortgage rates and CPI inflation were in double digits, which was more than 20 years ago. Not many New Zealanders under the age of 40 or 45 have an adult memory of high inflation and high mortgage rates.
The Great Escape actually accelerated after the GFC
10 Sep 2015 Leave a comment
in development economics, economic history, global financial crisis (GFC), growth disasters, growth miracles, health economics, labour economics, macroeconomics, poverty and inequality Tags: child poverty, extreme poverty, global poverty, India, The Great Escape, The Great Fact
In 1993, >30% of India's urban population lived in extreme poverty. In 2011? Only 13%. buff.ly/1iutlQA http://t.co/238hsW2aeF—
HumanProgress.org (@humanprogress) September 09, 2015
The mancession
06 Sep 2015 Leave a comment
in business cycles, economic history, global financial crisis (GFC), great recession, job search and matching, labour economics, labour supply, macroeconomics, unemployment Tags: reversing gender gap
How frequent are simultaneous financial crises in one country?
04 Sep 2015 Leave a comment
in business cycles, currency unions, development economics, economic growth, economic history, Euro crisis, financial economics, global financial crisis (GFC), great depression, great recession, growth disasters, growth miracles, law and economics, macroeconomics, monetary economics, property rights Tags: bank runs, banking crises, banking panics, currency crises, current account crises, debt crises, pseudo financial crises, real financial crises, sovereign debt crises, sovereign default
Longest time without a recession
02 Sep 2015 Leave a comment
in business cycles, economic growth, economic history, fiscal policy, global financial crisis (GFC), great recession, macroeconomics, monetary economics, politics - Australia, politics - New Zealand, politics - USA Tags: Australia, recessions and recoveries
British unemployment incidence by duration since 1983
09 Aug 2015 Leave a comment
in business cycles, economic history, global financial crisis (GFC), job search and matching, labour economics, labour supply, macroeconomics, unemployment Tags: British disease, British economy, equilibrium unemployment rate, Margaret Thatcher, natural unemployment rate, unemployment duration, unemployment rates
In contrast to the USA, there is been a long-term decline in long-term unemployment, that is unemployment of more than a year, in the British economy over the 1990s. The situation then stabilised and then increased after the global financial crisis. There is also a rather rapid fall in long-term unemployment in the mid-1980s as the British economy recovered under Thatchernomics
Source: OECD StatExtract.
ABCT insights are predominantly a theory of unsustainable credit-induced booms
09 Aug 2015 Leave a comment
in Austrian economics, business cycles, global financial crisis (GFC), great depression, great recession, macroeconomics, monetarism, monetary economics Tags: Austrian business cycle theory, Austrian macroeconomics, booms and busts, central banking, monetary policy, Roger Garrison

via What Austrian business cycle theory does and does not claim as true | Institute of Economic Affairs


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