Category Archives: Economic

Shiller’s insight is generalizable to all markets, perhaps into biology

A few years ago I had the good fortune to interview Robert Shiller of Princeton University (Listen to the audio interview.) His name will probably be familiar to you. Shiller won the Nobel Prize for Economics, along with Eugene Fama and Lars Peter Hansen of the University of Chicago this past week. Shiller is an influential economist whose housing index is a valuable leading indicator of home prices. We spoke about documenting human capital.

He’s also the man who coined the phrase “irrational exuberance” that described the behavior of investors during the dotcom and housing bubbles. The upshot of this is that there are huge variations in the price of an asset compared to its intrinsic value, but that prices will return to an average price over time. In the long run, the markets win, which was the contribution of Shiller’s co-Nobelists, Fama and Hansen.

I’ve been thinking about bubbles. They seem to occur at the outset of every market, a bubble unto itself, in essence, that will make or break a new industry. It is clear a market can be organized around anything, and within any market there is opportunity to profit by jumping aboard. Within those nascent markets, firms act like individual investors (and firms) that drive exaggerated valuations. I think this describes all fad behaviors and the market organized around them. Likewise, as a vet of the trade and financial press, I’ve seen whole industries form around, and that intense activity dissipate, a market as it grows until it reaches maturity. From inception to maturity, markets act erratically. Investors put money into the wrong places, and at the same time more investors enter the market, exacerbating the chaos of early growth. Some bubbles actually die out, like the pet rock of the gasoline automobile, but others become part of the sedimentary history of an economy.

This occurred to me because I read about the explosion of scientific papers published annually, which is resulting in very high degree of findings which cannot be reproduced. Eugene Samuel Reich, writing in Nature this week, quoted Henk Mode of scientific publisher Elsevier:

He notes that some institutional rankings, such as the Academic Ranking of World Universities, compiled by Shanghai Jiao Tong University, give explicit weight to the number of Nature and Science papers an institution has produced — making it likely that some universities would then begin to rank prospective faculty by the same measure. “There is more and more evaluation, and a need for researchers to prove their quality,” Moed says. “Journal reputations play a role, and that role has increased.”

That is the description of what happens in the early stages of growth, too, as intermediary players pile into a new market. Publishers of key data and news fructify around the mass of investors in the market, whether for dotstocks or housing derivatives or, as I see here in Washington State with the nascent marijuana market. All the missed investments will be recaptured by the market aggregator that eventually triumphs. This is why the greatest wealth is almost always from a reorganization of the economy, not simply innovation. The Walton and Gates fortunes, for example, come from aggregating markets in the wake of early broad innovations, which are consolidated and made normal, in the sense the product becomes a commodity.

The chaos at the core of the market, where the most investment exists in the form of capital and labor working in close order, is also analogous to the hot center of a bee colony, where the queen and the genetic investment exist in a perpetual swarming, while the bee colony as a whole maintains an equilibrium. In markets, the rapid early growth will end, consolidation will occur, and prices will settle down to at or near their intrinsic value, so that the only action in the markets come as long options chains.

Shiller’s insight will be discovered to be richer by each generation for millennia to come.

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Born of blogging and the return of a blogger

I note in The Economist that there is a school of economic thought that was “born in the blogosphere,” neo-chartalism (represented by and, which is really only a way of saying that the ideas were not incubated in the mainstream media. See Heterodox economics: Marginal revolutionaries in The Economist.

A few years ago, in Extreme Democracy, I was fortunate to work with a group of authors who examined how the forging of political movements could be influenced by the Internet and agile programming concepts. The Economist’s unbilined column is generally positive on the phenomenon of economics concocted outside the mainstream, because, it concludes, economic theory is often distilled from the less refined ideas from the fringes. Okay, but is it not the case that all movements — well-thought through and those built on whack-o assumptions alike — are always talked up from oblivion to prominence?

For what it’s worth, Extreme Democracy can be sold back to Amazon for $0.54 after all these years, though it’ll still cost you $13.48 to buy it used (or $28 new). Consider this my $0.54 on the following….

“Forged in the Blogosphere” is only a way of saying that the ideas were developed through the most contemporary form of discussion available, just as Enlightment thinking grew on branches of the early mail networks that carried private letters to and fro across Europe, North America and Latin American, Asian and African colonies. It’s good to see ideas developing from the ferment of the blogosphere, but they also need to develop in academy, the “mainstream” (e.g., something still printed or delivered via television) press and elsewhere.

The challenge neo-Chartalists face is not so different from any prior school of economics or Web political campaign, to “cross the chasm” into widespread contemporary thought.

And that is hard.

But this is all a way of saying, by the by, that I am going to be participating in the blogosphere, again, after a break of a few years. Something about writing became very difficult for me during my neck problems — probably due to all the Percoset I was chowing down on – but it got no better in the first couple years that I’ve worked at Microsoft, either. So, it’s time that I just churn it out and see what happens. The worst that could happen is that I remain a movement of one, I guess, but that’s always been the way it is with writing.

I’ll be starting to chew on things here. Please stay tuned and give me your feedback.

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Rationale for a nightmare

“This notion that the economy is self-stabilising is usually right but it is wrong a few times a century. And this is one of those times….” Lawrence Summers, Obama economic advisor in today’s Financial Times.

This is the wrong argument, one that supports unregulated markets most of the time. Rather, we’ve learned that the balance of market and regulatory power is something that cannot remain static over time, that constant retooling is needed. IF we want to think differently, it’s time to acknowledge that mixed markets are the healthiest and that, once this crisis is over, there is no “going back,” because the unregulated economy has demonstrated it is a ruinous economy.

Warren Buffett agrees: “We want to err on the side next time of not allowing big institutions to get as unchecked on leverage as we have allowed them to do.”

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What if we just declare “jubilee”?

I’ve been thinking about something a realtor friend told me last night. Yesterday, three homeowners called a banker she knows and said that, if the banks were going to be bailed out, they weren’t going to pay their mortgage. These were regular mortgage payers with no history of credit problems. They have simply given up on the relationship between the economy and themselves that they’ve believed all their lives.

So, I looked into the total US debt, the total of debt owed by low-income countries, the total mortgage debt in the United States and other factors, such as total consumer debt, in the clusterf*^%$k we call the economy.

The United States has $10.2 trillion dollars of national debt as of today. Only $5.9 trillion of that is held by the public, the rest is intragovernmental debt, held by various government entities as part of borrowing conducted to keep things going.

As of August, there was $2.5 trillion in U.S. consumer revolving and nonrevolving debt. Low-income nations owe about $523 billion to rich countries, including the United States.

What if we call it all even? Just erase all debts, including all debts owed by developing nations, except those U.S. Treasury notes held by the public

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Legislators from both sides agree: Rip-off

It may be needed, but the bail-out shouldn’t come in the form of a give-away to the banks, Congress says.

This is when the vaunted “bipartisanship” Republicans demand at every turn actually becomes a real debate and negotiation. In this case, the only people in favor of the bail-out in its current form are the Bushies. This is why we need a strong Congress, not a unitary executive.

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Low unemployment? Then where’d all the workers go?

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Turn up the global heat, turn down the global economy

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