Archive for May 2009


Eggheads vs. “real world nitty-gritty”

I am getting burned out dealing with endless complaints about the way I think about markets.  Thus I thought it might be useful to compare my views to what I hear from those down in the trenches.  Those who actually know how auction-style markets work.  Bob supplied a typical complaint:

The financial instability caused a huge demand for commodities as investment – just look at the USO holdings of futures contracts last spring. Airlines don’t buy ETFs to get their oil.

I’m increasingly coming to the conclusion that academic economists have pretty close to 0 comprehension of how commodity futures markets actually function (this is really not even directed at you Scott). They don’t even understand the theory of futures pricing, let alone the real world nitty-gritty.

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Are bubble theories fools gold? Or successful alchemy?

There’s been a lot of buzz in the blogosphere recently about attempts by Brad DeLong and Paul Krugman to develop models of asset bubbles.  I can’t blame people for trying; we’d all like to understand why we keep getting these crazy price peaks in tech stocks, oil, housing, etc.  But as you may have already noticed if you read my EMH post, I am somewhat skeptical.  Today I’d like to look at this question from several different angles, starting with a question:

What’s the point of bubble theories?

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Anything IS-LM can do, Fisher did better

Here’s what economists knew before the General Theory:

1.  Monetary policy and velocity determine NGDP growth.

2.  Velocity is positively related to interest rates (and hence investment booms and deficit spending may raise velocity.)

3.  Wages and prices are sticky in the short run.

4.  Because of point 3 a monetary shock may produce a liquidity effect for short term rates.

5.  Because of point 3, money and velocity shocks can destabilize output in the short run.

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That’s “former central bankers”

A few days ago I posted a discussion of the apparent conflict between a well-publicized Fed study of the Taylor Rule’s policy implications, and the traditional Keynesian view of the SRAS.  The study claimed that we needed Fed policy to be expansionary enough to reduce interest rates by 5%.  The clear implication (since nominal rates are near zero) was that we needed at least 5% inflation expectations.  I claimed this made no sense, as the SRAS is generally assumed to be fairly flat in a deep recession, and that with very high unemployment, NGDP increases in the 5-8% range would almost certainly be expected to consist mostly of real output gains, with only mild inflation.

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Deregulation Dems can believe in:

From Kausfiles:

The administration has rolled back transparency rules that require unions to more extensively report their finances, executive compensation and potential conflicts of interest every year. The Labor Department said “it would not be a good use of resources” to require this.

The Obama administration’s first proposed budget calls for cutting the budget of the Labor Department’s Office of Labor-Management Standards, which investigates unions on behalf of workers, to $41 million, down from $45 million last year.

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