Ricardian Equivalence

I think of it as rational expectations and efficient markets theory taken to its farcical limit, the market always efficient, the economy always operating optimally, unemployment and recessions figments of our imagination. It shows how ludicrous a theory it can be and if you take it seriously, you have just missed the joke.

The Low Interest Rate Myth

Probably the most common explanation for the financial crisis is that interest rates were too low for too long.  I would dispute this.  The whole point of our financial ponzi scheme was to promise and keep interest rates higher than what they would otherwise have been.  Had only good lending been permitted, vast sums would have had no investment opportunity driving interest rates far lower than they had been.  Interest rates were not too low but too high given the available investment opportunities.  So when people ask, how can more of the same which got us into this trouble solve our problems they are incorrect.  This is not more of the same but something very different, the truly low interest rates the investment possibilities offer us.  It is the spur in our sides to take more risk to build a better future because our current one is not very promising.  

Incentives and Investments

The incentives were wrong, but the incentives are always wrong. It is in the interest of those that profit from the incentives to insure they are wrong so they can benefit from them. That is why it requires an honest regulator, but despite the incentives rather then because of them, as their incentives are wrong as well.

If only good lending was allowed, then interest rates would have had to have dropped further and lenders would have to decide whether to continue to lend or to speculate or consume. If they continued to lend, the bubble would have been sustained, speculate and it would have been diverted into equities, consume and it would have expanded the economy. Any of these would have been a better solution than what we had. The big problem is when there is a paucity of good investments for the amount of saving people want, the only thing left to invest in is ponzi schemes.

On the Causes of the Current Crisis

While the low interest rates and abundance of savings amplified the result, it was bad lending that really created it. Bad lending is not only bad in itself but turns even good lending bad by increasing asset prices beyond their true value. Part of the job of regulating the value of money is regulating credit. Failing to do the latter is failing to do the former.

Whenever one hears of the profits of financial innovation the presumption should be someone is getting robbed and if you don't know who, it is probably you. There were no profits, only hidden future losses for the taxpayer to pick up. The innovation consists of fooling others and looting the treasury.

Animal Spirits, Knowledge and Psychology

Why do we make mistakes in economic calculations? What do we mean by animal spirits? Are these a cause or a result? In psychology as a cause theory, it is not that people don't learn from the past, but rather, learn too well from the recent past, and not well enough from the distant past, that outside of their experience, and end up repeating the mistakes of their forebearers. There does seem to be a disconnect between what we think we learn and reality though, that what we may learn may be false or incomplete such that we always have new lessons to learn as well as some we need to unlearn. In that, it is less of psychology as irrational emotionality than as bounded rationality limited by the truthfulness of our conceptions. Thus it seems both knowledge and psychology play a part in our mistakes.