Wednesday, October 01, 2008

Meltdown links

1) Leonard Lopate interview with Economist editor Greg Ip, formerly of the WSJ. (Scroll down the page to Financial Crisis: What Happens Next?). This is the best 12 minute summary of the current situation I have yet heard. Ip is consistently good at explaining this complicated subject in an accessible manner. If you have a friend who is confused about the credit crisis, have them listen to this interview. (Avoid Terri Gross and pals on this one... ;-)

I have been listening to Leonard Lopate's show for some time and I can tell his grasp of finance has increased dramatically in the last year or so (his strength is interviewing artists, writers, etc.). It's yet another example of high-g at work. He knew almost nothing a year ago but now asks occasional perceptive questions. (But of course it doesn't matter how smart our next President is!)

2) Mark Thoma discusses the pros and cons of mark to market accounting. To me it's rather obvious that M2M accounting is exacerbating this crisis. It has introduced a very significant nonlinearity, both on the upside (bubble), and now in the collapse. If the market for mortgage assets has failed it is crazy to use it as a barometer for value. More discussion at WSJ.

3) This NYTimes Op-Ed written by a former theoretical physicist discusses agent-based simulation, behavioral economics and phase transitions -- yes, in an Op-Ed! (Thanks again to reader STS for the pointer.)

3 comments:

STS said...

Steve:

Glad you enjoyed that NYT OpEd. I liked the shout out to Doyne Farmer, whose work I have long admired. Economics badly needs some fresh insights from math, physics and biology. Those insights are appearing at the fringes, but need to start being take up into the mainstream.

Anonymous said...

A good response to the Op-ed

http://angrybear.blogspot.com/2008/10/whats-wrong-with-economic-theory-as.html

steve said...

anonymous: thanks for that link. Waldmann makes several points in his post.

1) the op-ed attacks a caricature of economic theory

2) this caricature is not supported by any rigorous foundations (the really smart/mathematical economists know this, but perhaps not most of the community -- or perhaps they don't care)

3) but this caricature is the one used in real policy debates, so is worth attacking

The caricature is the same thing I attack around here, because many free market boosters really believe it. I'm a free market booster myself, to some extent, but don't have quite that level of blind faith in markets' optimizing capability or infallibility. And I certainly don't believe in any rigorous basis for real world economic results.

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