Peter Thiel on Irrational Faith in Economic Growth

Of the financial crisis, Thiel says, “Certain assumptions were just wrong. One was that housing prices would always go up. And that is probably a true assumption in a world where you have massive growth. When you don’t have growth, it’s not true…the reason they made that mistake is because you can’t have growth if [...]

Behavioral Economics Explains All and Saves All

So says David Leonhardt in the Times. But let’s say you work for a firm that specializes in applying the latest theories in management and organizational behavior.  Idea factories, like HBS and Wharton, spew out cutting edge techniques and models, sending them to dealerships like Boston Consulting Group and McBain. Hordes of 22 year olds [...]

To What Extent Does Behavioral Economics Explain Mania in Finance?

I say very little, but I’m willing to be convinced. One very implausible, but popular line of reasoning runs along these lines: neoclassical economics assumes every agent is rational and fully informed; the euphoria inflating the real estate bubble was obviously not rational; therefore, neoclassical economics fails to explain the current crisis. Having reached this [...]

Michael Lewis Out Scoops Them All

Michael Lewis has a must read article on the implosion of finance. He calls it the end of wall street. It’s an article so clear in its import that, upon reading it, the left wing Lepermessiah at the DailyKos writes: 
Congress and/or Obama must stop these people from looting the treasury. The Bailout is the biggest [...]

Posner Calls It a Depression

The honorable judge has gone a bit daffy. He writes: 
By undermining faith in free markets, the depression opens the door to more government intervention in the economy and eventually to higher taxes (though probably not until the economy improves). These are not necessarily bad things. Obviously neither the optimal amount of government intervention nor the [...]

Applied Nozick: Finessing The Entitlement Theory

Richard Epstein uses Robert Nozick’s entitlement theory of justice to interpret the ideology behind the financial meltdown. From Epstein’s latest Forbes column: 
Behind this lending fiasco lay the strong collective preference for the “patterned principles” of justice that Robert Nozick attacked so powerfully in his 1974 masterpiece, Anarchy, State, and Utopia.
Believers in patterned principles hold that there [...]

Paulson Uses Nepotism to Provide Financial Stability

Today, the Wall Street Journal reports that Treasury Sec Paulson will name an old disciple from Goldman Sachs, Neel Kashkari, to manage the $700 billion bailout to buy distressed assets from financial institutions. Mr. Kashkari will get to tell his friends he’s the head of the Office Ministry of Financial Stability. Though Kashkari has an MBA from Wharton, [...]

Culpable Rating Agencies

S & P, Moody’s & Co., and Fitch–a portfolio manager tells me I shouldn’t overlook the culpability of these rating agencies for misjudging and then cloaking the risk involved in the sub-prime mortgage market. By law, investment banks and other financial entities would have been prohibited from adding so many risky mortgage-backed securities to their [...]

Hedge Fund Managers Deserve Their Salaries Because They’re Smarter

The ever insightful Richard Posner writes: 
I do not think that the government does bear much responsibility for the crisis. I fear that the responsibility falls almost entirely on the private sector. The people running financial institutions, along with financial analysts, academics, and other knowledgeable insiders, believed incorrectly (or accepted the beliefs of others) that by [...]

Attorney Generalissimo Cuomo to Einhorn: You Know Too Much!

Our man of the hour, David Einhorn, has said academic research and his firm’s experience indicate that whenever management complains about short-selling, it is a sign that management is attempting to distract investors from serious problems. Einhorn said that back in May. I would like to add a corollary to Einhorn’s principle: whenever management convinces [...]