J.P. Koning makes an important point.
It's also about the irreversabilities. Even if rational expectations aren't assumed, but some sort of decent evolving forward looking expectations are assumed. If investments are easily reversible that might not be so bad. When investments are irreversible or can't be easily repurposed even good forward looking expectations can still cause these Austrian-flavored problems.
I'll include my usual disclaimer on all this: I think this makes sense in theory and there's a modest literature on it that shows there's even evidence that this actually happens - but I don't think it's a substantial enough thing to dictate policy decisions. We have a terrible recession because of a financial crisis due to all sorts of other problems with market psychology. We do not have a terrible recession because production structures were distorted and then later revealed to be unsustainable.
Wednesday, December 5, 2012
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"... financial crisis due to all sorts of other problems with market psychology."
ReplyDeleteAre you sure? I still don't see any good evidence for this argument. The idea that it was connected to mortgage securitization is very fishy. There was little securitization in Britain, Ireland, Spain or Portugal, but there were still big property bubbles that burst. (Blaming ARM mortgages is even sillier since in most of those other places there are only ARM mortgages).
What all us ABCT advocates wonder is why everyone else is so keen to avoid discussing the effect of prices here. I think it's simple why people invested so much in housing, doing so was cheap because central banks and governments made it so.
The funny thing about these psychological explanations is that they claim that the investor is both stupid and brilliant at the same time. Stupid because he is subject to biases and herd behaviour, etc. But brilliant too, because somehow he can see what the long-run natural interest rate is.
Real estate bubbles don't need securitization do they? We talk about it because that seems to be a contributor in the U.S., but I don't see how its absence elsewhere implies anything.
DeleteHave all central banks been following the same policy? I don't see how international diversity necessarily helps your point.
And why not a housing bubble elsewhere in the Eurozone if this was a monetary issue?
I'm just throwing things out there, I don't know the best way to approach all of this but I don't think you can say securitization is a U.S. phenomenon and close the book on it.
It's not just psychological of course either. International capital flows probably had to do with it (although even there, capital flows plus bubble psychology is the real problem).
I do not agree with you that psychological biases imply stupidity and I do not agree with you that you have to be brilliant to assess long run (real) natural interest rates.
If it's prices why didn't we have this back in the 70s? The recession we did have was a policy choice (I don't know the international context on this).
"Have all central banks been following the same policy? I don't see how international diversity necessarily helps your point."
DeleteThe ECB, BoJ, BoE and Fed all had low interest rate policies in the early-mid 2000s.
"And why not a housing bubble elsewhere in the Eurozone if this was a monetary issue?"
At the time the economies of Germany and France were quite depressed (that was the reason for low rates). In France there are laws against housing speculation. If a house has been owned for less than 5 years then it must be sold at the same price it was bought at. In Germany home-ownership isn't that common, nor encouraged as it is in Anglo-Saxon countries. Private and state landlords own most residential property.
"I don't think you can say securitization is a U.S. phenomenon and close the book on it."
I can't. My point is though that people keen to blame the psychological effects connected with securitization can't make a good case. I'm thinking of Jeffrey Friedman here as much as any Keynesian.
"I do not agree with you that you have to be brilliant to assess long run (real) natural interest rates."
Well, what is the long run real natural interest rate then? :)
"If it's prices why didn't we have this back in the 70s?"
In Britain we did, it was called the Barber boom and it led to the Secondary Banking Crisis of 1973. It's a good point though, what I'd say (of-course) is that expectations of inflation vary between times and places. Sometimes when inflation is expected it's effects are neutralized, or when there's other uncertainty to discourage investment. I could make the same point about psychological theories. Why is it that psychology causes bubbles at some times and not other?
"We do not have a terrible recession because production structures were distorted and then later revealed to be unsustainable. "
ReplyDeleteTrue; this is most certainly a "money recession", one which is all about a broken finance sector.
We're gonna hit a recession due to unsustainable production structures if we don't get off of fossil fuels soon, though.