On the State of Macro

Amidst all the battering that macroeconomics has been taking in the blogosphere, here is a more detached - and in my view, realistic - looking-back (by Prof. Kocherlakota at UMN).

HT: Greg Mankiw's blog

Update: The number of articles can almost make a mini-anthology now. May be useful later now (including ones on efficient markets / state of financial economics) :

1. Darren Acemoglu's (MIT) - one of the first one

2. Krugman's tirade: Mistaking Beauty for Truth

3. Cochrane's response

4. Krugman on 'fresh' rage

5. Mark Thoma's compilation

6. David Laidler at Western Ontario

7. From the Economist: On Macro; On financial economics; Robert Lucas's piece; Lucas roundtable

8. From the Economist 2: What went wrong with economics

9. @ VOXeu: 1

10. Mark Thoma comments on William Buiter

11. Justin Wolfers comments on Kocherlakota

12. Mark Thoma comments on Justin Fox

13. Mark Thoma on whether econometrics is any use

14. Krugman on economics' equilibrium decadence

15. Thoma comments on Economist pieces

16. Dani Rodrik (Harvard) joins in

17. Thoma comments on mathematical formalism in economics (Kaletsky)

18. Kahneman's ideas

19. Robert Levine responds to Krugman

20. David Altig at Atlanta Fed

21. The last temptation of risk - Barry Eichengreen

22. Arnold Kling agrees with Krugman

23. Econospeak disagrees with Cochrane

24. How could Brad de Long not be a part of this

25. Economics and its Discontents - economicprincipals.com

26. Robert Gordon of Northwestern

Being Realistic - I

In Defense of Greenspan - The Behavioural Explanation

Disagreement among people all of who want 'to belong' is uncommon - which may be one of the reasons why warnings were ignored. Robert Shller reminds.

HT: Greg Mankiw's blog

Bailouts

1. 20th Oct: French government to inject E10.5 bn in the country's six largest banks: BBC reports

2. 19th Oct: Dutch government considering injecting E9 bn in ING: Reuter reports

On the Crisis: Role of Credit Rating Agencies and "the Confidence Game"

1. When A was not A - "Man's Confidence in Man" and Moody's rating of structured debt (Sam Jones)

2. The confidence game - "It's complacency that precedes bear markets" (James Grant)

3. Dominic Connor, while not directly dealing with the topic (he is only dealing with the mundane issue of how to destroy a bank, you know), reminds us that why, given the current situation, the rating analysts will almost always fail to figure out the risk associated with exotic instruments with any degree or accuracy:

" The next villains in this mess are the ratings agencies. Their job is guessing the odds of a debtor not paying back debts, whether that is bonds, or payments to suppliers. This is an eclectic mix of accountancy and PhD-level mathematics, though of course it is mostly done by MSc-level people at ratings agencies, trying to vet the maths of PhDs. Guess how well that ends? The MScs are not only cheaper than PhD Quants, they ask fewer awkward questions...It is thus convenient that the smart quants at the banks can outclass the MSc and often BSc-level agency employees. Ironically the agencies have the harder job, since they are trying to work out the value of an instrument whose real value is often intentionally obscured."

True. I can vouch for it. Dismal as it may sound, I don't think we have seen the last of such crisis yet. The roots go deep. Way deep.

On the Crisis: The Conflict between the Boon of Derivatives and the Curse of Information Asymmetry

Kenneth Arrow reminds:

While advances in economic theory in presence of uncertainty tells us that "spreading risks among many bearers improves the functioning of the economy" [so arguing for the expansion of markets], it also warns that "there are large differences of information among market participants and that these differences are not well handled by market forces" [but recognizing that markets may not come to exist, or if they do, they may fail to work]. 

So, if "...individuals in the market have different degrees of information, the ability to create securities or engage in other forms of contracts becomes limited; the less informed understand that the more informed will take advantage and react accordingly."

He concludes that: 

"...the root is this conflict between the genuine social value of increased variety and spread of risk-bearing securities and the limits imposed by the growing difficulty of understanding the underlying risks imposed by growing complexity."

[HT: Al Roth's Market Design blog]

On the Bailout (I)

1. 14th Oct: The drama behind the $250 bn deal 

[HT: Al Roth's Market Design blog)

Some FAQs on the Recent Financial Crisis

From guest posts by Anil Kashyap and Douglas Diamond of the University of Chicago on the Freakonomics blog:

* As things look like on 15th Oct: Everything you need to know about the financial crisis

* and as they did on 18th Sept.: On the recent financial upheavals

Update: Also see http://igmchicago.org (Initiatives on Global Markets at GSB Chicago)

* Stiglitz at Oxford (on iTunes): HT BBC