I know there will be many different topics debated, but here are some topics I would personally like to discuss at the next BCBSF3.
Month: May 2010
Ignorance is bliss
Yesterday I read through a fascinating paper called Opacity and the Optimality of Debt for Liquidity Provision. The main point is that welfare of participants is maximized when using debt instruments to trade, rather than, say equity or real assets. The reason is that participants will be less worried about a debt than by a piece of equity, so they will seek less information, which in turn will maximize the issuance of debt, and maximize welfare.
Of course, while all of this is fine, a serious financial crisis can happen when everyone starts doubting at once about the debt that no-one seemed to question at all.
What’s fascinating is that according to the authors: welfare is maximized when participants are equally ignorant of the actual quality of the debt and trade simply according to its face value:
In this economy government policies that increase transparency would reduce welfare. This would seem to be counter to the intuition built from the idea of efficient markets.
They do not stop there. They actually claim that the complexity of securitization, CDOs, etc. is good because it increases costs about figuring out the exact value, which in turns maximizes welfare because it facilitates trade as long as everyone is equally unwilling to do any homework (if I understand correctly):
Clearly, if complexity raises the cost of producing information, raises ?, this can be welfare improving. Suppose that agent A could choose a level of complexity for the security designed at t=1. This corresponds to choosing some ? less than a given maximum. For large w, agent A would always choose to issue the most complex security, the one with the maximum ? because this maximizes the amount of debt that will be accepted by agent B without triggering information production.
More, they even justify one of the roles of the central bank as maintaining the opacity and secrecy.
The lender-of-last- resort’s role is to exchange information-insensitive debt for information-sensitive debt, possibly at a subsidized price to prevent information production, or, to make the private debt, which has become information-sensitive, information-insensitive. This prevents the crisis from being worse…
Keynes quote
“The ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood. Indeed the world is ruled by little else. Practical men, who believe themselves to be quite exempt from any intellectual influence, are usually the slaves of some defunct economist. Madmen in authority, who hear voices in the air, are distilling their frenzy from some academic scribbler of a few years back.”
Account metrics beyond the account balance
We are so obsessed with our bank account balance being positive that we forget it is a very crude measure of our value in a society. Three persons with a net worth of $0 could have this balance for very different reasons:
- one person may have borrowed $1M many years ago and have just finished paying it back;
- one person may have just opened an account with no deposited money, nor borrowed money.
- one person may have borrowed 100 times $1,000 and paid each time back.
Same balance, but very different levels of value and risk contributed.
On how to improve the account balance, there is a lot we can learn from exchanges not based on bank money, such as time banks, bartering networks or gift circles.
The San Francisco Time Bank for instance shows the balance, but also the hours received and given:
The sharing Web site Neighborhood goods accounts for the money you saved your friends by allowing to borrow your goods (and, I believe, until recently the money your friends saved you).
Finally, Martien van Steenbergen proposes a very elegant measure of trust: the number of times you’ve changed the sign of your balance i.e. the number of times your balance went through zero.
When is Michael Moore going to make a movie about money?
I watched Capitalism: a love story this Saturday night.
I didn’t think it was one of his best. Bowling for Columbine was my favorite.
I think Michael Moore failed on several accounts:
- He vilified capitalism without defining it.
- In particular, he didn’t distinguish capitalism and corporatocracy.
- Most importantly, he didn’t dig deeper in the corporatocracy’s enabler: money.
When is Michael Moore going to stop beating around the bush and make a movie about money?