7 -- What Bagehot said
10 -- When collateral is king
7 -- What Bagehot said
10 -- When collateral is king
Noah Smith asks economics bloggers to describe situations where other blogs "have actually changed your mind about something, not just convinced you of a position where you had none to begin with!"
This post first appeared on 15 April 2013 at FT Alphaville.
I spoke on a panel with Allison Schrager of The Economist and Joe Weisenthal of Business Insider at the Kauffman Economics Bloggers Forum. Below is a revised draft of my prepared notes, and many thanks to Brad DeLong for the invitation.
This article appeared in the November 21 edition of the Financial Times.
“High society in Tampa is a strip club with a cover charge,” quipped a magazine editor on Twitter. The line is funny but it also inspires a vague resentment, probably because it is based on misconceptions both about high society and about Tampa, my home town. I’ve heard many similar jokes this year and, at the risk of seeming churlish, I needn’t bother asking if the joke-tellers have actually spent much time here.
This post first appeared on 12 November 2012 at FT Alphaville.
“Under current law, on January 1, 2013, there’s going to be a massive fiscal cliff of large spending cuts and tax increases.”
– Ben Bernanke, first usage of “fiscal cliff”, 29 Feb 2012 (Hat tip Kevin Drum)
It’s hard to say if Bernanke actually planned to attach the specific label “fiscal cliff” to the series of spending and tax changes that are scheduled to begin at the start of next year. The above comment came during a Q&A after his formal testimony in the Semiannual Monetary Policy Report to the Congress; the testimony itself did not include it.
But the appeal of the term was obvious. It signaled an immediate and irreversible and perilous economic harm pending just on the other side of the New Year — and also made possible a lot of asinine metaphorical extensions (of the US economy “tumbling off the fiscal cliff” or policymakers “driving us over the fiscal cliff” or whatever).
If you’re in charge of US monetary policy and trying to accelerate a recovery amid a devastating long-term unemployment problem, you want fiscal policy to either complement your efforts or at least be neutral, not work against you. “Fiscal cliff” is a lot easier than “policies contributing to tighter fiscal policy beginning next year”.
And so the term might have been useful to help focus the collective media and policymaker attention on what would have to be done after the election — and to give everyone a facile way to lump all of these looming tax cut expirations and sequestration cuts into a short and highly suggestive phrase.
Too facile. It worked, but the problem with “fiscal cliff” is that the metaphor kinda sucks, as so many commentators have now taken to explaining. If policymakers don’t work out a solution by January 1st, the harm is not immediate. Nor is it irreversible, nor is it even all that perilous at first. And even to describe the various components as a single item is problematic: each would have a different effect on the economy. (See the charts posted by Gavyn Davies, or Kevin Drum, or Calculated Risk for a breakdown.)
This post originally appeared on 25 October 2012 at FT Alphaville.
Read enough books and economics papers about the recent US financial crisis, and at some point you might notice something odd.
Most of them are about the factors that made the crisis and subsequent recession so profound and enduring — excess leverage, deregulation, lax lending standards, the rise of securitisation, blindness of the rating agencies, fraudulent bankers — but very few of them are about what actually started the crisis.
Gary Gorton’s work is different. His 2009 book, “Slapped by the Invisible Hand”, argued that although these factors were all present, they were also somewhat beside the point. The financial crisis started the way all systemic financial crises start: as a bank run. The only difference was that this bank run took place in the shadow banking system, and the creditors who started the run weren’t depositors of retail banks, but the counterparties of investment banks in repo and commercial paper markets.
More to the point, he has long argued that market economies are inherently vulnerable to such runs. And to begin thinking of why the recent crisis happened at all and how to prevent another, it is at least as important to address the question of why the US didn’t have a crisis between 1934 and 2007. And to answer that, you need to know something about how the country’s banking system evolved in the century leading up to 1934.
In his new book, “Misunderstanding Financial Crises: Why We Don’t See Them Coming”, Gorton frames the recent crisis in the context of this longer history. And he also tackles some of the more complicated epistemological problems of modern-day economics (and in particular, macroeconomic models).
Along the way, he arrives at some provocative conclusions — including a few that would probably make a lot of regulators, economists, and especially the more severe critics of the banks and bankers a little uncomfortable.
Gorton agreed to have an email back-and-forth with FT Alphaville about the book, and beneath we reproduce the transcript.
My cover story in this month's APS Observer looks at some of the research on entrepreneurial psychology. For those in too much of a hurry to read the whole thing, here's the conclusion (with a few typos fixed):
In some ways, the Schumpeterian view of entrepreneurs — as ruthless, risk-defying capitalist superheroes with ambitions as big as their outsized egos — persists. For the latest example of this approach, one need look no further than how Mark Zuckerberg is fictionally portrayed in The Social Network, a new movie about the origins of Facebook: He is brilliant, backstabbing, arrogant, and innovative. And certainly some entrepreneurs do fit this mold.
But with more than 550,000 new firms opening in the US each year, it’s obvious that only a tiny percentage of startups ever become global phenomena like Facebook — and most entrepreneurs are nothing like the Zuckerberg of the movies. As Shaver has labored to prove, it’s time to do away with much of the stereotypical personality sketch.
That doesn’t mean, however, that we should ignore all personal characteristics in evaluating potential entrepreneurs. It is just that the relevant characteristics have more to do with how equipped someone is to endure the rigors of entrepreneurship than with personality. Consider what the studies have found, beginning with how entrepreneurs are similar to everyone else. Entrepreneurs are no more likely to care about money. On average, they are no more ruthless than non-entrepreneurs, or any more spontaneous. They should not be portrayed as either gooey optimists or control freaks. They do not crave risk more. They’re not more outgoing or agreeable. And they don’t have a magical problem-solving approach that’s denied to the rest of us.
Shaver likes to emphasize how important it is for more people to realize this. Psychological perceptions matter. A young college grad with a big idea who thinks he lacks the personality to create a business should reconsider. So should venture capitalists and financiers who think they can instantly distinguish a winner from a loser during a first meeting. This is nonsense, as the ways in which entrepreneurs differ are mostly unrelated to the kinds of personality features that can be observed in such a manner.
But (and this is a large but) the few psychological differences that entrepreneurs do have are crucial ones. The PSED found that entrepreneurs are more willing to sacrifice other parts of their lives for their ventures. Their lives are less balanced and more heavily oriented towards their work. They care a lot less what others think of them. Shaver believes this is because entrepreneurs find their primary validation in the success of their businesses. No wonder that entrepreneurship attracts people who both expect to succeed and are better able to cope with the stress and rigors it brings. Starting a business can be grueling and full of uncertainty, and it will exact too heavy a cost on people unable or unwilling to throw themselves at the process.
Maybe, then, the right lesson to draw from the research is that more people than we think are capable of starting and running new businesses, but there are good reasons why not all of them will — or should — try.