I found (actually LM found) a cool blog. John Cassidy is posting there interviews with Chicago School economists. I did particularly like the one with Fama..
Here is a quote, just to give you a taste:
Krugman wants to be the czar of the world. There are no economists that he likes. (Laughs)
By the way, despite being super smart, I think some of the Chicago guys, Fama and Cochrane for instance, are a bit too extreme…
At the end of an article Fear of the dragon in this week’s Economist, analyst Chris Wood (I have no clue who that is) is cited saying that China is doing more to eliminate the global imbalances than the US (Global Imbalances = Chinese working like crazy and not spending – exporting a lot, Americans consuming way too much – importing ). He says that China is encouraging spending while the US is doing nothing to prop up the already low and further falling saving rate.
He misses the point why the US saving rate is falling and that the government has a very limited maneuver space. The saving rate is falling because of massive US government’s borrowing and stimulus spending. The Americans, like the Chinese are trying to spend more to prop up the economy. The falling saving rate is a (negative) byproduct of the fiscal stimulus. Unless the above cited analyst argues that the fiscal stimulus is stupid, he has no case…
By the way, even though one can certainly argue against the stimulus, I actually think despite all the inefficiencies it makes sense. (More on that sometimes else…)
There was a big excitement about the BRIC (Brazil, Russia, India, China) countries among investors last year. The excitement was in to some extent understandable, despite the Global Depression GDP growths were (Br:0%,Ru:-7%,In:5.5%,Ch:8.2%, The Economist), with the exception of Russia quite a respectable performance. It was, probably still is, believed that the emerging economies are better prepared for the 21st century and will be shaping the world (I think this notion is ridiculous, but more on that sometimes later).
Last yeat, the BRIC stock markets grew in dollar terms by (Br:154%,Ru:128%, In:95%,Ch(SSEB):129%), USA grew in the same period by 26% and Euro area by approx. 29% in dollar terms. Note that some of the market have suffered a huge blow in 2007. In February 2008, the change on December 2007 was (Br:-50%,Ru:-73%,In:-61%,Ch:-60%). Us fell in the same period by -43% and Euro Area by -55%.
In my opinion, diversifying portfolio and investing in the BRIC countries made sense some time ago (I would have bought an index). I don’t think it does anymore. I think the stocks (especially IPOs) are overpriced.
Investors are looking for positively skewed stocks (low probability of huge payoff – Imagine you bought Lenovo few years ago), and are in their overconfidence persuaded that the stock they’ve bought is going to be next success story, like Lenovo, so they are willing to overpay for it. Where to find more highly skewed stocks than in the emerging markets?…
They are also looking for ambiguous stocks (stock with not known fundamental value), if the fundamental value is unknown investors can dream that they have had a luck and picked the next Microsoft. And they overpay for the stock… Given the analyst coverage, information, laws protecting investors etc. guess where to find more ambiguous stocks, in the US or in the BRIC countries?
Last (but probably most importantly) seeing how the BRIC countries have weather the crisis have made us think that they really are different and better prepared for the 21st century. We got extremely excited about the developing world and the excitement got extended on their stock markets…
To put it very bluntly, B(R-who knows)IC markets are overvalued because investors got overexcited about them.
Yesterday came out an article in the FT, the article says the same thing as I do that the BRIC stocks are overvalued, but completely misses the point why. I would recommend reading last four paragraphs (the author gives few indicators of stock market overvaluation for China) . The first paragraphs are nonsense. To give one simple short example, the answer to paragraph 4 is: buy an index and the problem he is talking about is gone…
p.s. Investing in the B(R-who knows about Russia)IC markets as analysts still recommend is equally stupid as buying gold…
Krugman has (as usual in a confrontational tone) announced the end of the Chicago School.
It’s true that there were better times for the Chicago School, home of the Efficient Market Hypothesis, than the post financial crisis period of 2009/2010, but announcing the end of the School is a bit premature. I think as long as Chicago reconsiders some of its positions it needs not to perish (as Krugman surely wishes)…
What bothers me is Krugman’s style of writing. He quotes Fama and Cochrane in the second paragraph, but he does not give the link to their speaches/articles. How do I know he did not take the quotes out of the context, as he did with many in his “How did Economists get it so Wrong”? (See Cochrane’s response:”How did Paul Krugman Get it so Wrong?”)
True, based on the quotes Fama and Cochrane look like idiots, but did they really say that?… I am sorry, but I don’t trust Krugman’s articles any more.
I like very much Thaler and Sunstein’s book Nudge. The basic theme of the book is Liberal Paternalism, which is broadly speaking (the way I understand it) creating environment in which individuals can make the right choices. Liberal Paternalism should by no means limit individual’s choices.
New move by number of Japanese railway companies is a beautiful example of Liberal Paternalism. The company is installing blue lights on platforms, the blue color should have a calming effect and so prevent people from committing suicides by jumping under arriving trains!
Note that the company rejected building fences around the platforms, leaving people with the option of actually jumping! (I guess the fences would have to have some gates, for people to actually get to a train. I don’t know the details.)
I am not sure whether Liberal Paternalism was on East Japan Railways’ mind when choosing blue lights over fences, but it fits perfectly.
People are nudged to live while still having an option to commit a suicide!
The prostitutes in Copenhagen have offered free sex to the participants of the Conference on Climate change. Speigel claims that they’ve done it because of some petty dispute with the mayor. I think it’s because the girls want to make the delegates feel at home (actually maybe even better than that). They want to create an atmosphere of international friendship, understanding and cooperation. GO GIRLS!
(as you can see, my posts are not very serious recently – have too much work =>they won’t get serious for a while…)
If you buy a 50$ bike lock, don’t be an idiot!
(My bike lasted for 4 weeks – than someone cut my 10$ lock and stole my bike)
There was a conference on globalization at Yale two weeks ago. The speakers were excellent! Rajan (Chicago), Bhagwati (Columbia), Nordhaus (Yale), Reinhart (Maryland), Ferguson (Harvard), Buiter (LSE) plus many others.
If I had to choose between going to the conference and to a Led Zeppelin concert, I might choose the conference… No, honestly, I would go to see the LZ, but you know what I mean…
The closing session of the conference turned in to a standard “Economists vs. The rest of the Social Sciences” debate. The initiator of the debate was Ferguson from Harvard. He was absolutely right in saying that the economists should listen to the historians, but his arguments were absolutely flawed. (So nobody accepted what he was saying…)
He said (I can’t recall the exact wording, but the idea is such): We (historians) were listening and learning from economists in past decades. So now, it’s the time for economists to listed and learn from historians…
Let me use the exact same argument.
Six year old child comes to his teacher and says: I’ve been listening to you the whole morning. So you are going to listen to me the whole afternoon…
The argument is ridiculous!
The reason why we (everyone, not just the economists) should listen to the historians is because we need to be reminded of the mistakes mankind did, such that we don’t repeat them. End of story!
Buying a book is a tricky business. You don’t know whether it’s good, and so worth the money, until you read it. That is why, we often rely on our friends’ recommendations, customer reviews on Amazon, or book reviews by professionals in our favorite newspaper.
The problem is that your friends might not have the same taste as you. Even though “Mostly Harmless Econometrics” is a fantastic book on statistics, my friends that are studying English Literature would probably not like it!
Some reviewers at Amazon might not be representative for the same reason as your friends are not representative. They might read a book that is intended for a completely different audience giving it too low rating. I was reading reviews for Nudge (Sunstein and Thaler) and many reviewers simply DID NOT GET THE POINT of the book.
Also, there are too few reviews for some books. (How do I know the author did not create a fake identity giving himself a bunch of good reviews! – I wonder whether this is really happening). Even if the authors (and their publishers) are honest guys everyone who too statistics 1.0 knows that drawing an inference from two observations is stupid.
Finally the Newspaper. First of all, they review only a tiny fraction of all published books. Second of all, how can you trust these snobs at the New York Times?
THE SOLUTION (or the TomasH method)
I will propose a solution based on market forces! (Yes it’s going to be perfect!).
Step 1: Determine whether the book is intended for your type of audience. This is actually much simpler than it sounds (common sense suffices). Example: If you are an Econ Grad Student everything that has something to do with economy, econometrics, business, finance is potentially intended for you (you might also want to check whether there are any formulas in the book, that’s a big plus). If you are an alcoholic, unemployed, wife-beating male from Texas, than Going Rogue by Sarah Palin is potentially your kind of thing.
Step 2 (Here the market forces come in): Go to Amazon and check the price difference of used versus new books. The bigger the difference, the worse the book is (relative difference is probably more relevant).
The more are people satisfied with the book, the less likely are they to sell it. The less likely they are to sell it the lower the supply of used books there is. The lower the supply the higher the price! The price of good used books is close to the price of new ones!
Now it should be clear, why you first need to determine whether the book is intended for your type of audience. Going Rogue by Sarah Palin is among her supporters apparently perceived as an excellent book. They want to hang on to it and it’s resale price is close to the price of the original book! But I would still never want to read that garbage! (Actually read few pages of it and it gave me a headache.)
(I know few democrats bought it out of curiosity and then quickly resold it, but it was apparently only tiny fraction of all the sale and so had no effect on the price of the used books on Amazon – Yes I doubt they liked it and kept it).
And now it should also be clear why is my method better than Amazon reviews! Going Rogue by Sarah Palin has some pretty bad reviews, yet based on what the market says her supporters are gonna LOVE IT.
p.s. I could write an empiric paper on this! “How much off are Amazon Reviewers, ABR – American Bookstore Review, 2010″
p.p.s. When I wrote this cheapest used Going Rogue was selling two dollars expensiver than the new book.
UPDATE:
The reason why you don’t need to look at demand is because I’ve assumed it to be a constant fraction of the overall demand.
This will be true only within classes of books. That is different fraction of Harry Potter readers will be inclined to buying a used book than the fraction of readers of Econometrics textbook.
Since buyer of Econometrics textbook is not going to compare his pick to Harry Potter but to different metrics textbooks, the need to compare within class of books is not limiting.
Books that are on the market for a long time will have a lower resale price than the same quality new book. Some owners simply decide that even though the book is great, it’s been sitting on a shelf for ten years and maybe it’s time to pass it on. Further more in my opinion there is this glamor around new things making them more desirable and so expensive…
I do not think this is the most genial idea ever (that’s why I was ironic and said that it will be published in ABR – American Bookstore Review [which sounds a "bit" like AER])
Clarification
After rereading my previous post, I think I should add some clarification.
My previous post was meant to be a “research” proposal. I wanted to test whether people form the main street who know somebody in a well paid position are less likely to approve high wages in their friend’s industry.
The idea being, that people from Prague will dream about the life of Hollywood stars and idolize them, while cleaning lady that works for a Hollywood star sees that George Clooney is an ordinary human being like everyone else… The cleaning lady should be less likely to approve his high income (see the prev. post)…
I did want to avoid connection with the crisis. That’s what I meant by saying that bonuses reflect performance. But I agree, it’s a hot topic and is connected with the crisis no matter what one claims.
The Update
I went to Bob Pozen’s (Harvard) presentation of his new book “Too big to save” this monday (It’s on my Christmas reading list, I’ve just ordered it!). After reading the concluding chapter of the book, I have radicalized my view on the response to the crisis and on the aftermath of the crisis.
Yes, I agree, bonuses at THE Investment bank are ridiculous this year. You cannot pay huge bonuses, thanks to your counter party -AIG (,that owes you 12 billion) being bailed out and you getting back every single penny of your bad investment. Entrepreneurship is both about gains and losses of the entrepreneur.
I do not get why Lehman was not saved, while hundreds of non-systematic (read:unimportant) institutions were.
I do not get many things that happened last year… Both because I do not know enough and because some things are too ridiculous for a rational human being to process…
Maybe the policy response was pretty good in the end. Everyone is just being smart ex post (I think this is definitely at least partly true).