Saturday, March 21, 2009

Transcript: U.S. Economist Robert Shiller Prescribes 'More Derivatives'

From Radio Free Europe/Radio Liberty:

He was one of the few people to accurately predict the bursting of not one but two financial "bubbles." The dot-com collapse in technology stocks at the beginning of the decade, and the U.S. housing-market collapse that triggered the current economic crisis. So when Yale professor Robert Shiller comes up with suggestions for a way forward, they're likely worth hearing. One is about derivatives, the complex financial instruments -- many based on mortgages -- that were blamed for fueling the crisis. Shiller's prescription: not fewer derivatives, but more of them. RFE/RL's Kathleen Moore asked him why.
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Winning the Confidence Game

In the Business Standard:

Developed nations must invest in confidence-renewing measures like the Marshall Plan.

On April 2, the G-20 will hold a summit in London to discuss what we may hope will be an internationally coordinated plan to address the world economic crisis. But can such a plan really work?

The basic problem, of course, is confidence. People everywhere, consumers and investors alike, are cancelling spending plans, because the world economy seems very risky right now. The same thing happened during the Great Depression of the 1930s. A contemporary observer, Winthrop Case, explained it all in 1938: economic revival depended “on the willingness of individual and corporate buyers to make purchases that necessarily tie up their resources for a considerable length of time. For the individual, this implies confidence in the job, and in the end comes equally back to the confidence of industry leaders.” Unfortunately, confidence did not return until World War II ended the depression.
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Saturday, March 14, 2009

A Failure to Control the Animal Spirits

In the Financial Times:

Lydia Lopokova, wife of the economist John Maynard Keynes, was a famous ballerina. She was also a Russian émigré. Thus Keynes knew from the experience of his in-laws the horrors of living in the worst of socialist economies. But he also knew first-hand the great difficulties that come from unregulated, unfettered capitalism. He lived through the British depression of the 1920s and 1930s. Thus Keynes was inspired to find a middle way for modern economies.

We are seeing, in this financial crisis, a rebirth of Keynesian economics. We are talking again of his 1936 book The General Theory of Employment, Interest and Money, which was written during the Great Depression. This era, like the present, saw many calls to end capitalism as we know it. The 1930s have been called the heyday of communism in western countries. Keynes’s middle way would avoid the unemployment and the panics and manias of capitalism. But it would also avoid the economic and political controls of communism. The General Theory became the most important economics book of the 20th century because of its sensible balanced message.
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