Sunday, November 08, 2009
Believe it or not, economists don't take levels of borrowing into account when building predictive models, and counseling governments and businesses.
This WSJ article, "Crisis Compels Economists to Reach for New Paradigm", should be entitled, "Economists Asleep, Clueless through 2 Decades of Astronomical Debt Build-up".
Here's the way the Journal tries to explain the "new paradigm" reflecting the startling new and amazing observation that asset prices are skewed by borrowing tons of cheap money and leveraging bets to the hilt:
"That shift [acknowledging excessive borrowing] could change the way central bankers do their job, possibly leading them to wade more deeply into markets. They could, for example, place greater emphasis on the amount of borrowing in the economy, rather than just the interest rates at which borrowing is done. In boom times, that could lead them to restrict how much money various players, ranging from hedge funds to home buyers, can borrow."
Where have these people been? (Hint: you probably spent four years there.)
For those who teach economics and are struggling to make sense of "leveraged buy-outs", "private equity", "hedge funds", "alternative investments", "black swan events", "Bernie Madoff's Ponzi Scheme", "CDOs", "ivy league endowments" and the rest of the post-crash nomenclature, to say nothing of the very odd and perplexing 50% rise in the S&P500 since March, the steepest 9-month climb in post-WWII history, here is an article that explains why you are confused.
Posted by George Ford | (61) Comments •
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