Matt Nolan

Handling an asymmetric information problem

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Over at the Free exchange blog there is an interesting piece on actions in the current crisis – namely whether to follow the “free market” route or the “inteventionist” route.

My hefty use of speech marks in the above sentence stems from the belief that there aren’t really two distinct schools of thought telling us what to do – there is a single framework of events that forms its descriptive and prescriptive powers from value judgments. These value judgments are thereby the true differences.

This quote sums it up for me:

The problem is that we’ve reached a point of market failure and uncertainty. It’s impossible to tell who the weak banks are.

The difference between the two prescriptions stems from how significant the implied market failure is – not a difference describing what the market failure is.
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Matt Nolan

This is why exports from Asia are falling in a hole …

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Calculated Risk illustrates growth in US retail sales over the past 15 odd years:

retaildec2008

Source: Calculated Risk.

Now we know that exports from Japan are plummeting. We suspect exports from China are falling. This decline in spending in the world’s largest economy would be the reason why. Very interesting …

Update: Don’t forget about trade, ick!

Matt Nolan

Israel-Palestine Conflict: A general model?

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This blog tries to remain relatively apoliticial. I do not intend to break this by illustrating as opinion on the Israel-Palestine conflict, it is a difficult issue which I could do no justice. However, I do like to try to understand the world around me, so a relatively generalised model that describes these types of conflicts and “international policy advice” in the situation would be useful to me.

I aim to sketch out a few thoughts I have based on the study of economics. If there is a political scientist out there (or anyone else for that matter), I would be more than happy to hear about the multitude of logic flaws in my description 😉

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Matt Nolan

Arnold Kling, asymmetric information, and the crisis

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Arnold Kling from Econlog posts a passage from Michael Bordo approvingly. Specifically I enjoyed this part:

A key dynamic in the crisis stressed by Mishkin(1997) is information asymmetry, manifest in the spread between risky and safe securities, the consequences of which(adverse selection and moral hazard) are ignored in the boom and come into play with a vengeance in the bust.

So it appears they they both agree that asymmetric information is the key factor turning the current adjustment into a crisis (this is a belief that we share).

I would add one thing. Personally, I don’t just think it is “irrational exuberance” that leads to asymmetric information losing weight during a boom. I think that institutions form (reputations, organisations and the such) which appear to take care of the asymmetric information problem. However, when the downturn comes, and we discover that some of these institutions no longer exist/function we end up with a collapse.

Matt Nolan

Iceland’s bankrupt: Is this where NZ is going?

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So we all know that Iceland is bankrupt – what is the situation like for New Zealand?

A few of the stories I saw when Iceland first went into massive trouble were here, here, and here.  At the time the comparison was so popular that there was a Dom Post article on the risks of New Zealand’s current account.

However, I think by now it is obvious that I am not going to agree 😛  Our stock of debt is equal to one years income – I don’t see how this is unsustainable!

So tell me – are we heading towards bankruptcy, are we heading towards a bumpy ride, or are we heading towards more “golden weather” 🙂

Matt Nolan

Why would export volumes not fall during a global recession?

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A recent survey stated that New Zealand exports were “resiliant” in the face of a massive global recession.

Now this is something that, at first, might seem unusual. New Zealand relies on exports so much, and if the global economy is collapsing surely we will have no-one left to sell too.

However, it is important to remember the difference between “prices” and “quantities”.

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