Are economists allowing us to wander towards the Great Depression II
This was the feeling I got from Justin Wolfers at the Freakonomics blog and Dani Rodrik on his blog.
Both of these authors seemed to imply that our profession has:
failed to explain in clear language just what it is that credit markets do, and hence why it is so important that we fix them
However, I’m not sure I actually agree with this.
The above statement states that there is something “broken” in the credit markets – something that can be fixed.
Now when I hear the term broken and fixable in terms of a market, it tells me that there is some type of market failure – a market failure that can be solved through government intervention.
Credit crisis outlines
Over at Marginal Revolution, Tyler Cowen provides the world with a couple of useful posts:
- His views on the credit crisis (here),
- A couple of outlines of the crisis (here) – the first outline (here) is top notch and easy to understand.
I still feel that the main area where government intervention could be beneficial stems from the existence of an asymmetric information problem which is driving us towards a Pareto inferior equilibrium. In English, I think that buyers expectations have become sufficiently poor to put the credit market in a “downward spiral”.
However, in a broader sense I can buy Tyler Cowen’s point that the crisis is more complicated than we can possibly imagine – implying that it is difficult to actually pick how much of a decline in global economic activity will occur, and it is impossible to tell how much of an improvement is associated with solving the asymmetric information problem. However, isn’t this always the case with policies ex-ante?
Dom Post editorial: Outlook
The Dom Post had a good editorial today – it can be found here. (ht the Hive)
While most economists out there appear to be turning to sensationalist comparisons of today to the Great Depression, the Dom Post has written a balanced editorial that captures how the ramifications in the credit market may impact us through the borrowing channel – namely, higher interest rates for a highly indebted nation.
Assets and the market for lemons
I have spent so much time blabbing about asymmetric information without every explaining what I meant. As a result I feel that everyone deserves a little explanation. Thanks goes out to Akerlof and the lemons hypothesis.
September 2008 business confidence
National Bank consumer confidence has come out and (August here):
First positive result since May 2002. Own-activity expectations are rising. Capacity utilization is climbing. Profitability is climbing as cost pressures have eased. Employment intentions have improved (consistent with returning capacity pressures). Inflation expectations are still high – but the fall in cost growth has pushed it down in September.
Interestingly, the biggest rebound in confidence was in construction – the same sector that has reported a historically poor set of results over the three months to August on Tuesday.
We are not immune from the global slowdown, but just remember the two main channels the credit crisis will get us through: Interest rates and our terms of trade. These are the two factors we need to keep an eye on, and I can’t see them deteriorating enough to prevent a mild recovery in the domestic economy over the rest of the year. But we’ll see.