Brad DeLong — THE MUST-READ OF MUST-READS on the links between behavioral finance and macro

THE MUST-READ OF MUST-READS on the links between behavioral finance and macro: John Maynard Keynes (1936): The State of Long-Term Expectation: The General Theory of Employment, Interest and Money: Chapter 12: "If I may be allowed to appropriate the term _speculation for the activity of forecasting the psychology of the market, and the term enterprise for the activity of forecasting the prospective yield of assets over their whole life, it is by no means always the case that speculation predominates over enterprise. As the organisation of investment markets improves, the risk of the predominance of speculation does, however, increase...

Grasping Reality
THE MUST-READ OF MUST-READS on the links between behavioral finance and macro
Brad DeLong | Professor of Economics, UCAL Berkeley

Lord Keynes — A Quick Point about Bill Mitchell’s Views on Speculative Capital Movements

Lord Keynes takes issue with Bill Mitchell over BOP constraints.

Social Democracy For The 21St Century: A Post Keynesian Perspective
A Quick Point about Bill Mitchell’s Views on Speculative Capital Movements
Lord Keynes

Reasons To Turn Away From The MICC & Other Enemies of Peace. We Must Once Again Save Them From Themselves.

   (Commentary posted by Roger Erickson.)





The MICC and the usual enemies of peace have become a too perfect instrument, possessing their own institutional momentum. We may hate the outcome, but we have to honestly embrace the components of the MICC as well as our other Innocent Frauds, as a part of ourselves, and reform it and them, while not falling prey to the useless frictions of hating a part of ourselves.

  “We had to struggle with the old enemies of peace—business and financial monopoly, speculation, reckless banking, class antagonism, sectionalism, war profiteering.
  They had begun to consider the Government of the United States as a mere appendage to their own affairs. We know now that Government by organized money is just as dangerous as Government by organized mob.
  Never before in all our history have these forces been so united against one candidate as they stand today. They are unanimous in their hate for me—and I welcome their hatred.”
― Franklin D. Roosevelt

“I have seen war. I have seen war on land and sea. I have seen blood running from the wounded. I have seen men coughing out their gassed lungs. I have seen the dead in the mud. I have seen cities destroyed. I have seen 200 limping, exhausted men come out of line—the survivors of a regiment of 1,000 that went forward 48 hours before. I have seen children starving. I have seen the agony of mothers and wives. I hate war.”
― Franklin D. Roosevelt

War? Monopoly? Speculation? Reckless banking? Profiteering? This all sounds so drearily familiar. We can put these demons back in their box, and this time make it a coffin, firmly nailed shut. We just need the courage - and honesty - to act as our grandparents did. 

Just as a child going through a growth spurt, our cultural growth spurt has rendered us temporarily clumsier, before we can become agile again in our new condition. Yet we can regain cultural and policy agility, by the simple application of distributed cultural practice, thereby retraining our growing numbers to adaptive rather than divisive Public Purpose.

The Financial Sector is a Parasite?

   (Commentary posted by Roger Erickson)



Ben Strubel, Investment Manager, Speaks.

Teaser headings:

The Role of the Financial Sector
The Grift in Your Retirement Plan
Institutions and the Rich Have the Same Problem
Speculation in Commodities Costs Main Street Billions
Corruption of Public Infrastructure
Interest Rate Manipulation
Foods Stamps and Welfare

If those topics don't get more citizens up in arms .... what will?

Ben's summary: 

"A bloated and out-of-control financial sector does not add any value to society. Society benefits when the financial sector is kept as small as possible."

No argument here.

Robert Shiller--The best, brightest and least productive?

So much of our national "brain power" is siphoned off into finance where nothing of value is produced and rent seeking on already exsisting assets extracts a high cost on the rest of society. Yale Professor Robert Shiller sums it up pretty well.

To some people, the question is a moral one. Trading against others is regarded as an inherently selfish pursuit, even if it might have indirect societal benefits. But, as economists like to point out, traders and speculators provide a useful service. They sort through information about businesses and (at least some of the time) try to judge their real worth. They are thus helping to allocate society’s resources to the best uses – that is, to the most promising businesses.

But these people’s activities also impose costs on the rest of us. Indeed, a 2011 paper by Patrick Bolton, Tano Santos, and José Scheinkman argues that a significant amount of speculation and deal-making is pure rent-seeking. In other words, it is wasteful activity that achieves nothing more than enabling the collection of rents on items that might otherwise be free.

We hear people defend these predator rent-seekng finance capitalists all the time. Just turn on Fox News or listen to resident CNBC idiot Joe Kernan gush about "producers" and why they should be taxed less and regulated less. It's bullshit.

Shiller hits the nail on the head. Read the full article here.

Lars P. Syll — Keynes on speculators taking advantage of mob psychology

It may often profit the wisest to anticipate mob psychology rather than the real trend of events, and to ape unreason proleptically … (The object of speculators) is to re-sell to the mob after a few weeks or at most a few months. It is natural, therefore, that they should be influenced by the cost of borrowing, and still more by their expectations on the basis of past experience of the trend of mob psychology.

Lars P. Syll's Blog
Keynes on speculators taking advantage of mob psychology

quoting J. M. Keynes

Bingo. It's "go with the mo-mo" (trend momentum). Keynes was a trader in addition to be a mathematician that focused on economics.

Another gem: The ignorance of even the best-informed investor about the more remote future is much greater then his knowledge … But if this is true of the best-informed, the vast majority of those who are concerned with the buying and selling of securities know almost nothing whatever about what they are doing … This is one of the odd characteristics of the Capitalist System under which we live …

Andrew Lainton — The Cost (that is Price) of Speculation – Going Beyond The Minsky ‘Ponzi’ Model

How do you make speculation endogenous to economic theory?
Further how do you make the full suite of potential profit making activities, speculation, hedging, arbitrage and investment endogenous?

By endogenous I mean a variable that is determined alongside other variables rather than outside the economic model. 

The reasoning in this post comes was prompted in part from speculation by Steve Keen on to what extent the speculative drive is a necessary component of capitalism even though it is destabilising, partly from some dissatisfaction with the Minsky ‘Ponzi’ model of asset speculation, which has been too easily dismissed by neoclassicals as somehow individuals not behaving ‘rationally’. The model here is a generalisation of our earlier model of default risk in banking and insurance across all sectors.

Decisions, Decisions, Decisions
The Cost (that is Price) of Speculation – Going Beyond The Minsky ‘Ponzi’ Model
Andrew Lainton

Interesting model, but it sounds to me like Minsky's hedge phase after which the Ponzi phase.

Andrew Lainton — The Cost (that is Price) of Speculation – Going Beyond The Minsky ‘Ponzi’ Model

How do you make speculation endogenous to economic theory?
Further how do you make the full suite of potential profit making activities, speculation, hedging, arbitrage and investment endogenous?

By endogenous I mean a variable that is determined alongside other variables rather than outside the economic model.

The reasoning in this post comes was prompted in part from speculation by Steve Keen on to what extent the speculative drive is a necessary component of capitalism even though it is destabilising, partly from some dissatisfaction with the Minsky ‘Ponzi’ model of asset speculation, which has been too easily dismissed by neoclassicals as somehow individuals not behaving ‘rationally’. The model here is a generalisation of our earlier model of default risk in banking and insurance across all sectors.

Decisions, Decisions, Decisions
The Cost (that is Price) of Speculation – Going Beyond The Minsky ‘Ponzi’ Model
Andrew Lainton

Marshall Auerback — Speculators might be in for a crude awakening

The chart illustrates that there has been an immense decline in US consumption of oil since the big rise in the first half of the last decade. The demand destruction takes a long time. It did in the early 1980s. The data on Europe shows the same thing. The US, Europe, and Japan are half of world consumption. The data by IEA and others still says that oil demand globally is growing at one percent. But you have to have giant increases in the emerging world for that to be the case. Henry Groppe of Groppe, Long and Littell (one of the best independent oil analysts around) says demand should be down this year. He says the emerging world data on oil demand is non existent and all estimates are guesses. I think he is right. If that is the case and with US production of liquids up by more than 600k barrels a day I figure the oil market is in a large surplus.

But then where is that oil going? Remember 1990. when Saddam went into Kuwait: the oil price went from 20 to 40. It stayed there as we prepared to invade. Then on the night of Jan. 17th came the first airstrike.  That night the oil price went from 40 to 20.

Why?  Because during the prior five months, the Saudis and the allies built hidden oil reserves. And then the night of the air strike they dumped them. That killed the specs. Now we know that the allies and the Saudis want the oil price down, and they know the specs are holding it up.  I’m not saying the Saudis want the price down to $50 as they still have to bribe their way to social peace.  But $80 might well be in the cards.

Read the rest at Pinetree Capital | MacroBits

Speculators might be in for a crude awakening
by Marshall Auerback
(h/t Kevin Fathi)

Model on food prices and social unrest predicts crisis in 2013

Read it at Credit Writedowns
Model on food prices and social unrest predicts crisis in 2013

by Edward Harrison