MCK: Finance: The safe asset shortage: "[A] conversation I had over Twitter with David Beckworth…. We agreed that there are too few safe assets relative to the demand. But where I thought the government ought to issue more Treasury bonds to satiate investors, he thought that the solution was to induce the private sector to 'create; more safe assets. I doubted whether that is possible…. [A] genuinely safe asset… [is] liquid… may sometimes pay investors less than inflation but they always pay out what they say they will…. Assets that only sometimes keep their promises cannot be called safe, however, even if they fool people into believing otherwise for significant periods of time. So, can the private sector issue genuinely safe assets? I don’t see how, since private borrowers always have some default risk…. [I]nvestors in private credit act as if there is almost no risk for long periods of time before suddenly freaking out. When everyone decides to sell their loans at the same time, it becomes very difficult for any individual investor to dump his holdings. Thus, private debt also has a nasty tendency to become illiquid. These are not the characteristics of a safe asset…. The euro crisis can be thought of in a similar way. Greece’s sovereign debt problem spooked investors about Italian debt because, despite the fact that Italy has one of the world’s largest primary budget surpluses and has been steadily lowering its debt/GDP ratio for decades, Italy cannot print its own currency…. One would think that this would be the end of the discussion, but Mr Beckworth has a different definition of 'safe' than I do, which, to be fair, comes from Mr Gorton and his colleagues…. Mr Gorton is well aware of the changing nature of 'safety' and believes that the government needs to play a role. His preferred solution is to have the state make certain types of unsafe assets genuinely safe by regulating and guaranteeing them. Of course, that would mean that the government is the one creating the safe assets…. [I]t seems that there are only two ways to relieve the shortage of safe assets: the government could issue more debt or the government could guarantee private debt… the effect on the government’s balance sheet is the same."
Mark Thoma: That Terrible Trillion: "Deficit scolds long for 'frickin' sharks with frickin' laser beams attached to their frickin' heads' to use against 'programs that shield both poor and middle-class Americans from harm'"
Nick Barberis: Thirty Years of Prospect Theory in Economics: A Review and Assessment: "Prospect theory, first described in a 1979 paper by Daniel Kahneman and Amos Tversky, is widely viewed as the best available description of how people evaluate risk in experimental settings. While the theory contains many remarkable insights, economists have found it challenging to apply these insights, and it is only recently that there has been real progress in doing so. In this paper, after first reviewing prospect theory and the difficulties inherent in applying it, I discuss some of this recent work. While it is too early to declare this research effort an unqualified success, the rapid progress of the last decade makes me optimistic that at least some of the insights of prospect theory will eventually find a permanent and significant place in mainstream economic analysis."
Bruce I. Carlin, Francis A. Longstaff, and Kyle Matoba: Disagreement and Asset Prices: "How do differences of opinion affect asset prices? Do investors earn a risk premium when disagreement arises in the market? Despite their fundamental importance, these questions are among the most controversial issues in finance. In this paper, we use a novel data set that allows us to directly measure the level of disagreement among Wall Street mortgage dealers about prepayment speeds. We examine how disagreement evolves over time and study its effects on expected returns, return volatility, and trading volume in the mortgage-backed security market. We find that increased disagreement is associated with higher expected returns, higher return volatility, and larger trading volume. These results imply that there is a positive risk premium for disagreement in asset prices. We also show that volatility in and of itself does not lead to higher trading volume. Rather, it is only when disagreement arises in the market that higher uncertainty is associated with more trading. Finally, we are able to distinguish empirically between two competing hypotheses regarding how information in markets gets incorporated into asset prices. We find that sophisticated investors appear to update their beliefs through a rational expectations mechanism when disagreement arises."
Christopher Hanes and Paul W. Rhode: Harvests and Financial Crises in Gold-Standard America: "Most American financial crises of the postbellum gold-standard era were caused by fluctuations in the cotton harvest due to exogenous factors such as weather. The transmission channel ran through export revenues and financial markets under the pre-1914 monetary regime. A poor cotton harvest depressed export revenues and reduced international demand for American assets, which depressed American stock prices, drained deposits from money-center banks and precipitated a business-cycle downturn - conditions that bred financial crises. The crises caused by cotton harvests could have been prevented by an American central bank, even under gold-standard constraints."
Aaron Clauset, Cosma Rohilla Shalizi, M. E. J. Newman: Power-law distributions in empirical data
Aaron Carroll: Federally Qualified Health Centers: "I’m often asked by people concerned about the impending increase in individuals who may demand health care, 'where are all these all of them going to go?' I have no crystal ball, and obviously the answer will vary by population, but the short answer is that many of them will seek care in federally qualified health centers…"
Jon Gruber: Daring Fireball: "[O]ne recurrent theme I see in nearly every single 'how I write on the iPad' story is Dropbox. It’s the linchpin in the workflow. Scary, because Dropbox is outside Apple’s control. Scary, because if not for Dropbox, many of these people would not be using their iPads as much as they are. Scary, because Apple’s iCloud falls short of Dropbox. Long-time readers know that I seldom opine that Apple should acquire other companies. But Apple should buy Dropbox."
Email du jour: apparently the ebook of the Bretton Woods Transcripts "makes for a good "stocking stuffer"".— felix salmon (@felixsalmon) December 17, 2012
Fox's Krauthammer calls Obama speech "highly political." << talk of preventing massacres is now considered "political" by the right— igorvolsky (@igorvolsky) December 17, 2012
Boy in Oklahoma accidentally shoots and kills himself with gun.Age 3.bit.ly/Tpr9sj— Greg Mitchell (@GregMitch) December 17, 2012
Obama lays down marker to use 'all his powers' (approx) if 'even one thing' would reduce these killings. Let's see— James Fallows (@JamesFallows) December 17, 2012
@delong BTW FYI, "7 Economists" would be "Shichinin no Keizaigakusha"...— Noah Smith (@Noahpinion) December 17, 2012
Obama settling for fewer tax hikes in exchange for extra stimulus would be smart. #kohlbennett— Matt Yglesias (@mattyglesias) December 17, 2012