Wandering Thoughts

September 9, 2009

Irrational Reassurance

Filed under: Ramblings and Musings — terence @ 7:58 pm

Robert Shiller’s talk on behavioural finance at the LSE is worth a listen (you have to scroll down to find it). It’s rambly, but that seems ok; almost the right tone for a talk on the less rational aspects of economic behaviour.

Listening to it, it seems to me that you there’s a very plausible argument to say that the bank bailouts and stimulus package worked, not just because they freed up capital flows and pumped money into the economy but also because they reassured people that there was something that could be done. And would be done. And that reassurance changed behaviors from the types perpetuating the economic unravelling (cinema, smoke, I’m heading for the door!), to types that slowly started to counter it.


On this theory everything could still go belly up if people were to lose confidence in the ability of governments to act. If they were confronted with government failures to match the market ones we’ve just seen.


Meanwhile, being pessimistic, if the worst of the GFC is behind us, presumably we’ll be shortly returning to the other crisis it interrupted – commodity shortages. Not to mention the climate crisis on its way…



  1. That’s all great but Capitalism is about letting bad businesses fail due to poor practice leaving them to be taken over by companies that are good at what they do. From weak to strong hands etc. But the US Gov’t seems to think it’s better to take from the tax payer and give to the failed companies so mgmt bonuses can be maintained. It corrupt, the US has been hijacked by the bankers. Witness the decline of the empire under the weight of it’s debt based fractional reserve monetary system. The Parasite has killed it’s host.

    Comment by Tony P — September 10, 2009 @ 11:28 am

  2. Hi there Tony,

    We’ll have to discuss this one when we see each other next. In the meantime I’d just note that capitalism needs credit flows and prior to the bail out they had essentially all but frozen up. Much longer and that would have started knocking out good businesses as well as bad. Agree with you re bonuses though.

    cheers and I hope all is good with you.


    Comment by terence — September 10, 2009 @ 8:24 pm

  3. Well there’s credit and then there’s credit given out to people who don’t deserve credit (see sub-prime).

    Some would say it’s excessive credit that got the US into this mess in the first place. Sub Prime credit sold as AAA rated secruities by Wall St was fraud.

    So if excessive credit was the problem then why was it so critical to unlock the credit markets? Isn’t that like saying you have a hangover, here have another scotch!

    Business cycles involve booms and busts like night follows day, we just had a massive easy-credit fuelled boom, now we are trying to delay the bust. But busts are needed to wipeout excess liquity, no matter how painful.

    I fear that now the Fed is printing trillions for bank bailouts it will lead to something much worse than just having the bust, it’s called hyper-inflation. See Germany in the 1930s or Argentina. Money printing on this scale is leading to lack of confidence in the currency, note gold has broken $1,000 recently.

    America’s debts are so large now that they are unpayable, either they default or they reduce the value of the USD and inflate the debt away.

    The easy option for a politician is to inflate as voters will not enjoy massive tax hikes.

    It’s in these types of economies that dictators emerge, the next 5 years are going to be facinating to watch.

    I’ll be watching Gary and Suzie race this weekend down at the broadwater.

    Hope you are feeling well.

    Hopefully see you in Jan 2010.


    Comment by Tony P — September 11, 2009 @ 1:28 pm

  4. Hi again Tony,

    Excessive credit (or more accurately poor regulations which lead to global savings not being chanelled into productive investment but going into asset bubbles instead) may have been the cause of the mess but the solution certainly wasn’t to let credit markets collapse completely. That would have wiped out responsible investors along with the irresponsible. Which would have been like saying “you drank too much last night; don’t drink anything at all today, even water.” Bubbles are bad and we should regulate and pursue sensible policy to minimise and avoid them where we can. We probably shouldn’t destroy the modern economy to avoid them though.

    I’d agree though, that the current situation remains a problematic one – in NZ for example we still have a great big largely un-popped debt bubble, waiting for us one day…

    I’m not that worried about inflation though. It may be an issue in future years, but it’s very, very unlikely to become hyper-inflation – remotely responsible governments can avoid hyperinflation with little trouble. In the wake of WW2, when most developed country governments bore debts greater as a percentage of GDP than they do now, and they were able to grow and pay down the debts without massive levels of inflation. As for inflation itself, it is far less of an issue than deflation, which was what we were looking at. And which is what helped make the Great Depression great and what gave the Japanese their lost decade.

    Say hi to Gary and Susie for me. Definitely looking forwards to catching up and discussing all this more in the summer.

    Comment by terence — September 12, 2009 @ 9:13 am

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