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Bookblogging & bookwiki

October 5th, 2009

I’ve been moving slowly on the book for the last few weeks, but I have taken one positive step to encourage further discussion. In response to suggestions from readers, I’ve started a wiki site imaginatively named Zombiecon where my plan is to post draft chapters. The Efficient Markets Hypothesis is already up. In part, the idea is to provide a reference to avoid some of the problems that arise from blogging a section at a time. But, if someone wants to create one or more talk pages on the site itself, that would be great. I’m not really sure joint editing in the mode of Wikipedia, but if you have suggested minor changes, go ahead and make them – I may revert or partially adopt them. ????? ???? ? ????????? ????????

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  1. gerard
    October 5th, 2009 at 17:07 | #1

    There are a few extra concepts that could be included in the EMH chapter, but of course being able to fit everything in succinctly without including every tangential detail is an important skill for a writer. So these are just suggestions.

    First, I understand the desire not to get too technical, but a bit more detail on the CAPM might be useful. Does the EMH “work” without CAPM? There is a brief mention that it is “closely associated” but not much discussion of what it is. And the important thing is that Fama himself had turned his back on CAPM it by 2004 (admitting that it was empirically false) and has come up with a new “three factor model” to replace it. What’s the relationship, and what is the significance that CAPM is still taught in introductory finance despite its empirical refutation.

    With regard to the employment of “pattern-finding” analysts, there was a recent, highly technical book “A Non-Random Walk Down Wall Street” that supposedly demonstrated that the statistical evidence is that markets are not actually random. Then there’s been Mandelbrot and a couple of others who reckon that stock market behavior is better described as arising from a chaotic rather than random process – I don’t know the merits of these arguments but they are at least worth a mention.

    The section on Grossman-Stiglitz paradox is interesting. I’ve often wondered about that aspect myself. Models like Black-Scholes that say what the price of an option should be can only be used to make money if the actual price deviates from that ideal price. But isn’t this just an instance of a general principal that money can only be made from “inefficiencies” and that in profiting from them, the inefficiencies are corrected? Isn’t this just “arbitrage”, the same principal that adjusts yields to maturity to the market interest rate in the bond market? We are told that arbitrage is “impossible” because it allows a riskless profit and therefore if such an opportunity existed it would vanish immediately as somebody went to profit from it. But clearly (in continuous time) it does exist in the real world, because it IS the mechanism by which security prices are determined. Arbitrage opportunities exist, and they are quickly swallowed up by, I presume (having never worked in the finance industry), whichever company has the fastest automated trading system. It’s basically free money going to fast computer systems and I wonder how much is made everyday. Perhaps if you asked an arbitrageur they would say the amount they make is equal to the cost of the skill and effort that goes into discovering it!

    The next thing is that you mention Friedman’s “Lexus and the Olive Tree”. If you are going to make a reference to this ridiculous book, give it the proper skewering it deserves (block quotes included), since that pretentious, talentless ignoramus is pretty much the poster-boy of bubble-era, pop-intellectual liberal hubris, and a perfect example of what’s wrong with typical mass media discourses on economics.

    The section of the growth of the financial sector could be related to the development of financial engineering since they both took off around the same time. It would also be good to include a mention of international currency deregulation in that decade, since it’s pretty important factor (especially to any “Austrians” reading your book!). You might want to include a chart documenting number of bank failures per year, which exploded during the 80s coinciding neatly with deregulation of the sector. Then there’s the S&L scandal, which definitely deserves a mention. There’s also the issue (it might be getting too broad for the book) of how exactly did the Bush mega-rich tax cuts, on top of the Asian savings surplus, feed into the speculative bubble.

    There are a couple of references that could be made in the section on emerging markets. Firstly, it was largely the Asian financial crisis in the 90s that motivated China and Japan to start hoarding dollars – the extent that this imbalance contributed to the current crisis is an interesting quirk of history. And an interesting aspect of the Argenitian crisis is the fact that due to their currency board, the Argentinian central bank had no ability to create pesos and lend them to banks, so it provides a good case study of what happens to an economy in recession without monetary stimulus being an option.

    A bit more about Iceland would be interesting – including maybe some excerpts of Heritage/Cato/Fraser paeans.

    Another nice addition would be a brief explanation of the process of securitization, and how the combination and redivision of loans results in a sum of products supposedly worth more than their individual parts, even when the process is repeated multiple times. The conflict of interest between the “producers” of securities and the ratings agencies is explained, but a few details of how “ratings were embedded in official systems of regulation” would be useful (actually this is mentioned a bit later with reference to Basel, but it is interesting to note that Basel 2 was coming online just as everything was hitting the fan, and will probably not last very long).

    Also, feel free to ignore this small point, but as “scientific” as the economics profession likes to consider itself, there is still no actual “Nobel prize in economics”.

    There’s a section on “unawareness”. Wouldn’t this be strongly related to Keynes’ emphasis on “uncertainty”? An emphasis totally left out of the neoclassical-keynesian synthesis.

    Just some ideas, but in future, would you prefer us to post comments here or on the wiki page?

  2. Alice
    October 5th, 2009 at 20:07 | #2

    @gerard
    Gerard – some great comments…

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