Behavioural Finance 2010

There’s an excel­lent arti­cle in The Age today on the mad meth­ods of neo­clas­si­cal econ­o­mists. The author is Mar­tin Feil, who was once a direc­tor of the Indus­tries Assis­tance Commission–a pre­vi­ous incar­na­tion of what is now called the Pro­duc­tiv­i­ty Com­mis­sion:

The arti­cle is enti­tled We can’t live on moon­beams and air.

I plan to tack­le sim­i­lar issues in my next two Debt­watch Reports. Novem­ber’s (the 28th, which is also the sec­ond anniver­sary issue–I start­ed the report in Novem­ber 2006) focus­es on the data that neo­clas­si­cal the­o­ry directs the atten­tion of econ­o­mists to, and the data that the the­o­ry caus­es them to ignore. Cru­cial­ly, the lat­ter includes pri­vate debt–and Feil makes a sim­i­lar set of obser­va­tions. On the data that the RBA’s neo­clas­si­cal econ­o­mists con­sid­er impor­tant:

The import of Ger­ard Hen­der­son­’s dia­tribe in today’s SMH is that the media has done a “soft” job on  my views, which have only gained noto­ri­ety because of the extreme pre­dic­tion I have made—about the forth­com­ing eco­nom­ic down­turn qual­i­fy­ing as not mere­ly a reces­sion, but a Depres­sion. It seems I’ve only got atten­tion because of my extreme views, while the media has let the side down by doing a “tabloid” job only and not sub­ject­ing my views to scruti­ny.

Many ele­ments of the recent­ly announced pack­age are jus­ti­fied. When the econ­o­my is about to go into a debt-induced reces­sion, gov­ern­ment spend­ing both boosts demand, and pro­vides the pri­vate sec­tor with cash flow need­ed to meet its debt repay­ment com­mit­ments.

Equal­ly vital was the guar­an­tee of all bank deposits. A run on the banks would be dis­as­trous, and this guar­an­tee ensures that this will not hap­pen.

This week, finan­cial mar­kets tru­ly suc­cumbed to The Pan­ic. The US Dow Jones and S&P500 Indices lost 21%; Aus­trali­a’s All Ordi­nar­ies fell 16%. “Buy and Hold” gave way to “Get Out At All Costs”.

When we look back with the eyes of his­to­ry, the ninth day of the tenth month of 2008 will be the Black Thurs­day on which the world’s biggest ever spec­u­la­tive bub­ble final­ly burst.

The Stock Mar­ket Crash of 2008

Just a quick heads up to all blog read­ers that I’ll be on Chan­nel Ten’s “Meet the Press” on Sun­day morn­ing at 8am, and Chan­nel Nine’s “60 Min­utes” on Sun­day evening at 8.30pm.

You all know the movie plot: the Evil Sci­en­tist has laced the town’s water sup­ply with a poi­son. All will die unless The Anti­dote is added, and he holds the city to Ran­som. All seems lost until the Hero rides to the Res­cue with The Anti­dote. The Hero puts the Evil Sci­en­tist behind bars, and all is well (until The Sequel any­way).

Are there any par­al­lels here with Paulson’s cur­rent­ly ter­mi­nat­ed Wall Street bailout?

In my col­umn in Crikey yes­ter­day (see below) I promised to pro­vide some “back of the enve­lope” cal­cu­la­tions on why the Paul­son plan can’t work.

It’s not my usu­al stan­dard or style of analysis–just a sim­ple text-only flow­chart map­ping out of the pos­si­ble con­se­quences of a US$2 tril­lion bailout, financed by either bond issues or print­ing money–but a promise is a promise, so here it is. Since the images are quite dif­fi­cult to read, I’ve attached the Pow­er­point file as well.

Pow­er­point Flow­charts

Images from the two relevant slides

I’ve had a cou­ple of very enjoy­able chats this week with Red Symons, on the ABC Break­fast Show in Mel­bourne, and some friends have been try­ing to get me to throw some old Sky­hooks song lines into the conversation–such as “Hor­ror Movie” and the like (for any non-Aus­tralian and/or non-“Living in the Sev­en­ties” read­ers, Red was a guitarist–and played drums on the one occa­sion I saw them live, at Syd­ney Uni­ver­si­ty’s Union Build­ing in the ear­ly ’70s–and lyri­cist; here is a link for the lyrics).