The credit crisis hit in 2008 largely because American banks lost trust in one another. Specifically, top economists say that each bank had so much bad debt on its books (in the form of mortgage backed securities and derivatives which worth the paper they were written on) which made them essentially insolvent that they assumed that all of the other banks must be in a similar situation … so they stopped lending to each other. This drove the price which banks charged each other for loans (libor) skyrocket, and the whole credit market froze up. The same thing is now happening in China.

For the same reason, it’s impossible to know, even in principle, which information to pay attention to—because what is relevant now will only be decided by some future historian, who, like the novelist, can decide what was most relevant in the light of the ending that he or she knows about but that the participants themselves do not.
This is why, when we look back on bubbles, it seems to us that the explanation we have constructed is what really was happening and that investors at the time were falling for some contrived view of the world. Really, it’s the opposite: The confusion we experience in the present is real. It is the story that we tell afterwards that is contrived.

First Ben, then Jean-Claude, now Wen in national figures impacting markets with their rhetoric. Throw in the political action of oil reserve releases and we have another week of government event risk impacting markets both up and down and making the market almost unanalyzable day to day. I’m glad I went macro because there used to be a time when I just read annual reports. In our new world, micro research no longer suffices and there is no wonder volumes have been declining for two years, who wants to play in this new world?

Social Security payments must be reduced. Promises were made – by lawmakers – that are beyond the government’s (the taxpayer’s) ability to pay. The latest scheme is a ploy by cowardly elected representatives who surreptitiously cut benefits for those most in need: the old and the frail.

Then again, the forecasts of 90% of the economic community ain’t worth a plug nickel. Beyond the institutional habit of being excessively optimistic, the Fed’s economic forecasts have been working off the wrong data set, stubbornly refusing to recognize that this is a credit driven crisis, and not your run of the mill business cycle contraction. They have either been unwilling or unable to recognize this. I am not sure which I find more galling: The lack of acumen or missing sense of humility for the failures.

For example, on the issue of financial bailouts, it is easy to say that we oppose bailouts. What is difficult to do, starting from where we are today, is to implement institutional mechanisms to prevent bailouts. Each bailout is like paying ransom for a kidnapping. No matter how much you promise never to pay ransom, in a real case involving someone you love, the incentive is to pay the ransom. Similarly, no matter how strongly we believe that bailouts are wrong, in a real case where a major financial institution is in trouble, politicians have an incentive to undertake a bailout.

Did we lose a war? Or have we just run out of pro-antitrust economists in the USA? Not to sound like a conservative complaining about foreigners “stealing” American jobs, but there is absolutely no justification for a US government agency to hire an employee of a foreign government for a position of substantive authority over US citizens and businesses. The Bureau of Economics is the FTC’s clearinghouse for reviews of mergers and other interventionist policies. Most of the Bureau’s work is carefully shielded from public view. So on top of this institutional secrecy we now have a senior official whose loyalties are with a foreign government — one whose interests are not compatible with the alleged principles underlying the American constitutional system.