Re: Is This So?
On Jul 5, 2006, at 2:34 PM, Michael Pollak wrote:
Fair enough. Cockburn is no economist and clearly this is just
stopped-clock crisis mongering. If there is a serious downturn,
you don’t get any credit for predicting it if that’s all you ever
predict twice a year for decades.But just on the theoretical side, aren’t there at least two
reasonably substantial reasons why a large increase in the
complexity and novelty of financial instruments increases the risk
of a collapse of confidence? Namely
Maybe, but you don’t need complex instruments to do this kind of work
- all you need are some heavily indebted entities, or a daisy-chain
of obligations in which one link goes bad. Worked like a charm in the
19th and early 20th centuries. A current example: the US mortgage
market is characterized by increasingly exotic instruments, but the
fundamental fact is that a lot of people have borrowed very
aggressively, and in a serious downturn, risk losing their houses and
causing serious economic problems. Maybe. Maybe not. But it’d be a
mistake to focus on the exotic instruments when the real issue is
debt and debt service ratios.
Doug