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Extreme wonky alert: I've been watching the plunge in US bond rates, which has inverted the yield curve – historically a precursor to recession, but who knows? Anyway, Bloomberg has a really interesting piece on why the move has been so sharp 1/ bloomberg.com/news/articles/…
Basically they say that an unexpected drop in rates forced some investors to scramble to cover their bets, pushing rates even lower. If so, this is a classic illustration of a point Shleifer and Vishny made long ago 2/ scholar.harvard.edu/shleifer/publi…
Shleifer-Vishny argued that the business of keeping asset prices somewhere near fundamental values is normally handled by specialists who need sufficient capital - and that big price moves wipe out that very capital 3/
So even if informed investors are well aware that a big asset price move -- say, a plunge in a developing country's currency – is excessive, they're unable to buy the undervalued asset because their capital has been depleted 4/
If this is the story, by the way, we might want to be cautious about placing too much weight on that yield curve inversion. On the other hand, business economists I talk to are sounding very grim about the incoming data flow. (shrugs) 5/
