braddelong.substack.com/p/reading-from…
Jackson Hole in 2005: The "unremitting attack"—as Alan Blinder characterized it—on Raghu Rajan's warnings of financial instability and mistrust of the neoliberal market-financial order: Summers, Fraga, Fischer, Trichet, Sinai, Weber, Kohn—an... 1/
Jackson Hole in 2005: The "unremitting attack"—as Alan Blinder characterized it—on Raghu Rajan's warnings of financial instability and mistrust of the neoliberal market-financial order: Summers, Fraga, Fischer, Trichet, Sinai, Weber, Kohn—an... 1/
...impressive group saying that Rajan had overstated his case, with only Blinder coming to his defense, saying: "I’d like to defend Raghu a little bit against the unremitting attack he is getting here for not being a sufficiently good Chicago economist and... emphasize the... 2/
...sentence in his paper... “There is typically less downside and more upside risk from generating investment returns.” This is very mildly said. The way a lot of these funds operate, you can become richer than Croesus on the upside, and on the downside you just get your... 3/
...salary. These are extremely convex returns.
I’ve wondered for years why this is so. You don’t need to have public regulatory concerns to worry about it. Take the perspective from inside a big company. The traders don’t own the capital. The traders are taking all this... 4/
I’ve wondered for years why this is so. You don’t need to have public regulatory concerns to worry about it. Take the perspective from inside a big company. The traders don’t own the capital. The traders are taking all this... 4/
...risk and putting the company’s capital at enormous risk. I don’t quite understand why the incentives are as they are.
I remember a discussion I had with—I won’t name him—one of the principals of the LTCM, while it was riding high. He agreed with me that the skewed... 5/
I remember a discussion I had with—I won’t name him—one of the principals of the LTCM, while it was riding high. He agreed with me that the skewed... 5/
... incentives are a problem. But they weren’t solving it, obviously. So far, that is just an internal problem to the firm.
What can make it a systemic problem is herding, which Raghu mentioned, or bigness... 6/END
What can make it a systemic problem is herding, which Raghu mentioned, or bigness... 6/END
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