Monday, June 8, 2009
Bubbles and banks, the never ending story
Tyler has a new paper in which he deflects blame for the financial crisis away from central banks and towards behavioral biases such as herd behavior and over confidence. See my comments there, but basically I'm wondering why we can't blame both. My dissertation is about trying to sort out the relationship between these factors. I intend to test in the lab and with simulations the idea that free banking better mitigates bubbles, including those arising initially from behavioral biases (what other kind is there?).
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3 comments:
Interesting post Will
http://thefilter.blogs.com/thefilter/2009/06/cowen-on-the-crisis.html
Hi Will,
Glad to find your blog; hadn't seen you since Rowley's class a few years back.
This reminds me of the frequent analogy (eg Thomas Woods) of the crisis to airplane crashes & gravity; herd behavior affects markets like gravity affects planes. So the real question is why the system failed, which I think is pretty clearly fed enabling of over-liquidity and moral hazard.
Anyway you've got a great topic for the zeitgeist, and good luck!
Peter St. Onge
Peter, awesome analogy, thanks.
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