Saturday, April 10, 2010

Asset Bubbles from the President of the New York Federal Reserve

William C. Dudley, president of the Federal Reserve Bank of New York presented a wonderful paper on Asset Bubbles, valuable for pointers on experimental results that showed that Asset Bubbles and crashes happen in simulated markets, even when there were clear indications of the dividend stream, and everyone knew them. Dr. Dudley also showed that asset bubbles are likely to occur when one cannot easily sell short and when there are innovations whose results cannot be predicted accurately such as the internet boom. Because central banks cannot easily predict the future (Yogi Berra), they do not know if it really is an asset bubble and how big. (E. G., the central bank predicted and headed off thirty of the last ten asset bubbles.)

Also, bubbles involving debt create more damage when they burst, because people depend upon receiving the income stream from a debt and because of leverage. And he pointed out, as others have, the ease with which people could avoid leverage regulations by going offshare or using a different instrument that might e regulated differently.

On, I argued for a more extreme solution, outlaw the buying and selling of financial assets altogether. You buy it, you own it, you get the income stream, period! And here, I argue for a share economy, one invests in a real company or enterprise and gets a share of the income.

To be included a later Thoughtful Thursday:

  1. "Bubbles, Crashes and Endogenous Expectations in Experimental Spot Asset Markets", Vernon L. Smith, Gerry L. Suchanek, Arlington W. Williams, Econometrica Volume 56, Number Five, September 1988, 119-1151
  2. Vivian Lei, Charles N. Noussair, and Charles R. Plott, "Nonspeculative Bubbles in Experimental Asset Markets: Lack of Common Knowledge of Rationality vs. Actual Irrationality" Economitrica 69 Number 4 (July) 831 to 859 in 2001.
  3. Richard Thaler, "From Homo Economicus to Homo Sapiens" 2000 Journal fo Economic Perspectives 14 Number One (Winter) 133 to 141 (Overconfidence)
  4. Adrian Tobias, Arturo Estrella nd Hyun Song Shin, 2010 Monetary Cycles, Financial Cycles and the Business Cycle Federal Reserve Bank of New York Staff Reports 421.

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