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Self-Fulfilling Financial Crises

Posted by hkarner - 16. Oktober 2018

J. Bradford DeLong is Professor of Economics at the University of California at Berkeley and a research associate at the National Bureau of Economic Research. He was Deputy Assistant US Treasury Secretary during the Clinton Administration, where he was heavily involved in budget and trade negotiations. His role in designing the bailout of Mexico during the 1994 peso crisis placed him at the forefront of Latin America’s transformation into a region of open economies, and cemented his stature as a leading voice in economic-policy debates.

Many mistaken assumptions about the 2008 financial crisis remain in circulation. As long as policymakers believe the crisis was rooted in the housing bubble rather than human psychology, another crisis will be inevitable.

BERKELEY – The 2008 financial crisis and subsequent recession left the Global North 10% poorer than it otherwise would have been, based on 2005 forecasts. For those hoping to understand this episode better, I have long recommended four books, in particular: Manias, Panics, and Crashes, by the twentieth-century economist Charles P. Kindleberger; This Time Is Different, by Carmen M. Reinhart and Kenneth S. Rogoff of Harvard University; The Shifts and the Shocks, by the Financial Times economics commentator Martin Wolf; and Hall of Mirrors, by my University of California, Berkeley, colleague Barry Eichengreen.

Now, I want to add a fifth book to the list: A Crisis of Beliefs: Investor Psychology and Financial Fragility, by the economists Nicola Gennaioli and Andrei Shleifer. (Full disclosure: Shleifer was my roommate in college and graduate school; to this day, I credit him with whatever positive skills or reputation I may have.)

A Crisis of Beliefs is important for three reasons. First, it offers a welcome rejoinder to those who argue that the past decade was an unavoidable result of the housing bubble in the United States. Many experts still claim that the bubble’s deflation triggered the financial crisis. But the fact is that the bubble had already deflated substantially before the crisis erupted.

Recall that by mid-2008, home prices had returned to, or even fallen below, levels supported by their underlying fundamentals, and employment and production in the residential construction industry had declined to levels far below trend. The work of rebalancing asset valuations and reallocating economic resources across sectors had already been accomplished.

To be sure, there still would have been around $750 billion worth of financial-asset losses in the form of defaults on subprime mortgages and home-equity loans. But that is only one-quarter of what global equity markets lost in seven hours on October 19, 1987. In other words, it would not have been enough to sink the global financial system. Ben Bernanke, then Chair of the US Federal Reserve, seemed confident in the summer of 2008 that the correction in housing prices had not triggered any unmanageable financial crisis. At the time, he was mainly focused on the dangers of rising inflation.

And then the bottom fell out. The reason, Gennaioli and Shleifer show, is that beliefs changed. Investors came to believe that financial markets were saddled with highly elevated risk, owing to a number of factors. The interbank market had seized up, homeowners were defaulting on their mortgages, Bear Stearns had collapsed, the US Treasury had intervened to rein in Freddie Mac and Fannie Mae, and, above all, Lehman Brothers had declared bankruptcy.

All of this led to the sudden run on both the shadow and non-shadow banking systems, as investors scrambled to dump assets. The increased risk that they had imputed to the system became a reality. Like triage nurses in an emergency room, they quickly assessed the patient and then ran with their initial diagnosis as if there were no other option.

And yet nothing about the fallout from the crisis was inevitable. Had the Fed been in possession of contingency plans for putting too-big-to-fail institutions into receivership and becoming the risk-bearer of last resort, we would probably be living in a very different world today. Unlike those who look back and conclude that it was all an inevitable consequence of the housing bubble, Gennaioli and Shleifer recognize the central role that contingency played in the crisis and its aftermath.

Gennaioli and Shleifer’s second important contribution is to show that “crises of beliefs” like the one that precipitated the disaster of 2008-2009 are deeply rooted in human psychology, so much so that we will never be free of them. Thus, neither prudential policies nor crisis-response measures should treat these occurrences as flukes or one-off exceptions. Crises of belief are manifestations of a chronic condition that must be managed.

Thus, central banks and fiscal authorities should not use the end of a crisis as an excuse to step back or to take their hands off the wheel. When fundamental beliefs have shifted permanently, one should not expect the same policy mix that supported full employment, low inflation, and balanced growth before the crisis to do so afterwards. Moreover, the seeds of the next Kindlebergian sequence – displacement, optimism, enthusiasm, crash, panic, revulsion, discrediting – have already been sown by the very policies that were needed to address the last downturn.

The third reason why Gennaioli and Shleifer’s book is important is more technical, and applies directly to the field of economics. Economists have long recognized that requiring one’s representative agent to hold rational expectations of the future tends to produce models that are profoundly inapplicable to the real world. But, until now, no alternative approach has ever gained any traction. Gennaioli and Shleifer’s investors-as-triage-nurses framework shows great promise for being considered alongside other model-building strategies.

For a decade now, people have been looking for a silver lining to the disasters of 2008-2018, hoping that this period will bring about a more productive integration of finance, behavioral economics, and macroeconomic orthodoxy. So far, they have been searching in vain. But with the publication of A Crisis of Beliefs, there is hope yet.

 

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A Future Where Everything Becomes a Computer Is as Creepy as You Feared

Posted by hkarner - 12. Oktober 2018

Date: 12-10-2018
Source: The New York Times By Farhad Manjoo

More than 40 years ago, Bill Gates and Paul Allen founded Microsoft with a vision for putting a personal computer on every desk.

No one really believed them, so few tried to stop them. Then before anyone realized it, the deed was done: Just about everyone had a Windows machine, and governments were left scrambling to figure out how to put Microsoft’s monopoly back in the bottle.

This sort of thing happens again and again in the tech industry. Audacious founders set their sights on something hilariously out of reach — Mark Zuckerberg wants to connect everyone — and the very unlikeliness of their plans insulates them from scrutiny. By the time the rest of us catch up to their effects on society, it’s often too late to do much about them.

It is happening again now. In recent years, the tech industry’s largest powers set their sights on a new target for digital conquest. They promised wild conveniences and unimaginable benefits to our health and happiness. There’s just one catch, which often goes unstated: If their novelties take off without any intervention or supervision from the government, we could be inviting a nightmarish set of security and privacy vulnerabilities into the world. And guess what. No one is really doing much to stop it. Den Rest des Beitrags lesen »

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The Jungle Grows Back: America and Our Imperiled World

Posted by hkarner - 10. Oktober 2018

Date: 04-10-2018, The Economist
Source: Robert Kagan

We now live in a world:

„Where once people believed that the nation-state was a thing of the past in an increasingly cosmopolitan and interconnected age, we now see nationalism and tribalism reemerging, more than able to hold their own in the brave new world of the Internet.

Meanwhile, a profound and extended crisis of confidence besets the democratic world, even in the birthplace of modern democracy.

Liberal international institutions like the European Union, once considered the vanguard of a postmodern future, are now under assault from without and within.

In America, racial and tribal forces that have always been part of the “subterranean stream” of American history have reemerged to reshape politics and society.

Where thirty years ago the dreams of Enlightenment thinkers going back three centuries seemed to be on the cusp of fulfillment, today a Counter-Enlightenment of surprising potency stirs in Moscow, Budapest, Beijing, Tehran, and Cairo, in parts of Western Europe, and even in the nation that saved liberalism seventy-five years ago. Den Rest des Beitrags lesen »

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In the struggle for AI supremacy, China will prevail

Posted by hkarner - 30. September 2018

Date: 27-09-2018
Source: The Economist

Or so reckons Kai-Fu Lee, a tech insider, in “AI Superpowers”

AI Superpowers: China, Silicon Valley and the New World Order. By Kai-Fu Lee. Houghton Mifflin Harcourt; 272 pages; $28.

CHINA’S “Sputnik moment” came on May 27th 2017. On that day an algorithm thrashed Ke Jie, the world’s best player of Go, an ancient and demanding Chinese board game. Mr Ke’s defeat by AlphaGo, an artificial intelligence (AI) system developed by DeepMind, a British firm that had been bought by Google, was as much a blow to China’s psyche as the Soviet satellite was to America’s self-esteem in 1957. Within months, China announced ambitious plans to dominate AI by 2030.

Kai-Fu Lee thinks it will succeed. He is well placed to judge. He moved from Taiwan to America at 11, earned a PhD in AI in the 1980s and has been a senior manager at America’s mightiest tech firms, including Apple, Microsoft and Google. Now he runs a Chinese venture-capital fund, which gives him a ringside seat for the contest between what he calls the two “AI superpowers”, China and America.

He thinks China will win because it has the edge in the four determinants of AI success: brains, capital, regulation and data. His verdict on the last three criteria is largely persuasive. For example, China’s internet economy generates vastly more data than any other, particularly in the area of payments—many Chinese merchants eschew coins and currency in favour of digital money. Meanwhile, whereas American cities are restricting self-driving cars, the district of Xiong’an, 60 miles south of Beijing, is being built from scratch to accommodate them (along with 2.5m people). The mayors of Chinese cities are splashing cash on AI startups. Den Rest des Beitrags lesen »

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Just Incredible

Posted by hkarner - 30. September 2018

Date: 29-09-2018
Source: The Guardian by Michael Lewis
Subject: ‘This guy doesn’t know anything’: the inside story of Trump’s shambolic transition team

Michael Lewis, author of Moneyball and The Big Short, reveals how Trump’s bungled presidential transition set the template for his time in the White House

Chris Christie noticed a piece in the New York Times – that’s how it all started. The New Jersey governor had dropped out of the presidential race in February 2016 and thrown what support he had behind Donald Trump. In late April, he saw the article. It described meetings between representatives of the remaining candidates still in the race – Trump, John Kasich, Ted Cruz, Hillary Clinton and Bernie Sanders – and the Obama White House. Anyone who still had any kind of shot at becoming president of the United States apparently needed to start preparing to run the federal government. The guy Trump sent to the meeting was, in Christie’s estimation, comically underqualified. Christie called up Trump’s campaign manager, Corey Lewandowski, to ask why this critical job had not been handed to someone who actually knew something about government. “We don’t have anyone,” said Lewandowski. Den Rest des Beitrags lesen »

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Historian Yuval Noah Harari on the Robot Revolution

Posted by hkarner - 28. September 2018

Date: 27-09-2018
Source: The Wall Street Journal

The author of ‘Sapiens’ sees a future in which machines make better doctors, AI aids dictatorships and surveillance has a silver lining

Historian Yuval Noah Harari on the Robot Revolution

Science fiction is full of artificial intelligence that gains consciousness and wreaks destruction on humankind. In reality, the threat is less dramatic but just as scary, according to historian Yuval Noah Harari, who predicts upheaval in the workforce, global governments and our emotional lives.

Harari gained a global fan base after the 2011 release of “Sapiens: A Brief History of Humankind,” a bestseller that questioned conventional wisdom on the evolution of the species. He followed that up in 2017 with “Homo Deus: A Brief History of Tomorrow.” In “21 Lessons for the 21st Century,” published in September, the Israeli scholar offers advice on tackling the most pressing issues of tomorrow, from information technology to terrorism.

Harari, age 43, recently spoke to The Future of Everything about potential winners and losers in the automation revolution, how AI could help dictatorships outpace democracies, and the rise of machines more sympathetic than humans.

Most Jobs Will Not Be Worth Saving Den Rest des Beitrags lesen »

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No, the Financial Crisis Didn’t Spawn Populism

Posted by hkarner - 20. September 2018

Date: 19-09-2018
Source: The Wall Street Journal By Greg Ip

Election results and economic data suggest the two aren’t as closely connected as some commentators believe

The unifying factor in the rise of right-wing populism is a disenchantment with globalization in all its manifestations: international trade, international institutions (like the EU) and, most of all, immigration.

Two defining events of the last decade were the financial crisis and the rise of right-wing populists like Donald Trump. Many believe that the first caused the second.

In “Crashed,” historian Adam Tooze’s ambitious new history of the last decade, there is a direct line connecting them: “Overshadowed by memories of 2008, the 2016 election delivered a stark verdict.”

Surveys find little evidence for Mr. Bannon’s claim that the crisis drove voters into Mr. Trump’s arms.

Steve Bannon, the right-wing provocateur and architect of Mr. Trump’s campaign, agrees: “The legacy of the financial crisis is Donald J. Trump,” he told New York Magazine. “You know why the deplorables are angry? They’re rational human beings. We took away the risk for the wealthy.”

This seems intuitive. If, like Mr. Tooze, we treat the series of crises that include the failure of Lehman Brothers and cascaded through the eurozone as a single event, then this was the worst economic catastrophe since the Great Depression. And since the Depression led to political convulsions like nationalism and fascism, shouldn’t this one?

I used to think so, but upon closer read of elections, economic data, surveys and history, this connection looks exaggerated if not wrong.

This isn’t merely an academic point. By linking the financial crisis and populism too tightly, we might draw the wrong lessons about both.

To be sure, the crisis had political consequences. Practically every political party that governed during a crisis, from George W. Bush’s Republicans to Gordon Brown’s Labour Party, was shown the door. Several studies have found that politics becomes more fragmented and polarized in the wake of crises, and this one was no exception. Den Rest des Beitrags lesen »

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Future Politics: Living Together in a World Transformed By Tech – review

Posted by hkarner - 18. September 2018

Date: 17-09-2018
Source: The Guardian by Nick Cohen

In an age where our every action can be harvested as data and used against us, Jamie Susskind’s book makes crucial reading

US sentencing algorithms are more likely to predict that black offenders will more likely reoffend than whites.

Nothing is as remote as yesterday’s utopias. From the 1990s until the end of the last decade, the explosion in computing power was seen by wide-eyed optimists as a force for liberation that would lay low unaccountable authority. Their eyes have narrowed now. Democracy, justice, our very ability to earn a living, feel precarious. “All that is solid melts into air,” said Marx of 19th-century capitalism. In our times, not only do economic systems feel unstable, but basic assumptions on how humans live together.

Now, and ever more so in the future, how we perceive the world will be determined by what is revealed and concealed by social media and search services, affective computing and virtual reality platforms. The distinction between cyberspace and real space is becoming redundant. The two are merging, and as they come together, companies and states will have the power to control our perceptions. The fragmentation social media promotes has been discussed to death. But it is worth stressing that automated systems are placing us in silos.
It is their choice not ours to create a world where the people who most need to hear opposing views are the least likely to hear them. Meanwhile, the scandal of the Brexit campaign is setting the pattern for all campaigns; showing how politcians and their agents can harvest data and target propaganda, tailored to meet its recipients’ prejudices, without any public authority regulating it or even knowing about it. Den Rest des Beitrags lesen »

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Yuval Noah Harari: the myth of freedom

Posted by hkarner - 17. September 2018

Date: 16-09-2018
Source: The Guardian by Yuval Noah Harari

Governments and corporations will soon know you better than you know yourself.

Belief in the idea of ‘free will’ has become dangerous

Main image: Future proof … to survive, we must accept that humans are hackable animals.

Should scholars serve the truth, even at the cost of social harmony? Should you expose a fiction even if that fiction sustains the social order? In writing my latest book, 21 Lessons for the 21st Century, I had to struggle with this dilemma with regard to liberalism.

On the one hand, I believe that the liberal story is flawed, that it does not tell the truth about humanity, and that in order to survive and flourish in the 21st century we need to go beyond it. On the other hand, at present the liberal story is still fundamental to the functioning of the global order. What’s more, liberalism is now attacked by religious and nationalist fanatics who believe in nostalgic fantasies that are far more dangerous and harmful.

So should I speak my mind openly, risking that my words could be taken out of context and used by demagogues and autocrats to further attack the liberal order? Or should I censor myself? It is a mark of illiberal regimes that they make free speech more difficult even outside their borders. Due to the spread of such regimes, it is becoming increasingly dangerous to think critically about the future of our species. Den Rest des Beitrags lesen »

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The Human Promise of the AI Revolution

Posted by hkarner - 16. September 2018

Date: 15-09-2018
Source: The Wall Street Journal By Kai-Fu Lee

Artificial intelligence will radically disrupt the world of work, but the right policy choices can make it a force for a more compassionate social contract.

Artificial intelligence is a technology that sparks the human imagination. What will our future look like as we come to share the earth with intelligent machines? Our minds gravitate to extremes, to the sharply contrasting visions that have captured public attention and divided much of the technological community. As a longtime AI researcher and venture capitalist in China and the U.S., I’ve observed these two camps across continents and over many decades.

Utopians believe that once AI far surpasses human intelligence, it will provide us with near-magical tools for alleviating suffering and realizing human potential. In this vision, super-intelligent AI systems will so deeply understand the universe that they will act as omnipotent oracles, answering humanity’s most vexing questions and conjuring brilliant solutions to problems such as disease and climate change.

But not everyone is so optimistic. The best-known member of the dystopian camp is the technology entrepreneur Elon Musk, who has called super-intelligent AI systems “the biggest risk we face as a civilization,” comparing their creation to “summoning the demon.” This group warns that when humans create self-improving AI programs whose intellect dwarfs our own, we will lose the ability to understand or control them. Den Rest des Beitrags lesen »

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