The global financial crisis and its aftermath : hidden factors in the meltdown

521 Pages·2017·4.88 MB·English

by  A.G. Malliaris

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The Global Financial Crisis
and Its Aftermath
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The Global Financial Crisis
and Its Aftermath
Hidden Factors in the Meltdown
EDITED BY A. G. MALLIARIS, LESLIE SHAW
AND
HERSH SHEFRIN
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1
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LibraryofCongressCataloging-in-PublicationData
Names:Malliaris,A.G.,editor.
Title:Theglobalfinancialcrisisanditsaftermath:hiddenfactorsinthe
meltdown/editedbyA.G.Malliaris,LoyolaUniversityChicago,Leslie
Shaw,ChicagoPsychoanalyticSociety,HershShefrin,SantaClaraUniversity.
Description:NewYork:OxfordUniversityPress,2016.|Includes
bibliographicalreferencesandindex.
Identifiers:LCCN2016008338|ISBN9780199386222(alk.paper)
Subjects:LCSH:Financialcrises.|GlobalFinancialCrisis,2008–2009.|
Economicpolicy.|Socialjustice.
Classification:LCCHB3722.G58562016|DDC330.9/0511–dc23LCrecordavailableat
http://lccn.loc.gov/2016008338
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PrintedbyWebCom,Inc.,Canada
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CONTENTS
PrefaceandAcknowledgments xiii
Contributors xv
PART ONE Introduction
1. TheGlobalFinancialCrisisandItsAftermath 3
A.G.Malliaris,LeslieShaw,andHershShefrin
Introduction 3
AMultidisciplinaryMethodology 5
OrthodoxEconomicsandFinancialCrises 6
AClassicFinancialPanic 8
ContributionsfromEconomics 9
ContributionsfromPsychology 15
Values 18
Epilogue 21
References 21
PART TWO TheGlobalFinancialCrisisof2007–2009andEconomics
2. FromAssetPriceBubblestoLiquidityTraps 25
A.G.Malliaris
Introduction 25
PurposeofThisChapter 26
WhatIsFinancialInstability? 30
Methodology 35
TheRecentGlobalFinancialCrisis 38
TheExpansionPhase 39
TheUpperTurningPeriod 45
TheGreatRecessionof2007–2009 48
TheLiquidityTrap:TheLowerTurningPeriod 49
Conclusions 52
Notes 53
References 53
3. AMinskyMeltdown 57
JanetYellen
MinskyandtheCurrentCrisis 57
BubblesandMonetaryPolicy 60
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vi CONTENTS
AnotherImportantToolforFinancialStability 63
Notes 64
4. ModelingFinancialInstability 67
SteveKeen
Introduction 67
LoanableFundsvs.EndogenousMoney 68
AMonetaryModelofLoanableFunds 69
AMonetaryModelofEndogenousMoney 75
Occam’sRazorPassesEndogenousMoneyandFailsLoanableFunds 78
SimulatingLoanableFundsandEndogenousMoney 78
ModelingFinancialInstability 81
EmpiricalData 86
Conclusion 88
Appendix 89
LoanableFundsModel 89
EndogenousMoneyModel 89
Goodwinmodel 91
MinskyModel(NewandModifiedEquationsOnly) 92
CommonParameterstoGoodwinandMinskyModels 92
Minsky 92
Notes 98
References 100
5. AssessingtheContributionofHymanMinsky’sPerspectivetoOur
UnderstandingofEconomicInstability 104
HershShefrin
Introduction 104
EightElementsinMinsky’sPerspective 105
MinskyandFCICJuxtaposed 108
PsychologyinMinsky’sPerspective 123
ExcessiveOptimism 123
Overconfidence 124
Aspiration-BasedRiskSeekingandAversiontoaSureLoss 125
ConfirmationBias 126
Representativeness 126
ReactiontoMinsky’sWork 126
DiversePerspectives 127
LackofContagion,Self-Interest,andConfirmationBias 130
Conclusion:Self-InterestColoredbyConfirmationBias 133
Appendix 134
Notes 136
References 139
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Contents vii
6. PreludetotheGlobalFinancialCreditCrisis 143
JohnSilvia
TheThingsWeTakeforGranted—andTheirEconomicImplications 143
SecularShiftsMaskedbyShort-TermEconomicProsperity 144
PushingtheCreditEnvelope 149
HomePricesFailtoMeetExpectations:TheEconomicShock 151
FeedbackfromtheChange:ChangeBegetsCreditRevulsion 152
FeedbackfromtheChange:ImpactontheLaborMarket 153
EconomicGrowthwithoutaLaborMarketRecovery 153
AnAlteredFrameworkfortheLaborMarket 154
TheReservationWageModel 156
LegacyofaDisparateLaborMarketaftertheCreditCrisis 158
DurationofUnemployment:NoSignofRecoveryforManyWorkers 158
APermanentDropintheEmploymentRatio? 161
RegionalDisparitiesReflectIndustryConcentrations 163
NewAmericanPhenomenon:ConstrainedWorkerMobility 165
The“Mancession,”the“Mancovery,”andIndustryMix 165
WhereRaceandEthnicityMatter 167
ParticipationRates:OlderWorkersStayLonger,Younger
WorkersQuit? 167
UnequalEducation=UnequalRecession 168
DualReturnstoEducation:HigherIncomeandLowerUnemployment 169
HardRealities:FewerJobsforthe20th-CenturyWorkerinthe
21stCentury 170
ShowMetheMoney:WagesandHours 171
IncomeGrowth:StillbelowPre-RecessionPace 171
AMonetaryPolicyDisconnect? 171
Conclusion 174
Notes 175
7. MathematicalDefinition,Mapping,andDetectionof(Anti)Fragility 177
NassimNicholasTalebandRaphaelDouady
Introduction 177
WhatIsFragility? 177
FragilityasSeparateRiskfromPsychologicalPreferences 179
DetectionHeuristic 181
FragilityandTransferTheorems 182
Tail-VegaSensitivity 182
MathematicalExpressionofFragility 185
DefinitionofFragility:TheIntrinsicCase 186
DefinitionofFragility:TheInheritedCase 186
ImplicationsofaNonlinearChangeofVariableontheIntrinsicFragility 187
Theorem1(FragilityTransferTheorem) 188
Proof 188
Theorem2(FragilityExacerbationTheorem) 189
Discussion 190
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viii CONTENTS
Monomodalcase 190
ScalingParameter 190
FragilityDrift 191
Second-OrderFragility 191
DefinitionsofRobustnessandAntifragility 192
DefinitionofRobustness 192
ExampleofRobustness(Barbells) 193
DefinitionofAntifragility 193
Remarks 194
ApplicationstoModelError 195
Case1:ApplicationtoDeficits 196
ModelErrorandSemi-BiasasNonlinearityfromMissedStochasticity
ofVariables 197
ModelBias,Second-OrderEffects,andFragility 197
TheFragility/ModelErrorDetectionHeuristic(Detectingω andω
A B
whenCogent) 198
TheHeuristic 199
PropertiesoftheHeuristic 199
ComparisonoftheHeuristictoOtherMethods 200
FurtherApplications 200
Acknowledgments 201
References 201
PART THREE TheGlobalFinancialCrisisof2007–2009andPsychology
8. TheVarietiesofIncentiveExperience 205
RobertW.Kolb
Introduction 205
TheRangeofIncentives 206
ATaxonomyofIncentives 210
Conclusion 222
Notes 222
References 223
9. GoalsandtheOrganizationofChoiceunderRiskinBoththeLongRun
andtheShortRun 226
LolaLopes
TheExceedinglyLong(andMostlyUnexamined)HistoryofThoughton
RiskyChoice 227
DistributionalThinking:RuinandSafety-First 228
ModelingDistributionalThinking 229
GamblingWhenYouMust:AspirationandBoldPlay 231
DemonstratingSecurity-PotentialandAspirationLevelintheLab 232
ConcludingThoughtsontheImportanceofApplication 236
References 238
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Contents ix
10. TheTopologyofGreedandFear 240
GracielaChichilnisky
Introduction 240
BackgroundandExamples 243
TwoApproachestoDecisionTheory 244
TheTopologyofFearandtheValueofLife 246
HowPeopleValueTheirLives 246
GerardDebreuandtheInvisibleHand 247
TheAxiomofChoiceandRareEvents 248
RepresentingaPurelyFinitelyAdditiveMeasure 248
Appendix 250
Arrow’sDefinitionofMonotoneContinuity(MC) 250
∗
TheDualSpaceL∞ 252
Notes 251
References 254
11. ASustainableUnderstandingofInstabilityinMindsandMarkets 257
LeslieShaw
Introduction 257
PartOne:ThePsychology-PsychoanalysisDivide 261
PartTwo:IrrationalityasaPsycho-PhilosophicalProblem 266
PartThree:ASustainableUnderstandingofInstability 269
Notes 274
References 277
12.ExistenceofMonopolyintheStockMarket 279
ViktoriaDalko,LawrenceR.Klein,S.PrakashSethi,andMichaelH.Wang
Introduction 279
ExistenceofMonopolisticTendenciesintheStockMarket 281
ComparisonbetweenMonopolyPowerintheFinancial,andtheGoods
andServicesMarkets 282
MarketManipulationisWidespread,Frequent,andOccasionally
Rampant 284
AModelofanInformation-BasedManipulativeTradingStrategy 285
TheSet-UpoftheModelandRelatedLiterature 285
TheModelandResults 287
DiscussionoftheResults 292
UnderWhatConditionsCantheStrategicTraderProfitfrom
Information-BasedManipulation? 292
UndertheAboveConditions,DothePerception-GuidedInvestorsRealize
GainorLoss? 293
WhatIstheSourceofThoughtContagion,Leadingtothe
Perception-GuidedInvestors’Herding? 294
WhyDoPositiveReturnsReverseaftertheAnnouncementof
GoodNews? 294
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