Who are this ‘we’ of which you speak, Tyler Cowen?

Tyler Cowen has a tag line he’s been using for a while. Here’s the latest example:

Just to review briefly, I find the most plausible structural interpretations of the recent downturn to be based in the “we thought we were wealthier than we were” mechanism, leading to excess enthusiasm, excess leverage, and an eventual series of painful contractions, both AS and AD-driven, to correct the previous mistakes. I view this hypothesis as the intersection of Fischer Black, Hyman Minsky, and Michael Mandel.

In what sense is it true that “we thought we were wealthier than we were”? It is not obvious, for example, that we have encountered some unexpected scarcity in real factors that has forced us to downgrade our perception of our collective wealth. I don’t think that is what Cowen claims has happened, exactly. So what does he mean? We get some clues from his list of names. Fisher Black, as Cowen has interpreted him, suggests that since investors’ views over the short-term are not independent of one another, patterns of aggregate investment can be systematically mistaken for a while in ways that seem surprisingly obvious in retrospect. Hyman Minsky famously argued that the dynamics of financial capitalism encourage and even require ever more fragile and optimistic means of finance, leading inexorably to crisis. Michael Mandel claims that US productivity measures exaggerate domestic capabilities by failing to distinguish between domestic production efficiencies and gains due to outsourcing and production efficiencies elsewhere.

I’d like to add another name to the list, for Cowen’s consideration. Here’s John Kenneth Galbraith (grateful ht to commenter groucho, long ago):

To the economist embezzlement is the most interesting of crimes. Alone among the various forms of larceny it has a time parameter. Weeks, months, or years may elapse between the commission of the crime and its discovery. (This is a period, incidentally, when the embezzler has his gain and the man who has been embezzled, oddly enough, feels no loss. There is a net increase in psychic wealth.) At any given time there exists an inventory of undiscovered embezzlement in — or more precisely not in — the country’s businesses and banks. This inventory — it should perhaps be called the bezzle — amounts at any moment to many millions of dollars. It also varies in size with the business cycle. In good times, people are relaxed, trusting, and money is plentiful. But even though money is plentiful, there are always people who need more. Under the circumstances the rate of embezzlement grows, the rate of discovery falls off, and the bezzle increases rapidly. In depression, all this is reversed. Money is watched with a narrow, suspicious eye. The man who handles it is assumed to be dishonest until he proves himself otherwise. Audits are penetrating and meticulous. The bezzle shrinks.

In any case, a common thread behind all of these stories is that our “overestimate” of wealth is not a random phenomenon. We did not just have a collective “oops!”. In Galbraith’s version, it is outright embezzlers who contrive to keep our accounts inflated. In Mandel’s, it is well-meaning but mistaken government economists (as well as those who unskeptically rely upon them). In Minsky, it is the interplay of competitive dynamics and financing arrangements. The Black/Cowen account is the least specific, but requires some common signal that causes investors’ judgments to be correlated, so their errors do not cancel.

What has been our actual, lived experience of the past decade or so? What were the common signals that rendered investors decisions to be both correlated and mistaken?

I don’t wish to denigrate Mandel’s work, which I consider useful and insightful. Certainly overestimates of domestic productivity contributed to a general sense of optimism, and as Mandel has argued, probably contributed to policy errors during the crisis as apparent high productivity helped policymakers to mistake a chronic economic crisis for a transient distortion in response to a financial shock. Robust apparent productivity growth might well have helped rationalize consumer and housing credit decisions that now seem questionable.

But I think we know something about the investors of the last decade. There was, as This American Life / Planet Money famously put it a “giant pool of money”, specifically sovereign and institutional money, that was seeking out ultra-safe, “Triple A” investment, and sometimes agitating for yield within that category. We really don’t need to look for subtle information cascades in order to explain investors’ “errors”. The investors in question weren’t, in fact, investors at all in an informational sense. To a first approximation, they paid no attention at all to the real projects in which they were investing. They were simply trying to put money in the bank, and competitively shopping for good rates on investments they could defend as broadly equivalent to a savings account.

But how did this “giant pool of money” come to be? The overestimate of wealth occurred prior to as well as during the investment process, a fact which can’t readily be explained by the Black/Cowen story. There was too much income to be invested, income which took the form not of speculative securities but of money, visible flows of central bank reserves and bank deposits. When ordinary investors make mistakes, however correlated, what we observe is a mere overpricing of questionable securities. Under current institutional arrangements, there is only one kind of investor who can convert investors’ mistakes into cash income growth (holding “velocity”, the reciprocal of peoples’ desire to hold income as cash or bank deposits, roughly constant). Only mistakes by banks can explain the increase of money income. (Note that the relevant income here, for the US, is not NGDP, but US dollar income worldwide, including e.g. income generated from exports by China and oil producers.)

It would be plausible to argue that banks were not at the vanguard of the error, that they were only caught up in a general zeitgeist of malinvestment, if other classes of investors were making the same misjudgment. That roughly describes what happened during the dot-com boom. But during second boom, other classes of investors were, to a first approximation, making no judgments at all. Institutional investors were simply buying the securities that banks were willing to treat as “money good” and reaching nihilistically for yield without a care in the world about how it might be generated.

Even the most careful and independent population of investors is likely to have its aggregate expectation disappointed if those investors’ incomes correspond to a lower quality of real resources than is suggested by the number of dollars that alight in their bank accounts. And any rational investor will choose to forego direct participation in risky real projects if intermediaries offer sufficient yield on securities that banks are willing to monetize at will. The primary mistake of non-bank investors was to fail to foresee that banks would change their willingness to accept as “money good” securities that core institutions were designing for precisely that acceptance. The “overestimate” of wealth from which we are now suffering occurred first as an exaggeration of value within the core financial system and then as a willingness of institutional investors to take values given by core financial intermediaries as durably sound. “We” did not decide we were wealthier than we are. Two groups of people whose economic role is precisely to evaluate the quality of our wealth misjudged, one directly by neglecting risk, the other indirectly by trusting the first when it should have known better. The broad public or taxpayers or the polity erred only and precisely by trusting these professionals.

Why were banks so easily persuaded that, via the magicks of tranching and diversification, lending into obviously questionable real projects was so safe that any downside risk could safely be socialized? The banking sector’s job is to convert a portfolio of real investment into money that is ultimately backed by the state, and its responsibility is to do so in a manner such that the likelihood realized values will in aggregate undershoot funds advanced is negligible, without recourse, directly or indirectly, to any heroic government stabilization. “Mistake” is not a remotely sufficient characterization of what occurred. There were discernible incentives behind the banking sector’s misbehavior. Throughout the securitization chain, conservative valuation practices were entirely inconsistent with maximizing employee and shareholder wealth. And why did institutional money trust bank and rating agency valuations when money managers were not too stupid to understand that high yield and low risk make for a fishy combination? Again, the answer is not some kind of sunspot. Agents were well paid not to question “money center banks”, for whose misjudgments and misrepresentations they could never reasonably be blamed.

The broad public did err, by accepting an absurdly and dangerously arranged financial system. If we want to prevent a recurrence going forward, if (qua Black/Cowen) we want to enter a world where it would even be possible for investors’ judgments to be reasonably independent, we have to undo a financial system designed around the delegation of investment decisions from the broad public through several tiers of professionals to a semi-socialized “money center” core. Yes, we also have to attend to the public sector’s role in generating “money good” securities not-necessarily-backed by reliable value. But that’s an implausible account of the lead-up to 2008, and we should be cognizant of the fact that, absent debt-ceiling own goals, public sector securities fail more gracefully than bank advances against private assets. (The costs of public sector over-issue would be experienced either as inflation or economic depression due to tight monetary policy required to avoid inflation even in the face of underemployment and not, at least initially, as a banking crisis.)

Despite all these errors, we have no reason to believe that, in real terms, we are unable to consume or produce today at levels suggested by the pre-2008 trendline. Yes, we’ve recently experienced price spikes that might suggest scarcity of some commodities. But we experienced large spikes prior to the crisis and kept on growing. Over the longer haul, we may be able to grow around emerging scarcities via technological ingenuity or we might have to redefine growth so that we value less resource-intensive consumption more highly in order to sustain the almighty trendline. But at this moment, we are not discouraged by a physical bottleneck, but by increased uncertainty about the future value of our resources, skills, organizations, and political arrangements. The only coherent way to understand Cowen’s tag line is that we currently believe the future to be less bright than we believed it to be in 2007, and this change in collective expectation has altered our behavior. We are not, today, forced to produce or consume less than we expected to in 2007. We are choosing to do so, perhaps pathologically as a Keynesian output gap, perhaps wisely in order to conserve and regroup given diminished expectations going forward. (Even if you buy the latter story, conservation of human resources implies providing education or employment. No true Austrian would characterize involuntary idleness, misery, and decay as desirable no matter how badly we discover we have malinvested.)

If Cowen is right, it has caused us a great deal of misery that “we thought we were wealthier than we were”. We should attend very carefully to the details of how we came to think what we thought, of who told us we were wealthy when we weren’t. (Shades of Galbraith…) More importantly, if we cannot evaluate the quality of our wealth going forward, we are unlikely to make decisions conducive to sustaining and expanding that wealth. There is something in the tone of Cowen’s tagline that suggests an “oops!”, a shrug of the shoulders. Whether he intends that or not, it’s precisely the wrong response to the events of the last decade. “Our” misjudgments were not some random perturbation spiraled out of control. They were the result of a set of arrangements that systematically bribed gatekeepers to make and accept incautious estimates, and to circumvent control systems intended to keep valuations in check. As of this writing, those arrangements remain largely in place.

Update History:

  • 1-Aug-2011, 1:01 a.m. EEST: Changed misspelling, “hos” to “his”, in Galbraith quote. Changed “specifically seeking” to “seeking out” in order to avoid awkward repetition of “specifically”. Changed “are” to “is” to agree with “population”, the actual subject of the sentence. Removed a superfluous “the”. Changed “really can’t” to “can’t readily”. No substantive changes.
 
 

28 Responses to “Who are this ‘we’ of which you speak, Tyler Cowen?”

  1. TC writes:

    Dude, you type fast.

    I was about to go after him, for pretty much the same reasons, but it would look like a a stunted and misshapen parody of this beautiful post.

    I’d point out, if we can build something, we need be able to afford it by identity, barring unsupportable maintenance costs. Tyler doesn’t think this is the case. He thinks we were poorer than we thought.

    This is another reason monetary policy sucks. It puts a huge class of bulky, lengthly, hard to figure out transactions at the center of our economic stabilization program. This is a recipe for “bezzle”- because the consequences aren’t seen for months or years, and hard to pinpoint even after the fact.

    It’s harder and harder to ignore the fact he’s a watercarrier for Mercatus people.

  2. Foppe writes:

    Nice post (especially the first half). Your conclusion strikes me as somewhat odd, though, and rather more carefully formulated than is warranted, because of your willingness to go along with Cowen’s choice of vocabulary (“Mistakes”).
    But there’s a very simple reason why Cowen is talking about “mistakes” and naivete, when the operative words are institutionalized fraud (NC) and government-approved mass deception (nyt). That is, Cowen just wants to be able to keep pretending that the change in the way in which the wealth was distributed prior to the housing/dotcom bubbles, and the way it is distributed now, has not come about largely intentionally. And the reason he wants that is because doing so suits his agenda.

  3. Foppe writes:

    (Yes, I realize that you realize this, but the danger in going along with a narrative like his is that you become unable to say certain things because the entire framework on offer is crap.)

  4. nadezhda writes:

    Outstanding! I find it remarkable how someone as clever as Cowen has bought into the theological world view that there’s just nothing that can done about what the market, AKA invisible hand, AKA Providence, produces. We’ve lost the notion of “political” in political economy. Our institutions that produced these misalignments of expectations and perverse behaviors are man-made and reflect human decisions (both public and private) that can be identified and, yes, even predicted. Which means they can be changed. Going forward, we might even think about holding people accountable for their behavior.

    I had another problem with Cowen’s post. I was bemused by his conclusion that the revised GDP figures show that we had a bunch of “structural” problems that weren’t identified as such. Seems to me most of what he IDs as “structural” are old-fashioned cyclical difficulties, just to a much greater degree than had been captured by the data. They are becoming increasingly structural as the slump lengthens, but I don’t see the evidence that simply missing the severity of the initial collapse has the implications he suggests.

  5. vlade writes:

    “But during second boom, other classes of investors were, to a first approximation, making no judgments at all. Institutional investors were simply …”

    This is making a rather large assumption that an asset manager is equal to investor (and I’m not talking technical definition).
    I believe they are not (and, in reality, cannot, because it is very hard to sensibly invest the large amounts of money under management). In other words, I would argue that large amounts of money cannot be invested properly, but are more likely to go the way of a superhuge bank account. Moreover, I believe there is little to no willigness to really invest them properly.

  6. Jonas writes:

    Love the concept of bezzle! What happens when the time lag for bezzle grows very high, i.e. it is not uncovered for more than a generation (either literally or a professional generation)? Seems like the bezzle gains de-facto authority. In our case, I think it became so prevalent that a parallel system grew primarily to trade and speculate on bezzle, mushrooming it further.

    Also, the trend lines pre 2008 are heavily filled with bezzle, so it’s not surprising that once bezzle is devalued, we find we are not as rich as we thought.

    Maybe the financial crisis can be thought as a currency crisis, where there was a run on bezzle. The govt intervened and propped up the value of bezzle, so now the bezzle economy is doing passably well, but the real economy is not.

  7. Steve Roth writes:

    “The investors in question weren’t, in fact, investors at all in an informational sense.”

    I think I understand, but would love an extra sentence on this. I think you’re saying that they weren’t operating on information signals from the real economy, nor were their trades delivering any kind of useful price information about the real economy (QTC, in fact…). But to be sure: what do you mean by an “investor in an informational sense”?

    “They were simply trying to put money in the bank, and competitively shopping for good rates on investments they could defend as broadly equivalent to a savings account.”

    Doesn’t this characterize a great deal, even the bulk, of financial “investment”? Both in the past and now? Equities only constitute 28% of financial assets. I don’t know the portion for corporate bonds offhand, but pure financial plays (notably government bonds) — only distantly related to real assets — comprise a very large portion of financial “assets.” 50%? 30%?

    “Under current institutional arrangements, there is only one kind of investor who can convert investors’ mistakes into cash income growth (holding “velocity”, the reciprocal of peoples’ desire to hold income as cash or bank deposits, roughly constant). Only mistakes by banks can explain the increase of money income”

    My feeble mind finds this confusing. It suggests that (non money-core) investors were making mistakes, but also that mistakes by banks created the income that caused the investors to make mistakes. Or…? So investors’ mistakes were 1. believing the money core was reliable (Belushi/Soon-to-be-Senator Blutowski in Animal House: “You fucked up. You trusted me.”), and 2. believing the income signal that was generated by the money core’s mistakes. If 2, was it really a mistake? It kind of makes sense but doesn’t gel clearly. Any clarification appreciated.

    “Agents were well paid not to question “money center banks”,”

    Yikes did you really write that in 2007? Remind me to go back to read even more of your old posts than I’ve already plowed through.

    TC: “It’s harder and harder to ignore the fact he’s a watercarrier for Mercatus people.”

    Yeah, I’m actually making an effort not to contribute page views or links to the Mercatus/GMU crowd these days, quixotic and trivial as that effort might be…

  8. [...] Stupid, stupid giant pools of [...]

  9. fresno dan writes:

    I agree with Foppe. Long story short – the people who run the major financial institution really pay no penalty for making bad loans. Indeed, the incentives are make as many loans as possible without any regard to quality – as Willian Black has written, it is called looting.

    For example, Dick Fuld, although taking some losses, is still VASTLY more wealthly than I could ever hope to be, despite the fact that objective, empiracal evidence shows that the guy fundamentaly had no idea of what he was doing.

  10. Oliver writes:

    fresno dan

    I call this the meritocracy gap. I believe it is highly corrosive to democracy and society as a whole, especially in a country with a capitalist economic system, because merit is supposedly one of capitalism’s main pillars. At least I think it should be.

  11. Oliver writes:

    If we want to prevent a recurrence going forward, if (qua Black/Cowen) we want to enter a world where it would even be possible for investors’ judgments to be reasonably independent, we have to undo a financial system designed around the delegation of investment decisions from the broad public through several tiers of professionals to a semi-socialized “money center” core. Yes, we also have to attend to the public sector’s role in generating “money good” securities not-necessarily-backed by reliable value.

    I think it is now widely accpeted, that much of the problems we have experienced come from intentionally fudging, linguistically, legally and as a matter of fact, any separation between public and private realms, by perfecting the game of moral arbitrage, broadly captured by the expression ‘privatizing gains and socializing losses’. Keeping in line with Minsky, obviously we experienced such a long period of seeming stability in the build up to the GFC, that the paradigmal rot managed to work itself all the way down the food chain and infect us all. Where do you see a realistic division between the public and private realms of finance?

  12. K. Williams writes:

    ““We” did not decide we were wealthier than we are.”

    Aren’t you leaving out an important part of the story, which is that ordinary Americans all over the country were willing to pay absolutely absurd prices for homes, prices that made absolutely no sense unless people had, in fact, decided that they were wealthier than they actually were. And, along the same lines, people took out huge amounts of equity from their homes (what was it, $600 billion in 2006) and used it for consumption, which again made no sense unless people had decided that they were wealthier than they actually were. I’m fine with an explanation of how this happened that focuses on the failure of financial intermediaries. But no narrative of the last decade is plausible that doesn’t recognize that tens of millions of Americans made awful decisions because they did, in fact, think that the country was wealthier than it actually was.

  13. SW:
    Part of the problem is bad accounting. Capital consumption allowances are inadequate and make “real GDP” look larger than it is. Also “gatekeepers” like CPAs and the ratings agencies have no incentive to “spill the beans” about the real financial condition of out major financial institutions.
    I have said things like you about the “bezzle” for decades! Fraud pays!

  14. [...] 4. An excellent Interfluidity post on how we thought we were wealthier than we were, and why it matters. [...]

  15. Mark writes:

    While I think you are generally in the right direction, I think you have missed the critical point. Fin instns around the world piled into certain kinds of paper because Basel II and its national implementations – governmental policies not private greed – assigned the lowest risk weighting to that paper providing a governmental subsidy or incentive to that kind of paper versus alternatives. Further, when the Basel II rules herded fin instns into that kind of paper, it thus incresing risk correlation throughtout the global financial marketplace.

  16. [...] What a decade of reaching for yield hath wrought.  (Interfluidity) [...]

  17. Robert K writes:

    You reminded me of a favorite quote: “An undertaking of great advantage, but no one to know what it is.”

  18. Foppe writes:

    @mark: The correlation was mostly due to CDS exposure — which became attractive because of Basel-2, of course, but it’s distinct from the AAA rating OECD state debt got.

    K Williams: I think you misunderstood this post.

  19. Ted K writes:

    Wow. Awesome. Really great writing. Mr. Waldman, I am a blog junkie, and in my book you are consistently one of the top 5 finance bloggers in existence. Some churn blabber everyday. When you post you have something insightful to say or clarity to add. Quality or quantity. Just really great stuff.

    The “free market” (it is nothing of the kind, thanks to people like Phil Gramm and Dick Shelby) F*CKED UP. Keynes, Minsky, Galbraith, and others saw it has happened and will happen again.

    What kills me is how guys like Cowen find it so nauseating when some poor person gets one dollar of “redistribution of income” but when TBTF (oligopolistic) bankers get their billions of “redistribution of income” you always get the feeling that the Tyler Cowens and Peter J. Wallisons of the world are chuckling inside going “Well, the rich getting richer is the way it should be”. The wealthy individuals and corporations cheat the system the most (create advantages with laws which enforce rigged markets) because they hold the most sway with lawmakers. Anyone who thinks the black welfare Mom supposedly driving the Cadillac has Congress’s ear is obviously living in a Glenn Beck conjured world.

    Merk, Cisco, General Electric have fired more than they have hired over several years (pre-Obama). Tens if not hundreds of other corporations are net job terminators, not “job creators”. So Republicans throwing around the misnomer “job creators” to rationalize tax breaks, tax loopholes, and tax cuts for the wealthy doesn’t even stand the test of casual observation.
    See here: http://jessescrossroadscafe.blogspot.com/2011/07/us-is-not-high-tax-corporate-country.html

  20. Ted K writes:

    I should have typed “quality over quantity” in the above comment.

  21. Ted K writes:

    It’s very important to note that Mercatus Center (closely affiliated with George Mason University) is a Koch Brothers operation. A “non-profit” think thank. Tyler Cowen is a “General Director” at Mercatus.

    I wonder what Tyler Cowen’s “non-profit” salary is??? Kids, can you say “bought and paid for mouthpiece”????

  22. rsj writes:

    It’s a great post, but I would like to be more radical.

    From the system level perspective you can think about about capital as a stream of future consumption, and so the ideal or social price of capital should reflect some indifference between present and future consumption.

    But that is all philosophy. Even in the credit-unconstrained frictionless case, each individual household must value capital by means of its resale value versus the present price of consumption goods, which creates all sorts of self-fulfilling prophecies and multiple equilibria. Specifically, it means that capital is not a normal good.

    Take a look at China, in which GDP is growing very quickly, but consumption is growing more slowly, and the consumption share of GDP keeps falling. Those high capital values are merely the result Chinese interest rate policies, and do not represent an enormous stream of future consumption that will be delivered to the Chinese people.

    Markets are not set up to deliver the philosophical price of capital; They can only determine — in the best case — the arbitrage-free price of capital. Only in the case of circulating capital can you argue that the two must be the same. And perhaps over long enough periods, the circulating capital approximation starts to hold and they will be the same. But over any reasonable period, it is a happy accident when the philosophical price and the arbitrage-free price are the same. Disagreement should not be attributed to a failure or subversion of asset markets.

    If I were to point a finger of blame at the most fundamental cause, it would be the combination of tax and regulatory policies that subsidize capital income relative to wage income, combined with a period of secularly falling nominal rates. It seems to me that this is enough of a driver to explain the secular increase in capital prices and the resulting misperceptions of household wealth. I think rising capital prices, together with the pro-capital policies, created an environment that encouraged corruption, rather than attributing the rising prices to corruption.

  23. TC writes:

    Ted K,

    Not a peep out of Cowen on the risk of a global financial meltdown due to the debt ceiling fight.

    You’d think a guy who blogs 4-5 posts a day would find time to notice that there was a non-zero risk of a economic catastrophe due to an arbitrary law. Instead, he complained about the spendthrift ways of the U.S.

    Check this out:

    “There is something in the tone of Cowen’s tagline that suggests an “oops!”, a shrug of the shoulders. Whether he intends that or not, it’s precisely the wrong response to the events of the last decade. “Our” misjudgments were not some random perturbation spiraled out of control. They were the result of a set of arrangements that systematically bribed gatekeepers to make and accept incautious estimates, and to circumvent control systems intended to keep valuations in check. As of this writing, those arrangements remain largely in place.”

    Tyler Cowen does this all the time. I wrote a post about another one of his “oops!” statements that set the blogging world on fire last year. Then, his “oops!” article was about inequality.

    http://traderscrucible.com/2010/12/16/tyler-cowen-weak-opinions-strongly-held-and-blind-in-real-time/

  24. “Despite all these errors, we have no reason to believe that, in real terms, we are unable to consume or produce today at levels suggested by the pre-2008 trendline.” Not so. As Maulden and others pointed out,at the time, expenditures by the American population exceeded income in the earlier part of the decade leading up to 2008. At first this was made possible by very substantial increases in credit card debt then later by second mortgages on the inflated value of real estate. This artificial largess scewed GDP figures to the upside and contributed to a feeling of “wealthier than we thought” That was the 2000’s. In the 80’s and 90’s household incomes went up as the nation transitioned from a largely one earner household to a two earner condition. This one time change propped up the trendline but is now completed and can no longer give it hidden support. Add to this, if you will, slow, but steady, environmental degredation that makes everything more costly-less productive.; and you have a trendline that was artificially optimistic. It can be maintained only by further gimics or actual real increases in productivity and income, neither of which are apparent on the horizon.

  25. Ted K writes:

    Another thing that kills me about Tyler Cowen is he is regularly invited on NPR for his opinions. Here is the Koch Brothers lapdog being fawned over like the rock star by NPR host idiots, when all the while Tyler Cowen, the Koch Brothers lapdog would slice the entire NPR institution in a heartbeat.

    NPR host idiots scratch their heads wondering why they can’t stop the Congressional upsurge every 3–4 years to kill NPR. Gee, I guess when you validate the Koch Brothers lapdog by inviting him to discuss things and fawn over him like he is a Hindu God it’s not to hard to figure out.

    Hey NPR IDIOTS!!!!, you don’t help the guy who is planning your bonfire to collect dry hay at the run-through rehearsal.

  26. Greg writes:

    Thieves assume other people are thieves. He stole America’s wealth, so he assumes all Americans did so, as well.

    No, Mr. Cowen. We did not. YOU did. And Lloyd Blankfein, and others.

  27. fresno dan writes:

    Always enjoy this blog and your insights.
    “But how did this “giant pool of money” come to be? The overestimate of wealth occurred prior to as well as during the investment process, a fact which can’t readily be explained by the Black/Cowen story. There was too much income to be invested, income which took the form not of speculative securities but of money, visible flows of central bank reserves and bank deposits.”

    But I would posit that the giant pools of money are obvious, no? If you leverage 50, or 60 to one, well, there’s your problem. And that leveraged (what a great euphemism for “borrowed”) money really never existed.

  28. Jim writes:

    Good post. I thought you were going to mention that it was primarily artificially low interest rates, held there for far too long, that instigated the bezzle and progagated over-estimation of wealth.

    Actually, I am increasingly mystified by Cowen.