Saturday, 6 August 2011

"Profitability" In Question

Here is an excellent example of the argument we made in our review of Mishkin and of Bernanke and Gertler, written by another Nobel Prize winner (in 2006 - the Nobel Prize in economics these days is almost a seal of imbecillity!). Here is the piece
http://lecercle.lesechos.fr/economistes-project-syndicate/autres-auteurs/221136803/the-root-of-all-sovereign-debt-crises

As you can see, Phelps (how clever!) says that the sovereign debt crisis can be resolved very easily: simply stop international banks from lending to countries that are "unprofitable" - just as you would with any "enterprise". (Remember that this is the same argument introduced by Bernanke-Gertler - only lend to "genuine" entrepreneurs.)

But this is precisely the question!!  How on earth do you decide what investments will be "profitable" and which will not, particularly in a financial crisis when it is impossible to tell what even the "monetary" value of investments is? 

Some may be tempted to say: "let the market decide (as in "mark-to-market"). But again, what do you do when there is no "market", and in any case it was PRECISELY the "market" that led you to the speculative bubble that led us to the Great Financial Crisis???

I hope you get the point. If you do, you will see why the problem is no longer one of "economic science', but one of "economic politics", of institutions.... And I write this just as a violent riot erupts in North London (not a "financial" riot, by the way).

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