On Jul 5, 2006, at 2:34 PM, Michael Pollak wrote:
> Fair enough. Cockburn is no economist and clearly this is just
> stopped-clock crisis mongering. If there is a serious downturn,
> you don't get any credit for predicting it if that's all you ever
> predict twice a year for decades.
>
> But just on the theoretical side, aren't there at least two
> reasonably substantial reasons why a large increase in the
> complexity and novelty of financial instruments increases the risk
> of a collapse of confidence? Namely
Maybe, but you don't need complex instruments to do this kind of work - all you need are some heavily indebted entities, or a daisy-chain of obligations in which one link goes bad. Worked like a charm in the 19th and early 20th centuries. A current example: the US mortgage market is characterized by increasingly exotic instruments, but the fundamental fact is that a lot of people have borrowed very aggressively, and in a serious downturn, risk losing their houses and causing serious economic problems. Maybe. Maybe not. But it'd be a mistake to focus on the exotic instruments when the real issue is debt and debt service ratios.
Doug