“ One look at this chart should be sufficient to understand why the Great Crash of 1929 was both great, and a major cause of the Great Depression which followed it, and why levered speculation, rather than rational calculation, dominates the behaviour of asset markets.”
I’m kind of curious what the system response (of housing prices) to a deceleration of interest rates. If price changes reflect acceleration of home loan interest rates, how does a deceleration propagate into the economy? The US economy is built upon the housing sector. It plays an outsized role in economic health.
“ Finance, and banking, and macroeconomics, are therefore integrated topics: they cannot be treated as separate domains, as Neoclassical treats them. My focus in this book is on how macroeconomics and the theory of banking need to be overhauled, and a similar overhaul is needed of finance theory.”
“ I won't attempt that here, but fortunately, that process has been started by a group of mathematicians in the London Mathematical Laboratory. They are developing what they call "Ergodicity Economics" to replace the existing theory of finance.”
“ Sharpe continued with a half-hearted defence of these manifestly false assumptions, using a distorted rendition of Friedman's methodological claim that a theory cannot be tested by its assumptions (Friedman 1953):
.. However, since the proper test of a theory is not the realism of its assumptions but the acceptability of its implications,..”
really, wrap your heads around mainstream economics dept. They count themselves scientific
Keen’s current chapter offers another example of how micro is mapped to macro by mainstreamers. It’s a headachy example of how backwards mainstream “tricks” are.
It’s an abuse of the math trick of mapping a unsolved problem to a solved one. absolute cringe Instead of doing proof of a map, they just pull it out of their asses in assumptions.
“ The technical term for a process whose average across space is the same as its average across time is that it is ergodic. The fact that as simple a process as tossing a coin is non-ergodic shows just how rare ergodic processes are in economics. And yet, as Peters observes, Neoclassical economics makes "an indiscriminate assumption of ergodicity":
In all debt crises, it’s the fall in prices, because the economy slows down, that precipitates much of the damage. It magically renders perfectly “good” productive capacity less valuable or worthless.
This is a by product of lending itself, and of commodification, when non monetary assets are collateral and nothing necessarily intrinsic over the “value” or maybe I should say the use value of the property.
I’ll be aggressive and say financialization itself is an existentially dangerous dynamic for a civilization. It’s crack mixed with fentanyl and other opiods.
“ What became known as the "Capital Asset Pricing Model" or CAPM, after Sharpe's … "Capital Asset Prices: A Theory of Market Equilibrium under Conditions of Risk" … argued that a company's share price should simply reflect the rationally anticipated net present value of the income stream from the assets owned by the company. ”
I see the flaw right away: “rationally anticipated” both a joke because markets are not, and it’s rational to play that irrationality.
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“ In order to derive conditions for equilibrium in the capital market we invoke two assumptions. First, we assume a common pure rate of interest, with all investors able to borrow or lend funds on equal terms. Second, we assume homogeneity of investor expectations: investor are assumed to agree on the prospects of various investments-the expected values, standard deviations and correlation coefficients. (Sharpe 1964, pp. 433-34.)
Oh yes, let’s also not forget Black-Scholes assumptions
“ Any mathematical model of reality relies on simplifications and assumptions. The Black-Scholes equation was based on arbitrage pricing theory, in which both drift and volatility are constant. This assumption is common in financial theory, but it is often false for real markets.”
“ Therefore, credit is a major component of the demand for assets, and particularly for housing. We need a model of asset pricing that includes the role of debt. Given the growth in levered speculation on house prices over the last thirty years, this is especially needed to explain house price dynamics.”
Especially relevant to the US housing crisis. Post WWII, home loans were engineered to power the US economy from war footing.
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It powered the rise of the middle class, but was in essence a ponzi scheme. Decades on, the US has been subject to housing related financial crises about every 8 to 12 years.
The same methods have been deployed in other countries like Australia.
“ Treating the rates of change of and HQ as negligible, this implies that the rate of change of house prices is related to—and largely driven by—the acceleration of mortgage debt:”
Interesting, the acceleration in debt itself. Consider the Fed’s policy on interest rates.
Here is a direct relation of interest rates causing inflation.
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