Category Finance
John Cochrane, Paul Krugman, and Say’s Law, again
Via Casey Mulligan and Karl Smith, here is John Cochrane's response to Paul Krugman. It's a very good response. But there is one part where John Cochrane is definitely wrong. It's small, but important. And it's all about Say's Law, and the crucial difference between a monetary exchange and a barter economy.
Who is increasing their spending – debtors or creditors?
That's the question we ought to be asking right now, but I haven't seen anyone ask it, let alone answer it. I don't know the answer, but I do know it's the right question to ask.
The grain of truth in the Junker Fallacy
I saw an example of the Junker Fallacy recently (it doesn't matter where). You have probably seen it too somewhere. "Investment is low because people (or firms) spend all their savings on speculation rather than investment — bidding up the price of houses, shares, land, or in corporate takeovers; there is no money left over […]
Banks, Money, and Debt
"You and I can only lend money if we've got some to lend; but banks can create money and debt simultaneously at the stroke of a pen". Might commercial banks be the cause of the increase in debt over the last few years? Maybe partly, but basically no. You can't just look at one side […]
Money and debt
Could monetary policy have caused the recent rise in levels of debt? The obvious answer is that loose monetary policy lowers interest rates, which causes people to want to borrow and spend more, and so go deeper into debt. That answer is both obvious and wrong, as I explained in a previous post. Low interest […]
Why did debt increase?
Updated below. I have heard the argument so many times: "Low interest rates caused people to want to borrow and spend, and that's what caused debt to increase". It's such a simple and obvious explanation; only someone with a PhD in economics could fail to understand it. Unfortunately it's also an explanation that makes no […]
We are born with a short position in housing
Felix Salmon has a lovely metaphor that helps me articulate something I've been wanting to say about the risk of buying a house: "In that sense buying a house isn’t an investment, so much as it’s a way of permanently covering your built-in short position when it comes to the shelter market."
Too big a percentage to fail?
Suppose one big bank makes a mistake, and that big bank is 50% of the market? You have a problem. Suppose lots of little banks make the same mistake, and those little banks are 50% of the market? You have a problem. The same problem.
Monetary stability vs financial stability
I want to compare and contrast the pursuit of monetary stability with the pursuit of financial stability. I am talking mainly about Canada, though much of what I say applies to other countries as well.
Too much household debt? Again.
As far as I can tell, the Bank of Canada's Financial System Review (pdf) has basically got it right. At least in the way it is looking at household debt. Provided you ignore the aggregate numbers that make the headlines, and focus on the disaggregated numbers instead.
Worthwhile Canadian Initiative 
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