Links to some interesting stuff that I have been reading
- The quiet coup by Simon Johnson. Many others like William Buiter have written about crony capitalism and regulatory capture in the US (I too blogged about it a year ago). But none is as comprehensive, as persuasive and as chilling as this piece by a former chief economist at the IMF and a co-founder of the must-read Baseline Scenario blog.
- Are Stocks Really Less Volatile in the Long Run? by Pastor and Stambaugh. “Conventional wisdom views stocks as less volatile over long horizons than over short horizons due to mean reversion induced by return predictability. In contrast, we find stocks are substantially more volatile over long horizons from an investor’s perspective. This perspective recognizes that parameters are uncertain, even with two centuries of data, and that observable predictors imperfectly deliver the conditional expected return.”
- An old (2006) paper by Edward Altman on bond defaults. Altman argued that the low default rates of the mid 2000s was due to excess liquidity and that default rates were likely to rise back to the long term average as this liquidity receded – perhaps as early as 2007. “But as investment managers like to say, the past is not necessarily a perfect guide to future performance. The question is which past will manifest in the next few years. Will it be the longer patterns of the past 30 years or will the most recent past continue to dominate? I have always believed in ‘regression to the mean,’ and in this case I mean the long-term mean and not the average of the recent past. ”
- Blame Washington more than Wall Street for the financial crisis: transcript of a panel discussion featuring (among others) Niall Ferguson, Nouriel Roubini and Jim Chanos. One nice quote from Roubini: “actually greed in some sense is good, is one of the drivers of capitalism. But we know that greed has to be controlled by three things. By fear of losses, by the fact they should not expect to be bailed out, and by a system of prudential regulation and supervision of the financial system because financial markets without ruling institutions are like the law of the jungle.” And one from Ferguson: “And I move in conclusion, that we should blame Washington more than Wall Street, for this crisis. Not least because in my view, Washington sold itself to Wall Street. And I very much fear, is still in hock to it.”