Yellen as Fed Chair.
Andre Willers
30 Oct 2013 12h00 US ES time
Synopsis :
Expect aggressive tapering of credit creation . The plug is
going to be pulled . Soon .
Discussion :
Yellen is very guarded , but look at the reflections from
those around her .
Notably her husband , Akerlof . Economics Nobel 2001 :
Lemons : see Appendix A .
Looting of public purse : See Appendix B
Is your parachute in good order ?
Andre
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Appendix A
"The Market for Lemons: Quality Uncertainty and the Market
Mechanism" is a 1970 paper by
the economist George Akerlof.
It discussesinformation asymmetry,
which occurs when the seller knows more about a product than the buyer. A lemon is an American slang term for a car
that is found to be defective only after it has been bought. Akerlof, Michael Spence, and Joseph Stiglitz jointly received the Nobel
Memorial Prize in Economic Sciences in 2001 for their research
related to asymmetric information. Akerlof's paper uses the market for used cars as an example of the problem of
quality uncertainty. It concludes that owners of good cars will not place their
cars on the used car market. This is sometimes summarized as "the bad
driving out the good" in the market.
.
Akerlof's paper uses the market for used cars as an example of the problem of
quality uncertainty. A used car is one in which ownership is transferred from
one person to another, after a period of use by its first owner and its
inevitable wear and tear. There are good used cars ("cherries") and
defective used cars ("lemons"), normally as a consequence of several
not-always-traceable variables such as the owner's driving style, quality and
frequency of maintenance and accident history. Because many important
mechanical parts and other elements are hidden from view and not easily
accessible for inspection, the buyer of a car does not know beforehand whether
it is a cherry or a lemon. So the buyer's best guess for a given car is that
the car is of average quality; accordingly, he/she will be willing to pay for
it only the price of a car of known average quality. This means that the owner
of a carefully maintained, never-abused, good used car will be unable to get a
high enough price to make selling that car worthwhile.
Therefore, owners of good cars will not place their cars on the
used car market. The withdrawal of good cars reduces the average quality of
cars on the market, causing buyers to revise downward their expectations for
any given car. This, in turn, motivates the owners of moderately good cars not
to sell, and so on. The result is that a market in which there is asymmetric
information with respect to quality shows characteristics
similar to those described by Gresham's Law: the bad drives out the good
(although Gresham's Law applies more specifically to exchange rates, modified
analogies can be drawn).
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Appendix B
In 1993 Akerlof and Paul Romer brought
forth Looting: The
Economic Underworld of Bankruptcy for Profit, describing how under
certain conditions, owners of corporations will decide it is more profitable
for them personally to 'loot' the company and 'extract value' from it instead
of trying to make it grow and prosper. IE:
"Bankruptcy for
profit will occur if poor accounting, lax regulation, or low penalties for
abuse give owners an incentive to pay themselves more than their firms are
worth and then default on their debt obligations. Bankruptcy for profit occurs
most commonly when a government guarantees a firm's debt obligations." [8]
Yves Smith argues in her book "Econned" that Akerlof and Romer's
"Looting" theory applies to the subprime mortgage crisis and the Financial crisis of 2007-2010. She argues
that the 'Looted' companies in this case are banks and others who were 'looted'
by certain traders and executives within those companies.[9]
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