I just came back from the SED 2012 in Cyprus (that explains the short blogging hiatus for the last few days). As usual, the SED was a great conference with a lot of new ideas. Anyone, who thinks that the so-called mainstream is monolithic, static and sclerotic should go to this conference and if they do not come back with the impression of a lively, vibrant and stimulating intellectual climate, then… well, maybe then there was no intellect to stimulate to begin with.

I want to point to two papers I particularly liked, first of all because they were very well done (which is no surprise given the authors), but also because they show that mainstream economics is by no means about an economic policy philosophy that favors the rich and the well-connected.

First, there is this paper by Dirk Krüger and co-authors about the implicit bail out guarantees for institutions like Fannie and Freddie. Contrary to what you may think, namely that these guarantees were a way of the Clinton and subsequent administrations to help the poor into their own home, they show in a quite convincing exercise that this is actually a horrible idea from a distributional perspective. First of all – who benefits the most of this implicit (and later explicit) bailout? Mostly the owners of housing-related financial assets, not necessarily the owners of houses, and for sure not the poor, who do not hold such assets. Also, they show that with these bailouts the aggregate housing stock in the economy is lower than in an economy without them, mainly because the housing-related financial assets have a distorted return vis-a-vis the return of houses. This paper is a great example why we need economists: well-meant public policies often have not so easily understandable consequences that again very often are totally against the original intention behind them. Economists are trained to figure this out.

The second paper (which is not available online yet, but stay posted) is a paper by Monika Piazzesi and a team, which she gave as one of the plenary talks: Banks’ Risk Exposures. In this paper they try to come up with simple measures of banks’ total risk exposures, in particular for their derivatives holdings. So, instead of bullshitting about how big and therefore dangerous the derivatives market is and that we need to constrain it, like the feuilleton economists do, Monika just tries to measure what banks actually do with these derivatives. Do they hedge other positions, i.e. reduce other risk exposures, or do they essentially gamble? And indeed, their (preliminary) results are compatible with gambling for the large American banks, certainly not with hedging. To be fair, there are other more benign (for the banks) interpretations of their findings, but the point is: if you want to argue that we need to somehow regulate or even prohibit the derivatives market, isn’t it better to actually do that on the basis of some facts, some data? Monika and team try to give us those. This is the kind of stuff we need, and only the so-called mainstream will be able to give it to us. At least, I have not seen anyone else doing it.

Update: Williamson also reports from the SED.