Monday, April 13, 2009

Collateral

Wrote Geanakoplos: “Who can remember the interest rate that Shylock charged Antonio? But everybody remembers the pound of flesh that Shylock and Antonio agreed upon as collateral."

The post is overall somewhat ignorant on just how much literature there had been out there on the importance of collateral and leverage in real economic effects, one canonical piece that comes to mind is Kiyotaki-Moore (1997) JPE "Credit Cycles", predating anything mentioned in the article. The Kocherlakota piece I mentioned the other day also generates bubbles through collateral-based effects.

Macroeconomists do generate a lot of good ideas, however it's often difficult to tell that they are good until after something blows up. Correct me if I'm wrong (I probably am), but if we accept the housing price bubble was a major contributor to this whole mess (as opposed to the notion that the weird-acronym-finance-jazz would've spontaneously combusted anyway), I'm hard pressed to think of other postwar macro events in developed countries where asset prices and household debt played a large role.

POSTSCRIPT: It's the Merchant of Venice, in case you were wondering.

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