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Leithner Letter Nos. 167-170
26 October 2013 - 26 January 2014

In short, the delusion of paper riches is working as rapidly in England as it did in America. A young and inexperienced Minister, like a young and inexperienced Congress, may suppose that he sees mines of wealth in a printing press, and that a nation cannot be exhausted while there is paper and ink enough to print paper money. Every new emission, until the delusion bursts, will appear to the nation an increase of wealth. Every merchant’s coffers will appear a treasury, and he will swell with paper riches till he becomes a bankrupt.

When a Bank makes too free with its paper, it exposes itself in much the same manner which a Government does that makes too free with its power; … and there is such a thing as governing too much, as well in a Bank, as in a Government. But nothing exposes a Bank more than being under the influence instead of the protection of Government, and whenever either the property or the credit of a Bank, can be commanded or influenced by a Government, on a Minister, its destruction is not far off.

Thomas Paine
Prospects on the Rubicon (1779)

From financial history and from my own experience, I long ago concluded that regression to the mean is the most powerful law in financial physics: Periods of above-average performance are inevitably followed by below-average returns, and bad times inevitably set the stage for surprisingly good performance. But humans perceive reality in short bursts and streaks, making a long-term perspective almost impossible to sustain – and making most people prone to believing that every blip is the beginning of a durable opportunity.

My role, therefore, is to bet on regression to the mean even as most investors, and financial journalists, are betting against it. … There’s no smugness or self-satisfaction in this sort of role. The competitive and psychological pressure to give bad advice is so intense, the demand to produce noise is so unremitting, that I often feel like a performer onstage before a hostile audience that is forever hissing and throwing rotten fruit at him. It’s hard for your head to swell when you spend so much of your time ducking.

Jason Zweig
Saving Investors from Themselves
WSJ.com MoneyBeat (28 June 2013)

A Reviewee Reviews the Reviewer – Part I

“Why,” asks Ciro Scotti in Robert Shiller Explains Why Economists Won’t Help Fix the Economy (Business Insider, 9 October 2011), “didn’t economists see the financial crisis of 2008 coming? And why in the face of joblessness and a floundering economy are they, in the words of one top economist, ‘unable to be helpful’?” Scotti continues:

Yale economist Robert Shiller [one of the winners of the 2013 Bank of Sweden Prize in Economics in Memory of Alfred Nobel, which is commonly but erroneously called the “Nobel Prize in Economics”] has a very simple answer – at least to the financial crisis question: His colleagues in the dismal science are wearing blinders these days, with most examining only narrow strands of data instead of taking a world view that encompasses other disciplines. Economists are no longer the “worldly philosophers” they once were, argues Shiller. … “The financial crisis that started in 2007 and that continues today is widely taken in the popular press as evidence of a lapse, moral or otherwise, in the wisdom and judgment of the economics profession,” Shiller and his wife, Yale psychologist Virginia Shiller, write in a paper presented to the 9th annual conference of Columbia University’s Center on Capitalism and Society.

“These days,” Shiller said at the conference, which occurred in September 2011, “economists seem to miss things that are important because they’re so busy.” The Shiller-Shiller paper added:

Specialisation coupled with strong competitive pressures within academia leads to a situation in which academics often feel that they just do not have time to ponder broad issues and learn even basic simple facts outside their specialty. Their general knowledge may be embarrassingly limited, and so they may retreat into their own specialty and produce research which contributes in small ways to the development of the field, but fails to pay attention to the larger picture.

To read the entire Newsletter (PDF), click here.

Chris Leithner


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