walkitout (walkitout) wrote,

From _13 Bankers_

I've complained about people who talk about the housing bubble and act as if bubbles are a pricing phenomenon, and if the prices stay low then there wasn't a bubble (yes, you, Zoned Zone/Flatland inventor), when any reasonable definition of bubble has to include over-supply as well as inflated asset prices. But really, it's a larger problem.

Just like economists (based on a damn small sample size) have this weird prose style that involves inappropriately mixing metaphors, economists also have this Theory of Reality that veers off so sharply from my Theory of Reality that I just stop cold and go, what? Here's the latest example:

p 122:

"While investors might demand a high rate of interest to invest in an airline route from Los Angeles to Shanghai, they might accept a lower rate if that route were packaged with an option to buy oil at a cheap price in the future. [This makes _perfect_ sense to me. Southwest Airlines bought options on oil that matched how far out they sold plane tickets. They couldn't get boxed into a situation where the already-old-ticket wouldn't cover their costs. But no, here's what the economist says:] (If oil prices rise, hurting demand for long-distance flights, the option will increase in value.)"


In _my_ reality, if you package an oil option with an airline flight, it's _so you can continue to run the flight at a price people will pay even if oil does a rocket launch_. In Johnson/Kwak Reality, the oil option is there to console the investors, whose airline route died a horrifying death.

Does anyone else see a problem with this? Just to be clear, YES, it makes sense for an investor to want a consolation price. _I GET THAT._ But if you think that way all the time, after a while, you stop caring whether the pork bellies you are buying and selling are actually edible (you know, *bacon*). You don't care about the reality of raising pigs (which will eventually cause you problems when someone decides to actually regulate your shit pools.). It's all just numbers.

And I actually do understand at least some of the theory behind all this. The numbers are only right if people are really thinking through the underlying reality and acting, you know, rationally. If people start ignoring reality, the numbers can just float off into the ether.
Tags: economics, not-a-book-review, politics
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