The Great Debate UK

from Anatole Kaletsky:

Markets: Exuberance is not always ‘irrational’

A pedestrian holding his mobile phone walks past an electronic board showing the stock market indices of various countries outside a brokerage in Tokyo

With the stock market continuing to hit new highs almost daily despite the appalling geopolitical disasters and human tragedies unfolding in Ukraine, Gaza, Syria and Iraq, there has been much head-scratching about the baffling indifference among investors. Many economists and analysts see this apparent complacency as a symptom of a deeper malaise: an “irrational exuberance” that has pushed stock prices to absurdly overvalued levels.

The most celebrated proponent of this view is Robert Shiller, the Nobel Prize-winning, Yale University economist who is often credited with predicting both the 2000 stock market crash and the bursting of the U.S. housing bubble. Shiller may or may not have deserved a Nobel Prize for his academic work on behavioral economics but as a practical guide to investing, his approach has been thoroughly refuted by real-world experience.

Robert Shiller, one of three American scientists who won the 2013 economics Nobel prize, attends a press conference in New HavenShiller’s status as an investment guru owes much to the timing of his book “Irrational Exuberance,” published just days before the collapse of Internet and technology stocks in March 2000. What is less widely advertised, however, is that for decades, both before and after that predictive triumph, the stock market strategy implied by his analysis has turned out to be plain wrong.

Shiller’s argument that stock prices have been inflated to irrational levels is centered on a statistic called the cyclical adjusted price-earnings ratio, or the Shiller price-earnings ratio. Conventional price-earnings ratios divide the current level of share prices by the earnings estimated by analysts for the year ahead.

from The Great Debate:

Derivative rules: Global problem needs global solution

The 2008 financial crisis demonstrated how interconnected the global financial system is. What began as a real estate bubble fueled by subprime mortgages in many states ballooned into a global financial panic of unprecedented magnitude. Bundles of poorly underwritten mortgages generated toxic derivatives bet on in a global market. When the dust settled, there was broad agreement that not only did we need a new financial regulatory regime, it had to be globally coordinated.

The United States, the European Union, Britain, Japan and other nations should come up with a regulatory regime that works across all borders. This does not have to be the exact same set of rules and regulations, but rather compatible systems, based on a common set of definitions and structures.