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Reading Stiglitz has led me to think about the differences between the real economy and the nominal economy. The real economy is made up of "things you can eat;" the nominal economy is made up of transactions and ownership rights. The issue of banning naked credit default swaps (see Naked Credit Default Swaps - Credit Slips)
is one of protecting the real economy from perverse incentives created in the nominal economy. That said, I do think that futures contracts for pork bellies are very different and very valuable than naked credit default swaps on Greek debt.
Sunday, May 23, 2010
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I've also started thinking about the real versus nominal economy from this week's reading. I really liked when Stiglitz contrasted how the auto industry was treated during the financial crisis with how major banks were bailed out and, as he said, the auto industry "actually produces something". We have definitely been favoring the nominal economy at the expense of the real economy. I'm not sure if its because financial institutions have so much power or because what they do is poorly understood by the general public.
ReplyDeleteI agree with Chloe's point and I think a lot of why we're "favoring the nominal economy at the expense of the real economy" is because of a (perhaps mistaken) idea that banks can produce wealth (through financial advising, interest payments, and planning) and provide liquidity and in that role serves as central to the real economy. In theory the idea sounds nice but in reality banks do so much more than those traditional tasks.
ReplyDeleteTrying to create wealth from these non-real assets seems pretty foolish at this point. Trying to make something of nothing is not going to work. I think all of you above are right on. We need to start investment more in real assets.
ReplyDelete