Wednesday, 4 March 2009

Economic Sociology on the Financial Crisis

Fred Block traces the evolution of the sub-prime crisis in this very clear exposition of the problem. Donald McKenzie of Edinburgh University makes the key point that the subprime mortgage crisis was a relatively small and localised part of the financial system - what set off the spillover effects was the collapse of faith within the investment world in the 'public facts' that had been shared until then.

There are a selection of European economic sociology perspectives in the latest issue of the online newsletter Economic Sociology.

An earlier issue in 2007 also examined various issues to do with the sociology of credit, finance and investing.

2 comments:

James said...

Interesting to not that Willem Buiter, in his scathing assesment of the state of macroeconomics, says:

"The future surely belongs to behavioural approaches relying on empirical studies on how market participants learn, form views about the future and change these views in response to changes in their environment, peer group effects etc."

Sounds pretty sociological, no?

Link here: http://blogs.ft.com/maverecon/2009/03/the-unfortunate-uselessness-of-most-state-of-the-art-academic-monetary-economics/

Aaron McDaid said...

"the subprime mortgage crisis was a relatively small and localised part of the financial system - what set off the spillover effects was the collapse of faith within the investment world in the 'public facts' that had been shared until then."

That is perhaps a little misleading, and I think the linked papers are in danger being misinterpreted here. There is nothing particularly psychological about this crash ("collapse of faith"). I'm not really sure what Sean is trying to say here. Is he saying that the economic would be fine, but for some irrational fears? If he's not saying that, then I apologize; I'm just concerned that some social sciences tend to rely on private intellectualizing as a substitute for grappling with the facts.

The boom was certainly fueled, in part, by irrationality and economic ignorance; but the bust is as rational as any economic behaviour. Alcoholism may be caused by depressing thoughts, but you can't repair your liver using psychology alone.

The balance sheets of individuals, businesses, banks and governments in much of the developed world were in a rancid state before US subprime became headline news. When any Ponzi scheme collapses, the most recent entrants to the pyramid are the first to feel the pain. But anybody that bought into a pyramid scheme is a fool, even a 'prime' borrower paying half a million euro for a shoddy half-built box in Dublin.

The troubled "assets" have already defaulted. Many of the AAA-rated CDOs have practically no income. The upshot of this is that today's low bank share prices are not the result of panicky concerns about future incomes but are based on sound consideration of current incomes.

This crisis did NOT start with US subprime mortgages. That was simply the initial symptom of the serious disease that was eating through our entire economy for five years or more.