Pursuit of Truthiness

my gut tells me I know economics

J.S. Mill (1848) on the Financial Crisis of 2007-8

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In his 1848 Principles of Political Economy, John Stuart Mill gives what sounds to me like a description of the “global savings glut” and subsequent financial crisis of the 2000’s:

By the time a few years have passed over without a crisis, so much additional capital has been accumulated, that it is no longer possible to invest it at the accustomed profit: all public securities rise to a high price, the rate of interest on the best mercantile security falls very low, and the complaint is general among persons in business that no money is to be made…. the diminished scale of all safe gains inclines persons to give a ready ear to any projects which hold out, though at the risk of loss, the hope of a higher rate of profit; and speculations ensue, which, with the subsequent revulsions, destroy, or transfer to foreigners, a considerable amount of capital, produce a temporary rise of interest and profit, make room for fresh accumulations, and the same round is recommenced.

A global savings glut lead to low yields on safe investments like US Treasuries.  Investors chasing high yields turned to riskier investments, especially those which could be packaged as safe- like securitized subprime mortgages.  When the risks were realized, the crisis occurred.  Score one for Mill.

Written by James Bailey

June 15, 2011 at 3:12 pm

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