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Thursday, September 25, 2008

Why Companies Won't Buy Bad Assets

Mankiw thinks it's because they might be "irrationally pessimistic."

They seem to certainly be pessimistic, but that doesn't make them irrational.  There is nothing irrational, using either the economic or the psychology definition of the term at the micro level, for companies to not want to buy up the value of securities and assets whose values are virtually indeterminate - indeterminate because they are tied up and bundled into complex financial instruments, and indeterminate because of growing general market uncertainty and unease overall.   So if the private market doesn't want to be the first to wade out into the cold water (with the exception of maybe Warren Buffett), the government, who can absorb risk and uncertainty the easiest, will.  

Economists need to start getting away from using terms like "rational" and "irrational" to decide how to "classify" behavior.  Some behavior is gray area - it just IS.  Live with it.  

BTW, Hyman Minsky saw this coming a long time ago, back when economists of Mankiw's ilk were calling him "crazy." 

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