A profile of John Geanakoplos works’

WSJ has a very interesting article profiling the works of John Geanakoplos of Yale University. I had posted about his work sometime ago. The moment I read his work, I was like wow. Drawing insights from Shakespeare’s Merchant of Venice, he shows the importance of collateral in a financial cycle. And he went about explaining the model to people but was ignored. Now, he is getting his share of pie.

The article also reviews the economic modelling history and how it is going to change:

Mr. Geanakoplos has yet to develop his theory into a comprehensive model. “His work assumes that the leverage cycle is bad, but gives little guidance [about] to what extent regulators should control it,” says Markus Brunnermeier, an economist at Princeton who specializes in financial bubbles. (Read a related article.)

The goal for economists now is a model that takes account of what happens in the financial sector, yet is simple enough to apply in policy making. The quest is bringing financial economists — long viewed by some as a curiosity mostly relevant to Wall Street — together with macroeconomists. Some believe a viable solution will emerge within a couple of years; others say it could take decades.

Coming up with the right model could force economists to move away from the ideas of efficient markets and rational expectations on which much of their current work relies. “If that happens, that will be a change of enormous proportions,” says Martin Eichenbaum, a professor of economics at Northwestern.

Mr. Geanakoplos is convinced such a paradigm shift is under way. He hopes it will prove beneficial in protecting people from the excesses of the financial markets. To that end, he believes central bankers should collect and publish data on the amount of leverage in the system, and intervene if it gets out of line.

Right now, that would require the Fed to step in where banks fear to go by lending against risky assets such as mortgage bonds, but it would also mean limiting investors’ ability to use leverage in exuberant times.

“Our policy seems geared largely toward rescuing banks and bankers,” Mr. Geanakoplos says. “If we could manage these cycles better, I think we’d all be better off.”

Toqrads the end, there is brief profiles of important works of economists that help us understand the current crisis:

In the wake of the worst financial crisis since the Great Depression, economists are racing to provide policy makers with the tools they need to avert a repeat — a process that some believe could require a revolution in economic thought. In doing so, they are building on the work of colleagues who saw early on the dangers presented by an unstable financial sector. Here are some of the people who did the early work, and who are now using it to build new models of the economy.

  • Bernanke and Mark Gertler
  • Nobuhiro Kiyotaki and John Moore
  • John Geanakoplos
  • Hyun Shin and Tobias Adrain
  • Markus Brunnermeier, Lasse Pedersen and Yuliy Sannikov

There also links to the key works of these economists as well (most are paid though). Excellent stuff.

 

2 Responses to “A profile of John Geanakoplos works’”

  1. A profile of John Geanakoplos works' « Mostly Economics Economic Finance news Says:

    […] Read the original:  A profile of John Geanakoplos works' « Mostly Economics […]

  2. A profile of John Geanakoplos works' « Mostly Economics Economic Finance news Says:

    […] Go here to read the rest: A profile of John Geanakoplos works' « Mostly Economics […]

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