Regular readers will know I'm a big fan of Robert Shiller's proposal for macro markets - markets in assets that'll help people spread risk.
The absence of such markets is especially irksome now, and not just for the obvious reason that real economic risks seem to have risen. What I mean is that a market in a labour income security - an asset linked to the net present value of labour income, as shares are the NPV of profits - would shed light on at least three interesting questions now:
1. What's the effect of higher commodity prices? The conjunction of record-high commodity prices with low PE ratios could be read as a sign that markets now agree with David Ricardo, who pointed out back in 1814 that rising prices of raw materials would squeeze profits. But what impact will it have on labour incomes? To Ricardo, this was a non-issue as he thought wages tended towards subsistence. But it is an issue now. And if we had a market in labour income, we'd at least see what the market had to say about this.
2. Why are house prices falling? The glib view is that it's because a bubble's bursting. But could it also be because expectations for long-term labour income are falling? Again, if we had a labour income market, we'd get an idea.
3. What will be the real impact of the credit crunch? Clearly, it's hitting share prices. But is this because investors expect lower long-run profits growth as tighter finance crimps otherwise good capital spending? Or is it just because the crunch has raised risk aversion? Again, a market in labour income might shed light.
Of course, such a market might will be bedevilled by the same problems that (arguably) afflict stocks - excessive volatility and over-reaction. All I'm saying is that the absence of such a market doesn't just deprive people of a useful means of spreading risk. It also deprives us of valuable information.
In light of the collapse of Bear Stearns and various hedge funds, it's easy to forget one thing - that the real scandal about financial innovation is not that there's been too much of it, but that there's been nothing like enough of it.
We had a labour market. This was denegrated by the Labour Party introducing the minimum wage. To counteract the effects of their actions they allowed, via a third party(the EU), immigration to debase said minimum wage, so they behaved as the market predicted. Except it was called something else.
Succinctness, dontcha love it?
STB.
Posted by: ScotsToryB | March 17, 2008 at 05:49 PM
Chris,
You haven't yet explained why these markets don't exist. Could it be, that nobody trusts that these markets would actually deliver (i.e. the time difference between payments and claims is so great that nobody trusts the counterparty to still be there, or to be honestly accountable.) This is a general problem with private insurance markets.
Posted by: reason | March 18, 2008 at 02:26 PM
Reason - that might be one reason. I gave some others here:
http://stumblingandmumbling.typepad.com/stumbling_and_mumbling/2006/08/shillers_clueba.html
Remember - you could have asked in 1980 why stock index futures didn't exist, even though they were obviously a good idea. Maybe these things just take longer than we appreciate.
Posted by: chris | March 18, 2008 at 04:23 PM
eh porco dio...
Posted by: gino | March 19, 2008 at 03:01 PM