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July 13, 2012



Whenever one uses homo economicus in a model, there is an implicit assumption that he's prevented from running off with the money, either because of perfect information, or because of a perfect enforcement of the law.

That's the problem with the neoclassical framework. It's full of assumptions that make no sense. The selfish rational maximizer who's so often decried is not the root of the problem, he's only the top of the iceberg.

Luis Enrique

so where are we in this cycle now?

Ralph Musgrave

Boom and bust cycles as described by Walter Bagehot in the 1800s where very much “trust cycles”. E.g. too much trust means people lend indiscriminately. Then it dawns that many of loans are worthless. So everyone makes a dash for the exit, i.e. sells their bills of exchange for cash, and the bust kicks in.

And wouldn’t you know it: we’ve learned nothing. Banks lent indiscriminately up to about five years ago, and then . . . .


@ Luis - my concern (for which there is not yet much evidence) is that we might be about to start a downward move from a highish level, if distrust in banks (MPs, pharma...) starts to generalize.
I've been vague about how long these cycles last - maybe many years.


Interesting post. Have been also wondering if we are heading down a trust cycle.

Trust is at rock bottom in Greece, but apparently has been for many years.

Then again, unwarranted trust is not necessarily a good thing, and perhaps a loss of it is necessary to drive beneficial change.


I still trust a bank enough to have my salary paid in to it and enough that I still expect my bills to be paid and money to be in the cash till.

I do not trust them to do my mortgage/car insurance / savings etc etc which is what they have been trying to move into over the last few years.

If the banking market is open, I would expect banks to be moving back towards things that we trust them to do and other entities to rise that we can trust - the bank of tesco already exists and other things like peer to peer lenders

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