When Markets Collide

When Markets Collide is the title of a quite well-written book by Mohamed el-Erian, an economist who worked at the International Monetary Fund for 15 years, and has since worked at Salomon Smith Barney, the Harvard Management Company, and PIMCO.

(Gee, he can't keep a job, can he?)

I read large chunks of it during my train rides Wednesday, from Stratford CT to Manhattan in the morning and back the other way in the evening.

Love that spinning top cover art. The "equator" of the globe presented as a top is considerably to the north of the actual equator, though. the pseudo-equator seems to pass through the Yucatan peninsula.

More seriously: I don't agree with the author's Keynesianism in macro-economics but ... disagreement is why they run the horse races.


I appreciated his summary of theories about the "market for lemons."

Used cars are a product with non-obvious defects. Consumers are aware of this, of the danger that they'll end up with a lemon, but they sometimes do have to enter this market anyway. With what result?

With the result, as el-Erian tells it, that perfectly fine non-lemons end up selling for a price less than they would were accurate information more generally available and appreciated. The fear of a lemon forces a discount on the whole second-hand jalopy markets, and some people get non-lemons cheap.

I suppose something like that was the theory behind early versions of the TARP [Troubled Asset Relief Program]. The troubled assets on banks' books include, to simplify considerably, the rights to the flow of money from mortgaged homeowners. Some of these homeowners are "lemons." They'll likely default. Others won't default, though, and the troubled banks might under ideal circumstances sell the rights to the good mortgages for significant chunks of needed cash. But as with cars, the taste of the lemons infects the non-lemons.

But this still leaves us with the age-old question durected by citizens to those who would govern them: "Why do you think you're smarter than us?"

Why are the administrators of the TARP presumed to be better at deciding what is or isn't a lemon than the private sector?

I'll say no more, but parts of this book do help frame the discussion nicely.