Tuesday, March 29, 2005

Soft landings

"For the third time in five weeks, bond markets have weakened to face the bad, if not terrible news. They are cooling down, not melting down." This from "American bond markets: A sated appetite" in The Economist, March 26.

Prices are supposed to move to clear markets and usually do. That's the good news. When prices move precipitously, for whatever reason, things can go bad. Soft landings vs hard landings -- and all the talk of "bubbles" that might "pop".

Comparative static analysis, by definition, has almost nothing to contribute. Whether dynamic analysis can be helpful is still unknown.

What is known is that in the world beyond economic theory, modern capital markets and modern information markets work to limit the frequency and the impacts of surpises. Once again, the real news is that spontaneous innovation and ingenuity are everyone's best bet.