Peter Thiel Sparks Debate on “The Money Illusion”

A heated discussion has ensued about Big Think’s interview with Peter Thiel on Scott Sumner’s blog, The Money Illusion. Check it out after the jump.

STATSGUY:

“His message about blaming political power (instead of financial institutions) is somewhat self-serving, given his position as a fund manager. Smacks of Jamie Dimon’s “Don’t Villify Us” mantra. It’s hard to imagine that the AIG division (for example) made its uncovered options bets (”insurance” sales) with the expectation that they would get bailed out if it went south. Fannie and Freddie are more compelling stories, but focusing excessively on these institutions is a convenient way to deflect attention from all the other at-fault factors and players. He’s right about long/short term incentives in publicly held companies, but no one can quantify this. He’s right about hidden leverage – but hidden or not, the problem is probably simply excessive leverage at all. (Think about a multi-player game involving borrowing and investment, and now think about known dynamics like tournament effects in hedge fund awareness, and/or the “winner’s curse” in auction theory.)”

MIKE SANDIFER:

“Thiel essentially says that he has no idea how the recent housing bubble developed. In my mind, there is the simple answer that so many fail to grasp. Granted, few people agree with me, but to restate an earlier idea, the housing bubble and financial sector bubbles developed because almost everyone benefited on the way up. This was especially true of top executives and commissioned employees in the largest banks and other financial institutions. One argument against this idea was that some of these executives lost a great deal of money when their institutions’ stock prices collapsed. Fair enough, but a new study suggests that even these executives earned more than enough money in bonuses to be very profitable after these losses.”

ROB:

“ ‘In reality, Abu Dhabi was probably quite resentful of the shiny and glittering and fake city known as Dubai and when push came to shove didn’t really want to give them more money.’ This appears to have been the truth, and to the extent Abu Dhabi puts more money into Dubai, it will be the actions of an investor buying at fire sale prices, not the actions of a government bailing a firm out. The same would have been true in 2007, if this had happened then, so I don’t think Dubai is symptomatic of a trend. Would Germany bail out a poorer country? I doubt it. Will the USA bailout GM again and again to the end of time? Of course. Anyway, he is not being autistic enough. He is trying to find a story where there is none.”

BONNIE:

“In a political sense I wanted nothing to do with bailing out anyone. But with a little bit of high level knowledge about how many of them ended up out on a limb, it presents a moral quandary and requires more investigation before I can decide who the bad actors really are rather than just painting the whole thing with a broad evil brush. It would have been nice if financial institutions never took the bait but the promise of super-sized helpings of gravy on AAA securities backed by assets that “could never devalue” was just too good of a deal to pass up. It would also have been nice if the massive amounts of capital they dumped into sub-prime mortgages based on the promise of a nearly free lunch had gone to more efficient uses instead.”