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TEMPERING THE CREATIVE DESTRUCTION.

Nouriel Roubini and Stephen Mihm collaborated on Crisis Economics: A Crash Course in the Future of Finance.  Book Review No. 27 will be brief and favorable.  It's readable, and intuitive.  Despite that, it clarifies some of the subtleties of complex financial products.  Apparently, there are some conditions under which even a properly-weighted portfolio of subprime mortgages -- one in which there's a conservative estimate of how much principal and interest will be forthcoming to support the gilt-edged tranche -- can be catastrophically undone.  In addition, traders were active constructing portfolios of portfolios, up to some order greater than two, and these were subject even more to relatively small hiccups in the housing market.  Looking forward, the authors suggest that in order for labor and capital markets to foster greater resource mobility and creative destruction, greater government involvement in job retraining, unemployment insurance, and portable health insurance is desirable.  That debate is properly left to other authors.


(Cross-posted to Cold Spring Shops.)

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