Larry Summers: evaluation

Transcript context

…You’re active on Twitter now. I saw a tweet not long ago. It read something like this. “I’m going to sell all of my Ethereum and double down on VIX . See you in hell.” If you were tweeting back to that person, Ethereum and ICOs seem to be priced very high. VIX seems to be remarkably low for what, at least to observers, feels like a very volatile period in our history, either nationally or globally. How do you think about those asset prices? I don’t know where Ethereum is going. It makes me nervous whenever I see an asset where I think most of the demanders are buying it in the anticipation of selling it to somebody else at a higher price rather than buying it in the anticipation of some use they’ll put it to or some set of cash flows they’ll receive. I tend to be nervous about cyber currencies and in particular some of the more libertarian arguments that are made in their favor. “Governments are known to debauch the regular currencies,” or “this will permit avoidance of excruciating regulation” and the like, I’d be pretty skeptical of. That said, I think blockchains have fundamental technology. There will be winners that come out of its use. Which cryptocurrency it will be I don’t know, but some of what’s said makes me uneasy. With respect to the VIX, first of all, it was up 30 percent yesterday. So whatever anomaly one saw is a lot less anomalous today. Second, the VIX — people tend to underappreciate this. The volatility of the market moves very much with the level of the market. The reason is that if a company has $100 of debt and $100 of equity, and then the stock market goes up, it’s 50/50 levered. If the stock market goes up by $100, then it has $100 of debt and $200 of equity and it’s only one-third levered. So when the stock market goes up, its volatility naturally goes down. And the stock market has gone way up over the last 10 months. That’s a factor operating to make its volatility go significantly down. It’s also the case if you look at surprises. The magnitude of errors in the consensus estimates of company profits or the consensus estimates of industrial production or what have you, numbers have been coming in close to consensus to an unusual degree over the last few months. I think all those things contribute to the relatively low level of the VIX, but those are more in the way of ex post explanations. If you had told me everything that was going on in the world and asked me to guess where the VIX would be, I would expect it to have been a little higher than it is right now. Today, Dennis Rodman offered to mediate between President Donald Trump and the leader of North Korea, Kim Jong Un. You wouldn’t sell yourself as an expert on North Korea, but as an economist, people who’ve negotiated with the North Koreans swear they’re rational. Is your instinct to apply a rational actor model to try and understand what’s going on there? Or do you think it’s more like a version of behavioral economics where other ends are being pursued? [pause]…

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