In his Maverecon blog, London School of Economics prof Willem Buiter, whose interesting ideas about what central banks should do in times like these have been getting a lot of attention lately, offers an explanation of why financial markets do that voodoo that they do. They’re manic-depressive–or, to use what Buiter calls a “wimpish medical euphemism,” bipolar:
I don’t mean to imply that those who operate in financial markets are bipolar to a greater degree than those in any other profession, from Amish ministers to zoologists. But if one were to model the aggregate behaviour of financial markets as representing the actions of a representative agent, the choice could only be a heroically bipolar Ayn Randian figure.
An even keel is just an ephemeral, transitional state of affairs between the depth of depression and the height of mania. The mood swings can be triggered by external fundamental events, by sun spots, or be intrinsic – like the rich dynamics of non-linear differential and difference equation systems.
I especially like Buiter’s proposed cure: “a slightly more downbeat version of Aldous Huxley’s Soma.” (Not to be confused with the muscle relaxer marketed under that name.)