Back to Minsky again with asymmetry

Says Krugman who wants to prove the financial system failed us. The Minsly moment is the moment when an investor suddenly realizes his long term investments are worth shit. The Minsky models involved differing groups of agents with some speculations about the future . Somehow these moments can occur due to something like incomplete markets and massive build up of speculative animal spirits.

The problem they are trying to understand is framed as this: The sane traders make a sound prediction of the future of some asset(s) based on their knowledge of the past absent any sudden appearance of noise traders. Then the noise traders appear with enough wealth to force the stock down when it should be rising predictably. So the sane traders have to meet higher margin calls, agreeing to their contract to buy the stock at higher prices.

Right away, I ask, if the sane traders had secret, but correct knowledge, then they would only speculate on that knowledge if it was not revealed. If it was revealed knowledge, then speculation does them no good. Absent a speculative position they should be buying the stock, or selling it based on public information and current prices relative to their portfolio.

If they are speculating based on unrevealed knowledge, then they are introducing noise and should expect to see noise traders appear. Their unrevealed knowledge is not complete if it does not take into account their own off-equilibrium trades which result from secret knowledge.

Now lets change the topic and talk about asymmetry and coherence. If I build cars, I have a specific queuing model, mainly: I buy one factory every thirty years, then buy a few dealships every ten years, and the consumer buys one care every five years. Those sample periods are fixed by the technology and the requirement of efficiency of scale. The net result, at equilibrium, is that the inventory of factories, dealerships, and household cars will fluctuate minimally.

The problem is reversibility, how do I unbuy one car factory every thirty years? It can become a factory for another car company, but it cannot become a shopping center easily. The economies of scale is zero bound, I cannot run a car company and temporarily have a negative inventory of car factories. This is a result of coherent animal spirits, and finance must be positive definite to support coherent animal spirits. That is the car dealerships are coherent with the inventory of car factories. To reverse ground and have negative inventory we have to use pre-monetary practices, like inefficient bankruptcy.

The car company might figure out they can have a smooth transition of many stages between the factory and the consumer, essentially have an infinite dimensional production line. In that case, marginal reversibility is possible. But the Animal Spirits are constant uncertainty things, they have to separate queues with finite, non zero distance between them to minimizes measurement interference.

We are a Coherent Quantum Mechanical, Finite Dimensional economy, the Animal Spirits tell me that.

Update:

This paper: The Market: Catalyst for Rationality and Filter of Irrationality by John A. List and Daniel L. Millimet (HT Division of Labor)