Thursday, 30 April 2009
Case in point: according to the headlines of most of the major newspapers I read on a daily basis, the biggest threat swine flu is posing to the world is the damage it is going to cause to the economy. So we've got a potentially massive public health emergency, and I'm reading about how this will affect airlines stocks. Hmm.
It's time to re-evaluate my daily news-gathering routine...
Sunday, 26 April 2009
Wednesday, 22 April 2009
- Many high street stores selling goods that no one wanted to buy have
closed, prompting art galleries and other edifying enterprises to move in to the
vacant sites. Alas, all these shops peddling tawdry knick-knacks will be back
with us again.
- Dinner party talk of house price rises will return. People will no longer
be ashamed of being estate agents. Sons and daughters will again want to go into
investment banking rather than eco-farming.
- Service blossoms in a downturn. Waiters wait, usherettes usher, doormen
open doors. GDP growth = general grumpiness.
Monday, 20 April 2009
Gillian Tett - Financial markets: the case for radical intellectual overhaul
The Economist's backgrounder on South Africa's next president, Jacob Zuma
Esther Duflo outlines the basics of AIDS prevention: abstinence vs. risk reduction, with findings based on actual field work.
Cyprus - more divided.
Matt Taibbi asks the (*shudder*) teabaggers some questions
The promise of cheap genome sequencing
Friday, 17 April 2009
...anyone who understands the efficient market hypothesis knows it is a long-run equilibrium condition, which means deviations from equilibrium (bubbles) can and do occur. Does it predict them, no? But it is not the scope of EMH to describe and predict short-run deviations.
So there you go - I was using a poor example. But the main argument of the post still holds.
Tuesday, 14 April 2009
I've been thinking a lot lately about the political theory of an independent central bank....There's little doubt in my mind that if we had not had an independent central bank, unemployment would be many percentage points higher, GDP would have contracted much more strongly, and we wouldn't now be making optimistic noises about the thing bottoming out....I confess that I am not a diehard libertarian and so this kind of thinking leaves me a little stunned. I don't believe that monetary policy should be any more influenced by popular opinion than heart surgery - it's an incredibly complicated task and belongs in the realm of experts. I am perfectly willing to admit that the experts can be wrong, but they are likely to be less consistently wrong than the population at large. Besides, there's a reason why we have checks and balances.
I think that the political process will hopelessly screw up the management of this crisis (something which libertarians are perfectly able to see when the government screwing things up is a left-wing populist one in Latin America). But maybe The People, God bless them, deserve to screw up their economy if they want. On principle, I am opposed to saving people from themselves. And anyway, maybe I'm wrong and the wisdom of crowds will prevail.
On the other hand, do they have a right to screw things up for everyone else? Should a populist 60% be allowed to plunge their neighbors deeper into crisis? In the case of America, to plunge the whole world deeper into crisis?
The uncomfortable conclusion I'm coming to is that yes, they should. Ben Bernanke should be hamstrung even though it's likely that this would make everyone worse off. And people who advocate for ending the independence of the central bank should be willing to accept all that this entails: inflationary monetary policy (the people love inflation!), bad and unpredictible banking policy, the collapse of the US economy. I just wish I didn't have to go along for the ride.
Let's revisit this sentence: "Ben Bernanke should be hamstrung even though it's likely that this would make everyone worse off." That's an awfully big leap of princple. I guess Megan thinks economic policy is like Voltaire's free speech: she disagrees with your policy prescriptions, but will defend your right to implement them to the death (of the economy). Call me an elitist, but I'm not convinced.
So maybe there are really good arguments for why the Fed has too much autonomy. But there's an awful lot of wiggle room between a fully independent central bank and a collection of monetary policies decided by direct democracy. And the number of times I've seen Ben (or Hank, or Tim) sitting in front of a collection of Congresspeople that are grilling him with questions suggests to me that he's not that politically isolated.
What think you?
UPDATE: In a rather creepy coincidence, Patrick at zzzeitgeist is thinking pretty much the exact same thing.
Polish Finance Minister Jacek Rostowski was careful to point out that the credit line would be treated as a "supplementary reserve" for the central bank, rather than "emergency funding."
Monday, 13 April 2009
Much of modern financial economics is based upon a set of assumptions that can be broadly labeled the efficient markets hypothesis (EMH). While not universal, the EMH forms the core of most financial modeling and is the foundation of a great deal of wealth creation in the last couple of decades - at least, it was. The three basic assumptions of the EMH are:
- markets allocate resources most efficiently
- liberalized markets will enhance the overall welfare of society, and
- given the opportunity, market actors will converge on the "correct" economic outcome
Stronger versions of the theory claim that market prices accurately reflect the fundamental values of corporations and thus cannot be improved upon. In other words, when a share in Company X is worth $50, that price is based upon all the available information about Company X. And if the price of a share in Company X is worth $0.50 the next day, that's because investors responded (rationally!) to new information, nothing more. Even though nobody actually believes that ALL investors are rational, it is assumed that capital markets are close enough to the ideal to allow rational investors to prevail.
The EMH is used in academia primarily for modeling discipline, but the theory also underpins many of the models and tools used by Big Finance. Unfortunately, it appears as though the beautiful simplicity offered by models of market rationality can lead to some pretty disastrous consequences. For example, Felix Salmon has a great piece on the formula that killed Wall Street. The article tells the story of how a mathematical model was developed which appeared to take the risk out of pricing risk. The formula explicitly assumed a strong version of the EMH and it spread like "a highly-infectious thought virus." All of the qualifications about the limits of model were buried under the stacks of money that this little formula was earning for financial executives. This is definitely worth reading.
But what's the problem with EMH, anyway? For one thing, it's tautological: how do you define the correct, most efficient economic outcome? If the answer is: "the outcome achieved by perfect markets," you're back where you started. The EMH appears to simultaneously assume a) a non-determined process driven by human choice, and b) that this spontaneous process is working towards some final end which is somehow "correct." Willem Buiter puts it more colourfully, as usual:
The efficient markets hypothesis assumes that there is a friendly auctioneer at the end of time - a God-like father figure - who makes sure that nothing untoward happens with long term price expectations or (in a complete markets model) with the present discounted value of terminal asset stocks or financial wealth.
What this shows, not for the first time, is that models of the economy that incorporate the EMH - and this includes the complete markets core of the New Classical and New Keynesian macroeconomics - are not models of decentralised market economies, but models of a centrally planned economy.
Put that in your efficient markets pipe and smoke it! Whether the fallout from the financial crisis will shift the balance towards more behavioural models of economics remains to be seen. At the very least, the crisis has forced a critical re-examination of the assumptions underlying modern finance; a re-assessment of what we thought we knew. That can only be a healthy thing.
(photo of the friendly auctioneer at the end of time from Wonder's photostream)
-China has turned it's increasingly assertive foreign policy to South-East Asia this week with the announcement of a $10bn investment fund for Asean countries. It will also provide $15bn in credit over the next three to five years.
-Thailand's state of emergency is weighing heavily on the baht, while ratings agencies have warned of downgrades to the country's credit rating.
-The UN Security Council has agreed on a statement condemning North Korea's missile launch and calling for the tightening of existing sanctions.
Sunday, 12 April 2009
-Japanese Prime Minister Taro Aso announced a new, Y15,400bn fiscal stimulus package.
-All criminal charges against Jacob Zuma are dropped, clearing the way for the ANC head's election to the presidency later this month.
-An East Asia summit is cancelled as Thailand stands on the brink of "revolution." Elsewhere, tens of thousands of protesters rallied in the Georgian capital of Tbilisi for Saakashvili's resignation.
-An earthquake killed at least 250 people in Italy, leaving near 20,000 others homeless.
-Wells Fargo stunned Wall Street with a profitable Q1 2009, contributing to the fifth straight weekly gains for US stocks.
-The FT ran an interesting article on Japanese bank Nomura's move towards more "western-style" contracts for employees.
-Underlining the collapse of trade in Asia, Singapore's GDP "probably" shrank for the fourth straight quarter, the deepest recession in the country's history.
-In Europe, Barca looked unbeatable in their thrashing of Bayern Munich, a sublime Adebayor goal put Arsenal in the driver's seat and Chealsea stunned Liverpool at Anfield.
-A Reuters piece asks, "Is America's love affair with the 'exurbs' over?"
-Art prices fell 35% in Q1 2009.
Saturday, 11 April 2009
Friday, 10 April 2009
Under a gold standard, the amount of credit that an economy can support is determined by the economy's tangible assets... [but] in the absence of the gold standard... there is no safe store of value," Greenspan wrote back then, pointing out that, without a gold standard in place, there is little to prevent governments indulging in wild credit creation. "Deficit spending is simply a scheme for the confiscation of wealth. Gold stands in the way of this insidious process. It stands as a protector of property rights.
Wednesday, 8 April 2009
"I cannot condone violations of our sovereignty even when they are done by allies and friends. We would much prefer that the US share its intelligence and give us the drones and missiles that will allow us to take care of this problem on our own."
Give you drones and missiles. Um, no.
-Cyberspies (China, Russia) have reportedly infiltrated the US electrical grid, reflecting a growing consensus in the intelligence community that cybersecurity will be one of the flashpoints of the 21st century.
-From the serious to the absurd: North Korea has accused the South of poisoning its footballers with "adulterated foodstuff" ahead of South Korea's 1-0 World Cup qualifying victory last week. North Korea also maintains its "satellite" was successfully launched into orbit over the weekend, while back on earth everyone agrees a satellite-less missile now rests on the floor of the Pacific.
-According to Reuters, the US government will delay, if release at all, the results of its "stress tests" on the US banking sector. It reportedly wants to avoid negatively affecting first quarter earnings announcements.
-US Secretary of Defense Bob Gates makes good on his call to overhaul US defense spending, contracting and strategic priorities. He must now contend with the congressional/special interests outrage.
Adebayor's second half stunner, fed by a sublime 40-yard pass from Fabregas, defied the laws of physics, salvaged a key away goal for an Arsenal side that was completely "out-Arsenaled" by the attacking Villareal, and positioned the Gunners to reach the Champions League semifinals for the first time since 2006.
Enjoy. (0:55 mark begins the replays, wait for it)
I would imagine that the more senior finance executives are also eyeing academia as an alternative source of employment - in fact, for many it would be a return to the type of work they were doing before being lured away to Wall St. by the massive salaries.
And in case there was any doubt that the government needed the human capital, check out a recent podcast of This American Life. In Act Two, they tell the story of what exactly happens when the FDIC deals with a bank failure (something that's happening at the rate of two per week these days): scores of federal agents swoop into the bank's HQ to seize all the money, computers and paperwork, inventory everything, then turn the good bits over to the bank's new owner. All in complete secrecy, and all over the course of a weekend. It's a fascinating listen.
UPDATE: here's a clip from 60 minutes that tells the same story, only with moving pictures! (13 min.) Thanks to George M. for the pointer.
Monday, 6 April 2009
In a tearful interview with ABC News, Stanford said of flying commercial, coach to be exact, for the first time in two decades after authorities seized his private aircraft,
"They make you take your shoes off and everything, it's terrible."
Stanford followed this memorable line with a threat to punch his interviewer in the mouth.
Sunday, 5 April 2009
-The G20 reached deals on IMF funding, tax havens and trade finance. Bretton Woods it was not, but a productive start?
-North Korea launches an intercontinental ballistic missile (er, satellite), world condemns and an emergency security council meeting is called for Sunday at the UN.
-NATO agrees on a troop surge to Afghanistan, Rasmussen for Secretary-General.
-Mexico became the first country to seek access to the IMF's new no-strings-attached lending facility.
-The ECB cuts rates again and Trichet signals the possibility of unconventional measures to come.
-The mark-to-market rule is amended in the US, financial stocks soar.
-In the Prem, Liverpool go top, Fab and Adebayor solidify Arsenal's hold on 4 in their return to action, while Shearer's big return to Saint James' Park is business as usual for the Magpies.
-Honda's new robotic helmet reads your mind. Matrix or Terminator?
-An Antarctic ice bridge the size of Jamaica has snapped.
Friday, 3 April 2009
But if you think that's sad, imagine how you'd feel if you ran one of the 41,798 blogs that ranked lower than we did.
As the bankers offered various justifications for bonus payments and executive compensation, the president reportedly responded, “Be careful how you make those statements, gentlemen. The public isn’t buying that.” He followed by letting them know exactly where they stood in the current crisis,
"My administration is only thing between you and the pitchforks."
And boom goes the dynamite.
Berlusconi is hilarious. By all accounts, the guy shows up late to the G20 (prior conference commitment in Rome), hangs around with little impact, slides his way into what is surely the most widely circulated photo of the conference and then annoys the Queen.
And this guy hosts the G8 in July. I can't wait.
Thursday, 2 April 2009
Read the article, its worth all the details, but I'll sum it up by saying it ultimately took a late night meeting between Sarkozy and Hu at the French president's hotel, and a last minute intervention by Obama, to smooth over the differences.
All sides are backing the account of Obama's last minute intervention; it seems the young US president is making good on his promise of a new era of US leadership.
Institutions such as the International Monetary Fund face a novel task: to protect the periphery countries from a storm created in the developed world. Global institutions are used to dealing with governments; now they must deal with the collapse of the private sector. If they fail to do so, the periphery economies will suffer even more than those at the centre.Soros then goes on to point out how differing perspectives about the financial crisis on both sides of the Atlantic threaten to derail any substantial progress in upgrading our international financial institutions. But he's only telling one-half of the story.
Yes it's true that the IMF needs more resources, but it also needs customers. The problem is both the stigma attached to countries that go to the IMF cap-in-hand and the strings attached to IMF loans. These are two of the mains reasons why the East Asian economies have built up very large currency reserves: applying for an IMF loan is punished by market actors that interpret such activity as a sign of weakness (not prudence), and is "punished" by the IMF in the form of disruptive policy reforms.
Recognizing this problem, the IMF has just launched a new Flexible Credit Line (FCL) that is specifically designed for "countries with very strong fundamentals, policies, and track records of policy implementation." It has considerably fewer strings attached and is aimed at being a precautionary tool, rather than a last resort. But the optics problem remains and countries are reluctant to apply.
Until yesterday, that is. Mexico is seeking $47 billion under the FCL to act as a buffer against the fallout from the financial crisis. In other words, Mexico has bravely volunteered itself to test how the market will react to the IMF providing pre-emptive financial assistance to a country that has their "strong fundamentals" stamp of approval. Has the financial crisis caused such an upheaval in the market mentality that this prudence will be rewarded? Or are serious investors unconvinced of Mexico's "fundamentals" and going to punish it just like old times?
-$750bn increased funding for the IMF ($500bn in new loans, $250bn creation of a new special drawing rights facility)
-$250bn in trade finance
-OECD to publish list of tax havens to "name and shame"
-Hedge funds will come under the direct supervision of national regulators
So, where do we stand? Well, the Europeans seem to be the big winners. The EU got its tax havens/hedge fund regulation, increased IMF funding and international trade support. We have no "grand bargain" on global financial regulation, but that was always as unlikely as a stimulus commitment. Sarko's showmanship seems to have worked; another successful summit for the great Summit Sarko.
I must say that the US/UK largely failed to obtain its priorities, especially a global commitment on fiscal stimulus. In his closing presser, Brown boasted of historic interest rate cuts and a global fiscal stimulus. But this was a classic summit tactic of framing actions already taken by national governments in the context of the summit consensus; when, in fact, no such consensus exists moving forward.
We will have much more to say about the G20 communique once we dive into the details. But initially, the agreement does seem pretty unremarkable, and the global fault lines appear as deep as they were heading in.
Wednesday, 1 April 2009
While breaking the news of a brilliant bit of political gamesmanship by UK Prime Minister Gordon Brown at the EU Summit of March 19-20, Barber eloquently expressed a similar sentiment. He calls newspapers the "first draft of history", while blogs have the special responsibility of providing the "second version", as he has done with his Brown story.
Barber managed to state clearly what I often struggle to properly express: that newspapers still matter. While clearly a medium in decline, its collective reputation, access and quality of reporting is still unmatched. Noone can consistently break the news like print media, and I include the websites of these publications in that category (the convergence of print/online staff, resources and editorial coverage has accelerated in recent years). You can find better analysis and insight in the blogosphere (like at, say...IPE Journal). But until the official press corps' in world capitals incorporate more non-traditional sources (perhaps President Obama calling on Sam Stein of The Huffington Post at his first press conference was a breakthrough), newspapers will continue to craft the "first-draft" history.
And I may be too nostalgic, but there is still something so familiar, romantic even, about holding my Financial Times in the morning. It appeals to your senses in a way digital media cannot. I come from a family of newspaper and radio men and women, and I still cling to these media, while embracing the progress of the digital age. I hope this delicate balance is sustainable, but I fear it is not.
On Tuesday, the Unemployment Olympics were held in New York City. The "games" were organized by Nick Goddard, a 26 year-old unemployed computer programmer, and featured events like the "Fax Machine toss" and "Office Phone skee-ball."
While the organizer hopes this will be the first, and last, Unemployment Olympics, I have started training in earnest for 2010...just in case.
Attacking the "tax incentives for new cars" schemes being adopted in many countries, and more specifically the marketing-as-environmentalism justification for the schemes, he says,
"This artificial shortening of the economic life of a car seems nuts. It’s worse than getting paid to dig holes and fill them again. It’s like being paid to burn down your house to encourage the residential construction industry. In Iceland, where economic calamity has befallen a population that was until the autumn of 2008 among the richest in the world, people torch their SUVs for the insurance money. Iceland doesn’t produce any cars, let alone SUVs, so this does not do their GDP any good, but think of the global externalities! Perhaps the G20 could propose the world-wide legalisation and subsidisation of the willful destruction of consumer durables, residential property and infrastructure (schools, hospitals, prisons etc.) as a global stabilisation policy measure."
-It is fascinating to watch the public relations machines in overdrive ahead of the meeting: downplay the differences (US, UK), demand your red lines are met 'or else' (France, Germany), the other side just doesn't get it (Japan), mumble about the dollar to avoid taking a vocal stance on the most controversial issues (Russia, China), sit back and avoid the collateral damage (everyone else). Summits are always about image/message management, and unfortunately only rarely about radical or decisive action. As a colleague noted to me this week, 90% of a multilateral summit is completed before the principals even sit down at the table (sherpas do the heavy lifting in advance of the meeting itself). Each leader knows this, and thus positions him/herself accordingly ahead of the final communique, speaking directly to their domestic audience. The fact that such deep divisions are so publicly aired ahead of this particular summit suggests that there will be few major breakthroughs in London. Regardless of the post-summit rhetoric, increasing the regulation of hedge funds, while important, isn't going to solve any of our most immediate problems. Increasing IMF funding would occur with or without this meeting.
-The City of London was fighting back!! ahead of the protests, although I wonder how many are actually hanging around Bank and Moorgate after work this evening.
-Dan Drezner's April Fool's Day joke would be a lot funnier if it wasn't so, sadly, improbable.
-For two leaders with a chilly relationship, Merkel and Sarko have forged quite the formidable alliance at this summit. This front was built on tax havens in Europe and seems to be carrying through quite strongly to global financial regulation.
-Sarkozy, in fact, claimed today that China was the main obstacle to a deal on global regulation, blocking a provision on...wait for it...tax havens (which, by relation, is an issue directly connected to hedge fund regulation). Who would have guessed that tiny alpine kingdoms, English Channel rock formations and tropical islands would collectively sink a summit? And does it not seem a little too convenient for China to be cast as the problem when such deep divisions exist between the US/UK and France/Germany?
The Ascent of Stan, or: why you will end up as lame as your parents.
An interesting parallel between the impact of oxygen and intelligence on our planet.
And as someone who regularly has objects flung in his direction as the result of a groan-worthy pun, I particularly enjoyed this artice.