daily Synopsis

World Cup Consumption Effects

2010-07-06T16:43:00.003+01:00

Well, I can't remember where I read recently about the euphoria created by winning the football trophies and their effect on the consumption of the relative country. Eitherway, it would be suspiciously funny to watch Germany win the World Cup on the 11th of July. Economists would really wish that this was accompanied by greater consumer confidence and more consumption and investment as a percentage of GDP. This might get the engine of the world economy on. Does this reminds you of the Euro Cup in 2004 that Greece won right before the Olympics? Oooohhh, that's a coincedence! I know that the Eurovision contest that Germany won last month is a coincidence too, I know! I am thinking that China stands a great chance of winning the next World Cup. We'll see...

Sunday Morning Coffee Reading to share

2010-07-04T11:54:00.000+01:00

For those who might be interested, these are some nice articles about recent Economics and Finance news.

- Yesterday Goldman Sachs’ chief economist warned that data from China and the US revealed that any recovery was facing a "challenging period" and that evidence from America was "troubling". In other words, we may face soon another global economic slowdown. Read the article here: http://bit.ly/9unA8Y.

- Recall that Goldman Sachs was the first Investment Bank that last summer announced the end of recession! The Bloomberg message was very aggressive and in just 4 words they said: “Recession Is Ending Now”. Now!! Read the article here: http://bit.ly/2LbsK7.

- This is one of the latest posts of economist Paul Krugman: http://nyti.ms/c4bG27. He talks about the Myths of (fiscal) Austerity and is relevant to the current European debt crisis.

- Finally, I highly recommend this article on The New York Times which is about the recent best seller book of the economics prof. Reinhart’s and Rogoff ,“This time is Different”, a quantitative reconstruction of hundreds of historical episodes in which perfectly smart people made perfectly disastrous decisions. Read it here: http://nyti.ms/ayh5xD.

Looking forward to your comments..

Twitter Sentiment (aka How to Kill your Time) and Asset Pricing

2010-07-02T10:26:00.001+01:00

Twitter has an awesome tool, called Twitter search.

You type any word and then you get real time results on what the rest of the world thinks of that word. Well, it is a kind of sentiment, right? In finance, surveys are widely used to track people’s expectations or in other word to capture the sentiment before and after important economic announcements. Why is sentiment important? Think of asset pricing. All asset pricing equations are conditional on information. For instance:

P(t)= Expect. [ prob. * payoff(t+1) | information at time t ].

In words, the price of an asset at time t, equals the expectation of the product of a subjective probability and the payoff of the asset at time t+1, given all available information at time t. But information is unobservable, and this is the reason researchers in finance use sentiment surveys; to capture conditional expectations. To understand the difference between conditional and unconditional expectations, think of having to do a BBQ tomorrow and you are concerned about the weather. Is it gonna rain? Well, if you stay in the UK the answer is easy. But, let’s assume you have just moved here and you are not aware of the british shit weather. In this example, unconditional forecasting would mean to take the average of all past “weather” on the 3^rd of July (that’s tomorrow) and then use this estimate to predict weather. On the other hand, conditional forecasting would mean to take into account today’s BBC weather forecast. Sounds better? To conclude, in finance terms, think of sentiment surveys as the BBC weather forecast.

Now, forget everything about finance and let’s move back to Twitter search. So, it is kind of sentiment about everything. Type Greece, and you can read real time people’s thoughts about Greece. Then type England, Eurozone and so on and so forth. This is what I did this morning (I admit I was not very productive) and here are the results. I am thinking to post a “Twitter Sentiment” every other week. What do you think?

Twitter Sentiment about

Greece

(@ July, 2^nd 2010 at 8:00 GMT) ?

latviaonline:

Greece

’s Woes May Give Pause to Euro Zone Candidates http://bit.ly/b6UDms

greececrisis: New post:

Greece

: Fighting Corruption and Bankruptcy | European Journal http://greececrisis.tk/?p=1344

emjaydavies: Leaving

Greece

is a lot harder than I thought it would be. I've been on the verge of tears all morning.

LittleAngie_79: Tink! Coffee! TGIF! One week until...vacay!! Ahhhhhhhh. @JonathanRKnight if by any chance you passed byGreece, I'll see you there! ;)

kreuz1: How

Greece

's Crisis Could Wreck the Eurohttp://tinyurl.com/23b2tzb

gladys_kw:

greece

, italy, france, spain, uk. <-- i want to go thereeeee !

julietcat67: @raingeorgia I hope one day, or I might just have to plan a vacation to

Greece

fithria80: Lucky,

Greece

has beautiful islands coz Santorini is my fav city dat I've been to. So beautiful, nice ppl n really magical. Wanna go again!

RoryYo:I would actually love to see Ghana win the world cup. Not impossible, I mean

Greece

won a euro...

StevePerry78: Greek unions call sixth general strike for July 8 - ATHENS (AFP) - Greece's two main unions on Thursday called a new ... http://su.pr/7cSXml

markovich_79: I can officially say

Greece

is FUCKED! No organisation and no one knows what is going on!

tokiohotelusa: MTV World Stage from Greece with Tokio Hotel will be on TV in the USA on July 4 - DISH Network, Palladia Channel. Check your local listings.

Refinanceable:

Chile

Investable Market (ECH): The 'Anti-Greece': "Chile's impressive economic achievements have been reflected in... http://bit.ly/brR8M1

Twitter Sentiment about England (@ July, 2^nd 2010 at 8:30 GMT)?

DanSunkAtlantis: Fabio Capello is probably looking at jobseekers.co.uk right this second.

AVuori: "

England

is no longer the mother country of football. It's more like the grandmother country." -Harald Schumacher-

jenkin7NICK: Hope I'm not asked to be the next

England

Manager. Tried it on a PC game & I was hopeless... although I did pick a lot of Southend Players.

lioneltgh: Whats the difference between a tea bag and the

England

Team? Ans: The teabag stays longer in the cup. LOL

Twitter Sentiment about Eurozone (@ July, 2^nd 2010 at 9:00 GMT)?

ForexTwips: Reading : Emerging Markets Rally, DespiteEurozone Debt Crisis. http://bit.ly/aasNVj

thebusinessday: Slovakian opposition delays Eurozonestabilisation fund: Opposition from Eurozone member state Slovakia has introd... http://bit.ly/9ir8Ho

fx_guy: Dollar Weakens on Positive Eurozone News (at TheStreet.com): The greenback was weaker Thursday morning after a com... http://bit.ly/91YEY5

A_r_i_f: aaref.com / Arif blog post: Eurozone s stabilisation fund faces delay (at Financial Times) http://bit.ly/deTgX9

ManufacturingD:

manufacturers' export orders hit byEurozone crisis, new data shows | http://dld.bz/jVXY #UK_Eurozone

OneRiot_ie: ECB to defer rates hike to Q3 of 2011: SIGNS of a slowing eurozone economy and intensifying austerity measures mea... http://bit.ly/bhGL19

finance_yard: Eurozone banks fall on solvency concerns: Financial stocks lead the region’s losses after small gro...http://bit.ly/cf82kZ #finance #money

Looking forward to your comments…

How can a country build its brand name? The Greek wine case.

2010-06-19T23:27:00.001+01:00

In one of my previous posts I talked about how negative publicity can put a country’s prosperity under risk. This is the story of Greece the last 9 months. The Greek problem (the huge debt) was known before the 2007 crisis, however Greece could still have access to low interest rates even during the financial turmoil of 2007-09. Then, a new government come into power, found that the deficit was higher, and in just few months everyone around the world (surprisingly, with the contribution of the ~~Greek Prime Minister~~ too) was talking about the Greek Statistics, and how the Greeks fooled Europe. What followed is known to everyone..

So, how wine is related to this discussion? Well, countries just like products have their own brand name, which (among others) is a reflection of a country’s tangible products reputation. For instance, lets think about Germany: Audi/technology, Porsche/luxury, Siemens/innovation, Sausage/food, Beer/drinks etc come across our minds. So, Germany is a country where technology and innovation flourish, where you can buy a luxurious car, where you can eat and drink well etc etc.

- What about Greece? What products come across your mind?

- Debt? …

- Debt is not a product! Try harder!

- …

- Hmm, difficult to say? Ok, it could be wine, why not?

About wine: The word “wine” comes from the Latin “vinum”, which comes from the Greek “oinos” and the Aeolic Greek “woinos”. The oldest known evidence of wine production in Europe is dated to 4500 BC and comes from archaeological sites in Greece, while recall that the ancient Greek god Dionysus, a major figure of Greek Mythology, was the god of wine.

Obviously, the origin of wine is Greek. But, how obvious it is for a non-Greek? Well, this weekend, FT has a special report about wine. You can find it online here, under the title: the world wine map. I copy from FT: “Although France remains the source of most investment quality wine, fine wines are now made as far from Bordeaux as South America and Australia”. (Not) surprisingly, Greece is not among the significant producing areas. On the contrary, France, Italy, Germany (!), Portugal and 7 more countries belong to the producing wine areas family – according to FT of course.

The bottom line is that when a country suffers from negative publicity, a quality product can change public’s beliefs. For example, a good Greek wine could play this role; be a national winner product and add value to the Made in Greece brand name. Unfortunately, this is not the case...

As always, reality has many faces. The last few months, the bad face of Greece was overexposed in the worldwide Media (surprisingly, with the contribution of the ~~Greek government~~). But this is the one side of the coin; the ugly face of Greece. In order to survive, we have to discover the other side; the appealing face of Greece, the national winners that will boost our image and get us back on track.

Looking forward to your comments..

Let’s talk about sex (aka IMF) baby!

2010-06-03T15:58:00.001+01:00

What if you had to leave Earth for one month and then come back, how different things would have been?

Say, how likely would be a eurozone country to be bailout by IMF, several other countries to suffer from a high-deficit domino effect and Brittan to have a Conservatives and Liberal Democrats coalition government? Not so likely, right? Or at least it should be less likely than, say, England wins the World Cup (but let’s wait for few more weeks for that, you never know...).

Obviously, the last few weeks were particular changeling for Europe and Britain. First of all, Greece suffered from a liquidity crisis. Government bonds’ rates skyrocketed and the Greek government asked for the help of IMF. They signed an agreement after negotiations that lasted (at least officially) less than a week. New austerity measures were taken, but even now it seems inevitable that Greece will have to default (but difficult to define what default means in this case..) sooner or later.

Many other countries (the rest of the famous PIGS or STUPID clubs) are in similar shape as Greece. Spain, Portugal, Italy, Ireland, Britain are all tightening their budgets try to reform their economies, but everyone is talking about when they will join Greece in the IMF party. And now we all know what this party means..

I am looking forward to your comments..

"Kurzarbeit" or "No Arbeit"?

2010-04-17T06:59:00.003+01:00

During the last week, the IMF published a report on the unemployment dynamics during recessions and recoveries for a large number of countries. Among the other things, there was a comparison between Germany and US on the employment conditions during the Great Recession and how these two countries dealt with the crisis.

There are two striking things that one can trace in that report.

The first thing is that Germany actually saw its unemployment rate decreasing (!!!) since the Recession started, mainly through the use of Kurzarbeit programms, i.e. short-time work programs that create no cost burden for the employer when it comes to firing the employee. This shows that Germany was really fast to deal with high unemployment coming by decreasing hours worked per employee and output per hour.

The second thing is that on the contrary, US faced a large drop in the employment rate and hours worked per employee but saw its output per hour growing strongly despite the generall fall in total output. Again, this shows that US chose a different, a less "social" model, one of free market, but this time we are talking about the market of recruiting people.

Different strategies. Different results.

Could it be that Germany just got lucky? Or is that a "miracle" for the Germans and a seminar for all developed countries? What if the same model was used during the Great Depression of the 1930s? Would that make any difference?

Comments as always more than welcomed.

Until it Sleeps...

2010-04-09T18:38:00.004+01:00

And now after being assured that the worst was over and that bad luck for the greek people was behind, things have lately changed to worse and this f*** number, you know, 'the spread' keeps rising higher and higher! The cost of insuring Greece’s bonds surpassed even that of poor Iceland’s the current week. Imagine! And the obvious anwer to all is "When will that stop for God's sake?"

Nobody knows, or better some know but won't tell. Assymetric information on such a thing, point to the usual theory of 'self-fullfiling expectations'. It won't sleep unless the IMF and the European funding really comes in. It won't sleep unless it brings this poor country to its knees.

Who is such a fool to believe that Mr. Papandreou spent all that time flying between countries just to make sure that in case something goes wrong, we will be able to borrow at some hypothetical rate?

One reason I think one would do it slowly but still painfully, is to avoid more than a million poor people gathering at the Syntagma Square one sunny morning.

Cause if it does happen, the 9 million missing from Syntagma Square will be on their way!

Fiona Apple

2010-04-07T20:42:00.004+01:00

Fiona Apple was born in New York.Her music was influenced by everything from early jazz, pop to alt-rock. Her sound reveals an artist with a sprawling, hard found range of emotions and with the musical palette to express them. Apple recorded a cover of "Sally's Song" for the Tim Burton film the Nightmare Before Christmas.

Beautiful but in a slightly dark way!

Some Random Thoughts on Central Banking

2010-04-05T11:58:00.004+01:00

At a time of stock taking and deciding on future reforms, it is worthwhile to think about how Central Banking has evolved.

Most Central Banks began as private institutions involved in lending to government as well as facilitating payments, taking deposits and making loans. The Bank of England was founded in 1694 to lend money to the government to help finance wars. The government gradually came to depend more and more on the Bank for borrowing and the Bank of England was given certain privileges, ultimately ending up with a monopoly on the creation of fiat money (currency). This is what distinguishes a Central Bank from any other bank - the Central Bank controls the nation’s money supply.

For most of the second half of the 19th century until the First World War, the world was on the gold standard, this period saw the zenith of globalisation and capital flows across countries that have not been repeated since, until now (?). The gold standard was essentially a fixed exchange rate regime and Central Banks were on standby to convert currency into gold at the agreed rate, which implies that the money supply cannot increase unless the Bank has augmented its reserves of gold (or we depreciate the currency).

During this period there were recurring liquidity crises, and the principle of lending of last resort (LOLR) was established by the Bank of England after the failure of Overend & Gurney in 1866 lead to widespread panic in the City, and it was felt that some measure is needed to deal with the externalities of the failure of a big institution. LOLR is perhaps the first modern financial stability policy; Bagehot articulates it at the time as:

“Lending freely at a penalty rate of interest on good banking securities”

By using LOLR, the Bank of England successfully combated the crises of 1878 and 1893 (Barings!). However, we note that lending of last resort is at odds with the commitment to the gold standard, as the same time as its gold reserves are declining (i.e. people taking out their money from banks and converting it into gold), the Central Bank was increasing the provision of credit to the market. Nevertheless, given the absolute belief that the government is committed to the gold standard, LOLR activities did not destabilise the currency, and it was recognised that financial stability was an essential function of central banking as well as price stability. Indeed the Federal Reserve System was created after
the liquidity crises of 1907.

Before the crisis, we were guilty of thinking that the Central Bank was responsible for carrying out monetary policy that has ONE objective: price stability in the form of an inflation target. This has come about partly because there have been no major liquidity crises in the last 30-40 years, therefore liquidity has slipped down the priority list, and partly the amount of academic research that supported the idea that unemployment and inflation can be controlled with monetary policy. The success of Central Banks in dealing with stagflation in the 1970s further lent credibility to the ideas of central bank independence and inflation targeting.

Some commentators argue that in the UK, the Bank of England were too preoccupied with price stability and therefore not prepared when the crisis hit. The delay in their actions may have been costly.

So what now in terms of re-thinking the mandate for Central Bankers taking into account it has a dual function of price and financial stability?

Well, first of all, we need a more concrete definition of financial stability. Do we mean no excess leverage? No bubbles? No institution too big/ too interconnected to fail? No speculation activities? I have read a few proposals arguing for targeting of asset price levels but these haven’t gained much traction. Personally, I think some measure of systemic risk might be called for.

Second of all, what policy instruments should we use to achieve financial stability? Are interest rates too blunt? Should more be made of capital and leverage ratios? If so, should monitoring of this come under Central Banking responsibilities?

Finally, an interesting question to ask is whether price stability leads to financial instability by creating over-optimistic expectations? If this is true, then we might need to start employing psychologists at Central Banks...

Alas, no easy answers in this complicated world of ours :-)

FLORENCE AND THE MACHINE

2010-03-31T23:06:00.003+01:00

Florence Welch and her band are one of the most musically mature and unique bands of our times. Their music is a combination of various genres including pop,rock and soul.

What we have to admit for sure is that Florence and her group are remarkable and their sound is mesmerising.

Finance is hot! Why economists suck?

2010-03-31T12:20:00.004+01:00

Few days ago I read a disappointing article about economists. Well, it seems economists are not sexy. On the contrary, the faculty of finance departments is hot!

To be more specific, Felton et al. (2004) study the web-based (on RateMyProfessors.com) student evaluations of teaching and find a student preference for course easiness and instructor sexiness. As you can see in the graph, there is a increasing linear relanionship between the faculty hotness and the quality of teaching. In their paper (yes, it is a paper), they further rank departments in terms of the hotness score of their faculty. One of the striking results is

that Language, Sociology, Political Science and Finance are among the top departments in Hotness. Conversely, Economics, Engineering, Computer Science and Chemistry have Hotness ratings of 30, 34, 35, and 36 respectively out of 36 departments.

As an aspiring researcher, I was not convinced, so I checked for the robustness of their results. My ~~sophisticated methodology~~ is as follows (do it!); I google images for “hot economists” versus “hot finance”. The hot economists search results included the photos of two famous American economists, Joseph E. Stiglitz and Paul Krugman. On the other hand, the top hot finance search result was the photo of the American actress, Megan Fox (?)! Have a look at the photos below and make your own judgments about who is hotter; Economics or Finance? Looking forward to your comments.

Who is your Daddy? Saint Trichet or Angela Merkel (aka IMF)? Part a.

2010-03-29T12:03:00.002+01:00

My starting points today are two previous articles; Greece's Debt Crisis: Silence is Golden and UK don't be S.T.U.P.I.D. - The debate. My key points were that Greece is trying to tackle the credit crisis the wrong way on the one hand, and that there is a debate in UK about when is the best time to tighten its fiscal policy on the other hand.

Now lets move to the aftermaths of the recent European Leaders Summit, having in mind my introduction. The main result was the decision of Europe (France and Germany actually) to launch in the near future a ~~lender of last resort~~, with the participation of IMF. The new lending mechanism will have a specific size; approx. 25 billions euros. Does this decision solve Greek credit problems? Absolutely no. Just recall that only in 2010 Greece has to borrow more than 50 billion euros and that its total debt is more than 300 billions euros. Does this decision solve Greek fiscal problems? Well, the answer is maybe. Maybe is better than no, and my optimism is due to the participation of IMF (guess what.. the loaded gun was finally triggered..). The last 20 years or more, Greece’s main problem was (is) the lack of fiscal discipline. In other words, Greece, (but also all the other European countries with huge deficit) is the spoiled child who ate all the chocolate, now nothing is left and Daddy has to punish you first and then supervise you. It is a very common Moral Hazard story..

Who is your Daddy? In the previous years, ECB president, Jean-Claude Trichet, was the tough guy. Recall that even when the 2007 economic crisis began, hekept increasing interest rates for several months. However, last Thursday, few hours before the European Summit, Trichet surprisingly eased ECB policy by extending its current (flexible) liquidity arrangements into 2011. Now, ECB president is a hero and someone else has to play the role of the Daddy. It cannot be Angela Merkel, Nicolas Sarkozy or Gordon Brown since their political future is uncertain. Moreover, they don’t have the know-how to play this role. So, Europe welcomes IMF.

In the second part I will explain you why “Who is your daddy?” is related to “Silence is Golden” and “UK don’t be Stupid”. Any guess?

Anthropology of Behavioral Economics and Finance

2010-03-27T18:29:00.003Z

Many economists try to explain what drives the creation of crisis. It is very interesting that after the 2007 crisis many (new) explanations have the human behavior at their heart. Even the traditional Chicago Economists conduct research in this area. I am sure you have read about Moral Hazard, Irrational Investors, abnormal Risk Appetite etc. Well, it is true that Behavioral Economics and Finance is one of the few winners of the 2007 crisis (at least for those with a keen interest in Academia).

To shed light on the issue, I reproduce a photo from Foreign Policy magazine, which has put together a nice (but simplified) little timeline of the history of behavioral economics. Enjoy!

An Improbable (Semi) Victory for Obamacare

2010-03-25T22:26:00.007Z

Against all odds, President Obama signed US healthcare reform into law this week, ending a year-long struggle to pass the legislation.
The magnitude of this achievement should not be undermined. The US was just about the only developed nation without universal healthcare (one of the scars left behind by slavery), its system of private health insurance resulted in the US spending vast sums of money yet achieving inferior standards of care compared to other advanced nations. See BBC graphic reproduced here.

Sadly, there has been little change in the healthcare system since President Johnson created Medicare and Medicaid in the 1960s. Medicare is government provided insurance for the over 65s and Medicaid provides support for low-income families. Apart from some help for children and veterans, the majority of the population had to rely on the private sector for insurance.

Econ 101 teaches that the invisible hand of the market will lead blind self-interest to attain the optimal allocation of resources (under some assumptions J). However, if we stop to think for a moment, it becomes obvious why private insurance has perverse incentives. How do insurers maximise profits? By charging as high premiums as they could whilst avoiding paying for health care by any means possible. This translates to not insuring those who are already ill, charging astronomical premiums for those at risk of becoming ill and fighting with doctors over whether the required treatment is covered or not (indeed, an industry has developed to help doctors argue with insurers). Private insurers also lack incentives to invest in preventative care, treatments that cost money now and save in the future, since Medicare covers over 65s.

The result is 45 million uninsured Americans. Life for them must have been pretty scary.

So what does the reform look like? Well, those not covered by Medicaid or Medicare must obtain insurance, insurers are no longer permitted to discriminate against those with pre-existing conditions, and low-income families will get higher subsidies. Together, the legislation aims to cover 95% of the population. Simply by letting the tax cuts President Bush passed expire (essentially increasing the tax rate on the wealthy) can fund part of this.

Whilst this legislation is a step in the right direction in my opinion, it doesn’t go far enough to tackle the different level of premiums. Ideally, to ensure fairness, premiums should not depend on medical history. This is already the reality in some states but not all. Moreover, I am not convinced that competitions solely between private insurers are sufficient to offer people the best value for money, as more people are required to buy insurance, the profit temptation may be too strong. Some kind of public-private competition would be more effective to keep costs down.

Watching Obama’s “victory speech” reminded me of a line from President Franklin Roosevelt’s Madison Square Garden speech in 1936:

They do not tell him that the insurance policy that is bought for him is far more favorable to him than any policy that any private insurance company could afford to issue.

FDR was talking about unemployment insurance, but it applies with equal force to healthcare.

*I do apologise for the lengths of my posts, it's supposed to be three paragraphs long!

Music, Art or Both? 70 millions by Hold Your Horses

2010-03-25T13:33:00.002Z

I love this "70 millions" video clip by Hold Your Horses! Very arty.. How many famous paintings can you get? Leave your comments with the names of the paintings..

UK don’t be S.T.U.P.I.D.* - The debate

2010-03-23T16:28:00.001Z

In a few weeks time, brit will vote for their next Prime Minister; Gordon Brown versus David Cameron. No matter who wins, the day after the elections will have to deal with the economic slowdown. Even if the ~~economy has been stabilized~~, you can still feel the aftermath of the 2007 credit crisis on the air; high unemployment, frozen credit markets, and signs of a slow and fragile recovery.

In January, some of the most influential figures of British academia
disputed over how the next UK government should tackle with the problems in economy. On the one end, the first group of economists (T. Besley (LSE), C. Goodhart (LSE), H. Davis (LSE), C. Pissarides (LSE), J. Vickers (Oxford) and H. Pesaran (Cambridge) among others) argued, in their "UK economy cries out for credible rescue plan" article in The Sunday Time, that Government should tighten its fiscal policy and especially should aggressively attack its rapidly increasing debt.

"In these circumstances a credible medium-term fiscal consolidation plan would make a sustainable recovery more likely. In the absence of a credible plan, there is a risk that a loss of confidence in the UK’s economic policy framework will contribute to higher long-term interest rates and/or currency instability, which could undermine the recovery. In order to minimise this risk and support a sustainable recovery, the next government should set out a detailed plan to reduce the structural budget deficit more quickly than set out in the 2009 pre-budget report."

On the other end, the second group of economists (Lord Layard (LSE), D. Hendry (Oxford), R. Solow (MIT) and D. Vines (Oxford) among others) argued, in their "Sharp shock now would be dangerous" article in FT, that the focus should be on taking measures that will boost the economic recovery, which will inevitably ease the fiscal policy and further increase budget deficit.

"While unemployment is still high, it would be dangerous to reduce the government’s contribution to aggregate demand beyond the cuts already planned for 2010-11 [...] With people’s livelihoods at stake, a responsible government should avoid reckless actions [...] If next year the government spent less and saved more than it currently plans, this would not “make a sustainable recovery more likely”. The weight of evidence points in the opposite direction."

A third group of economists (Lord Skidelsky (Warwick), M. Miller (Warwick), M. Andrews (Manchester), W. Brown (Cambridge), B. DeLong (Berkeley), R. Freeman (Harvard), A. Manning (LSE), J. Stiglitz (Columbia) among others) disagreed, in their "First priority must be to restore robust growth" article in FT, with the need for an accelerated programme of fiscal consolidation at this point of time. On the contrary, they argue that the first priority must be to restore robust economic growth.

"There is no disagreement that fiscal consolidation will be necessary to put UK public finances back on a sustainable basis. But the timing of the measures should depend on the strength of the recovery. [...] The wealth of the nation lies in what its citizens can produce."

The debate is still open. However, it is still dubious which part will win. Looking forward to your comments.

* S.T.U.P.I.D. stands for Spain, Turkey, UK, Portugal, Italy and Dubai, which suppose to be the countries with the highest deficit (after Greece).

Forgotten History - Crisis of 1763

2010-03-22T12:37:00.008Z

The financial crisis of 2007-2008 has been widely talked of as a crisis of liquidity, complexity and systemic risk. All three, however, are not new albeit they have now gained sexy status. Perhaps we should have heeded the lessons of the crisis of 1763.

In those days, it was uncommon for banks to take deposits and make investments to the private sector. Its primary function was to facilitate payments between exporters and importers using bills of exchange. Bills of exchange are rather like modern day cheques; the drawer of the bill requires the drawee to pay a specified amount to the holder of the bill at a date in the future. For example, if I imported some rice from Thailand, I (the drawer) would order my bank (the drawee) to pay Thailand (the holder). Bills of exchange could be traded subject to some rules.

Financial centres were Amsterdam, London and Hamburg. Prussia was developing fast and capital hungry. The main problem then was how to get money from Amsterdam to Berlin (capital of Prussia). Berlin merchants could not borrow directly from Amsterdam banks and the use of collateral was limited given the geographical distance.

The innovation was the acceptance loan. It works as follows, a Berlin merchant goes to a Hamburg bank and says: please can you arrange a bill with the great Amsterdam bank, I will pay you before you pay the Amsterdam bank and I will also pay you commission for your troubles. Hamburg bank says OK and pays the Amsterdam bank a commission in return for accepting a bill. The Berlin merchant can then obtain a bill drawn on the Amsterdam bank, which can then be sold to the Amsterdam investor. At the maturity date, the Berlin merchant pays the Hamburg bank who then pays the Amsterdam bank who finally pays the Amsterdam investor. Sounds complicated? Well, in reality the chain was even longer as bills were bought and sold on capital markets.

These acceptance loans have two features worth mentioning. First, if Amsterdam bank fails to pay the Amsterdam investor, then the Amsterdam investor can demand repayment from both the Hamburg bank and the Berlin merchant. Second, if Hamburg bank pays the Amsterdam bank, but the Amsterdam bank goes bankrupt before they can pay the investor, then the investor can demand repayment from the Hamburg bank, so the Hamburg bank then effectively pays “twice”. These two rules prevent people selling bad bills.

The Seven Years War brought an economic boom
that lead to an expansion of credit through the acceptance loans, nearly all Northern Europe joined in the fun, leading to increasing interlocking claims between different banks in different countries. The most famous bank in Amsterdam was the de Neufville brothers’.

At the end of the Sevens Years War, recovery took longer than expected and the prices of commodities fell. Falling prices reduced the value of collateral and it become harder to secure credit. Spreads increased and banks had to sell their commodities assets to obtain the liquidity to repay their maturing bills. Given all the banks were selling, prices fell further and a vicious loop develops. De Neufville was the first to go bankrupt, and this lead to a wave of bank bankruptcies as far afield as Sweden, Britain as well as Prussia and Hamburg.

We see many parallels with the crisis of 2007-2008. Then as now, financial innovation lead to a credit bubble, and in a highly interconnected and leveraged financial system, a relatively small liquidity shock can trigger failures. Furthermore, hedging had been proved to have its limits, even though each party in the acceptance loan chain believed they were perfectly hedged, they weren’t. There was still systemic risk. To illustrate, the Amsterdam investor has effectively transferred credit risk of the Berlin merchant to the Hamburg and Amsterdam banks (counterparty risk). But given all three held similar assets (commodities), one’s failure becomes highly correlated with failures of others. The Amsterdam investor is not insured at all when the going got tough.

We should have learnt the lessons from 250 years ago.

Greece's Debt Cricis: Silence is Golden

2010-03-21T20:45:00.008Z

Few weeks ago, I posted an article about the EurOscar.. One of my main points was how two countries with similar fiscal problems, Greece and Italy, deal with the bad publicity. It seems that Greece, a country of approx. 11 million people and with a very small economy, moves (unfortunately to the wrong direction) the markets the last 3-4 months. On the other hand, no one really cares about Italy or Ireland (almost bankrupt 2 years ago) or the other P.I.I.G.S.* countries.

To further contribute to this discussion, I give you the links of 2 recent relevant articles. One was published in Businessweek with title, "Greece's Weakness Is Its Strength". Peter Coy, the author, says: "Prime Minister Papandreou has used his country's fragile state to his advantage in negotiations with the EU ... If you want to learn how to dig yourself out of a deep hole, watch Greek Prime Minister." This article was published the week after the Greek PM had consecutive meetings with President Obama and several European Leaders. To my best understanding, Peter analysis suggests that if you have a rotten product, the best thing to do is to make sure everyone knows about that, and then threaten your counterparts that if they do not help you, you will infect them as well (aka ask the help of IMF). It looks like the so-called "put the gun on the table" strategy.

But sometimes it turns out that your threat is not strong enough. Then your strategy collapses and you have to eat the poison pill or in other words you trigger the gun and you hit yourself. For instance, Germany said this week that they do not mind if Greece asks the IMF for help, while the president of the European Commission, J. M. Baroso, state that Euro currency will not be affected if one of the eurozone members seek assistance from the IMF.

As Richard Barley notes in The Wall Street Journal (Greece's Risky Rhetoric), sometimes Silence is Golden. "But every time Mr. Papandreou complains of a lack of support for the nation or hints he will tap the International Monetary Fund, he makes financing Greece's deficit tougher".

All in all, sooner or later we will know which strategy is correct. But it is a shame that the future of a nation is tied to a lottery. Looking forward to your comments.

* P.I.I.G.S. stands for Portugal, Italy, Ireland, Greece and Spain.

Lobbying, Political Influence and Google

2010-03-17T03:11:00.005Z

One of the characteristics of the US political scene is the active lobbying of several group of interests in order to influence the political decision making in Washington. Yesterday, I read a report on the opensecrets.org (Center for Responsive Politics), which was about the increasing lobbying efforts of the technology companies, i.e. Google and Facebook. More specifically, while Google spent a tiny amount of $80,000 in 2003, six years later in 2009 Google spent almost $4,000,000 on federal lobbying. Facebook in 2009, the first year ever lobbied, spent more than $209,000. More generally, in the last decade technology companies have spent more than $1 billion in order to give themselves a voice in Washington, the fourth highest amount among the total 120 industries.

Recall how "massive" was the the response of the Obama administration in early 2010, when the war between China and Google started. It may be the case that Google is right and defy over web censorship. But my point is that without the backup of Washington Google would not have dared to clash with China.

Now, let's move to the Financial Services industry. In 2006 the total amount spent on federal lobbying was $262,491,763, while in 2008 the amount almost doubled to $476,575,121. The top 3 contributors in 2008 are Goldman Sachs, Citigroup and JPMorgan Chase. The increase in spending could be due to the US elections. But it could also be due to the 2007 credit crisis and the efforts of banks to put pressure on Washington to ~~bailout the banking sector~~. Who knows? All in all, it seems Money and Political Influence are two sides of the same coin.

It’s a China time! The year of the Tiger!

2010-03-14T23:40:00.007Z

It’s a China time! The year of the Tiger!

The latest eye-catching news is the unprecedented numbers of Chinese billionaires on Forbes List. As a Chinese, I supposed to be immensely proud of the outshining performance of my nation. Yes, it may be a positive sign underscoring the rebound of the largest emerging country.

However, having probing the information, I suspect it may be not...

It is reported that their fortune rose sharply a year on from global crisis, when coincidently Chinese government launched a series record stimulus plans, including relaxing credit borrowing in order to keep the engine on, which is evident in key industry sectors, such as automobile, energy, technology. Wang Chuan Fu, the richest Chinese on the list, is running BYD Company, which actually straddles between lucrative industries, namely gasoline vehicle, electrical cars, portable electronic device. There is no reason to believe it won’t be the direct beneficiary of the government policies. But the worry here is if BYD or the companies along the same line will be able to keep the strong momentum when the

tightening monetary policies step in. Well, it really depends… depends on if the effect of the previous expanding fiscal or/and monetary policies has filtered to the private sector, where the consumer purchasing power lies in and consumer confidence comes from.

However, the undeniable fact is that China is still suffering the income imparity and higher poverty ratio, which, personally think, are the major headache of the government policy and hinder the sustainable economic growth in the long run. Looking forward to your comments..

Xuan

Business Schools Rankings and How to Assess Them

2010-03-14T11:06:00.009Z

There's been a lot of talk about rankings for Business Schools. The Schools themselves often cannot clear out the misconceptions about the notion of rankings. Recently, I heard myself from a top professor of Kellogg Business School (IL) that students cannot make out when it comes to choose from the top 10 in the world. He thought that No 1 & 2 go together, followed by No 3 & 4 (being his own).

A question open to all those that come to decide which one to choose, is the ordinality or cardinality of the rankings. Apparently one cannot believe that moving from No 21 to No 20 is the same as moving from No 6 to No 5. But if it's not, then what is it? Mathematically speaking (I am not, so dear mathematicians out there correct me if I am wrong), if that is not linear (which is not), then what is it?

I think that press release initiators (FT, Businessweek etc.) have more to explain about what lies behind the rankings that they post, as clearly, they have an effect on the business world and form the trends in higher education.

Could it be that these initiators are not in essence ''initiators'' but co-initiators along with other counter-partners?

http://rankings.ft.com/businessschoolrankings/global-mba-rankings

EMF: Just A Matter of Incentives?

2010-03-11T16:43:00.010Z

The Eurozone has recently been in a position against all kinds of collapse scenarios.

If credibility is the milestone in today's institutions, then in terms of structure, something new, something more rigorous inside E.E is needed to be established.

Greece is currently playing the role that knows better than anyone. Back into the past, it used the trick of the 'trojan horse' to fool the enemy in Troy.

And this led to something noone had mentioned above.

White-collared guys in meeting rooms, asked again and again: What can we do with a bunkrupt country?

And the light in the tunnel...

How about a European Monetary Fund, a la International Monetary Fund? After all, it can't be that hard.

In terms of this new framework under study, Country leaders more or less came out with their own views. The French President pointed out: “We must support Greece, because they are making an effort”. “If we created the euro, we cannot let a country fall that is in the eurozone. Otherwise there was no point in creating the euro.”

How would a country near collapse or a country far away the Maastricht limits react after that creation?

Is it just a matter of giving the right incentives?

What would you advise your 'brother' that has overloaded his credit cards and receives ugly notes from the 'speculator' Bank?

http://www.ft.com/cms/s/0/fa9877f0-2a26-11df-b940-00144feabdc0.html?ftcamp=Late_headline1/NL/CEMar2010/Vanilla_eu_imf/0/&nclick_check=1

And the EurOscar goes to..

2010-03-07T13:11:00.003Z

I reproduce this week's KAL's cartoon from The Economist print edition.

These are the 2010 EurOscar Awards! It is interesting that two Mediterranean countries are among the "protagonists" of 2010. Obviously, both Italy and Greece suffers from bad publicity. Both countries suffers from the poor condition of their economy and the actions of their "hilarious" politicians. But negative publicity can be a risk to countries prosperity.

My first question is how do you deal with this negative publicity? Do you think constantly travelling around the world, meeting with foreign leaders, and "promoting" your damaged image is the best way to do that? Who is aware of the Italian huge deficit (both in percentage and absolute value) compared to the global awareness of the "Greek problem"?

My second question is how many more southern European countries do you think will get an EuroOscar award over the course of 2010? Looking forward to your comments..

The Greek Response to Focus Magazine

2010-03-03T01:02:00.011Z

This is a true story!

One week ago, Focus, a weekly German magazine, blamed Greeks for cheating eurozone with fake statistical data and hurting the Euro currency.. This was the cover..

As a response, the leader of a small party of the Greek Parliament sent a letter to the editor of Focus magazine attaching a photo of a Satyr (a creature of Greek Mythology)..

For one thing you cannot blame Greeks.. For losing our humor!

The Road to Recovery - UPDATE

2010-03-03T00:27:00.002Z

I update an older graph.. The discussion in August was about The Road to Recovery and the Shape of the Recovery. Recall that the argument was whether the recovery will be V- , W- or U- shaped.

After 6 months, the graph (which can be found on dshort.com) looks exactly the same.. a persistent V-shaped recovery in US equity markets.. What about the real economy? Do you see any similar radical recovery? Looking forward to your comments..

THIS IS WHAT A BUBBLE LOOKS LIKE!

2010-03-01T21:31:00.003Z

This is a nice article of Cassidy in TheNewYorker. Looking forward to your comments..

http://www.newyorker.com/online/blogs/johncassidy/2010/02/this-is-what-a-bubble-looks-like.html

Synopsis: Party in Markets! Crisis is over?

2009-08-28T10:19:00.013+01:00

Yesterday, stocks rose for another day and markets seem ready for new highs.. but why? Are we out of recession? Recovery comes earlier than expected?

For sure, the latest macroeconomic news highlight an improvement in global economies; US economy shrank by a lower than expected pace; Durable orders started to warm up; More importantly market confidence gives the impression that is back.

In my opinion, this euphoria is mainly triggered by the common anticipation that the abyss of the worst crisis in the last 50 years is behind us or else we have seen the bottom of the crisis, therefore now markets can only go higher.. or not?

Food for thought (http://dshort.com/charts/bears/road-to-recovery-large.gif):

Ps1 Are you short or long?

Ps2 Citigroup above $5.. again..

Daily Synopsis

2006-08-05T10:57:00.000+01:00

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