Archive for April, 2008

Remembering Theodore Schultz in times of food crisis

April 21, 2008

I just happenned to read the Nobel Prize speech given by Theodore Schultz on receiving the prize in 1979. On reading the speech I had to recheck whether it was 1979 or 2007. Every word of the speech is relvant today. It seems all crisis are same- financial or food.

This inspired me to write a piece for Mint where I remember Schultz and suggest what his recommendation would be for the ongoing food crisis- incentivise agriculture.

Here is a good short piece on Schultz from one of his students. He had a good sense of humor :-)

Assorted Links

April 21, 2008

1. WSJ Blog points inflation hawks are back. See this post as well

2. WSJ BLog says trends in life expectancy similar to incme inequality

3. Mankiw points what Harvard students want from Bernanke visit

4. Rodrik on financial globalisation

5. Frankel points to growing correlation in LIBOR spreads

6. Johnson on food prices

7. Ajay Shah points to developments in Chinese education

8. JRV on LIBOR reliability

9. IEB on Indian real estate

Happy Birthday Mostlyeconomics

April 18, 2008

On April 20, Mostlyeconomics completes one year. It is unbelievable that I could blog so consistently for one year. What started as a time-pass activity became a passion and I realized blogging is quite helpful. It makes a person put his thoughts together. And for people like me helps organize files/papers etc. I remember so much more now as I now at the back of my mind I have covered this topic somewhere.

 

The Blog has got tremendous response in a very short span of time. It is ranked as the 2nd best South Asian Blog for Economics as per this ranking. It is moving gradually up on this ranking that ranks all the popular economics blog. It is unbelievable to be ranked in the same list as Mankiw, Rodrik, Krugman, Jeff Frankel etc. These are all top economists and it is an honor to be a part of the same company.

 

In one year, the Blog has grown to over 500 posts and it has received comments from all over the world. WordPress does not allow me to see the profile of the visitors so don’t know the details. But yeah comments have been from quite a few places. The blog thanks all the visitors for reading the blog posts. Special thanks to people who spare their time to comment/suggest on the posts. Keep them flowing.

 

So, all in all it has been a fantastic year. Hope this blog achieves even greater heights in the next year.

The cost of Active Investing

April 17, 2008

I have been looking for this paper for quite sometime. It is from Kenneth French (the one who collaborated with Eugene Fama on various landmark papers). The abstract says it all:

I compare the fees, expenses, and trading costs society pays to invest in the U.S. stock market with an estimate of what would be paid if everyone invested passively. Averaging over 1980 to 2006, I find investors spend 0.67% of the aggregate value of the market each year searching for superior returns. Society’s capitalized cost of price discovery is at least 10% of the current market cap. Under reasonable assumptions, the typical investor would increase his average annual return by 67 basis points over the 1980 to 2006 period if he switched to a passive market portfolio.

I am yet to read the paper. Will add comments if I manage to read it.  Here is a profile of the paper.

Double standards in the 2 ongoing crisis

April 17, 2008

It is not very often we see two crisis at a global level. I haven’t seen such times when we are seeing both financial crisis and food crisis happening together.

Though, the policy responses for both has been really different. The financial markets/experts have given a big thumbs up for all the Central Bank and government intervention but have given a big thumbs down for the government intervention in the food crisis.

The interventions in financial markets are justified as it could paralyse the entire economy but if given for food then it is said it leads to market distortions/against free-market philosophy etc.

This is actually double standards at its best. Any intervention leads to distortions be it any market. For instance, bailouts of Bear Stearns and Northern Rock though justified as important it leads to issues of moral hazard and is against the philosophy of “survival of the fittest”. In 2001, several large firms were shown the door but smaller firms in finance  are provided the support.

So, it is true that the various interventions by several governments (I have highlighted a few cases here) will not result in the desired benefits, but so is the case with finance. The central banks have pumped in huge liquidity but it is seen that firms are still holding on to whatever finance is available and are not willing to lend or borrow. Isn’t it much like hoarding or using a euphemism- saving themselves for worst times to come?

The WSJ/Mint article shows financial firms are not disclosing correct LIBOR and this is leading to false market signals. They are disclosing rates lower than the actual as they are afraid higher rates will show that they are distressed.  This is leading to overall lower interest rates as most lending/borrowing is done at LIBOR plus rates. So, there is a problem everywhere.

Did people learn anything from previous financial crisis? Nothing at all. It is still the same. Numerous research has been done to show nothing has changed (see this as well) and no lessons have been learnt.  So, it can’t be said this crisis is different and hence intervention is needed.

So either we should not support government intervention at all and let markets solve the problem by itself. Or, we should understand the fact that in any crisis the response is much the same- government interventions and market distortions.  There are no easy solutions/answers.

IMF- euphemism at its best

April 17, 2008

Euphemism is basically double standards. I read this IMF GFSR April 2008 third chapter titled “Market and Funding Illiquidity: When Private Risk Becomes Public” . The summary is here.

IMF has very cleverly and neatly replaced the word bailout/central bank intervention by saying “When private risk becomes public” :-) 

Overall it is a nice chapter on how different kinds of liquidity mechanisms are at work and how comples things have become. For a primer on liquidity see this primer as well.

Assorted Links

April 17, 2008

1. Econbrowser on the hot  topic-  commodity arbitrage

2. Johnson has a terrific post titled Gravity and modern economist

3. ID Blog discusses whether microloans should be used for consumption or not

4. MR points to a really confusing paper title

5. WSJ Blog points to Fedspeak

6. Krugman on why oil prices are rising?

7. Mankiw has a nice humor

8. Ajay Shah on global turmoil. Monetary Policy frameworks are inconsistent everywhere and we just can’t at other central banks as benchmarks. There is some more criticism from Ajay Shah here.

An analysis on food crisis and rising prices

April 16, 2008

I have added my own food for thought paper on the subject. It can be found here.

I argue how this food crisis was a thing waiting to happen as this sector has been ignored for quite a while. So all these measures to control prices are at best going to be short-termism. The sector needs an urgent push from all possible angles.

As the crisis is a global one, we can’t just criticise India and its policies. The crisis would have happened sometime back but what was keeping it going was that agriculture exporting countries like Argentina, Australia etc. were doing well. Now, because of some adverse climatic conditions since 2006, we are seeing this crisis take shape.  

Addendum:

The Hindu also covered this paper here

Assorted Links

April 16, 2008

1. Simon Johnson has a food for thought poston rising food prices. Econbrowser has some ideas on food prices as well

2. WSJ Blog points to a new OECD report calculating subprime losses. OECD also names Klaus Schmidt-Hebbel as its cheif economist

3. Economist Blog has a nice post on financial literacy

4. Predictably Irrational Blog is active now. Dan Ariely is answering irrational  questions

5. JRV on Global crisis

6. ID Blog points to interesting links

A new report on India’s services sector

April 15, 2008

Planning Commission has released a detailed report on the Services sector in India.

The Group selected six sub-sectors of the Services Sector viz. IT & IT enabled Services, Tourism, Shipping, Health Services, Financial Services and Retail Trading Services for detailed examination. While the needs of each sub-sector are unique in many respects, the Group felt that action on three fronts was critical for enhancing the competitiveness of the services sector. The education system must be reformed and expanded, the skill deficit in almost all service sectors must be eliminated through concerted action and the physical infrastructure including the urban infrastructure and civic amenities brought to world standards. A copy of the Report is enclosed.

A much needed report on the sector which contributes majority of India’s output but we know very little about.

You notice one thing- this report has hardly been covered in the media. Unlike the Rajan report or MIFC report on financial sector, the services sector report seems to have been completely ignored.

This is what I keep saying – we hardly care for reforms in the real sector but are extremely focused on financial sector. Finance can only work if we get activity in the real sector. But somehow we just don’t seem to care.

Financial deepening without financial excesses

April 15, 2008

Mr Hervé Hannoun, Deputy General Manager of the Bank for International Settlements gives good speeches. I covered his previous speech on how Asian economies are managing their capital flows here and in a research paper here.

In his recent speechhe raises the burning issue – how to deepen financial markets without creating financial excesses. He suggests the need for Central bankers to adopt a macro-prudential framework to understand risks in the financial system. Read the speech for details.

Assorted Links

April 15, 2008

1. PSD Blog points to comments over rising food prices. Simon Johnson also has some comments. EPSA Blog points to some developments on this issue as well

2. ID Blog has some interesting posts: first of its kind microfinance deal, concerns in microfinance

3. WSJ Blog points to a discussion what drives growth- exports. This discussion was actually held at a meeting to discuss findings of Growth Commission. The Commission is chaired by Michael Spence.

4. Fin Prof pointsto a paper on how financially constrained people spend their money

5. Rodrik on governance

6. JRV says Mahathirism is back

7. Ajay Shah on exchange rate regimes. I am expecting some good debate on this topic – whether exchange rate appreication lowers inflation or not?

Bank of England is targeting growth not inflation

April 11, 2008

Thanks to my colleague Namrata for pointing this.

Bank of Engalnd lowered its benchmark rates from 5.25% to 5.00% in its meeting yesterday. Its press release is pretty interesting:

Even if commodity prices remain at their current high levels, inflation should fall back.

Really? Inflation will fall back despite rising prices. How will this happen?

But to ensure that inflation meets the 2% target in the medium term, the Committee needs to balance two risks. On the upside, above-target inflation this year could raise inflation expectations so that, in the absence of some margin of spare capacity, inflation would remain above the target. On the downside, the disruption in financial markets could lead to a slowdown in the economy that was sufficiently sharp to pull inflation below the target.

So, despite rising inflation and inflation expectations, BoE expects that financial markets would lead to slowdown. This would lower demand and aggregate price levels.

But as it is well known by now, this inflation is supply led inflation and is a result of years of ignoring the food security risks. Hence, by lowering its interest rate, it is at best trying to ensure that demand does not drop. So, in other words, it is targeting growth rates and not inflation.

Taylor’s rule suggests Central Banks target both prices and growth levels. So, we had multiple target central banks. But an inflation targetting central bank was formed on the presumption that inflation is the biggest enemy of growth. So, if we manage inflation we can manage growth as well.

This was working as long as both growth and inflation were moving in same direction. Now, in these times when inflation is rising  but growth falling,  you would expect a inflation targetting central bank to look at inflation. Isnt it? But BoE is targetting growth instead. (Bank of Canada, another IT Central Bank is also similar in its approach)

Obviously no questions would be asked as it is trying to protect jobs etc. But at the end of the day, it is not sticking to its mandate.

I would suggest Rajan report to look into this matter and be in tune with this reality. By simply suggesting RBI to adopt inflation targeting (IT) is not going to work. If IT Central Banks have been good at managing inflation it was only in good times. In times such as these it is leaning towards growth . So, it is not as perfect as it is made to look out to be.

True, New Zealand and Australia (and other IT Central Banks) have still not cut rates but they don’t have downward growth pressures as of date (though IMF has projected lower Australia growth rate) . So, it will be interesting to see how they react. Like it has been said at numerous places, this IT Central Bank experience has been too short for it to be considered as an outright success. We need to evaluate the evidence properly.

How good is forecasting growth in India?

April 11, 2008

I have covered the forecasting abilities of Fed and Riksbank. It is at best modest. Riksbank has improved its forecasting ability but still a long way to go. I have always doubted the ability of central banks/experts to forecast financial variables. But to see very similar performance for even macroeconomic variables is surprising (though not any more).

It is difficult to do similar analysis for India. However, we can do an analysis for the various organisations that do forecasting for growth levels in India. Before its quarterly monetary policy review, RBI releases a report on Macroeconomic and Monetary developments.

In the report there is a chapter on real economy (see towards the end) which publishes forecasts given by various agencies for the ongoing financial year. The forecasts are given for only expected growth in Overall economy and sector-wise growth (agriculture, industry and services). RBI has been releasing these estimates since July 2005-06.

I just did some analysis and here is how the numbers look:

  Overall Agriculture Industry Services
2005-06        
July 7.0 3.3 7.4 8.3
Oct 7.0 3.1 7.5 8.1
Jan 7.2 3.3 7.9 8.6
Actual 9.2 6 8 10.3
         
2006-07        
Apr 7.6 2.7 9.1 9.0
July 7.7 2.5 9.0 9.3
Oct 8.0 2.1 9.7 9.5
Jan 8.3 2.3 9.5 10.1
Actual 9.6 3.5 10.7 11.8
         
2007-08        
Apr 8.3 2.9 9.2 10.1
July 8.5 2.8 9.4 10.4
Oct 8.7 3.3 9.4 10.4
Jan 8.8 3.4 9.5 10.4
Projected by CSO 8.7 2.6 8.6 10.6

The actual numbers have been picked from CSO. The agencies have underestimated the growth potential right along. The average estimates have been rising every quarter. Infact in Jan – 2008 the average estimates are higher than what CSO has projected. In sector-wise analysis the trend is similar. If we look at median or mode, the analysis is very much the same.

On checking the standard deviation it is around 0.3-0.5 for overall growth indicating there are diverse views amidst agencies. There is higher standard deviation in some quarters in sector-wise forecasts.

As far as number of agencies are concerned involved in forecasting, it has improved. In July 2005 there were 8 agencies and in Jan 2008, there are 15 agencies. Though, mostly agencies prefer to give overall growth forecasts but skip sector-wise forecasts. As a result, we have more number of data points for overall growth numbers.

Bernacer Prize 2007 to Pierre-Olivier Gourinchas

April 11, 2008

Thugh the focus is either on Clark Medal or Nobel Prize, Bernacer Prize is equally distinguished.

Like Clarke medal which is given to American Economists under 40, Bernacer Prize is given to promising European economists under the age of 40. The list of previous winners is here.

The award for this year goes to Pierre-Olivier Gourinchas of University of California, Berkeley. He has done some exceptional work in the field of international economics. I have reviewed his paper on Allocation Puzzle here.

Assorted Links

April 11, 2008

1. WSJ Blog points to IMF forecasts. It also points to a debate on tax havens

2. Fin Rounds pointshow can we read WSJ online for free

3. PSD Blog on rising food prices

4. Simon Johnson on global imbalances

5. Econbrowser on the IMF’s WEO

IMF lowers growth forecasts and raises concerns over financial markets

April 10, 2008

IMF’s twin bi-annual bonanza is out. It has released its World Economc Outlook and Global Financial Stability report for April 2008.

Both reports give usual forecasts on world economy and state of financial markets. Frankly these forecasts are getting extremely difficult to make; either ways they are questionable- in times of growth they underestimate and in times of stress they overestimate.

Apart from the forecasts, the one thing one must read are the valuable chapters on contemporay topics. IMF does these topics really well and is an exhaustive literature survey on the topic.

In WEO, it has three chapters:

1. The Changing Housing Cycle and the Implications for Monetary Policy
2. Climate Change and the Global Economy
3.  Globalization, Commodity Prices, and Developing Countries

The first chapter is being discussed fervently as it mentions something controversial (made out to be) that monetary policy should have rising housing prices in their monetary policy framework. This does not imply it should target house prices but include the inflation due to rising housing prices in their framework.

I had raised this issue in my research as well.

GFSR has 2 chapters with catchy headings:

1. Structured Finance: Issues of Valuation and Disclosure
2.  Market and Funding Illiquidity: When Private Risk Becomes Public

Highly recommended readings!

Assorted Links

April 10, 2008

1. WSJ Blog points to Fedspeak, Fisher (superb speech), Kozner and Bernanke. It also points that Congreemen worried that Banks are using the discount window money to benefit their shareholders.

2. Krugman points to some funny euphemisms and another post on upside to the food crisis

3. DB Blog has a fantastic post on what is missing in India- a ministry to get business going

4. Ajay Shah has a detailed post on the subprime crisis. My take is it was pure greed, nothing more nothing less

5. ID Blog points to a new paper on financial inclusion

6. MR points to an article on hedge funds.

Statecraft is the new buzzword

April 9, 2008

I read this speech (This is an alternative link for the speech as World Bank link not really working) from Robert Zoellick which is being discussed widely across media and blogs.

In this speech Zoellick talks about a New Deal for rising food prices and involving Sovereign Wealth Funds for developing Africa. (He raises two more issues of reviving Doha round and helping resource rich countries. )

I really don’t understand this. Food prices have bneen rising all along and a crisis was just about to happen. That policymakers have waited tillt he crisis actually occured is disturbing. And suddenly all SWF money has become good and can be used for development.

Read the interesting speech as you might get to hear the new buzzword- statecraft – which Zoellick uses to address the problems

Assorted Links

April 9, 2008

1. Rodrik points to a fantastic similarity between Korean crisis in 1997 and subprime crisis

2. WSJ BLog on what more Fed can do

3. WSJ Blog points to Volcker speech criticising Fed and financial markets. It also points latest FOMC minutes shows recession is on.

4. Ajay Shah points to an article on currency futures. He also points to two articles from Ila Patnaik- one on investments in states and two on capital controls 

5. ID Blog on Self Help Groups and points to a poverty map

6. Krugman has been pointing articles on rising food prices. Here is another one

7. IE Blog on rising food prices

8. Mankiw’s blog provides some relief after disappointing news everywhere. He points to a shoe company that makes shoes for the two powerful economic schools. He also gets a nice invitation to a party.

9. Fin Prof on what makes Buffet successful

10. Simon Johnson on importance of exports in growth and development, An interesting post on starbucks index


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