Archive for July 24th, 2009

Economic forecasting was created to make astrology look respectable

July 24, 2009

Richard Fisher of Dallas Fed in his recent speech points to this memorable quote from John Kenneth Galbraith.

Mind you, one of my professors at Harvard was John Kenneth Galbraith, who warned us that “economic forecasting was created to make astrology look respectable.”

Well only Fisher can point to such quotes.This is another super speech from Fisher whose speeches are always a big hit and full of humor. His last speech was in May 2009 so it has been quite a while.

In this speech he begins by saying:

In his upcoming book, In Fed We Trust: Ben Bernanke’s War on the Great Panic, David Wessel of the Wall Street Journal writes that “Fed officials are the Jewish mothers of the global economy. They always have to worry about something …”[1] He also organizes the Federal Open Market Committee (FOMC) into “cool guys,” “jocks,” “geeks” and “wannabes.” I am classified as one of the “jocks” who, according to Wessel, are “determined to show their manhood by talking tough about inflation and economic rectitude.” So this morning, you are going to hear from a compulsive worrier preoccupied with price stability and monetary integrity.

:-)

He looks at two issues in this speech – growth (which he thinks will be weak) and Too Big Too Fail (which is a big worry despite Obama proposals to rein them). He says TBTF was a problem in this cruisis but the bailouts have led to much bigger TBTF institutions. In the end for TBTF he says:

I know my opinions on this subject will hardly endear me to the largest financial institutions. On his death bed, Voltaire (who was neither a Hollywood lyricist nor a movie actor nor the president of the Federal Reserve Bank of Minneapolis) was asked to renounce the devil. He is said to have replied that this was no time for making new enemies. Some think that during this time of crisis and with financial and economic recovery still so tenuous, it is not the right time to think about proposals that make the perfect the enemy of the good. I disagree.

I believe we need to “think long,” as the Californian George Shultz likes to say, and the current policy prescription for treatment of TBTF is a bit shortsighted or, at best, necessary but not sufficient. If we want to avoid a repeat of what has just happened over the past 18 months, we need to exorcise the notion that an institution is too big to fail and remove all incentives for any institution to risk infecting the health of the financial system. If we make some enemies in the process, so be it. The object is to get it right.

Superb all the way.

Comparing Japan and Asian crisis with US 2007 crisis

July 24, 2009

Takatoshi Ito of Tokyo University has given a superb lecture comparing Japan and Asian crisis in 1990s with US crisis in 2007. I usually don’t read presentations as it misses the details but this one is really good.

He points to various similarities (quite a many) and differences (very few) between the three crises. It is full of useful facts on the 3 crisis and covers wide areas (mon pol, banking issues etc)

In the last 2 slides he says:

All the US advices to Japan (1997-2003) and Asia (1997-98) have to be taken seriously—for the US itself
–Avoiding moral hazard
–Stick to mark-to-market; transparency of balance sheet is important
–Hedge funds should be regulated
–Management should be purged immediately, when an institution essentially fails
–Keep pumping in capital to insolvent institutions and create a “zombie”is a bad solution
–“To big to fail”should be avoided

Maybe it is human nature to be objective and critical to others, but to be protective and optimistic to oneself 

 :-) Unfortunately, as key US policymakers have hardly changed there is no one to remind them of the lessons. They have been conveniently forgotten.

Have Short-selling bans helped?

July 24, 2009

Riksbank has this short research notes section called economic commentaries. I was reading this short note on short-selling Maria Strömqvist. She works for their financial stability dept.

In this short note she explains:

  • basics of short-selling,
  • the policy responses of various countries on short-selling in this crisis (see this)
  • Sweden’s response to short-selling (did not ban it despite pressure from banks)
  • reasons given by people for banning short-selling in the crisis
  • manipulation is not the same as short-selling (though ex-Lehman ex-chief thinks they are same)
  • Finally, Short-selling is an important part of efficient financial markets (yeah they still believe in it) and should not be banned. It helps in  arbitrage and is quite useful to push prices lower when they are not rightly priced.

I don’t know but short-selling is always a puzzle with me. It is rarely used in good times and used extensively in bad times. If rational investor theory is to be believed it should be opposite but fin markets work on the herd principle. And this time when US/UK banned it, who have advocated it all along I knew something is terribly wrong about the way we think about short-selling. Textbook explanation is fine but reality is a lot different.

This paper is a good primer but is too text-bookish.

This paper reminded of another paper by the same authoron hedge funds. In that paper she defended hedge funds sayng they have not caused the crisis and are actually quite useful for efficient markets (again). Recently, Sweden was in news as its finance minister said hedge funds and PE firms are not to be blamed for this crisis.

So, Sweden is emerging as one country which has dared to go different in this crisis. Its policy docs, policies still favor all that efficient market talk. This is exactly what finance people love. I read somewhere (can’t locate the link) that it is pitching itself as the preferred destination for international finance etc. But it has been hurt pretty bad in this crisis as its banks had lent heavily to East European region. I r’ber reading the stuff from Riksbank as the crisis set in, saying we will not be affected, have robust fin system etc. I hope it has learnt the lessons.

FinMin Rupee Symbol Design Contest Update

July 24, 2009

I had posted about this contest by Finance Ministry of India to design a symbol for Indian Rupee (like $ for US Dollar etc). I got a lot of comments and designs on the post. Some were concerned over the status of the contest.

Fin Min has released a press release on the status of the contest. It says it has received many applications and a first list of short-listed entries would be posted on the website very soon.

Great news.

Addendum:

The first list of short-listed candidates is out and is here.


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