Rogoff-Reinhart duo keep repackaging their huge hitoric macro/finance data to throw some interesting results.
In this paper they compare recoveries from financial crisis from 1o0 episodes:
Super column by Prof. Shiller.
He says it has been really difficult to pass any reforms to regulate financial sector. The policymakers have een rejecting simple ideas to rein in future crises. He narrates his experiences of chairing sessions at recent AEA-2014 meeting in financial crisis policy:
Nice article by Prof. Brigitte Granville of University of London. A while back I had pointed to this really interesting article on how Scotland is contemplating breaking from UK.
She compares how Scotland is likely to face problems of whether to maintain its monetary union with England. This is sinialr to the questuons the GIIPS are asking of the EZ monetary union.
She says despite the advantages of keeping Pounds as its currency, EZ crisis shows it is best to have your own currency.
This is a really interesting paper by Simi Kedia and Xing Zhou ( both of Rutgers University) and Shivaram Rajgopal (Emory University).
The authors say that Moody’s ratings seem to become more lax post its IPO in 2000. They seem to be stricter with respect to ratings before the IPO. S&P which remains privately hold is not as much affected:
Reinhart and Rogoff have this interesting paper on the topic. They say that most advanced economies are stuck in this trap to resolve crises in their economies. The reason is the easier solutions look pretty much of the developing world. Now, how can advanced economies use such policy measures?
The reality is much different. Throughout their history, today’s advanced economies have used the solutions which are now termed as belonging to emerging world:
Even after one of the most severe multi-year crisis on record in the advanced economies, the received wisdom in policy circles clings to the notion that high-income countries are completely different from their emerging market counterparts. The current phase of the official policy approach is predicated on the assumption that debt sustainability can be achieved through a mix of austerity, forbearance and growth. The claim is that advanced countries do not need to resort to the standard toolkit of emerging markets, including debt restructurings and conversions, higher inflation, capital controls and other forms of financial repression. As we document, this claim is at odds with the historical track record of most advanced economies, where debt restructuring or conversions, financial repression, and a tolerance for higher inflation or a combination of these were an integral part of the resolution of significant past debt overhangs.
In this paper, we extend our earlier work on pre-WWII sovereign defaults by further documenting lesser known domestic default episodes but particularly by delving deeper into the widespread default by both advanced and emerging European nations on World War I debts to the United States during the 1930s. We quantify this largely forgotten episode of debt
forgiveness (the debts were never repaid) in terms of both its incidence across countries (which is relatively well known) and its scale or orders of magnitude of default in comparison to the debtor countries’ GDP as well as to what it collectively amounted to from the US creditor perspectives.
We also illustrate the continuing depth of the debt overhang problem, which in our view remains the overarching obstacle to faster recovery. Research shows that debt overhang of this magnitude is typically associated with a sustained period of sub-par growth, lasting two decades or more.3 In light of this danger, we review the possible options, concluding that the endgame to the global financial crisis is likely to require some combination of financial repression (a nontransparent form of debt restructuring), outright restructuring of public and private debt, conversions, somewhat higher inflation and a variety capital controls under the umbrella of macroprudential regulation. While austerity in varying degrees is necessary, in many cases it is not sufficient to cope with record public and private debt overhangs. All these options, while understandably anathema to the current generation of advanced country policymakers, are more familiar to their economies than is commonly recognized.
We take this opportunity to highlight four basic of the lessons from the historical track record learned as well as those economists, financial market participants, and policy makers seem to have collectively forgotten.
What are the four lessons?
Well, few econs have stuck to a single task ever since the crisis started. One such person is Prof Simon Johnson of MIT who has been after this too big to fail approach of banks. He has written several articles asking banks to be broken up and facing sever penalties for the losses they have brought to public.
So, in this recent article he compares Cricket Australia’s decision to penalise Michael Clarke with US Dept of Justice to penalise JP Morgan. It is really nice to see an American Prof following cricket!!:
When an athlete breaks the rules, it is easy to figure out whether the relevant disciplinary body really wants to discourage repeat offenses. Suspending a player from the sport – as happens in soccer in the case of dangerous fouls – is a real punishment, not only for the individual but also for the team.
Consider the case of Michael Clarke, the captain of the Australian cricket team, who recently threatened bodily harm to an opposing player. Despite public hand-wringing, Cricket Australia (the governing body) imposed only a small fine (that is, small relative to Clarke’s annual salary). Whether or not this was appropriate, Cricket Australia was making it clear that such behavior merited only a symbolic punishment.
The recent $13 billion settlement between the US Department of Justice and JPMorgan Chase (JPM), one of the world’s largest international banks, should be viewed the same way. To the uninitiated, the fine appears significant (which explains all the attention-grabbing headlines), and it certainly has made America’s financial regulators look busy and serious. But, just like Cricket Australia, the message is clear: There will be no change to business as usual.
He points how both pay some really low penalty:
A $13 billion “fine” for a company the size of JPM is about as painful as Clarke’s fine is for him – not painful at all. Clarke earns about $6 million (Australian dollars) per year; in addition to an annual retainer, he receives a $14,000 match fee for every international test match, along with other tour fees and bonuses. He was fined 20% of the international match fee ($2,800), or about 0.05% of his annual salary. For anyone with an annual income of $50,000 (which is close to the median for US households), this would be equivalent to a fine of $25.
JPM has a total balance sheet of around $4 trillion, measured using international accounting standards. As management told shareholders after the settlement was announced, “the Firm is appropriately reserved for all of these matters,” meaning that there would be no material impact on earnings. And, predictably, “the Firm did not admit any violations of law.”
In fact, while Clark’s paltry fine presumably at least comes out of his own pocket, the penalty levied on JPM is to be paid largely by its shareholders. And, because there is no market for corporate control over megabanks (because protections provided by regulators prevent hostile takeovers or effective shareholder activism), frustration on the part of JPM’s investors cannot result in a change of management.
But, again, JPM’s shareholders have little cause for concern. Marianne Lake, JP Morgan’s chief financial officer, has suggested that about $7 billion of the fine is likely to be tax deductible, that is, treated as a form of necessary and usual business expense. The bank was taxed at an effective rate of 31.3% in the first nine months of 2013, according to the Wall Street Journal, implying a tax break worth around $2.2 billion (which could end up higher).
Fine to be tax deductible!! Really?
Prof Solow says Herr Greenspan has still not learnt from his mistakes. He starts with some +ves in Greenspan’s career. And then gets to the minuses:
On the minus side, Greenspan’s reputation has suffered from two big mistakes. The first was his failure to see the importance of the housing bubble and the dangerous vulnerability of the financial mechanism that supported it. Had he done so and punctured the bubble promptly, the economy would have been spared the prolonged weakness that it is still suffering. The second was his deep-seated conviction that the unregulated financial system was self-stabilizing, that the self-interest of all those clever and experienced participants with a lot of their wealth at stake would keep the accumulation of risk within tolerable bounds. So he promoted deregulation and financial consolidation (as did others, of course) and, when this simple faith proved wrong, allowed disaster to strike. I think that the first mistake may be partially excusable, but the second mistake was a catastrophe, and it was not an accident.
Hindsight leaves no doubt that it would have been a great idea to prick the housing bubble early. But imagine that Greenspan and the Fed had done so. Suppose they had tightened credit, pushed interest rates higher, put an end to the housing boom, and thus—very likely—created a standard recession like so many of the others. They would surely have been pilloried for destroying a nice prosperity in midstream and creating painful unemployment. And for what? To prevent a later financial crisis? But no financial crisis would be actually visible, not in this version of history. How could anyone know that one had really been averted? It was still a mistake to have let the bubble continue, blandly claiming that it would be easier to pick up the pieces later on. It stands as a bad grade in the Greenspan report card. But it was not simply a matter of foolishness and ideological fantasy.
The second mistake, the bigger one, was both. An unregulated financial system, no matter how many smart people have megabucks in the game, can easily become over-leveraged and then fatally underestimate or ignore the amount of risk that financial institutions have taken on and the depth to which their risky balance sheets contaminate each other in hidden ways. When the edifice starts to collapse, central bankers and other policymakers may be left with the choice between bailing out the very people and institutions whose behavior created the crisis and letting the edifice collapse, doing even more harm to millions of people who played no active part in the disaster. The point is that this was not just a bad hair day, or one of those cases where nature presents nothing but bad options. It was a case of bad ideas coming home to roost. Greenspan was a prominent opponent of financial regulation, and it cost him (and us).
Further, the recent book shows he has not learnt:
Greenspan’s new book is obviously intended to show that his errors were only partial and that he has found useful ways to correct them, and thus to refurbish his reputation as oracle-in-chief. It fails. His argument is thematically vague and analytically weak. In the end it sounds like the same old right-wing conviction that the unregulated or very lightly regulated market knows best.
Begin with the book’s title and subtitle. The analogy between a map and a theory is a useful device. Fathers-in-law are always pointing out that any economic theory ignores this or that obvious fact about the real-world economy. But a map on the scale of one to one is precisely useless. A map on the scale of one to 500,000 is useful for most purposes, but you cannot expect it to show every bend in the road or every dirt track leading north. Greenspan does not seriously discuss the goals and the limitations of reasoning about the economy. He talks some about his early life as a forecaster, and he is clear that economic policy has to be based on forecasts: policies undertaken now will have effects in the future, and sensible economic policy usually has long-run goals anyway. But the reader of this book will learn little or nothing about the process of forecasting other than that it is difficult and that the results are always uncertain. Duh.
The new Greenspan concedes that the decisions made by participants in the economy are not always governed by rational adaptation to given facts, and that this failure leads to unpredictability and instability. Instead the economist-forecaster-policymaker has to take account of “animal spirits.” (The phrase was introduced into economics by Keynes and was recently revived by George Akerlof and Robert Shiller.) This is a step in the right direction, but even here Greenspan does a poor job. He rattles off a long list of what he regards as “inbred” propensities of people and groups to behave irrationally, or at least non-rationally, in economic matters. They include fear, euphoria, aversion to risk, preference for early rewards over larger later ones, herd behavior, dependency on peers, a bias toward dealing with people close to home, competitiveness, reliance on a code of values, a bias toward one’s relatives, self-interest, and self-esteem. That comes to twelve propensities, some broad, some narrow, some vague, some precise, some important, some less so, and Greenspan says that there are more of them.
He questions the use of regressions in the new book and couple of other things as well..
In the end:
Students of economics are taught about the efficiency of competitive markets, and they are also taught that judgments about “social welfare” or justice have to come from some other source. Here I have to introduce a question that I am not the best person to discuss. It is sometimes claimed that Alan Greenspan is a closet follower of Ayn Rand; he certainly had an early association with her circle. I got through maybe half of one of those fat paperbacks when I was young, the one about the architect. Since then I have found it impossible to take Ayn Rand seriously as a novelist or a thinker. In the past I have gone on the assumption that Greenspan’s ideas about economic life are his own, just what is contained in his writings, and the Ayn Rand question does not arise. But now there is this book, with its particular misinterpretation of mainstream economics, which might be thought to reopen the question if anyone is interested.
Anna Rosenberg Hoffman once said to me, when I was prattling on about what “the data” said: “What are you going to believe, the data or your eyes?” A hard choice. The Alan Greenspan I admired was a pragmatic central banker who was able to believe both the data and his eyes and to ignore the people who already knew the answer without looking. The author of this book makes a show of both, but not really. His eyes are too often closed and he seems to be listening to another voice, with quite conventional opinions, coming from somewhere stage right.
How quickly the world of Alan Greenspan crashed…The same ideas were praised by most (not Prof. Solow hopefully) before 2007 and are being questioned now. though, it is a different story that his ideas are still alive and kicking..Though no one wants to be called a la Greenspan..
Wharon Profs. Howard C. Kunreuther and Mark V. Pauly, have co-authored a book titled, Insurance and Behavioral Economics: Improving Decisions in the Most Misunderstood Industry.
In this interview, they say why insurance is the most misunderstood industry. Some think it like investments, others do not insure as events are low probability:
Well taper has finally arrived minus the hoopla which came with when the word taper. Taper was mentioned in May-2013 by Herr Bernnake and finally not done in Sep 2013 policy.
Barry Eichengreen and Poonam Gupta have done this really useful research ( a longer version of research here)evaluating which countries were impacted the most in the period May-2013 and Sep-2013. Ever since it was released yday, this voxeu article has been mentioned in most places, much like most Prof. Eichengreen work.
The results are quite surprising actually:
Prof. Lucas Davis of UN Berkeley has this nice paper where he estimates the cost of global fuel subsidies. It is a nice paper which can be used to explain the concepts of social costs, external costs. private costs to students with some real world analysis.
He estimates the global subsidy bill at $11o bn: