Who should supervise banks? Central Banks or Independent Financial Regulators?

This is a nice paper from Barry Eichengreen and Nergiz Dincer (unable to find a free version).

Well there is huge debate on who should be looking at  banks post the crisis? Independent regulator in form of FSA failed in UK whereas Fed and other multiple regulators of US failed in USA. Despite different findings, it is being increasingly felt that central banks should be bank supervisors. They have natural advantage to do so as they are lenders of last resort and should know how banks are faring.

RTI and RBI….

This is a nice speech from Mr V. S. Das, Executive Director, Reserve Bank of India.

He has handled implementation of Right to Information Act (RTI) in RBI, so knows the challenges, issues etc:

Going back to gold standard…possible?

A superb critique from Barry Eichengreen on the topic.

One keeps hearing cries for going back to gold standard but I did not know it is really popular with some US state Governors and officials. So much so, some states have actually introduced gold standard (and its variants) in their states!

Hayek vs. Keynes

Robert Skidelsky, biography of John Maynard Keynes writes this nice article.

He says biggest advantage Hayek enjoyed was he outlived Keynes by nearly 50 years. This allowed Hayek to spread his influence and Keynes to lose out his.

Biggest threat for urbanisation – earthquakes/natural disasters

Here is another superb article from City Journal. This one is by Claire Berlinski who is a contributing editor.

She says seismic risk poses the biggest risks for cities in the world. There are two reasons for this. One, an earthquake causes more damage than anything else. Two, most big cities end up naturally being in the seismic danger zone. People like to live near water and fertile ground. Over the millennia, seismic activity creates coasts, valleys that channel water, temperate microclimates. So people come and settle at these places and become big cities. As per Claire, 8 of top 10 cities are in seismic zone.

So cities should be working to address this huge risk. And there are some good examples from recent Japanese, NZ and Chilean earthquakes:

Fed’s New Communication Strategy: Will it Work?

This is the title of my new paper. It looks at the Fed’s new communication strategy of keeping policy rates at near zero till mid-2013.  It compares this with Bank of Canada and Bank of Japan’s communication policies. It ends with comments on recent Fed dissents.

Comments/suggestions/criticisms are welcome..

Indian growths story is a case of trickle up not trickle down!!

SS Aiyar writes this rather surprising paper. Like the several papers on Indian growth story, he discusses Indian economy over last twenty years. He says Indian reforms is about two things – economic reforms and governance reforms. Latter lags big time over former as econ reforms have led to growth of 8.5%.

Buses vs High Speed Trains/Cars vs cycles – Which is better?

I always thought it is better to have high-speed trains given the scale of activity in that domain. It was deemed as energy-efficient, low pollution and a better way for mass transit.

However, this interview of one of the best urban economists Edward Glaesar made me sit up.  He says:

We should rename the Great recession as Great contraction

Ken Rogoff tries to settle the debate on severity of the downturn and policy measures needed (HT: Divya Iyer).

He says the first thing to fix is the name – Great recession. By recession people simply assume a cyclical downturn which has standard policy measures (cutting rates, some stimulus etc). This is anything but a simple recession. This approach in turn has led to policies etc which are not suited for the harsh times:

Classifying various monetary economics fields

Philip Arestis and Alexander Mihailov have this amazing paper which classifies various fields of monetary economics.

It has this super Venn diagram at the end in which you have three major strands of monetary economics:

Fed penalises Wells Fargo in the largest consumer-protection enforcement action

This is a pretty intersting and sad reflection of what was happening before the crisis.

Wells Fargo was imposed a $85 million penalty for pushing prime loan customers into subprime loan categors and falsified loan docs as well. All for making more salaries. This is the largest penalty on a consumer protection case:

Blaming Smoot Hawley for Great Depression is not really correct

The research on Great Depression continues and gets even more interesting.

Economic historian Douglas Irwin looks at the issue of Smoot Hawley Act (SHA) in what looks like a super book on great depression. The intro free chapter is here. Here is a videowhere Irwin discusses the book at Cato. It has a video of a movie starring Ben Stein (1986 movie – Ferris Bueller’s Day Off) and a debate between Al Gore and Ross Perot in 1990s over NAFTA. In both SHA  is criticized and suggested as a main reason for the Great Depression.

In the book Irwin says, S-H act criticism is overdone. He did argue the same in a paper written with Eichengreen and expands on the idea in this book.

What are the main ideas?

• SHA was not in response to economic contraction. It was to gain political advantage and support agricultural sector. The latter was doing poorly and the act was initially to raise tariffs in agri sector. Infact it was proposed in peak of the business cycle not middle of depression as it is perceived.
• As it always happens finalisation of the Act took time and by that time manufacturing items were added as well. There was lot of lobbying and rent seeking to get one’s items included.
• By the time it was enacted, depression conditions had started to set it. Other policymakers enacted tariffs looking at US leading to further issues. So, it did lead to international reactions.
• Economists opposed the Act but was still done leading to further conformations that politicians do what leads to winning elections. Economics is no where in the picture.
• So though it was a factor in great depression, it was not responsible for it. GD would have remained GD without SH act as well. Monetary and financial factors set up the depression.
• The debacle of the Act led to a change in policymaking design in US. Congress did not look at trade policy and it was assigned to US president to deal with trade policy issues

Very interesting. So we still debate GD and not sure about its causes/factors etc. The well known lessons from GD are being questioned. Some of them are:

• One paper said Fed doubling reserves in 1937-38 was not responsible for double dip depression as banks had raised reserves earlier.
• Another paper says Fed may have committed mistakes but Atlanta Fed did help by providing liquidity to struggling banks.

And now this bit on SH act. Pretty interesting stuff.

Here are some reviews —Economist, EH.net (very good one), Roger Lowenstein.

However, one thing came good because of SH act. Politicians are atleast serious about not doing anything with trade protections. They refer to SH act and say I am not touching this. This was seen in this crisis too. Imagine the chaos if countries implemented trade restrictions in this crisis.

Trivia:

The act should have been named HS Act:

Because the Constitution provides that revenue measures must originate in the House before going to the Senate, tariff legislation was often named for the Ways and Means Committee chair first and the Senate Finance Committee chair second. This implies that the legislation should be known as the HawleySmoot tariff, but Smoot played such a large role in its passage that contemporaries began to refer to it as the Smoot-Hawley tariff.

FinMin’s expenditure management measures…

India’s Ministry of Finance initiated a few measures to cut its expenditure mainly the revenue expenditure.I saw some of these measures earlier as well but were not successful it seems. This time we have some more measures and there are efforts to monitor them as well.

What are the measures?

Traffic and environment Management: US vs Europe

Gulzar has a fab post on the topic. s

He points how the two areas differ in their traffic management systems.

The prevailing traffic management paradigms on both sides of the Atlantic could not have been more contrasting. On the one side American cities are implementing policies that adapt cities to accommodate driving (by intelligent transport systems to improve traffic flow and apps to help drivers find parking spaces), while on the other hand European cities are creating environments that are hostile to cars (congestion pricing, outright car bans from green and pedestrian zones, closely spaced red lights, speed and parking restrictions, pedestrianization etc). 

The strategies employed by European cities aims to make car use expensive and difficult and thereby force them into using other modes of transport.

As Europe was built much before US, it has narrow roads and needs to stop congestion. US has much wider roads barring old areas and hence has different policies. In Swiss, it is not odd to see parliament members take trams to work.

Barring this there are some other interesting restrictions as well:

Further, even as American cities try to synchronize green lights to expedite traffic flow, European cities have been shortening the green-light periods and lengthening the red light times so as to reduce waiting times for pedestrians. In stark contrast to countries like US and India which stipulate minimum parking space for apartment units and new buildings, building codes in Europe cap the number of parking spaces in new buildings to discourage car ownership. Store owners in Zurich who had worried that road closings and pedestrianization would reduce business have been pleasantly surprised to see 30-40% increase in pedestrian traffic. 

Then in Europe no one really breaks these rules which is very different from the experiences in India where traffic rules are not followed. Infactit is rare for people following the rules.

Nice perspective..

 

Did QE work?

St Louis Fed hosted a conference on the topic.

Papers presented look at whether QE worked or not in variety of ways — domestic economy, international economy, financial markets etc. Papers say QE worked in most of these cases.

Speech by St Louis Fed President James Bullard is a nice one full of graphs showing QE2 worked. He asserts the evidence shows central bank is not bound at zero rates.

Well, there is just one thing. Most of the evidence is related to financial markets. It is being assumed that low rates would have helped real economy. We need more evidence on that..

Whither India’s demographic dividend?

Most must have read this superb piece from Arvind Subramaniam. He points to some initial results from his ongoing research on Indian economy.

• First growth in states has been double in 2001-09 compared to 1990s.Barring HP and Rajasthan, all states show higher growth
• However divergences in growth patterns continue. Inequality between laggard and frontrunner states remains and inequality has actually increased.
• Interestinlgy globalization has caught up with states as well. In this crisis, Maharashtra, Karnataka etc were impacted more than say Bihar and Gujarat. Globalisation works both ways…
• Finally, to the topic of the post. He says states with better demographics and having younger population (like Bihar, UP etc) fared worse than older states of Karnataka, Maharashtra etc.  He says:

 Hope in India’s future growth is founded on the demographic dividend: a rapidly expanding young population will save more and inject entrepreneurial vigor that will lift the country to a faster growth trajectory. And corroborative evidence was provided in an excellent recent paper by Shekhar Aiyar and Ashoka Mody of the International Monetary Fund. But the pattern of growth in the 2000s appears to muddy the waters. Our preliminary analysis, based on the 2001 Census projections rather than actual data from the 2011 Census, suggests that key demographic factors such as changes in the share of working-age population are not correlated—they may indeed be negatively correlated—with growth performance. This may not be surprising given that many of the demographically aging states such as Kerala, Tamil Nadu, and, to a lesser extent, Maharashtra and Gujarat have done remarkably well while demographically dynamic states such as Uttar Pradesh, Rajasthan and Madhya Pradesh have not fared as well. The preliminary nature of these results must be stressed, but succumbing to a demography-based complacency must be resisted.

Shankar Acharya said the same thing in a 2004 paper. He said demographic dividend is questionable as laggard states have higher fertility rates. So not much has changed. I wrote the post in 2007 (just started blogging then) and seems so relevant even now.

This demographic dividend thing has been overblown. It is like you assume if there is demand and supply markets would  be efficient. So as India has favorable demographics, it will grow. Well, like to markets efficient you need many things (infrastructure, institutions, law etc) you need the same for demographics as well – education, healthcare etc. The moment you look at these, you know we actually could be in for demographic discount.

He also points to some interesting aspects of communist regimes in two states – West Bengal and Kerala.

The figure provides a clue both to the long-standing success of the Communist party in West Bengal and its overthrow in the recent elections: West Bengal was one of the strongest performers in the 1990s but was one of the few states that stagnated in the 2000s while others surged.

A final intriguing factoid relates to Kerala. The conventional wisdom is of a state that is Scandinavian in its social achievements but sclerotic in its growth performance because of investment-chilling labor laws and militant trade unions, and reflected in a labor force that has voted with its feet by emigrating to West Asia. The abiding caricature is of the lazy, argumentative Malayali, discussing Foucault and Gramsci over endless cups of chai while living parasitically off the remittances sent by the relatives-in-exile. Well, the data suggest that the conventional wisdom and the caricature are dead wrong. Kerala posted amongst the highest rates of growth in the 1990s (4 percent per capita), continued its stellar performance in the go-go 2000s (7.5 percent), and exhibited great resilience during the crisis, experiencing virtually no decline in growth.

Well…what can one say to this?

Previous post along with this article gives a nice glimpse into India’s states economic performance.

Impose public ownership to reduce corruption??

A superb interview of Ed Glaesar. Truly, urban economics would have been into its old age without him. Thanks to him it is still youthful and actually getting younger by the day.

Glaesar points to five books on urban development/cities one should read.

• Nature’s Metropolis By William Cronon
• Plunkitt of Tammany Hall By William L Riordon
• The Philadelphia Negro By W E B DuBois
• The Urban Transportation Problem By John Robert Meyer, John Kain and Martin Wohl
• The Death and Life of Great American Cities By Jane Jacobs

Profile of George Akerlof

Prakash Loungani of IMF profiles George Akerlof, one of the most brilliant minds ever.

What strikes you in the profile (and most of Akerlof’s work) is his focus on unemployment. It is like his lemon/ information asymmetry papers are just part of some random thoughts which econs keep getting from time to time:

Taylor Rule for Euro-core and Euro-periphery: Does it fit?

Fernanda Nechio of FRBSF has this amazing and timely research on the issue. It estimates Taylor rule for Euroarea as a whole and then calculates it separately for Euro-core and Euro-periphery economies. Needless to say, one size does not fit all.

The paper responds to the recent ECB rate hike in Apr-11 and one more expected in July. Are these rate hikes in line with Taylor Rule?

Lessons from the U.S. Congressional Budget Office

CBO is one of the finest institutions around. Its non-partisan reviews on so many aspects of US economy is something so rare to see. I had pointed to it amazing history some days back at Hungary Fiscal Council Conference.  I am unable to locate the speech mentioned in the post as the council website has gone.

Phil Joyce points to more lessons from CBO on PFM Blog. He has just written a book which is the first ever institutional history of CBO- The Congressional Budget Office: Honest Numbers, Power, and Policymaking.

I am reproducing the lessons in full: