Jean Tirole is perhaps the closest a Prize winner has been to Graduate/PhD students….

October 14, 2014

You can hate him but just cannot ignore him. The Prize for 2014 has been given to Prof Jean Tirole of Toulouse 1 Capitole University.

There were two reactions from my friends. First said never heard of him and second had perhaps only heard of him. The first one is working in the elite finance industry and second is a PhD student in economics.  I mean why would a finance professional be interested in anything but markets and how can a PhD student ignore Jean Tirole?

Doing a PhD, the name Tirole keeps coming to haunt you quite often. His stamp on the subject is so vast that you just cannot avoid him in your coursework. He has written textbooks specifically for PhD students in industrial organisation, game theory, finance, banking etc and are hugely recommended. If this is not enough, his large number of papers are obviously there. The sheer work he has produced makes one scratch his/her head if all this is real or surreal? And then most of his papers/books are not for the faint hearted. The struggle to get through a few pages is an enormous task given the math and complexity involved.

So a really interesting choice. As this second friend said- this is the closest a graduate student has ever felt to the prize winner. Most of the time, even graduate students do  not know the works of the choices in a given year unless you have specialised in the area. But with Prof Tirole this is a rarity. If a Phd student has completely missed Prof Tirole then either he/she is lucky or needs to redo his coursework.

Prof Tirole has influenced a lot of fields and continues to dominate the space. Even if you ignore the math, his illustrations in industrial organisation are quite interesting and obvious as well.  I guess now Prof Tirole should also write a book for general public as well,,,

What has led to financialisation of developed economies?

October 13, 2014

Òscar Jordà, Alan Taylor and Moritz Schularick look at this question in this paper. They summarise the findings in voxeu.

Understanding the causes and consequences of the rise of finance is a first order concern for macroeconomists and policymakers. The increasing size and leverage of the financial sector has been interpreted as an indicator of excessive risk taking1and has been linked to the increase in income inequality in advanced economies,2 as well as to the growing political influence of the financial industry (Johnson and Kwak 2010). Yet surprisingly little is known about the driving forces behind these trends.

In our recent research we turn to economic history. We build on our earlier work that first demonstrated the dramatic growth of the balance sheets of financial intermediaries in the second half of the 20th century and how periods of rapid credit growth were often followed by systemic financial crises and severe recessions (Schularick and Taylor 2012, Jordà, Schularick, and Taylor 2013).

 

They say that main reason has been shift of bank credit towards mortgage lending or for home buying. Banks over the years have become like a housing fund:

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Why History Should Replace Economics in the 21st Century?

October 13, 2014

Annalee Newitz reviews this book called History Manefesto by Jo Guldi and David Armitage.

The book points how historians lost their place to economists:

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If the unemployed formed a country, they would be the world’s 5th largest country

October 13, 2014

Sabina Bhatia of IMF reviews the recent bi-annual IMF/WB meetings (nice paid holiday trips for officials actually).

She collects the various ideas which were discussed this time. The prime issue of course being jobs:

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Bill Gross exit and behavioral economics

October 10, 2014

Interesting piece by Megan Mcardle of Bloomberg.

She says post Gross exit money has exited from PIMCO but not gone to Janus where Gross is currently based. How to really interpret this? Some insights from beh eco can explain:

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Recent trends in India’s Bank deposits..

October 10, 2014

J Dennis Rajakumar, Anita Shetty and Vishakha Karmarkar of EPW  Research Foundation provide a snapshot of recent trends in India’s bank deposits.

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We should also look at redistributive effects of financial deregulation

October 10, 2014

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How (and why) Bernanke used alias Edward Quincy during crisis..

October 10, 2014

One does not know how to react to such a post from WSJ Blog.

Bernanke used an alias Edward Quincy during the crisis:

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What could be the biggest risks for markets going ahead?

October 9, 2014

Vineer Bhansali of PIMCO has this article where he lists all the possible risks in future and the probability of them happening. Also the indicators one should track to monitor these risks like for inflation  there is PCE and so on.

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Should ECB copy the Fed?

October 9, 2014

Daniel Gros says no.

He says the financial system is very different in Europe and so is the debt profile of nations. This is the real issue for questioning QE and not the buying of govt debt:

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Will Swiss National Bank move to quasi gold standard?

October 9, 2014

A fascinating speech by SNB’s Jean-Pierre Danthine. The title of the speech is “Are central banks doing too much?”. To which he of course says no 9it is surprising to hear that he thinks we will be surprised to hear his answer as no).

Anyways,  what interested me in the speech was this thing called “Save our Swiss Gold” referendum. Referendums have become fashionable but I read somewhere they decide everything in Swissland via referendums. It is as close to near people’s democracy as one can get. So what is this?

The initiative is calling for three things: first, the SNB should hold at least 20% of its assets in gold; second, it should no longer be allowed to sell any gold at any time; and third, all of its gold reserves should be stored in Switzerland.

Hmmm. The voting is to happen on 30 Nov. If yes, SNB shall back to quasi gold standard…

This worries SNB:

Let me address the last point first. Today, 70% of our gold reserves are stored in Switzerland, 20% are held at the Bank of England and 10% at the Bank of Canada. As you know, a country’s gold reserves usually have the function of an asset to be used only in emergencies. For that reason, it makes sense to diversify the storage locations. In addition, it makes sense to choose locations where gold is traded, so that it can be sold faster and at lower transaction costs. The UK and Canada both meet that criterion. In addition, they both have a strong and reliable legal system and we have every assurance that our gold is safe there.

The initiative’s demand to hold at least 20% of our assets in gold would severely restrict the conduct of monetary policy. Monetary policy transactions directly change our balance sheet. Restrictions on the composition of the balance sheet therefore restrict our monetary policy options. A telling example is our decision to implement the exchange rate floor vis-à-vis the euro that I mentioned above: with the initiative’s legal limitation in place, we would have been forced during our defence of the minimum exchange rate not only to buy euros, but also to buy gold in large quantities. Our defence of the minimum exchange rate would thus have involved huge costs, which would almost certainly have caused foreign exchange markets to doubt our resolve to enforce the rate by all means.

Even worse consequences would result from the initiative’s proposal to prohibit the sale of gold at any time. An increase in gold holdings could not be reversed, even if necessary from a monetary policy perspective. In combination with the obligation to hold at least 20% of total assets in gold, this could gradually lead the SNB into a situation where its assets would mainly consist of gold: each extension of the balance sheet for monetary policy reasons would necessitate gold purchases, but whenever the balance sheet needed to be reduced again for the same reasons, we would not be able to resell our gold holdings. This would severely restrict our room for manoeuvre.

Furthermore, because gold pays no interest or dividends, the SNB’s ability to generate profits and distribute them to the Confederation and the Cantons would be impaired.

As a final point, note that currency reserves which cannot be sold are not truly reserves. It does not make sense to call for an increase in emergency reserves – gold holdings – and simultaneously prohibit the use of these reserves even in emergencies.

The SNB’s overriding objection to the gold initiative stems from the danger it poses to the conduct of a successful monetary policy. It would severely impair the SNB’s ability to fulfil its constitutional and legal mandate to ensure price stability while taking due account of economic developments, in the interests of the country as a whole.

Hmm.. Basically the points people had towards gold standard apply here as well.

Will be really interesting to see how Swiss vote on this..

How New Zealand CPI index will include pets as an item from now on….

October 9, 2014

WSJ Blog has this interesting post on addtions and deletions in NZ CPI basket. I mean this is far more more interesting than the CPI inflation levels which are we so obsessed with.

So what are NZers consuming more/less?:

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Reforming NY Fed and changing its culture…

October 9, 2014

WSJ Blog interviews Professor David Beim who was behind the report to study and reform NY Fed.  Though NY Fed did not do much to change and we have quite a story on the cards now.

So what did he find in NY Fed:

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Book review – An Undocumented Wonder : The Making of the Great Indian Election

October 8, 2014

This is an exciting book on Indian elections written by Dr SY Quraishi, former Election Commission chief.  The title of the book says it all. The way India conducts and manages its elections is really an undocumented wonder. So little is known and we have all kinds of prejudices and biases around the process.

So, the book tells you about how elections are conducted and the challenges faced by ECI in the process. How our visionary founders gave ECI supreme independence to conduct elections, a mandate from which we continue to benefit. The book is interspersed with interesting anecdotes regarding elections. The stories on how ECI runs a booth just for one individual is quite a read. I mean there is a temple in Gir (Gujarat) where only the priest lives and we have a booth for him. Likewise all people from village migrated except one and there is a booth for him as well.

The book discusses roles of various stakeholders in the election game/circus and way ahead.

Must read..

Well…Philips curve is a myth…

October 8, 2014

James Forder of Oxford Univ writes this stirring paper saying much of what we know of Philips curve is a myth. He has written a series of papers questioning the idea.

He says what we know of the famous curve is just a cooked up story. First, Philips did not really point to a new relationship. Second, he did not wish it be known as a trade-off.  Third, the glorification of how Phelps and Friedman dismantled the curve is another cooked up story. The idea of expectations was always there and their contribution was questioning that we could run inflation permanently. So, we need to reconsider how this idea has become mainstream macroeconomics where as it is just stories:

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Skills of Keynes as a fund manager…

October 7, 2014

David Chambers, Elroy Dimson and  Justin Foo have this interesting paper on Keynes and his skills in fund management. It is kind of known that he was quite skillful at managing money and left a fortune at the end. He could not see the depression and lost a lot of miney but at the end of the day (EoD as called by market guys), he was in positive.

This paper tracks how Keynes managed the endowment fund of King’s College. Keynes was a bursar of the college and responsible for the endowment.Keynes shifted the fund allocation from real estate to equities and till date Kings has higher asset allocation towards equities compared  to other colleges:

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Has China’s monetary policy become more “standardized”?

October 7, 2014

The title should actually read Has China’s monetary policy become more “advance country like”? I mean whatever they do is deemed as a standard even when they are all wrong on the matter.

Anyways, this note by John Fernald, Eric Hsu, and Mark Spiegel look at how Chinese mon pol has evolved over the years. The changes in Chinese economy have led monetary policy to react just like it does in the west:

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Great news for Yellen…one in six Americans think Greenspan still runs the Fed

October 7, 2014

The survey is highly limited as it was polled across 1002 adults. That is too small really to draw results.

Nevertheless, it seems Yellen is doing a great job  as just 24% could recognise Yellen.  So much so, around 16% of Americans still think that Greenspan is running the Fed.  Bernanke did a better job of being recognised with 33% recognising him in a survey in 2009.

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Swachh Bharat lessons from Bangladesh…

October 6, 2014

This Swachh bharat initiative is easily the best taken by new Indian govt (read PM) after getting elected. Living in India has become a huge hassle given the lack of basic hygiene in most parts of the country. We literally live around garbage and filth and is a huge health hazard. Children are sick every other day and hygiene plays a big role. Most soap ads show washing hands after each task as a way but there is a limit to washing hands each time and then even clean water is not there.

Gyanendra Keshri of Inclusion points how Bangladesh rectified this open defecation but we continue to struggle despite booming economy and markets.

Likes of Sen and Dreaze have pointed how we lack behind Bangladesh on basic human indicators and this open defecation is one such indicator…

Hope the initiative lives on and we do get a better life by 2019..

Central bankers as new philosophers to fix world economy and why that is a problem..

October 6, 2014

A brilliant column by Prof Harold James bringing a lot of things under one column.

He points how Europe and US have differed on philosophy of life. The philosophy of course comes from one’s world values which are shaped by culture and history. These differences reflect in all things including economic policy. Whereas US has been much more active trying to stimulate their economies out of trouble, Europeans have dithered for a long time.

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