The rise and fall of Brazil’s banking golden boy..

November 27, 2015

Another of those once golden banking boy bites the dust. This one is a Brazilian banker – Andre Esteves.

Andre Esteves, the brash banker who once joked his firm’s name, Grupo BTG Pactual, stood for “better than Goldman”, became the latest high-profile executive dragged into Brazil’s widening corruption scandal.

The 47-year-old billionaire was arrested in on Wednesday, along with Senator Delcidio Amaral, police said. Esteves allegedly sought an agreement with Amaral to interfere with testimony from a jailed former executive of oil producer Petroleo Brasileiro SA, according to a court document.

Esteves made a splash on the international financial stage – and became Brazil’s youngest self-made billionaire – when he sold Pactual to UBS for $2.6 billion in 2006. He and partners bought it back three years later and set off on an expansion, snapping up businesses including the Swiss private-banking unit of Assicurazioni Generali SpA. The firm sold shares to the public in 2012.

What is it about banking and finance that most of its earlier priests end up being ostracised later? Prof Galbraith in his book on history of money pointed to several of such cases in the past which continues till date.

RIP: Prof Douglass North

November 27, 2015

The blog was on a break which got longer than planned. There has been no blogging for a while and it is quite a sad post to start off with.

Prof Douglass North  passed away this week. No words can do justice to the contribution made by Prof North to institutional economics.  There is a collection of tributes on MR and another one at his Univ website.

I only have couple of things to add. I was once reading his interview where he said he learnt most of his economics after his PhD! Moreover, he mugged and cleared his written comprehensive exams (a set of exams in a Phd program one has to clear before writing the dissertation). But the people on his oral viva figured he knew very little about economics. They could not fail him as his written scores were really good! Sometimes inefficiency in the system does some good :-) In the same interview, he also explains how his first students did not take him seriously at all. He thought the students were smarter than him.

Knowing Hos Prof North shaped economics later on, one can hardly believe all this. As they say, if one stays committed to a cause(with dash of some luck), anything can happen in life.

Here is another tribute posted on

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Will RuPay end the dominance of Visa and MasterCard in India?

November 20, 2015

If this indeed happens, it will be a superb case of an “Indian PSU” overtaking the efficient MNC giants Visa and Mastercard. This blog had earlier mentioned the unsung story of Rupay card pioneered by NCPI.

ET has a story on how the Rupay is challenging the Card giants. Interestingly, it is in the area of information sharing where Rupay clearly has an edge…

Crowdfunding or Crowdphishing?

November 20, 2015

US SEC recently allowed crowdfunding. Prof Robert Shiller has a piece on the same:

If one were seeking a perfect example of why it’s so hard to make financial markets work well, one would not have to look further than the difficulties and controversies surrounding crowdfunding in the United States. After deliberating for more than three years, the US Securities and Exchange Commission (SEC) last month issued a final rule that will allow true crowdfunding; and yet the new regulatory framework still falls far short of what’s needed to boost crowdfunding worldwide.

True crowdfunding, or equity crowdfunding, refers to the activities of online platforms that sell shares of startup companies directly to large numbers of small investors, bypassing traditional venture capital or investment banking. The concept is analogous to that of online auctions. But, unlike allowing individuals to offer their furniture to the whole world, crowdfunding is supposed to raise money fast, from those in the know, for businesses that bankers might not understand. It certainly sounds exciting.

Regulators outside the US have often been more accommodating, and some crowdfunding platforms are already operating. For example, Symbid in the Netherlands and Crowdcube in the United Kingdom were both founded in 2011. But crowdfunding is still not a major factor in world markets. And that will not change without adequate – and innovative – financial regulation.

There is a conceptual barrier to understanding the problems that officials might face in regulating crowdfunding, owing to the failure of prevailing economic models to account for the manipulative and devious aspects of human behavior. Economists typically describe people’s rational, honest side, but ignore their duplicity. As a result, they underestimate the downside risks of crowdsourcing.

The risks consist not so much in outright fraud – big lies that would be jailable offenses – as in more subtle forms of deception. It may well be open deception, with promoters steering gullible amateurs around a business plan’s fatal flaw, or disclosing it only grudgingly or in the fine print.

He says such crowdsourcing platforms should curb expected phishing as well:

The 2012 US legislation that tasked the SEC with rulemaking for crowdfunding platforms specified that no startup can use them to raise more than $1 million a year. This is practically worthless in terms of limiting the scope for deception. In fact, including this provision was a serious mistake, and needs to be corrected with new legislation. A million dollars is not enough, and the cap will tend to limit crowdfunding to small ideas.

Some of the SEC rules do work against deception. Notably, crowdfunding platforms must provide communication channels “through which investors can communicate with one another and with representatives of the issuer about offerings made available.”

That is a good rule, fundamental to the entire idea of crowdfunding. But the SEC could do more than just avow its belief in “uncensored and transparent crowd discussions.” It should require that the intermediary sponsoring a platform install a surveillance system to guard against interference and shills offering phony comments.

The SEC and other regulators could go even further. They could nudge intermediaries to create a platform that summarizes commenters’ record and reputation. Indeed, why not pay commenters who accumulate “likes” or whose comments on issuers turn out to be valuable in light of evidence of those enterprises’ subsequent success?

For the financial system as a whole, success ultimately depends on trust and confidence, both of which, like suspicion and fear, are highly contagious. That’s why, if crowdfunding is to reach its global potential, crowdphishing must be prevented from the outset. Regulators need to get the rules right (and it would help if they hurried up about it).

How technology is reshaping financial markets. The focus is usually on banks but some interesting changes happening in equity markets as well..

How is Development Economics Taught in Developing Countries?

November 19, 2015

David McKenzie (of World Bank) and Anna Luisa Paffhausen ( of University of Passau) have written an interesting paper on the topic. They summarise the findings in this post:

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Is Bitcoin Only for Crooks and Cheats?

November 18, 2015

William Luther’s short answer is no.

The long answer:

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What began as a technical tweak for one Aussie batsman is now a nationwide fad..

November 18, 2015

Superb article by Sb Tang in Cricket Monthly. He looks at this habit of Aussie batsmen’s stance while facing the bowlers. Some batters tap the pitch as bowler steams in whereas others keep their bats up showing their stumps. The tapping bit is how it has been traditionally done. But recently the option to keep bats up has picked up leading to technical deficiency in batsmen.

And who was behind this bat-up stance? Ironically, Mr. Cricket Michael Hussey:

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Goldman closes its BRIC fund

November 18, 2015

How ironical to see Goldman close its BRIC Fund. It created the BRIC acronym from nowhere and created huge hysteria and hype. Just recently the BRICS nations have started their own bank and are pretyy gung ho about the whole group members.

And after all this, it goes on to close its own BRIC fund.

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Role of bank branches in age of mobile banking..

November 17, 2015

Kristle Cortés of Cleveland Fed has a short note on the topic.

She says though it is true that role of branches in world of mobile banking has dimmed somewhat, but the branches remain important for local information. So the role of branch is likely to shift from being the one that collects deposits/gives credit to the one that collects and maintains information. The info bit role the branch was doing anyways but it becomes more important now:

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Nothing makes sense anymore in global debt markets..

November 17, 2015

A team of Bloomberg columnists have this piece on global debt markets:

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Rising indirect taxes and food prices spoil promise of good days..

November 17, 2015

Two articles by Money Life team. One on rising food prices and other on rising indirect taxes. The same govt as opposition would have created huge hue and cry over both these measures if done by the previous govt. But thanks to the near demolition of the opposition, there are no questions being asked.

The problem is not limited to the centre but at state level too. In Karnataka one pays nearly 20% tax on eating food in hotels! It is so crazy really with nearly 15% VAT and 5% Service tax on eating food. With spiralling food prices, atleast taxes on eating could have been avoided. So much so for government for the people.

On inflation front and more so on food inflation, we have two kinds of measures. One is the official number which only impacts the policymakers and marketmakers. The other is the unofficial number which is what the mango man pays and is a more realistic number. Needless to say, the second is much higher than the first. Hence any talk of low inflation in India as reported by the official data is to be laughed off. All it could do is lower rates and excite the financial street but all this hardly matters to those on the real street.

And now we have rising indirect taxes to further dampen whatever remaining spirits…

Bankruptcy reforms: It is not dejure ranking but defacto outcome that matters..

November 16, 2015

Insightful post by Rajeshwari Sengupta. She analyses the recent bankruptcy code released by the Finance Ministry. She figures how the code will lead to a jump in Doing Business Rankings. So there will be a dejure increase but what matters is the defacto outcome. At the end of the day, businesses should see the benefits not just the media:

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Federal Reserve’s ties to the Barbie doll and why there isn’t a banker Barbie?

November 16, 2015

A really out of the blue post from 

She points to how the Barbie doll is connected to Fed. The doll’s founder sat on the board of San Francisco Fed:

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Knowing about policing Indian Railways – GRP vs RPF..

November 16, 2015

Another informative piece by Bibek Debroy on Indian Railways. This one is on police in Indian railways:

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When financial markets misread politics

November 16, 2015

Well as they say money has no color. Financial markets are pretty notorious for saluting the rising sun no matter how scorching the heat of the sun is likely to be. As this sun descents, the markets quickly shrug off the baggage and ride on to the next rising sun.  All this happens without minimal fuss and behaving as if nothing has happened.

Dani Rodrik has a piece on financial markets responding to Turkey elections:

When Turkey’s Justice and Development Party (AKP) defied pundits and pollsters by regaining a parliamentary majority in the country’s general election on November 1, financial markets cheered. The next day, the Istanbul stock exchange rose by more than 5%, and the Turkish lira rallied.  Never mind that one would be hard pressed to find anyone in business or financial circles these days with a nice thing to say about Recep Tayyip Erdoğan or the AKP that he led before ascending to the presidency in 2014. And make no mistake: Though Turkey’s president is supposed to be above party politics, Erdoğan remains very much at the helm.

Indeed, it was Erdoğan’s divide-and-rule strategy – fueling religious populism and nationalist sentiment, and inflaming ethnic tension with the Kurds – that carried the AKP to victory. Arguably, it was the only strategy that could work. After all, his regime has alienated liberals with its attacks on the media; business leaders with its expropriation of companies affiliated with his erstwhile allies in the so-called Gülen movement; and the West with its confrontational language and inconsistent stance on the Islamic State.

And yet financial markets, evidently placing a premium on stability, hailed the outcome. A majority AKP government, investors apparently believed, would be much better than the likely alternative: a period of political uncertainty, followed by a weak and indecisive coalition or minority administration. But, in this case, there was not much wisdom in crowds.

It is true that the AKP had a few good years after first coming to power in late 2002. But the party’s room for mischief was constrained by the European Union and the International Monetary Fund abroad and secularists at home. Once those limits were removed, Erdoğan’s governments embraced economic populism and authoritarian politics. Investors’ apparent optimism following the AKP’s victory recalls Einstein’s definition of insanity: doing the same thing over and over and expecting a different outcome.

:-) How similar all this resembles India’s politics as well!

Prof Rodrik says this does not apply to Turkey alone:

Turkey certainly isn’t the only case where financial markets have misread a country’s politics. Consider Brazil, whose currency, the real, has been hammered since mid-2014 – much worse than most other emerging-market currencies – largely because of a major corruption scandal unfolding there. Prosecutors have revealed a wide-ranging kickback scheme centered on the state-owned oil company Petrobras and involving executives, parliamentarians, and government officials. So it may seem natural that financial markets have been spooked.

Yet the most important outcome of the scandal has been to highlight the remarkable strength, not weakness, of Brazil’s legal and democratic institutions. The prosecutor and judge on the case have been allowed to do their job, despite the natural impulse of President Dilma Rousseff’s government to quash the investigation. And, from all appearances, the probe has been following proper judicial procedures and has not been used to advance the opposition’s political agenda.

Beyond the judiciary, a slew of institutions, including the federal police and the finance ministry, have taken part and worked in synch. Leading businessmen and politicians have been jailed, among them the former treasurer of the ruling Workers’ Party.

Financial markets are supposed to be forward-looking, and many economists believe that they allocate resources in a way that reflects all available information. But an accurate comparison of Brazil’s experience with that of other emerging-market economies, where corruption is no less a problem, would, if anything, lead to an upgrade of Brazil’s standing among investors.

This emphasised bit is what textbooks usually preach. But political economy of finance (the real world finance) is much different. Here, how financial markets align themselves to ruling political party is as important. How they eulogize the political leader and build grand narratives over big bang reforms and so on is quite a story by itself

He also picks examples of other countries and finally ends:

We know from painful experience that financial markets’ short-term focus and herd behavior often lead them to neglect significant economic fundamentals. We should not be surprised that the same characteristics can distort markets’ judgment of countries’ governance and political prospects.

Well said.

As they say, the show must go on. Not many have mastered the phrase as financial markets have done..

Even famous female economists get no respect..

November 13, 2015

Prof. Justin Wolfers has an article on the status of female economists. Just like females in other walks of life, in economics too they get a secondary status to males. This is even more irritating as even famous female economists are accorded the secondary status:

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How Shiv Nadar Foundation is making its impact on the society..

November 13, 2015

Nice story by Shelly Singh of ET.

Emergence of credible private universities is indeed a huge welcome development in India. It will gives students more choices and help them escape the wrath of India’s declining public university system. Though, it is still early days for Shiv Nadar University, one wishes them all the good luck in their endeavours.

Shiva’s wrath – Divali, creative destruction and central banking

November 13, 2015

First of all, Happy Diwali to all the viewers of this blog. Hope you all had a great time and continuing to have one on a really extended set of holidays.

It has been a while since this blog last posted. What better way to start than to point a speech linking Diwali with central banking. I had pointed earlier how Central Bank of Trinidad and Tobago celebrates Diwali keeping all these mythological stories as its theme. Earlier ones were on Ramayana and this year it is on Lord Shiva:

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Impact of Intellectual property rights on Italian artistic creativity in 19th century..

November 9, 2015
Petra Moser of Stern School of Business has a nice piece showing how the IPRs impacted arts on expected lines even in 19th  century. These things are quite obvious and people understood it without all the jazzy research:
The effects of copyright laws on artistic creativity are difficult to identify. This column looks back at 19th century Lombardy and Venetia where, following annexation by Napoleon, basic copyright protection was adopted. The copyright laws raised both the quantity and quality of Italian opera. The findings have important implications for modern debates about protecting intellectual property.

More generally, our results suggest that narrowly defined intellectual property – in the form of copyright – can encourage innovation. This finding contrasts with historical evidence on more broadly defined intellectual property rights such as patents, which suggests that policies that weaken patents encourage innovation, while policies that strengthen patents discourage innovation (Moser 2013). For example, my analyses of 19th century innovations indicate that the adoption of patent laws may affect the direction, but not the level of creative work (Moser 2005).

Intuitively, the narrow scope of copyright, which protects an individual expression of a work, prevents a key problem with patents. When patent rights are broad and their boundaries are poorly defined, innovators are at risk of unintentionally infringing on existing intellectual property, and patent examiners may issue overlapping patents for the same invention. These characteristics of patent laws increase the risks of litigation and discourage innovation. Comparison of patents and copyright suggests that intellectual property policies that reduce the breadth of patents (for example, by disallowing patents for abstract ideas) can encourage innovation.

Nice bit..

Book review: Towards Development Economics: Selected Indian Contributions, c. 1900-1945

November 6, 2015

TCA Ananth mention this book in a previous article. I am quite sure most econ students who graduate from India have not heard about most economists featured in the book. Such is the tragedy of our econ teaching.

The book is a compilation of select writings of select eminent economists, written in the period 1900-45. The title of the book could have been much better. This one hardly does any justice and might be seen as another development book.

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