IMF lowers growth projections in 2008

IMF has updated its October forecasts and lowered its growth projections. It says world economy is poised to grow by 4.1% in 2008 lower than 4.4% it projected in October 2007 outlook.

Basically, IMF has revised its estimates by 0.5% each year between 2002-07 as part of its International Comparison Program. It had estimated world economy to grow by 4.7% in 2007 but the recent report shows it has actually grown by 4.9%.

The economic outlook is here and financial market update is here

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Assorted Links

1. WSJ Blog points that markets would be bimodal in future. It also has a nice article on how fiscal policy might help.

2. PSD Blog points to a new paper on financial liberalization

3. EPSA Blog on Sri Lankan economy

4. MR points to a new blog – from Columbia business school. It should change the presentation style. It also points to a new kind of flight.

5. MR on why so many papers are being co-authored?

6. JRV updates Soc Gen case.

Rangarajan report on financial inclusion

I had unearthed Deepak Parekh report on infrastructure financing couple of months ago. At that time I had expressed my frustration about not knowing on which website various important policy reports are maintained.

The newspapers had reported a while back that Rangarajan committee has submitted its report on Financial Inclusion to the government. However, the report was nowhere to be found.

I just found it today on Nabard’s website. Take a look. It is one of the most important policy documents on financial sector. RBI has always shows its commitment to financial inclusion and subprime crisis will make us rethink on financial inclusion as subprime was nothing but an attempt at financial inclusion.

India Monetary Policy Review: Q3 2007-08

RBI has presented its monetary policy for Q3 2007-08.  The full report is here and the summary is here.

In nutshell, RBI maintains its policy rates and there are no changes. The overall stance of monetary policy in the period ahead will broadly continue to be:

• To reinforce the emphasis on price stability and well-anchored inflation expectations while ensuring a monetary and interest rate environment conducive to continuation of the growth momentum and orderly conditions in financial markets.
• To emphasise credit quality as well as credit delivery, in particular, for employment-intensive sectors, while pursuing financial inclusion.
• To monitor the evolving heightened global uncertainties and domestic situation impinging on inflation expectations, financial stability and growth  momentum in order to respond swiftly with both conventional and unconventional measures, as appropriate.

I am glad RBI maintained its rates. There were huge pressures on RBI to cut rates but it stood its ground.

There were numerous arguments from various people arguing for a rate cut on account of slowdown ( is 8.5% growth slow), credit growth (again about 20% , is it slow?), IIP slowdown (about 9%  from Apr-Nov with capital goods index increasing at about 20% every year, again is it slow), low inflation (well oil prices have not been raised and good prices are expected to rise, so inflation is only going to rise).

I will read the statement and see if I can post something on the report.

Addendum:

In the Q3 2007-08 macroeconomic report, it is seen that despite rising deposits, banks have not been deploying it in credit but in G-secs and other financial assets. Hence RBI says in its mon policy that one of the aim would be:

• To emphasise credit quality as well as credit delivery, in particular, for employment-intensive sectors, while pursuing financial inclusion.

RBI also says:

In view of the prevailing liquidity conditions and the sustained profitability of banks as reflected in net interest margins, there is a need for banks to undertake institutional and procedural changes for enhancing credit delivery to sectors that are employment-intensive. 

This employment-intensive word just caught my eye and set me thinking. RBI has been emphasizing on the word earlier as well (see Midterm report 2007-08 and Annual report 2007-08.)

I think it is because of the NSS 2004-05 report which says that employment numbers have improved but the quality of employment hasn’t (Read my posts here and here). Infact much of the employment has actually been in agriculture and self-employment both having lower growth rates than services and industry. Hence, the need to allocate more credit to those sectors which are growing and are employment intensive as well.

This is one of the biggest problems in Indian economy- migrating the huge labor from low growth sectors to high growth ones.

Societe Generale fraud note

Reams are being written about the Soc Gen fraud. Here is an official statement from Soc Gen about the fraud.

Here is a list of the top frauds in financial markets till date

Update:
On reading the note, I realise it is not really useful. It doesn’t help you understand the details about the fraud . Like Prof JRV says, it is a non explanation note.

Assorted Links

1. WSJ Blog on recession odds. It says hello to stick market crybabies

2. Mankiw points to a research that says probability of recession is 0.355.

3. Mankiw points to a debate on fiscal stimulus. Mankiw sayshe is not running for the NBER chief’s post.

4. Fin Prof points that Soc Gen was warned about Karviel before the crisis. I knew something like that must have been there.

5. Fin Prof points to ridiculous compensation structures in financial industry.

6. Menzie Chinn on fiscal stimulus

7. Rodrik discusses his weekend.

8. MR points to Keynes’ diaries

9. Martin Feldstein on Recession

10. V. Anantha Nageswaran says run for safety.

New Zealand Central Bank makes reading on its economy interesting

Reserve Bank of New Zealand is an inflation targeting (IT) central bank. It was the first to have adopted the IT framework in 1990. Central banking as a whole has made tremendous progress since then. There is a lot of research on the way Central Banks have come to terms with inflation and have helped in their own way to stabilise growth in respective countries (However, this was all till the subprime came and we really don’t know which way the Central Banking is headed)

However, RBNZ is one central bank which is right at the top when it comes to explanation. The speeches etc from them are really simple and worth a read. It seems they take their role of being accountable to the public pretty seriously. They assume anyone who knows English should be able to read their report.

NZ is a pretty small economy but the way RBNZ explains the developments is excellent stuff. For instance see this on explaining financial system and this on rising food prices.

Now this recent one on the way NZ economy has performed over the years. It is a speech from the Governor – Alan Bollard. It is a nice prototype for all the analysts doing a report on a certain economy.

Indian economy report: Q3 2007-08

RBI’s quarterly report on Indian economy and financial markets has been released. It is released a day before the Monetary Policy meeting. The summary of the report is here.

I have not read the report. I will post later if I find anything interesting.

Addendum:

The report is routine stuff with lots of numbers and statistics. However, chapter 3 of the report on Monetary and Liquidity Conditions is really interesting. The new doing the rounds in economy is that rates are too high, banks are not giving loans etc. Here is what RBI has to say:

• Non-food credit by scheduled commercial banks (SCBs) expanded by 22.2 per cent, y-o-y, as on January 4, 2008 as compared with 28.4 per cent at end-March 2007 and 31.9 per cent a year ago. The deceleration in credit growth coupled with the acceleration in deposit growth led to a decline in the incremental credit-deposit ratio (y-o-y) of SCBs to 63.3 per cent as on January 4, 2008 from 93.7 per cent a year ago.
• Disaggregated sectoral data available up to November 23, 2007 show that about 43 per cent of incremental non-food credit (y-o-y) was absorbed by industry, as compared with 34 per cent in the corresponding period of the previous year. The expansion of incremental non-food credit to industry during this period was led by infrastructure (power, port and telecommunication), iron and steel, textiles, engineering, food processing, vehicles, petroleum, chemicals and construction industries. The infrastructure sector alone accounted for over 28 per cent of the incremental credit to industry as compared with 18 per cent in the corresponding period of the previous year.
• Apart from bank credit, the corporate sector continued to meet its funding requirements from non-bank sources such as capital markets, external commercial borrowings and internal generation of funds. Resources raised through domestic equity issuances during the first nine months of 2007-08 (Rs.31,897 crore) were higher by 40 per cent than the corresponding period of the previous year.

So, capital raising is not that much of a problem. However, credit has slowed down but deposits have increased within banking system. Where are these deposits then invested in?

• Growth in deposits, issuances of fresh capital and internal generation of funds by banks on the one hand, and moderation in credit growth on the other, enabled banks to deploy their funds in Government and other approved securities, which increased by 24.7 per cent, y-o-y, as on January 4, 2008 as compared with 5.9 per cent a year ago. 
• Investments by SCBs in non-SLR securities (such as shares/bonds/commercial papers) increased substantially during the year. As regards banks’ exposure to the external sector, while banks’ overseas borrowings expanded, their holdings of foreign currency assets declined

So, it is not as much a problem with lower credit on account of lower deposits. The deposits have been growing but instead of deploying the proceeds as credit, they are being invested in G-Sec and other financial assets. Why is that? The reasons that comes to my mind are:

• There are no really bankable projects- this is scary to think of given the huge infrastructure deficit in the country.
• The returns on financial assets are higher- the banks could prefer financial assets instead of giving loans for creating real assets. The returns on real assets could be lower or the projects may not really be worthwhile.
• The interest rates are quite high and the corporates are not looking forward to banks to raise debt capital. But cost of debt is lower than cost of equity and corporates seem to be raising via the equity route. Hence, this high interest rate is not really an important factor.

What else could be the possible reasons?

Central Bankers are neither doves nor hawks, they are owls

Reading speeches of Richard Fisher is always entertaining stuff. (See previous posts one & two). He is usually very forthright in his views and doesn’t mince words either.

Here is another classic from the man. He says:

Those of you who follow my speeches—probably a very small number of you with way too much time on your hands—will recall that I like neither the term “hawk” nor “dove.” I like to think that all FOMC members are best metaphorically described in ornithological terms as “owls”—wise women and men seeking to achieve the right balance in carrying out our dual mandate.

🙂

The speech is another reminder on rising inflation and inflation expectations.

Banks, Banking and crises

Here is an excellent summary of the various aspects of Banking. It is basically a literature survey of Gary Gorton’s work.

The subprime mortgage credit crisis demonstrates that while financial intermediaries have changed in many ways, at root their problems remain the same. Indeed, the old problem of banking panics can reappear in new guises.

In the subprime mortgage crisis, investors without information about exactly which bonds have declined in value have refused to reinvest in the short-term obligations of structured vehicles, including Structured Investment Vehicles (SIVs) and Asset-Backed Commercial Paper Conduits. And, without financing from capital markets, these intermediary vehicles either must sell assets, causing the prices of a range of assets to fall and resulting in widespread losses, or must receive financing from their sponsor banks, reabsorbing the vehicles onto the balance sheet and resulting in decreased capital for the sponsoring banks. In this report I review my research on banks and banking, and look at bank crises in particular.

Again, the broad learning is nothing is different about the crisis. It also implies no lessons are really being learnt. See this excellent paper from Rogoff and Reinhart also saying nothing is really different this time.

Review of Joseph Stigilitz’s work

This paper from Karla Hoff is a nice summary of Joe Stiligiltz’s work.

Citations are an objective, if imperfect, measure of influence. Kim, Morse and Zingales (2006) compiled a list of the 146 articles published in economics journals from 1970 to 2002 that had received by June 2006 more than 500 citations from the ISI Web of Science/Social Science Citation Index. Six of Stiglitz’s papers appear on this list (no other author has more).

Procyclicality of balance sheets is another problem

Procylicality of balance sheet mean that leverage of balance sheets increase with rising asset prices  and vice versa. So when times are good leverage increases and then when we have sudden downfall, the entire thing is a mess.

I came across this paper from Adrian and Shin which show how strong this relationship has been over the years. The implication of this behavior is that we have upward sloping demand curves for assets and downward sloping supply curve.

It is a nice read. Really short and crisp. They gave a presentation at BIS which is also worth a look.

Assorted Links

1. JRV onIndia’s margin system. TTR also lends his thoughts on the margin system.

2. WSJ Blog points to economists discussion over whether enough is done already. It also pointsto Mark Gertler ‘s views on the crisis. He was Bernanke’s coauthor in few papers.

3. WSJ Blog also revisits financial accelerator, the one broad  idea developed by Bernanke that is behind the problems in US economy and the monetary policy measures.

4. Mankiw’s list of economists against the fiscal stimulus. It is amazing that in such stiff times, the economists in US are still debating what should be and should not be done.

5. Rodrik points to a capital flow analogy.

6. JRV also has a nice take on the Soc Gen fraud.

7. Ajay Shah reminds us of debt management office

Repugnance in markets

Ronald Coase discovered firms exist as pricing mechanism couldn’t coordinate (as advocated by free market advocates) as there were transaction costs and the firms were best positioned to take care of those transaction costs. Then we had theories from Doug North where he said markets worked bnest if we had proper institutions. Then we had work from Akerlof, Spence and Stigilitz which took off after Akerlof’s seminal piece called Market for lemons. It brought the importance of information asymmetry being persistent in markets leading to ineffective markets.  Next was the work from Behavior Economics/Finance field pioneered by Kahnemann and Tversky which questioned the basic assumptions of economics- rationality.

Basically, all four said in their own way that markets don’t work as efficiently and effectively as we assume it to be. I thought these four main theories summarised more or less about inefficiency of markets. However, I soon realised more is to come.

On reading Greg Mankiw’s post on repugnance in markets where he simply points to a forum discussing the same, I never gave it much thought. However, on reading the background paper by Alvin Roth, I was really taken back that there is something called repugnance which could be brought into the equation as well while discussing markets.

What is repugnance? Wikipedia says

The term wisdom of repugnance describes the belief that an intuitive (or “deep-seated”) negative response to some thing, idea or practice should be interpreted as evidence for the intrinsically harmful or evil character of that thing.

How does it impact working of markets? Well, those products/services which a society deems as repugnant (but are useful like an exchange for trading kidneys) will not trade in the usual way as the other products. First, there will be a reluctance to come forward and offer such products and second even if they do come, the outcomes are not going to be efficient as these markets will have only very few takers.

Roth offers many examples of repugnant markets like insurance products for children& old, gambling and betting markets, adoption, etc. Then he shows how it leads to problems in market design and how he tried to solve them in some cases.

Excellent stuff. Highly recommended! A different and fresh perspective.

I now realise, it could be made part of behavior economics. Using BE theories, attempts could be made to reduce repugnance as elimination might not be possible.

India’s test cricket record at home and away

I had posteda while back over India’s performance in test cricket. The post basically looked at how Indian team has performed pre and post Sunil Gavaskar. I mentioned that I would cover India’s performance at home and away test matches to get more clarity on the picture. And I have included the recently concluded Perth test as well in the analysis.

Here are the results:

	In Number		In %
Before Gavaskar	in India	Away	in India	Away
Played	69	48
Won	12	3	17.4	6.3
Lost	19	30	27.5	62.5
Draw	38	15	55.1	31.3
	In Number		In %
During Gavaskar	in India	Away	in India	Away
Played	69	60
Won	16	9	23.2	15.0
Lost	14	21	20.3	35.0
Draw	38	30	55.1	50.0
Tie	1
	In Number		In %
After Gavaskar	in India	Away	in India	Away
Played	72	96
Won	35	18	48.6	18.8
Lost	14	35	19.4	36.5
Draw	23	43	31.9	44.8

• During G’kar we see improvement in winning ratio in Indian and away test matches. The number of draws remains the same in India matches but improves substantially in away matches. Pre-G’kar we lost most matches abroad and in his time the draw and winning %, both improved.
• After Gavaskar, winning has improved substantially in India. The number of draws comes down fromm  55% to 32% . The number of losses in India has also declined marginally from 20% to 19%. So, it has become harder to beat India in India.
• However, the story isn’t much different as far as away test matches are concerned. The winning % has improved from 15% to 19% and number of draw % has declined from 50% to 45%. The loss % has increased after Gavaskar from 35% to 37%. A better indicator is that total draws and wins declines from 65% to 63.5%.
• Now, another interesting piece- out of the 18 post Gavaskar wins abroad, 17 come post 2000. India won a  test match in Sri Lanka in 1993 and then the next win was in B’Desh in 2000. The real turn around came from that great win in England in 2002 in Leeds. Since then India has won in England, Australia, South Africa, Pakistan etc. The total wins have been 18 compared to 9 during Gavaskar. New Zealand is one place where a win is due for a long time; the last win was in 1976 at Auckland!
• If we look at wins in India, the wins have been pretty consistent in 1990s and 2000s

The summary is post-G’kar India has started winning much more in India. However, it took a while for India to start winning abroad after G’kar left. Since then, it has been quite a ride.

Assorted Links

1. Mankiw doesn’tsupport the fiscal stimulus. Atleast he is sticking to his previous view.

2. Rodrik discusses a new paper on trade

3. Fin Prof points to the Societe Generale fraud which has shaken the financial system further.

4. EPSA blog points to an article on India’s education problem.

5. Econbrowser on recession betting

6. MR on why so many lawyers join politics.

7. Ajay Shah points to another article on media ethics

8. TCA points to 3 papers which help you understand the nature of markets.

9. Shanmuganathan N has an interesting piece in Mint

Is Mumbai a superstar city?

One thing which I could never understand is despite so many problems, why do housing prices in Mumbai continue to rise?Both commercial and residential property prices are extremely expensive and continue to rise exponentially. Every day, you get to hear deals being made at even more higher prices when you hoped the previous deal was perhaps the peak.

This paper provides quite a few answers. Thanks to this Mint article for pointing the paper. What is a superstar city?

A MSA (Metropolitan statistical area)

is categorized as a superstar if it exhibits high demand, defined as whether its sum of price and quantity growth over the prior two decades is above the sample median, and it has a low elasticity of supply, indicated by a high ratio of price growth to quantity growth. We allow the high-demand cutoff to vary over time to account for changes in the aggregate economy. By contrast, the cutoff for having a low elasticity of supply should not vary over time since aggregate changes in demand should not affect the ratio of price growth to unit growth.

I will post my comments and its application to Mumbai later.

Addendum:

It is a well known fact that in Mumbai there is shortage of housing units. It is a city which gets talent across fields- acting, modelling, finance, etc. Even most corporate houses have their headquartyers in Mumbai. A Mumbai post is always looked upon as a plum one and the one to hope for.

So, given the limited supply of land/houses, and with huge number of people coming, the only way is to see the house prices going up. So all this is pretty well known but to say all that via an academic paper is what makes this paper different. As the paper shows, Mumbai has all the elements of a superstar city.

However, the situation between India and US quite different. US can afford to have superstar cities as first income levels are pretty high and second there are alternative cities one can work in. In India, there are just a handful of cities which generate jobs and given the size of the population there is always a lot of pressure on the few cities.

As a  result, despite paying such high premiums for a house in Mumbai (and other services), one doesn’t get the quality he should actually be getting. In most places in Mumbai, there is water shortage, poor roads and the list of problems is endless. Despite the problems, people don’t move to other places as you get much better work and opportunities in Mumbai as most companies are based here.

So, it is not really right that Mumbai becomes a superstar city as apart from very rich, loads of low income people also flock to the city. But as house prices are so high, it becomes really difficult to manage a living.

A better solution is to help develop infrastructure in number of cities in the country. This would reduce pressures on Mumbai and help people find employment elsewhere. It is happening as we see cities like Jaipur, Nasik etc coming up but given the population pressures more effort is needed.

Why just focus on Mumbai and make it an international financial centre? This will make it a bigger superstar. Instead develop alternate financial centres in the country and help Mumbai from its existing immense pressures. And after the pressure is reduced, MIFC can be moved ahead. As so far Mumbai is not just a financial centre but does a wide variety of activities. Someday someone will talk about making it an International film centre like Hollywood. How will so many people be absorbed int he city? Those who believe the infrastructure problems in Mumbai can be solved and requires a political will more than anything else, don’t understand the magnitude of the problem.

As Ed Glaesar said, economics of cities approach says people should get more choices. So that should be the approach in India. Otherwise, we will see more and more migration to places like Mumbai and problems of plenty.

And it is not as if the other cities can’t develop. In western UP, every city had some speciality handicraft and number of industries were run based on that art. However, with globalisation and China, industrial activity has slowed in these centres. So, it is not as if Mumbai, Delhi etc alone have been doing some industrial activity, there are other centres as well provided we understand their importance.

This is something even Bob Shiller advocates.

Assorted Links

1. CBO’s latest economic outlook suggests there will be a slowdown not outright recession. WSJ Blog also writes on the same

2. WSJ Blog saysthat the rate cut is due to Bernanke research. The research looked at the way financial system drove the length of depression. So, does it imply that we see similar conditions like the great depression?

3. WSJ BLog updates on what NBER thinks about recession

4. Greg Mankiw says markets expect another 50 bps rate cut in the Jan FOMC meeting.

5. Rodrik onDavos

6. Fin Prof points to importance of compounding

7. EPSA Blog on findings of seminar on development in India.

8. TTR getsbacking from Soros

9. Dr. Bimal Jalan (former RBI governor) is a man of few words. But whenever he talks, it makes a lot of sense. See this interview for details.

Does institutional structure in economies converge?

I just came across this paper by Richard Freeman of Harvrd University which made me sit up. Well to say institutions are important is now a cliche and their importance is in all facets of economics. So whether you talk about financial system or health care, having the right kind of institutions is really important.

There is wide literature showing institutional structure matters and how each country’s institutions have shaped up. However, very few actually compare the institutions across countries. This paper does exactly that in the field of labor economics.

Ideally, we should be expecting institutions across countries to converge and become more similar to the one that is the most successful. However, the paper shows that difference in institutions persist in labor markets in OECD countries.

It also reminded me of another economics field where we see divergence- Central Banking. The mandate of most Central Banks is to target inflation and the way they do it, differs  across countries. The independence of central bank, making monetary policies for their economies etc. is quite different from each other. The basic mandate itself may differ with some like Fed having dual mandate and  some like Bank of England only managing inflation. Even within inflation targeting central banks, there is wide difference in the way they approach inflation targeting.

It could be a research worth attempting to see whether the institutions involved in monetary stability are converging or not.

Assorted Links

1. Fed in a really surprise move lowered both fed funds rate and discount rate by 75 bps (difference between the two is here). I juts don’t know what is really going on in US. Fed and policymakers are surely seeing something which we are not and it must be really scary for FOMC to take such a step. This time there was one dissent- Bill Poole and one absentee- Mishkin.

I can understand the dissent as Poole “did not believe that current conditions justified policy action before the regularly scheduled meeting next week. ” However, I can’t understand this absent and no voting business .

2. WSJ Blog on economists’ reactions.

3. Economist Blog summarises what few economists have to say

4. Econbrowser has its usual useful analysis. Infact there are two pieces of analysis one and two. The first one says:

I believe the FOMC cast its vote today with those who declare that a recession has already begun.

5. TTR believes brain-drain isn’t as big as it is made out to be.

6. Parag Parikh says it is greed that did the damage to the investors.