Archive for May 22nd, 2008

Kohn offers financial lessons

May 22, 2008

This speech from Donald Kohn is interesting at the end. Though the speech is being discussed in blogosphere for other reasons (whether low interest rates led to a rise in commodity prices- advocated by Jeff Frankel and countered by Kohn in this speech).

He offers some basis finance lessons to improve management of pension funds:

most public pension funds calculate the present value of their liabilities using the projected rate of return on the portfolio of assets as the discount rate. This practice makes little sense from an economic perspective. If they shift their portfolio into even riskier assets, does the value of the liabilities backed by their taxpayers go down?

Financial economists would say no, but the conventional approach to pension accounting says yes. Unfortunately, the measure of liabilities that results from this process has a real consequence: It pushes the burden of financing today’s pension benefits onto future taxpayers, who will be called upon to fund the true cost of existing pension promises.

Overall a good read

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What happened to liquidity?

May 22, 2008

This speech from Jean Paul Redouin, Deputy Governor, Banque of France  is a good one. It describes what has happened to liquidity in money markets.

He ponders that one year ago we were talking abut excess liquidity and now we are talking abot drying liquidity.

One year ago, studies focused on the issue of excess liquidity. The main questions were: why is liquidity so abundant? What disequilibrium could this cause on financial markets, particularly in pushing spreads far below their long-term average level? These questions remain at the heart of our concerns today, but the focus is now on market and asset liquidity.

The main discovery is that liquidity is not given. It can suddenly disappear, and for several months. The US ABCP market is a striking example of the sudden disruption of market mechanisms that were deemed to be robust. Another discovery is that these sudden liquidity dry-ups can affect even the core of the financial system, such as the interbank market.

He looks at liquidity from 3 angles: assets, money markets and role of banks in providing liquidity. The first and third have been debated quite a bit. I liked the one onm money markets quite a bit:

The money market today faces a real dislocation. This can be viewed from different standpoints.

First, a dislocation in maturities : over the shortest horizons (less than one week), liquidity is abundant. It’s also possible to find liquidity for horizons exceeding one or two years. But a severe liquidity dry-up is occurring between these two maturities (1 month, 3 months, 6 months), with the only entity providing liquidity at those medium-term horizons being the central bank [ECB has recently introduced a new 6-month operation]

Dislocation also appears between players: some lend only over the very short term, others concentrate on longer period.

Lastly, the dislocation has also been a geographical one: the circulation of liquidity across borders between euro area banks came to a halt. For instance, German banks used to lend substantially to French banks, while now they hoard liquidity and French banks have to resort more to the central bank to finance their short liquidity positions. In a certain sense, borders have been reintroduced into the euro area money market!

Do read the speech for further details.

Growth Commission report released

May 22, 2008

Growth Commission has released its reporton what drives growth in economies. It is chaired by Michale Spence and has congregated some great minds together. It has top academia like Bob Solow and policymakers/ practitioners like MS Ahluwalia as Commissioners.

Plus it has brought together great economists together each contributing how their respective fields can contribute to growth. See the Working Papers, Workshop section as well.

The press release has some quotes. Michale Spence provides hope:

 “At a time when industrialized countries are experiencing a sharp slowdown in growth, many of the world’s poorest countries have found growth to be elusive. It is our belief, however, that sustained, high growth can be explained and repeated,”

 The Growth Report also kills off once and for all the misguided notion that you can lift people out of poverty in the absence of growth. Growth can spare people en masse from poverty and drudgery. And with India needing to grow at a fast pace for another 13-15 years to catch up to where China is today, and China having another 600 million people in agriculture yet to move into more productive employment in urban areas, growth will lift many more people out of poverty in the coming decades.

What a timing for this report to be released! It has come at a time when the world is facing crisis of basic necessity – food. The report has some advice for food crisis:

Actions recommended by the Report to combat food price rises (once the current emergency situation is dealt with) include an end to export bans; more effective safety nets and redistribution mechanisms to protect people vulnerable from sudden shifts in prices; and a revitalization of infrastructure investment for agriculture. The Report also urges that policies that favor bio fuels over food be reviewed and, if necessary, reversed and that reserves and inventories be accumulated to relieve temporary shortages. 

Anyways, it should be a nice read. It will provide a good review of what has worked and what hasn’t in different countries.

Assorted Links

May 22, 2008

1. TTR points techies didn’t vote in Karnataka elections. I am not sure how would that improve things

2. WSJ Blog points to Fedspeak- Kevin Warsh

3. NB points to a review of Nudges- a book on behavioral economics

4. PIB offers some selling tips

5. Frankel counters Kohn

6. Mankiw points how AEA invests its money

7. Rodrik points to his new paper on development economics. Should be a fantastic read

8. DB Blog points China is investing USD 400 bn in trade logistics infrastructure. Phew!! In India we are struggling to invest USD 500 bn in overall infrastructure.


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