Archive for June 24th, 2008

Who is the happiest economist?

June 24, 2008

I came to know of this paper from Tyler Cowen (where else but Marginal Revolution). It was originally pointed by Will Willkinson and has been discussed at Economist blog as well.

The paper is from three economists – Benno Torgler, Nemanja Antić and Uwe Dulleck. They take pictures of 12 economists ( 4 nobel winners, 4 top and 4 happiness researchers) and show them to the sample asking them:

“Taking all things together, would you say this person is: (1) very happy, (2) quite happy, (3) not very happy, (4) not at all happy?”

They then take the profile of the samplers to understand who is happier and popular among certain categories. Findings:

The advice for young academics is: if you seek happiness, become a macro-economist and research happiness; a Nobel Prize does not make you happier; if you want to be popular with the ladies, take lessons from Edmund Phelps, Bruno Frey and Richard Easterlin; if you are looking for the ability to age like a red wine, Joseph Stiglitz and Jean Tirole have the trick, but not Richard Easterlin.

I think this paper will be most liked by Ned Phelps. Though he has produced papers which have changed the way we understand macroeconomics, he might consider this one as tops. Read this fun paper for more details.

Meanwhile Krugman (he is profiled in the survey as a top economist) cries foul saying his picture is not correct and he is as happy as others.

RBI says Credit derivatives will have to wait

June 24, 2008

On 19 June 2008, RBI issued a press release saying credit derivatives will have to wait: (This was covered widely in media as well)

in view of certain adverse developments witnessed in different international financial markets, particularly the credit markets, resulting in considerable volatility in the recent past, such as mounting losses suffered by banks on account of sub-prime crisis, need for the central banks of those countries to inject liquidity into the system, as also the level of risk management systems and possible non-adherence to the regulatory guidelines on complex products such as credit derivatives, time is not considered opportune to introduce the credit derivatives in India, for the present.

I have been hinting all along the problems wth credit derivatives market (see few possts here). I also did some research on the most popular Credit derivative- Credit default swaps. The CDS market has expanded substantially with most trades in – multi-name , non-rated and longer term swaps. All these indicate increasing complexity. A simple CDS is difficult to price as it is based on probability of default (probability is not certainty) and with more complexity we never know what is going on. Just throw the model in the system and it gives you a price. And we know how these models are. The summary – increasing complexity.

The developed economies’ Central banks just saved another crisis. By intervening they didn’t let the financial firms collapse and no calls for honoring the CDS were made. If they were made, we would have seen another crisis.

I am sure this would have not made the “modern finance people” one bit happy.  No one doubts the usefulness, but we should realise all is not well with these derivative markets. Hardly anybody uses them for hedging and mostly it is used to earn premiums. And moreover, top financial firms have been seen to trade them with each other leading to large concentration risks. So, if one defaults, we really do not know how it will be settled.

This Mint article (from Mobis Philipose) suggests why not have exchange traded credit derivatives instead?  In my report I also mention that credit derivatives are an OTC product and not exchange traded. This is a good idea but somehow exchange traded derivatives have not picked up except for equities. Most of the other derivatives like interest rate, currency etc continues to flourish as OTC markets.

Hopefully, after this crisis we would see development of more exchange traded markets in these financial products as well.

Assorted Links

June 24, 2008

In case you need to assess US housing developments in the whole year, WSJ Blog points to Harvard University report

Krugman says if anyone mentions speculation again as one of the factors for the oil rise……

WSJ Blog points to a paper which suggest giving lottery tickets leads to more blood donation. It points to another paper which suggests don’t trust Mutual fund managers under 35

TTR points to an Indian reality

IDB says microfinance firms should also offer saving products.

IEB points to rising inflation in Asian economies.

ISB pointsto reasons for BMC failure in every monsoon

Nudges points to a paper testing human patience. It also pointsto how beh eco is impacting UK public policy

PSD Blog points offering private health insurance is going to be profitable

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