Financial development in transition economies

In 1990s, there were many economies that moved over from state run economies to private sector driven economies. These economies were called Transition economies.

I came across this interesting paper from Eric Berglof and Partick Bolton. It looks at financial development in these economies and whether it helped them move to a market driven system. They call the transition as the Great Divide and ask whether financial development helped?

Perhaps the main lesson of the past decade of financial transition is the importance of fiscal and monetary discipline at the critical point when the Great Divide opens up. It appears to have been a necessary condition for a successful financial transition. Without fiscal discipline, private investment is crowded out or discouraged by the looming threat of macroinstability. Lack of fiscal discipline has also been a symptom of other ills, like a lack of commitment to close down loss-making firms, poor enforcement of property rights and low tax compliance.

Countries on the wrong side of the divide have been caught in a vicious circle of macro instability and repeated relapses in financial development. Financial development in these countries at best has had little effect on economic growth, and may even have been counterproductive, by making it easier for firms to receive credit and thereby reducing their incentive to undertake needed restructuring.

In the countries that have crossed the Great Divide financial architecture appears to have converged to a bank-based system with substantial foreign ownership. On the positive side, the financial sector in these countries has contributed to the hardening of budget constraints. However, banks have not yet begun extending significant long-term finance nor have they actively promoted restructuring in the industrial sector.

So what is the way forward?

There is a basic complementarity between the macroeconomic notion of fiscal and monetary responsibility and the microeconomic foundations of sound financial institutions, protection of property rights and tax compliance. Writing new laws or transferring them more or less wholesale from abroad is a relatively easy task. Enforcement and the creation of functional institutions is much more difficult. Sound government finances create favorable conditions not only for financial development but also for proper enforcement of the law.

This transfer of foreign code for doing things right was quite fashonable that time. But it did not work. What is also interesting to see is that we need a full list of reforms and right real economy to get financial system working.

How about other recent papers? What do they say? I came across a recent IMF paper which says the story differently- financial development only helps those economies where there are proper institutions in place .

After conducting tests based on alternative empirical approaches and undertaking extensive robustness tests, we conclude that the beneficial effects of reforms on financial deepening have materialized only where the institutional environment was sufficiently favorable. More specifically, the key binding institutional dimension seems to have been the extent to which political institutions protect citizens from expropriation from the state or powerful elites.  We do not find much evidence that other institutional dimensions, such as contractual rights, or features of the macroeconomic environment, such as fiscal prudence played such a pivotal role in shaping the impact of banking sector reforms.

Actually there is a lot of literature on the subject whether financial development leads to growth. One can check Ross Levine’s monumental paper on the same.

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What ends recessions? Monetary or fiscal policy?

I read this long time pending paperfrom Romer Duo:

This paper analyzes the contributions of monetary and fiscal policy to postwar economic recoveries. We find that the Federal Reserve typically responds to downturns with prompt and large reductions in interest rates. Discretionary fiscal policy, in contrast, rarely reacts before the trough in economic activity, and even then the responses are usually small. Simulations using multipliers from both simple regressions and a large macroeconomic model show that the interest rate falls account for nearly all of the above-average growth that occurs early in recoveries. Our estimates also indicate that on several occasions expansionary policies have contributed substantially to above-normal growth outside of recoveries. Finally, the results suggest that the persistence of aggregate output movements is largely the result of the extreme persistence of the contribution of policy changes. 

I don’t have a free version of the paper (NBER papers are not free for all). In all the paper says monetary stimulus alone is enough to get economies out of recession. Moreover, automatic fiscal policy works better than discretionary fiscal policy. But as the Chief economist for President Obama she is doing the opposite- discretionary fiscal stimulus.

If I add this paper to her Great Depression paper which says monetary policy alone was enough to cure depression, it seems monetary policy has an advantage compared to fiscal policy.

All this brings me back to the point I made earlier– Christina Romer says monetary policy works in research but believes fiscal policy can do the trick in this crisis. But why should this be? What is so different about this crisis that discretionary fiscal stimulus seems to be the answer?

Dissecting the credit crunch in India

The media is rife with reports on credit crunch in India. There are assertions from industry that banks are not lending, rates are high etc but banks (esp public sector banks) say they are lending and the main problem is finding right projects.

I was just looking at the recent Monetary policy statement from RBI and it gives some interesting statistics on credit markets in India.

Assorted Links

1. MR points if US buys toxic assets it could cost USD 4 trillion

2. Krugman answers Fama back. This is actually getting painful

3. WSJ Blog points saving banks not enough, save others as well. It also summarises the fiscal stimulus debate

4. Mankiw points two more top econs join team Obama

IMF revises forecasts much lower

IMF continues to revise its growth forecasts lower (Though Niranjan pointed this was coming much earlier). In its recent outlook , it has forecasted global growth at just 0.50% lower than 2.5% forecasted in November outlook.

IMF has released 3 reports: World Economic Outlook, Global Financial Stability Report Update and a report on deflation.

• WEO shows skies are expected to fall – growth (advanced economies at -2.0% in 2009, all in negative in 2009. I would still think IMF is too optimistic for 2010), inflation (0.3% and 0.8% average in developed in 2009 and 2010), trade (decline of 2.8% in 2009). What is worse is that forecasts have been revised sharply compared to previous report on November 2008. Both advanced and developing are expected to shave off 3% of their growth in 2009 from 2008. India expected to grow at 5.1% in 2009 and 6.5% in 2010 compared to 6.3% and 6.8% forecasted in Nov-08.
• GFSR is also highly bearish and one does not see any signs of improvement in financial markets. The banks in developed economies have stunning exposure to emerging econs (Figure 7) and latter are just slipping. This could make crisis worse.  IMF has increased Us originated distressed asset  from USD 1.4 trillion to 2.2 trillion. This is just a US figure. We don’t have a clue to how much the other economies’ figures are.
• Deflation paper is a lot longer and is really interesting. It is a revised version of its 2003 paper and as I said it is the third time in 10 years we are seeing deflation risks. The paper says unless we get financial sector right, deflation would intensify. It also updates the deflation index used in 2003 paper and says:

Looking at individual countries, 13 display “moderate” risk of deflation based on 2009 projections, among them Germany, Italy, and France (Table 3). The United States is on the border to high risk. Only Japan exhibits clearly high risk, according to the indicator. However, risks of a debt-deflation spiral in Japan are lower than 10 years ago, owing to improved balance sheets of the banks and the nonfinancial corporate sector.An important caveat to this analysis is that the deflation indicator may underestimate the risks today relative to those for earlier episodes, as it does not consider house prices.

I like the caveat bit as it could easily push US, UK into high risk zone. With no respite in their housing markets and crucial linkage to financial markets, the risks could easily increase once we factor housing prices. Though it says, non fin sector of Japan looks in better shape, this report provides contrary evidence.

The paper pushes for fiscal policies  and communication polices to address deflation risks. It says mon pol can help but fiscal polices would be needed.

Update:

IMF  has released transcript of the discussion between IMF economists and media over the recent WEO and GFSR Updates.

 QUESTION: Mr. Caruana, I’m not sure I understand the $2.2 trillion. When you say here that potential deterioration in U.S.-originated credit assets, that presumably means just bad loans here in the United States. If so, what percentage of those are in real estate and what about the losses in Europe on real estate and also what’s the breakdown in terms of what percentage of United States-based banks hold those bad loans and European?

Read the answer (there is none actually). Oliver Blanchard, chief Economist of IMF says to a question:

I think the dimension in which there has been the least progress is in putting a price on the troubled assets, and I would say that nearly no matter what price you put will be an improvement in terms of reducing the uncertainty associated with balance sheets. This is really, I think, of the four margins that Jaime has mentioned, the one where I think the most urgent progress is needed.

All this suggests we just don;t know how deep the problem is. With both economic recovery and deflation depending on recovery in financial markets, it is recovery in financial markets which looks far away. It all depends on hope really.

Assorted Links

1. WSJ Blog points Richmond Fed chief Lacker has dissented on Fed policy. I didn’t know I would be taken so seriously.

2. WSJ Blog points to a trust index which has hit low

3. TTR on Citi’s recent pushing to purchase a jet plan worth USD 50 mn.

4. IDB points warehouse receipts being launched

5. Nudges points to some excellent discussion on why people sell winners and hold on to losers

6. Rodrik asks want to shape the G-20 agenda?

7. Fin Prof points to Joe Stigilitz article

8. Fama replies to Krugman

9. GCB on elusive quest for good government

10. CTB on fin sector wages.

It wasn’t just the Swede Crisis of 1992, it was a Nordic region Crisis

Just like the crisis keeps coming back ,  the comparison to Sweden crisis of 1992 also keeps coming back. One keeps coming across the need to draw lessons from the crisis. I had posted about lessons from Sweden crisis of 1992  and realised how bad a job Fed/Treasury have been doing. I came across this post from Baseline Scenario where some research material is provided and also points a new article at NYT.

However, I also realised the crisis wasn’t just limited to Sweden but also engulfed Finland and Norway (Denmark avoided the crisis as the regulators tightened screws early on) . It is referred in crisis literature as Nordic Crisis of 1990s but somehow the focus is always on Sweden. Actually it is much more useful to study the Nordic crisis in totality.

• It is always useful to study different approaches for crisis management
• We need to look for situations where number of economies are facing the crisis as is the case now. Thew Nordic economies though smaller compared to US/UK etc would have faced similar constraints (as mentioned in the paper; though am yet to see any political economy literature of Nordic crisis management )

I came across this excellent speech (also as a working paper; check references as well) from Seppo Honkapohja, Bank of Finland Board Member (who is on sick leave now). The speech summarises in nut shell how the crisis started (it was financial deregulation, just like in this crisis) and how each country tried to resolve the crisis. He has some excellent graphs to show the impact of crisis on growth, employment, inflation, share prices, housing prices, credit markets etc.

Norges Bank also released a superb publication (check references) in 2004 on the crisis. The report focuses on Norway but its chapter 3 focuses on the Nordic Crisis.  Check out Table 1 for the impact of crisis on 3 countries (Finland worst effected) .

Table 2 has an excellent summary of the policy responses.  There is quite a bit of similarity on the policy responses except Norway not introducing asset management companies (bad banks/aggregator banks) and also issuing  a blanket creditor guarnatee.

I don’t know  whether the similarity in policy responses is because of countries imitating each other or coordinating with each other (coordination could be bothe xplicit and implicit). However, as they are quite similar I would believe what would work for Global distressed financial system is some kind of global coordination on bailouts and restructuring packages.

We can’t have a situation where one country promises much more and other simply bites time. This way the financial system in second would not be happy and would want a package similar to first one. This has indeed been the case as we have only seen TARP, auto sector plan etc starting from US to be applied elsewhere as well. Some economies like UK got first on a capital infusion plan which was praised and copied by US etc. However, as crisis got worse, UK also had to launch its own version of TARP. All this is also leading to a rise in protectionism. However,  if we have some kind of coordination may be we see private sector getting its act together. Till then expect more lobbying (for bailouts) and indirect protectionism rising and crisis simply going on and on.

UK’s auto bailout package; protectionism rising

Great Depression became a global event because of a couple of reasons : one Gold Standard and two rise in protectionism ( I am still reading on the subject and would post as I come across more evidence). We dont have a gold standard but some countries follow a fixed exchange rate system dubbed as Bretton Woods -II. I don’t really know whether the crisis has deepened in these economies because of sticking to exchange rates (if they are).

However, what is surely happening is rising of protectionism. The rise is not as straight as Smoot-Hawley Tariff Act that raised US tariffs on 20,000 products. However, it is happening indirectly

• After US, Germany, France (see this report), UK has launched its auto bailout plan (see this as well). These plans protect their domestic industries leading to protectionism.
• Increase in antidumping (mainly against China)- WTO reports a rise in anti-dumping cases in Jan-June 2008 period (85 cases) compared to 2007 period (61 cases). Max cases on China -37. WTO is investigating China’s retaliation
• US Treasury Chief Geithner is supposedly working on Chinese currency suggesting stern measures would be taken against China for not appreciating its currency. (see NYT). If this is true China is sure to retaliate and protectionism soars. (Read Buiter’s criticismon Geithner move)
• Financial Protectionism – Banks are getting nationalised everywhere. Buiter points to another indirect move which surfaced in Italy. The Italian central bank has just created a Collateralised Interbank Market. The Central bank will serve as the universal counterparty, guaranteeing settlement in case of default.  The arrangement is, however, only open to Italian banks (the statement is here, in Italian). Italy is a member of Euroarea and this facility should be extended to all the members. It beats me why Italy and not ECB is introducing this facility. The EU is simply getting more factitious as pointed in this report.  

Despite policymakers assertions that we would not repeat Great Depression and lessons have been learnt, the similar causes are being repeated. Let us just hope all this protectionism does not retort to direct measures as well.

Assorted Links

1. Krugman answers Fama and Cochrane

2. WSJ Blog points to key Fed members and their recent comments

3. CBO Blog pointsto its analysis on fiscal stimulus. Mankiw as well

4. Lusardi compares Alps to financial markets and how preliminary education in both helps

5. EAP summarises all the bad news in Asian region

6. ACB points how to fund public infrastructure?

7. Urbanomics has a fantastic post on Indian Banks. It points Public sector banks have managed  to hold up better with lower NPAs than private banks.

Public Policy for economists

RBI’s ex-Governor Dr Reddy’s humor is well known (see this and this for just a few amongst the many). I came across this speech which provides loads of food on thought for economists  involved in public policy. (It also tells me to try and read his previous speeches on various subjects). He details the challenges an economist faces in public policy with his trademark humor.

He begins like this:

The question is : Is there life without the economist? ….Since everyone has a view on economic matters, the subject looks deceptively simple in most eyes and is thus prone to much contention. Add to this the fact that in a subject which concerns everyone so intimately and which is almost always in the headlines, the temptation for the economist to play to the gallery and to seek the limelight by simplification, exaggeration and even glamorisation is not easy to resist. But with all that, it is difficult to imagine life without the economist.

But then, life with the economist is not very simple either. Economics is perhaps the only field in which two people can share a Nobel Prize for having divergent viewpoints – to cite Myrdal and Hayek. Often, people hold that economics is as definitive a science as astrology is, and the more charitable of them place an economist between a physicist and a sociologist. For example, in the Preface to his book Peddling prosperity: Economic Sense and Nonsense in the Age of Diminished Expectations (1944), Paul Krugman says that an Indian born economist once explained his personal theory of reincarnation to his graduate economics class. If you are a good economist, a virtuous economist, he said, you are reborn as a physicist. But if you are an evil, wicked economist, you are reborn as a sociologist .

🙂 I think that Paul Krugman joke was mentioned by Avinash Dixit, I read it somewhere not sure

Actually the speech is not as well organised as I would have liked it to be. It has many ideas so am just leaving a few quotes from the text.  Actually the entire speech is worth quoting. It is amazing how he mixes humor on a relatively serious topic.

RBI’s third quarter review of monetary policy – status quo

RBI has kept all the rates unchanged in its monetary policy

• The repo rate under the LAF has been kept unchanged at 5.5 per cent.
• The reverse repo rate under the LAF has been kept unchanged at 4.0 per cent.
• The cash reserve ratio (CRR) of scheduled banks has been kept unchanged at 5.0 per cent of NDTL

The market was pretty much divided on the rate cuts, with half saying yes rate cuts and half saying no to rate cuts.

Anyways, what is actually better is this time’s statement. It is just about 35 pages which is a relief from the 60-70 pages statement.

However, the macroeconomic and monetary policy report released yesterday is still about 114 pages, similar to previous reports. In a way it is good as we hardly get any report from official sources on Indian economy.  But it also means loads of reading.

Update:

1. As I complain, RBI has released a short statement (all of 5 pages)  summarising its monetary policy stance.

2. I have analysed the credit market situation in India

Assorted Links

1. MR points to a new blog – William Easterly.

2. Krugman on liquidity traps

3. WSJ Blog on job losses at Caterpillar

4. Buiter says when all fails blame China. 🙂

5. Mankiw points to list of economists not agreeing to fiscal stimulus

6. Rodrik on fiscal stmulus debate

7. Finprof on CDS

8. Roth pointsto a paper which discusses UK’s TARP from auction theory perspective

9. CTB points to a nice debate (full of research) on banks and state

10. ASB pointstrade protectionism rising in India

11. TTR points to shameless financial sector

12. IDB points to an interesting study which says opening bank accounts does not lead to financial inclusion.

UK Govt should present its liabilities correctly

BBC pointed to this intertesting news:

The Commons Treasury sub-committee said the government had failed to reveal its “significant liabilities” in full. Accounting for nationalised and part-nationalised banks must be at least as good as for those in the private sector, it added.

In its report, the committee said: “In order for public scrutiny to be effectively performed, the magnitude and nature of these liabilities must be comprehensively disclosed.”  The accounts for fully and part-nationalised banks should be “at least as comprehensive as those made by major banks”, and go beyond minimum accounting standards, it suggested.

 The mentioned report is here. The report further says (emphasis in the report):

 18. Northern Rock was taken into temporary public ownership on 17 February 2008 and the Treasury Resource accounts were published on 16 July 2008, suggesting that it took five months for HM Treasury to identify an accounting treatment of Northern Rock which the National Audit Office (NAO) would accept as true and fair.From this we must infer that the treatment of the part-nationalisation of the banks also remains to be addressed.The nationalising transactions of 2008–09 raise some complex accounting questions for the Treasury. In order to ensure that the Treasury Group’s 2008–09 Annual Report and Accounts can properly be laid before Parliament before the summer adjournment, we recommend that the Treasury engages early with the National Audit Office to agree appropriate accounting treatments for the transactions surrounding the nationalised and part-nationalised banks.

 

 

19. It is already apparent that the Treasury Group’s 2008–09 Resource Accounts will throw up a number of equally complex accounting issues: the treatment of the Government’s revised equity stake in Northern Rock; the transactions with Abbey Santander and Bradford & Bingley; and its investment in the part-nationalised banks.

20. Louise Tulett, HM Treasury’s Director of Finance, Procurement and Operations, told us that the accounting treatment of the Treasury’s transactions with Abbey Santander and Bradford and Bingley had not yet been agreed with the NAO. 

22. In its report on the Performance of HM Treasury in 2007–08, the NAO highlighted that no fewer then five liabilities relating to Northern Rock were disclosed in the Treasury’s Resource Accounts as contingent liabilities but listed as ‘unquantified’.These are shown in Table 3.

 

 

23. By nationalising financial institutions, th Government has taken on responsibility for significant liabilities. In order for public scrutiny to be effectively performed, the magnitude and nature of these liabilities must be comprehensively disclosed. We recommend that the Treasury quantify and disclose the liabilities involved in the nationalisations and part-nationalisations of financial institutions. These disclosures should appear in the Treasury Group Resource Accounts, must be at least as comprehensive as those made by major banks and should go further then meeting the minimum acceptable accounting standards.

 

See table 3 on page 13.

This is quite interesting. Just like the case of India, UK seems to be presenting its financial statements excluding certain liabilities (off-balance sheet liabilities). In this case the liabilities seem to be its acquisitions of financial firms in the crisis.

This is a global program now and part nationalisations have happened in quite a few economies. These problems wiil be present in their accounting statements as well. And above all, how do you value these financial firms at this moment? 

Confusions galore in India’s financial markets

Mint edit piece y’day said there is no finance minister in the country. This has become a big problem as suddenly we have been flooded by comments from various Indian policymakers and politicians.

• On Jan 20 Planning Commission chief said India had more room for monetary and fiscal policy
• On Jan 21, he said no more stimulus for 2008-09
• On Jan 21, another news item says PM’s apex economic committee (which includes Plan Com chief) are readying Stimulus III package

These are news items and can still be clarified (however, unlike SEBI no one issues any clarifications) . On various newswires the confusion is worse. We have comments after comments from various key people often with conflicting views. This confuses the stance of financial markets.

For instance today a leading policymaker expressed different views to two seperate newswires. On one he said rate cuts are desirable (indicating rate cuts could come in monetary policy) to other he said though desirable, he didn’t expect it on Tuesday’s monetary policy. He also adds that he has changed his view on central bank monetary policy stance and RBI is an independent body and he is not involved.

Likewise, comments are flowing thick and thin from policymakers each trying to sooth his audience. It is becoming a nightmare. This is all the more evident in case of government debt markets where comments on inflation, govt deficit has an immediate impact.

The policy statements are adding their own volatility premium to the already high volatility.

EAC presents India Economic Review 2008-09

Prime Minister’s Economic Advisory Council has released its review of Indian economy for 2008-09. I haven’t read it. Will post my comments later.

Denmark to be 17th EMU member?

I had pointed the dilemma of EU members in this paper – some want to quit and some want to join in.

Denmark is a member of EU but not EMU (Denmark Central Bank still is responsible for its monetary policy and still has its own currency). Denmark always prided on being a non-member until this crisis happened. I have noted the problems with Denmark’s monetary policy and the problems on its economy.

The Denmark Central Bank Governor Nils Bernstein gave a speech to Danish parliament. In this he outlined Denmark’s case for joining EMU and accepting Euro as a currency.

Danish participation in the euro can be expected to lead to slightly lower interest rates, a small increase in foreign trade and lower transaction costs. In normal, calm periods, interest rates will be only marginally lower than under the current fixed exchange- rate regime.

The real reason is:

In the current situation with a financial crisis and a global economic slowdown, the Economic and Monetary Union demonstrates its strength. The single currency and single monetary policy are stabilising factors that prevent the individual member states from seeking their own – often mutually competitive – monetary solutions to the crisis. This would only make it escalate further, as we saw in the 1970s. It is and has been the general view of Danmarks Nationalbank that Denmark’s adoption of the euro is a natural extension of our fixed-exchange-rate policy and would not involve major economic upheavals.

He also points how ECB is a great institution which has extended support to non-EU member is the crisis. He also says ECB works in a coordination fashion and Denmark’s voice will be equally heard.

Eurointelligence also points out Denmark is set to join EMU and Euro adoption from the political angle.

Exciting times. Would UK, Sweden, Norway follow as well and initiate public debate on the topic? I havent read much on Norway and Sweden but in UK discussions are already on. Willem Buiterhas been advocating the same in his blog and also points to a recent publication of leading economists/policymakers on the issue.

India’s Growth: Potential/Forecasted vs Actual?

This is a fairly old paper (Sep 2007) but still is worth revisiting. It is written by Hiroko Oura of IMF and is a literature survey of the various research papers estimating growth of India.

With India’s GDP expanding at a rate above 8 percent in recent years, the debate about whether India is overheating revolves mainly about whether growth is above potential-that is, whether the economy is exceeding its “speed limit.” This paper attempts to shed light on this debate by providing up-to-date projections of India’s potential growth, including by clarifying differences in underlying assumptions used by various researchers that lead to a range of estimates. Estimates of potential growth on this basis range from 7.4 percent to 8.1 percent for 2006/07, and about 8 percent for the medium term.

Oura covers 4 papers that estimate India’s growth:

	Rodrik-Subramanian (2004)	Poddar-Yi (2007)	WEO (2006)	Bosworth Collins (2006)
Potential Growth (2006-07)	6.8	8.8	8.1	7.4
Potential Growth (2007-08 to 2012-13)	7.3-7.6	9.5-9.8	8.7-9.0	8.0-8.4

All these 4 papers basically have used different methodologies to arrive at these growth numbers. And they have missed their mark widely. In 2006-07 the actual growth was 9.6% much higher than forecasted. An average growth rate of 8% plus from 2007-08 to 2012-13 looks very difficult as well with growth expected to touch 7% in 2008-09 and 6% in 2009-10. Even if growth recovers in 2010-11 and 2011-12 improve to 7% and 8% respectively,  average would still be 7.0-7.5%. Rodrik-Subramaniam might be the closest to the long-term forecast.

Though am worried about future growth forecasts, the question that always interests me is – How did India manage this average growth rate of 8.9% from 2003-04 to 2007-08. No model could forecast this high a growth rate. Out of the 4 papers mentioned abpove, 1 is in written in 2004, 2 in 2006 and 3 in 2007. So only the one in 2004 is applicable and it predicted 7.0% around levels. I had also analysed how private forecasters fared and realised they started forecasting higher growth rates only after the actual was higher than their previous forecasts.

Shankar Acharya and Arvind Virmani have presented their analysis which suggests surge in investment was the key. In 2004-05 average quarterly investment growth was 18.0%, 18.0% in 2005-06, 21.4% in 2006-07, 13.4% in 2007-08 and 11.0% in first half 2008-09. So, a slowdown seems to have already kicked in from 2007-08  and looks like quite sharp in 2008-09. It will be interesting to see invesstment fares in the next quarterely GDP data releases.

But what is still not understood is what led to the higher investments?

• Was it because of expceted higher future growth? This then becomes full circle- investments rise because of future growth, and higher investments lead to higher current growth.
• Was investment just bubble driven (see this paper by Cecchetti for details) where bubbles lead to optimistic  views on economy and drives high investment which then collapses as the bubble burst.
• Was it conducive business environment  that led to higher investments? (though Doing Business Surveys suggest it has only worsened)
• Was it economic polices?
• Great Moderation worldwide?
• Plain Good Luck?
• The easiest of all answers- mix of all??

I still have not fully understood what did India do that it jumped to this near 9% growth trajectory and managed it for 5 continuous years? Any answers?

Assorted Links

1. 2 prominent research conferences in India. IGIDR’s Annual Money and Finance conference -2009. Ajay Shah pointsto NCAER’s Neemrana conference 2009.

2. Time for some Krugman humor. He takes on Barro who does not like fiscal stimulus

3. WSJ Blog pointsto Chinese mantra for the year – Bao Ba meaning protect the 8 (8% growth rate). EAPB analyses China’s GDP nos

4. CTB points to research on east Europe stock markets

5. WSJ Blog points Obama to get daily economic briefing

6. CMB has an astonishing graph which compares CPI in 1929 and now. Inflation is much lower now. Time to do the helicopter drop?

7. FinProf points who is the largest oil company in America? It is Morgan Stanley!! It also points that ex-Merrill CEO  John Thain who then moved to BoA (as BoA took over Merrill) spent USD 1.2 mn on his office!!

8. WSJ BLog points to Bini Smaghi interview

9. TTR points Indian banks still looking good but not become complacent.

10. Urbanomics points to behavioral models of finance. Also read the excellent post on 3 broad models of banking bailouts.

How did Lehman et al survive the Great Depression?

Jeremy Stein, Wharton Univ Professor has given excellent insights on the crisis:

What was the true cause of the worst financial crisis the world has seen since the Great Depression? Was it excessive greed on Wall Street? Was it mark-to-market accounting? The answer is none of the above, says Jeremy Siegel , a professor of finance at Wharton. While these factors contributed to the crisis, they do not represent its most significant cause.

Here is the real reason, according to Siegel: Financial firms bought, held and insured large quantities of risky, mortgage-related assets on borrowed money. The irony is that these financial giants had little need to hold these securities; they were already making enormous profits simply from creating, bundling and selling them. “During dot-com IPOs of the early 1990s, the firms that underwrote the stock offerings did not hold on to those stocks,” Siegel says. “They flipped them. But in the case of mortgage-backed securities, the financial firms decided these were good assets to hold. That was their fatal flaw.”

The cause of the crisis was identified in Bretton Woods

Mervyn King in his recent speech (this speech has been quite popular in media as King discusses Bank of England move to buy corporate bonds in this, see this):

It is also clear that at the heart of the crisis was the problem identified but not solved at Bretton Woods – the need to impose symmetric obligations on countries that run persistent current account surpluses and not just on countries that run deficits. From that failure stemmed a chain of events, no one of which alone appeared to threaten stability, but which taken together led to the worst financial crisis any of us can recall.

This is quite interesting. Bretoon Woods led to the formation of  many key institutions (World Bank, IMF, GATT) and was a result of collapse in the world economy post world wars and economies needed an international monetary and payment system after collapse of gold standard. However, am not clear with the connection King is making here. As far as I remember it was US that was running surpluses then and transferred the same to the deficit economies (mainly war torn European economies). I guess, all the deficit economies to receive the funds had certain conditions but the same did not apply to the US.  If it was identified why wan’t it solved?

What is the linkage to this crisis? On the highest macro-level it is the global imbalances (see this paper; wrote it exactly an year ago) which are sort of correcting (though capital still flowing to US, I am not sure whether they would correct completely). These imbalances have been created by US importing capital and Emerging Economies (and Middle East) exporting the same. Now, what should have been the “symmetric obligation” which King refers to. Should there have been restrictions (self imposed or imposed by the imporing economies??) on emerging economies?  And since he calls for symmetric obligation it seems asymmetric obligation was in place (just like post Bretton Woods) on importing economies (developed – US, UK etc.) But what were they?

I am quite perplexed and it will be interesting to read political economy literature on Bretton Woods to get some clarity. Anybody has come across any useful papers?