Archive for January, 2010

Volcker Rule

January 22, 2010

So finally Paul Volcker is heard.  After his proposal of seperating the trading activity from commercial banking was ignored for much of 2009, he finally has a say.

Obama announced y’day what he calls as Volcker Rule to curb financial sector risks and size:

Now, limits on the risks major financial firms can take are central to the reforms that I’ve proposed.  They are central to the legislation that has passed the House under the leadership of Chairman Barney Frank, and that we’re working to pass in the Senate under the leadership of Chairman Chris Dodd.  As part of these efforts, today I’m proposing two additional reforms that I believe will strengthen the financial system while preventing future crises.

First, we should no longer allow banks to stray too far from their central mission of serving their customers. 

…..Our government provides deposit insurance and other safeguards and guarantees to firms that operate banks.  We do so because a stable and reliable banking system promotes sustained growth, and because we learned how dangerous the failure of that system can be during the Great Depression. 

But these privileges were not created to bestow banks operating hedge funds or private equity funds with an unfair advantage.  When banks benefit from the safety net that taxpayers provide –- which includes lower-cost capital –- it is not appropriate for them to turn around and use that cheap money to trade for profit.  And that is especially true when this kind of trading often puts banks in direct conflict with their customers’ interests.

The fact is, these kinds of trading operations can create enormous and costly risks, endangering the entire bank if things go wrong.  We simply cannot accept a system in which hedge funds or private equity firms inside banks can place huge, risky bets that are subsidized by taxpayers and that could pose a conflict of interest.  And we cannot accept a system in which shareholders make money on these operations if the bank wins but taxpayers foot the bill if the bank loses.

It’s for these reasons that I’m proposing a simple and common-sense reform, which we’re calling the “Volcker Rule” — after this tall guy behind me.  Banks will no longer be allowed to own, invest, or sponsor hedge funds, private equity funds, or proprietary trading operations for their own profit, unrelated to serving their customers.  If financial firms want to trade for profit, that’s something they’re free to do.  Indeed, doing so –- responsibly –- is a good thing for the markets and the economy.  But these firms should not be allowed to run these hedge funds and private equities funds while running a bank backed by the American people.

In addition, as part of our efforts to protect against future crises, I’m also proposing that we prevent the further consolidation of our financial system.  There has long been a deposit cap in place to guard against too much risk being concentrated in a single bank.  The same principle should apply to wider forms of funding employed by large financial institutions in today’s economy. 

The factsheet is here.

He takes on wall street lobbying  as well:

My message to members of Congress of both parties is that we have to get this done.  And my message to leaders of the financial industry is to work with us, and not against us, on needed reforms.  I welcome constructive input from folks in the financial sector.  But what we’ve seen so far, in recent weeks, is an army of industry lobbyists from Wall Street descending on Capitol Hill to try and block basic and common-sense rules of the road that would protect our economy and the American people.

So if these folks want a fight, it’s a fight I’m ready to have.  And my resolve is only strengthened when I see a return to old practices at some of the very firms fighting reform; and when I see soaring profits and obscene bonuses at some of the very firms claiming that they can’t lend more to small business, they can’t keep credit card rates low, they can’t pay a fee to refund taxpayers for the bailout without passing on the cost to shareholders or customers — that’s the claims they’re making.  It’s exactly this kind of irresponsibility that makes clear reform is necessary.

Hmm. strong words…i hope there is some action as well. There are some good links on this proposal:

  • WSJ Blog lists econ/expert views of the proposal. 
  • Time to read on Glass Steagall Act. Comparison with Glass Steagall
  • Paul Mason of BBC Blog says Obama is serious with this
  • UK to follow Obama
  • Krugman says unless we really rein in shadow banking nothing will work really

So after Obama proposed the Bank tax (sorry fee), followed by a funny story that wall street planning to build a legal case against the fee, we have another proposal from Obama. There are two ways to think about it – One. it is all happening randomly. Two, Obama admin is waking up to new challenges from the wall street practices/ lobbying everyday.

There is a very useful timeline by WSJ Blog on various US admin initiatives on financial sector. The war does not look over as these are just proposals. Real thing lies in implementation.

Simon Johnson looks at the politics and says it does not look the recent proposals would be passed. He instead suggests to look at making anti-trust cases against major banks.

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Bank of England’s MPC not good enough

January 21, 2010

After his term at Bank of England Monetary Policy Committee (MPC) was over, David Blanchflower is busy criticising MPC and its functioning. WSJ Blog has a review of his recent articles.

In his recent article he says he is worried over stimulus being withdrawn soon leading to a double dip recession. He takes on BoE MPC for missing the recession completely:

And then one of the external members of the Bank of England’s Monetary Policy Committee, Andrew Sentance, gave an interview that sent jitters through the markets, pushing the pound up when he unwisely suggested that growth had arrived and rate hikes were imminent. The first rule, for an MPC member, should be to do no harm. He was the one who throughout 2008 denied there was going to be a recession.

It is now my view that the MPC’s days are numbered, certainly in terms of its remit and probably its membership. After the election we are going to have to reconsider who sets monetary policy. Here is why.

Creating an independent central bank in 1997 was a good idea and much comforted the markets. The idea of inflation targeting had much traction in academic literature and seemedlike it was worth a shot. The claim was that it would help bring macroeconomic stability and it seemed to have worked for a while, because inflation remained low for most of the next decade. But that was driven by cheap imports from China. When Tony Blair was asked recently in an interview at Columbia University what had driven the Great Moderation he replied, “Luck”, and that seems about right.

It turns out that countries without an inflation target did just as well as those with one. And it didn’t protect us from the greatest economic shock of our lifetimes.

It also helped to make it feel like everything was rosy, because all the attention was focused on the consumer price index (CPI) as a measure of inflation, which excluded the major variable that was increasing a lot — house prices. If house prices had been included in the index, interest rates would have been a lot higher in 2006 and 2007, and that would have helped to prevent the bubble that followed. Symmetrically, including house prices now in the measure of inflation would make it clearer that we are in a deflationary period.

The MPC missed the recession entirely. Rates were cut too late and even in early September 2008, just days before the collapse of Lehman Brothers and the secret loans to RBS and HBOS, most of my MPC colleagues were concerned only about inflation and wage-price spirals. The recession was much deeper because of their failure to act. The MPC was asleep at the wheel. Its inability to communicate adequately what quantitative easing is supposed to do suggests it has learned little.

Targeting the CPI alone no longer has credibility and has to go. The US Federal Reserve has a much broader remit — “to promote effectively the goals of maximum employment, stable prices and moderate long-term interest rates”. I would advocate that something similar should be the remit for macro policy in the UK, not least because unemployment hurts much more than inflation. The last thing we need is for interest rates to rise any time soon. Inflation is going to jump in the short term because of the VAT increase, but will then fall back sharply.

This MPC is not fit for purpose and should be disbanded. The big question is what it should be replaced with. That is a subject to which I will be returning.

I am surely waiting for his next piece.

We all thought MPCs are great way to do monetary policy. In specific, Bank of England MPC model was seen as one of the ideal ones where one could express his views freely.

And then came this crisis questioning all basics and great ideas of economics we have learnt in recent years. And now this Blanchflower criticism of BoE MPC.

I haven’t heard anyone else criticise the other central banks’ MPC. May be we don’t have Blanchflower type members who are willing to stick their neck out. And this is not when he has moved out of MPC. He spoke for cutting rates very early and did it pretty openly. Or may be there are no such issues with other MPCs.

But I would doubt the second reason as most MPCs missed the recession. All simply looked at inflation and thought all is well. So, there would be issues in other MPCs as well. We need straight talking as Blanchflower to set things right. Otherwise, how will the MPC framework improve?

Equity Premium puzzle solved?

January 21, 2010

Fatih Guvenen of University of Minnesota has written an insightful paper on equity premium. As the paper is too technical, Minneapolis fed has a summary of the same.

First some basics. What is equity premium?

The equity premium—the higher return from stocks than from bonds—is an entrancing puzzle for economists. Standard theory suggests that stockholders should receive perhaps a 1 percent greater return from stocks than from safer bonds, to compensate for the larger risk inherent to equity investing. But the historical reality is dramatically different. Between 1926 and 1999 (to choose a period without recent booms and busts), stocks returned nearly 7 percent more per year than bonds.

Econ reasons:

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Euro: It Can’t Happen, It’s a Bad Idea, It Won’t Last

January 21, 2010

This is what major US (and few European) economists believed when the idea of one currency in Europe was floated (HT: Tyler Cowen).

In a paper next on my reading list, Lars Jonung and Eoin Drea track from 1989-2002 the comments and research of US economists on the prospect of European monetary union and the euro. Needless to say, most analysis was like the title of this blog post.

One should also read comments of a few economists who have kinda revised their views on EMU and Euro.

  • C. Fred Bergsten
  • Jeffry Frieden
  • C.A.E. Goodhart
  • Steve Hanke
  • Otmar Issing
  • Peter Kenen
  • Ronald McKinnon
  • George Selgin
  • Roland Vaubel
  • What do you think comes as a key insight from the above economists discussions on Euro? American economists looked at economics and theory of optimal currency areas to say EMU/Euro will not work. However, what was crucial behind EMU/Euro working was not economics but politics. The US economists did not understand politics behind the decision and called it a failure.

    Charles Goodhart even says once economics was taught as political economy. Later politics was just ignored and economics became supreme. To understand EMU/Euro a revisit to political economy is needed.

    I have learnt many lessons from this crisis and two stand put. One, it is so important to know economics history. Two politics is central to decision making. I just learnt how US political cycle prevented this crisis from becoming a depression. I don’t know why economists underestimate the two most of the times.

    95 finance lectures everyone should listen to

    January 21, 2010

    Jesse Young of Online Colleges sends me an email of this very useful compilation – 95 lectures on finance.

    It has lectures on basics, personal finance, business finance, crisis, investing, international issues etc.

    Happy reading. Thanks Jesse.

    Employment recoveries from previous recessions

    January 20, 2010

    Boston Fed President, Eric Rosengren in his speech looks at how employment shaped in previous recoveries from recessions.

    First a general take:

    • As shown in Figure 1, this is not unusual for the first year of a recovery. Consider the following logic.  The difference between real GDP and real final sales is the change in inventories. In the first year of the recovery from the four previous recessions, real GDP grew faster than real final sales.  This shows how the normalizing of inventories has been an important source of economic growth in the early stages of most recoveries. 
    • Figure 2 shows that the past two recoveries did not feature job growth in the first year of the recovery, in sharp contrast to the recoveries of the 1970s and 1980s.  The past two recessions had positive economic growth in the first year of the recovery, but it was not rapid enough to generate job growth.  In contrast, in the recoveries in the 1970s and 1980s, growth was sufficient to yield employment growth in the first year of the recovery.
    • Figure 3 illustrates another pattern typical of recoveries.  While there has been a longstanding downward trend in the average weekly hours of production workers, it is common for average hours to decline more steeply during a recession.  Note that in prolonged recessions, where the shading is the widest, average weekly hours decline more significantly – as workers are placed on shortened work weeks. 
    • Another harbinger of a recovery in employment is growth in temporary services.  Firms often extend work weeks and hire temporary workers before committing to hiring permanent workers.  As Figure 4 highlights, the use of temporary workers fell quite dramatically during the recession, but has been rebounding more recently.

    Some industry patterns:

    • Figure 9 shows four industries that have tended to perform well in the first year of a recovery – professional and business services, education and health services, leisure and hospitality, and to a lesser extent government.  The first three are areas that have increased their share of total employment, and all have tended to be less sensitive to economic downturns.  

      While it is quite possible that these areas will grow in the initial stages of this recovery, that growth is likely to be restrained by various factors.  In education and health services, there is the matter of the significant retrenchment in college endowments, and uncertainty as national health reform proposals are debated in Washington.

    • Figure 10 highlights industries that have had more mixed results in the first year of a recovery and are uncertain this time as well.  While construction employment will be restrained by low housing prices and elevated foreclosures – and commercial construction employment is restrained in many areas by falling commercial real estate prices and high vacancy rates – employment levels in these sectors have experienced such significant declines that we may still see some rebound. 

    Read the speech for nice graphs and a better understanding of the issues.

    Benefits and Limitations of Taylor rule

    January 20, 2010

    Donald Kohn has a nice oldish speech on Taylor rules. The speech was given in this Dallas Fed conference in the honor of John Taylor.

    3 benefits:

    • The first benefit of looking at a simple rule like John’s is that it can provide a useful benchmark for policymakers.  It relates policy setting systematically to the state of the economy in a way that, over time, will produce reasonably good outcomes on average.
    • A second benefit of simple rules is that they help financial market participants form a baseline for expectations regarding the future course of monetary policy.
    • A third benefit is that simple rules can be helpful in the central bank’s communication with the general public.  Such an understanding is important for the transmission mechanism of monetary policy

    4 limitations:

    • The first limitation is that the use of a Taylor rule requires that a single measure of inflation be used to obtain the rule prescriptions.  The price index used by John in the Carnegie Rochester paper was the GDP price deflator.  Other researchers have used the inflation measure based on the consumer price index (CPI).  Over the past fifteen years, the Federal Reserve has emphasized the inflation rate as measured by changes in the price index for personal consumption expenditures (PCE). 
    • Second, the implementation of the Taylor rule and other related rules requires determining the level of the equilibrium real interest rate and the level of potential output; neither of them are observable variables, and both must be inferred from other information. 
    • The third limitation of using simple rules for monetary policymaking stems from the fact that, by their nature, simple rules involve only a small number of variables.  However, the state of a complex economy like that of the United States cannot be fully captured by any small set of summary statistics.
    • The final limitation I want to highlight is that simple policy rules may not capture risk-management considerations.  In some circumstances, the risks to the outlook or the perceived costs of missing an objective on a particular side may be sufficiently skewed that policymakers will choose to respond by adjusting policy in a way that would not be justified solely by the current state of the economy or the modal outlook for output and inflation gaps.    

    He then looks at these limitations and applies it on policy real time.  He shows how applying the Taylor rules in real time leads to difficulties. Pretty much what Bernanke said in his recent speech.

    Productivity curve in India is j-shaped

    January 20, 2010

    Danish A. Hashim, Ajay Kumar and Arvind Virmani have written a nice paper looking at growth of productivity in Indian economy. It is part of Finance Ministry Working paper series.

    The paper says productivity in Indian economy has followed a J-shaped curve. The reforms in 1990s led first to a decline in productivity because of initial adjustments and surplus capacities. The productivity then picks up in 2000s.

    Majority of the studies on the impact the economic reforms on productivity growth in Indian manufacturing have found that productivity growth in the post reform period of 1990s declined as compared to its level during 1980s. Poor capacity utilization during the 1990s was attributed as one of the main reasons. However, even after correction for capacity utilization, Goldar and Kumari, 2003 did not find trace of productivity acceleration in the 1990s. They argued for a case of time lag between reforms and its impact on productivity growth and hence felt that productivity could improve in later years. The present study endeavors to see if productivity growth indeed improved in later years when the issue of capacity utilization also eased.

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    Simon Johnson says US resembles USSR now

    January 19, 2010

    Simon Johnson kickstarted the idea of financial oligarches (I have written numerous posts on financial oligarches) in this excellent piece in The Atlantic. He compared US economy to the crony capitalism seen in emerging economies:

    In its depth and suddenness, the U.S. economic and financial crisis is shockingly reminiscent of moments we have recently seen in emerging markets (and only in emerging markets): South Korea (1997), Malaysia (1998), Russia and Argentina (time and again).

    But there’s a deeper and more disturbing similarity: elite business interests—financiers, in the case of the U.S.—played a central role in creating the crisis, making ever-larger gambles, with the implicit backing of the government, until the inevitable collapse. More alarming, they are now using their influence to prevent precisely the sorts of reforms that are needed, and fast, to pull the economy out of its nosedive. The government seems helpless, or unwilling, to act against them

    In a recent FT article co-written with Peter Boone he says US economy looks like USSR now.

    The last few weeks of political developments around the American-European financial system make us feel like we are back in the USSR. During the final years of communism’s decline, Soviet bureaucrats argued for futile tweaks to laws that would crack down on speculators and close “loopholes” – all in the vain hope they could keep the unproductive system of incentives intact. The US, UK and key European countries are now making the same errors. Rather than recognising the dangerous systemic failures in our financial system, their leaders are proposing bandages that can – at best – only postpone another, possibly much larger, meltdown.

    What did USSR do wrong?

    When the Soviet Union fell apart, there were two competing views on what needed to be done: total change or tinkering. The establishment wanted tinkering – it felt much less threatening. This elite believed that if they could just get the rules right, the system would work well. But they completely missed the larger point – egregious loopholes in the rules were inherent to the system failing.

    It took strong leaders like Yeltsin to undo the reforms for elitists.

    However, we don’t see anything in US as of now. Bernanke recently argued that extremely low interest rates on his watch – and decades of similar bail-outs of the financial sector – did not play a role in the recent collapse.  Obama admin proposed a bank tax which will not lead to lesser risks as banks know they would be bailed out.

    They sarcastically point that bankers appear more honest than policymakers. Both Jamie Dimon of JP Morgan and Lloyd Blankfein of Goldman Sachs said if there is somethint to exploit banks will go ahead.

    Phil Angelides, chair of the Commission, nailed Lloyd Blankfein, head of Goldman Sachs, with a metaphor for the age: Wall Street is in effect selling cars with faulty brakes, and then taking out insurance on the buyers. Blankfein naturally retorted: “I do not think the behaviour is improper.” Here we go again.

    However, there are some good guys around. From US- Paul Volcker, Thomas Hoenig, head of the Kansas City Fed, and Mr Angelides. From UK –  Lord Turner, Mr Haldane, and Mervyn King.

    Time to do something urgent before next one kicks in. Going by Temin, Obama has lost the opportunity to pass any meaningful reform. There are strong pressures not to do anything as recession is nearly over everywhere.  Infact, Obama could just be readying himself for a legal battle with wall street!

    How US political cycle (elections) prevented another depression?

    January 19, 2010

    Peter Temin a noted economic historian from MIT writes a paper comparing this recession with great depression. Though many such papers have been written, we are going to get a lot more in future. I have pointed to a few as well.

    The paper is NBER version. I couldn’t find the free version.

    Temin (alongwith Barry Eichengreen) brought the role of gold standard in creating great depression. So, in this paper he uses the same analogies.

    This paper discusses parallels between our current recession and the Great Depression for the intelligent general public. It stresses the role of economic models and ideas in public policy and argues that gold-standard mentality still holds sway today. The parallels are greatest in the generation of the crises, and they also illuminate the policy choices being made today. We have escaped a repeat of the Depression, but we appear to have lost the opportunity for significant financial reform.

    He says if it was gold standard in 1930s which led policymakers to believe all is well, it was Washington Consensus of 1990s which led to the same belief in 1990s.

    First some good quotes:

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    Wall Street plans a legal battle against Obama’s bank tax!!

    January 19, 2010

    I hate to give these news bytes and would instead prefer to just focus on eco research. But the current events are just too interesting (and frustrating) to give it a miss.

    This NYT article says: (HT: Paul Krugman)

    Wall Street’s main lobbying arm has hired a top Supreme Court litigator to study a possible legal battle against a bank tax proposed by the Obama administration, on the theory that it would be unconstitutional, according to three industry officials briefed on the matter.

    In an e-mail message sent last week to the heads of Wall Street legal departments, executives of the lobbying group, the Securities Industry and Financial Markets Association, wrote that a bank tax might be unconstitutional because it would unfairly single out and penalize big banks, according to these officials, who did not want to be identified to preserve relationships with the group’s members.

    Can you beat that!! They plan to file a case against the Obama government as they think the newly proposed bank tax is unconstitutional ! Unfair to big banks.. give me a break!

    It is precisely what Krugman says:

    Ok this isn’t quite the classic definition of chutzpah, which is when you murder your parents, then plead for mercy because you’re an orphan. It’s more like being a drunk driver who, after killing a number of pedestrians, received life-saving treatment at a nearby hospital — and responds by suing the doctor.

    How does one respond to that. Though Krugman adds at the end:

    I’d say it was unbelievable, but it actually should have been predictable

    I had pointed to this IMF Research bulletin which had Q&A of IMF econs who are studying political lobbying of financial firms. This one easily takes the cake. After such a huge crisis and all that govt support, they now plan to make a case against the govt for taxing them!!

    It is all so frustrating as well. How can financial sector regulation/reform move ahead with such kinds of lobbying/ pressures? Obama has a huge task at hand.

    Interviews of Paul Romer

    January 19, 2010

    Getting to read a lot of interviews these days. Just posted about Raghu Rajan interview a couple of days back, completed the list of Chicago Econs interviews (which also has a Raghuram Rajan interview).

    There are nice interviews of Paul Romer of chartercities.org who is explaining his concept of charter cities.

    Romer has become a missionary and is really promoting the idea big time.

    A public debt target for India?

    January 18, 2010

    Petia Topalova and Dan Nyberg in a new paper write:

    This paper discusses possible medium-term public debt targets for India, based on evidence from the economic literature on prudent levels of public debt and the feasibility for the country to meet a particular target over the next 5-6 years. While recognizing the challenges in determining an appropriate debt target, cross-country analysis and simulations suggest that a debt ratio in the range of 60-65 percent of GDP by 2015/16 might be suitable for India. Such a debt ceiling, while still above the average debt level for emerging markets, is within the range of debt ratios that would provide room for countercyclical fiscal policy and contingent liabilities. It would also send a strong signal of the government’s commitment to fiscal consolidation by making a clear break with the past.

    Currently it is at around 78% of GDP and is high in the emerging market space. It has also made the least progress in reducing its debt despite great growth.

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    RBI starts scholarship scheme for faculty members from Indian academic institutions

    January 18, 2010

    RBI has started a program to provide scholarship scheme for faculty members from Indian academic institutes.

    Applications are invited by the Reserve Bank of India for Scholarship Scheme for Faculty Members from Academic Institutions. The scholarship scheme for faculty members aims at bringing on board scholars, who would be able to undertake and pursue critical projects successfully and thereby contribute to the Bank’s research universe. The Reserve Bank of India invites full time faculty members teaching economics or finance in any UGC-recognised institution in India to undertake short term research in the areas of monetary and financial economics, banking, real sector issues and other areas of interest to the Bank.

    The objectives are:

  • To increase awareness about the activities of  the Bank amongst faculty members and student community, and
  • To provide exposure to faculty members teaching economics and/or finance in different areas/activities in the Bank.
  • I think it is an excellent initiative to help build monetary economic research in the country. The academics could use RBI as a base to build on their research and RBI could use research findings for their policy purposes. I am hopeful I can learn more about Indian monetary economics from this initiative.

    Microfinance: Translating Research into Practice

    January 18, 2010

    I had written a while ago on the new controversy in microfinance research. Recent research shows that microfinance has not really helped individuals where it is most expected.

    For three decades, microfinance institutions have given out small loans to the world’s poor — mostly women — and amassed hundreds if not thousands of case studies showing that the loans help alleviate poverty, improve health, increase education and promote women’s empowerment. Skeptics, however, have argued there is not enough hard data to prove that microfinance transforms lives on a large scale, and they have called for more rigorous analysis.

    Now two new studies have raised doubts about long-held beliefs in microfinance. The studies — which used randomized controlled trial methodologies — did find that microloans helped poor entrepreneurs boost profits in their businesses. However, the studies found little impact on health, education, average consumption, women’s decision making or self-reported well being.

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    Concentration in baning sector increasing every decade

    January 15, 2010

    Silvio Contessi of St Louis Fed has a nice short research article on  size of the US banking sector.

    Fundamental issues about bank size and the systemic risk implications of so-called too-big-to fail policies are heated topics of discussion for researchers, policymakers, and the press alike. However, significant changes in size distribution of banks have been occurring since at least the 1980s and 1990s, when the structure of the banking industry began to evolve following regulatory changes such as the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 and and the Gramm-Leach-Bliley Financial Services Modernization Act of 1999.

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    A primer on measures of India’s inflation

    January 15, 2010

    Deepak Mohanty, ED, RBI in a recent speech provides a nice primer on India’s inflation and issues.

    In my talk today, I will briefly review the various primary measures of inflation with a particular reference to the divergence between WPI and CPI.  I will also focus on different secondary (derived) measures of inflation, particularly core inflation, and end the discussion with some thoughts on the way forward.

    Read the speech for details. Especially the various measures of core inflation.

    I also remembered a speech from RBI ex-Governor YV Reddy on similar topic in 1999. It served as a useful way to understand India’s inflation and issues.  So, I just scanned through it. You will be surprised to see the similarity of the inflation issues then and now, especially the measurement issues.

    More than ten years and we have not progressed at all as far as our statistical system is concerned.  RBI now Gov – Subbarao raised these concerns in his 2009 speech, I hope there is some action on it.

    State of US Financial regulation gets only worse

    January 15, 2010

    It is amazing to see the struggle Obama and his team are having to rein in financial sector. Every quarter you see talk by Obama on Wall Street bonuses, profits, rent-seeking etc. The talk is followed by a promise to regulate financial sector and ensure taxpayers are not burdened further. However, now of the efforts are working.

    Now, we have a new proposal called Financial Crisis Responsibility Fee which plans to put charge large banks a fee to payoff every penny of TARP money. It is estimated that cost of TARP would be around USD 117 billion. The fee would be charged on bank’s coverred liabilities per year. Here is a factsheet to show how it would work.

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    Connection betwen leverage, house prices and consumption

    January 14, 2010

    FRBSF Economists Reuven Glick and Kevin J. Lansing explain the relationship very clearly in this short note:

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    RBI warns over teaser rates

    January 14, 2010

    Though I am posting this late, just couldn’t resist it. I had posted a while ago that Indian banks are not learning lessons from the recent crisis and offering home loans at teaser rates (see this article for the fight between bankers over teaser rates).

    RBI Deputy Gov, Usha Thorat in her recent speech speaks on risk management issues. She says teaser rates as one of the risks banks should watch out:

    In the area of housing loans, teaser rates are increasingly being offered which is a cause for concern. I hope banks are ensuring that borrowers are well aware of the implications of such rates and the appraisal takes into account repaying capacity of the borrowers when the rates become normal.

    Thankfully RBI is talking about it. However, India’s bankers are still not understanding the issue. Their first line of defence is Indian financial system/consumers etc are different. Same was said in 2005 in US as well. 

    Well, avoiding these fancy products helped us remain out of trouble at first place. And this is what we were told in times of crisis as well that India does not have such products. How quickly times change. See the number of banks offering these products. It is like a race going on….


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