Archive for February 24th, 2010

Teaching financial literacy is not for all

February 24, 2010

Anna Lusardi in a post says:

I regularly receive e-mails from people who recognize the terrible need for improving financial literacy among young people. Most of the people who write say they want to volunteer their time and teach financial literacy in high school. I am very impressed by how strongly people feel about financial literacy and I have been thinking of ways of harnessing that willingness to help and the generosity of volunteers. Financial literacy is much in need of promoters and organizers. It is a very important issue and we need to work for it.

While I want to encourage everyone to get involved with the schools, I am reluctant to recommend that individual volunteers teach financial literacy in schools, for three main reasons.

1. Contrary to popular belief, it is very hard to teach

2. Individuals seem to have many different ideas about how to approach the instruction of financial literacy. As I have mentioned in previous blogs, financial literacy is a topic grounded in economic and finance theory and it should be taught accordingly. But what I often hear suggested are topics like how to balance a checkbook or how to buy stocks. We need to stay away from these narrow “how to” lessons of financial literacy, as the objective here is to prepare people to understand and navigate a world of complex and changing financial markets.

3. It’s not always clear how well qualified individuals are to teach financial literacy. In several cases, I have found that college freshmen have set up web pages to teach financial literacy and are eager to go to high schools to offer some classes, even though they may have taken only one introductory course in economics. This is the curse of economics. I have found that many people feel very confident about their views of how the economy works even if they have never read an economics textbook.

Very well said Prof Lusardi. Pick up a newspaper, magazine etc and you see so many people telling you about vitues of financial planning etc. Especially at the year end you have tons of advice on what to do to save taxes etc. And buying stocks advice comes from all kinds of people all across the year.

So what is the way:

I do not want to discourage anyone who is interested in the pursuit of improving financial literacy in schools. Quite the opposite! Please be involved; do not let the school in your own district not pursue financial literacy, not teach these courses! But perhaps the best role is to be an “ambassador of financial literacy”; be an advocate for financial literacy without going directly to the blackboard. We normally do not let strangers into the classroom, in any course, not just financial literacy. In my view, teaching financial literacy requires a deep knowledge of economics, solid training, and a fair dose of humility.

An analysis of Fed exit strategies from previous recessions

February 24, 2010

Michael Bordo and John Landon Lane have written a super paper looking at how Fed has exited from various recessions.  They look at all the US recessions from 1920-2007. They first look at what Fed did in all those recessions and then how it exited from recessions.  The exit is basically when Fed started raising rates and looking at what macroeconomic variables. In exit policies they use both narrative evidence and econometric exercises.

The findings are quite amazing:

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Mankiw on US political system

February 24, 2010

Wellesley Weston Magazine has a good interview of Greg Mankiw (HT: Mankiw himself):

Why an economist?

WellesleyWeston Magazine: You have had a remarkable career both in the public and private sector. What is it about economics that piqued your interest?

Greg Mankiw: I first became interested in economics during my freshman year at Princeton. One of my friends was taking a microeconomics class; I started reading her textbook and found that I like economics, a lot. In many ways I am a prototypical economist. Economists share a couple of characteristics: they tend to be naturally better in math and science—economics is fairly quantitative—and they are generally more interested in public policy and social issues than in the substance of science. I have always been interested in politics—dinner conversation in my home often centered on what was happening locally and in Washington. But politics by itself seemed vague, random, and subjective. Economics appealed to me because it brought an analytic perspective to social policy questions.

On complexity of US political system:

WW: In your experience heading the Council of Economic Advisors, how much does economics really affect public policy?

GM: The Council has only an advisory function. It has no decision-making power over anything. My day started with a 7:30 am meeting every morning in the Roosevelt Room, the conference room right next to the Oval Office, with members of the White House senior staff. Everyone was fully prepared for the meeting, having already read the news of the day. This was quite a shock for an academic—no one at Harvard would ever dream of calling a meeting at 7:30 am!

I also met regularly with the Administration’s economic policy team—the head of the National Economic Council, the Secretary of the Treasury, the Commerce Secretary, and the Head of the Office of Management and Budget. We coordinated the economic policy effort with a goal of providing either a recommendation or a menu of options for the President to consider regarding the economic policy issues of the day. Several times a week we would meet with the President to discuss the pros and cons of our recommendations. Ultimately, he was the decision maker.

But that’s not the end of the story. When I went down to Washington, I thought the political constraints [on economic policy] would come through political advisors, people like Karl Rove, but they usually came from Legislative Affairs, the group that acts as a liaison between the President and Congress. Congress provides powerful political constraints. From the outside it often seems like there are only two teams in Washington: Republicans and Democrats. But it is really far more nuanced that. There is the Administration and the Congress; and within Congress, there is the Senate and the House; and there are coalitions within each of them. Everyone is looking over their shoulder trying to figure out what they can get passed; everyone is promoting their own agenda. It is very easy to get frustrated, thinking, “Gosh, it’s really terrible we can’t get our economic agenda through and we have all these great ideas.” But then you realize that these checks and balances are precisely the system for which the founding fathers were aiming.

It is the same everywhere. That is why all economists must read this note from Blinder before advising governments/taking up policy roles.

Profile of Paul Krugman

February 24, 2010

Larissa MacFarquhar has a wonderful profile of PaulKrugman (HT: Krugman’s blog)  . The title of the article – The Deflationist How Paul Krugman found politics. The article is a kind of short bio on Paul Krugman.

In particular how he started being interested and writing on politics. He wasn’t interested much till George Bush became President.

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A behavioral perspective to causes of global imbalances

February 24, 2010

David Laibson and Johanna Mollerstrom provide an alternative explanation to the reason for surge in global imbalances. The paper is here. (It is a NBER version. The free version is not yet available).

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Germany and Greece…history repeats itself

February 24, 2010

Tyler Cowen has a superb post :

…the Greek Finance Ministry had warned of “complete collapse” if the whole system…was not rethought…”Prices and value move in an atmosphere of imminent catastrophe,” he wrote.  “In Greece for a while now all the foundations of a healthy economy have been overturned.  There can be no stability, neither in economic equilibrium nor in monetary or financial affairs.”

…While the Italians…were genuinely worried by Greece’s financial crisis, it was the Germans who needed to be persuaded.  Initially, Altenburg’s advocacy of the Greek position was not well received even in his own Ministry.  But then the political stakes were suddenly raised…

…In Athens people expected the Finance Minister to win substantial concessions from the Germans.  In actual fact he was in a very weak position.

…It was not that the Greek financial crisis could be ignored; nor that the Greek Finance Minister lacked the wit or intelligence to present his case.  It was simply that no Greek politician carried enough weight to be heard seriously in Berlin.

That’s from yesterday’s Financial Times, no…whoops, sorry!  That’s from Mark Mazower’s Inside Hitler’s Greece: The Experience of Occupation, 1941-44.  It’s a good book

Just amazing isn’t it. As Cowen says, you are reading the same lines everywhere now. So, again knowing history is very important. THose who say, this is the first time this has happened etc are mostly wrong. Dig up history and you find parallels.

Reinhart-Rogoff recently said:

Since independence in the 1830s, Greece has been in a state of default about 50% of the time

Given this frequency, Greece should have many such cases in the past as well. The question that comes to my mind is why was Greece allowed to be a part of EMU with such a poor track record? And then allowed to carry on despite having debt levels over 60% for so many years after joining EMU.

Another worry is a financial crisis strikes, govts are asked to bail out. The revenues and expenditure of govts decline and deficit looms. As financial crisis eases, the govt goes into a debt crisis. And now the financial firms start penalising the govt asking for higher interest rates, credit rating agencies lower ratings etc. Eitherways , govt is pushed into a corner. How do we end all this?

It is surprising that most reports now say the govt needs to have better public finances in order to manage future financial crisis. Fair point. But why not some criticism for the way financial firms operate?

I had also pointed out to the financial jugglery used by Goldman Sachs and Greek govt to lower latter’s debt levels. Robert Peston of BBC looks at Goldman Sachs’ defense. GS says the impact was marginal. Moreover, financial firms will always look for business opportunities and there needs to be a stricter code to prevent govts from using financial jugglery. This is sad really. There is no corporate conscience anymore.


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