Archive for January, 2011

Banks Should Hold More Capital

January 31, 2011

WSJ BLog points to a new paper from BoE economists. It says optimal bank capital assets ratio is 52% and not the 17% required by global banks by 2019!  

Bankers typically present capital requirements as a sort of zero-sum game, or worse. If banks have more capital — that is, finance their activities with more of their own shareholders’ money, or equity, as opposed to debt — they’ll be less likely to go bankrupt and exacerbate crises. But, the logic goes, capital is expensive: If they can’t use as much cheap, borrowed money, banks will have to charge more for loans, an outcome that could hobble the economy and make us all poorer.

That logic, though, contradicts an insight that financial economists Franco Modigliani and Merton Miller had more than 50 years ago: Any firm’s financing costs shouldn’t depend on the mix of debt and equity it chooses. Shareholders demand high returns on bank equity in part because banks’ heavy borrowing subjects them to a lot of risk. Many banks typically borrow $30 or more for every $1 their shareholders put in, so a mere 3% drop in the value of their assets can wipe out the shareholders’ investment completely. If banks borrowed less, equity would probably be cheaper. The only reason debt remains a better deal is that governments subsidize it through creditor bailouts and tax breaks on interest.

This new paper estimates costs and benefits of higher capital and finds much higher benefits:

The Bank of England economists estimate, for example, that a permanent one-percentage-point reduction in the probability of banking crises is worth more than half an entire year’s economic output. By contrast, permanently doubling banks’ capital ratios would add only about 0.06 percentage point to companies’ financing costs, taking a long-term bite out of the economy equivalent to about 6% of one year’s output.

The upshot: If one assumes that really bad crises tend to happen every few decades or so, the most beneficial capital level would be 52% of assets, weighted according to their riskiness. Even if one assumes the future holds only mediocre crises, the optimal capital ratio would be about 19%. That compares to a 7% requirement big global banks must meet by 2019 under new rules drawn up in Basel last year.

Some really stiff proposals coming from UK….

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Is US a good model for a Monetary Union?

January 31, 2011

Just when you thought, US stands as a nice model for how to make a monetary union work, we have some contrarian thoughts.

Erik Jones of John Hopkins Univ in this post says not all is well the US model either.

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TBTF strategy: Differences between US and Europe

January 31, 2011

Morris Goldstein and Nicolas Véron write this superb paper on the topic. It gives you an excellent flavor on many issues wrt financial sector and the differences policies in US and Europe.

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Shareholding Pattern in India

January 28, 2011

Venkateswaran R of SEBI has this nice note on the topic:

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Should central banks be focusing on headline inflation going forward?

January 28, 2011

Two very interesting thoughts. First from Luis AV Catão and Roberto Chang and second from Lorenzo Bini Smaghi.

Roberto and Luis have done this paper and summarise findings in voxeu.

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Industrial Policy revisited

January 28, 2011

It is an umpteenth time of revisiting this controversial topic.

Célestin Monga of World Bank argues that industrial policy is not as bad as it is made out to be:

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Japanese PMO is blogging..

January 27, 2011

Japanese Prime Minister’s Office is blogging since Nov-2010. It has some nice posts on political and economic events.

TGS Blog points to some ideas which Dr Manmohan Singh can take to work on several issues in India. May be India’s PMO could take up blogging as well helping us understand a few things better.

No one dissents at in Jan-2011 FOMC ?

January 27, 2011

This blog got one possible prediction badly wrong (another reminder that this blog should not predict anything).

It had analysed in Nov 2011 that who would be FOMC members in 2011. It looked as  there will be more dissents with Richard Fisher of Dallas Fed, Narayana Kocherlakota of Minneapolis Fed and Charles Plosser of Philadelphia Fed joining the FOMC as voting members. All three are seen as hawks and argued in their own way that easy monetary policy will not help problems in  US economy.

However, that did not happen in Jan 26 2011 meeting. Are they preferring not to walk the talk? Or have they moderated their stance since the previous talks? Not really as Plosser recently made the same point.

It takes me back to a 2009 post where I noticed similar not walking the talking by Fed members. Though, Hoenig talked and dissented bigtime in 2010 as he became a voting member. May be we will see their dissent later.

UK economy is interestingly poised

January 27, 2011

UK economy is really nicely poised at this moment. The economic activity remains in slump but inflation keeps missing BoE’s targets. On top of this you have bank bonuses which keep going on and on.

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Pricing Pollution

January 27, 2011

Ted Gayer of Brookings has a nice essay on the topic.

He says there are two ways to control/check pollution:

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Demographics problem – not just limited to developed economies

January 27, 2011

It was a matter of time before demographics again come to mainstream economics discussions. It was such an important area and then came the global financial crisis. Now, slowly people are again beginning to look at this issue.  

I posted on this superb speech from BoJ chief who shows why this recession could be different because of demographics.

World Bank has done two studies which point to a different idea. The two studies are – Some Consequences of Global Aging,  and case studies on in New EU Member States and Croatia: Challenges and Opportunities.

The studies say ageing problem is not limited to developed economies but is going to strike developing and middle income economies as well. What is worse is that unlike developed economies who are rich and some have buffers (though crisis has done a lot of damage), developing economies do not have any such things. They are likely to fall in this trap before reaching prosperity levels.

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Join ICICI Fellows Programme..

January 27, 2011

Blogging is back after a short break.

ICICI Foundation launched this program in 2010- ICICI Fellows Programme, where it trains young talent to become future leaders. The applications for 2011 program have started. Last date is 31 December.

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Why tables are better than graphs in analysis?

January 21, 2011

I always thought the otherway as graphs help convey the broad trend in a much easier fashion.

Here is Andrew Gelman, a Stats Professor, arguing differently (see his profile here):

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More on Goldman-Facebook deal…

January 21, 2011

There was recent news on how Goldman had hyped valuation of Facebook.

K@W has  some more discussion on the deal. Just like we saw in Abacus deal, it seems Wall Street is not willing to learn any lessons.

Just to recall in Abacus, there was a dispute over whether Goldman had sold the securities properly. But this was before the crisis and we would believe some lessons should have been learnt. It is disappointing to say – nothing is being learnt.

In the Facebook deal GS has done following:

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After BRIC – CIVETS the new buzzword…

January 21, 2011

There are six countries  in CIVETS club — Colombia, Indonesia, Vietnam, Egypt, Turkey and South Africa.These are marketed as the next happening emerging economies after BRICs.

K@W has an article covering CIVETS. (more…)

Pakistan: On the Verge of an Economic Meltdown?

January 21, 2011

Ever since I learnt about Pakistan economy and its similar inflation trajectory as India’s, it is interesting to read more.

Mohsin Khan of Peterson Institute advised Pakistan Government. Here are his views.

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Will a Growth Miracle Reduce Debt in Japan?

January 20, 2011

This is the title of a new paper by Selahattin Imrohoroglu and Nao Sudo.

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Inequality in US and India…

January 20, 2011

Gulzar points to rising inequality in US. Forget inequality between rich and poor. The gap is widening between mere rich and uber -rich.

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Estimating software piracy in China

January 20, 2011

David Leonhardt of NYT points to this interesting way of estimating software piracy in China.

There is a belief that China is a leader in software piracy. But this is just a hypothesis. How can you test it?

Leonhardt says look at the sales of hardware vs software. China is 2nd in the hardware list ($64.4 bn) and 8th in the software industry ($5.4 bn). The difference is too large  – $ 59 bn. It implies China is buying its computer hardware and copying much of its computer software.

The post led to some interesting comments:

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Interview of Andrew Gelman

January 19, 2011

There is a superb interview of Andrew Gelman of  Columbia University. He is a professor in statistics and has received what I reckon as the Clark medal for statisticians – Council of Presidents of Statistical Societies award for outstanding contributions by a person under the age of 40. 

In this interview he picks five books to read on statistics. He says stats is all about uncertainty:

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