Archive for December, 2011

Lessons from Tamil Nadu’s Road Safety system

December 30, 2011

World Bank  has implemented a project to improve road safety in TN (pdf here).

They have developed a software which is fully web-based. This system is called Road Accident Data Management System (RADMS).

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Why did the Soviet Union fall?

December 30, 2011

Picked up from Tyler Cowen’s post in 2007 (Tabarrok in a review of MR blog in 2011 mentions this post).

It is based on this AEI lecture by Yegor Gaidar  which in turn is a summary of this book written in 2007. Gaidar simplifies the collapse of USSR to a great extent. He says it was basically because of two commodities – grain and oil.

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A history of development of Pakistan’s financial sector (and similarities with India)

December 29, 2011

Yaseen Anwar, Governor of the State Bank of Pakistan gives a super speech on the topic. What is amazing to note is some interesting similarities and differences with India’s history of financial markets.

He divides the development in three phases:

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Reviewing 21 books on the 2007 crisis: Facts vs Fantasies

December 29, 2011

Andrew Lo of MIT’s this paper  really helps as it reviews 21 books on the crisis (HT: Cowen).

Though  Lo just gives a very brief overview of the books, atleast now you know what each one is talking about. I have not read any of these books fully (as most get repetitive after a while, papers are so much better) so is really helpful.

He says sch an exercise it is much like Kurosawa’s film Roshomon:

In Akira Kurosawa’s classic 1950 film Rashomon, an alleged rape and a murder are described in contradictory ways by four individuals who participated in various aspects of the crime. Despite the relatively clear set of facts presented by the different narrators—a woman’s loss of honor and her husband’s death—there is nothing clear about the interpretation of those facts. At the end of the film, we’re left with several mutually inconsistent narratives, none of which completely satisfies our need for redemption and closure. Although the movie won many awards, including an Academy Award for Best Foreign Language Film in 1952, it was hardly a commercial success in the United States, with total U.S. earnings of $96,568 as of April 2010.1 This is no surprise; who wants to sit through 88 minutes of vivid story-telling only to be left wondering whodunit and why?

Six decades later, Kurosawa’s message of multiple truths couldn’t be more relevant as we sift through the wreckage of the worst financial crisis since the Great Depression. Even the Financial Crisis Inquiry Commission—a prestigious bipartisan committee of  0 experts with subpoena power who deliberated for 18 months, interviewed over 700 witnesses, and held 19 days of public hearings—presented three different conclusions in its final report. Apparently, it’s complicated.

He looks at some initial papers on the crisis and says one can argue both for and against the causes pointed by authors. If one paper says high leverage was the reason, other says leverage was even higher earlier.

However, if Kuroshawa was alive and was to write an op-ed he would have written to continue writing:

it may seem like sheer folly to choose a subset of books that economists might want to read to learn more about the crisis. After all, new books are still being published today about the Great Depression, and that was eight decades ago! But if Kurosawa were alive today and inclined to write an op-ed piece on the crisis, he might propose Rashomon as a practical guide to making sense of the past several years. Only by collecting a diverse and often mutually contradictory set of narratives can we eventually develop a more complete understanding of the crisis. While facts can be verified or refuted—and we should do so expeditiously and relentlessly—we must also recognize the possibility that more complex truths are often in the eyes of the beholder.

This fact of human cognition doesn’t necessarily imply that relativism is correct or desirable; not all truths are equally valid. But because the particular narrative that one adopts can color and influence the subsequent course of inquiry and debate, we should strive at the outset to entertain as many interpretations of the same set of objective facts as we can, and hope that a more nuanced and internally consistent understanding of the crisis emerges in the fullness of time.

His list of 21 books includes 11 by  economists and 10 by journalists.   The difference between acads and journos is that latter relies more on anecdotes, connections, media reporting etc. Acad books are more researched and empirical with close examination of their and other theories

I am not looking at all of the books but just mention one from each which tops Lo’s list (he does not rank them but praise for the books does indicate).

Amidst the econ books he seems to prefer This time is different by Rogoff- Reinhart:

By the fall of 2009, the outlines of the early stages of the financial crisis were clear, although the exact causation (or the blame) remained a point of vigorous contention. With the September publication of This Time Is Different: Eight Centuries of Financial Folly, Carmen M. Reinhart and Kenneth Rogoff provided invaluable historical data and context for understanding the crisis. Among all the books reviewed in this article, theirs is the most richly researched and empirically based, with almost 100 pages of data appendices. If all authors of crisis books were required to support their claims with hard data, as Reinhart and Rogoff do most of the time, readers would be considerably better off and our collective intelligence would be far greater.

This vast compendium of financial crises showed that the 2007 subprime meltdown was neither unprecedented nor extraordinary when compared to the historical record. Reinhart and Rogoff briefly document the “this time is different” thinking among investors, academics, and policymakers.

RR link the housing bubble to capital inflows to US which just made the whole thing unsustainable after a point. Hence the crash. And as Rogoff has said in multiple forums that debt financed housing bubbles and financial crisis plus recessions take a while to resolve. What is RR solution? One, to have early warning systems (not sure whether they can work) and more detailed monitoring of national financial data preferably via new international financial institution.

What about the journalists? It is likely to be Too big to Fail by Andrew Ross Sorkin:

During the autumn of 2009, The New York Times columnist Andrew Ross Sorkin published Too Big to Fail: The Inside Story of How Wall Street and Washington Fought to Save the Financial System—and Themselves. Its release came a little over a year after the critical events of September 2008 (speaking generally for all these books, one has to be impressed by their speed from crisis to print). Sorkin’s account is perhaps the best single descriptive narrative of the top levels of the 2008 phase of the crisis  that we have, and as memories fade, self-justifications harden, and participants leave the scene, it’s likely to remain the best anecdotal summary of these events. As one of The New York Times reporters covering the crisis, Sorkin had an unusual amount of access to participants and observers both during and after the events of 2008. Too Big to Fail must represent the distillation of hundreds, if not thousands of hours of off-the-record interviews, tapes, videos, and more conventional sources.

However, Sorkin’s wide scope and multiple viewpoints of the crisis represent a tradeoff with respect to deeper analysis. His book is probably best read in conjunction with other accounts as a reference point.

What are the lessons from his readings:

There are several observations to be made from the number and variety of narratives that the authors in this review have proffered. The most obvious is that there is still significant disagreement as to what the underlying causes of the crisis were, and even less agreement as to what to do about it. But what may be more disconcerting for most economists is the fact that we can’t even agree on all the facts. Did CEOs take too much risk, or were they acting as they were incentivized to act? Was there too much leverage in the system? Did regulators do their jobs or was forbearance a significant factor? Was the Fed’s low interest-rate policy responsible for the housing bubble, or did other factors cause housing prices to skyrocket?

Was liquidity the issue with respect to the run on the repo market, or was it more of a solvency issue among a handful of “problem” banks? For financial economists—who are used to dealing with precise concepts such as noarbitrage conditions, portfolio optimization, linear risk/reward trade-offs, and dynamic hedging strategies—this is a terribly frustrating state of affairs. Many of us like to think of financial economics as a science, but complex events like the financial crisis suggest that this conceit may be more wishful thinking than reality. John Maynard Keynes had even greater ambitions for economics when he wrote, “If economists could manage to get themselves thought of as humble, competent people on a level with dentists, that would be splendid”. Instead, we’re now more likely to be thought of as astrologers, making pronouncements and predictions without any basis in fact or empirical evidence.

He says we should approach research on financial crisis and recessions as we do for airplane crashes. National Transportation Safety Board does a real good job of understanding any plane crash. Though straight application is difficult in financial markets, some lessons could still be taken.

Given that we can’t even agree on a set of facts surrounding the financial crisis, nor do we fully understand what the “correct” operation of a financial institution ought to be in every circumstance, the challenges facing economists are far greater than those faced by the NTSB. However, the stakes are also far higher, as we’ve witnessed over the past four years. There is a great deal to be learned from the NTSB’s methods and enviable track record, as Fielding, Lo, and Yang (2011) illustrate in their case study of this remarkable organization. And one of the most basic elements of their success is starting with a single set of incontrovertible facts. In other words, we need the equivalent of the “black box” flight  data recorder for the financial industry, otherwise we may never get to the bottom of any serious financial accident.

He says there are some major myths surrounding the crisis and one of them is SEC-2004 regulation which allowed i-banks to increase leverage. He says this is just a myth as i-banks has higher leverage even earlier:

While these “facts” seemed straightforward enough, it turns out that the 2004 SEC amendment to Rule 15c3–1 did nothing to change the leverage restrictions of these financial institutions. In a speech given by the SEC’s director of the Division of Markets and Trading on April 9, 2009 (Sirri, 2009), Dr. Erik Sirri stated clearly and unequivocally that “First, and most importantly, the Commission did not undo any leverage restrictions in 2004”. He cites several documented and verifiable facts to support this surprising conclusion, and this correction was reiterated in a letter from Michael Macchiaroli, Associate Director of the SEC’s Division of Markets and Trading to the General Accountability Office (GAO) on July 17, 2009, and reproduced in the GAO Report GAO–09–739 (2009, p. 117).

He points that this story fit well with the perception that rising leverage was a problem. So no one even checked the facts and most big names actually used this to press their points. Infact the error remains uncorrected:

As of October 19, 2011, The New York Times has yet to print a correction of its original stories on the 2004 change to Rule 15c3–1, nor did the Times provide any coverage of Dr. Sirri’s April 9, 2009 speech. Correcting mistaken views and factual errors may not be news, but it does make for good economic science.

Hmmm..

Superb effort by Dr Lo. Much appreciated..

Economic and Financial Developments in Andaman and Nicobar Islands

December 28, 2011

Deepak Mohanty, ED of RBI is RBI’s regional economy expert. He has been giving speeches explaining economies of North-East region , Goa and now Andaman and Nicobar Islands.

Unlike the other speeches which give an all India perspective, these bring the much unknown and very important regional flavor to the discussion. Then there are useful tables and graphs as well which are difficult to compile otherwise.

He summarises the broad findings of A&N economy :

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National Food Security Bill: A discussion

December 28, 2011

This is the title of my new paper. It look at the economics of the bill and the debates so far.

Comments/suggestions are always welcome..

Privatization of Mumbai and Delhi Airport- Thriller of a case study

December 28, 2011

There was a lot of media coverage as these two airports were privatised.

Prateek Kuhad (an intern in the Secretariat for Infrastructure, Planning Commission during July-August 2010) writes this superb case study. It was quite a thriller with bidders  going in and out of the final list and legal interventions from variety of players. The final outcome was that the bidding process was fairer and did not receive any criticism from stakeholders:

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The Best 10 Economics Papers of 2011

December 27, 2011

Here is a list of 10 best papers as per Andres Marroquin (what a blog design) (HT: Tyler Cowen)

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How an academic economist discovered a useful theory via trading in markets

December 27, 2011

John Geanakoplos, an economics professor at  Yale and has Greece origins. His grandfather migrated to US from Greece in search of a better life.

He explains in this speech how he became an economist and discovered the leverage cycle via trading in financial markets. In this theory he showed the importance of collateral in finance and how it amplifies the financial cycle both ways. In good times less collateral is required amplifying the boom and in bad times more collateral is demanded amplifying the bust.

Why he became an economist is interesting:

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Does microfinance work? A survey of research so far…

December 27, 2011

A superb literature survey on the state of microfinance. Five economists write this survey – Jonathan Bauchet, Cristobal Marshall, Laura Starita, Jeanette Thomas and Anna Yalouris.

The survey is mainly of random evaluation experiments done around the world in various fields of microfinance- credit, savings, insurance etc. They also look at whether specific design features like community lending, preference to women works or not.

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Are Americans Bayesians?

December 26, 2011

A nice confidence boosting speech from Alan Krueger, Chairman of CEA.

First the title of the post. he says unlike others Americans like to try out other options before arriving at a final solution. However, others imterpret this differently:

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ECB expresses concern about the independence of the central bank of Hungary

December 26, 2011

With ongoing developments in Hungary, it is interesting to note of new changes in  Central Bank of Hungary (called Magyar Nemzeti Bank). ECB says the new changes in MNB are undermining the independence of the central bank:

Hungary’s authorities asked ECB’s views on the new laws regarding MNB. ECB opined:

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How Infotech developments is forcing changes in the constitution

December 26, 2011

Constitutions are not written in stone but you need some strong changes in the political and socio environment to make changes in the constitutions. Is technology in particular the social networks putting pressures on constitutions to change?

Jeffrey Rosen and Benjamin Wittes of Brookings write a new book on the topic showing how technology will force changes in US constitution.

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Looking at 17th century Italian Art and Painting activity from an economic lens

December 26, 2011

Federico Etro of University of Venice links us to this interesting paper on the topic. He summarises the findings on voxeu.

In this paper, he looks at the this arts  and paintings activity  in Italy in 17th century and looks at it like a market. So just like you seen in a market where there are buyers, sellers and there is a price, same you see here in the arts market in Italy as well.

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Two mistakes holding Indian economy?

December 23, 2011

Mihir Sharma has this article in BS.

He says there are two mistakes which are holding Indian economy:

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Books to read on financial speculation

December 23, 2011

John Gapper, FT’s chief business commentator picks his 5 books to read on financial speculation. He says we all have a bit of rogue trader in us.

Interesting picks for the kind of financial sector  developments we are seeing these days…

An economy is like a cloud…

December 23, 2011

A brilliant article by Henry Mintzberg of  McGill University and author of Managers not MBAs :-).

He begins by saying economy is like a cloud:

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Wall Street jobs and bonus cuts to hurt growth??

December 23, 2011

I am not even sure how should one react to such stuff. This news item from Reuters says:

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Do Newspapers Matter?

December 23, 2011

Yes they do. My media friends have this nice empirical paper to show and prove their might.

There is an interesting research on the topic by Miguel Garrido and Sam Schulhofer-Wohl of Minneapolis Fed. Results are summarised here as well.

They point there were something like 689 city newspapers in US a century ago. This has shrunk to just 11 city newspapers. What is the impact of this decline? There have been some studies but cannot separate correlation from causation. This paper runs on a natural experiment and hence one can track the impact easier.

What is the natural experiment?

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A brilliant financial engineering solution to lower India’s fiscal deficit for FY 2011-12

December 22, 2011

I just did  a review of Govt’s finances after the second supplementary demand for expenditure. Like most others, the post sia situation is pretty grim. The exp to be higher and rev lower leading to a much wider fiscal deficit. How much was anyone’s guess.

However knowing fiscal mathematics and government innovation, one knows something will come. One major item for such innovation was disinvestment figure. Govt budgeted Rs 40ooo cr but so far just around 2500 cr in the kitty. So there were suggestions from Mohandas Pai that government should ask cash rich PSUs to declare aggressive dividends. This was opposed  by SS Aiyar saying govt should not fritter away gains in commodity booms.

Now comes this wire from Bloomberg on another new plan. I must say upfront this is just speculation so far and coule be completely false. However, the mechanism is just brilliant fin eng:

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