Archive for September, 2012

Glass Steagall is not the solution…

September 21, 2012

Phillip Wallach of Brookings on the topic.

He says it is fashionable to mention that let us bring back Glass Steagall Act.

In the wake of the recent revelations about trading losses at J.P. Morgan and the manipulation of LIBOR rates, cries for further reform are again rising, with many dismissing the two-year-old Dodd-Frank Act as off-target or insufficiently bold. One particular reform idea has proven surprisingly resilient: “We need a new version of the Glass-Steagall Act.” Of late, characters ranging from former Kansas City Fed President Thomas Hoenig to UK Labour leader Ed Miliband to the ever-eclectic Lyndon LaRouche have called for a revival of Glass-Steagall in some form, warning that the financial sector and taxpayers will not be safe without resurrecting the law that separated commercial and investment banking.1 While most advocates of a new Glass-Steagall seem to be on the left, prominent Republicans have sometimes joined in, including former Speaker Newt Gingrichand current House Budget Chairman and Vice Presidential Nominee Paul Ryan.2 Even Sandy Weill, the architect of the merger between Citi and Traveler’s Group which dealt Glass-Steagall one of its final blows, has penitently endorsed bringing back the wall.

He says it is mainly political posturing. In reality Glass Steagall changed from its original format as time passed. The original act was:

What we now know as Glass-Steagall (§§ 16, 20, 21, 32 of the Banking Act of 1933) was primarily the work of the architect of the Federal Reserve System, Senator Carter Glass (D-VA).23 By separating commercial and investment banking into separate legal structures, the law would purportedly prevent:

1)Banks making risky investments in securities, thereby endangering deposits; 2)Unsound loans made to prop up companies in which a bank was invested; 3)Pushing underwritten securities onto banking customers.
2) The new law satisfied widespread demand for action in the wake of the financial system’s cataclysmic meltdown, but Glass’s ideas were also highly congenial to dedicated securities firms, which would greatly benefit from having a large part of their competition banned. Far from being a regulatory regime that acquisitive bankers were always eager to scrap, throughout its history dedicated investment banks remained the most vocal and active supporters of maintaining a “wall of separation.”

All of this became complex over bank holding companies:

Although most banks were satisfied to maintain symbiotic relationships with separated investment houses until the 1950s, at that point various pressures began to test just what the separation required. A special challenge was how Bank Holding Companies (BHCs), companies that controlled at least one national (commercial) bank, would be treated. After many false starts, Congress set out a fairly clear policy with the Bank Holding Company Act of 1956 and amendments in 1966 and 1970: BHCs would be regulated by the Federal Reserve, and could not control both commercial banks and investment banks.25 Importantly, though, the Act was not meant to prohibit commercial banks from undertaking activities “so closely related to banking as to be a proper incident thereto” and it provided no explicit laundry list of prohibited activities.

Exactly what commercial banks (or their corporate affiliates under the same BHC umbrella) were allowed to do became a source of controversy and protracted litigation over the subsequent decades.27 Glass-Steagall (plus the Bank Holding Company Act) thus meant quite different things in 1950, 1970, and 1990, even if those calling for the Act’s revival never specify which vintage they prefer.

He says Dodd-Frank already has several rules to strengthen the banking system:

Framing the discussion around Glass-Steagall leads us to act as if nothing has changed in banking regulation since 2008, which could hardly be further from the truth. The Dodd-Frank Act made dozens of major changes and hundreds of minor ones, many of which have yet to be implemented but are on their way. Discussions of “breaking up the banks” or “ending TBTF” should begin with what Dodd-Frank did on these fronts, rather than starting from either of the equally oblivious)  premises of “everything in Dodd-Frank is an incoherent disaster” or “Dodd-Frank did nothing to rein in the big banks.

So as per him, energies need to eb elsewhere:

The surge of interest in bringing back Glass-Steagall speaks to the understandable persistence of concerns about the safety and soundness of our banking system. There are ample reasons for these concerns, but I have argued that the focus on Glass-Steagall is largely misguided. Reformers should turn their energies elsewhere.

Nice bit on the famed G-S act. Frankly I was unaware that it changed overtime..

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From fighting Great recession to avoiding “Great Stagnation”

September 21, 2012

A nice speech by Boston Fed head Eric Rosengren.

He says usually Historians dub certain events/persons as Great for huge success. In economics, the connotation is different and usually applied to events with harmful impacts:

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Dreaghi’s frank interview on Germans not liking ECB and its policies

September 20, 2012

Mario Draghi is far more frank and open than either Trichet or most central bankers around.

A nice interview of him by Alexander Hagelüken and Markus Zydra of   Süddeutsche Zeitung. He says ECB would love it if it could always work  together with Bundesbank :

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Winding and unwinding extraordinary monetary policy…

September 20, 2012

A must read speech for mon eco students. It is by David Miles of BoE.

He begins defending state of economics:

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How intro of Euro led Germany to move from being a hegemon to just one important player

September 20, 2012

A nice speech by Mr Mojmír Hampl of the Czech National Bank, at the Mont Pelerin Society Annual Conference. Just wish it was a not longer.

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What’s the use of economics? (voxeu debate)

September 20, 2012

This is the title of a recent debate hosted at voxeu.org.

First contribution comes from Diane Coyle of Enlightenment Economics. She looks at the issue of teaching econ in schools.

She says econs need introspection post-crisis:

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The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel – Predictions for 2012

September 19, 2012

Every October of the month the buzz and excitement shifts to Stockholm for Nobel Prize announcements. There is tremendous excitement for the top econ prize as well. Based on this blogpost we should be careful while calling it Nobel Prize in economics. It is a prize in memory of Alfred Nobel and this distinction is important.

Robert Johnson of Anne Klein Communications Group alerts me to this annual prediction list by Thompson Reuters.

Their three predictions  for econ are (Econ prize to be given on Oct-15-12):

  • Sir Anthony B. Atkinson of Oxford University and Angus S. Deaton of Princeton University “for empirical research on consumption, income and savings, poverty and health, and well-being”
  • Stephen A. Ross  of Massachusetts Institute of Technology  “for his arbitrage pricing theory and other fundamental contributions to finance”
  • Robert J. Shiller of Yale Univ  “for pioneering contributions to financial market volatility and the dynamics of asset prices”

More details are there in the press release..

I doubt whether Prof. Ross or any finance guys can win as of now. Shiller is different..

Atkinson and Deaton are a great pick..Inequality and well-being is the top hot topic these days..And the award has been giving recently based on current issues..

What do guys think?

Inflatable Dams…a possible solution for overflowing city during rains

September 18, 2012

Most Indian cities and towns are a mess during rains.

Here is a solution from NY who have built something called inflatable dams (HT: Prof. Matt Kahn Blog). It helps  rescue NY during rainstorms/hurricanes etc.  It is fairly interesting how it sucks excess water flows during these events..

A picture and working of the dam is given here.

Could it be a solution for Indian cities?

What works? State regulation or consumer awareness?

September 18, 2012

An interesting paper by James Habyarimana and William Jack of Georgetown Univ.

The usual debate is what is better – Should state regulate to ensure safety etc for consumers? Or should consumers be made more aware and let them decide. Ideally one should have a bit of both but econs want to know which is more effective. Moreover, in case of limited resources one needs to choose the most effective policy option.

The case here is of road safety. They do a random experiment to understand whether state regulation is better or a consumer empowerment intervention. Their findings show it is latter:

This paper compares the relative impact of two road safety interventions in the Kenyan minibus or matatu sector: a top down set of regulatory requirements known as the Michuki Rules and a consumer empowerment intervention. We use very detailed insurance claims data on three classes of vehicles to implement a difference-in-differences estimation strategy to measure the impact of the Michuki Rules. Despite strong political leadership and dedicated resources, we find no statistically significant effect of the Michuki Rules on accident rates.

In contrast, the consumer empowerment intervention that didn’t rely on third party enforcement has very large and significant effects on accident rates. Our intent-to-treat estimates suggest reductions in accident rates of at least 50%. Our analysis suggests that in institutionally weak environments, innovative consumer-driven solutions might provide an alternative solution to low quality service provision.

 They could have written the paper a little better. Becomes confusing towards the middle..

The consumer awareness mission is nice bit. They put stickers on these vans on safe driving etc and reward  the drivers (via a lottery) to keep the stickers pasted on the vans:

Institutional weakness and corruption may compromise the effectiveness of a variety of reform efforts, especially those that rely on third‐party enforcement. In the case of public transportation, an alternative to top‐down campaigns like the Michuki rules is to empower passengers to demand higher quality services directly, not by threatening to report a bad driver, but simply by openly complaining to him.11 To motivate the potential impact of such a strategy, we argue that complaints to the driver represent contributions to a local public good, and that a collective action problem among passengers could arise accordingly. Multiple equilibria can exist in such environments, characterized by different aggregate levels of public good provision. This suggests that lowering the resource or psychic costs of complaints, for example by making them appear more legitimate and thereby giving passengers a voice, could lead to discrete changes in the intensity of consumer monitoring and enforcement, and perhaps meaningful changes in safety and outcomes.

To test these ideas, we conducted a randomized control trial of an intervention aimed at empowering matatu passengers to exert pressure on drivers to drive more safely.12 The intervention was simple  and cheap: stickers with evocative messages intended to motivate passengers to take demonstrative action ‐ to “heckle and chide” a dangerous driver ‐ were placed in about half of roughly 2,300 recruited matatus. The stickers included graphic images of injuries, and text in English and Kiswahili encouraging passengers to “Don’t just sit there! Stand up! Speak up!”

An initial small pilot in fall 2007 was compromised when we discovered that stickers were quickly being removed from treated vehicles. In response to this, we reissued stickers and scaled up to the full sample in early 2008, but in an attempt to ensure higher rates of compliance we ran a weekly lottery amongst drivers of participating treatment matatus. Each week three prizes of 5,000, 3,000 and 2,000 Kenyan Shillings were awarded to drivers (about $60 – roughly a week’s wages, $35, and $25) if their vehicle was found to have all stickers intact upon inspection by our field staff. 

Interesting. How we usually do not think of such issues in designing experiments and surprises crop up from somewhere..

 

Capping LPG Cylinders to 6 an year…some discussion

September 18, 2012

Based on my experiences living in India and seeing several such allocation policies, I found this 6 cylinder cap another corruption scam in making. Somehow, people in India are too smart  and try and work around the system.

I found two articles giving different viewpoints:

 

  • For the move: BS edit says it gives lessons on transparency. It says the govt. created a website showing LPG usage before the reform. This helped create awareness on the misuse and build public support for the need to cap the cylinders.

    In a press release yesterday, Oil Marketing cos said based on this database, they saw around 44% of population uses around 6 cylinders per year. Hence, the number.

  • Against the move: Bibek Debroy in this funny piece calls it  a policy that cannot be policed. He makes up a nice story on how in order to help his  driver learn he tries several interventions and in the end the driver remains same..he relates this similar to the diesel story (and several other govt. policies) which only lead to worse outcomes.

Both give different sides of the debate. Using IT is welcome to usher transparency but frankly such policies do not  help despite the best intention. One will soon hear stories on how we gamed the system to keep milking subsidised cylinders..

It would have been better if government released some note/paper explaining this 6 cylinder rationale and how they will ensure it will work..

RBI’s Balance Sheet and Liquidity Management: 2011-12

September 18, 2012

Here is my new analysis based on RBI’s recently released Annual Accounts for 2011-12 (along with the Annual report). It is continuation of my efforts to demystify RBI’s B/S and how it creates liquidity. I had looked at a more historical perspective here  and this one focuses on 2011-12.

I also try and link this balance sheet with WSS, continuing previous attempts to demystify RBI’s WSS

Comments/Questions are welcome…Each time I learn new things with respect to central bank balance sheets..

 

RBI’s Mid-Quarter Monetary Policy Review: Sep 2012

September 17, 2012

RBI released its much awaited mid-quarter policy review today.

My review of the policy here

Inflation Responses to Commodity Price Shocks – How and Why Do Countries Differ?

September 17, 2012

A nice paper which does offer some answers for India’s inflation problem. It looks at how inflaiton moves post commodity price shocks in different econs:

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Not one mention of spiraling inflation (PM’s statement at the Full Planning Commission Meeting)

September 17, 2012

People might think I am just a critique of Indian government policies for nothing. However, statements from leading policymakers only forces you to keep criticising.

If there was another moment to prove the growth at all costs fascination for Indian government, it is this recent speech by India’s PM. This speech has created waves for PM’s three growth scenarios for 12th plan. However, there is just no mention of an equally bigger problem of inflation. Where search for “growth” leads to 16 finds, for inflation there are none.

The speech notes of some achievements of 11th 5yp:

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Political economy of international trade..

September 14, 2012

An amazing interview of Pascal Lamy, chief of WTO. If this blog was launched around 2000, WTO would have captured much of the attention. Now, WTO is hardly discussed barring a few pieces here and there. Doha development round just does not get over.

Anyways, Lamy points to several interesting things going in trade economics:

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Indian economy In interesting Times..

September 14, 2012

A note from my end on the topic.

Comments are welcome.

Some probable reforms for Indian economy…

September 14, 2012

What a rally today! Based on Qe3, ECB policy, Diesel price hike (yes that is a reform in India), markets rallied. Despite inflation again playing spoilsport (thanks to sharp electricity tariff revision), markets sustained their rally. Inflation again dampened hopes for rate cuts in upcoming Sep-12 review, but still..Markets are markets…Rally till it lasts..

Anyways, here is an interesting paper on probable economic reforms in any country. It is based on Doing Business rankings.

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Branding Yoga: A case study of 2 different approaches

September 13, 2012

Superb explanation of a case by HBS Prof. Rohit Deshpandé.

In Branding Yoga, cowritten with HBS Global Research Group associate director Kerry Herman and research associate Annelena Lobb, Deshpandé examines the different paths of two successful yoga teachers.

There’s Bikram Choudhury, the founder of Bikram yoga in America, who has aggressively fought to patent his approach to traditional yoga style. Then there is the former model and ballet dancer Tara Stiles, who isn’t particularly interested in yoga’s roots or rules, but rather in mixing up different styles of yoga to create a beneficial exercise.

“There are two elements of brand authenticity, and they appeal to two different sorts of people,” Deshpandé says.

The case also discusses issues with respect to branding of yoga:

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What Krugman & Stiglitz Can Tell Us..

September 13, 2012

A review of two recent books of the two giants.

Both talk about pretty similar things with Stiglitz having a far broader compass. Krugman is as all know talks about fiscal stimulus for ending depression. Stiglitz goes a step further and talks about several ills facing the economy and what can be done to fix it:

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Moral Economy of Contract Farming Arrangements in India…

September 13, 2012

A fab paper from Sudha Narayanan of IGIDR.

She says economics of contracts in agriculture do not work in India. It is more relationship based contacting (minus the r) than contracting which works:

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