The First Global Emerging Markets Investor: Foreign & Colonial Investment Trust 1880-1913

A brilliant paper by David Chambers (University of Cambridge) and Rui Esteves (University of Oxford).

We have quite a few papers on so called first era of globalization (1870-1913). Most of them deal with scale of flows, how UK was a capital exporter and US capital importer, easy flow of capital etc.

But this paper talks about this phase of fin glob from a different perspective. How about those financial firms which actively traded in this first era of globalization? This paper throws light on one such financial firm which apparently was the first emerging market investor.

The Foreign and Colonial Investment Trust (FCIT) is the oldest surviving closed end fund in the world today and was established fully half a century before similar funds appeared in  the US of the 1920s. Its early success was related to its identification of a missing market, namely, the provision of a wholesale diversified investment vehicle for the investing public. Whilst much research has been conducted on aggregate international capital flows in this First Era of Globalisation, little work has been undertaken on the prime investment institutions.

This micro-study seeks to fill this gap by undertaking detailed quantitative analysis of the leading investment trust investing widely in emerging markets during the First Era of financial globalisation before WWI. The history of this flagship fund over more than three decades provides an insight into the relative success of this institutional innovation as well as into the risk and returns of investing in global emerging markets over a century ago.

The best part of the paper is the methodology. IN a lot of detail it explains how it calculates the returns, compares the returns with other benchmarks etc.

The lesson on investing and managing portfolio remains as eternal as ever. Buy and hold securities, don’t trade excessive and don’t panic. Keep costs as low as possible. Keynes himself was an investor in the fund:

There could be no higher testament to FCIT’s attractions than the fact that this was the only investment trust share which John Maynard Keynes included in the security portfolio  he managed for his father before WW1. FCIT stands as a shining example of a highly  successful financial innovation.

Its success was based on the idea of providing the average investor with the  opportunity to invest in a globally diversified portfolio at an extremely low cost. Back in the  late 19th century, when it would be too costly both in time and money for individual investors  to try and replicate such a portfolio, this proved to be a highly attractive and convenient solution for the majority of the investment public.

The investment trust structure permitted the FCIT to exploit fully the benefits of a  long-term investment horizon and to pursue its buy-and-hold investment approach. This in turn allowed the board to make heavy investments in emerging market bonds and in the American continent in particular, an investment approach which paid off handsomely. The fund’s NAV averaged returns in excess of British Consols and of the global ex-UK benchmark whilst also offering a better risk-return trade-off. The trust’s deferred shares delivered an attractive 6.9% annual return, exceeding its NAV performance thanks to the leverage provided by the issue of preference shares. Whilst the deferred shares consistently traded at a discount to the NAV of the underlying investments, the level of discount was not out of line with what investors a century later experienced and most probably reflected the exposure to illiquid securities in the portfolio. 

The benefits of the investment trust structure also manifested themselves in the trading behaviour of FCIT during the two major financial crises of 1890 and 1907. There was little indication of FCIT contributing to any contagion effects. Mauro et al. (2006) suggest that the institutionalisation of investment activity over the 20th century is crucial in helping to explain the greater incidence of emerging markets contagion in the Second Era compared to the First. The implication of this study is that not all investment institutions are the same. The evidence from FCIT suggests that the investment trust or closed end fund model, unlike its close cousin the mutual fund model, is less conducive to contagion effects. This research question, that of the degree to which the FCIT experience was representative of the investment trust industry as a whole, together with a better understanding of the evolution of the closed end fund discount before the 1920s, seem worthy of further study.

Fascinating to read all this..

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Estimating fiscal multiplier in China – More than 2…

Xin Wang and Yi Wen of St. Louis Fed look at fiscal multiplier in China post the crisis. The paper is fairly technical though..

They say the multiplier is more than 1:

Daron Acemoglu vs Rajnikant..

A real funny link on Daron Acemoglu (HT: Tyler Cowen).

For the Indian audience, I could not help but think of Rajnikant jokes…

 

Governments now answer to business, not voters…Is democracy dead?

An amazing article by Henry Farrell (Associate professor of political science and international affairs at George Washington University).

He was in Italy recently and realised that neither the Left or the Right had any new ideas. This is nothing new as worldwide we see the same things, The 1980s and 1990s belonged to the Right as deregulation and privatisation kicked off. Now, post crisis with things in reversal, the left ones should clearly be better off. This is not the case:

This isn’t what was supposed to happen. In the 1990s and the 2000s, right-wing parties were the enthusiasts of the market, pushing for the deregulation of banks, the privatisation of core state functions and the whittling away of social protections. All of these now look to have been very bad ideas. The economic crisis should really have discredited the right, not the left. So why is it the left that is paralysed?

Colin Crouch’s disquieting little book, Post-Democracy (2005), provides one plausible answer. Crouch is a British academic who spent several years teaching at the European University Institute in Florence, where he was my academic supervisor. His book has been well read in the UK, but in continental Europe its impact has been much more remarkable. Though he was not at the Cortona summer school in person, his ideas were omnipresent. Speaker after speaker grappled with the challenge that his book threw down. The fear that he was right, that there was no palatable exit from our situation, hung over the conference like a dusty pall.

Crouch sees the history of democracy as an arc. In the beginning, ordinary people were excluded from decision-making. During the 20th century, they became increasingly able to determine their collective fate through the electoral process, building mass parties that could represent their interests in government. Prosperity and the contentment of working people went hand in hand. Business recognised limits to its power and answered to democratically legitimated government. Markets were subordinate to politics, not the other way around.

At some point shortly after the end of the Second World War, democracy reached its apex in countries such as Britain and the US. According to Crouch, it has been declining ever since. Places such as Italy had more ambiguous histories of rise and decline, while others still, including Spain, Portugal and Greece, began the ascent much later, having only emerged from dictatorship in the 1970s. Nevertheless, all of these countries have reached the downward slope of the arc. The formal structures of democracy remain intact. People still vote. Political parties vie with each other in elections, and circulate in and out of government. Yet these acts of apparent choice have had their meaning hollowed out. The real decisions are taken elsewhere. We have become squatters in the ruins of the great democratic societies of the past.

The blame lies on foreign capital and businesses dominating politics:

Crouch lays some blame for this at the feet of the usual suspects. As markets globalise, businesses grow more powerful (they can relocate their activities, or threaten to relocate) and governments are weakened. Yet the real lessons of his book are about more particular forms of disconnection.

Neo-liberalism, which was supposed to replace grubby politics with efficient, market-based competition, has led not to the triumph of the free market but to the birth of new and horrid chimeras. The traditional firm, based on stable relations between employer, workers and customers, has spun itself out into a complicated and ever-shifting network of supply relationships and contractual forms. The owners remain the same but their relationship to their employees and customers is very different. For one thing, they cannot easily be held to account. As the American labour lawyer Thomas Geoghegan and others have shown, US firms have systematically divested themselves of inconvenient pension obligations to their employees, by farming them out to subsidiaries and spin-offs. Walmart has used hands-off subcontracting relationships to take advantage of unsafe working conditions in the developing world, while actively blocking efforts to improve industry safety standards until 112 garment workers died in a Bangladesh factory fire in November last year. Amazon uses subcontractors to employ warehouse employees in what can be unsafe and miserable working conditions, while minimising damage to its own brand.

Instead of clamping down on such abuses, the state has actually tried to ape these more flexible and apparently more efficient arrangements, either by putting many of its core activities out to private tender through complex contracting arrangements or by requiring its internal units to behave as if they were competing firms. As one looks from business to state and from state to business again, it is increasingly difficult to say which is which. The result is a complex web of relationships that are subject neither to market discipline nor democratic control. Businesses become entangled with the state as both customer and as regulator. States grow increasingly reliant on business, to the point where they no longer know what to do without its advice. Responsibility and accountability evanesce into an endlessly proliferating maze of contracts and subcontracts. As Crouch describes it, government is no more responsible for the delivery of services than Nike is for making the shoes that it brands. The realm of real democracy — political choices that are responsive to voters’ needs — shrinks ever further.

Politicians, meanwhile, have floated away, drifting beyond the reach of the parties that nominally chose them and the voters who elected them. They simply don’t need us as much as they used to. These days, it is far easier to ask business for money and expertise in exchange for political favours than to figure out the needs of a voting public that is increasingly fragmented and difficult to understand anyway. Both the traditional right, which always had strong connections to business, and the new left, which has woven new ties in a hurry, now rely on the private sector more than on voters or party activists. As left and right grow ever more disconnected from the public and ever closer to one another, elections become exercises in branding rather than substantive choice.

This makes both right and left nearly indistinguishable from each other:

Crouch was writing Post-Democracy 10 years ago, when most people thought that things were going quite well. As long as the economy kept delivering jobs and growth, voters didn’t seem to mind about the hollowing out of democracy. Left-of-centre parties weren’t worried either: they responded to the new incentives by trying to articulate a ‘Third Way’ of market-like initiatives that could deliver broad social benefits. Crouch’s lessons have only really come home in the wake of the economic crisis.

The problem that the centre-left now faces is not that it wants to make difficult or unpopular choices. It is that no real choices remain. It is lost in the maze, able neither to reach out to its traditional bases of support (which are largely dying or alienated from it anyway) nor to propose any grand new initiatives, the state no longer having the tools to implement them. When the important decisions are all made outside of democratic politics, the centre-left can only keep going through the ritualistic motions of democracy, all the while praying for intercession.

Most left-wing parties face some version of these dilemmas. Cronyism is less a problem than an institution in the US, where decision-makers relentlessly circulate between Wall Street, K Street, and the Senate and Congress. Yet Europe has some particular bugbears of its own. Even if national political systems were by some miracle to regain their old responsiveness, the power of decision has moved to the European Union, which is dominated by a toxic combination of economic realpolitik and bureaucratic self-interest. Rich northern states are unwilling to help their southern neighbours more than is absolutely necessary; instead they press for greater austerity. The European Central Bank, which was deliberately designed to be free of democratic oversight, is becoming ever more important, and ever more political. Social democrats once looked to the EU as a bulwark against globalisation — perhaps even a model for how the international economy might be subjected to democratic control. Instead, it is turning out to be a vector of corrosion, demanding that weaker member states implement drastic economic reforms without even a pretence of consultation.

Brilliant..

Confessions of a Policy Analyst: Ethical Dilemmas Facing Economic Professionals in Government

A brilliant piece by Robert Nelson of University of Maryland – School of Public Policy.

Post his PhD at Princeton, he worked as an econ with Secretary of Interior.

Why HR leaders need to think like economists?

An interesting article in BS by Shyamal Majumdar.

He says HR leaders shoudl think like econs in figuring human resources in their companies:

Mistresses and marriage: or, a short history of the Mrs

I discovered this wonderful set of working papers of University of Cambridge’s  Economic and Social History. Thanks to this wonderful voxeu piece by Anthony Hotson (of the same department) on monetary history practices in medieval times.

So within the working papers, we have this paper by Amy Louise Erickson. She tracks this amazing and fascinating history of  usage of Mrs. to address women:

Differences between Lender of Last Resort, market maker of last resort and global lender of last resort

An important speech by Mr Hiroshi Nakaso, Deputy Governor of the Bank of Japan. Apart from the topics listed in the title of the post, the speech discusses things like financial trilemma, role of monetary and financial stability policy of central banks etc.

He distinguishes the various LLRs:

The purpose of the LLR function is to prevent the manifestation of systemic risk, that is, the risk that a problem in one part of the financial system spreads to the whole system in a  domino-like fashion. The classic description of systemic risk focuses on contagion, where a  bank run could affect other domestic banks in the system through a decline in funding liquidity.

In contrast, the recent financial crisis revealed that, in the light of deepening financial markets and globalization, systemic risk can (a) be magnified through mutually reinforcing declines in funding and market liquidity; and (b) spill over across national borders and have a global dimension. Central banks’ LLR function has evolved in response, encompassing the roles of “market maker of last resort” (MMLR hereafter) and “global lender of last resort” (GLLR hereafter).

Hmm…MLLR was done via unconventional monetary policy and GLLR by swap lines:

He points to new issues regarding LLR:

The transmutation of the LLR function of central banks raises a set of new issues. In the following, focusing on MMLR and GLLR, I will discuss (a) the relationship between monetary and financial stability policies, (b) the limits to liquidity provision and support by governments, (c) the financial trilemma and cooperation among central banks, and (d) the relationship between foreign reserves policy and the GLLR function.

In financial trilemma, he points to this financial trilemma (Schoenmaker’s trilemma):

With regard to the stability of the financial system under deepening globalization, an important perspective is provided by Schoenmaker: the “financial trilemma” (Chart 5).2 That view holds that it is impossible to simultaneously achieve financial stability, financial integration (capital mobility), and national financial policy. Let me apply this framework to the LLR function.

If, against the background of deepening global financial integration, the LLR function of the central bank is confined to providing liquidity in the domestic currency – that is, its role is limited to national financial policy – stability of the global financial system cannot be achieved. Under a different combination, if financial stability is to be pursued with national financial policy (i.e., domestic currency LLR), financial integration – globalization – must be curbed through the regulation of capital flows. Alternatively, in order to attain financial stability under global financial integration, some sort of supra-national financial policy is necessary, including an international framework for financial regulation and supervision. 

GLLR realized through central bank cooperation might be regarded as an element of the safety net in the broad context of the third combination. There are many proposals for an international safety net other than central banks acting as GLLR. For example, one suggestion calls for the establishment by national central banks of credit lines in domestic currencies to the IMF – the IMF will then manage the money and provide liquidity to, and monitor the policies of, central banks in need of liquidity. Another scheme attempts to make use of SDRs. There is also a plan to collectively manage a pool of national foreign exchange reserves. All of these will require an agreement on cost allocation before they can become a reality.

He says central banks need to figure both  – Mundell’s trilemma and Schoenmaker’s trilemma. In both capital mobility/financial integration is the common leg of the trilemma:

We must also pay attention to the fallacy of composition in the global financial system. In the context of ever-growing global financial integration with free capital flows, individual central banks, in their pursuit of maintaining the stability of their domestic economies, have the choice of either conducting an independent monetary policy or focusing on the exchange rate (i.e., maintaining a fixed exchange rate). Whatever choice individual central banks make for themselves, the effects of their policies do not necessarily add up globally to guarantee the stability of the global economy (Chart 9).

For example, if there are externalities to stabilization policies, such policies are likely to be synchronized across countries, which may amplify fluctuations in the world economy and destabilize the global financial system. The policy issues confronting central banks in this problem of “fallacy of composition” are probably more intractable than the trilemma described by Robert Mundell. Monetary policy in a globalized economy may also be affected by feedback loops in unexpected ways, since nationally granular foreign reserves policies (accumulation of precautionary reserves against capital flight) or national financial policies could amplify international capital flows or concentrate capital flows into economies with the laxest regulations. Such interactions between Mundell’s and Schoenmaker’s trilemmas would complicate the policy conundrum.

He says we shouldn’t say this time isn’t different and feel helpless:

“This time is different” has become synonymous with our follies. Nevertheless, we should not fall into the trap of defeatism. There are many things we can do to reduce the chances of another crisis. Although the bar is high for central banks in building up ideal and foolproof arrangements, we know that “even the longest journey begins with a single step” – a Japanese proverb equivalent to “Rome was not built in one day.” It is important to enhance coordination and cooperation among central banks and governments wherever possible, and such steps taken, however small, will enable us to eventually reach a goal that seems to be far away.

Hmm..

This trilemma thing is really interesting. Before crisis:

• Mundell side: most econs adopted indep. mon pol and allowed free capital. This meant exchange rate was left to markets..
• Schoenmaker side: most econs adopted indep. national financial pol and allowed free capital. This meant financial stability was left to markets or was assumed all would be well as long as capital was free…

This choice was tested post-crisis.

• On Mundell, central banks were seen as defending currencies (openly or selectively) and trying to keep foreign capital volatility away.
• On Schoenmaker, we had problems of plenty as far as financial stability was concerned..

Now if we include Rodrik’s political trilemma or Europe’s trilemma, capital mobility plays a central role. It will be an interesting exercise to have a more comprehensive understanding of capital flows and its role in both national and global economies..

Lessons for South Africa from Germany in a challenging global environment

Nice speech by Gill Marcus, Governor of the South African Reserve Bank.

He points how SA can learn from Germany. The lessons actually apply to most econs:

The Evolution of Modern Repo Contracts

This is a must read paper for those interested in fixed income markets and monetary policy as well. It also helps understand today’s crisis as it involved run in the repo market. The paper is by Kenneth D. Garbade of NY Fed and was written in 2006.

The growth of the repo market, new uses for repos, and the appearance of previously unappreciated risks led to dramatic changes in repo contracting conventions in the 1980s. The changes included recognition of accrued interest on repo securities, a revision to how federal bankruptcy law applied to repos, and the faster growth of tri-party repo—a new form of repurchase agreement.

Individual market participants, motivated largely by profit, hastened the growth of tri-party repo. Because uncoordinated, individual solutions  would have been too costly, market participants took collective action to bring about the recognition of accrued interest on repo securities and petition Congress to amend federal bankruptcy law.

The paper explains the basics of Repo market and how multiple failures of firms led to changes in Repo market. There was an interesting case in 1982, when bankruptcy court prohibited sale of repo securities of a failed dealer:

On August 12, 1982, Lombard-Wall, a small government securities dealer with about $2 billion in assets and a similar amount of liabilities, filed for bankruptcy. Unlike Drysdale’s failure three months earlier, the collapse of Lombard-Wall had little direct effect on the Treasury market. Rumors about the firm’s financial condition had been circulating for weeks and many market participants had already reduced their exposure to the failing enterprise.

The most significant consequence of Lombard-Wall’s insolvency came from a court decision. On August 17, the bankruptcy court overseeing the insolvency announced that the firm’s repos would be treated as secured loans, rather than outright transactions, and issued a temporary restraining order prohibiting sale of the repo securities.33 Despite submissions by the Federal Reserve Bank of New York; Goldman, Sachs; Salomon Bothers; and the Investment Company Institute (a trade association of more than 650 mutual funds) arguing that the decision would undermine the liquidity of the repo market, the bankruptcy court reiterated its position a month later. The restraining order crystallized the fears of many repo creditors that they might not be able to liquidate promptly the securities of a defaulting borrower.

This led to two choices:

Following the Lombard-Wall ruling, two strategies were available to those market participants that favored placing repo securities outside the boundaries of the automatic stay: they could write contracts that made it clear that a repo was a pair of  outright transactions, or they could seek an amendment to federal bankruptcy law exempting repos from application of the stay.Dealers and institutional investors tried to write contracts that clarified the nature of a repo, but the effort got bogged down. In part, this reflected a reluctance to suppress contract provisions that made a repo look like a secured loan, including the borrower’s right to coupon payments and to substitute securities, while retaining the aspect of a repo that was present in outright transactions: the creditor’s right to sell repo securities to a third party.

In lieu of altering their contracting conventions, private market participants and the Federal Reserve petitioned Congress for relief. Fed Chairman Paul Volcker urged adoption of an amendment exempting repos on Treasury and other specified securities from application of the automatic stay. Volcker noted that “repos are a very important tool used in Federal Reserve open market operations” and argued that “it is important that the repo market be protected from unnecessary disruption.” He suggested that if repos were subject to the automatic stay, “the rippling effect of the potential loss of liquidity or capital on market participants could generally disrupt the repo market and cause an otherwise manageable and isolated problem to become generalized.”

Interesting bit…

Five Moral Philosophies on Economic Growth

A super paper by Robert  Nelson of University of Maryland – School of Public Policy.

He questions this single minded focus on growth without looking at morality of achieving growth:

How Geography Explains the United States?

Aaron David Miller of Woodrow Wilson International Center for Scholars writes this article on the topic. It will obviously not be liked by Acemoglu/Robinson who don’t think geog plays a role.

He says geog defines America. His focus is on foreign policy:

The Philosophical Foundations of John Maynard Keynes’s Thinking

Today is a history day..

Jesús Muñoz Sr. writes this interesting paper summarising economic historians views on Keynes philosophy. The discussion is mainly related to Keynes’ book – Economic Consequences of Peace and how Keynes had a philosophical outlook to this book.

Investigation of Keynes’ philosophy is not a new subject. For instance, O´Donnell has dealt with this broad topic it since 1982. The purpose of this paper is narrower: to synthesize the philosophical background of The Economic Consequences of the Peace (hereafter ECP) in order to learn more about the foundations of Keynes’s legacy. 

Attention will be paid to the philosophical origins, foundations and meaning of the ECP. Keynes’s critique of the Treaty of Versailles was in terms of its viability. His methodological approach was thus related to the coordination of theory and practice as well as the use of both rationality and intuition, wherein his economic thought mirrored his philosophical thought. 

Keynes’s core lays in both organicism and uncertainty. The complex interrelations of a system are at the core of the ECP. Indeed Keynes aimed to see a co-ordinated effort on the part of nations as every happening in Europe affected all the countries and sectors. Accordingly he is considered as a realist. Further Keynes’s belief in the lack of a natural order highlighted the need for practical and ethical intervention. Thus, in 1919 he championed practical egalitarianism. Efficacy in terms of reparations was for him the road to freedom. Since his objective was to search for the truth and freedom, Keynes realized that the then current situation in Europe was a turning point in world history. If this was his objective Keynes’s language was characterized by reasonableness, propaganda and persuasion. 

His advanced philosophy in 1919 anticipated his intellectual legacy, especially remarkable after 1936. The first Section is an introduction to the topics studied in the ECP. The second Section is a literature review of Keynes’s general philosophy. The third Section is about the general philosophy expressed in the ECP. The fourth Section is about the philosophical insights of the ECP in terms of Epistemology, Ethics, Ontology, and Political and Social Philosophy. Section 5 concludes. References are listed at the end of the article.

Nice read..

Why We Still Need to Read Hayek?

John Taylor in the Hayek Lecture 2012 organised by Manhattan Institute looks at this question.

Most figure Hayek with liberty and anti-planning. Taylor says we need to read Hayek for a different cause.

He says we need to still read Hayek as latter believed in rules:

Rethinking Macro Policy – II…

IMF hosted a conference recently titled – “Rethinking Macro Policy II: First Steps and Early Lessons”.

IMF econs have released a note giving us some ideas on what lessons have been learnt and what to expect:

Understanding Coinage decisions of the monetary authorities …a historical perspective..

A very interesting paper by Angela Redish (of UBC) and Warren Weber (Minneapolis Fed).Though highly technical, the findings are pretty interesting.

The paper talks about coinage decisions of monetary authorities and looks at it from two angles. First they build a model and suggest predictions of the model. They then compare the model on historical experience of Venice and England and show the model is indeed true:

Why the paper? Most papers on monetary history look at from Quantity theory of money. So the usual research looks at flow of money and its impact on inflation. But this misses other aspects:

Great Scientist ≠ Good at Math

A nice article from EO Wilson, professor emeritus at Harvard University.

He says it  is not necessary to be an ace mathematician to be a good scientist — Discoveries emerge from ideas not number crunching. 

For many young people who aspire to be scientists, the great bugbear is mathematics. Without advanced math, how can you do serious work in the sciences? Well, I have a professional secret to share: Many of the most successful scientists in the world today are mathematically no more than semiliterate.

During my decades of teaching biology at Harvard, I watched sadly as bright undergraduates turned away from the possibility of a scientific career, fearing that, without strong math skills, they would fail. This mistaken assumption has deprived science of an immeasurable amount of sorely needed talent. It has created a hemorrhage of brain power we need to stanch.

I speak as an authority on this subject because I myself am an extreme case. Having spent my precollege years in relatively poor Southern schools, I didn’t take algebra until my freshman year at the University of Alabama. I finally got around to calculus as a 32-year-old tenured professor at Harvard, where I sat uncomfortably in classes with undergraduate students only a bit more than half my age. A couple of them were students in a course on evolutionary biology I was teaching. I swallowed my pride and learned calculus.

He adds very few fields  require exceptional know-how of math:

Fortunately, exceptional mathematical fluency is required in only a few disciplines, such as particle physics, astrophysics and information theory. Far more important throughout the rest of science is the ability to form concepts, during which the researcher conjures images and processes by intuition.

He did not add economics and finance here 🙂

He says one could collaborate with a math guy after the idea has been generated..

Over the years, I have co-written many papers with mathematicians and statisticians, so I can offer the following principle with confidence. Call it Wilson’s Principle No. 1: It is far easier for scientists to acquire needed collaboration from mathematicians and statisticians than it is for mathematicians and statisticians to find scientists able to make use of their equations.

This imbalance is especially the case in biology, where factors in a real-life phenomenon are often misunderstood or never noticed in the first place. The annals of theoretical biology are clogged with mathematical models that either can be safely ignored or, when tested, fail. Possibly no more than 10% have any lasting value. Only those linked solidly to knowledge of real living systems have much chance of being used. If your level of mathematical competence is low, plan to raise it, but meanwhile, know that you can do outstanding scientific work with what you have.

Think twice, though, about specializing in fields that require a close alternation of experiment and quantitative analysis. These include most of physics and chemistry, as well as a few specialties in molecular biology.Newton invented calculus in order to give substance to his imagination. Darwin had little or no mathematical ability, but with the masses of information he had accumulated, he was able to conceive a process to which mathematics was later applied.

More important is to get ideas:

For aspiring scientists, a key first step is to find a subject that interests them deeply and focus on it. In doing so, they should keep in mind Wilson’s Principle No. 2: For every scientist, there exists a discipline for which his or her level of mathematical competence is enough to achieve excellence.

Well, what can one say. I just hope we could have the same mind-set for eco as well.  Here are Krugman’s comments on what to expect in eco..

Why Banking Systems Fail? (Similar to Why Nations Fail)

This is easily one of the best papers I have read so far (ppt here). I am surprised that it has not been quoted and blogged much.

It is by Charles Calomiris (of Columbia) and Stephen Haber (of Stanford). So you read this paper and you get a flavor of why certain national banking systems keep failing. Just like Why nations fail, here also the answer is Politics. Just as seen in WNF, this paper tells you a narrative account of how political systems and history shapes banking systems. Accordingly, why certain banking systems remain safe come what may and others are so crisis prone.

So unlike other papers on baking and financial crisis which look at tons of data to figure what went wrong, this one gives you a more powerful account. It tells you why if political systems do not bring changes in banking system, nothing else really matters.

How the EZ crisis is permanently changing EU institutions?

A nice piece by Stefano Micossi of College of Europe.

He sums up the various policies taken by policymakers in Europe which have led to deep institutional changes in Europe. So it has this nice list of all those 2 packs, 6 packs, fiscal compacts and what they mean and the changes they bring. The common thing across these changes is loss of sovereignty.  He proposes how we can make these changes more democratic and accountable..

Four main conclusions stand out from the preceding analysis.

Reinhart, Rogoff, and How the Macroeconomic Sausage Is Made

Prasul, a regular follower of this blog says how come I haven’t posted anything on the Reinhart=-Rogoff controversy. Well. I found it both shocking and interesting and was trying to read as much as possible.

Rogoff-Reinhart made waves with their finding that once a country crosses a debt level of 90% of GDP, growth slows down. This became the most cited reference for both policymakers and econs who supported austerity. This was questioned by the anti-austerity camp likes Krugman et al. But soon became a major reference point.