Archive for September, 2013

The age of diminished expectations..

September 30, 2013

I just finished this wonderful book by Paul Krugman.  What a terrific book on macro writing. A book which students should be asked to read to understand various lines of reasoning on macroeconomics.

It is sad that I only read this book after such a long time. Whatever we see in world economy particularly US now, was all expected and written by Dr Krugman way back in 1990s.  He goes slightly wrong on his probabilities as he puts worst case scenario of a crisis in US at 25% (20% for things improving and remaining 55% for a status quo). But he clearly put the case of all things wrong in economy when few expected it.

Krugman says there are three kinds of econ writings:

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India’s temples guard their gold from government?!?

September 30, 2013

The recent CAD figures have come at 4.9% of GDP. These are lower than market expectations and markets likely to take a breather. Dr Rajan is one lucky man,,

Though, the govt keeps thinking of ways to curb Gold buys.  The Government/RBI seems to have taken Jamal Mecklai’s suggestions rather seriously. However, Jamal had asked to buy gold from Tirupati, the recent developments are little different.

Mint has this story (via Reuters):

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Hayek and his influence on Czech transition

September 30, 2013

Václav Klaus has served as finance minister, prime minister, and president of Czechoslovakia and the Czech Republic. He helped lead his country out of communism, through a peaceful separation, and into the modern world.

He gave a lecture at Cato Institute which is quite a read.

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Where are the women in Central Banking?

September 30, 2013

Caroline Freund of  PIIE poses this question in a WAPO article.

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Bringing Wall Street flavour to Mint Street — insider vs outsider..

September 27, 2013

One gets curious while reading such pieces. It is fine to appreciate a positive development but one must really think through what is going on around the world.

Recently RBI set up 2 committees (first on monetary policy framework and second on providing financial services). The article says:

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Behavioral economics and RBI’s move to ban zero financing on consumer durables…

September 27, 2013

RBI recently banned banks from offering 0% EMIs on consumer durable products. It also asked various merchants not to deduct a fee while someone pays from his debit card. It is nothing new and RBI had asked banks to stop this practice even earlier.

In the zero percent EMI schemes offered on credit card outstandings, the interest element is often camouflaged and passed on to customer in the form of processing fee. Similarly, some banks were loading the expenses incurred in sourcing the loan (viz DSA commission) in the applicable RoI charged on the product. Since the very concept of zero percent interest is non-existent and fair practice demands that the processing charge and RoI charged should be kept uniform product/segment wise, irrespective of the sourcing channel, such schemes only serve the purpose of alluring and exploiting the vulnerable customers. The only factor that can justify differential RoI for the same product, tenor being the same, is the risk rating of the customer, which may not be applicable in case of retail products where the RoI is generally kept flat and is indifferent to the customer risk profile.

Though many banks have appreciated our concerns and have discontinued with the above mentioned practices/ products, some of them still seem to persist with them. These practices/ products thwart the very principle of fair and transparent pricing of products which beholds customer rights and customer protection, especially, in the more vulnerable retail segment. Such practices thus violate, both in letter and spirit, various provisions of our MC on Interest Rate on Advances and therefore, you are advised to strictly desist from these practices hence forth.

ET has this edit on the move and as always criticises the move (as ET is strongly pro-markets):

The RBI has done immense disservice to industrial growth in the short term by asking banks not to offer popular financing schemes for consumer durables dressed up as zero-interest equated monthly instalment (EMI) schemes. Industrial growth has been extremely weak for an extended period and the forthcoming festival season is an opportunity for assorted consumer durable companies to step up their sales.

The zero-down-payment, zero-processing-fee, zero-interest EMI schemes an increasing number of companies offer on a variety of products are good for both consumers and for companies. The RBI’s move scuppers this opportunity to a large extent.

It is not the case that consumers are unaware that these financing schemes entail real costs on account of interest and documentation. They are aware that credit card-issuing banks charge a financing cost that product companies bear, to tempt consumers with “zero” offers. But this is not their concern. Nor should it be the RBI’s. If the RBI is worried about the rates banks offer, it is welcome to examine the banks’ books and ascertain if any rule is being violated.

Why should the bank regulator interfere with the behavioural economics at work when consumers prefer “zero” finance options on a higher price that bundles financing cost with the product price to the transparency of a lower product price and an explicit overlay of financing cost? Nor are consumers irrational. The cost would be lower, when borne by the company for multiple transactions all together, than when financing is offered to individual consumers.

It says Nor are consumers irrational..Really ET?

Well it seems the lessons from history have been forgotten very quickly. The several Americans who took sub-prime loans also were rational and did not need any intervention. Right? Wrong! The regulator is not interfering with bvevioral economics but is following behavioral economics. The field says we need to nudge when expectations are going crazy..

Further:

The only beneficiary from the RBI’s move is the buyer with sufficient purchasing power to not need a financing scheme, now that the product would be priced lower, taking out the financing cost by which price had been marked up earlier. Product sales and industrial growth would suffer, for the benefit of a tiny elite. This is a fetish for transparency that benefits no one except bean counters at the RBI. The RBI should withdraw these strictures gracefully and wish the economy a Happy Diwali.

Well it is fetish for growth which is the problem. Growth shd come at whatever cost. RBI is trying to not spoil Diwali but prevent Diwala (not literally though)… It is not asking people not to buy products but simply making sure people know the hidden costs. This is something rational people assume are not there but real world shows there is plenty of it..

Behavioral economics has shown the problems with the rational thinking and the crisis showed how rational people are..How many events do we need to debunk the idea of consumer rationality?

Prize in economics in memory of Alfred Nobel – 2013 ..Predictions..

September 27, 2013

Thomson Reuters releases its annual predictions for 2013.

It has interesting choices this time and none of the names are those which have been on the pending list for a while:

  • Joshua D. Angrist (MIT)  and David E. Card (University of California, Berkeley) and Alan B. Krueger (Princeton University) for their advancement of empirical microeconomics
  • Sir David F. Hendry (University of Oxford) and M. Hashem Pesaran (University of Cambridge) and Peter C.B. Phillips (Yale University) for their contributions to economic time-series, including modeling, testing and forecasting
  • Sam Peltzman (University of Chicago Booth School of Business) and Richard A. Posner (University of Chicago Law School) for extending economic theories of regulation

The committee has been awarding the prize foe hot issues of the day. Let’s see what is the pick for this year..

Estimating India’s fiscal multiplier..

September 26, 2013

The blogger attended a stirring talk by Dr NR Bhanumurthy of NIPFP at IIM, Bangalore yesterday based on this paper.

In the paper he and his colleague calculate fiscal multipliers based on a model spanning for 20 years. There is hardly any research on the fiscal multiplier issue in India and this paper tries to bridge the gap.The paper shows India has a much larger multiplier in case govt expenditure is for capital creation than for wasteful revenue exp (which is fairly intuitive). However, in case of tax multiplier, we get a negative multiplier:

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Seventh Pay Commission is on …so is the game for 2014 elections..

September 26, 2013

The formula has been nearly perfected for winning general elections in India..announce a rights bill for poor and announce the pay commission just ahead of elections….

Last time it was NREGA and this time it is food security bill. Last time it was the 6th pay and now we have this 7th pay commission. Interestingly my friend Neetika informs me that 6th pay commission was implemented retrospectively. So it was announced in 2008 but awarded from 2006 onwards…And then came elections and rest we know is history…Though am not sure, how many expected 7th pay commission along with this FSB.

There is fair bit of criticism on this new move with most saying what this post is saying. Some have even expected rise in wages due to the commission.

I mean the idea is not to criticise the pay commission per se. India has a huge public sector and public sector people have to feed their families too. The runaway inflation in last few years must have dented majority if gains made in 6th pay commission.  Now one could criticise the commission saying public sector in inefficient and we do not nee a hike. Well, that is a related but different mater, Till we have a a large public sector, we will have a pay commission.

What is an issue is the timing of the move. Why can’t we have these commissions announced in the beginning or the middle of the term of the government. What just before elections is the award given or commission announced?

What does one say really over these measures….As things have improved in markets (only in markets and not otherwise) recently some experts have started saying perhaps the economic record of current govt is not as bad as it sounds. A leading business daily has even awarded the best change agent to the current FM. Well, one does not even know how to react to all this. It just requires a few upward ticks in markets to start getting appreciation from people that matter..It is not just the media but top experts/corporates who should question such moves. Somehow the feeling is that as long as markets keep moving, all is well..

The planned introduction of the East African Monetary Union…

September 25, 2013

Well, not just members of EMU are expanding but so are the monetary unions. Gulf countries were interested in setting their own union and now I relaise East Africa is planning one as well.

Mr Emmanuel Tumusiime-Mutebile, Governor of the Bank of Uganda enlightens me on the upcoming union.

The issue that we have gathered here to discuss today – the planned introduction of the East African Monetary Union (EAMU) – is one which will have profound effects on this region for decades to come. Later this year I expect that the heads of state of each of the partner states of the East African Community (EAC) will sign the Protocol for the introduction of the EAMU. The Protocol will pave the way for the transition to EAMU over the course of the next 10 years and the complementary legal, institutional and economic reforms. 

The East African Monetary Union is a project with potentially large long term benefits for all of the economies in the EAC but which also entails considerable risks. The long termsuccess of EAMU will be dependent upon major changes to public policy and in the way inwhich public policy is made in all partner states of the EAC. A successful monetary union is only possible if each partner state is prepared to accept the pooling of its economic sovereignty. Many economic decisions which are now made at the national level will have to be made at the regional level. 

This pooling of economic sovereignty extends beyond the loss of independent national monetary policy and exchange rates, which is of course inherent in a monetary union; it also requires that each partner state accepts constraints on its fiscal policy and implements fully the provisions of the common market, including not just free trade in goods and services within the EAC but also the free movement of capital and labour within the EAC. If we do not build the requisite foundations for monetary union, the introduction of EAMU may actually harm our economies. The problems which are currently being experienced by some of the peripheral members of the Euro zone – Greece, Portugal and Spain for example – which have lost competitiveness on international markets and can no longer use exchange rate depreciation to restore their competitiveness, should provide a salutary lesson to everyone involved in planning for the introduction of the EAMU.

Well no body will be rejecting the lessons from EMU crisis for sure, but is there a need for a mon union amidst diverse economic players…

Nice read anyways ..

Analysing RBI’s Annual Report 2012-13..

September 25, 2013

It has been quite a while since I did some useful research. So time to point to a research which I have been working on.

The blogger has taken a keen interest in figuring RBI’s balance sheet from time to time. Understanding RBI’s B/S has been a source of learning. 

In Aug-13, RBI released its annual report and in it we have annual accounts. So here is an analysis of the Balance sheet trying to again figure the flow of funds in the balance sheet of the c-bank.

Comments/suggestions are welcome as always..

India’s political economy – where is it headed?

September 24, 2013

A really stimulating discussion was held at IGIDR in May-2013 in state of India’s recent political economy developments. It looked at this rise in corruption along with growth in India.

Louise Tillin of King’s College provides a summary of the developments:

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Why institutions matter (more than ever)

September 24, 2013

Andy Haldane once again. I mean what speeches one gets to read from him.

This one on institutions (slightly dated though) becomes an immediate read for those which have not read. It is one of those speeches which touches on so many aspects of institutional economics. It is just amazing by all means.

He points how two forces – information and integration (of economies) mean institutions are more important than ever. Integration leads to world economy becoming more connected leading to one player affecting the whole system. Whereas too much of information is making the attention span shorter and unable to focus on long term aspects.  We need institutions with long term memory:

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Does finance get the best, brightest, and least productive people?

September 23, 2013

Robert Shiller in his recent column:

economic research has not yet permitted us to estimate the value to society of so many of our best and brightest making their careers in the currently popular kinds of “other finance.” Speculative activities have plusses and minuses, much that is good and some that is bad, and these are very difficult to quantify. We need to be very careful about regulations that impinge on such activities, but we should not shy away from making regulations once we have clarity…

Quotes interesting recent research questioning the true value of finance careers..

Men are from Mars, women from venus…

September 23, 2013

An interesting column on voxeu which continues with the adage — Men are from Mars, women from venus

Vincenzo Galasso and Tommaso Nannicini of Bocconi Univ run an experiment in Italy to show the differences between the two:

The perceived tone of a product or political advertisement affects public response – even holding constant the content of the message. This column provides evidence that men and women react differently to positive and negative tones in electoral advertisements. Negative advertising increases voter turnout among men but not women; positive advertising tends to win women’s sympathy but alienates men. This should inform gender-specific tailoring of targeted advertisements.

Negative men vs positive women…interesting. They discuss the reasons for this difference..

Economic textbooks especially chapters on monetary policy needs to be re-written..

September 23, 2013

Sylvester Eijffinger and Edin Mujagic of Tilburg University make this comment over need for change in econ textbooks. This blogger has been suggesting this for a while as what we have seen in recent years is not mentioned in any textbook. It was known that the there is a huge gap in two worlds of econ text-books and real world. The recent economic developments show the difference has widened a way too much. This has led to events like Occupy Harvard etc etc.

Anyways coming to the article:

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Does RBI ease or complicate the bank branch policy?

September 20, 2013

One of the many items of Dr Rajan’s speech was to ease the bank branch regime in India. he said:

The Indian public would benefit from more competition between banks, and banks would benefit from more freedom in decision making. The RBI will shortly issue the necessary circular to completely free bank branching for domestic scheduled commercial banks in every part of the country. No longer will a well-run scheduled domestic commercial bank have to approach the RBI for permission to open a branch. We will, of course, require banks to fulfil certain inclusion criteria in underserved areas in proportion to their expansion in urban areas, and we will restrain improperly managed banks from expanding until they convince supervisors of their stability. But branching will be free for all scheduled domestic commercial banks except the poorly managed.

On reading this, some experts said that is how one should do reform – uncluttered and simple.But this was said without really reading the final guidelines and that is where the so called masala is.

So RBI released a circular on Sep 19, 2013 giving these guidelines. They allow banks to open branches freely in Tier A cities given certain restrictions. Spot the differences between earlier policy and recent policy (like those you get in magazines etc:

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Assessing the costs of the 2007–09 financial crisis…

September 20, 2013

Dallas Fed econs  David Luttrell, Tyler Atkinson and Harvey Rosenblum summarise the costs of the 2007-09 financial crisis (did it end in 2009??).

The 2007–09 meltdown produced a huge downshift in the path of economic output, consumption and financial wealth. The nation has borne additional costs arising from psychological consequences, skill atrophy from extended unemployment, a reduced set of economic opportunities and increased government intervention in the economy. Assuming the financial crisis is the root cause of all that dislocation, an estimate of the crisis’ overall cost must be weighed against the potential costs of policies intended to prevent similar episodes in the future.

We conservatively estimate the loss of national output as a result of the financial crisis and its aftermath at between $6 trillion and $14 trillion. The high end of this range is equal to nearly one year of U.S. output. Including broader and more-difficult-to-quantify measures that reflect the lingering trauma experienced by millions of Americans pushes these costs still higher—possibly to as much as two years’ worth of forgone consumption.

Given this range of estimates, the tepid economic recovery and the collateral damage sustained, it is crucial to implement effective policies that avoid future episodes whose magnitude could exceed even the staggering costs and consequences of the most recent financial crisis.

Hmmm…A really high range of costs..nearly one year of GDP at the higher end of the range..

Khar residents find worms, insects in BMC water..(People in Bangalore will say big deal!!)

September 20, 2013

Indian express has this story:

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Dr Rajan plays a bogey with markets…

September 20, 2013

What a surprise from Dr. Rajan in his first policy. There were so many expectations not from the policy per se but from the person. Well he did say he is not here for FB likes..

Post-Fed breather, most expected that not only will the liquidity measures be eased but signalling of future rate cuts will also be mentioned in the policy.  However, only one of the wishes was granted (eas eof liquidity) and in other there was a complete surprise (higher repo):

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