Wishing all the viewers a very happy new year. Hope 2014 is a great year for all of you.
Here is ME’s 2013 Annual Report (courtesy wordpress.com):
Well, few econs have stuck to a single task ever since the crisis started. One such person is Prof Simon Johnson of MIT who has been after this too big to fail approach of banks. He has written several articles asking banks to be broken up and facing sever penalties for the losses they have brought to public.
So, in this recent article he compares Cricket Australia’s decision to penalise Michael Clarke with US Dept of Justice to penalise JP Morgan. It is really nice to see an American Prof following cricket!!:
When an athlete breaks the rules, it is easy to figure out whether the relevant disciplinary body really wants to discourage repeat offenses. Suspending a player from the sport – as happens in soccer in the case of dangerous fouls – is a real punishment, not only for the individual but also for the team.
Consider the case of Michael Clarke, the captain of the Australian cricket team, who recently threatened bodily harm to an opposing player. Despite public hand-wringing, Cricket Australia (the governing body) imposed only a small fine (that is, small relative to Clarke’s annual salary). Whether or not this was appropriate, Cricket Australia was making it clear that such behavior merited only a symbolic punishment.
The recent $13 billion settlement between the US Department of Justice and JPMorgan Chase (JPM), one of the world’s largest international banks, should be viewed the same way. To the uninitiated, the fine appears significant (which explains all the attention-grabbing headlines), and it certainly has made America’s financial regulators look busy and serious. But, just like Cricket Australia, the message is clear: There will be no change to business as usual.
He points how both pay some really low penalty:
A $13 billion “fine” for a company the size of JPM is about as painful as Clarke’s fine is for him – not painful at all. Clarke earns about $6 million (Australian dollars) per year; in addition to an annual retainer, he receives a $14,000 match fee for every international test match, along with other tour fees and bonuses. He was fined 20% of the international match fee ($2,800), or about 0.05% of his annual salary. For anyone with an annual income of $50,000 (which is close to the median for US households), this would be equivalent to a fine of $25.
JPM has a total balance sheet of around $4 trillion, measured using international accounting standards. As management told shareholders after the settlement was announced, “the Firm is appropriately reserved for all of these matters,” meaning that there would be no material impact on earnings. And, predictably, “the Firm did not admit any violations of law.”
In fact, while Clark’s paltry fine presumably at least comes out of his own pocket, the penalty levied on JPM is to be paid largely by its shareholders. And, because there is no market for corporate control over megabanks (because protections provided by regulators prevent hostile takeovers or effective shareholder activism), frustration on the part of JPM’s investors cannot result in a change of management.
But, again, JPM’s shareholders have little cause for concern. Marianne Lake, JP Morgan’s chief financial officer, has suggested that about $7 billion of the fine is likely to be tax deductible, that is, treated as a form of necessary and usual business expense. The bank was taxed at an effective rate of 31.3% in the first nine months of 2013, according to the Wall Street Journal, implying a tax break worth around $2.2 billion (which could end up higher).
Fine to be tax deductible!! Really?
Prof. Ashoka Mody of Princeton University chips in and joins several others who have been making the same points. Traditionally Govt. looks at growth and central bank at inflation. It is time to switch roles — let Govt look at inflation (much is food prices anyways) and let RBI look at growth by cutting rates (as all that is needed is lowering rates)…
One should expect such articles as RBI decided to play bogey by not raising rates amidst record high inflation.
Prof. Modi actually says RBI should do much for growth and should have allowed Rupee to depreciate:
Aam Aadmi Party’s and Arvind Kejriwal‘s amazing journey from being a corruption activist to becoming Delhi’s youngest CM is stuff of fairy tale. And all this in just one year where people sped all their lives in politics tying to become some minister. And becoming a CM right away that too representing a party which celebrated its one year on 26 Nov 2013. It is all so surreal really.
Equally amazing is How Delhiites have voted so strongly for the party. Anyone you talk to in Delhi, says we knew they will win some seats but so many was never really believed. To see a change (if we can call it one) in India’s political capital is amazing to see.
Coming to the title of the post. As expected, there have been lot of praises from all corners (barring the opposition camp which is stumped for words). People have analysed the reasons for victory, challenges going ahead, how many days will it last etc..
Now there is another section which says AAP’s economic manifesto is full of problems. Basically it is all about uneconomic stuff – cheaper electricity bills, free water etc. I picked some economic agenda from its manifesto:
Prof Solow says Herr Greenspan has still not learnt from his mistakes. He starts with some +ves in Greenspan’s career. And then gets to the minuses:
On the minus side, Greenspan’s reputation has suffered from two big mistakes. The first was his failure to see the importance of the housing bubble and the dangerous vulnerability of the financial mechanism that supported it. Had he done so and punctured the bubble promptly, the economy would have been spared the prolonged weakness that it is still suffering. The second was his deep-seated conviction that the unregulated financial system was self-stabilizing, that the self-interest of all those clever and experienced participants with a lot of their wealth at stake would keep the accumulation of risk within tolerable bounds. So he promoted deregulation and financial consolidation (as did others, of course) and, when this simple faith proved wrong, allowed disaster to strike. I think that the first mistake may be partially excusable, but the second mistake was a catastrophe, and it was not an accident.
Hindsight leaves no doubt that it would have been a great idea to prick the housing bubble early. But imagine that Greenspan and the Fed had done so. Suppose they had tightened credit, pushed interest rates higher, put an end to the housing boom, and thus—very likely—created a standard recession like so many of the others. They would surely have been pilloried for destroying a nice prosperity in midstream and creating painful unemployment. And for what? To prevent a later financial crisis? But no financial crisis would be actually visible, not in this version of history. How could anyone know that one had really been averted? It was still a mistake to have let the bubble continue, blandly claiming that it would be easier to pick up the pieces later on. It stands as a bad grade in the Greenspan report card. But it was not simply a matter of foolishness and ideological fantasy.
The second mistake, the bigger one, was both. An unregulated financial system, no matter how many smart people have megabucks in the game, can easily become over-leveraged and then fatally underestimate or ignore the amount of risk that financial institutions have taken on and the depth to which their risky balance sheets contaminate each other in hidden ways. When the edifice starts to collapse, central bankers and other policymakers may be left with the choice between bailing out the very people and institutions whose behavior created the crisis and letting the edifice collapse, doing even more harm to millions of people who played no active part in the disaster. The point is that this was not just a bad hair day, or one of those cases where nature presents nothing but bad options. It was a case of bad ideas coming home to roost. Greenspan was a prominent opponent of financial regulation, and it cost him (and us).
Further, the recent book shows he has not learnt:
Greenspan’s new book is obviously intended to show that his errors were only partial and that he has found useful ways to correct them, and thus to refurbish his reputation as oracle-in-chief. It fails. His argument is thematically vague and analytically weak. In the end it sounds like the same old right-wing conviction that the unregulated or very lightly regulated market knows best.
Begin with the book’s title and subtitle. The analogy between a map and a theory is a useful device. Fathers-in-law are always pointing out that any economic theory ignores this or that obvious fact about the real-world economy. But a map on the scale of one to one is precisely useless. A map on the scale of one to 500,000 is useful for most purposes, but you cannot expect it to show every bend in the road or every dirt track leading north. Greenspan does not seriously discuss the goals and the limitations of reasoning about the economy. He talks some about his early life as a forecaster, and he is clear that economic policy has to be based on forecasts: policies undertaken now will have effects in the future, and sensible economic policy usually has long-run goals anyway. But the reader of this book will learn little or nothing about the process of forecasting other than that it is difficult and that the results are always uncertain. Duh.
The new Greenspan concedes that the decisions made by participants in the economy are not always governed by rational adaptation to given facts, and that this failure leads to unpredictability and instability. Instead the economist-forecaster-policymaker has to take account of “animal spirits.” (The phrase was introduced into economics by Keynes and was recently revived by George Akerlof and Robert Shiller.) This is a step in the right direction, but even here Greenspan does a poor job. He rattles off a long list of what he regards as “inbred” propensities of people and groups to behave irrationally, or at least non-rationally, in economic matters. They include fear, euphoria, aversion to risk, preference for early rewards over larger later ones, herd behavior, dependency on peers, a bias toward dealing with people close to home, competitiveness, reliance on a code of values, a bias toward one’s relatives, self-interest, and self-esteem. That comes to twelve propensities, some broad, some narrow, some vague, some precise, some important, some less so, and Greenspan says that there are more of them.
He questions the use of regressions in the new book and couple of other things as well..
In the end:
Students of economics are taught about the efficiency of competitive markets, and they are also taught that judgments about “social welfare” or justice have to come from some other source. Here I have to introduce a question that I am not the best person to discuss. It is sometimes claimed that Alan Greenspan is a closet follower of Ayn Rand; he certainly had an early association with her circle. I got through maybe half of one of those fat paperbacks when I was young, the one about the architect. Since then I have found it impossible to take Ayn Rand seriously as a novelist or a thinker. In the past I have gone on the assumption that Greenspan’s ideas about economic life are his own, just what is contained in his writings, and the Ayn Rand question does not arise. But now there is this book, with its particular misinterpretation of mainstream economics, which might be thought to reopen the question if anyone is interested.
Anna Rosenberg Hoffman once said to me, when I was prattling on about what “the data” said: “What are you going to believe, the data or your eyes?” A hard choice. The Alan Greenspan I admired was a pragmatic central banker who was able to believe both the data and his eyes and to ignore the people who already knew the answer without looking. The author of this book makes a show of both, but not really. His eyes are too often closed and he seems to be listening to another voice, with quite conventional opinions, coming from somewhere stage right.
How quickly the world of Alan Greenspan crashed…The same ideas were praised by most (not Prof. Solow hopefully) before 2007 and are being questioned now. though, it is a different story that his ideas are still alive and kicking..Though no one wants to be called a la Greenspan..
A visit to CSO’s website today got me to this paper by Ashish Kumar and G. M. Boopathy of the same institution.
It is a much needed paper as it fills this gap of comparing the various inflaiton measures in India. Apart from the numbers and trends which most other papers/notes give us, this one goes into methodology and construction details. And this is what leads to differences in the various inflation measures as well:
An interesting piece in ToI today. They point to a CSO report which looks at how retail level prices have risen in rural areas from a historical perspective. I did check CSO’s website and could only see these reports which is for randomly selected periods from Oct 2011 onwards. So not sure where the report is.
And this report talks about school fee only in rural areas. Imagine the school fee inflation in urban areas where it is faster than the taxi meter:
An excellent note by FRBSF econs – Mary C. Daly, John Fernald, Òscar Jordà, and Fernanda Nechio.
They look at the labor markets in key economies in the world both pre and post crisis. They find these labor markets had converged pre-crisis but have differed post-crisis.This is because of policy interventions.
David Yermack of New York University has this interesting paper on Bitcoin.
He looks at various features of bitcoin and compares it to some dominant currencies. He says there is huge volatility and it resembles more like a speculative investment and not currency:
Motivated by Bitcoin’s rapid appreciation in recent weeks, I examine its historical trading behavior to see whether it behaves like a traditional sovereign currency. Bitcoin has exchange rate volatility an order of magnitude higher than the volatilities of widely used currencies, undermining Bitcoin’s usefulness as a unit of account or a store of value. Bitcoin’s daily exchange rates exhibit virtually zero correlation with bona fide currencies, making Bitcoin useless for risk management purposes and exceedingly difficult for its owners to hedge. Bitcoin also lacks access to a banking system with deposit insurance, and it is not used to denominate consumer credit or loan contracts. Bitcoin appears to behave more like a speculative investment than like a currency.
It is still early days and one would get such results as really bitcoin value has been highly volatile. Comparing it to currencies ike USD, Euro etc is just not right. I mean how can a currency match these giants in such little time that too without any political backing.
But still nice summary of the whole debate. It is these parameters on which bicoin is likely to be judged in future..
Just a while back, RBI DG Anand Sinha was hauling banks on why they have not raised rates after two rate hikes in Sep and Oct-13. Now they have acted post a rate pause decision by RBI.
If other banks follow by cutting rates (even on selective products), it will be a joke on RBI’s attempt to lower inflation by hiking policy rates in Sep-13 and Oct-13.
Wharon Profs. Howard C. Kunreuther and Mark V. Pauly, have co-authored a book titled, Insurance and Behavioral Economics: Improving Decisions in the Most Misunderstood Industry.
In this interview, they say why insurance is the most misunderstood industry. Some think it like investments, others do not insure as events are low probability: