Archive for March 23rd, 2015

Making sense of India’s emerging financial and monetary architecture

March 23, 2015

There are worries over the new finance bill which looks to take away certain powers from Indian central bank. Actually it is not just certain but quite a few powers. Indian central bank in future will just be like Bank of England in future responsible for just meeting the so called inflation target.  The spate of financial committees since 2006 have all suggested the same.

The traditional RBI camp have all opposed these ideas and have said why fix something which is not broken. Of course, those in finance ministry have not really cared. They have appointed committees after committees keeping RBI top brass out of the discussion. Even Planning Commission got into the act and ended up advising what RBI should do which was none of their business really. RBI obstructed the committees in whatever ways it could which did not please those in North Block. In India one has to look beyond the objective of the committees. It is highly political with those in power trying to prove their point.


Does a politician’s age matter for policy?

March 23, 2015

Alberto Alesina, Traviss Cassidy and Ugo Troiano think so.

We find that a politician’s age does matter for policy, though not always in the way conventional wisdom would suggest.


Student Loan Debt Is the Enemy of Meritocracy in the US

March 23, 2015

Thomas Piketty picks on highly elevated student debt levels in US. He says student debt is just the anathema of US idea of meritocracy:


Are low bond yields a problem?

March 23, 2015

Prof Shiller says based on his research so far low bond yields do not show a crisis. But never say never:

I have been thinking about the bond market for a long time. In fact, the long-term bond market was the subject of my 1972 PhD dissertation and my first-ever academic publication the following year, co-authored with my academic adviser, Franco Modigliani. Our work with data for the years 1952-1971 showed that the long-term bond market back then was pretty easy to describe. Long-term interest rates on any given date could be explained quite well as a certain weighted average of the last 18 quarters of inflation and the last 18 quarters of short-term real interest rates. When either inflation or short-term real interest rates went up, long-term rates rose. When either fell, so did long-term rates.

We now have more than 40 years of additional data, so I took a look to see if our theory still predicts well. It turns out that our estimates then, if applied to subsequent data, predicted long-term rates extremely well for the 20 years after we published; but then, in the mid-1990s, our theory started to overpredict. According to our model, long-term rates in the US should be even lower than they are now, because both inflation and short-term real interest rates are practically zero or negative. Even taking into account the impact of quantitative easing since 2008, long-term rates are higher than expected.

But the explanation that we developed so long ago still fits well enough to encourage the belief that we will not see a crash in the bond market unless central banks tighten monetary policy very sharply (by hiking short-term interest rates) or there is a major spike in inflation.

Bond-market crashes have actually been relatively rare and mild. In the US, the biggest one-year drop in the Global Financial Data extension of Moody’s monthly total return index for 30-year corporate bonds (going back to 1857) was 12.5% in the 12 months ending in February 1980. Compare that to the stock market: According to the GFD monthly S&P 500 total return index, an annual loss of 67.8% occurred in the year ending in May 1932, during the Great Depression, and one-year losses have exceeded 12.5% in 23 separate episodes since 1900.

It is also worth noting what kind of event is needed to produce a 12.5% crash in the long-term bond market. The one-year drop in February 1980 came immediately after Paul Volcker took the helm of the Federal Reserve in 1979. A 1979 Gallup Poll had shown that 62% of Americans regarded inflation as the “most important problem facing the nation.” Volcker took radical steps to deal with it, hiking short-term interest rates so high that he created a major recession. He also created enemies (and even faced death threats). People wondered whether he would get away with it politically, or be impeached.

Regarding the stock market and the housing market, there may well be a major downward correction someday. But it probably will have little to do with a bond-market crash. That was the case with the biggest US stock-market corrections of the last century (after 1907, 1929, 1973, 2000, and 2007) and the biggest US housing-market corrections of all time (after 1979, 1989, and 2006).

It is true that extraordinarily low long-term bond yields put us outside the range of historical experience. But so would a scenario in which a sudden bond-market crash drags down prices of stocks and housing. When an event has never occurred, it cannot be predicted with any semblance of confidence.

Keep watching. We have seen many things in last few years which were least imagined in the fancy finance world..

Linking inequality to house analogy

March 23, 2015

James Kwak says wage inequality is just tip of iceberg. Real deal is wealth inequality.

Uses an analogy:


RIP – Lee Kuan Yew

March 23, 2015

The chief Singapore architect Lee Kuan Yew passed away. Rest in Peace Sir.

A slideshow of turnaround of Singapore.

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