Archive for June 25th, 2015

Who should be there on $10 note?

June 25, 2015

A huge controversy has erupted ever since US Treasury Sec made this speech. There was a view that Alexander Hamilton will be removed from the note and be replaced by a Woman (who has done commendable work).

However, Treasury Sec did not really make this comment. He said we are exploring options and want to keep Hamilton on the note:

Given the vital role women have played to build our nation, it is only right that our currency reflect their contributions.  In the past, we have honored women on our paper currency and on our coins and Congressional medals.  Great women like Martha Washington, Sacagawea, Susan B. Anthony, Helen Keller, Mary Lasker, and Rosa Parks.  These women confronted the status quo, and for them, no challenge was unsurmountable, no problem unbeatable.   But the fact is, today, a woman is nowhere to be found on any of our seven paper bills.  That is wrong, and it needs to change.
We will right that wrong, and when the new, redesigned 10 dollar note is released, it will bear the portrait of a woman.  This is historic: We have made changes to the faces on our currency only a few times since bills were first put into circulation.  And the woman whose engraved image will appear on the new 10 dollar bill will be the first to grace our paper currency in more than a century. 
Of course, changing the look of our money will not erase discrimination against women in the United States.  But it is a small step with big significance.
This is not the first time that the 10 dollar note has charted a new course for our paper currency.  Back in 1928, when Treasury Secretary Andrew Mellon put Alexander Hamilton on the 10, he did it over the objections of his advisers who argued that the bill should only carry the images of former U.S. presidents.  The Secretary rejected that view, and established the 10 as a bill that celebrates visionary Americans—Americans who helped make our nation the strongest in the world.
Alexander Hamilton certainly did that.  He was a military commander during the Revolution, an abolitionist long before the Civil War, the author of more than two-thirds of the Federalist Papers, and the driving force behind the ratification of our Constitution.  He was also the first Treasury Secretary of the United States, and all of his successors, including me, are indebted to him.  In the period following the Revolution, Hamilton laid the groundwork for our economy and America’s long term prosperity. 
Alexander Hamilton has left an enduring mark on our nation’s history.  That is why we will make sure that his image will remain a part of the $10 note. We are exploring a range of options to make sure that he continues to be honored on the 10.

Bernanke responds to this (how the world’s most powerful econ has moved to a role of a blogger is amazing, this happens in US. In India all our central bank chiefs remain part of the system for eternity). He says removing Hamilton is not right. At best we should replace Andrew Jackson from the $20 note:

Hamilton also played a leading role in creating U.S. monetary and financial institutions. He founded the nation’s first major bank, the Bank of New York; and, as Chernow points out, Hamilton’s 1791 Report on the Mint set the basis for U.S. currency arrangements, which makes his demotion from the ten dollar bill all the more ironic. Importantly, over the objections of Thomas Jefferson and James Madison, Hamilton also oversaw the chartering in 1791 of the First Bank of the United States, which was to serve as a central bank and would be a precursor of the Federal Reserve System.

In the nineteenth century, a principal public role of central banks was to control banking panics, as the Bank of England would do quite successfully. Unfortunately, in large part because of populist opposition, neither the First Bank of the United States nor its successor, the Second Bank of the United States, would have their charters renewed. President Andrew Jackson led the opposition to the Second Bank, vetoing a bill passed by Congress to continue its operations. The expiration of the Second Bank’s charter in 1836 likely worsened the very severe Panic of 1837, which was followed by a prolonged economic depression. The United States would go on to suffer numerous banking panics that would hamper its economic and financial development over the rest of the century.

Hamilton’s demotion is intended to make room to honor a deserving woman on the face of our currency. That’s a fine idea, but it shouldn’t come at Hamilton’s expense. As many have pointed out, a better solution is available: Replace Andrew Jackson, a man of many unattractive qualities and a poor president, on the twenty dollar bill. Given his views on central banking, Jackson would probably be fine with having his image dropped from a Federal Reserve note. Another, less attractive, possibility is to circulate two versions of the ten dollar bill, one of which continues to feature Hamilton.

I was in government long enough to know that decisions like this have considerable bureaucratic inertia and are accordingly hard to reverse. But the Treasury Department should do everything within its power to defend the honor of Jack Lew’s most illustrious predecessor.


Mark Thornton of Mises, a leading advocate of free banking and no central bank reacts to Bernanke’s post:

Hamilton should get some credit for the Constitution and for being a policy maker. But the Constitution was an inferior form of government compared to the Articles of Confederation and his economic policy making was all geared toward bigger government and monetary nationalism, the two problems that are arguably the greatest threats to the American people, their prosperity, and their liberty. Bernanke then goes on to present a convoluted history of National Banks and bank panics during the 19th century. However, he does provide a suggestion for resolving the $10 bill controversy. Leave good old Hamilton on the $10 and take President Andrew Jackson off the $20 bill and replace him with a women.

This is probably the only idea of Ben Bernanke (removing the anti-central banking Jackson from the $20 bill) that I can agree with. And while you are at it take the image of Thomas Jefferson off the $2 bill and replace him with Paul Krugman or Ben Bernanke.


Both suggest to remove Jackson but for different reasons. Bernanke an advocate of central banking believes Jackson should not be there. Thornton an advocate of no central banking also believes Jackson should not be there as when we have private bank money, there is no need to put govt officials pictures on the notes. It is also interesting to see how central bankers are criticised in US. Here we just pray them..


From IIT politics to IIM politics..

June 25, 2015

Just a couple of months ago, the govt announced that a new IIT will come up in Karnataka. This led to political battles over which city/place will host the new IIT. It was as if the new IIT was some kind of a industrial project which will lead to huge income and welfare for the local public. The relation is actually the opposite. It is the overall development of city which keeps these educational institutions humming. One can compare IITs in Kanpur, Kharagpur, Guwahati with IITs in Mumbai, Delhi, Madras etc to get some ideas.

This politics moves to IIMs now. Despite poor logic to set up more of such places, the govt announced yesterday to set up 6 new IIMs. This was in line with the Union Budget proposal to set up new IIT/IIM in the states. In the budget, it announced the states that will have these new entities. Y’day the note specified the places in the same states:


Why does Indian PM want weak institutions?

June 25, 2015

Sucheta Dalal ponders over this question. She points to recent appointments by the Prime Minister and is not too happy with the choices.

Well, time will only tell. But this is a large feeling most have. Those on the other side might say, were these institutions any effective at the first place?

Is too much Finance a concern, or is it just statistical illusion?

June 25, 2015

An interesting paper by William Cline of PIIE. Lately, there has been some research which shows that too much finance leads to lower growth.  The author critques such research.

He says much of this has been shown using a kind of econometric trick. What people have done is added a quadratic term (of say financial deepening) in the regression equation. This shows a negative coefficient leading people to make their claims that after such and such ratio/percentage (of say bank assets to GDP), finance leads to lower growth.

Fair enough. The author says one could actually do the same for doctors, telephones, R&D and so on. His analysis shows the coefficient is negative here as well. So, after so many doctors, so many telephones etc growth becomes lower. Does this sound plausible?

This Policy Brief shows that these recent fi ndings warrant considerable caution, however, because the negative quadratic term may be an artifact of spurious attribution of causality. I fi rst show that correlation without causation could similarly lead to the conclusion that too many doctors spoil growth (for example). I then demonstrate algebraically that if the variable of interest, be it fi nancial depth, doctors, or any other good or service that rises along with per capita income, is incorporated in a quadratic form into a regression of growth on per capita income, there will be a necessary but spurious fi nding that above a certain point more of the good or service in question causes growth to decline.

Fascinating. This quadratic term is an old idea (or a trick now) in econometrics and amazing to see how it has been used this time. It usually shows a negative term just to limit the same excesses (have limited understanding of this though).

Though, the author misses the main point. People used same tricks before the crisis as well. All kinds of fancy regressions were invented to show that only finance matters for growth. This was used to push policy agenda. So all kinds of financial indicators (bank assets, equity markets, bank accounts etc) were used to show how they lead to GDP growth. This was a phase where GDP growth was rising generally and by fitting such regressions, positive relationships were not difficult to find. So the mantra was simple. Just let financial sector grow. And hence, finance professors became the new dons and got huge fame. They were appointed to all kinds of committees to drive financial sector of respective countries. Same with the finance sector.

Post-crisis, we are now questioning these findings and arguing the opposite. After all, we have to show that the discipline is responsible and knows things. Nothing could be further from truth. It is even more bizarre that the professors who argued for finance earlier have only seen their fame grow!!

Another point is it is not right to compare finance with medicine/telephones/R&D etc. Finance interacts with the economy in many more ways than all these other factors. Too many doctors, telephones etc hardly impact the economy adversely but finance surely does. This is nothing new. For ages, speculations and manias in finance have impacted economies.

For any development, one needs several factors and finance is just one of them. We had overdone the analysis earlier and are perhaps overdoing it now.

Do you want to build a dam or create employment?

June 25, 2015

Interesting anecdote by Michael Tanner.

Lately, there is a concern over rising inequality in US and developed world. Politicians feel growth is only rewarding those at the top. The author says we are mixing these two things. High growth should be welcome at all costs and if inequality is rising we should use different tools for the same. But to say growth should be lower does not get us anywhere. In this context he quotes this story from Prof. Milton Friedman :


Krugman battles Austerians … A cartoon strip

June 25, 2015

Interesting and funny cartoon strip on how Krugman knocks out the several austerity promoting economists and declares himself as the winner..

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