Archive for October, 2018

Remembering Albert Hirschman’s tunnel effect

October 31, 2018

Prof Timothy Taylor in his blog remembers Hirshman’s tunnel effect and links it to inequality debate:

Hirschman was focused on issues of economic development. He offers examples of a number of countries where many poor people welcome signs of economic development before it touches them personally in any way–presumably because they are in the position of that driver stuck in the left lane who is taking hope from the movement of the right-hand lane.  He also points out that this tunnel effect can lead to a sense of complacency among leaders, when most people seem to be supportive of the processes that are leading to inequality, so that the leaders are unprepared when people start to denounce those same practices.

“Providential and tremendously helpful as the tunnel effect is in one respect (because it accommodates the inequalities almost inevitably arising in the course of development), it is also treacherous: the rulers are not necessarily given any advance notice about its decay and exhaustion, that is, about the time at which they ought to be on the lookout for a drastically different climate of public and popular opinion; on the contrary, they are lulled into complacency by the easy early stage when everybody seems to be enjoying the very process that will later be vehemently denounced and damned as one consisting essentially in `the rich becoming richer.'”

Writing back in 1973, Hirschman offers examples of “development disasters,” in which those stuck in the left lane have come to strongly suspect that economic development will not benefit them, and thus a high degree of social unrest emerges. and he cites Nigeria, Pakistan, Brazil and Mexico as facing these issues in various ways.

I find myself thinking about the tunnel effect and expectations about future social mobility in the current context of the United States. Rising economic inequality in the United States goes back to the 1970s, and the single biggest jump in inequality at the very top of the income distribution happened in the 1990s when stock options and executive compensation took off. But my unscientific sense is that at that time, during the dot-com boom of the 1990s, many people who were either pleased, or not that unhappy, with the rise in inequality of that time. There seemed to be new economic opportunities opening up, new businesses were starting, unemployment rates were low, cool new products and services were becoming available. Even if you were for the time stuck in the left lane, all that movement in the right lane seemed to offer opportunities.

But that optimistic view of high and rising inequality came apart in the 2000s, under pressure from a from a number of factors: the sharp rise in imports from China in the early 2000s that hit a number of local areas so hard; the rise of the opioid epidemic, with its dramatically rising death toll exceeding 40,000 in 2016; and the carnage in employment and housing markets in the aftermath of the Great Recession.  In Hirschman’s words, it seems to me that many politicians were “lulled into complacency by the easy early stage when everybody seems to be enjoying the very process that will later be vehemently denounced and damned as one consisting essentially in `the rich becoming richer.'”

Of course, no country is really one big tunnel. When people look at high or rising inequality, their views will often depend on the extent to which they feel some commonality–Hirschman calls it “shared historical experience”–with those who are moving ahead more briskly. In turn, this feeling may depend on the extent to which those who are moving ahead more briskly segment themselves off as a special and separate guild, with an implicit claim that they are just more worthy, or the extent to which they act in ways that embody broader and more inclusive outcomes.


Hirschman was from a different league altogether. What a thinker and communicator of economic ideas…


The history and importance of Section 7 (1) of RBI Act (1934)

October 31, 2018

Lot of talk in media about Section 7(1) of RBI Act 1934. As per media reports, Government has invoked this section to give certain orders to the central bank. See this by Ira Dugal.

Section 7 of RBI Act states:

1) The Central Government may from time to time give such directions to the Bank as it may, after consultation with the Governor of the Bank, consider
necessary in the public interest.

(2) Subject to any such directions, the general superintendence and direction of the affairs and business of the Bank shall be entrusted to a Central Board of
Directors which may exercise all powers and do all acts and things which may be exercised or done by the Bank.

(3) Save as otherwise provided in regulations made by the Central Board, the Governor and in his absence the Deputy Governor nominated by him in this
behalf, shall also have powers of general superintendence and direction of the affairs and the business of the Bank, and may exercise all powers and do all acts
and things which may be exercised or done by the Bank.]

I  had blogged about the history of Section 7(1) in an earlier post. Reblogging it:


Sweden moves closer to issuing e-krona…

October 30, 2018

In Sweden, physical cash continues to decline and this has led to Swedes thinking of introducing a cash law.

Parallely, they are now moving closer to issuing a central bank digital currency:


Remembering Prof Dwijendra Tripathi: Why is India’s business history important?

October 30, 2018

Prof Tirthankar Roy pays tribute to Prof Dwijendra Tripathi.

In September this year, Professor Dwijendra Tripathi passed away. Until recently, he was the only business historian of India whose works were internationally recognized and respected. In the last twenty years, he produced as author or co-author a set of books, the Oxford History of Indian Business. The deep knowledge of the facts, love of the field, and a direct writing style, for which Tripathi was known, are in full display in these books.

I had interacted with Professor Tripathi closely in the 1990s, reviewed his books, visited his home, and admired him for his warm personality, scholarship, and his distance from ideological camps. On the last occasion we were in touch (7th July 2017), I emailed him the draft of a paper where there was a reference to Tripathi and Jumani in a mildly critical fashion, asking him if he would think that my criticism was unfair. He wrote: “Please go ahead with your paper; criticism is the life blood of scholarship.” Few Indian scholars I know of are so sporting.

In the process, he also tells us about his new book on business history:


A review of Governance/Board/MPC in State Bank of Pakistan…

October 29, 2018

Pakistan’s central bank which is celebrating its 70th anniversary, is going through its own governance challenges with the change of government as written in this article.

Keeping the challenges aside, it is interesting to review whether and how the governance and policy structure differs in SBP compared to RBI.

As per the SBP Act (1956), SBP’ s Board has 10 directors:


100 Years of Saraswat Bank: What made the Gauda Saraswat Brahmins excel at banking?

October 29, 2018

I keep saying that 2018 is a year of anniversaries especially for banks and central banks.

On 14 September 2018, Saraswat Bank celebrated its 100th anniversary. We do see commercial banks celebrating 100 years but it is really nice to see an urban cooperative bank  also achieve this milestone of 100 years. On the anniversary, they call themselves 100 years young. Its business has grown from a mere 0.07 lakh in 1920 to nearly 60,000 crore today.

While searching for more articles on Saraswat Bank, I realised that North Kanara Gauda Saraswat Bank also completed its 100 years in 2017. Further research showed another cooperative bank- Shamrao Vithal Bank (SVB), formed in 1906, was in its 112th year.

The readers might wonder about the linkages between these three banks. The connection is that apart from being Mumbai based cooperative banks, these three banks were found by one community of Gauda Saraswat Brahmins (GSB).


Milton Friedman’s presidential address at 50: One of the defining moments in history of macroeconomics…

October 25, 2018

The year 2018 marks the 50 years of the celebrated and much talked about lecture given by Milton Friedman: The role of monetary policy. It is seen as one of those key moments in history of macroeconomics where Friedman questioned the trade-off between inflation and unemployment as espoused in Philips curve.

It is rather odd to see a journal – Review of Keynesian economics – to dedicate an entire issue on the 50th anniversary.

Milton Friedman’s American Economic Association (AEA) presidential address, ‘The role of monetary policy,’ was published 50 years ago in the 1968 Papers and Proceedings issue of the American Economic Review. Friedman’s influence as an economist is undeniable and he is widely viewed, together with John Maynard Keynes, as the most important macroeconomist of the twentieth century. His contributions were extensive but, in our view, his AEA address has been the most influential.

In that address, Friedman introduced the concept of the natural rate of unemployment (NRU), which can be paired with Wicksell’s notion of a natural rate of interest. The idea of the NRU represents a clear theoretical return to pre-Keynesian views, which Friedman had tacitly defended throughout his career and which were connected to his revival of the quantity theory of money in his book, A Monetary History of the United States, co-authored with Anna Schwartz. However, as shown in the monetarist debates of the 1960s, his earlier work on monetary theory lacked a convincing macroeconomic theory in which to ground his policy conclusions.

Friedman’s address provided that missing theory by revamping the Keynesian IS–LM model to include a Phillips curve which was vertical at the NRU in the long run. Thus, not only did Friedman fill the gap in his own thinking, he also co-opted the Keynesian macro model.

The idea of the NRU provided an anchor for the simple monetary rules that have since come to dominate the theory of monetary policy. In effect, in the same way that Keynes’s The General Theory of Employment, Interest and Money had done a generation earlier, Friedman’s address provided both a theoretical framework and a simple policy prescription. That framework and prescription fell on fertile ground in the 1970s, when the neoliberal revolution swept through the political landscape.

It should be clear that Friedman’s monetary rule for a constant rate of money-supply growth never became dominant, and these days most central banks are concerned with rules about the rate of interest. However, Friedman’s concept of the NRU remains overwhelmingly dominant within the profession and has proven incredibly resilient. Indeed, the founding of the Review of Keynesian Economics (ROKE) was to some extent a reaction to the dominance of the Friedmanite notion of an NRU.

The current symposium aims to reflect on the reasons for the success of Friedman’s address and its consequences for macroeconomic analysis and policy. We hope the contributions of this distinguished group of economists will enrich understanding of the current macroeconomic consensus. Beyond that, speaking from a personal point of view, we hope it will help pave the way for wider engagement with Keynesian responses to Friedman’s natural rate hypothesis, leading to reassessment of the real-world relevance of the idea of a natural rate of unemployment.


Most of the papers of the issue are gated. But there are nongated versions of some of the papers on the web…

What’s Wrong With the 2 Percent Inflation Target: False precision can lead to dangerous policies.

October 25, 2018

Paul Volcker’s new book,KEEPING AT IT – The Quest for Sound Money and Good Government, should be an interesting read.

In an extract from the book, he questions the 2% inflation target obsession:


On 24 October 1648, the Treaty of Westphalia was signed…

October 24, 2018

Today marks the 270th anniversary of the Treaty of Westphalia which shaped much of Europe as we know today.

A nice short piece on the anniv:

The Westphalia area of north-western Germany gave its name to the treaty that ended the Thirty Years’ War, one of the most destructive conflicts in the history of Europe.

The war or series of connected wars began in 1618, when the Austrian Habsburgs tried to impose Roman Catholicism on their Protestant subjects in Bohemia. It pitted Protestant against Catholic, the Holy Roman Empire against France, the German princes and princelings against the emperor and each other, and France against the Habsburgs of Spain. The Swedes, the Danes, the Poles, the Russians, the Dutch and the Swiss were all dragged in or dived in. Commercial interests and rivalries played a part, as did religion and power politics.


The war was largely fought on German soil and reduced the country to desolation as hordes of mercenaries, left unpaid by their masters, lived off the land. Rapine, pillage and famine stalked the countryside as armies marched about, plundering towns, villages and farms as they went. ‘We live like animals, eating bark and grass,’ says a pitiful entry in a family Bible from a Swabian village. ‘No one could have imagined that anything like this would happen to us. Many people say that there is no God…’ Wenceslas Hollar recorded devastation in the war zone in engravings of the 1630s and starvation reached such a point in the Rhineland that there were cases of cannibalism. The horror became a way of life and when the war finally ended, the mercenaries and their womenfolk complained that their livelihood was gone.

The peace conference to end the war opened in Münster and Osnabrück in December 1644. It involved no fewer than 194 states, from the biggest to the smallest, represented by 179 plenipotentiaries. There were thousands of ancillary diplomats and support staff, who had to be given housing, fed and watered, and they did themselves well for close to four years, despite famine in the country around. Presiding over the conference were the Papal Nuncio, Fabio Chigi (the future Pope Alexander VII), and the Venetian ambassador.

The first six months were spent arguing about who was to sit where and who was to go into a room ahead of whom. The principal French and Spanish envoys never managed to meet at all because the correct protocol could not be agreed. A special postal system handled reams of letters between the envoys and their principals at a time when it took ten days or more to send a communication from Münster to Paris or Vienna and twenty days or more to Stockholm or Madrid. Slowly deals were hammered out. Even then it took almost three weeks just to organise the signing ceremony, which commenced at two o’clock in the afternoon of Saturday, 24 October 24th 1648.

The treaty gave the Swiss independence of Austria and the Netherlands independence of Spain. The German principalities secured their autonomy. Sweden gained territory and a payment in cash, Brandenburg and Bavaria made gains too, and France acquired most of Alsace-Lorraine. The prospect of a Roman Catholic reconquest of Europe vanished forever. Protestantism was in the world to stay.

I liked this bit of trivia: Sweden gained territory and payment in cash 🙂

Ethics in banking – from Gordon Gekko to George Bailey (It’s a wonderful life)

October 24, 2018

I had written a recent piece on how culture and ethics has become one of the central topics of discussion in central banking.

Danièle Nouy, Chair of the Supervisory Board of the ECB in this speech looks at two characters from the two Hollywood movies. One is Gordon Gekko of Wall Street who epitomized greed and was fine with any conduct in finance as long as it brought more returns/income. Another is George Bailey of It’s a Wonderful Life who used his own money to pay depositors and save his bank.


European Central Bank’s List of supervised entities in different Euroarea countries

October 24, 2018

This is an interesting list put up by ECB of the entities it has supervised lately. It is country-wise. It has even given reasons for their supervision which varies from large size to Significant cross-border assets. There are 118 such entities. What is interesting is that within the 118, there are several subsidiaries as well.

It also has a huge list of other financial entities which are not significant “as of now”….


True finance and three lies of finance..

October 24, 2018

Interesting lecture by Mark Carney of Bank of England.

He talks about how the GFC has led to changes in the financial system for the good. But there can be no progress if we don;t know the three lies of finance:

  • Lie I: “This Time Is Different”
  • Lie II: “Markets Always Clear”
  • Lie III: “Markets Are Moral”


He says we should work towards true finance. Call it truer finance actually:


Will Indian financial markets click Robert Merton’s SeLFIES?

October 24, 2018

Prof. Robert Merton recently gave the RH Patil memorial lecture organised by NSE.

Here is my recent piece where I have reviewed the key ideas of his lecture. The lecture was about this retirement financial product which he has named as SeLFIES. I also have tried to figure whether and how India can click these SeLFIES.

Danske Bank: the story of Europe’s biggest money laundering scandal

October 23, 2018

As culture in finance keeps going worse from one scam to another, Prof Sean Curley of Staffordshire University in this piece tells us about Danske Bank:


In recognition of the extent of the problem, the G7 group of major economies formed the Financial Action Task Force on Money Laundering back in 1989. The idea behind this was to produce a set of standards and guidelines and to monitor progress on anti-money laundering regimes.

The focus is to identify suspicious transactions and report them. For anti-money laundering efforts to be successful, it requires financial institutions to know their customers. This means that banks must be able to identify the ultimate beneficial recipient of a transaction – so the person who takes the profit – of any customer on their books.

This is where Danske Bank ran into trouble. Its Estonian branch came about when Danske acquired Sampo Bank, a small Finnish Bank in 2007. Sampo had a non-resident portfolio in Estonia and it is this that caused the problems.

In the words of the independent report into the scandal, which preempted CEO Borgen’s resignation: “Anti-money laundering procedures at the Estonian branch had been manifestly insufficient and inadequate.” Danske Bank has also admitted there were “major deficiencies in controls and governance that made it possible to use Danske Bank’s branch in Estonia for criminal activities such as money laundering”.

Danske shut down the non-resident portfolio in 2015 after it became clear that the bank’s anti-money laundering procedures at the Estonian branch weren’t working. As a mere branch, Estonia should have been subject to Danske’s own money laundering systems – but the branch had its own IT platform, which meant it was not covered by the same risk monitoring as the bank’s Copenhagen headquarters.

The independent investigation found that more than half of Danske’s 15,000 customers in Estonia were suspicious. The source of funds passing through the portfolio was identified as more than 58% coming from Russia, Estonia and Latvia. The destinations of the funds were worldwide.

The difficulty in identifying the true source of the funds comes from the lack of transparency as to the real owners of the customers in the portfolio. A proportion of them are UK-based companies that are registered as limited liability partnerships – this means they are not required to publish details of their eventual owners. This is a classic case of money laundering where ownership often passes through a series of shell companies before the eventual owner can be identified.

The customers are being investigated by several national authorities including the FBI and the UK National Crime Agency. The Danish regulator is investigating Danske Bank itself. Harsh penalties for the bank could ensue – Denmark’s business minister said the Danish authorities could fine Danske 4 billion Danish kroner (£475m). But it remains to be seen what the long-term damage will be for Danske, if any.


Imposing an obligation on Swedish banks to handle cash and redefining legal tender…

October 23, 2018

From the Riskbank:

The Riksbank Committee, consisting of representatives from all the parliamentary parties, has been tasked with performing a review of the monetary policy framework and the Sveriges Riksbank Act. In June, the Committee published its interim report “Secure access to cash” (SOU 2018:42).

In a consultation response to the report, the Riksbank writes that all banks and other credit institutions that offer payment accounts and associated services shall be obliged to offer cash services to their customers.

The Committee proposes a requirement that companies shall be able to deposit their daily cash takings in their bank accounts. The Riksbank wishes to go a step further even in this regard. Banks should also be obliged to ensure that private individuals can make deposits. “The possibility to make deposits shall be included in the concept of cash services. This is a service that consumers can reasonably expect of banks,” says Governor Ingves.

The Riksbank also considers it important that the status of cash as legal tender be clarified. For example, it needs to be clear which services, in addition to public medical care, shall be obliged to accept cash.

As cash use is declining rapidly, it is important that the Riksdag adopt a position on the issue of what constitutes legal tender in Sweden and its connection to the Swedish krona as a currency. Any legislation should be as technology-neutral as possible in order to also be applicable to any future means of payment issued by the Riksbank.


Human capital formation during the first Industrial Revolution: Evidence from the use of steam engines

October 23, 2018

Researchers- Alexandra de Pleijt , Alessandro Nuvolari, Jacob Weisdorf – look at human capital during industrial revolution.

They say it led to deskilling in UK with demand for unskilled falling quite a bit:


Profit Inflation, Keynes and the Holocaust in Bengal, 1943–44

October 22, 2018

Prof Utsa Patnaik in this interesting paper discusses Keynes’role in Bengal Famine in 1943-44. This year marks the 75th anniversary of the disaster.

Prof Utsa says Keynes’ profit inflation idea/policy was the key to the famine:


Featuring lifeboat and lighthouse in banknotes: Case of Norway…

October 19, 2018

Norway and Sea are connected deeply. They had earlier included cods in their 200 kroner note.

Now the new 50 kroner has lighthouse and 500 kroner has lifeboat as key themes.

Governor Øystein Olsen in this speech explains:


Promoting financial education using cinema…

October 19, 2018

Banca D’Italia oe Central Bank of Italy is promoting financial education using cinema:

As part of Financial Education Month, on 19 October at 9.30, Marco Onado, Senior Professor at Milan’s Bocconi University and expert in the law and economics of financial intermediaries, will give a talk to the students present at the screening of Adam McKay’s film ‘The Big Short’ at the Bank of Italy’s convention centre in Via Nazionale 190, Rome. The aim is to encourage high school students to reflect on themes relating to the economy and finance.

They even have a poster. Nice bit.

The Indian government/regulators could not just screen movies but even teach economics/finance lessons from them via Housefull Economics columns run by Think Pragati

The peso and Philippine economic history

October 19, 2018

The recent Agustín Carstens, (General Manager of the BIS) speech discusses the discovery of trade route between Philippines and Mexico:

In 1565, an Augustinian friar, Andrés de Urdaneta, discovered the return route from the Philippines to Mexico – then New Spain. This discovery meant that galleons could do round trips between America and Asia in an efficient way. Chinese silk, porcelain, spices and other goods travelled from Manila to Acapulco. The merchandise was then transported to Veracruz on Mexico’s east coast, from where it was on-shipped to Europe. From Mexico to the Philippines, the galleons would carry mostly Mexican silver, a widely accepted means of payment at the time. This trade route lasted for approximately 250 years, up to 1810-15 when Mexico fought for its independence from Spain. I bring this up because that trade route could be considered an early manifestation of globalisation.

The speech was given at the 20th anniversary of BIS’s Asia office in Hong Kong.

Notice that he mentions how the trade led to Solver coming to Philippines which becomes its main form payment.

Gerardo Secat in a series of posts (one, two)is looking at history of Philippine Peso and Philippines economic history. In these he points how the Peso got its value from this Spanish silver. He also discusses the later linkages between US dollar and the Philippine Peso:

The story of the peso is inextricably linked with our economic history as a nation. It is also part of Philippine political history. A monetary currency is adopted by the government to set up a means (and guarantee) of payment to enable normal commerce to proceed.

Spanish colonial times. During the 16th century (the age of explorations and European colonization of the world), the peso was a royal silver coin minted by the Spanish royal crown, much like the thaler (or “dollar”) within Europe.

Also known as real de a ocho (or “piece of eight”), the peso was also minted in larger quantities in colonial mints of the crown in Mexico and Peru, where bountiful mines were located that produced great wealth and power for the Spanish empire.

The peso would find great currency in the Spanish colonies (including the Philippines). Spanish colonial administration would adopt the peso as the means of payments in trade and financing of the government.

Throughout Spanish colonial period, the peso would delineate the story of Philippine trade and domestic prices. It was the currency that financed the Galleon Trade with Mexico and life within the colony up until the contemporaneous life of Jose Rizal  who was executed by the Spanish authorities shortly before the Spanish-US War of 1898.

The peso in American colonial times. One of the first decisions of the American military government when it took control of Las Islas Filipinas (the Philippine Islands) from Spain was to continue to use the peso as the local currency for transactions in the new colony unit.

The islands were a booty won from war in 1898. The US destroyed Spanish colonial rule over the islands, overcame also militarily the local struggle for independence, and took political possession. The transfer of political control through a treaty of peace and the payment of $20 million equivalent for “improvements” that Spain made as the former colonial master saved face as the loser.

In adopting the peso as the unit of currency, the US colonial government fixed its value at one-half the US dollar. Thus, one US dollar became equivalent to two Philippine pesos.

That made the Philippine peso become a currency based on fixed exchange rate with the US dollar. Hence, it was a currency operating under a “dollar exchange” standard. It was common practice among colonial powers to base local currencies after a fixed exchange with their own stronger currency.

Throughout the almost five-decades of strictly being under American colonial administration, the Philippine peso had a fixed value of two pesos per US dollar.

Superb bit of history and know how….

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