Parul Agrawal of IFMR-Lead has an interesting post on the topic.
She says most fin lit programs are one size fits all. This is unlikely to work as individuals shape differently as per their life cycle:
It is amazing to note how things change. Before the crisis, econs talked really big about financial development, role of credit etc. Careers were made in area of finance in a big way. Credit growth was seen as a way for financial deepening and all kinds of things.
Cometh the crisis and all has changed. Now these trends are seen as a serious concern not just in present context but future one as well. Alan Taylor who with his coauthors has been researching these historic credit trends speaks on the dangers ahead:
Alan Taylor, a professor and Director of the Center for the Evolution of the Global Economy at the University of California, Davis, has conducted, along with Moritz Schularick, ground-breaking research on the history and role of credit, partly funded by the Institute for New Economic Thinking. He finds that today’s advanced economies depend on private sector credit more than anything we have ever seen before. His work and that of his colleagues call into question the assumption that was commonplace before 2008, that private credit flows are primarily forces for stability and predictability in economies.
If current trends continue, Taylor warns, our economic future could be very different from our recent past, when financial crises were relatively rare. Crises could become more commonplace, which will impact every stage of our financial lives, from cradle to retirement. Do we just fasten our seatbelts for a bumpy ride, or is there a way to smooth the path ahead? Taylor discusses his findings and thoughts about how to safeguard the financial system in the interview that follows.
He says how credit has risen and what that means:
Lynn Parramore: Looking back in history at 17 countries, you discovered something interesting about the private sector financial credit market. What did you find?
Alan Taylor: Our project compiled, for the first time, comprehensive aggregate credit data in the form of bank lending in 17 advanced countries since 1870, in addition to some important categories of lending like mortgages.
What we found was quite striking. Up until the 1970s, the ratio of credit to GDP in the advanced economies had been stable over the quite long run. There had been upswings and downswings, to be sure: from 1870 to 1900, some countries were still in early stages of financial sector development, an up trend that tapered off in the early 20th century; then in the 1930s most countries saw credit to GDP fall after the financial crises of the Great Depression, and this continued in WWII. The postwar era began with a return to previously normal levels by the 1960s, but after that credit to GDP ratios continued an unstoppable rise to new heights not seen before, reaching a peak at almost double their pre-WWII levels by 2008.
LP: How is the world of credit different today than in the past?
AT: The first time we plotted credit levels, well, we were almost shocked by our own data. It was a bit like finding the banking sector equivalent of the “hockey stick” chart (a plot of historic temperature that shows the emergence of dramatic uptrend in modern times). It tells us that we live in a different financial world than any of our ancestors.
This basic aggregate measure of gearing or leverage is telling us that today’s advanced economies’ operating systems are more heavily dependent on private sector credit than anything we have ever seen before. Furthermore, this pattern is seen across all the advanced economies, and isn’t just a feature of some special subset (e.g. the Anglo-Saxons). It’s also a little bit of a conservative estimate of the divergent trend, since it excludes the market-based financial flows (e.g., securitized debt) which bypass banks for the most part, and which have become so sizeable in the last 10-20 years.
LP: You’ve mentioned a “perfect storm” brewing around the explosion of credit. What are some of the conditions you have observed?
We have been able to show that this trend matters: in the data, when we observe a sharp run-up in this kind of leverage measure, financial crises have tended to become more likely; and when those crises strike, recessions tend to be worse, and even more painful in the cases where a large run-up in leverage was observed.
These are findings from 200+ recessions over a century or more of experience, and they are some of the most robust pieces of evidence found to date concerning the drivers of financial instability and the fallout that results. Once we look at the current crisis through this lens, it starts to look comprehensible: a bad event, certainly, but not outside historical norms once we take into account the preceding explosion of credit. Under those conditions, it turns out, a deep recession followed by a long sub-par recovery should not be seen as surprising at all. Sadly, nobody had put together this sort of empirical work before the crisis, but now at least we have a better guide going forward.
The guy never gives up. But given how the street has behaved in the last 5-6 years there is no reason why he should give up.
He has eight wishes for Wall Street. Some of them include never allow someone below 35 to be in Wall Street, all intelligent guys should be shunned from taking finance jobs, women should handle finance jobs and so on.
Fun to read as always…
Imagine going out in 1600s and getting a glimpse of a world of finance in a country like Netherlands. Even more so, the world is not very different from the world today in the area of finance. One critical difference between the two times is role of technology and ready availability of information (too much now a days perhaps).
This book (Amazon India link here) by Dutch scholar Lodewijk Petram is a must read for finance scholars and followers. It is encouraging (for someone like me) that this book emerged as the scholar’s thesis. This is just amazing as getting such a readable book and that too out of a finance thesis of all things. In times, when most finance thesis are just algebraic representations of some fancy idea, such work is like a breath of fresh air. The book is highly lucid and accessible as well.
Cullin Roche reflects on a recent article by Passive investment guru – Jack Bogle. Bogle says that he will only invest in US markets and ignore others. As per Roche, this decision is itself an active one and likely to harm his investors.
A finance professor once told me that passive investing is far more active than it is made out to be. The amount of work needed to ensure your portfolio mirrors that of an index and so on is not an easy job. It requires continuous rebalancing and reallocating of portfolio..
One of the central lessons of econ-finance literature is when economy is not doing well, stock markets shall follow. The markets follow economic developments . Based on this, analysts have been predicting poor economic growth and stagnated stock markets for a while now. And what happens? Well economies remain poor but stock markets have a different story and they keep rising.
Jim O Neil of Brics fame has this piece on how emerging markets made a mockery of the pessimist analysts once again. They have risen much more than eveb what the optimists had to predict. And why just EMEs, this applies to advanced economies as well.
The books need to written again. The markets can rise irrespective of what the economic fundamentals have to say…
In this piece,
This paper argues that microfinance in south Asia, like mainstream finance in North America and Europe, “has lost its moral compass”. Microfinance institutions have increasingly focused on financial performance and have neglected their declared social mission of poverty reduction and empowerment. Loan officers in the field are under enormous pressure to achieve individual financial targets and now routinely mistreat clients, especially poor women.
The values of neo-liberal mainstream finance in the rich world have spread to microcredit in the villages of Bangladesh and India. This situation is hidden from western publics who are fed the lie of “the magic of microfinance” by their media, guided by the needs and interests of mainstream finance seeking to provide some “good news” about the financial sector as scandal after scandal unfold. Urgent action is needed, particularly from the leaders of the microfinance industry, to refocus their organisations and workforce on achieving both financial and social performance targets.
It has interesting stories on how this social enterprise is just becoming like its greedy big cousin…
NYT points to this interesting bit of experimen on bankers.
In the experiment, people do not cheat as long as the are not reminded of their profession. The moment you ask them their profession and then get on with the experiment, bankers cheat:
As banking scandals have mounted over the past decade, some critics have suggested that the industry simply harbors a dishonest culture. Now, three economists from the University of Zurich have tested the idea.
They found that bankers were about as honest as anyone else — until they were reminded that they were bankers.
One hundred twenty-eight employees from a large international bank were assigned either to a group that answered questions about their profession (”What is your job?”) or general questions (“How much TV do you watch?”). Each employee was then asked to toss a coin 10 times and report the outcomes online.
There was an advantage, however, to lying: The subjects were told in advance that they would get a $20 reward if a given toss came up heads or tails — as long as the overall winning percentage they reported was greater than that of another randomly chosen participant.
The group that hadn’t been asked about their profession was largely honest, reporting a winning toss 51.6 percent of the time. The other group reported 58.2 percent winning tosses. The researchers calculated that 26 percent of the bankers in the latter group had cheated, compared with almost none of the first group.
To confirm their findings, the researchers performed the study again with people from other professions. Those people did not become more dishonest when asked about their work.
The findings, which were published in the journal Nature, suggest that bankers behave dishonestly only when they feel that is what is expected of them, said Alain Cohn, who is now with the University of Chicago. Perhaps, he said, banks should take a page from medicine and require their own version of the Hippocratic oath.
“It is very important to let employees know exactly what desired and undesired behaviors are,” he said in a conference call. “Then we could use a professional oath to activate these norms.”
Amazing sets of values the newgen bankers have accumulated over the years. Just make money in whatever way possible. The dangerous Friedman/Chicago School idea that the only purpose of the firm is to make money has become way too perverse..
There is huge buzz around European banks stress test. There have been tests before as well but did not exude enough confidence.
Wharton Prof Richard Herring discusses what is new in these tests and do we finally know the true status of European banks.
The basic complications over who shall fund the bill remain despite ECB coming into the picture now:
A one week old news..not sure how many saw it.
IMF charges an interest rate for lending against SDR. These rates are calculated on a weekly basis. These interest rates are in turn calculated by the prevailing interest rates in developed economies, With rates even touching negative, there was a threat to SDR rates as well. So IMF has set the floor rate at 0.05%:
The International Finance Centres are now discussing questions like these which were bread and butter (or mickey mouse) before the crisis. Even asking such qs was a crime and laughed upon.
The Fair and Effective Markets Review (FEMR) has today published a consultation document on what needs to be done to reinforce confidence in the fairness and effectiveness of the Fixed Income, Currency and Commodities (FICC) markets.
The Review was established by the Chancellor in June 2014, to conduct a comprehensive and forward looking assessment of the way wholesale financial markets operate, to help to restore trust in those markets in the wake of a number of recent high profile abuses, and to influence the international debate on trading practices.
The Chancellor, George Osborne, said:“The integrity of the City matters to the economy of Britain. Markets here set the interest rates for people’s mortgages, the exchange rates for our exports and holidays, and the commodity prices for the goods we buy.
I am determined to deal with abuses, tackle the unacceptable behaviour of the few and ensure that markets are fair for the many who depend on them. I want to make sure it is done in a way that preserves the UK’s position as the global financial centre for many of these markets, with all the jobs and investment that brings.
The consultation that the Fair and Effective Markets Review has launched today is comprehensive, balanced and rigorous, and asks all the right questions. I look forward to the Review’s final recommendations in June next year.”
Wholesale fixed income, currency and commodity markets ultimately make it possible to do business across almost every sector of the global economy. They help determine the borrowing costs of households, companies and governments, set countries’ exchange rates, influence the cost of food and raw materials, and enable companies to manage financial risks associated with investment, production and trade.
However, in recent years there have been a number of high-profile abuses in these markets. These have included the attempted manipulation of benchmarks, alleged misuse of confidential information, misleading clients about the nature of assets sold to them, and collusion.
Interesting times..Despite all this, hype over finance and financial development continue..
Yellen has this useful speech to show how inequality has risen so much in US.
This is a trend which has clearly caught US econs napping. Economists is around two questions: How much to produce and how to distribute. The question of distribution was dismissed by most economists in recent years. There was a widely held belief that just like econs have resolved the problem of depression, they have resolved for distribution as well.
And now both, depression and inequaity have hit these economies hard. And what is worse that there were clear signs of this but were ignored.
Central Bank of Trinidad and Tobago has taken Ramayana really seriously. Last year this blog pointed, how the bank compared central bank to Lord Hanuman (to which this blog did not agree).
This year, the chief of the bank Jwala Rambarran looks at five more characters of Ramayana and once again points to lessons for central banking: