Lessons from 2017 Clark economics prize: Encourage more studies on Indian railways and economic history..

April 17, 2017

Niranjan Rajadhyaksha of Mint has this piece on the 2017 Clark prize given to Donald Daveson of Stanford.

One of Daveson papers is othe controversial topic: Development history of Indian railways. Those for railways say it connected India mainlands to hinterlands enabling development. Those against say railways was another source of colonial exploitation (perhaps the most successful one) where rich resources from hinterlands were brought first to ports and then shipped to London.

Daveson looks at historical data and falls in the first camp:

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How to deflect attention from core issues in Indian policy? Add digital/internet to policy…

April 14, 2017

The best way to deflect attention from any major issue in India is to say the 7 letter golden word: Digital. Be it anything from water provision to bus transport, the government has figured the magical word- digital/internet.

This is one such article which says Bangalore’s BMTC buses will be equipped with wifi.

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Ghana and Ukraine central bank chiefs resign for different reasons…

April 14, 2017

It is always interesting to track central bank appointments, firing and resignations.

In just a fortnight, we have seen two resignations.


Too Late to Compensate Free Trade’s Losers

April 14, 2017

The usually superb Dani Rodrik has a piece:

Today’s consensus concerning the need to compensate globalization’s losers presumes that the winners are motivated by enlightened self-interest – that they believe buy-in from the losers is essential to maintain economic openness. Trump’s presidency has revealed an alternative perspective: globalization, at least as currently construed, tilts the balance of political power toward those with the skills and assets to benefit from openness, undermining whatever organized influence the losers might have had in the first place. Inchoate discontent about globalization, Trump has shown, can easily be channeled to serve an altogether different agenda, more in line with elites’ interests.

The politics of compensation is always subject to a problem that economists call “time inconsistency.” Before a new policy – say, a trade agreement – is adopted, beneficiaries have an incentive to promise compensation. Once the policy is in place, they have little interest in following through, either because reversal is costly all around or because the underlying balance of power shifts toward them.

The time for compensation has come and gone. Even if compensation was a viable approach two decades ago, it no longer serves as a practical response to globalization’s adverse effects. To bring the losers along, we will need to consider changing the rules of globalization itself.

India’s Financial Literacy Week: June 5-9, 2017

April 14, 2017

Indian central bank announced organising a financial literacy week  in June 2017:

To emphasize the importance of financial literacy, it has been decided to observe the week June 5-9, 2017 as Financial Literacy Week across the country.

The literacy week will focus on four broad themes, viz. KYC, Exercising Credit Discipline, Grievance Redressal and Going Digital (UPI and *99#). The five messages that will be communicated to the common man based on the above broad themes are available under “Financial Literacy Week” in the downloads section of the financial education webpage of RBI. in the country may display A3 size posters on the five messages in the local language in a prominent place inside the branch premises. These posters will continue to be displayed for at least six months in the branch premises even after the Financial Literacy week is over.

Robots and jobs: Evidence from the US

April 14, 2017

Daron Acemoglu and Pascual Restrepo research on emerging hot topic:


What is good rhetoric?

April 12, 2017

The subject of economics hardly pays any attention to rhetoric. But it is so important.

This piece by Tushar Irani, Prof  of  Philosophy at Wesleyan University is a good read on the topic:

Philosophers have had a longstanding problem with rhetoric. The standard view of the quarrel is well-known: philosophy is a truth-directed activity concerned with reasoned argument, while rhetoric is uninterested in truth and concerned merely with persuasion. This view is often traced to Plato, but it is too crude. As Plato himself recognised, philosophers need to present their ideas in persuasive form if they are to gain acceptance, and there are uses of rhetoric that can further our commitment to truth rather than frustrate it. The power of an effective speaker to captivate an audience is apt to arouse our suspicion in democratic politics, yet we should also acknowledge that the practice of rhetoric can serve a civic purpose. The real question here is what distinguishes good rhetoric from bad rhetoric.

He quotes from Lincon’s Gettysburg Address saying it as an example of a good rhetoric:

The great power of the Gettysburg Address, full as it is with feeling and urgency, comes from its invitation to the listener to consider the basis on which the US was founded. The persuasiveness of the speech consists not just in its ability to stir the passions of an audience and instil conviction, but also in its ability to get ordinary Americans to think more conscientiously than they had previously about the coherence of their own ideals and the application of those ideals in practice. The audience is moved, but also (in Plato’s sense) self-moved, to the extent that they are led to think for themselves.

If this is right, we can see why the assumption that rhetoric serves as a pale substitute for reason and argument is too simplistic. Good rhetoric also does the work of reason, though in a different form than philosophical argument. Plato came to be pessimistic about the rhetoric of his contemporaries in democratic Athens, which might be why he set up his Academy as a place where the practice of independent thinking could flourish. Yet there have been moments in history since then that should leave us more hopeful about the prospects for good rhetoric – or at least less doubtful. The important question for us today is: ‘Can we conceive of a piece of political rhetoric that is both highly persuasive and at the same time spurs independent thought?’ That is not a rhetorical question. If we can’t, we might be in trouble.

Lots to think about..

Brilliant quote from Eduardo Galeano on role of bankers in India’s demonetisation and cash war

April 12, 2017

Via the latest edition of GreatGameIndia magazine:

The big bankers of the world, who practice the terrorism of money, are more powerful than kings and field marshals, even more than the Pope of Rome himself. They never dirty their hands. They kill no-one: they limit themselves to applauding the show. Their officials, international technocrats, rule our countries: they are neither presidents nor ministers, they have not been elected, but they decide the level of salaries and public expenditure, investments and divestments, prices, taxes, interest rates, subsidies, when the sun rises and how frequently it rains. However, they don’t concern themselves with the prisons or torture chambers or concentration camps or extermination centers, although these house the inevitable consequences of their acts. The technocrats claim the privilege of irresponsibility: ‘We’re neutral’ they say. – Galeano (1991)

Just brilliant. Sums up the nonchalance attitude of Indian banking heads on demonetisation and war on cash. It was written way back in 1991 but applies across periods and countries.

One should also read God’s Bankers by Gerald Posner to get a sense of how and why bankers are so powerful..

The drought in Kerala is so acute that farmers are sinking borewells on the river bed

April 12, 2017

A state whose history is so crucially connected to availability of water is facing a severe drought.

Scroll reports how farmers are sinking borewells on river bed:

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Why Germany has rental housing and US own housing? Institutional perspective..

April 12, 2017

A very interesting paper by Sebastian Kohl (HT: Economic Sociology blog).

There is always interest in this question: Why Germany has rental housing and US own housing? Kohl says this is due to differences in evolution of housing finance institutions in the 2 countries in 19th century:

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How failure of stock brokers/banks in 1860s led to formation of Bombay Stock Exchange..(and history repeated with NSE 120 years later)

April 12, 2017

This blog had earlier posted on why and when Bombay overtook Calcutta as the leading financial centre of India. Most likely Bombay displaced Calcutta around late 1940s post Partition. However, Bombay was always chipping Calcutta’s share even at the beginning of 20th century. SO it was expected that Bombay will eventually takeover Calcutta in financial activity.

One reason why eventually Bombay was to takeover was Bombay had stock markets much before Calcutta. BSE started in 1875 and Calcutta Stock Exchange started 33 years later in 1908.

The question is how and why did BSE start? BSE website has some history but not much detailed.

I had earlier blogged about a coffeebook on SEBI history.  In the book, there is a very brief account of BSE history. It is just outright fascinating how multiple factors are behind formation of financial institutions and same is the case with BSE as well. And behind most institutions is the common thread of some or the other financial crisis.

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Did India get the idea for its recent demonetization by watching old episodes of M*A*S*H?

April 11, 2017

Another fascinating post by Jim Koning. He  has written some amazing stuff on India’s demonetisation drawn from monetary history.

In this post he points how US Army had also tried to demonetise notes  in the Vietnam war. The epic serial M*A*S*H was also based on the war. Though, chances are highly remote that the war serial had anything to with India’s demonetisation. But the Vietnam war surely has parallels:

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What Explains Call Money Rate Spread in India?

April 11, 2017

RBI researchers – Sunil Kumar, Anand Prakash and Krishna M Kushawaha – look at the factors that explain call spread (spread = call rate – policy rate):

The study focuses on various drivers of overnight inter-bank rate spread under the new liquidity management framework during July 2013 to December 2016. Applying OLS with Newey-West estimator and various GARCH models to daily data, the study finds that liquidity conditions, viz., deficit, distribution and uncertainty impact the call money rate spread adversely. A moderation in the impact of liquidity uncertainty has, however, been noticed after the introduction of fine-tuning liquidity management operations in September 2014. Other factors, viz., the quarter-end phenomenon and structural changes in the liquidity management framework have also been found impacting the call money rate spread

The findings pretty much fit with understanding of call market players as well..

Wholesale & Long-Term Finance Banks: An old wine in a new bottle?

April 11, 2017

Indian central bank recently released a discussion paper on whether India should establish some new financial entities termed as Wholesale & Long-Term Finance Banks.

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Case of Konoklota Mahila Urban Cooperative Bank: A women based bank in Assam

April 10, 2017

There is little doubt that our financial media is highly biased towards its coverage of just large city based banks. Most of these banks are largely transactional in nature which just attract lot of attention due to their scale of operations and jazz surrounding them. The media hardly covers small relationship banks which are playing an equally important role serving small people in remote locations.

So getting to know about Konoklota Mahila Urban Cooperative Bank via this story is really nice. The bank is an all women bank (employees and customers) based in Jorhat (Assam). It was started in 1998 by Lakhimi Barua. In a way it was a precursor to Mahila Union Bank launched by the UPA Government which was more out of populism than designing it to really serve women customers.

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Why we don’t need macroeconomic data in a free economy

April 10, 2017

Frank Shostak says most macroeconomic data is just hype:

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Why is Hungary trying to close George Soros’s prestigious university?

April 10, 2017

On April 4, 2017, the Hungarian Parliament amended a law regulating higher education in a way that has been widely reported as targeting the Central European University (CEU), founded by Hungarian-born U.S. financier George Soros. The amended law requires universities to open campuses in the country in which they are registered; and to cease operations in Hungary unless the country they are in enters a bilateral educational agreement with the Hungarian government.

Observers have been calling this the Lex CEU given that it appears to be tailored to kick out one specific institution: the CEU, one of Hungary’s leadinginstitutions of higher education. While it operates only in Budapest, CEU’s degrees are recognized in the United States. If the amendment goes into effect, CEU would be required to establish a U.S. campus, or close.

So why is the Hungarian government going to war with an individual university?

Givern Soros recent track record, the reasons are not difficult to guess. Soros has been against illiberal policies followed by the current President:

Orbán uses Soros as a symbol of globalist interference and disregard for national sovereignty. For instance, after human rights watchdogs condemned Hungary’s treatment of refugees on the Hungarian-Serb border, a government communique asserted that “Soros’s people are using lies to attack Hungarian policemen and soldiers defending our borders.” Soros further symbolizes the cosmopolitan-liberal and international opposition that has been criticized Orbán’s illiberal practices. In fact, international observers note that CEU is widely considered a last bastion of liberal values in Hungary.

A new election campaign of the far-right opposition reads: “While you are working, they are stealing.” In the coming months, Orbán is bound to continue his fight against the bogeymen he created in fear of becoming one himself.

How Soros continues to bother Central bankers even without taking a financial position..

Ending the Federal Reserve: Top Down vs bottom up…

April 10, 2017

There are Fed dissenters who not just criticise policies but vouch for its closure. So far, we have known likes of Ron Paul who have tried to argue for the closure using the Federal Government route. However, there is  another approach in which US States use their constitutional powers to undermine the money issued by Fed. The first approach is called top down and second bottoms up.

William Greene, an advocate of second approach explains:

Since its inception, the U.S. Federal Reserve’s monetary policies have led to a decline of over 95% in the purchasing power of the U.S. dollar. As a result, there have been several attempts to curtail or eliminate the Federal Reserve’s powers (e.g., the efforts of Rep. Louis T. McFadden in the 1930s; the efforts of Rep. Wright Patman in the 1970s; the efforts of Rep. Henry Gonzalez in the 1990s; and the efforts of Rep. Ron Paul since the 1990s). However, none have proven successful to date, due mainly to the constraints of strong political opposition at the national level. In contrast to these “top‐down” attempts at the national level, this paper proposes an alternative approach to ending the Federal Reserve’s monopoly on money: the “Constitutional Tender Act,” a bill template that can be introduced in every state legislature in the nation, returning each of them to adherence to the U.S. Constitution’s “legal tender” provisions of Article I, Section 10.

This approach would have a greater likelihood of success for a number of reasons. First, it is decentralized: rather than facing concerted political opposition at a single Federal level, it attacks the issue at the State level, where strategies and tactics can be adapted to the types and amount of political opposition they encounter. Second, it is diffused: it can be attempted in any number of States, which can cause the opposition to spread its resources much more thinly than would be necessary at the Federal level. Finally, it is legally sound: it relies on the U.S. Constitution’s negative mandate in Article I, Section 10, that “No State shall… make any Thing but gold and silver Coin a Tender in Payment of Debts.” Therefore, in contrast to “top‐down” attempts to “end the Fed,” a “bottom‐up” approach using “constitutional tender” laws will find greater success.

He points how Top Down approaches have been vetoed by some or the other official from Federal Government.

US monetary history is quite different in many ways to other countries…

Lessons from Hitler’s Rise…

April 10, 2017

Christopher Browning reviews a book by Volker Ullrich: Hitler: Ascent 1889–1939 (translated from the German by Jefferson Chase).

While reviewing the book, Browning points to similarities and differences between Trump’s rise.

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Reform bankers culture and not banks…

April 7, 2017

After so much talk about all kinds of proposals to resurrect financial world, scholars are realising we have to focus on bankers’ culture. There is something really weird about the financial world which gives you perks and salaries which cannot be provided by any other sector. Despite the crisis, bankers continue to make monies like never before.

NY Fed has been talking a lot about culture. Interestingly, Hong Kong Mon Auth also released a document about reforming bank culture.

Further, Prof Charles Goodhart in this post says:

The incentive for those in any institution is to justify and extol the virtues of the decisions that they have taken.   Criticisms of current regulatory measures are more likely to come from outsiders, perhaps especially from academics, (with tenure), who can play the fool to the regulatory king.   I offer some thoughts here from that perspective.  I contend that the regulatory failures that led to the crisis and the shortcomings of regulation since are largely derived from a failure to identify the persons responsible for bad decisions.   Banks cannot take decisions, exhibit behaviour, or have feelings – but individuals can.  The solution lies in reforming  the governance set-up  and realigning incentives faced by banks’ management.

Recent regulatory problems have been greatly reinforced by a widespread tendency to apply human characteristics, i.e. to anthropomorphise, to an inanimate institute, in this case a bank.  We tend to talk about Bank X having assumed too much leverage, or having behaved in an improper fashion—rather than management of Bank X did such and such; We say that Bank X got bailed out rather than the creditors and clients of Bank X got bailed out.

The outcome has been a regulatory system primarily based on imposing a structure of regulations on banks, with insufficient concern about the incentives on bankers to adjust to, and to ‘game’, that system.  By the same token there has been insufficient concern for reform of the incentive and control system facing bank managers.  Some reforms of the governance structure for bankers have been introduced in the UK, for example in the guise of claw-back rules and the senior managers’ regime.  But even while the Bank of England has been in the vanguard on this, I believe that much more could, and should, be done in this respect.


The root of the problem is the bad behaviour of bankers, not of banks, who are incapable of behaviour, for good or ill.   The regulatory framework should be refocused towards the latter, with a focus on reforming incentives.

You wonder what has taken it so long to understand these basic issues?