James Kwak of Baseline Scenario Blog points to this once famous and now highly infamous article. It built this hype over a committee comprising Alan Greenspan, Robert Rubin and Larry Summers which could save the economic world from catastrophe. It was written in 1999 and in a classic turnaround of fortunes same committee is now being blamed for the crisis of 2008.
If one gets an idea to write on, he/she should write/blog about it immediately. Else, someone will write about it soon. This is one such article.
There has been a lot of noise about this word P2P (peer to peer) in financial world recently. What was essentially a term used in tech industry for sharing music, movies etc pioneered by likes of Napster, has come to hit the world of banking/finance.
What does P2P banking mean? Like in tech world, where a person creates a music file and shares it with others via a tech platform, same is the case with P2P banking as well. Some person with funds lends it to others via a tech platform as well. Important to note the role of individuals here. Unlike a music firm or a banking company this time the distribution of music/funds done by individuals. Just like tech made it easier for people to share music, same tech helping to make it easier for people to lend funds.
Sounds exciting? Yes it does but we know what happened with all these P2P music/video platforms. Eventually, the big firms lobbied to throw these guys out of business. One could expect banks to retaliate in similar fashion as well in future.
But the point is even deeper than this. P2P banking is hardly anything new. It is perhaps the oldest form of banking when people lent funds to others as there were hardly any organised form like a bank of today. In India, there were several such forms of P2P banking which British together called as indigenous banks. Within these indigenous banks, there were nidhis, chit funds etc which were nothing but P2P forms of lending. Group of persons came together to lend funds to each other minus all the tech of today. Infact, the tech then was trust, social networks, peer pressure etc.
This is what Mr Rajwade also says in this article:
One has to rub his eyes on reading title of this post. I did too. Lessons of Banking from China? That too on future? Really?
But Spontaneous Finance Blog thinks so. And the lessons are not about how China made the right banking policy etc. But how it made the policy which led to troubles:
The title of this article instead should be how can we examples from parenting to explain game theory to students. But it is written as other way round. Economics excels in using examples from normal life and converting into highly abstract theory. After all that is how most economists justify their wage premiums in the society.
The examples pointed in the article are used by many parents without having any idea of game theory. Instead game theory is usually taught as this really complex set of ideas which have nothing to do with game or theory..
The title reminds you of those war movies where suddenly due to some upcoming.ongoing catastrophe some leader (mostly US) says something like “time to act”. And the next scene is of helicopters and jets begin to make noises ready to fly and conquer the enemy/enemies.
However, the post is to do with central banks using helicopters to drop money. This is obviously the most discussed topic in global economy. Should one leash the helicopters? Adair Turner says time yes we should leash these helicopters on the dead economies:
David Berreby has this fascinating post summarising this paper on what drives endowment bias. What is endowment bias? There is a cup to be traded. AS a buyer you are willing to pay Re 1 for it but as a seller you want Rs 5 for the same cup. If one believes in markets, then price of the cup should be same whether you are a buyer or seller. This is called endowment bias where you value something more just because you owe it. This is one the classic anomalies pointed by behavioral economics.
The question is what drives this bias? In this experiment on hunter gatherers they start to show endowment bias as exposed to markets:
Anthony Gottlieb reviews Hume: An Intellectual Biography by James A. Harris. In the process, one gets some very interesting episodes in one of the most eminent thinkers of our time..
It is not just about 1% and 99%. It is also about what makes nearly similar talented people enter the 1%. Why is it that people with similar talents earn such dramatically different incomes?
Robert H. Frank says luck matters greatly in those outcomes. People who are luckier and are chosen by so called market process continue to be eventually rewarded. Whereas others equally talented and not as lucky are left out:
Jeremiah Dittmar and Ralf Meisenzahl have an interesting research on the topic. They look at role of social institutions in development.
They use the tool made popular by likes of Acemoglu/Robinson. One region gets these social institutions and other does not? What is the overall impact on one vs the other? This time the region is Germany and we have cities instead of countries. There were certain cities where Protestant movement led to development in some cities over others:
I had blogged about this article by Howard Davies saying central bankers have become too big for their own good.
Mojmír Hampl, Vice-Governor of the Czech National Bank responds to this criticism.
Sweeping criticisms of developed-country central banks have lately become all the rage. The main line of attack goes something like this: monetary policymakers have been far too activist since 2008, overstepping their mandates and damaging the economy. This narrative – which, bizarrely, is equally popular among otherwise irreconcilable ideological adversaries, such as libertarians and neo-Marxists – is patently wrong.
What the critics fail to understand is that modern central banks are responsible not just for fighting inflation, but for maintaining long-term price stability. Like a person’s body temperature, price levels can go neither too high nor too low without causing serious complications. Central banks must be as “activist” when combating deflation caused by weak demand as they are when fighting high inflation driven by excessively strong demand.
Though the battle is completely symmetric, the public assessment of it is bafflingly lopsided, especially in countries with financially conservative populations. This includes my own country, the Czech Republic, a nation of small savers where the loan-to-deposit ratio remains well below 100%. Czechs fear inflation, even though it hit a 13-year low last year and the Czech National Bank, of which I am Vice-Governor, has been fighting to avert the risk of deflation since 2013.
Another common complaint about developed-country central banks’ policies since 2008 is that they have redistributive effects. They certainly do, but so what? Any and all monetary-policy actions redistribute wealth. An interest-rate hike pleases savers, whereas a rate cut is a boon to borrowers. Importers prefer a strong exchange rate; exporters prefer a weak one. To make any sense at all, monetary policy must have different effects on different groups at different times. That is no mistake; it is the essence of monetary policy.
Some critics add that central banks are failing to hit their inflation targets anyway, so their activism is not only unwarranted, but also ineffective. Sometimes they even manage to fit these contradictory criticisms in the same sentence, as though they were accusing someone of firing blanks, but somehow leaving people dead and wounded.
The reality is that central banks in the developed world have – in a truly fascinating way – succeeded in maintaining price stability and the purchasing power of money during and after the global financial crisis. Had they not intervened, their economies would have faced catastrophic deflation, major asset-price slumps, and a complete meltdown of the financial and real sectors. Clearly, strong action was the right response to the crisis (the extent to which central banks might have contributed to its outbreak is another matter).
Each one to his own..
One always believes that those born in bigger cities usually have more advantage then those in smaller places. Those in former category get better schools, public services, a wider social network and so on.
So in this article Clément Bosquet and Henry Overman look at this aspect of role of location in human capital:
Chris Benner and Manuel Pastor have been workin on a project looking at local regions in US and what drives growth in them. It is called Just Growth? Social Equity and Metropolitan Economic Performance. Here is an excerpt from the book.
Here is an interview of Chris Benner. He says unlike what most think, more equal the region, higher is its growth:
Rutger Bregman, a historian and writer looks at the job roles of these two people – bankers and garbage collectors. He also looks at rise of so called bullshit jobs where we are working just for the sake of it. It is hardly creating any value and in a way quite a few financial sector jobs fall in this category
One can live without banks (quoting from this Irish example) but one can’t live without garbage collectors not doing their jobs:
Aashish Chandorkar has a nice piece on (link corrected now. thanks to Manasi for the pointer) how certain thinkers were at the centre of Indian sociopolitical changes. Even more interesting how they came from Pune. Pune was the centre of all this thinking and it is a tragedy that all this history is lost: