two interesting news/approaches

The first comes with the new award of John Bates Clark Medal that goes to Emmanuel Saez for an interesting field of macro research - the increase in income inequality - see here and here for details.

The second is another(?!) way to approach the causes and consequences of the actual crisis that is related more or less to the behavioral approach. More exactly, the comparison of how people react to the risk of flu this days and how they reacted to the panic created by the 2007/2008/2009 crisis. See here for details and speeches of the initiator of this approach, Andrew Haldane of the Bank of England. Thus, once again we have an argument that economics is such an interdisciplinary science.

(to be continued)

The economy's on prozac

For an Econosofia trademark project, for an inspiring professor, Lajos Bokros, and for a bunch of intelligent people to share your knowledge and beliefs with.

For details: Economics through a Macrofying Glass 2009

notes on bailout by nationalization

Extremely speaking, nationalization implies the government taking over every bank permanently and turning banking into a government service. There are also less extreme cases of temporary or partial nationalization.

How does nationalization really work?




Pros on nationalization (The Economist: “better a temporary ward of the state than a permanent zombie”):

- explicit government ownership is better than ad-hoc “deals” (injection of liquidities – welfare transfers from the taxpayers)
- raise capital rapidly for the insolvent institutions
- taxpayers will earn when the shares’ market value of the nationalized bank will appreciate
- debt holders are bailed out, except from the unsecured ones who will lose and, in this way, the market discipline will be recovered (and the problem of the moral hazard solved)
- solves the toxic asset problem (one possibility: through bad banks under conservatorship)


Limits on nationalization (Bernanke: [nationalization] “is when the government seizes the bank and zeroes out the shareholders… we don’t plan anything like that”):

- from necessity to obligation (contagion risk): if a bad bank is seized, other weak banks’ liabilities will start running
- uncertainty (whether nationalization or not) is costly: debtholders fears lead to increasing volatility; taxpayers will receive a share of the upside but also inherit the risks
- difficult to design incentive contracts for managers hired in nationalized banks
- the government might get attached to banks they control
- nationalized banks would have a competitive advantage over solvent, less supported banks


Cons on nationalization (Myron Scholes is in favor of nationalization "as long at it lasts just 10 minutes"):

- change of managers - maybe less competent ones, political interests & bureaucratic management
- at the expense of owners that lose everything
- banks’ unreliable assets are hard to value – impossible to know how much capital they need and expensive to provide it
- all over the world examples prove that nationalized institutions are less efficient than private ones
- any nationalized bank would be forced to reduce its activity because not that many risks will be taken and this could make the actual downturn even worse

(part of a group presentation on the propagation of the crisis and its management, march 2009)

a good remark from dani rodrik

"The economics profession doesn't take an argument seriously until the argument can be laid out with a well-specified model that respects accepted standards of modeling.[...] Maybe the problem is with those standards of modeling, but other fields within economics have been much more willing to adapt themselves to behavioral thinking, or the fact of missing markets, or the role of market failures. So what is wrong with macroeconomists?"

I would say this is a good remark from Dani Rodrick. I really admire theoreticians that are consistent with their beliefs whatever happens. If not they may lose credibility (like politicians migrating from a party to another). But, I suppose in crisis times, being flexible and balanced is an attitude to appreciate, even if this in-between approach may lead sometimes to rather not concrete solutions. And this openness does not mean moving from a fervent free-markets fan to an almighty-government believer approach. But rather admit flaws and look for alternatives to fix them. All this, in my humble opinion, just to cite Denis.

greenspan's last view

http://online.wsj.com/article/SB123672965066989281.html

in crisis' times, back to basics

these days, i reserve my time (due to university tasks) to read basic literature on macroeconomics (BC & co.) even more than keeping track on "recent developments of the crisis". today i read Mankiw - "a quick refresher course in macroeconomics" (1990) and Blanchard - "what we know about macroeconomics?" (2000).

instead of answering to questions, these two readings kept making me posing questions. on the other hand, i did not find a lot of new things, just the history of macroeconomics told from two not too different points of view. still, it's interesting to understand the evolution, the limits of theories, basically confronted with in times of crisis.

For instance, Mankiw obviously underlines the distinction between applied and academic macroeconomists. If the second ones moved from theory to theory looking for improvements all the time, the first ones, the applied ones, "have not substantially changed the way they analyze the economy". I suppose that this distinction rings a bell to the actual situation and raises once again the problem of macro research that does not hold in data.

so, it holds in theory, but does in hold in practice, or the other way around?

sad but true

http://www.iht.com/articles/2009/02/13/europe/bribery.php?page=1

bribery - a problem of vicious circle! if you bribe, the one you bribe gets used to it and so on... the solution, i suppose, like for all things that have to change, is a matter of "wisdom of crowds" (a must on the to-read list, by James Surowiecki) and of course of game theory and, also, time inconsistency. the solution is not in the hands of the government (which/who, not to forget, is a bribery-receiver), nor in those of the civil society/press and so on. it's much more complicated as we talk about a positive sum game. first step - clearly the change of the health care system!

p.s. it would be interesting to see what the theory/experience says about eradicating a black market, in general.

fiscal stimulus: pros and cons

figuring out arguments for fiscal policy (from right and left):

John Cochrane (Chicago):
http://faculty.chicagobooth.edu/john.cochrane/research/Papers/fiscal2.htm

Robert Barro (Harvard):
http://online.wsj.com/article/SB123258618204604599.html

Paul Krugman:
http://www.nytimes.com/2009/01/26/opinion/26krugman.html?partner=rssnyt&emc=rss

Greg Mankiw:
http://gregmankiw.blogspot.com/2009/02/my-preferred-fiscal-stimulus.html

and an argument for the state of fiscal policy research: http://freakonomics.blogs.nytimes.com/2009/01/28/on-the-failure-of-macroeconomists/

p.s.
and an opinion with which i agree: http://www.economist.com/blogs/freeexchange/2009/02/the_alternative_to_econoblogge.cfm#list-comments

thinking out of the box

i've just changed the perspective. still, i don't know for how much time.

instead of looking for the ideology that brings the better (!!?) solution to the actual situation, i'll try to "think out of the box". this means considering the different perspectives (chicago boys, neo-keynesians, binary economics, libertarians, etc.), but looking for economic and scientific (as it is possible) arguments, that means learning economics and not politics from this whole great "experiment".

i think the actual situation asks the politics to get involved. at least in a period of crisis, government should have its voice. and i agree with each ideology bringing its own (feasible) arguments. in fact, it's quite interesting to compare lists of causes, stimulus plans and predictions of different ideologies. in the end, what's important is how everything goes on. for example, the difference financial regulation / overall regulation or the lessons of the history but considering change of circumstances. see barry eichengreen. thus, i would opt for trying to understand the mechanisms of this whole phenomenon and put apart ideological and economic arguments.

finally, i believe the cause of how the global economy looks like is rather a question of moral hazard and irrational agents. and of a "black swan" which kind of sent signs that she would come up (not a "black swan" anymore, huh?!).

debates to follow

http://www.voxeu.org/index.php?q=node/2824

http://www.economist.com/blogs/freeexchange/blanchard_roundtable/

http://www.leighbureau.com/theme.asp?id=1032