The End of Growth?

This is just a really good read. Professor Gordon from Northwestern makes his case that the rapid rise in per capita (in the advanced economies), might well have been a two-century blip in the really really long term. 

He lays out the three revolutions (steam engines/rail roads - electicity/water - computers/internet) and then argues against further increases at such historical rates. The abridged/intro version is available on voxeu. 

The Abe of the Orient

Amidst a relatively quiet calm in the occident, fiscal slope/cliff/bungee notwithstanding, it's safe to say that the story of the week and of the new year is very much the story of the East's 'Abe'. Questions have arisen, currency and equity markets have reacted (look what happened to the Yen) and as forecasters dare to look forward, the concept of monetization has arisen once again. Floyd Norris captures this well in a column barely over a week ago where he tries to delve deep into the heart of the Japanese economy. 

The Japanese economy has been stagnant for a really really long time. In a long-term low interest-rate environment, it has suffered (?) from chronic deflation again and again. Theoretically of course, as interest rates approach the ZLB, one would think a central bank could do very little more but of course the past few years have shown otherwise. Here's a longgg history of Japanese price levels:

It's common knowledge that Bernanke the scholar was named "Helicopter Ben" for his inflation-fighting endorsement of printing cash (helicopter drop). And Abe has a renewed aggressiveness after the landslide. He's put immense pressure on the central bank and called for specific inflationary targets to rid the economy of this deflationary malaise. 

One would assume that Japan should have, could have and would have tried this in the past but such a path is fraught with danger. With an extraordinarily high stock of government debt, a mis-crafted move could wreak havoc on bond prices and send the central bank balance sheet out of control. For credibility to be established, as Norris suggests, minute attention would have to be paid to a faster pace of credit growth and some sort of band or target for the yen (currency wars anyone?). 

Of course, changing inflationary expectations could yield wonders for the country's debt. After all, in a deflationary environment with stagnant growth, the debt-to-GDP ratio worsens even without additional borrowing. Furthermore, a global recovery, renewed demand would improve the deteriorating current account etc. Then there's the problem of demography, the country's declining and aging working population coupled with a relatively hostile attitude to immigration. 

There seem to be too many structural problems over the long-term but that's no argument against change. For too long, Japan has gone down a path with no change - a relatively safe path if you will. Abe's mandate makes things exciting and and perhaps gives his country something to look forward to, one way or another. 

A Subprime CEO

Here's how to blatantly lie and run away from accountability, according to a June 2011 deposition (the documents were filed this week). Courtesy this Bloomberg report.

The crisis was “not caused by an act of Countrywide,” said M, 73, according to a transcript of the deposition. “This is all about an unprecedented, cataclysmic situation, unprecedented in the history of this country. Values in this country dropped by 50 percent.”

M was responding to questions from an MBIA attorney who asked if he regretted how Calabasas, California-based Countrywide was run after “all the foreclosures and ruined lives and lawsuits.” Mozilo called the lawyer’s question “nonsensical and insulting.”

“I have no regrets about how Countrywide was run,” M said. “We were a world-class company in every respect.”

The firm only made loans that it was confident would be repaid, M said. Countrywide was the third-largest subprime lender in 2006, with about $40.6 billion in the mortgages, compared with $44.6 billion in 2005, according to data from Inside Mortgage Finance.

“We never made a loan knowingly -- and it would be stupid to do so -- that we knew the borrower could not pay. Never,” M said. “All our loans had that one standard from 1968 to the end of my reign at C.”

“It had nothing to do with anything that I did at Countrywide or anything I did in my personal life,” M said. Relatives “were being harassed in school. My name was in the paper every day nationally and internationally, accusing me of things that were absolutely untrue. I could not have my family go through it anymore, and that’s why I settled.”

M “remains really proud of his company and this institution he built,” said his attorney, DS. “It would be unfair to say he doesn’t feel a great deal of empathy for the honest, hard-working Americans who suffered in the financial crisis.”

In the 2011 deposition, M also denied that there was a program called “Friends of A” to reward high-profile customers, including elected officials, with below-market rates for home loans. Instead, he said that he gave people including taxi drivers, stewardesses, and gardeners his business card.

“Almost everybody I come in contact with, that was my job, was to originate loans,” M said. “That’s who I was. That’s why I started the company.”

A perfect example of a man in denial, sitting pretty on millions but also desperate for a clear conscience. There are some things that money can't buy and reputation definitely is one of them in this case. No one would be ludicrous enough to assign full responsibility towards Countrywide but you could bet your last dollar that they certainly didn't do much good. And that's an enormous understatement. 

Dimon on jiving with the junta

Thanks to Joe Weisenthal for this one from the Dealbook conference hosted by Andrew Sorkin:

DIMON: Why don't you stand up so they know where you are.

SORKIN: Please introduce yourself if you could.

AUDIENCE MEMBER: ...With Secretary of State Hilary Clinton going to Burma and Barack Obama visiting Burma as well, there's a rumor about you shadow banking with the Burmese Junta and I'd like to second follow up with that on....

DIMON: There's a rumor about what?

AUDIENCE MEMBER: Shadow banking with the Burmese Junta.

DIMON: I have no idea what you're talking about.

[audience laughs]

AUDIENCE MEMBER: Also, with the recent insider trading scandal at SAC, I was wondering what kind of exposure JPMorgan would have to that?

DIMON: Hopefully none.  I don't know exactly what the facts about what's going on around there so I don't want to comment, but hopefully none.

SORKIN: Okay. Thank you for that. 

Here's Dimon's look of...incredulity? 

The IMF on Capital Controls

The IMF, that has been praised from some corners for its willingness to change and adjust its stance as the situation demands, had an institutional paper out recently on the use of capital controls. While history tells a different story, this time is different and Blanchard/Ostry, the Director and Deputy of the research department, have a brief, explanatory follow-up note out at voxeu. 

What the essentially elaborate upon is the main tenet of the paper - i.e: the acknowledgement that complete capital account liberalisation, depending on the macro and financial environment (among others), may not be the right goal for a particular country. 

Harry Dexter White and Keynes, during the Bretton-Woods era, essentially laid out a fairly obvious but crucial point that holds enormous relevance even today - that  CFM (capital flow management) as a toolkit is severely limited when initiated unilaterally. The restriction of movements of capital would be most effective when "controlled at both ends". This is akin to asking for cooperation among different countries. 

This emphasis on multilateral actions is backed by four instances according to the authors. Basically:

1) If an economy is in a state where an adjustment in the external balance is warranted, it could look to capital controls as means of bypass. Essentially, this is a beggar-thy-neighbour attitude of using controls to sustain an under-valued currency. In the note, Blanchard and Ostry state outrightly, "This is why one normally thinks that capital controls whose purpose is to frustrate external adjustment are multilaterally aberrant". Strong words with room for a benefit-of-doubt in the sense that the reason for controls could also be directly linked to the stability of the financial system in an economy (think foreign borrowing reliance etc.)

2) A more insidious case of controls would be related to an indrect attempt at manipulation of the intertemporal TOT for an economy. This is essentially the same as using tarriffs and subsidies to tinker with terms-of-trade but would rarely be something seen in practice blatantly. The authors have a charming way of putting this point across - "it is not beyond credulity to think that some policies that affect capital flows can materially move world interest rates in a direction that benefits the country. To see this, ask yourself whether there are any large creditor countries that maintain restrictions on capital outflows; or whether any large debtor countries pursue policies that push down world interest rates." Ahem!

3) Controls that are put in place to deal with externalities (production-side) in the export sector. This goes back, in a way, to parts of the first instance, i.e: production taxes/subsidies could be a response to externalities but are more difficult to put into practice due to budgetary constraints etc. Theoretically, a situation such as this could be alternatively dealt with by a control-supported currency devaluation which would have negative consequences (distorting the consumption/production effects and decisions), As one can see, there's asymmetry due to the impact on consumption.

4) This goes back to the latter half of the first instance where measures are undertaken for the purpose of financial stability. Think foreign borrowing risks if not internalized by the borrower - in such a case, capital controls can act as a Pigouvian tax (tax on an activity that generates externalities) and internalize these external effects.

What capital controls come down to in a multilateral scenario is the existence of spill-overs and subsequent financial stability issues. What the authors try to emphasize is that if capital controls had no costs for a country, there would exist a Nash equilibrium where any country chose controls at a certain level to check its own financial stability risks. 

And that's the problem. Because imposing controls creates costs and this is where coordination is required (risk of capital control wars, excessive flows etc.) between both the source and the recipient. In such a case, naturally, the equilibrium ceases to be efficient because each country still has one instrument but now two targets (the externality domestically and the cost of the measure). 

The note concludes by admitting the difficulty of this possible paradox. In certain cases, some countries might have no interest whatsoever in bearing the cost of financial stability in another country. Coordination however, should not be thought of as a pursuit of interests contrary to domestic policy but rather, to ensure that domestic objectives are met while the spill-over damage done is minimized. 

Light in the Euro-tunnel

Olli Rehn, the EC-VP had a comment in the FT on how there was light at the end of the euro tunnel and that persistence during these lean times would take the euro home. A few issues:

"Ireland has returned to the debt markets. In September more private capital moved into Spain than out for the first time in 15 months. And Italy recently sold 10-year debt at the lowest yield since 2010. That was clear recognition of the resolve shown by Mario Monti’s government to boost competitiveness and pursue sound public finances. With Italian bond yields on the rise again after Mr Monti’s decision to stand down, it is also a reminder of the need to maintain resolve in the future."

The last line is, in a sense, true. One could pick holes in the Full Monti's agenda but there's a reason why you don't know what you've got till it's gone. What Italy certainly doesn't need is more Berlusconi - the markets will tell you that. 

Basically, Rehn makes the case on the premise of the trajectory we've seen in borrowing costs over the past few months and in doing so he might be underestimating how sensitive an issue perceived credibility is. It seems a bit naive to see capital flowing back into Spain as a portender for better times ahead rather than a broad indicator boosted by short-term conditions. 

But he also admits that reductions in certain current account balances (namely the deficit countries) need not necessarily be a positive indicator of a rebalance. After all, there is no compulsion on a creditor to adjust. Furthermore, he agrees that a stimulation of domestic demand in Germany, for example might not have a significant impact on countries not closely enough linked with German trade channels (Central European economies). Hence, the issue turns back to competitiveness and in turn to Germany being willing to uncheck a rise in wages in line with productivity gains. 

Given Rehn's mandate and position, it's apparent what the call is for. What he can't do, of course, is tell you how long the tunnel is.

Relief?

Q: WOO-HOO?
A: Naah

An opinion on a PBJ opinion

I always knew where the Louisiana governor stood on most social issues but then I understand, not accept (yet understand) that these stem largely from perceptively faith-based dogma. What I don't understand is his opinion recently published in Politico - it has some atrocious statements, some blatant misrepresentation, and calls for solutions that perhaps you may have heard before but are put forth in a way that is befuddling to anyone with common sense and basic economic concepts. Oh, it's clever alright. It's crafty with allusions and dramatized with metaphors but it panders to the base - a base (might I add) that just got hammered by a supposedly weak incumbent. 

"Today it’s the fiscal cliff, but that surely will not be the end of it; next year it will be the fiscal mountain, after that the fiscal black hole, and after that fiscal Armageddon. But the truth is Washington already drove us off the fiscal cliff while no one was looking. A nation that has a $16.3 trillion debt, a debt that is larger than our entire economy, has already driven through the guard rail and is in free fall with the cliff somewhere in the rear view mirror."

No B, I'm not aware and don't particularly care to know how the cliff terminology was so popularly accepted and used but I'm convinced that the last thing people need is more of these doomsday terms. The US has NOT been driven over the cliff and if it was hypothetically, it definitely wouldn't be with no one looking. To imply that the national debt has pushed the economy into a perpetual state of existing freefall is beyond absurd. But that's not the end of it because here are some 'solutions':

"A federal balanced budget amendment. States have balanced budget laws, small businesses have to balance their budgets, and families have to do the same. This is an idea that is supported by virtually every American who does not live in the 202 area code. It’s common sense. It is also laughed at in Washington. When you mention the BBA as a solution, they roll their eyes and write you off as a non-serious person. But the American public is dead serious about it, and they should be."

No B, the fact that states have balanced budget laws is exactly why it is almost scary to claim that the Federal government should have a balanced budget amendment. One would expect you, (a highly educated scholar), to at some point in Oxford or Brown or McKinsey to have grasped the ludicrousness of equating household budgets with a government budget. Essentially what you admit to is having never accepted the basic government accounting equation. Either that, or more likely, it just sounds better to the public when you pit them against government - patting them on the back for paying off debt while castigating the government as if it were part of the equation. 

"Place a cap on discretionary and mandatory federal spending by fixing a limit on it tied to a percentage of GDP. Eighteen percent is a reasonable number in my book, but almost any number would be a victory at this point. Require a super majority vote to over-ride this limit, which would allow for recourse in a time of war or other national emergency. Again, this solution makes far too much sense to be taken seriously in Washington, a sure sign that it’s a good idea."

No B, have you conveniently forgotten that we're barely a few years removed from a HUGE financial crisis and that the after-effects and consequences play out in a negative way till today? The US economy has been suffering from anemic growth, a severely-tested Fed with an unconventional arsenal, and a major balance sheet imbalance where corporations are flush with cash, interest rates are at their lower bound and the paying of household debt has been on a major spree. And during a time like this, you want an 18% cap on spending? Really? 

"A super majority to increase taxes. Make it harder for the politicians in Washington to simply take more from Americans, thereby forcing them to stop growing government. Yes, Washington hates this idea, so it should be pursued with vigor."

No B, I knew the party-old anti-tax sentiment would finally filter through your op-ed. No one advocates tax increases on the average domestic consumer. Trying to reason through this by saying it should be pursued because Washington displays a lack of ability to reason logically. Honestly, one should expect at least that much from you. 

"Now that I’ve offended everyone in Washington, a few final thoughts – our debt is strangling us. It seems to be a given that we will once again raise the debt ceiling. So the one thing that all involved agree must happen, may in fact be the single worst thing we can do – unless it is one-time, limited, and accompanied by structural reform to make sure we don’t repeat this nightmare.

Additionally, amidst all the talk of increasing taxes and cutting entitlements, something more important than either of these has been lost – economic growth. America is forever young because America is forever growing, leading the world and showing the way forward. All actions taken by Washington should be seen through this simple prism – will this help grow our economy? If not, maybe we shouldn’t do it."

No B, now that you've offended everyone in possession of at least an ounce of common sense, the least you can do is to stop providing the public with dramatic and graphic visuals of the debt strangling them like some sort of a python. I'm not even going to dig up data and reason with you unless you quit this fiscal crisis drama that you continue to espouse.

Lastly, as to your two flowery statements:

A. America is forever young

B. America is forever growing, leading the world and showing the way forward

I really don't understand how you connected these two with logical causality but that's just my personal opinion I had to insert. Do forgive me.

Italian Black Labor and Productivity

Just thought I'd explore further into a Krugman post a couple of days ago. He asks further questions to Italian productivity. Essentially his point is that Italy's labor market has always been characterized by poor enforcement and over-done labor regulation. Naturally, (this is a characteristic of the Indian labor economy too), one should expect to see some sort of rise in shadow-labor, black labor, whatever you'd like to call it. 

What he does, and what I looked at separately is to dig up measures of cost competitiveness - namely REERs based on ULCs and CPIs/WPIs. The divergence in the data seems in sync with what you would expect in the case of overvaluation and underreported productivity. He makes a note of the possible inconsistencies with an economy that has a difference in quality of their composition of exports but the point is still taken. 

The divergence is quite significant. One has to look at BOPs data to know that Italy wasn't really one to run up huge CA deficits. Anyway, what I did is to split the data from 1990-2001 and 2001-present. I'm dealing with indices based to 2005 so in both cases, i based them back to 100 to compare the trend. Here's what they look like:

Post-euro, it's a bit expected but still significant taking into account Italian growth rates and mild/moderate price levels.

More on Carney

Just some more Carney-related stuff - namely that you often (more than often!) hear of bankers and people in finance being poached left, right and center but when have we had central bank poaching at this level? I really really do believe that being a central banker might well be the single most important position in certain countries. 

Matt O'Brien at The Atlantic advocated a global market for central bankers and argued for a removal of the home-grown theory. This was back when news first filtered of Carney being a front-runner. In it, he said 

"Let's try a thought experiment. Say that Lars Svensson -- one of the world's top monetary economists and the current deputy governor of Sweden's central bank, the Riksbank -- could get our economy back to trend in half the time Ben Bernanke could. It's actually plausible-ish. Like Bernanke, Svensson spent his academic career championing unconventional monetary policy as a "foolproof" way to escape a liquidity trap. (Coincidentally, they were colleagues at Princeton). But unlike Bernanke, Svensson's Riksbank has been much more willing than Bernanke's Fed to experiment with these kind of heterodox policies. Perhaps unsurprisingly, Sweden's recovery has been the envy of the developed world. So I ask again: How much is a good central banker worth? Put simply, how much cash should we throw at Svensson to steal him away from Sweden?

That's another way of asking how long it will take the economy to return to trend. Here's where things get really depressing. According to Fed Vice Chair Janet Yellen, we won't get back to full employment until after 2018. If we assume the output gap will steadily shrink until then, that leaves us with roughly another $4 trillion in lost income. Maybe more. If Svensson really could double our recovery speed, he'd be worth $2 trillion to us. Even if that's being wildly optimistic, something on the order of hundreds of billions of dollars probably isn't. Tell me that wouldn't be worth paying Svensson a billion dollars a year. Maybe more.

The above suggestion is obviously a bit tongue-in-cheek ... but not completely. Right now, central bankers are paid almost entirely in prestige. Ben Bernanke is making just $199,700 this year. That's not to say that we need to pay central bankers more to attract the best ones. We don't. Economists really care about prestige.

This doesn't necessarily lead to the most efficient allocation of monetary economists. As Matt Yglesias pointed out, we'd ideally have economists prove their central banking chops in smaller countries before moving up to the big leagues of the Fed or the ECB or the Bank of England. Put a bit less diplomatically: Sweden is important, but it's a relative waste of Svensson's talents not to have him running a bigger central bank. (Not that I have anything against Sweden). Here comes the "to be sure" sentence: It wouldn't be enough just to import Svensson. As L.A. Galaxy fans can tell you, bringing in one (albeit, overrated) superstar like David Beckham doesn't help much if his teammates are only mediocre. We'd need to create a Federal Reserve board equivalent of the Super Friends for Svensson to make the biggest difference. We might even find out that we already have a superstar in Bernanke in that scenario.

Central banking should be a superstar profession. The difference between a top central banker and an average one can be astronomical, particularly when conventional policy is impotent. An efficient market would pay them accordingly. If the United States spent $10 billion assembling a central banking fantasy lineup of Lars Svensson, Stanley Fischer, Adam Posen, and Christina Romer, it would probably be a phenomenal investment. It'd pay for itself many, many times over. The biggest challenge is changing the norms around central banking. We shouldn't just consider the top American economists for the top spots.

We're a nation of immigrants. The Federal Reserve should reflect that."

Now that's some food for thought - assembling a superstar monetary policy team of global talent.

Sid Verma had an eye-opening piece in Euromoney where he notes how 'Finance's New Statesman's signature move in Canada was undoubtedly the 50 bps rate cut he administered one month into power (the ECB raised rates for the record) along with tact use of language and forward-guidance a year later to hold the rate there for a year once the lower-bound had been hit. 

Here's the actual BoC announcement from back then:

"With monetary policy now operating at the effective lower bound for the overnight policy rate, it is appropriate to provide more explicit guidance than is usual regarding its future path so as to influence rates at longer maturities. Conditional on the outlook for inflation, the target overnight rate can be expected to remain at its current level until the end of the second quarter of 2010 in order to achieve the inflation target. The Bank will continue to provide such guidance in its scheduled interest rate announcements as long as the overnight rate is at the effective lower bound."

For the sceptic in you, Nomura's Philip Rush says, "The only potential negatives we see are ones of perception rather than substance. Specifically, how the proliferation of ex-Goldman's bankers assuming senior policymaking positions around the world may feed popular mistrust, and how Mr Carney's willingness to leave previous posts may reflect a lack of commitment to each job."

Neither a dove nor a hawk and a trend setter to boot (the BoC was the first G7 central bank to introduce the conditional commitment concept), it's clear that big, innovative things are expected from Carney. Perhaps a bit too much. 

But with fiscal gridlock (read: austerity -> read: idiocy), how much can one man get done? It's something Bernanke probably asks himself every single day.

Infrastructure Spending

Sylvain Leduc and Daniel Wilson at the SF Fed have a forthcoming paper that looks at the dynamic effects of public infrastructure spending (namely federal grants to states for highways) on the output of a state. This is really really interesting to me. Estimating multipliers gets extremely tricky because at some points assumptions have to be made (remember the fiscal multiplier saga!) but essentially attempts to construct explanatory models - at least for the most part - point us in a certain direction.

I don't think there's much disagreement on the state of American infrastructure. There was a brilliant column in the NYT a few days ago by Uwe Reinhardt and one in the FT by Ed Luce as well on how public acceptance of sub-par infrastructure has led to a horrible state of things in the present. I'm just surprised there hasn't been a stronger and more forceful consensus (what's the use, nothing would ever be passed!). The best dose of medicine for the US would be massive, forward-thinking infrastructure spending on a grand scale. Anyway, I should get back to this bit. 

The problem with thinking along these lines is that generally, during a crisis, quick-fix measures and solutions are most in demand and the ones that are actually good in the medium-long term tend to be brushed side. Nevertheless, one would still think that approval for infrastructure projects could have a significant short-term impact as well, especially in a depressed economy. 

The goal is to shift AD and Luc/Wilson conclude with an estimated multiplier of about 2! Think about that for a minute, that's huge. It seems a bit too high from any angle - that for every dollar a state receives in federal highway grants, it's output increases by a couple. Also to be noted is that analytically, there's a variable used (constructed) that captures revisions to forecasts of current and future grants to states (seems sensible because actual spending can be far different in an unfavorable climate thus distorting the causal effects on output). Furthermore, (and there must be more of this in the paper) - spending specially on roads has a significant impact on a state's productive capacity as opposed to other government spending (eg: military).

So what are the conclusions?

- "Based on the results shown...we find that multipliers for federal highway spending are large. On initial impact, the multipliers range from 1.5 to 3, depending on the method for calculating the multiplier. In the medium run, the multipliers can be as high as eight. Over a 10-year horizon, our results imply an average highway grants multiplier of about two."

Hopefully I'll get back to this soon but like I said - models and numbers aside - it's the direction that needs to be established. As long as there's gridlock because one side's policy proposals are antithetical to the other, nothing will ever get accomplished. 

On Carney

Not sure how shocking it was beneath the surface but Osborne's courting of Mark Carney has to count as a bold move. After all, this is a central bank that has been in existence since 1694 and is under immense pressure just like the Fed in a world where conventional monetary policy has long since faded. The appointment of a Canadian ex-GS alum with an encouraging blend of banking experience says a lot about the situation. It's an unconventional, if not obvious appointment, for an unconventional era in central banking. 

Dr. Carney is known more recently for a relatively unscathed stewardship of Canada's central bank, a bust-up with the outspoken JP Morgan head Jamie Dimon, and attacks on fellow regulators (among them Andy Haldane, the leader of the simpler-regulation brigade) among other things.

The bottom line is - he has a huge task at hand. 

The overall reaction has been positive but that's also an outcome of the general empathy to change when the status quo doesn't seem to cut it. Martin Wolf lists three immediate issues - namely, the political (that a central bank in a fiat world makes decisions which have a huge impact on society), the organizational (enabling the consolidation of the various sub-authorities) and lastly (and most obviously!), the intellectual - that with a non-existent consensus on fiscal issues, there needs to be a complete re-think on long-term sources of growth etc. 

The devil's normally in the details and Osborne was determined (or desperate!) enough to tweak the details in his candidate's favor - a 60% salary hike, an eight to five year reduction in term and relocation expenses taken care of. 

All this for the man, who had this to say in response to Dimon's tirade, "If some institutions feel pressure today, it is because they have done too little for too long, rather than because they are being asked to do too much, too soon," and this of Haldane and his call for simpler regulation, "(Haldane’s) conclusion is not supported by the proper understanding of the facts."

Good times at the BoE.

Dragon booms

Here's a theory on the Hong Kong housing bubble courtesy Nomura research. Here's what you should know beforehand:

1) Hong Kong real estate is very very expensive.
2) This is the year of the Water Dragon (I'm Earth!) which should imply a noticeable baby boom.

The premise of the note is simply that while real estate prices have always been horribly expensive, what's puzzling is that it's still accelerating in spite of a growth slowdown! A measure of affordability, as the note shows would be a ratio of home prices and income. This is what it looks like over the long run:

And what's happening on the baby front? Boom?

"We are not seeing the usual boom in Dragon babies – Even on the demographic front, we are witnessing something very unusual. In the first eight months of 2012, there were only 60,103 births in Hong Kong. Compared to the same period in 2011, this is down 5.2% y-y. In the past two Years of the Dragon (2000 and 1988), the number of births rose by 6% and 4% even as the marriage numbers declined by 1% and 7%. Thus, the current condition of a 5% drop in births while marriages are up by 5% is highly unusual"

Draw your own conclusion, I've left out the rather obvious one from the note. No link or causality of any sort but it is a bit unusual in a dragon year.

More on the shadows

Here's Gary Gorton's take on the shadows:

"Historically, during a crisis, banks have suspended convertibility, have been bailed out, nationalised, subsidised, covered by blanket deposit guarantees and so on. There is no case where a society intentionally liquidated its banking during a financial crisis. But here’s the rub: saving the banking system means saving the bankers. And that means that debate over reform is overtaken by anger at bankers."

True, but there's also a lovely paragraph that even Mark Thoma mentions which calls for a kind of re-tooling in our data collecting frameworks. 

" Our measurement systems, national income accounting, regulatory filings and accounting systems are useful but limited. Market economies change. The financial system changes. Isn’t it clear that the measurement systems should also change to keep up? National income accounting, one of the greatest achievements of economics, was built largely as part of the second world war effort and intimately involved the government, which had an interest in understanding the capacity of economies to go to war. Now we need to build a national risk accounting system. The financial crisis occurred because the financial system has changed in very significant ways. The measurement system needs to change in equally significant ways. The efforts made to date focus mostly on “better data collection” or “better use of existing data” – phrases that, at best, suggest feeble efforts. A new measurement system is potentially forward-looking in detecting possible risks."

The problem with risk-reform and regulatory reform is that too many cooks spoil the brother. The biggest fallacy lies in thinking that a complex issue needs a complex solution. Nobody elucidates this better than Haldane in his Dog and the Frisbee speech a few months ago. Should it take an FSB report to start fearing the shadows again? As Gorton rightly says:

"One of the findings of the Financial Stability Board report is that the global shadow banking system grew to $62tn in 2007, just before the crisis. Yet we are only now measuring the shadow banking system. How did such a banking system grow without us noticing – and could it happen again? So a second crucial issue is measurement, in the new world of derivatives, off-balance sheet vehicles, securitisation and new forms of money."

Lines of the Day

Thanks to DeLong for this Keynes gem (1939):

"It is not an exaggeration to say that the end of abnormal unemployment is in sight. And it isn't only the unemployed who will feel the difference. A great number besides will be taking home better money each week.

The Grand Experiment has begun. If it works--if expenditure on armament really does cure unemployment--I predict we shall never go back all the way to the old state of affairs. Good may come out of evil. We may learn a trick or two which shall be useful when the day of peace comes.

If we can cure unemployment for the wasted purpose of armaments, we can cure it for the productive purposes of peace."

Well, we know what happened then...

Uncatchy cliques

I'll have to get back to this for want of time but I've thought all along that it's only a matter of time before such issues are brought to light. Gillian Tett from the FT has a good piece on russian-doll finance (isn't that exactly, in a way, what this is?). 

She credits Tucker with raising soft alarms back during the credit boom which would obviously lead you to question why it was only last week that the FSB released a report on the $67 trillion system that creates calamitous levels of systemic risk that barely anyone can measure? 

The main emphasis here is on the internal working of the BoE and how it seems to have finally transitioned from a hands-off approach (really?). As Tett writes:

"Some regulators on both sides of the Atlantic tried to bridge that mental gulf. When Mr Tucker, for example, became head of markets at the BoE a decade ago, he realised the operations of CDOs and SIVs were affecting the flow of credit. He even suggested an analysis of “vehicular finance” should be incorporated into discussions of monetary aggregates, such as M4.

But he faced at least two big obstacles in raising interest.

First, it was unclear who was responsible for analysing, let alone policing, this non-bank world. For while the FSA was watching the micro-level operations of banks, and the BoE was monitoring macro financial stability, CDOs and SIVs fell between the cracks.

Second – and more subtly – the silo mentality was so entrenched that Mr Tucker did not even have the words to communicate his fears. He knew the phrase “non-bank finance” sounded boring, so he tried to come up with alternatives. But they failed to grab attention."

More on shadow banking soon (hopefully). 

Inequal

Robert Skidelsky has a great condensed piece out at PS, on inequality and capitalism - what he's doing is making a common causal statement starting with why greed manifested itself so readily and focusing not on the supply of credit but the demand  for it instead. 

"And what did the relatively poor do to “keep up with the Joneses” in this world of rising standards? They did what the poor have always done: got into debt. In an earlier era, they became indebted to the pawnbroker; now they are indebted to banks or credit-card companies. And, because their poverty was only relative and house prices were racing ahead, creditors were happy to let them sink deeper and deeper into debt."

It's a bit narrow but it's a horribly valid point. What's more important though,is how the article ends.

"In short, recovery cannot be left to the Fed, the European Central Bank, or the Bank of England. It requires the active involvement of fiscal policymakers. Our current situation requires not a lender of last resort, but a spender of last resort, and that can only be governments.

If governments, with their already-high level of indebtedness, believe that they cannot borrow any more from the public, they should borrow from their central banks and spend the extra money themselves on public works and infrastructure projects. This is the only way to get the big economies of the West moving again."

A lot of people have been saying that. And a lot of people look upon such thoughts as blasphemy. That's why there's little hope for problems to be solved. Because a lot of people in power refuse to admit its very existence.

FUNY, not SUNY

I was browsing through the Atlantic on my phone and I came across a piece by Noah Smith from the ingenuous Noahpinion. It was about something I often wondered many times. Why are there no Federal universities in the United States of America? [which is (still is!) the beacon of higher education in the world?]

Is it because the state system works so well, is less complicated and functions without the hassles of bureaucracy? Probably, but what happens when there's a gradual crisis in tuition cost and overall quality?

Drastic measures = Drastic solutions; which is why the probability of something like this happening in such a politically united government (ahem!) is...well...almost zero.

Firstly, Noah says that the rise in tuition that is often talked about is misrepresented because the majority of it has been in the "display price" rather than the "actual cost" [factoring aid/scholarships etc].

Still, the rises are substantial enough to warrant concern and when one throws in the rapidly increasing burden of student debt you start to draw connecting lines by remembering just what household debt did to the economy.

It seems obvious to me that during a crisis period, and in an economy characterized by uncomfortably high unemployment, the increased costs wouldn't serve as a deterrent to one who decides that a college degree is his/her only hope to a secure job.

With a problem of rapidly rising demand, one would look at increasing supply (college seats). And here's where the private/public sector roles play out.

Smith labels the private sector participation (cue: University of Phoenix comparison) as a failure and reminds us of the crucial elements that will always be missing from an online education - human network, mentoring, personal growth etc.

The question then, is why federal instead of state and I think this is where there's a lot of room for constructive discussion. Essentially, Smith says that state spending will focus on the existing university systems and might simply displace funding (alumni or tuition) thereby having a restricted impact.

One need only look at other models of success such as the IITs and the Japanese universities which "annually produce superb graduates in technical fields". A national system would combat the tuition increases and also attract, as well as accommodate, highly skilled immigrant kids/parents. Furthermore, it would provide a way out in terms of research spending which is all too important to ignore.

There's a sense of reality here, however, that not even Smith can deny. A concept like this, which involves significant amounts of will, planning and money (and most importantly, a public good), will be shot down by the right faster than an injured moose on hunting day in Ohio.

But it's an intriguing thought nonetheless.

Balance Sheet Stuff

I'm continually puzzled as to why the fundamental concept of a balance-sheet problem hasn't filtered through the very-important-people-in-power. Is it really so difficult to look at the massive period of private sector deleveraging? If that's not the difficult part, is it difficult to draw a simple conclusion after that?

Goldman's US Chief Economist Jan Hatzius makes a visual point in a note which I've lifted of Business Insider. Essentially what he's stating unequivocally is the importance of monitoring the gaps between spending-income/saving-investment to see whether things are improving:

"...underneath the fiscal drag the fundamentals in the private sector of the US economy are improving. The key force behind this improvement is the gradual normalization in the private-sector financial balance, i.e., the gap between the total income and total spending--or alternatively, the total saving and the total investment--of all US households and businesses, from levels that remain very high. When the private sector balance is high, the level of spending is low relative to the level of income. A normalization then means that spending rises relative to income, providing a boost to demand, output, and ultimately employment and income. The induced improvement in 
income then has positive second-round effects into spending."

Krugman might be pleased. It is aggregate demand after all!

Ostriches vs Emus

Lisa Pollack at FT Alphaville has a gem of a summary on Super Mario in Milan. I'm not going to read the whole speech and the excerpts won't probably tell you all that much but it's still amusing to read. 

Now I don't quite know what Draghi really thinks. If he was fed a strong dose of veritaserum, what would he really say? That the traditional monetary transmission mechanism is broken? That we need a banking union (single supervisor); a fiscal union that can effectively prevent unsustainable budgets; an economic union that can guarantee sufficient competitiveness to sustain high unemployment; and a political union that can deeply engage euro area citizens? 

That's what Mr. Draghi did say (do keep in mind that he's addressing students after all!). But this is just politically correct stuff consistent with the kicking-can attitude that policy makers have had forever. After all, is a fiscal union just one that "prevents unsustainable budgets"? We might as endorse the austerity brigade then. What about effectively transferring resources, encouraging labor mobility and broader economic integration? 

Pooh, who cares. The goal of a fiscal union is to prevent unsustainable budgets. Gospel truth.

Here's the amusing thing (I have to copy and paste this in order to make you smile):

Background Blurb: If there's a father of the euro, it might well be Tomasso Pado-Schioppa who, in the early 80's recognized the inconsistency (much like the trinity) of free trade, a fixed exchange rate, independent monetary policies and free capital mobility. He also advocated eliminating the third to attain the other three.

"

All well and good. But, one more thing…As you know, in recent months I have repeatedly stressed the irreversibility of the euro. This was precisely the sentiment of one of Tommaso’s most noted quips. Speaking in 2004 about the “EMU”, an abbreviation for Economic and Monetary Union, he remarked that it was also the name of an Australian bird rather like an ostrich. And he added: “Neither of them can go backwards”.

Clever!

Know who’s also clever? That Gary Jenkins over at Swordfish Research: Yes Mr Draghi but a cynic might say that the real resemblance between Economic and Monetary Union and an Ostrich and Emu is that it sticks its head in the sand at the sign of trouble and in its current format has little chance of taking off…

                                                                                                                                                     "