SSG on risk appetite and IT

The reports of the Senior Supervisors Group are always worth reading. Here's the latest.

http://www.fsa.gov.uk/pubs/other/ssg_2010.pdf

On March 6, 2008, the Senior Supervisors Group1 (SSG) released its first report, Observations on Risk Management Practices during the Recent Market Turbulence. The report assessed the risk management practices that helped make some firms better able than others to withstand market stresses in the autumn of 2007. On October 21, 2009, the SSG released a follow-up report, Risk Management Lessons from the Global Banking Crisis of 2008 (the “2009 SSG report”), which reviewed in depth the funding and liquidity issues central to the crisis and explored critical risk management practices warranting improvement across the financial services industry. In addition to pinpointing various risk management areas in need of strengthening, the 2009 SSG report raised the concern that recent changes to firms’ risk management practices might not be sustained as memories of the crisis faded and pressures to pursue revenue opportunities increased.

A number of environmental factors have changed since the release of the 2009 report, including considerable progress toward raising global regulatory standards for capital adequacy and liquidity as well as a substantial easing of pressures in broad financial markets since the height of the crisis. Concurrently, however, market uncertainty has grown regarding the strength of sovereign finances and the resiliency of the banking sectors in some countries. These changes to the financial and regulatory environment underscore the importance of remediating the risk management weaknesses identified in the 2009 SSG report. In particular, firms must be able to make forward-looking and well-informed strategic decisions that can shape their ability to remain profitable while also managing risk prudently in the face of material economic, market, and regulatory events.

For help in guiding those strategic decisions, financial institutions will need to make demonstrable improvements in two key areas identified in the 2009 SSG report: 1) articulating a clearly defined risk appetite for the firm, and 2) monitoring risk effectively through reliable access to accurate, comprehensive, and timely quantitative information. The Financial Stability Board echoed this sentiment in a November 2010 report, Intensity and Effectiveness of SIFI Supervision (the “SIE report”), which urged supervisors to ensure that systemically important financial institutions (SIFIs) develop and maintain state-ofthe-art risk appetite and data aggregation capabilities. Specifically, the SIE report emphasized that more stringent criteria be applied to these areas, given the complex and broad array of financial services offered by SIFIs. In any case, all financial institutions will need to devote board and senior management attention, as well as significant financial and human resources, to developing these tools for use in adapting strategies to a changing business landscape.

Since the issuance of its 2009 report, the SSG has continued to meet regularly to discuss emerging supervisory and risk issues and to work collectively on selected risk management weaknesses exposed during the crisis. This report delivers observations about the interdependence between formal risk appetite frameworks and highly developed information technology (IT) infrastructures and considers how elements of those frameworks and infrastructures can be implemented effectively. We view these practices as crucial in providing the risk information that boards of directors and senior management need to make well-informed judgments — not only about risk management but also about their firms’ forward-looking business strategies.

Is Ireland solvent?

Is Ireland solvent?: "Is Ireland solvent?
By: Wolfgang Münchau und Raphael Cottin
This is a short essay on Irish solvency. We assume that Ireland takes the money. There may be a political crisis. The government will almost certainly lose the elections, now to be held in January. But whatever happens, Ireland will take the money eventually. There is no other choice. The interesting question is: what then?"


Nationalise all the Eurozone banks, re-staff all the regulators with people who can understand concentration risk. Start again.

Details - reset all mortgages to something like the current value of the property.

Impossible fiscal help - ECB sends 1,000 euro cheque to everybody in the Eurozone to kick up aggregate demand.

FT Alphaville » Shadow banks, shadow sovereigns

FT Alphaville » Shadow banks, shadow sovereigns: "Shadow banks, shadow sovereigns
Posted by Joseph Cotterill on Nov 25 15:58.

This is not your usual sovereign contagion post."

Complexity is a risk all by itself - nobody really understands what's going on and so we are uncertain of what action to take when a problem arises.

Yep, it's fraud: New Economic Perspectives

New Economic Perspectives:

This is the sort of talk we need! Cut the crap, just tell it like it is.

"Every link of the home finance food chain was designed to promote fraud—from the mortgage brokers and appraisers who conspired to overvalue property to stick buyers with overpriced homes, to the mortgage lenders who preferred the riskiest mortgages to maximize interest and fees, on to the investment bankers that packaged them into securities that they bet would blow up, and to the credit rating agencies who conspired to certify the junk as triple A. We should not forget the hedge fund managers who worked closely with investment banks like Goldman to re-securitize the very worst stuff into CDOs, sold on to Goldman’s gullible customers, nor the mortgage servicers (who not coincidentally happen to be the same biggest banks that created the toxic mortgages) who now maximize late fees as they drag out foreclosures while preventing loan modifications."

While trying to get my mind around the problems of the Irish government debt levels I came across this 2007 survey from Oliver Wyman: http://www.oliverwyman.com/ow/pdf_files/SPI_CS_0107.pdf

The relevant quote on Anglo Irish Bank is on p23:

Anglo Irish Bank owes much of its success to a concentrated focus on business lending, treasury and wealth management in the Irish, UK and US markets. Business lending, its largest and most profitable segment, has grown by 38% annually over the last 10 years. A centralized loan approval process has helped the bank maintain high asset quality and minimize the risks of portfolio concentration. In addition, the bank has exploited synergies among its narrow business mix to achieve a low cost-income ratio of 27%, providing a strong foundation for organic growth.

Anglo Irish went bust in 2008 mainly because of its centralized loan approval process that led to very low asset quality and excessively high portfolio concentration.

It's another warning to us all; unless we're actually sitting in the decision making centres of the financial institution on a day to day basis there is no way we can accurately make the sort of statements made by Oliver Wyman. Even if you think you're in the decision making centre we know there can be catastrophic stresses building up that aren't reported.

It seems the purist (simplest?) thing to do would be for the Irish government to put the all the troubled banks into bankruptcy, and then argue long and loud that:

• it's not the government that defaulted - the government might have guaranteed the debts, but it was lied to during the negotiations, so all guarantees are off;
• all lenders (apart from retail depositors) need to be reminded what credit risk really means - which part of the word "risk" don't they understand?
• Senior secured lenders can be given the banks' assets (good luck to them) - unsecured and junior lenders get wiped out;
• It's then up to the German and French governments, if necessary, to bail out their banks that lent to Irish banks.
  

Comments welcome.

FT.com / Companies / Financial Services - Departures at Gartmore could spark end game

FT.com / Companies / Financial Services - Departures at Gartmore could spark end game: "Others are more critical. A top 20 shareholder in Gartmore, who has seen the value of his shares collapse from 220p when purchased in the IPO to just 107p yesterday, said: “There are serious questions to be asked, [such as] why a company which was so reliant on just two people was allowed to list in the first place."

The more serious question is why did this top 20 shareholder invest in a company with such a large risk?

New Economic Perspectives: Let's Set the Record Straight on Bank of America: Open the Books!

New Economic Perspectives: Let's Set the Record Straight on Bank of America: Open the Books!

New Economic Perspectives: Foreclose the Foreclosure Frauds (Part 1)#comment-form

New Economic Perspectives: Foreclose the Foreclosure Frauds (Part 1)#comment-form

Risk Management pays

This has just come out. www.nber.org/papers/w16178


Ellul, A. and V. Yerramilli (2010). Stronger risk controls, lower risk: Evidence from US Bank holding companies. Cambridge, MA, NBER.

In this paper, we investigate whether US bank holding companies (BHCs) with strong and independent risk management functions have lower enterprise-wide risk. We hand-collect information on the organisational structure of the risk management function at the 74 largest publicly-listed BHCs and use this information to construct a Risk Management Index (RMI) that measures the strength of organisational risk controls. We find that BHCs with a high RMI in the year 2006 had lower exposure to private label mortgage backed securities, were less active in trading off-balance sheet derivatives, had a smaller fraction of non-performing loans and had lower downside risk during the crisis years. In a panel spanning the 9 year period 2000-08, we find that BHCs with higher RMIs have lower enterpise wide risk, after controlling for size, profitability, a variety of risk characteristics, corporate governance, CEO's pay-performance sensitivity and BHC fixed effects. This result holds even after controlling for any dynamic endogeneity between risk and internal risk controls. Overall, these results suggest that strong internal risk controls are effective in restraining risk-taking behaviour at banking institutions.


The risk management index (RMI) measures presence of CRO, if CRO is among the 5 highest paid executives, and relative pay CRO vs CEO. The RMI also considers composition of the board’s Risk Committee (whether there is significant banking experience??), frequency of meetings of risk committee.

Also finds that stock market rewards banks with higher RMI."

Japanese 10 year rates = 0.96%

Ridiculous!

Spreading the word on MMT

I've a small defense of MMT on Crikey.

http://www.crikey.com.au/2010/08/02/for-policy-makers-inflation-vs-deflation-is-a-choice-between-two-evils/#comment-88449

Sheer Lunacy

One of the most exciting bits of research in a long time has crossed my desk: Sheer Lunacy staring at the heavens From the RBS Equity Research team - 7 July 2010, sorry I can't paste a link.

"This paper presents a study of correlations between the moon phases and behaviour of financial markets, and suggests a medium-to-long term trading strategy, which can significantly increase profits. It also takes a quick look at planetary alignments and what could be significant in terms of timing for the coming weeks (really bad for stocks).

For many years, people have been monitoring relations between natural phenomena and industrial performances or markets behaviour in order to be able to estimate future performance and adapt to changes to either maximise the profits or minimise losses. In many cultures, it is well accepted that moon phases could influence peoples’ behaviour, (90 countries in the world today use the Lunar calendar as the basis for time measurement), whereas scientists established its relation to rising and low tides. New moon traditionally symbolise the period of low energy, or energy accumulation period, whereas the time of full moon is the period of high energy or spending period. The question arises of whether this observation could be extended to markets behaviour.

In this paper, we study the performance of 6 indices FTSE 100, S&P 500, DAX, EUROXX 50, Hang Seng, CAC 40 for a period of several decades.

Three scenarios are studied: investing £1000 in an index and holding it for the considered period, and two types of trading strategies, which are described below. The first strategy is buying an index worth of £1000 on the new moon, selling it on the next full moon (usually it is in 14-16 days) and then repeating the process: buying the index worth of the money left after the previous transaction on new moon and selling it gain on the full moon. The second strategy is
opposite to the first one, implying buying an index worth of £1000 on the full moon, selling it on the next new moon, and repeating these steps further.

If an investor had invested £1000 in FTSE in 1984, by now he would have approximately £5,130 by holding the index, which represents index performance. Whereas trading FTSE according to moon phases would make a big difference. First, consider buying FTSE on the new moon and selling on the full moon, this would result in £12,116 overall figure for the same period (Figure 1). It means more than double the profits: £11,116 versus £4,130. Contrary, buying on full moon and selling on the new moon would result in only £2,036 overall, as shown in the same Figure. This analysis supports the theory of a correlation between index prices and moon phases.
The similar behaviour is observed in other markets. Figure 2 presents the study of S&P 500 index versus moon phases for the period since 1928 till 2010. Having invested £1,000 in S&P in 1928, by now would outcome in holding £63,864 worth portfolio, while by implementing the proposed moon trading strategy, the value of portfolio would have been £1,502,689."


The evidence is in! Invest at the new moon, sell at the full moon and you outperform!

I've been wasting my time looking for something more fundamental.

Culture, Institutions and Risk Management

I've got a lot of ideas buzzing around in my head around the general area of how does risk management interact with corporate culture, institutional architecture (from largest e.g. IMF, to smallest e.g. how you report to your boss), human psychology (with its sub-discipline of behavioural economics), ethics and morality, and neuroscience.
If I had 5 or more people who were willing to come along to a lunch time meeting in the CBD, maybe once every 3 or 4 weeks, for the next few months then I'd be very tempted to run an informal (free, and so possibly I'd just talk off the top of my head sometimes) seminar session on the topic of risk management and culture, behaviour, institutions etc. I find I need a catalyst to do this sort of work, and having to talk to people about something is an excellent catalyst.
Here are some of the ideas that I’d like to discuss:
□ In naïve economics we could just as easily see workers hire capital as capital hiring workers, but we almost always see the latter. What do the various theories that explain this observation imply about the risk management culture? See Chapters 8 and 10 of Bowles .
□ Elinor Ostrom’s work has considered how societies have developed diverse institutional arrangements for managing natural resources and avoiding ecosystem collapse in many cases, even though some arrangements have failed to prevent resource exhaustion. The risk taking ability of a firm can be thought of as a resource. Does Ostrom’s work say anything about the possible design of a risk culture?
□ Animal spirits have been blamed for many things going wrong and right in an economy. Discussion can be made on Akerlof and Shiller’s treatment of fairness, corruption and bad faith, why do central bankers have power, and why are there people who can’t find a job.
□ Vernon Smith’s analysis of the interplay of constructivist rationality (the deliberate use of reason to design structures) and ecological rationality (emergent structures from small scale, non-teleological interactions) and its relationship with Hayek’s ideas.
□ Viewing Adam Smith’s two works as two sides of the same coin – trading in reputation and social status, and the trading of goods and services.
□ What do we make of Don Ross’s idea that we have a major economic question in saying how an individual makes a decision given that there are a number of semi-independent modules in the brain that may have conflicting goals? And what about his idea that it makes sense to ascribe some psychological attributes as emotions and drives to firms? This seems intimately involved in the concept of a corporate culture, and gives us some philosophical arguments that we can use to put a corporate culture on a firmer analytical foundation.


Akerlof, G. A. and R. J. Shiller (2009). Animal Spirits: How Human Psychology Drives the Economy, and Why it Matters for Global Capitalism, Princeton University Press.

Bowles, S. (2004). Microeconomics: Behavior, Institutions and Evolution, Russell Sage Foundation & Princeton University Press.

Ostrom, E. (2005). Understanding Institutional Diversity.

Ross, D. (2007). Economic Theory and Cognitive Science, The MIT Press.
In this study, Don Ross explores the relationship of economics to other branches of behavioral science, asking, in the course of his analysis, under what interpretation economics is a sound empirical science. The book explores the relationships between economic theory and the theoretical foundations of related disciplines that are relevant to the day-to-day work of economics—the cognitive and behavioral sciences. It asks whether the increasingly sophisticated techniques of microeconomic analysis have revealed any deep empirical regularities—whether technical improvement represents improvement in any other sense. Casting Daniel Dennett and Kenneth Binmore as its intellectual heroes, the book proposes a comprehensive model of economic theory that, Ross argues, does not supplant but recovers the core neoclassical insights and counters the caricaturish conception of neoclassicism so derided by advocates of behavioral or evolutionary economics.

Because he approaches his topic from the viewpoint of the philosophy of science, Ross devotes one chapter to the philosophical theory and terminology on which his argument depends and another to related philosophical issues. Two chapters provide the theoretical background in economics, one covering developments in neoclassical microeconomics and the other treating behavioral and experimental economics and evolutionary game theory. The three chapters at the heart of the argument then apply theses from the philosophy of cognitive science to foundational problems for economic theory. In these chapters economists will find a genuinely new way of thinking about the implications of cognitive science for economics and cognitive scientists will find in economic behavior a new testing site for the explanations of cognitive science.

Smith, A. (1776). An Inquiry into the Nature and Causes of the Wealth of Nations, Bantam Books.

Smith, A. (2007 (1749)). The Theory of Moral Sentiments, Dover Publications.
The foundation for a system of morals, this 1749 work is a landmark of moral and political thought. Its highly original theories of conscience, moral judgment, and virtue offer a reconstruction of the Enlightenment concept of social science, embracing both political economy and theories of law and government.

Smith, V. L. (2008). Rationality in Economics: Constructivist and Ecological Forms. Cambridge, Cambridge University Press.

Nice summary paper from FedNY here. Provides further evidence that it was a lack of regulatory willpower that helped cause the crash.

"Our conclusions are:
(1) The volume of credit intermediated by the shadow banking system is of comparable magnitude to credit intermediated by the traditional banking system.
(2) The shadow banking system can be subdivided into three sub-systems which intermediate different types of credit, in fundamentally different ways.
(3) Some segments of the shadow banking system have emerged through various channels of arbitrage with limited economic value…
(4) …but equally large segments of it have been driven by gains from specialization. It is more appropriate to refer to these segments as the “parallel” banking system.
(5) The collapse of the shadow banking system is not unprecedented in the context of the bank runs of the 19 th and early 20th centuries: …
(6) …private sector balance sheets will always fail at internalizing systemic risk. The official sector will always have to step in to help.
(7) The shadow banking system was temporarily brought into the “daylight” of public liquidity and liability insurance (like traditional banks), but was then pushed back into the shadows.
(8) Shadow banks will always exist. Their omnipresence—through arbitrage, innovation and gains from specialization—is a standard feature of all advanced financial systems.
(9) Regulation by function is a more potent style of regulation than regulation by institutional charter. Regulation by function could have “caught” shadow banks earlier."

James Montier is back! Behavioural Investing: Barbie does economics

Behavioural Investing: Barbie does economics: "The sheer hubris of many in the economics profession never ceases to amaze me. Take for instance a recent paper by Kartik Athreya of the Federal Reserve Bank of Richmond[1] entitled “Economics is Hard. Don’t let Bloggers Tell You Otherwise”. In a move that is eerily reminiscent of the controversial talking Barbie of the early 1990s who fatefully uttered “Math class is tough”[2], Athreya’s short paper essentially lays out a quite staggering claim :- that economics should be left to those with a PhD in the subject!"

It's good to see James is back blogging. And on a frightful subject.

Two things amazed me about the paper that James discusses here. Firstly, it disappeared awfully quickly off the web for a bit. The arrogance generated so much righteous indignation that the section of the web where it lived just curled up in a black hole is my guess. Secondly, arthraya talks so much about the Fallacy of Composition and internal consistency, but says nothing about the huge gaps where those calling for austerity are ignoring said Fallacy. He focusses his wrath on those, including Krugman and De long, who often point out that austerity will feedback through income to lower demand, and even worse deficits. Thirdly (yep, I can't count), if DSGE models of money policy are the sort of things that make economics really hard, then he'd better do more work on consistency, because these models aren't stock/flow consistent in money, which is sort of basic for monetary policy.

JGBs nearing 1% ...

... You've got to be joking!

SSRN-The Future of Public Debt: Prospects and Implications by Stephen Cecchetti, Madhusudan Mohanty, Fabrizio Zampolli

SSRN-The Future of Public Debt: Prospects and Implications by Stephen Cecchetti, Madhusudan Mohanty, Fabrizio Zampolli: "Since the start of the financial crisis, industrial country public debt levels have increased dramatically. And they are set to continue rising for the foreseeable future. A number of countries face the prospect of large and rising future costs related to the ageing of their populations. In this paper, we examine what current fiscal policy and expected future age-related spending imply for the path of debt/GDP ratios over the next several decades. Our projections of public debt ratios lead us to conclude that the path pursued by fiscal authorities in a number of industrial countries is unsustainable. Drastic measures are necessary to check the rapid growth of current and future liabilities of governments and reduce their adverse consequences for long-term growth and monetary stability."

Here we have a classic case of authors purporting of coming to a conclusion after some analysis, but all they have done is make some assumptions and then reproduce their assumptions in a different form in their conclusions.

Jerome Kerviel again

FT.com / Companies / Banks - Kerviel team ‘frequently’ broke limits: "There was no risk-reporting system for traders on the Delta One trading desk when he joined the team in 2007, and implementing regular reporting “was not a priority”, Mr Cordelle said. One of his priorities included recruiting staff for the rapidly expanding desk"

Yep, this is what you do - take on more risk makers and don't hire risk managers. It'll work every time.

Jerome Kerviel

This is why we have problems: FT.com / Companies / Banks - Kerviel team ‘frequently’ broke limits: "Eric Cordelle, Mr Kerviel’s immediate supervisor at the French bank, denied knowledge of the €50bn of unhedged positions built up by the 33-year-old in January 2008, saying he was overworked and had neither the resources nor the tools to monitor individual traders’ positions."

Problems with LIBOR - van Deventer

Donald van Deventer has an interesting article on LIBOR here. He presents good evidence that LIBOR is being systematically underquoted.

'Rogue trader' trial opens in Paris - Europe - Al Jazeera English

'Rogue trader' trial opens in Paris - Europe - Al Jazeera English: "'Rogue trader' trial opens in Paris


The trial of Jerome Kerviel, the alleged 'rogue trader' who is accused of unauthorised deals that cost Societe Generale, the French bank, $5.85bn has started in Paris."

Watch this space.

I've just come across this report from Goldman Sachs examining 44 major fiscal corrections in the OECD since 1975. I'm not sure what to make of it, except that it seems to be getting conclusions from the data that satisfy the authors' prior beliefs.

In a review of every major fiscal correction in the OECD since 1975, we find
that decisive budgetary adjustments that have focused on reducing
government expenditure have (i) been successful in correcting fiscal
imbalances; (ii) typically boosted growth; and (iii) resulted in significant bond
and equity market outperformance. Tax-driven fiscal adjustments, by contrast,
typically fail to correct fiscal imbalances and are damaging for growth.

Their analysis includes case studies of Ireland, Sweden and Canada that show there is another possible explanatory variable - change of government. These three countries, which had large turn arounds in growth, all had change of government before the fiscal contraction was put in place. It is quite possible that the animal spirits that provoked the change in government, themselves led to renewed activity in the economy.

There's another implication for government spending that is strong in their analysis but doesn't even make it to a single phrase in their conclusion, which is what makes me suspect that they have a conclusion and interpret the data to fit that conclusion. In their regressions of average growth relative to OECD (Table 1) the strongest coefficient is for government investment i.e. government spending on capital works has a strong effect on subsequent growth than either increases in tax or reduction in current government spending.

So how to prime growth? Shift government expenditure from current spending to investment and cut taxes. But my caveat still holds - none of their regressions are believeable while we have a major regression variable not taken into account - change of government.

The Madoff Circle: Who Knew What? - ProPublica

An interesting article showing more about the Madoff clientele. It was always hard to believe he was acting on his own.

The Madoff Circle: Who Knew What? - ProPublica: "The Madoff Circle: Who Knew What?"

SSRN-An Autopsy of the U.S. Financial System by Ross Levine

Levine gives a nice view of the failure of the US financial system in this paperAn Autopsy of the U.S. Financial System:
"In this postmortem, I find that the design, implementation, and maintenance of financial policies during the period from 1996 through 2006 were primary causes of the financial system’s demise. The evidence is inconsistent with the view that the collapse of the financial system was caused only by the popping of the housing bubble and the herding behavior of financiers rushing to create and market increasingly complex and questionable financial products. Rather, the evidence indicates that regulatory agencies were aware of the growing fragility of the financial system associated with their policies during the decade before the crisis and yet chose not to modify those policies."

"In this autopsy, I assess whether key financial policies during the period from 1996 through 2006 contributed to the financial system’s collapse. I analyze the decade before the cascade of financial institution insolvencies and bailouts and hence before policymakers shifted into an “emergency response” mode. Thus, I examine a comparatively calm period during which the regulatory authorities could assess the evolving impact of their policies and make adjustments. Specifically, I study five important policies: (1) SEC policies toward credit rating agencies, (2) Federal Reserve policies that allowed banks to reduce their capital cushions through the use of credit default swaps, (3) SEC and Federal Reserve policies concerning over-the-counter derivatives, (4) SEC policies toward the consolidated supervision of major investment banks, and (5) government policies toward two housing-finance entities, Fannie Mae and Freddie Mac. From this examination, I draw tentative conclusions about the determinants of the crisis.

The evidence indicates that senior policymakers repeatedly designed, implemented, and maintained policies that destabilized the global financial system in the decade before the crisis. The policies incentivized financial institutions to engage in activities that generated enormous short-run profits but dramatically increased long-run fragility. Moreover, the evidence suggests that the regulatory agencies were aware of the consequences of their policies and yet chose not to modify those policies. On the whole, these policy decisions reflect neither a lack of information nor an absence of regulatory power. They represent the selection -- and most importantly the maintenance -- of policies that increased financial fragility. The crisis did not just happen to policymakers."

Yep, the US financial system committed suicide. Makes sense to me.

Fantastic charts on 200 years that changed the world ...

... It's really the last 60, since the end of WW2.

www.bit.ly/anBJBK


Thanks to Brad DeLong for putting this in his blog. http://delong.typepad.com/sdj/

FT.com / Markets / Insight - ‘Flash crash’ delivers clear messages

FT.com / Markets / Insight - ‘Flash crash’ delivers clear messages: "Equity markets in the US remain the largest and most liquid in the world, and during the 2008 crisis seemed to be the only segment of our financial system that functioned unimpaired. Yet in less than 20 minutes on May 6th, confidence in our market system was significantly damaged.
Hours after the market’s wild ride, thousands of trades on electronic exchanges were cancelled on a somewhat arbitrary basis, leaving investors questioning the integrity of the marketplace. What is more, the search for a cause has not revealed specific triggers, but instead highlighted challenges with the fragmented nature of US markets."

This is not the first time this has happened in the world. Australia's interest rates futures market had its own version of the flash crash on 25 July 2007 for very similar reasons. The court judgement on the case brought by some traders against the Sydney Futures Exchange who thought the cancellation of some trades was "on a somewhat arbitrary basis" will be delivered at 10:15 on 28 May 2010.

Case Shiller Index

In May's Case shiller Index release house prices in the 12 cities that didn't have a boom (the slowest house price increase over 2001-2005). The prices keep going down for these cities. This can't be good.

This time is actually different

The following paragraph from Eggertsson is important for those quoting Romer and Romer and, even more importantly, Reinhart and Rogoff. This time may actually be different! I'll take the analysis with a large grain of salt, as to solve even an approximation to his basic equations he invokes Ricardian Equivalence. My main point I draw from this is that conclusions do differ when interest rates are at zero.


The contractionary effects of labor and capital tax cuts are special to the peculiar environment
created by zero interest rates. This point is illustrated by a numerical example in Table 1. It
shows the "multipliers" of cuts in labor taxes and of increasing government spending; several
other multipliers are also discussed in the paper. The multipliers summarize by how much output
decreases/increases if the government cuts tax rates by 1 percent or increases government spending
by 1 percent (as a fraction of GDP). At positive interest rates, a labor tax cut is expansionary,
as the literature has emphasized in the past. But at zero interest rates, it flips signs and tax cuts
become contractionary. Meanwhile, the multiplier of government spending not only stays positive
at zero interest rates, but becomes almost eight times larger. This illustrates that empirical work
on the effect of fiscal policy based on data from the post-WWII period, such as the much cited
and important work of Romer and Romer (2008), may not be directly applicable for assessing
the effect of fiscal policy on output today. Interest rates are always positive in their sample, as
in most other empirical research on this topic. To infer the effects of fiscal policy at zero interest
rates, then, we can rely on experience only to a limited extent . Reasonably grounded theory may
be a better benchmark with all the obvious weaknesses such inference entails, since the inference
will never be any more reliable than the model assumed.

DvD Insights - Corporate Credit Default Swaps and Non-Dealer Trading Volume @ RiskCenter: A Financial Risk Management Media Company

DvD Insights - Corporate Credit Default Swaps and Non-Dealer Trading Volume @ RiskCenter: A Financial Risk Management Media Company:

Hmmm! There's not too much real activity out there. As van Deventer warns, keep your hands firmly on your wallet.

billy blog » Blog Archive » Naked Keynesianism

billy blog » Blog Archive » Naked Keynesianism: "Naked Keynesianism"

There's the beginning of a good discussion in the commentary to this blog. How much of the institutions surrounding government spending are necessary to keep the political and economic machinery running smoothly? And, more to the point, how can we start to change the level of discourse so that we can move the debate on to better ground i.e. MMT.

This brings back memories ...

brief incomplete and mostly wrong

SSRN-The Shanxi Banks by Randall Morck, Fan Yang

Here's a little piece of insight into Chinese history.

SSRN-The Shanxi Banks by Randall Morck, Fan Yang: "The remote inland province of Shanxi was late Qing dynasty China’s paramount banking center. Its remoteness and China’s almost complete isolation from foreign influence at the time lead historians to posit a Chinese invention of modern banking. However, Shanxi merchants ran a tea trade north into Siberia, travelled to Moscow and St. Petersburg, and may well have observed Western banking there. Nonetheless, the Shanxi banks were unique. Their dual class shares let owners vote only on insiders’ retention and compensation every three or four years. Insiders shares had the same dividend plus votes in meetings advising the general manager on lending or other business decisions, and were swapped upon death or retirement for a third inheritable non-voting equity class, dead shares, with a fixed expiry date. Augmented by contracts permitting the enslavement of insiders’ wives and children, and their relative’s services as hostages, these governance mechanisms prevented insider fraud and propelled the banks to empire-wide dominance. Modern civil libertarians might question some of these governance innovations, but others provide lessons to modern corporations, regulators, and lawmakers."

Just as sad - Cochrane

http://www.newyorker.com/online/blogs/johncassidy/2010/01/interview-with-john-cochrane.html

Sad

http://www.newyorker.com/online/blogs/johncassidy/2010/01/interview-with-eugene-fama.html


This interview is so sad. What is Fama trying to say?