Indian Liberals

Abheek Bhattacharya has an interesting piece in The Wall Street Journal on the growth of classical liberalism in India.

too good!

gmail, clarified

Ever how Google Gmail web app works. Here is the link.

probability simplified

BBC Radio 4’s looked at the issue of probability..
...“Probability is the field of maths relating to random events and, although commonplace now, the idea that you can pluck a piece of maths from the tumbling of dice, the shuffling of cards or the odds in the local lottery is a relatively recent and powerful one. It may start with the toss of a coin but probability reaches into every area of the modern world, from the analysis of society to the decay of an atom.”

how to fold a T-shirt in 2 seconds

credit crunch leads to recession???

Credit conditions in financial markets have tightened and there has been a weakening of the capital positions of many major banks in the wake of recent financial market turbulence. These developments raise the question of whether a “credit crunch”—a severe declinein the supply of credit—is looming in the United States and other advanced economies and, if so, what adverse impact this will haveon economic activity. Past periods of financial market stress have not generally had a major impact on broader economic activity, largely because different segments of the financial system have been able, at least partly, to compensate for difficulties in others. However, there have been episodes associated with major bank strains and sharp declines in asset prices when activity has been more seriously affected. In the current context, an overarching concernis that credit creation may have been impaired because of the faltering of the twin engines ofthe financial system—the banking system and the securities markets.
Writing for the voxeu, Nicholos Bloom argues that the wave of uncertainty troubling the markets will likely induce a recession – and render policy instruments powerless to prevent it

Note: Prior to 1986, “annualised standard deviation” is calculated as the percentage actual volatility of monthly returns on the S&P500 index of the US stock market. After 1986, it is calculated using the percentage “implied volatility” from an option on the S&P100 index.

Note: The vertical axis shows a measure of volatility derived from Schwert (1990), which contains daily stock returns to the Dow Jones composite portfolio from 1885 to 1927, and to the Standard and Poor’s composite portfolio from 1928 to 1962.

virtual economics

Economists explore the research value of virtual worlds. Thanks Marginal Revolution for this pointer.

a tale of three Indias

Teresita C. Schaffer in The Globalist argues that the key problem is that millions of Indians are left out of their country's exciting rise.

Looking up and down the income scale, there are “three Indias”, airplane India, scooter India, and bullock cart India. The distinction is not new and Kalecki has already developed the theory of Intermediate class and Intermediate Regime. Here is a paper by Matthew McCartney and Barbara Harriss-White.

funny headlines

Thanks to Oddie for the pointer. I liked the following ones:

financial regulation

Larry Summers offers six principles of financial regulation.

1. there should be a strong presumption against having regulators competing to supervise particular institutions or activities. Experience suggests that even when firms do not have the option of switching, there are substantial risks that regulators will be co-opted. Adding “forum shopping” exacerbates the problem.
2. it should be recognised that to a substantial extent self-regulation is deregulation. Allowing institutions to determine capital levels based on risk models of their own design is tantamount to letting them set their own capital levels. We have seen institutions hurt again and again by events to which their models implied probabilities of less than one in a million. Where it is desired to impose capital requirements, this should be done in a way that can be monitored by supervisors on the basis of balance sheet data.
3. regulation must be premised on the inability of institutions or their regulators to predict future market conditions with much confidence. As obvious as the subprime crisis may look in retrospect, it was not widely foreseen 18 months ago even by those worried about complacency in credit markets. As the fact that the Dow Jones index was below 6,500 when Alan Greenspan famously spoke of irrational exuberance illustrates, it is also easy to see bubbles even when assets are undervalued or properly valued, as US stocks were in 1996. Rather than judging where and when the next crisis will occur, regulators need to try to assure the resilience of the system with respect to economic shocks or problems in any one sector or institution.
4. the focus of regulation must shift from the prudential practices of individual institutions to the health of the financial system. The proper focus of government regulation is not on how good a job managements do of looking out for their shareholders and bondholders. It is on the potential external consequences of their actions. This will require efforts to limit excesses when times are good and institutions appear robust – and efforts to avoid deleveraging in difficult times if that increases pressures on others. Prudence at the level of any one institution does involve more leverage at times when volatility is low than when it is high. The problem is that when any institution seeks to do what is prudent for it and sell off assets, it impairs the environment in which all others are operating and creates the kind of vicious cycle, in which liquidations beget declining prices and further liquidations, that we have just been through.
5. any regulatory regime must address the risks arising from “parallel banking activities” in a realistic way. We have been reminded by recent events of the old truth that borrowing short and lending long with limited capital is always at the root of financial crisis. This type of activity is not confined to banks and their offshoots. It is practised by bond guarantors, hedge funds, mortgage institutions and some insurance companies among others. If capital requirements are raised only on one set of institutions, problems may be exacerbated as activity migrates to those that are not regulated. On the other hand, regulating all potentially highly leveraged entities is a formidable task. There is no ideal answer. But the fear is that regulation that ensures the regulated can compete fairly with the unregulated is regulation that either promises government subsidy or does not raise capital requirements much above market levels.
6. regulatory policy must to the maximum extent possible create a situation in which the failure of an individual institution is not itself a source of systemic risk. Only in this way is it possible to contain the moral hazards associated with government support. The authorities had no realistic choice but to provide support as Bear Stearns faced bankruptcy. They do have a choice as to whether to put in place a regime where such problems can be managed with no government financial support provided directly or indirectly to shareholders or unsecured creditors. A resolution regime that could apply to any financial institution that became a source of systemic risk should be an urgent priority.

law of demand working

Here is NY Times take on the saving by Americans when there is an increase in the gasoline price.

subprime crisis:panglossianism

A simple fact: "one tends to bet more freely with other people’s money than with one’s own". Here is an explanation of financial crises based upon “Panglossian” values by Daniel Cohen, a French economist.

What is the origin of financial crises? A simple fact, a fact that may be summarised as follows: one tends to bet more freely with other people’s money than with one’s own.
The typical investment manager/financial innovator thinks: “If I win, my profit will be proportional to the gross sales I have initiated. If I lose, I will be dismissed, and perhaps I will lose my reputation in the process.” Thinking even further, the manager realises that the downside is limited to being fired, but the upside is limitless. This asymmetry between profits and losses encourages audacity. Once a certain risk threshold is breached, the investment manager who places bets with other people’s money ignores danger. From a social point of view, the problem stems from the divergence of incentives. Even though the intermediary knows that he may suffer a severe personal loss, it will never be proportional to the losses inflicted on investors.
This simple rule - that profits are for me (at least in part) while losses are for others – makes it possible to understand the enchanted world of finance. The investment manager lives in a world with “Panglossian” values, to borrow an expression used by the economist Paul Krugman. Just as Voltaire’s hero, this investor only sees the bright side of affairs. He ignores the risk – not by inadvertence, but by rationality.

Panglossian principles first explain why finance requires regulation. Prudential rules set a minimum ratio of banks’ equity capital to the amount of their investments. The idea is to oblige them to hold at their disposal the liquidity necessary to pay, and therefore to anticipate, their potential losses. The subprime crisis illustrates a contrario how the applicable logic works when, by diverse artifices, the financial intermediaries were able to free themselves from regulatory constraints.
At the origin of the so-called subprime crisis, there is a brilliant innovation. To make real estate credit available more to investors at attractive rates, the engineers of Wall Street came up with the following idea. Slice up portfolios of pooled mortgage assets into several tranches. The highest quality tranches are paid first, the mezzanine tranches afterward, and the lowest (equity) tranches sustain the risk of eventual default. A palette of varied assets is constructed in this way, attracting vast classes of investors: pension funds for the senior tranches, and hedge funds for the risky assets. This invention, finalized in 1983 by a subsidiary of General Electric, was originally intended for ordinary borrowers. In spite of a first crisis in 1994, the technique took off in 2000, making it possible to broaden the range of households benefiting from mortgage loans. Thanks to the now famous subprimes, the most disadvantaged social classes were able at last to buy their housing on credit. Wall Street came to the aid of Harlem with “ninja” loans (No Income, No Job, no Assets).
Stage one: warped creditworthiness evaluation
The collapse of the subprime system unfolded in several stages, each of which revealed the Panglossian vision of financial intermediaries. Upstream from the crisis, one fact became apparent rapidly. The quality of mortgage extended had profoundly deteriorated, even making allowances for the new clientele for whom they were intended. The clients’ creditworthiness had been systematically overestimated by the intermediaries in charge of distributing the mortgages. The cause of this deterioration is evident. Beforehand, in the old school of bank lending, lenders originating a loan were the ones who collected it afterwards, so they had an incentive to evaluate creditworthiness correctly. With the advent of loan securitisation, the agent originating the credit sells it immediately in the financial markets. The incentives are totally changed. What counts is to increase the numbers, not to examine the quality of the client.
Step two: flippancy of the banks
However, this phenomenon is only the first level in the house of cards. The second story is the “flippancy” of the banks themselves. To profit to the maximum from the new opportunities in mortgage lending, the banks created new, off-balance-sheet structures – “Special Investment Vehicles” (the infamous SIVs). By placing their new activities in these ad hoc structures, the banks liberated themselves from prudential rules. They were able to exploit to the financial leverage to finance high yielding operations on credit, without having to make use of their equity capital. The machine for betting imprudently with other people’s money was then set in motion.
The crisis that began in the summer of 2007 revealed the magnitude of the phenomenon. Losses are between 422 billion dollars, according to the OECD, and 945 billion according to the IMF. Whatever the final figure turns out to be, depending on how the current crisis evolves, a “reverse leveraging effect” is at work, what is called “deleveraging” on Wall Street. The banks will indeed be forced to reduce the volume of their lending, (re-)proportioning it to their equity capital, at the very moment when this equity is amputated by losses. A contraction of credit is inevitable, and this usually leads to a recession.
Phase three: the real estate bubble
This leads to the third and last story in the house of cards: the real estate bubble. Easy money in the year 2000 nourished an explosion in asset prices, especially housing prices. This enabled American households to live on credit. A very lax system allowed them indeed to increase their debt progressively as the value of their real estate holdings rose. All goes well as long as prices rise. When price fall, the households whose mortgage debt exceeds the value of their house (negative equity) may want to or may be forced to default.
Phase four: the borrows become Panglossian
Panglossian reasoning applies again here, but this time on the part of borrowers. The most heavily indebted households have an incentive to bet on the continuation of the rise, ignoring the risk of market reversal. This is the where the greatest risk lies going forward. In the United States, the fall in real estate prices has now reached a 10% average annual rate. A vicious circle is in motion. The reduction in prices obliges households to declare bankruptcy, which leads the banks to put the unpaid houses up for sale, which brings down the prices still more. Many of the same households also borrowed to buy cars, run up credit card bills, etc, so ‘deleveraging’ by the little guys could spread the crises far beyond mortgage lending.
What easy money brought forth during the years 2000, tight credit will take away in the years to come. “Deleveraging” has begun on all levels: for the banks, for the financial institutions having used leveraging to the maximum, such as the hedge funds or the private equity firms, and for the households themselves. Is this the disenchantment of the financial world? No doubt - until the next round.

history lessons

There are some who see a cycle of boom and bust as inevitable. But as Britain and much of the Western world faces up to a downturn, it's easy to look back into the past and find nasty decades, BBC offers historical perspectives on hard times. The article looks at three periods (England in the 1440s and 14450s, Britain in the 1840s and Rome in 270AD) and examines why the economy was faltering. The article misses out completely the colonial exploitation (resulted into famines to all possible adjectives of hard times in economic terms) the European has done to their respective colonies in the 18th, 19th and early 20th century.

mercantile movie of all time...

…Taxi Driver, claims Robert Mundell, FT columnist John Authers has the goop:

John Hinckley, the deranged would-be assassin who attempted to kill Ronald Reagan in 1981, claimed that he was inspired by [Taxi Driver]… According to Mundell, the wave of sympathy for President Reagan that was engendered by the assassination attempt deterred Democrats in Congress from voting against his proposed tax cuts. Due to this accident of history, the US administered a big fiscal stimulus at the same time that Paul Volcker at the Federal Reserve was administering tight money. This, for Professor Mundell, was vital in creating the era of prosperity that followed.“Taxi Driver is the most important movie ever made from the standpoint of creating GDP,” Mundell told delegates. “It’s the movie that made the Reagan revolution possible. That movie was indirectly responsible for adding between $5 trillion and $15 trillion of output to the US economy.”

india's booming service sector

Stephen Broadberry and Bishnupriya Gupta look at the historical roots of India’s booming service economy. “Our research demonstrates that India’s recent service-led development has deep historical roots. During the colonial period, India’s comparative productivity performance was already better in services than in industry or agriculture. This emphasis on services is in line with much recent research on long-run growth among the developed economies, which finds services playing a key role in comparative economic performance in the late nineteenth and early twentieth centuries as well as during more recent times.”

capitalism crisis?

Wity as ever, Winston Churchill once said, "capitalism is a bad system, but the others are worse.” Samuel Brittan looks at how booms and busts have been features of capitalism since the beginning. “The beginning of wisdom is to recognize that financial booms and busts have been a feature of capitalism from the very start. Indeed they are as deep-rooted as human gullibility and greed. Charles Kindleberger’s "Manias, Panics and Crashes" impressively documented this. He has a table listing more than 30 such events, starting with the South Sea bubble of 1720 and ending with the New York Stock Exchange crash of 1987. Although some analysts have tried to discern a periodicity in their occurrence, I can only see an irregular succession with some crises succeeding each other at intervals of about a decade so beloved by old-fashioned business cycle theorists, but others coming hot on the heels of their predecessors after only a couple of years.

who says big ideas are rare???

Malcolm Gladwell in NYT has says that history of science is full of ideas that several people had at the same time

what is happenning o food prices??

The sharp increase in food prices over the past couple of years has raised serious concerns about the food and nutrition situation of poor people in developing countries, about inflation, and—in some countries—about civil unrest. Real prices are still below their mid-1970s peak, but they have reached their highest point since that time. Both developing- and developed-country governmentshave roles to play in bringing prices under control and in helping poor people cope with higher food bills.

facts and figures behind the rising price of food across the globe

Sources of Current Price Increases:

1. High price of energy: Energy and agricultural prices have become increasingly intertwined. With oil prices at an all-time high of more than US$100 a barrel and the U.S. government subsidizing farmers to grow crops for energy, U.S. farmers have massively shifted their cultivation toward biofuel feedstocks, especially maize, often at the expense of soybean and wheat cultivation. About 30 percent of U.S. maize production will go into ethanol in 2008 rather than into world food and feed markets. High energy prices have also made agricultural production more expensive by raising the cost of mechanical cultivation, inputs like fertilizers and pesticides, and transportation of inputs and outputs.
2. Demand Supply Mismatch: the growing world population is demanding more and different kinds of food. Rapid economic growth in many developing countries has pushed up consumers’ purchasing power, generated rising demand for food, and shifted food demand away from traditional staples and toward higher-value foods like meat and milk. This dietary shift is leading to increased demand for grains used to feed livestock.
3. Blame weather: Poor weather and speculative capital have also played a role in the rise of food prices. Severe drought in Australia, one of the world’s largest wheat producers, has cut into global wheat production.

calls for policy actions

• comprehensive social protection and food and nutrition initiativesto meet the short- and medium-term needs of the poor;
• investment in agriculture, particularly in agricultural scienceand technology and in market access, at a national and global scale to address the long-term problem of boosting supply; and
• trade policy reforms, in which developed countries would revise their biofuel and agricultural trade policies and developingcountries would stop the new trade-distorting policies with which they are hurting each other.

Ester Dufflo come up with some policy conclusion.

relating to previous post

I just saw a Basu Chatterjee directed hindi film, Lakho ki Baat (1984), which depicts the law of economics, particularly compensation tort law, in the context of Coase Theorem.

economics and business issues in movie

Tom Hanks starrer, Cast Away (2000), a typical movie in Robinson Crusoe framework, was a good starting point to understand the basics of economics, the evolution of economics from the primitive era.

The hindi films, I remember, which vividly captures are Naya Daur,1957, (on Industrial policy, questioning Nehru Mahalnobis Model), Manthan,1976, (the Cooperative movement), Namak Haram,1973, (Contract Labour Policy), Jaane Bhi Do Yaaron,1983, (Urban land Ceiling and Regulation), Corporate,2006, (the Industrialist and Politician nexux), Upkaar,1970, (India vs. Bharat divide), Lagaan, 2001,(Brtish imperialist policy during colonial period)

Some of the foreign films are lists below, thanks to tutor2u for the pointer.

When the Levees Broke: A Requiem in Four Acts (2007) - great documentary from Spike Lee

Walmart – the High Cost of Low Price (2006) – which seeks to undermine the business practices allegedly used by the world’s biggest retailer.

A Crude Awakening – The Oil Crash (2006) - investigation into peak oil theory

Black Gold (2006) - a 78-minute documentary feature from Mark and Nick Francis which provides an vivid insight into the lives and challenges facing coffee farmers in Ethiopia

Darwin’s Nightmare (2005) is a startling look at the impact of multinational organisations such as the IMF and the World Bank together with EU commissioners and Russian airline pilots on the economic and geographic landscape of Uganda and Tanzania – excellent for examples of the tragedy of the commons, the destruction of natural resources

Kinky Boots (2005) – this Nick Frost movie about a failing shoe business that diversifies and explores issues such as redundancy, motivation, production operations.

The Corporation (2005) and Enron - The Smartest Guys in the Room (2006) both have great potential for students wanting to unearth the darker side of corporate power, greed and fraudulent behaviour.

Life and Debt (2004) – looks at the issue of fair trade, inequality and economic growth in Jamaica.

City of God (2003) – highlighting poverty and the value of human life in Brazil

A Beautiful Mind (2002) – starring Russell Crowe and a drama based loosely on the life of John Nash the Nobel-Prize winning mathematician and economist

Amelie (2002) – a cartoon delight that says much about human behaviour and maximising utility!

Goodbye Lenin! (2002) – examining the economic and social impact of a change from state planning to a market economy

Dirty Pretty Things (2002) – a gritty drama directed by Stephen Frears which is centred around the illegal trade in human organs

Start-up.com (2001) – a documentary which follows two New Yorkers who quit their day jobs to focus on their entrepreneurial online business, govWorks.com. The two men receive venture capital, grow the business, and then watch it fall apart.

The Insider (2000) – starring Al Pacino and Russell Crowe, this might be used to illustrate business ethics in tobacco and broadcast journalism

Rogue Trader (1999) - the events surrounding Nick Leeson and the collapse of Baring’s Bank - very topical today

Brassed Off (1996) or the Full Monty (1997) - both looking at the effects of industrial decline

Gold Finger (film released in 1964, new DVD version in 2006) – built around the plot to bomb Fort Knox and destroying the Federal gold so Goldfinger’s gold becomes relatively more valuable!

La Haine (1995) – a classic documentary in which disenfranchised and bored French youths patrol Paris’ suburban housing estates due to lack of government interest and attempts to create employment or education.

Of Mice and Men (1992) could be used as a backdrop to talk about the great depression - the use of migrant workers, the lengths people would go to find a job, and how a purely financial crisis can hit rural workers too – highlighting multiplier effects.

Rounders (1998) and Dr Strangelove: Or, How I Learned to Stop Worrying and Love the Bomb (1963) the classic film starring Peter Sellers both include clips and themes that illustrate game theory, risk aversion and behavioural economics.

The Life of Brian (1979) – including the classic the haggling scene involving Eric Idle – an example of first-degree price discrimination!

The Meaning of Life (1984) - especially the scene with Mr Creosote - externalities from consumption!

Withnail & I (1986) – a classic British film dealing perhaps with the economics of happiness!

American Psycho (2000), Barbarians at the Gate (1993), Boiler Room (2000) and Wall Street (1988) - all great for financial intrigue

It’s a Wonderful Life (1946) – beloved film starring James Stewart – ideal for showing a run on a bank – you might use it when discussing the Northern Rock saga!