(E)conomics is not a body of hard science that can be applied mechanically to social and economic problems. Nor do economists necessarily possess better judgment or foresight than others. Instead, what economists have are questions, not answers. They can offer arguments based in logic and evidence but which contradict instinct and consensus. They can force people to acknowledge that some moral principles, keeping poor Africans safe, can conflict with others - making them richer. They can force people to think.
Friday, December 12, 2008
Role of economics in policy debates
Chris Dillow, referring to the infamous Larry Summers memo on polluting industries, writes on the role of economics and economists
Impossibility theorem of global economy
The events of the past few weeks and months have proved that Dani Rodrik is right in claiming that it may not be possible to simultaneously have all the three desirables - democracy, national sovereignty and global economic integration. We can choose either of these three.
Given that democratic politics is non-negotiable, and ceding substantial national sovereignty is an impossibility, we may be left with little choice. The only trade-off possible is between national sovereignty and global economic integration, with the balance decisively tilted in favour of the former. This underlines the limiatations of globalization in shaping the world economy.
Given that democratic politics is non-negotiable, and ceding substantial national sovereignty is an impossibility, we may be left with little choice. The only trade-off possible is between national sovereignty and global economic integration, with the balance decisively tilted in favour of the former. This underlines the limiatations of globalization in shaping the world economy.
The problem of information flows
Mark Thoma makes an excellent point that while liquidity and solvency related concerns are being debated and addressed, we are yet to recognize the importance of a third factor - reliable information flows. Financial markets need information to work properly, but traditional information flows have completely broken down during the crisis. The collpased information structure needs to be repaired quickly if the markets are to even begin gaining some semblance of normalcy.
The credibility of ratings agencies, risk assessment models, pricing models, research analysts and advisory service providers, performance forecasts and guidances, and even plain balance sheets have all taken a massive hit as the crisis has evolved. Investors no longer even trust the price discovery mechanisms.
He writes, "There can be event that occurs in the tail of the distribution of possible events that is viewed as just that, an unusual, costly event, but not one that fundamentally upsets our understanding of how the world works while at the same time undercutting the informational flows we use to understand these markets... But this crisis has destroyed confidence in the information and the models we use, and it won't be easy to bring this back." In other words, we have a true "black swan" event that has completely shaken the foundations of our long held and entrenched beliefs and expectations.
Though only time will be able to heal the deep scars inflicted by the crisis, it is important that governments intervene to put in place structures and mechanisms that can atleast partially repair the models and information flows and thereby restore some level of confidence required to get the markets up and running. He asks the right questions,
"Is there more that the government could do, for example, with accounting standards or required disclosures that would help people evaluate the stability of a particular institution? Are there changes that could be made to give buyers and sellers more confidence that the people acting as their agents in the transaction have the right incentives? Is there some way to immediately change the regulation and structure of the ratings agencies that can help to restore confidence in their assessments of risk?"
The credibility of ratings agencies, risk assessment models, pricing models, research analysts and advisory service providers, performance forecasts and guidances, and even plain balance sheets have all taken a massive hit as the crisis has evolved. Investors no longer even trust the price discovery mechanisms.
He writes, "There can be event that occurs in the tail of the distribution of possible events that is viewed as just that, an unusual, costly event, but not one that fundamentally upsets our understanding of how the world works while at the same time undercutting the informational flows we use to understand these markets... But this crisis has destroyed confidence in the information and the models we use, and it won't be easy to bring this back." In other words, we have a true "black swan" event that has completely shaken the foundations of our long held and entrenched beliefs and expectations.
Though only time will be able to heal the deep scars inflicted by the crisis, it is important that governments intervene to put in place structures and mechanisms that can atleast partially repair the models and information flows and thereby restore some level of confidence required to get the markets up and running. He asks the right questions,
"Is there more that the government could do, for example, with accounting standards or required disclosures that would help people evaluate the stability of a particular institution? Are there changes that could be made to give buyers and sellers more confidence that the people acting as their agents in the transaction have the right incentives? Is there some way to immediately change the regulation and structure of the ratings agencies that can help to restore confidence in their assessments of risk?"
Thursday, December 11, 2008
Mumbai attacks and Indian reaction
If the Government of India were to take a leaf out of the George W Bush School of Politics, then there is one very clear path to victory in the next elections - cross-border air strikes on terrorist camps in Pakistan! Back in 2004, facing elections, President Bush had used the "sexed up" documents on Iraq possessing Weapons of Mass Destruction to invade Iraqi airspace and divert the attention of the electorate to his advantage.
PM Manmohan Singh faces the same situation - a fear of terror has gripped the nation, Pakistan is the easily identified culprit, inflation and the economy has driven the Government to a corner, elections are impending, and a hardline opposition is upping the ante on a government perceived as being soft on national security (Something Mr Bush did not have to contend with)! It is a tribute to the Indian Government's maturity and responsibility that it has so far not gone on the trigger happy path followed by the Bush administration, even in the face of gravest provocation and immediacy. I am also a bit surprised by the maturity of the debate (the over-the-top politician bashing apart), characterized by the refusal of the popular media, opinion makers and the Opposition to play to the galleries and force public opinion on the issue.
Agreed that the consequences of such adventurism can be catastrophic, but one has never associated desperate Governments facing elections to pay heed to such dangers.
PM Manmohan Singh faces the same situation - a fear of terror has gripped the nation, Pakistan is the easily identified culprit, inflation and the economy has driven the Government to a corner, elections are impending, and a hardline opposition is upping the ante on a government perceived as being soft on national security (Something Mr Bush did not have to contend with)! It is a tribute to the Indian Government's maturity and responsibility that it has so far not gone on the trigger happy path followed by the Bush administration, even in the face of gravest provocation and immediacy. I am also a bit surprised by the maturity of the debate (the over-the-top politician bashing apart), characterized by the refusal of the popular media, opinion makers and the Opposition to play to the galleries and force public opinion on the issue.
Agreed that the consequences of such adventurism can be catastrophic, but one has never associated desperate Governments facing elections to pay heed to such dangers.
$5.596 trillion and counting!
Slate has this excellent interactive guide of the bailout so far in the United States.
Wednesday, December 10, 2008
Investing at 0% rate!
Finally, the bottom has been breached! In the recent weeks, investors, both foreign and domestic, have been flocking to safe and liquid US T-Bills thereby driving down yields dramatically. Investors in the short term money market funds, driven by fears of a major impending depression, are pulling money out of mutual funds and hedge funds, forcing portfolio managers to sell more risky assets and hold Treasuries, which are easier to sell. Foreign investors are using American government securities to protect themselves against the falling value of their own currencies.
This NYT report just about sums up the scare driven flight to safety that has gripped the credit markets in the US and made the Fed virtually irrelevant,
This NYT report just about sums up the scare driven flight to safety that has gripped the credit markets in the US and made the Fed virtually irrelevant,
"Investors accepted the zero percent rate in the government’s auction on Tuesday of $30 billion worth of short-term securities that mature in four weeks. Demand was so great even for no return that the government could have sold four times as much. In addition, for a brief moment, investors were willing to take a small loss for holding another ultra-safe security, the already-issued three-month Treasury bill!"
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