Thursday, October 23, 2014

The ""transfer problem""

Larry Summers today wrote an interesting piece for Reuters. His first point - worth considering - is that the German obsession with wrapping the private sector's knuckles and enforcing discipline is overblown + dangerous. It is, indeed, what many thought before Lehman, and that one didn't end well. The second point he makes is about the chances of Greece actually paying up. Summers says "" country can be expected to generate huge primary surpluses for long periods for the benefit of foreign creditors."" Of course, if true, it also means that countries cannot credibly run up sizeable foreign debt positions. Pointing to Keynes' famous point in the Economic Consequences of the Peace, he argues that transferring so much money abroad is simply politically infeasible.

If I get my numbers right, Greece would have to produce primary surpluses of 5-10%, to be transferred to the rest of the EU (in the main) for the next 20 years or so. Of course, many regions in Europe transfer this much to other regions -- but not in exchange for past goods + services received, contrary to the Greek case. One example, close to home? Catalunya. One of the most productive regions in Spain, it is currently sending approximately 9% of its GDP to the rest of the country. Of course, Catalunya is not a separate country, but part of Spain, and all the taxes for which its citizens get precious little payback were not exactly embraced enthusiastically. But pay they do, regardless. This simply shows that open revolt need not follow on the heels of high transfers of a region's riches elsewhere; it depends on the way this is sold to the population. Catalans, while grumbling, are on the whole remarkably placid on the issue. What surprises me is that, in contrast to the rest of the Europe, where regions with their own culture + language are normally ""bribed"" to stay, Catalans end up paying for being part of a larger entity they do not much care about. Perhaps they should take some lessons from Southern Sudan, and sign up George Clooney to push their case internationally...

Surprise of the day... another bad idea

from the EU. This time, the collected EU finance ministers seem to think that by buying back Greek debt at depressed prices, they can really make those irritating, overpaid bankers pay. There may be clever ways of engineering such an outcome, but the basic idea doesn't work. In one of their classic papers, Bulow and Rogoff (QJE 91) & nbsp;show that buying back debt is no way to reduce the burden of too much debt. Open market buybacks, at least, ""allow creditors to reap more than 100 percent of any efficiency gains"". Why? A country's repayment capacity is its repayment capacity. As you buy back debt, you effectively spread that capacity over ever fewer bonds - there is more blood, sweat, and tears squeezed from the Greek taxpayer for each bondholder remaining. The secondary market price of debt rises as repurchases proceed. Most likely, the market value of all bonds outstanding stays roughly constant as the face value declines. So, what to do? Maybe buy-backs are the answer, but to get it right, get a good advisor to design the process - like Paul Klemperer of Nuffield, Oxford, who advised the UK government on G3-spectrum auctions.

Debt Trouble

I was teaching ""Financial Crises"" in the CREI Macro Summer School last week (link here). As I was brushing up the syllabus, I realized just how much great work Mian and Sufi have done on the recent crisis. I already knew their & nbsp;paper in the QJE on the subprime crisis, where they show that areas with high latent demand for mortgages in 1997 (i.e. high denial rates) saw a big increase in lending, lower denial rates, higher LTVs, without any improvement in economic conditions. & nbsp;

Now, they also have a paper (with Francesco Trebbi, in the AER) on the voting of Republicans and Democrats on the bailout packages for homeowners, and for the financial industry. Guess what? Your ideology matters.... but only up to a point. What also matters a lot are the economic interests of your constituents. So if you are a god-fearing Republican who believes in small government, Ronald Reagan, the right to bear arms, and not helping anyone in need... you may rethink the last bit if your constituents are looking at a lot of foreclosures. As Groucho Marx said - these are my principles, and if you don't like them, I have others.
Mian and Sufi also have a small new paper, published in the SF-Fed's Economic Letters, on which areas of the US are suffering the most from the current recession... and it's all about debt levels. The first thing that is stunning is the size of the debt binge in the last 10 years (figure above). The second killer chart in the paper looks at the differential performance in auto sales:

Counties with a lot of household debt saw a big decline in sales in the run-up to 2008 already, and have stayed depressed. The low-debt counties have roared back, as everyone should have done in a normal recovery. Slow recovery? Maybe there is something more to it than a bit of pump-priming via the government deficit, and QE1-3. Without inflation, it's hard to see what will help those suffering counties reduce their debt burdens.

All of this goes to show that the analogy of debt binges and alcohol-infused parties is quite apt - fun while the punch is on tab, less so the next morning. That was also the argument about the Great Depression, made by Barry Eichengreen and Kris Mitchener almost a decade ago (in a much underappreciated paper). The title? The Great Depression as a credit boom gone wrong.

Wednesday, October 22, 2014

hack attack!

The Barcelona GSE website was hacked last week, and remained down for much of it. I hope prospective students didn't get worried -- this kind of thing happens all the time, and the elves downstairs assure me nothing has been lost. As of Sunday, 11-7, we are back in business!

Hiring Season and Sunscreen Reflections

The hiring season at CREI and UPF is drawing to a close. We had some great junior scholars coming through, and it's always a pleasure to learn what the latest crop of Ph.D.s is working on. Now we have to keep our fingers crossed and hope that our offers are accepted. This year, the weak dollar should make our offers look particularly attractive. You'd think that if anyone is unaffected by the optics of an offer driven by the $/€ rate, it should be economics Ph.D.s, but you never know. UPF is also lucky that recruiting happens in January and February, when our relative "weather advantage" is greatest. All those graduate students emerging from the frozen East and North of the US tend to be charmed by our mild Mediterranean climate. This year, the winter has been ridiculously warm-- yesterday, I decided to get the deckchairs out on my terrace. While reading the latest issue of the Economist (which contains our new ad for the Master's), I even had to get sunscreen...

New course structure

Fernando, Jaume and I had a late-night session the other day, and decided that we could do better -- we are revamping the ITFD course structure. Some changes look bigger than they are; others are more substantial. The first big change involve replacing the existing, broad 40 hour classes with smaller, more focused 20 hour modules. Jaume and Fernando are going to teach 20 hours on international finance (Jaume) and on money and exchange rates (Fernando). My own teaching is going to cover an overview of the rise of the global economy in term 1, and a class on financial crises and bubbles in term 2.
We are particularly excited about the advanced elective classes that we will be offering (this replaces the micro and macro classes in term 1 that we had initially put on the program). There will now be additional classes that our students can chose: by Francesc Ortega and Libertad Gonzalez on the economics of immigration, on growth by Gino Gancia and Xavier Sala-i-Martin, by Paula Bustos and Gino Gancia on international trade, and by Alberto Martin and Fernando Broner on international finance.

Fuel price strike

There is still milk on the shelves of my supermarket, but for how much longer? Spanish lorry drivers have decided to strike, in protest against higher fuel prices. Apparently, transport fees are renegotiated only intermittently (taxi drivers are out of luck completely), and oil at $135 is not making them happy. Apart from the spectacle of cars lining up for fuel (like during the oil crises of the 1970s), it's an interesting exercise in how rigid some prices apparently are - without rigidities in setting prices for truck transport, presumably truckers would care but little (unless demand for their services collapses if they introduce a fuel surcharge). I assume the whole thing will be resolved with a few symbolic compromises, but it could be quite nasty if the strike lasts for more than a week or so. Now, if only I didn't have to worry about getting to a weekend wedding...