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...

Sounds familiar?

I have one more week of teaching in the summer school, but to be honest... I feel like having a bit of a vacation. And one of the things I love best about being at the Ciutadella Campus of UPF-BGSE is the amazingly central location (right next to the Born area, good for a beer with the colleagues and students). It is also just 5 minutes from the beach.
View Larger Map One of my students from the globalization class last term rented warehouse space on the P/Maritim for his windsurfing equipment with two friends, and I got in on the act -- 500 metres from the office, and I get to practice falling off the board and looking like an idiot. The M.Sc. programs located at UPF are really lucky. I envy the ones located at UAB the peace and quiet out amongst the green woods of the Bellaterra campus - it's really a bit like an American campus university. At the same time, we have the beach, the city, restaurants galore, hip bars and shady cafes, and Ciutadella park with its lake and the remnants of the old fortress, all in walking distance.

Silly item of the day

The delights of academic life... while you hopefully think that we slave day and night to get the new M.Sc. off the ground (not far off the mark), a friend of mine at the LSE apparently devoted his precious hours to energetic googling, and dug up all the dirt on my background:

"Voth - Memory Alpha, the Star Trek Wiki
The Voth are a saurian species, presumably native to the planet Earth, but residing in the Delta Quadrant. A significantly advanced species, the Voth are cold-blooded creatures, have a superior sense of smell, and skin pigmentation which alters according to moods... Adult Voth are slightly taller than adult Humans..."
This is apparently from the Star Trek wiki, and comes with full-color pictures of the species. I am sure my colleagues now find my eccentricities easier to understand. Last time anyone thought they could read my reaction to a paper in my face... they were just decoding subtle changes in skin pigmentation. Me? I am personally disappointed; all that cosmetic surgery to appear human for nothing...

Merrill Lynch Japan Internship

My former student, Takuji Okubo, is now chief economist at Merrill Lynch Tokyo. We have arranged for one student from the ITFD M.Sc. to complete an internship in his division in the summer of 2009. Tak wrote a thesis on "negative bubbles" -- the idea that big deviations from fundamental asset prices could just as well be negative as positive, and the way to detect these statistically. He applied this methodology to East Asian currencies in the late 1990s. Let's hope the incoming intern doesn't have to do analysis on negative bubbles in world stock and bond markets...

Tuesday, October 21, 2014

Sala-i-Martin signs up

Xavier Sala-i-Martin, Catalan economist at Columbia and founder of the NGO Umbele has agreed to give one of our policy topics classes in the spring of 09. I cannot tell you how thrilled I am -- in addition to being a leading expert on the economics of growth, Sala is a political economist in the best tradition, and one of the most popular lecturers at Pompeu (where he teaches in the graduate program every year). A frequent commentator on Spanish politics, economics and society, his foundation attempts to change the rules of the game in terms of development aid in Africa. Umbele is Kishwahili for "future", and you should go and check out the initiatives they support over at

Alwyn Young at UPF

Alwyn Young (LSE) was here on Monday, speaking in the CREI Macro seminar. He gave his talk about the positive side of AIDS - how a reduction in fertility, induced by the spread of AIDS in Africa, creates the resources with which to soften the blow of the disease. Together with his earlier article ""Gift of the Dying"", I think this is some of the boldest thinking in development economics. This time, I wasn't so convinced. Young shows how fertility declines rapidly in countries that are suffering particularly badly from the epidemic, but the causal channels remain slightly vague. I am not sure that country-specific trends are a good way to get rid of omitted variables. Of course, from a policy perspective, you don't really have to think that this is causal - that the AIDS epidemic really causes people to reduce their fertility. As long as the two trends coincide, for whatever reason, the countries in question have additional resources that can be used to alleviate suffering and to combat the disease.

Only in Spain?

Ah! To be a student in Spain... I receive some interesting excuses from students, but for today's class on the rise of the global economy from 15:00 to 17:00, I got one that I will always remember:

I am writing this email because I won't be able to come to class on the first hour today. I am telling you this in case you wanted me to do the presentation today. I have a lunch that I cannot finish earlier.

Sorry for any inconvenience!

Now, I I do enjoy a good lunch. And I don't want to create the impression that this is normal. Yet I wonder if faculty at other universities/countries can top this... To be honest, the vast majority of students here are actually very hard working. They certainly know how to have a good time, but especially the first year of the M.Sc. in Economics can be gruelling. I am glad to add that the student in question, fortified by a good lunch, gave a great presentation.

What policies work in Iraq?

I thought it would be interesting for prospective students to learn a bit about the kind of seminars that take place at UPF -- we don't just run undergrad and grad programs, there is a plethora of seminar series as well. One paper in particular caught my eye last week. Eric Chaney (Berkeley) came here on Friday, and talked about his work on Iraqi bonds. Iraq issued new debt after the fall of Baghdad. These are traded worldwide. He argues that you can learn a lot about the stability of the Iraqi government from looking at these bond prices. In particular, he asks if the major "turning points" in the fight against the insurgency show up in bond prices. The punchline - "hard power" doesn't work. Catching, for example, the head of El Qaeda in Iraq, Abu Musab al-Zarqawi (trumpeted as a major success at the time), hardly shows up in the bond prices at all. The market also wasn't much impressed by the formation of the al-Maliki government. What does matter is "soft power" - evidence of Sunni-Shiite reconciliation, of negotiations with tribal groups, etc. As Chaney notes, the bond price responses offer policy-makers real-time feedback on the type of initiative that works. I think this is really exciting work. Michael Greenstone (MIT) also has a paper using the same data to assess the success of the "surge". Potentially, these methods could improve the quality of decision-making.

Happy memories... or not?

I have just come back from the BGSE graduation ceremony, at the AXA forum at the other end of town. It was the normal mixture of fun and speeches, saying good-bye to students that I had come to get to know and greeting the parents that produced the interesting, alert, curious boys and girls that we taught. I feel a bit nostalgic about everyone leaving - didn't I just get to know you a few months ago?

But before I get all bleary-eyed, perhaps I should heed a bit of advice that comes out of really interesting research. Ever found yourself moaning silently when some postmodernist quack cr***ed on about how reality is socially constructed? Well, it turns out that there is some truth to that. In Science, there is an incredible bit of research showing that people who can perfectly well remember events change their view if you surround them by people who say something else. The scientists in question used MRI scanners to find out how this happens. Turns out that two parts of the brain, linked to fear and emotion, are involved in us changing our memories -- the hippocampus and the amygdala. Get a computer to tell people they remember wrong, and these parts of the brain do nothing. With people, it's the opposite. So maybe that's the point of ceremonies -- to create salient events that help us recall all that was great about a really great class!

Banning the Speculators

As the price of food soars skyward, a lot of people wonder what can be done. Is the price rise in rise and wheat, causing serious unrest and hunger in many parts of the world, a result of speculation? A knock-on effect of higher oil prices? Should we think of rising commodity prices as a reaction to negative real interest rates, as Jim Hamilton over at Econbrowser argues?
Instead of doing the hard work of getting to the bottom of today's problems, I did what I like to think I do better, and looked at what happens when you ban the speculators. In 1896, largely as a result of lobbying by the agricultural elites, the German parliament banned all commodities futures trading on exchanges. The reason was the opposite of today's -- they blamed speculators for the downward pressure on prices. American grain was invading Europe, making life hard for the estate-owning Junker of Eastern Prussia. I did a full-page article for the Frankfurter Rundschau on this particular piece of backlash against the world market [in German]. The punchline? It doesn't work. You can ban the traders, but it's equivalent to shooting the messenger. Speculation may be to blame, but it's near-impossible to stop.

Monday, October 20, 2014

Final fine-tuning of the courses

We had to make one final change in our courses, affecting terms 2 and 3. The course on ""Conflict, Wars, and Aid"" will now be available via the electives option in term 3, and is going to be taught by Marta Reynal-Querol. Formerly an economist at the World Bank, Marta is one of the prides and joys of the department. She recently won a five year ERC starting grant for young researcher - one of two for the department, and worth more than a million euros. These are the first of their kind awarded in Europe, by the new research funding body modelled on the NSF.
At the same time, we have added a class on the economics of immigration in term 2, taking the place of this class. It's going to be taught by our colleague Francesc Ortega Carandell. Francesc has worked on the redistributive impact of immigration, and has recently analysed the effect of migration on house prices. As I cycle through Barcelona on my way to work, I find it hard to think of a more topical addition to the class list.

My next (academic) book

.. is one step closer to completion. Peter Temin and I have been working away in the archives of Hoare's Bank for a some years now, producing a couple of articles along the way [for a ""best off"", click here or here]. We now have a book manuscript, entitled ""Prometheus Shackled: Goldsmith Banks and England's Financial Revolution after 1800"", which we are circulating prior to a book conference at Yale in early October.

The argument? Over the last 30 years, economic historians have learned that growth was ""slow"" in Britain after 1750 (Crafts, Harley, Antras and Voth). At the same time, there is plenty of evidence that the ""mechanical arts"" progressed quickly (Mokyr, Temin) - a wave of useful gadgets found its way into the British workplace. How do we explain the disconnect? Our answer is - finance. Or, more precisely, the absence of it, as well as the wrong kind. Scholars have long talked about a ""financial revolution"" after 1700 in Britain (Dickson). This revolution was about public finance, not credit intermediation. Using detailed micro-evidence, we examine why, in Postan's words:

""the reservoirs of savings were full enough, but conduits to connect them with the wheels of industry were few and meagre … surprisingly little of her wealth found its way into the new industrial enterprises …""

Our answer is that government regulations in the form of the usury laws and the Bubble Act stifled the development of private finance; government borrowing shocks - crowding out - in addition made financial intermediation much more difficult. In combination, this slowed things down a lot. Britain's industrial transformation after 1750 could have been a lot faster if private finance had played a bigger role. The fact that private capital did not find its way into enterprise readily, and that most financing took the form of retained profits, is a cause for the big rise in the capital share of output, as recently documented by Bob Allen (amongst others).

We document all these challenges through the lens of five goldsmith banks, whose records have survived to the present. The banking in industry in 1700 looked more like Silicon Valley today - lots of entry, lots of exit, little permanence. By 1750 or so, stability had become the norm -- this is what Peter and I call the ""Triumph of Boring Banking"". We show how these firms survived and eventually learned to prosper, despite stifling government regulations. We like to think it's an interesting exercise in ""business history meets macro and financial history"", but now it's time for advice from some of our readers.

You can have a peek here:

Solow doctorate

Fernando and I just came back from the Doctor honoris causa ceremony for Bob Solow. Last year, it was Woody Allen (our first doctor h.c.) I am probably not the most sentimental person on earth, but I found it strangely moving. Jaume Ventura, member of our ITFD steering committee and senior researcher at CREI, gave the eulogy. He was on the MIT faculty when Solow retired; Solow's own speech dwelled on the challenges that most advanced economies face as a result of wage stagnation for the less educated part of the population. Solow is 83 now, and doesn't look a day over 60. Amazingly, his ideas have also retained a freshness that most of us can only dream of.
I also learned something new -- Bob Solow spent WW II as an artillery observer in North Africa and Italy. He may even have been in charge of guiding in shellfire on my grandfather's position on the Cap Bon Peninsula in Tunisia in 1942/43 (my paternal granddad served as an interpreter, and was jolly happy about being taken POW by the Americans. He finished the war in a POW camp in Colorado, digging up potatoes).

Policy expert on board

We are now in the process of signing up senior policy experts for the courses in the third term. Antoni Estevadeordal from the InterAmerican Development Bank has agreed to teach for us. This is great news! He heads the trade and integration section at the Bank, and has been involved in developing new programs that facilitate trade development. Antoni holds a PhD from Harvard and has published in the leading economics journals, including the Quarterly Journal of Economics and the American Economic Review.

Alessandra Bonfiglioni joins teaching faculty

We are very happy that Alessandra Bonfiglioni has agreed to teach a class on ""Trade, Competition and Outsourcing" in the first term. She is currently a Researcher at the CSIC-UAB. Alessandra is a specialist in International Economics and Economic Growth, and holds a doctorate from Stockholm University. Her most recent research looks at the causes of stock market co-movement. Every day, as I look at the US, Spanish, and Germany market gyrating in parallel, I think her research couldn't be more topical.

Ted Miguel's paper on the cost of opposition in Venezuela

What is the cost of opposing your government? What if the government is run by a maverick general-turned-politician with, shall we say, not a great tolerance for those who disagree with him? Yesterday, Ted Miguel from Berkeley gave a talk about his work with Chang-Tai Hsieh, Daniel Ortega and Francisco Rodriguez. In 2002-03, the opposition tried to organize a referendum to recall Chavez from power. The list of signatures was submitted to the authorities, and it ended up - through some interesting twists and turns - on the internet. Government offices keep copies. So everyone can check if their neighbor is a "patriota" (signed the petition to recall opposition politicians, organized by the Chavistas), or an enemy of the president (i.e. signed the original petition). The so-called Maisanta database is an amazing document, and Ted and his co-authors use it to good effect. They demonstrate that firms run by opponents to Chavez ended with much lower profits and much higher taxes. On top, they track the earnings of those who signed the petition, and show marked drops in income. Overall, it seems that opposing Chavez is not for the faint-hearted. Some findings puzzle me a bit - patriota firms had very high capital productivity before the referendum, and then see a fall. This could be consistent with a story that has a fringe of firms outside the big business consensus locked out of credit markets; opposing the referendum and supporting the president might have relaxed this credit constraint, and led to a more optimal allocation of capital. Be that as it may, Ted and Co. show that labor allocation becomes MUCH worse after the referendum fails. I like the paper in a number of dimensions, and perhaps not least because I have a paper of my own (joint with Tom Ferguson) on the returns to affiliating with dictators.

Applications for the first incoming class of the ITFD master

We just counted the total applications up to the end of April of this year - we got 65! About a year ago, Jaume, Fernando, Antonio and I were just kicking the idea of launching this program back and forth. Naturally, we wondered if people would really want to come. Weren't we too ambitious, thinking of a stand-alone program? Would the reputation of CREI and UPF pull enough people in to make the course viable? I don't think even one of us predicted we would get such an overwhelming response. And it's not just the number - it's the quality. We are going to have exceptionally well-qualified students from every corner of the globe. If my own graduate student days taught me something, it's that you learn an awful lot from your peers. It's in that sense that I think this is such great news. We have been quite selective and had to turn down a lot of applicants who unfortunately did not meet our standards; now we have to convince the ones that we admitted that joining ITFD in the fall is the right move.

Sunday, October 19, 2014

The Leaves of Summer

If you grew up in Northern Europe, as I did, falling leaves produce an instant emotional reaction. Perhaps you feel a tinge of sadness -- the summer is over, another year is more than half-gone, the days are getting shorter. I have spent many a year in Spain, but I am still confused by the crunching of leaves under my feet that comes with high summer. The trees in Barcelona at least just give up on all that greenery sometime between mid-June and late July. For several weeks, while temperatures are around 30 degrees or more, the streets are brown and yellow with leaves. I guess that in a way, we get the best of all possible worlds -- all the sweet nostalgia of autumn, and the heat of high summer.

Recessions and Civil Wars

Antonio Ciccone, one of the steering committee members of the ITFD program, has recently been doing work on the determinants of civil war. We know that recessions often coincide with the outbreak of civil conflict. What is not clear is the direction of causation - it could be that countries on the brink of a breakdown of civic order also end up with a drop in output. Antonio uses variations in the price of international commodities, such as coffee, to pin down causality. In work with Markus Brückner that uses data on Subsaharan Africa, they conclude that the link between recession and civil war is indeed causal. The effect is strong in autocratic regimes. Democracies, on the other hand, do not experience the same increase in civil conflict when recessions bite. You can see Antonio talk about his research here.

Summer Readings

Forward-looking members of the incoming ITFD class of 2009 are asking me for recommendations on what books to take to the beach, to prepare themselves for the courses ahead. Wow! I like it when the students ask for more even before they arrive. We must have done something right with our admission decisions.
My suggestions would be [ordered from dead-serious preparation to more entertaining and stimulating]:
  1. Krugman-Obstfeld; International Economics: Theory and Policy
  2. Krugman, Peddling Prosperity: Economic Sense and Nonsense in the Age of Diminished Expectations [a bit dated now, but incredibly well-written]
  3. Taylor-Obstfeld, Global Capital Markets: Integration, Crisis, and Growth
  4. Eichengreen, The European Economy since 1945: Coordinated Capitalism and Beyond [my favourite economic history book of the last year]
  5. Seabright, The Company of Strangers: A Natural History of Economic Life

Bubble mess and monetary policy

Am I the only one who is confused? We have debated for about a decade if monetary policy should take asset prices into account - going back to Greenspan's ""irrational exuberance"" speech at least. And very clever people, like Bernanke and Gertler, wrote clever papers arguing it's a bad idea. I looked at what happened when a central bank intervenes to bring down the stock market - as the German central bank did in 1927 (published here). My conclusion was that it was an unnecessary disaster - there was no bubble, and the intervention that sent the German stock market down by a quarter by year-end did real damage to the economy. Capital-raising by undercapitalized firms came to an end. Investment turned down the year after, and weakly-capitalized firms went under in the Great Depression much more quickly. My conclusion - targeting asset prices can be seriously bad for your economic health. Only ex post do we know if something is a bubble. Bernanke, when he became governor of the Boston Fed, mentioned my research in his first speech, concluding that interventions are a bad idea.

Well, a few years on, I am no longer quite sure. Let's take the different points of the ""no intervention"" idea in turn: a) you never know if it's froth b) even if it is, intervening may not work c) if it does, the collateral damage may be awful. True, if I say bubble, you can say ""bad model"" - every claim that prices are too high comes from some model, and the models can be pretty poor. But that doesn't mean that we have no idea about what periods of overpricing look like. If you see P/E multiples north of 30 (or infinity - no earnings, as on NASDAQ), or rental yields around 2% (Spain today), the prior should be that these are abberrations. I am also no longer so convinced that nothing can be done.

It's probably a bad idea to use interest rate policy, but there are other means. Instead of using interest rates, we can think about time-varying regulatory minima. Capital requirements could be made to fluctuate counter-cyclically, as per the Goodhart proposal. In housing markets, for example, we could use a simple rule that says ""raise the down payment requirement every time rental yields dip below 5%"", or something to that effect. While we have to live with a one-size-fits-all interest rate policy in Europe, mortgage markets are still national (try to get a German bank to finance your house in Spain - fat chance). We should encourage active guidance for national mortgage lenders, to take the different cycles into account. Finally, I think that stabilizing the prices of assets such as housing is beneficial overall -- there is much less risk of overshooting than in shares, and the welfare costs of pricing an entire generation out of adequate housing are phenomenally large. Next time you think ""disaster"" when the IMF tells you that Spanish house prices are set to fall by 20% or thereabouts, think of all the happiness it will buy for families that are living in cramped conditions. Combine that with very ugly redistributive implications of house price bubbles, and the pain of thousands of households defaulting on their mortgages and losing their homes, and I think we should consider a experimenting with better intervention just a little bit. Now, if only I could think of a good equivalent to raising the down payment in housing for equity markets...

Exchange Rate Specialist to Present in Spring 09

I have been called many things... tear gas and ""chicken""

but not a Jew. Nico Voigtländer and I wrote a paper on the persistence of anti-Semitism which is getting a bit of press. Now a pro-Palestinian website has decided that writing about pogroms is a sure sign of us being both Zionists and Jews. Needless to say, I am rather flattered that someone should think me a member of a tribe that has consistently produced more outstanding intellectuals and artists than any other group I can think of. And equally needless to say... neither Nico nor I are in fact Jewish. We just think that extreme hatred and an inclination to group violence are really interesting issues and deserve to be studied seriously, in a historical context, and that anti-Semitism is a particularly important example in this regard.

Another big problem with cross-country growth regressions...

as explained by Tim Harford.

Saturday, October 18, 2014

Getting in - a tough act

We were kind of amazed by the number of students that applied to our program, in year 1. We got to pick and choose from a very wide range of applicants. Now that the numbers are more or less in, we tried to see how selective we had been -- and it turns out that ITFD this year was the toughest master at BGSE to get into. We rejected more than 35% of applicants (in addition to those who didn't satisfay basic criteria), being almost twice as tough as the next-most selective program. This is how we compare:

program rejection rate
ITFD 37%
CompMR 21%
GPEM-Econ 20%
MESI 18%
Macro 16%
GPEM-Fin 9%

tear gas and ""chicken""

Nathaniel Rothschild allegedly said that one should ""buy to the thunder of cannons and sell to the sound of trumpets"". I guess, the modern-day version would be to trade to the smell of tear gas, which has been wafting across Athens recently. Closer to home, in the beautiful park next to the university that houses the Catalan parliament, ministers and MPs were surrounded by Spain's own indignados movement... which made it just that touch harder to be in the office on time this morning, with riot police blocking many of the streets leading to the campus. It was pretty calm as things go, with no violent clashes, but the image of ministers being ferried in by helicopter reminded me a bit of President De La Rua's last day in office.

Back to the issue of trading: Even popular financial advice sites like marketwatch are now offering suggestions on how to make $$$ from a coming Greek default. I would say, not so fast... we are mainly witnessing a public game of ""chicken"" between the German finance ministry and the ECB. Some of this is squarely aimed at the wider public -- ""look, we are trying to get tough with private creditors"". While the EU has an amazing talent to screw up things, I would say -- uncharacteristically, as those who know my pessimistic side might think -- that this one is too important to go wrong, and that a deal will eventually get done, with no more than a bit of a Vienna-style initiative imposed on the creditors. Now, if only the Greek government will actually stay in office for long enough to see through the implementation of the next round of austerity...

Germans and the bailouts... Michael Lewis/Antonin Scalia edition

In his How to Write A Sentence, Stanley Fish rightly spends a few pages lauding and analyzing Antonin Scalia's beautiful sentence:

Interior decorating is a rock-hard science compared to psychology practiced by amateurs.
I was reminded of it because a friend sent me the link to Michael Lewis's ""It's the Economy, Dummkopf"", published by Vanity Fair. The abstract reads:

With Greece and Ireland in economic shreds, while Portugal, Spain, and perhaps even Italy head south, only one nation can save Europe from financial Armageddon: a highly reluctant Germany. The ironies—like the fact that bankers from Düsseldorf were the ultimate patsies in Wall Street's con game—pile up quickly as Michael Lewis investigates German attitudes toward money, excrement, and the country's Nazi past, all of which help explain its peculiar new status.
I normally like Michael Lewis's writings, from Liar's Poker to The Big Short. This one, however, is a very long amalgamation of stereotypes, with almost no insight mixed in -- starting with the entirely non-novel idea that German potty-training (too early) is somehow related to the countries sinister ways (always lurking behind the corner) to the allegedly ordered and disciplined approach to anything. It's basically pop psychology (Germans are hung up about shit, and hence do the most awful things, from the Holocaust to buying subprime debt) combined with what every newpaper-reading halfwit already knows about the European debt crisis (only the Germans thought EMU was serious, and that rules meant something; the Greeks and everyone else who borrowed more than they now want to pay only did what was natural). Page after page, from the description of German finance ministry officials to the Autobahn, Goering's Air Ministry, and the Reeperbahn, Germans are portrayed as goosestepping automatons animated by the busy executive's version of From Dr Caligari to Hitler. & nbsp;

You can debate if you want to devote 17 pages to predictable nonsene, writing or reading. I don't think Lewis is wrong about the notion that there is something like national character. He just gets it wrong, or at least 90% of it, after his multi-day fact-finding mission to Germany. What gets me the most is how smoothly Lewis skips over the disorderly, get-it-done, anarchic side of my countrymen - with all its good and bad sides. Try to have your flight cancelled in Frankfurt, and make it to the counter... in the UK, they would queue. In Germany, you will have one big melee, people getting their elbows out, fighting to get onto the next plane. It's a kind of can-do-anarchy, disorderly, results-oriented, each man for himself, and not very rule-bound. & nbsp; & nbsp;It isn't always pretty, but it's ... very different from Michael Lewis's image, which seems to come straight out of a 1950s Hollywood war movie. & nbsp;Tax officials in local offices (whose name and a number appears on your tax notification) can make decisions on fining you, or taking that fine off. Every year in my classes, when I ask questions that require people to think outside the box, the German students do much better than many other nationalities -- the school system emphasizes the exact opposite of rote learning, from an early age. In days of old, the German army, despite being an instrument of a deeply anti-democratic state, used ""empowerment"" before the term was invented, pushing independent, important decision-making down to the level of sergeants and privates (which made for very high efficiency, as analysed in Martin van Creveld's wonderful Fighting Power). And several German classmates of mine are I-bankers... and doing pretty well as far as I can tell.

What does all of this mean for the EU debt crisis? To be honest, I think national character has very little to do with it. Germans behaved much like the Greeks in the interwar period, borrowing right, left, and center, building public swimming pools with the proceeds of bond issues, and then defaulted on ... those (stupid) Americans. Much of this is eloquently described in what is still the best book about the Weimar economy & nbsp;-- Harold James's & nbsp;The German Slump: Politics and Economics 1924-1936. & nbsp;No need for potty-training fairy tales here. & nbsp;Back then, in the late 20s, American financier J.P. Morgan Jnr. lost faith in German borrowers, in the way that Germans are now updating their beliefs about Greeks. His comment? & nbsp;""...Germans are a second-rate people"".

Blogging the new M.Sc. in International Trade, Finance and Development

I thought it would be a nice idea to have a blog where I can tell people about the progress we are making as we move towards the launch of the new Master's at UPF in International Trade, Finance and Development. It's February now, almost a year after Jaume, Fernando, Antonio and I started to toy with the idea of launching this. Another six months, and we'll be "going live"! The process from idea to approval and launch of the program was short but pretty intense. Two weeks ago, we presented the new program the BGSE open day in Barcelona. Fernando's presentation seems to have generated quite a bit of interest.

Countercyclical Student Demand

I teach a summer course in the CREI Macro Summer School on financial crises. It is going to be a mix of theory and empirics, of looking at the sub-prime crisis and the South Sea bubble, plus everything we know about credit booms gone wrong (the chart on the left shows US GDP relative to trend1890-1940). Last time I taught something similar was two years ago, in the summer of 2006. I had about 15 students or so. It was fun and very interactive, the way I like to teach, but I couldn't help thinking that perhaps, it would have been nice if a few more people had signed up.
Today, the secretary in charge of registration rang me and asked if I wanted to limit registration. Limit registration? I thought I had trouble hearing. She proceeded to tell me that I had 41 students, and that applications were still coming in. Of course, recent minor hickups in world markets may have a thing or two to do with this. I look forward to having a good crowd of central bankers, private sector analysts, and PhD students taking my course. It seems that the most countercylical business you can run is a summer university dedicated to financial and other crises...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...

Search and Cycles

Last week, Robert Shimer from Chicago came to give the first of the CREI Lectures - a new series that CREI is organizing every other year, in association with Princeton University Press. The idea behind the series is to get ""young seniors"" who have already had a big impact on the profession to come to Barcelona, and to summarize a research area that is still active. Robert did a fantastic job, giving 3 two-hour lectures on labor markets and the business cycle. For all those who think that economics professors have a cushy life, flying from one conference to the next, Shimer provided the counter-example -- having attended a conference in the South of Portugal the day before, he had to leave at 3 am on the first day of the lectures to make it here on time. I am sure that the editors at PUP will sleep more easily in the knowledge that there is already a 100+ page manuscript on his webpage with the lecture notes.

Friday, October 17, 2014

The reigns of power...

pass to Fernando Broner at the end of the month - I am stepping down as the director of the ITFD Master. Fernando has been the deputy director for most of the last 3.5 years. Time whizzed by rather quickly -- it seems like yesterday that we planned the program in 2007, and started in 2008-09 with 18 students. In September, we will probably have 40 or so, from all over the globe. Less apparent from the outside, perhaps, is that we have a bit of a special governance structure, with a steering committee of four academics (Fernando, Jaume Ventura, Antonio Ciccone, me) setting the broad academic path, and the director being in charge of implementation and day-to-day running of the program. From my perspective, the structure has worked well, and fine-tuning over the years has made the master a lot stronger.

One of the pleasures of the job is keeping in touch with alumni, and following their trajectories. Just recently, I heard from Antonella Liberatore (who now has a permanent position at the Economic Research and Statistics Division of WTO in Geneva) and Jasper Hamerlynck (VP at the Institutional Equity Division of Morgan Stanley). If any ITFD students are reading this - do drop us a line, or even better, drop in when you are in town!

if this is private sector pain...

I want some. The EU finally got its act together: There will be a selective default to make the private sector pay... but the banks and insurance companies that agreed to the bond swap are not the only private investors out there. There was news that vulture funds were buying Greek bonds for 50 Eurocents on the € in early July, and now, the EU deal is making some people out there a lot better off. Some of the price action today:

Greek Eurobonds, inflation-indexed, 2003 (25) + 28.9%

EO-notes 2009 (19) + 21.1%

EO-notes 2009 (14) + 14.4%

...and so on, across the entire maturity spectrum. The rally started at a very low level, as we all know, and the 2009(14) for example is still trading at 63% of face value, for a yield to maturity of 24.9% p.a. That's down from over 35% a few days ago. Over the last year or so, every additional aid measure has been greeted with a relief rally, only to be followed by an ever-deeper slump. Will this one come to stay? I think it just might. Once markets factor in the lower bond yields, debt sustainability will look a lot better. That justifies lower yields, and so on. The mountain of debt hasn't gone away, but paying for it will have become just that much easier so that, together with the EU generously sprinkling aid on Greece, an outright default might not be on the cards after all...

IBM Watch : The making of a champion: Deep Blue

Interesting brief column on chess, Garry Kasparov, and IBM's Deep Blue computer.

IBM Watch : The making of a champion: Deep Blue: "The making of a champion: Deep Blue
IBM is a vast subject, and even an expert is bound to have a gap or two in his or her knowledge of the company. One of such gaps for me was in just how the so-called "Deep Blue" computer was programmed with the necessary expertise to beat world chess champion Garry Kasparov.

During a recent visit to IBM's Somers, New York, offices, I met with Bill Pulleyblank, vice-president of the center for business optimization for IBM Global Services. His job is to make connections between IBM Global Services and its clients, and IBM research.

Before he took his present position, Pulleyblank was the brains behind Deep Blue, if that's the right way of putting it. And to hear him talk about it is to understand that computers are the object of passion in their creators in much the way that sportscars are in theirs.

Pulleyblank recounted how Kasparov beat Deep Blue in their first match. The computers' designers took the lessons of the defeat back to their workshop and made some crucial tweaks."

Pictures from CREI

One of my important functions at CREI (you see, we all wear lots of hats here) is to act as the ""official"" photographer. The new building called for a small photo-shoot, and so did Robert Barro's visit last week. He gave two talks about his recent work on the frequency and impact of macroeconomic disasters. In particular, he argues along the lines of Rietz (1988) that disasters are common enough to explain why risky assets such as stocks yield as high a return as they do - what some call the ""equity premium puzzle"". The picture in the upper left shows him in conversation with Jordi Gali, director of CREI, during a recent lunchtime talk. You can see some more pictures of the new CREI building and of my beautiful colleagues here.

UNDP internships

As part of our focus on providing vocational training and real-life applications of classroom insights, we are actively seeking out internship opportunities for our students. Since ours is a one-year program, this is not the standard 'spend the summer' between years 1 and 2, and we try to be creative in what cooperations we pursue. As it happens, we've been in touch with the UN Development Program's International Poverty Center in Brasilia. Their Research Programme on Cash Transfers and Social Protection as well as their Communications and Outreach Programme are looking for interns. We've arranged for them to cooperate with us in making these internship opportunities available to one or two ITFD students per year.