To inform, confuse, and enlighten; in economic matters as well as philosophical ones. Jørund Aarsnes and Stephan Jensen write on economics and the human condition.
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Category — Recessions/Crises

The Future of Capitalism (and economics)

The opening session today in the ongoing OECD Forum 2010 was on the future of capitalism, where economic historian Anatole Kaletsky argued that “we’re entering a new period of pragmatism, when ideology will give way to a more “common sense” approach.” Arguably, this is not such a radical notion; the financial crisis has shown in a dramatic way that there have been some serious cracks in what has commonly been accepted as “good” economic policy. It is easy to blame greed and carelessness in the financial sector, but that hardly goes to the heart of the problem. At the end of the day, even if the greed and carelessness of a few “evil bankers” really is to blame, policy has to change if the economic structures have been conducive to making it cause despair for millions of people.

Aside from highlighting dysfunctional economic structures and the need for reform, a very immediate consequence of the crisis is that Governments have been [Read more →]

May 28, 2010   1 Comment

Vulnerability of Open Capital Flows: IMF and WB return to Ragnar Nurkse

According to the Washington consensus, open international capital flows were essential to developing countries in order to achieve cheap financing and efficient allocation of resources. In particular, the IMF and the World Bank were stalwart defenders of floating the exchange rate and letting the market forces determine the inflows and outflows of capital of a country.

Classical development economists, such as the Estonian Ragnar Nurkse, pointed out the fragility of relying on external financing as early as 1944 and paradoxically laid the basis for the founding of the Bretton Woods institutions (IMF and World Bank). With Bretton Woods came the managed flow of international capital, but which collapsed in 1968 and led to subsequent liberalization. In receiving aid and loans from the World Bank and IMF, developing countries were pressured to liberalize and open their economies to foreign investors.

After the Asian crisis of 1997, more attention was paid to fragility that arises when foreign investors withdraw capital and local currencies collapse. The problem is especially acute when locals have taken up loans denominated in foreign currencies, thus the depreciation causes their debts to sky-rocket. But it is first recently that mainstream economists have argued for letting developing countries control the capital inflows.

I find it very warming that both the IMF and World Bank seem to have changed tack, and returned to their more Nurksean / Keynesian roots. In this very interesting blogpost, Jamus Lim of the World Bank presents data that out of 189 major capital account liberalizations since 1970, at least 154  have led to a severe financial crisis!  He concludes by quoting a recent IMF staff paper.

Finally, the the selective use (PDF) of capital controls in a broad policy mix may be useful in helping moderate surges in portfolio inflows, especially when they are directed toward debt rather than equity. “

Striking words when coming from Washington indeed.  More depressingly though, Estonia seems to have forgotten the lessons from its premier economist.


If you are interested in the topic of international financial fragility, the excellent work of  Jan Kregel and Hyman Minsky is recommended.

May 27, 2010   1 Comment

“Betting Against Home Owners” is Betting For Affordable Housing – A case for Goldman Sachs doing “God’s work”

In the still ongoing political smear campaign against Goldman Sachs conducted by the Senate Subcommittee on Investigations, the latter has been particularly enraged by Goldman Sachs’ supposed “bet against home owners”. That is, because Goldman Sachs was net short exposure to mortgage-related securities, policy-makers have been arguing that the bank was contributing to pushing prices down, and in an evil way benefiting from the ruin of hard-working regular Americans.

Now, first of all, I am unsure about whether Goldman’s supposed “big short” really had a significant impact on housing prices. Arguably, the collapse of the U.S. housing market in 2007-2008 was a necessary consequence of unsustainably rapid price increases brought about by horribly easy credit in the years before, and would have been just as painful for regular hard-working Americans regardless of whether Goldman had a net short position or not. One could perhaps even argue that the crash would have been worse if Goldman had not been as hedged as they were.

Above: Charles Ponzi, the model banker, according to the Senate Subcommittee on Investigations

Nevertheless, it is interesting for the sake of argument to assume that Goldman’s supposed “big short” did in fact push down the price of property, which seems [Read more →]

May 9, 2010   7 Comments

Throwing Goldman Sachs to the Lynch Mob – Politics as usual, but hardly rule of law

As a part of its 18-month long inquiry into the causes of the financial crisis, Senate Homeland Security and Governmental Affairs Investigations Subcommittee on Tuesday summoned Lloyd Blainkfein and several other senior Goldman executives to answer for their role in causing the financial crisis.

According to the subcommittee, it has [

April 29, 2010   2 Comments

NBIM, ‘Alternative Investments’ and so-called superior returns

We’ve previously endorsed the Norwegian Government Pension Fund’s  (GPF) approach to enhancing global corporate governance. Recently, NBIM – the manager of the fund – was also instructed to allocate about five percent of its portfolio into unlisted real estate. I consider this  decision quite bad for the following reasons.

Property investments are notoriously illiquid. Currently the reserves of the GPF is used to cover the domestic fiscal budget deficit. As wee have recently seen, the deficit and need for fiscal expansive policy will usually be the highest when liquidity is the lowest. Illiquidity  implies below real value prices and as such NBIM will always be selling its real estate investments when prices are the worst (this is in a longer term perspective when oil revenues are actually smaller than the budget deficit)

It was the Yale endowment fund under management by David Swensen that started advocating that long term investors such as the GPF should allocate more of its investments [Read more →]

April 23, 2010   2 Comments

If you were wondering whether Norway has been affected by the “crisis”

The following were (seriously) the top three headlines last night on the RSS feed I get from Dagens Næringsliv, Norway’s biggest business and economics newspaper:

(Lang, lang rekke med gode viner)
(Tiltrekkende syrah-viner)
(Bortførte finansrådgiver)

That last link is foreign news, of course, about a something that happened in Germany. So far, it appears we are still living the good life.

March 24, 2010   2 Comments

Why Iceland is Doing the Right Thing by Not Paying Britain and the Netherlands

Above: Icelandic bankers marketing a new structured derivatives product to eager British and Dutch clients.
(Published under a Creative Commons licence by Eugene of Norway on Flickr)

I was recently reading some older posts on Andrew Clavell’s Financial Crookery, and came across a post from early January on the decision made by Iceland’s President Ólafur Ragnar Grímsson to let the so-called Icesave bill (with which Iceland agrees to pay back Britain and the Netherlands the deposits made by its citizens that were lost by its banks) be subject to a popular referendum that it surely would not survive. It didn’t, on March 6th 93% of voters wanted it dead, compared to a diminutive 1,6% who wanted Iceland to [Read more →]

March 23, 2010   4 Comments

Lehman Brothers’ Banzai Charge – A technical note for the layman

Above: “I think this is a very good death”, Lord Katsumoto tells a perplexed Tom Cruise, soon to become The Last Samurai

Like Custer at Little Bighorn, Lehman Brothers bravely removed the possibility of surviving by means of a tactical retreat in case they were befallen by a great host of hostile Indians by making use of the now infamous repo 105 contracts. Andrew Clavell, author of Financial Crookery, posted an interesting article on how and why they work here. Especially recommended for those of our readers who aren’t working with or haven’t studied a lot of finance or derivatives.


March 22, 2010   No Comments

North Korean Incentive Structures for Economists

A saying goes that “acceptable unemployment is defined as the level at which the Government economist writing the report still has a job.” Certainly, it can be argued that in most countries, economists tend to be quite insulated from the consequences of the policies they propose. Apparently, this is not the case in North Korea. After a major currency reform last year failed completely, the high-level economist Pak Nam Gi, former finance director for the North Korean “Worker’s Party”, was convicted of treason for “ruining the national economy as the son of a big landlord who infiltrated the ranks of revolutionaries” and executed by firing squad.

The policy environment leading the execution of the North Korean economist, who was most likely a scapegoat, is hardly one that should be emulated. However, I can’t help but think about how the U.S. or Europe might have looked in the wake of the financial crisis if a more North Korean approach had been taken during the witch-hunt that followed it (and is still ongoing).  Could you charge Richard Fuld with treason for over-leveraging, or Eugene Fama for trying to make people think that capital markets are efficient?. Certainly one would expect the emergence of a slightly more risk-averse financial sector.

For a more realistic discussion about discretionary power being given to regulators, check out The Epicurean Dealmaker’s recent post about fire alarms, strong men, and big axes.

Thanks goes to loyal Evolution-Revolution reader and good friend Jan Petter Janssen, creator of Developing Trader, for the tip about Pak Nam Gi.

March 21, 2010   No Comments