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 — Finance

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

The Return of Industrial Policy and the Incorporation of Time into Economics

The port of Shanghai from WikiCommons

Dani Rodrik recently had a commentary where he argued that industrial policy is returning to the main stage.  Within the Tallinn School (i.e. the economic research associated with the Technology Governance program in Tallinn) active government policies are seen as essential in order to create the ‘virtuous circles’ of high value-added economic activities. Rodrik (not associated with Tallinn), argues that industrial policy is  (i) “a state of mind rather than a list of specific policies” (ii) “relies on both carrots and sticks” and (iii) “industrial policy’s practitioners need to bear in mind that it aims to serve society at large” As Erik Reinert has shown, history abounds with  examples of how almost every successful economy has at some point employed some kind of industrial policy. Skeptics usually reply, yes, but what about all the failures?   By no means is industrial policy always effective and how well it works in a specific case depends on an inordinate amount of variables. Importantly, it is “a state of mind” and one must experiment to see what works. I would rather ask: what is the alternative, if industrial policy is the only way we know to have worked? Recently, the World Bank has come off as a bit more positive towards industrial policy, but their understanding is quite narrow:

“If industrial policy is nothing more than government agencies organizing conferences with private sector players, I’m all for it. If we include in the definition of industrial policy the supply of classic public goods like infrastructure and education in coordination with the needs of the private sector, I am still fully in support. However, I tend to part ways when the state gets involved to the point of picking winners, which must inevitably be the case when more heavy-handed interventions are put on the table. ” from the World Bank Private Sector Development Blog.

Industrial policy is more than supplying basic infrastructure, but still it is not about picking winners. One aims to develop specific sectors of the economy, calculating that the spillover effects will benefit the economy as a whole. The Asian economies, of India and China,  but also Brazil are recent examples of how industrial policy has been implemented successfully. But Chris Blattman points to an interesting example of how it has been carried out for shoe manufacturing in Ethiopia.

From my experience, how one looks at industrial policy depends a lot on one’s view of economics: In the first post here at Evolution-Revolution, we argued that “understanding the dynamics that propel the economy into the unknown should be at the core of economics, rather than optimizing a static economy that only exists in the abstract.” As such if one believes the most efficient allocation of today’s resources is essential one quite naturally comes to the conclusion that any form of intervention is inefficient. By incorporating the dimension of time however, one can more easily conclude that its worth sacrificing a little efficiency today for what might be a much more prosperous tomorrow.

May 27, 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.

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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

Norwegian Government Pension Fund dumped PIGS-bonds ahead of trouble

The Norwegian Government Pension Fund, managed by Norwegian Bank Investment Management (NBIM) sold off more than half of it’s 133 billion kroner position in Greek, Portugese, and Spanish government bonds during 2009. The funds chief executive, Yngve Slyngstad, explained that while Eurozone government bonds in 2008 were priced as if they gave risk-free returns, “we said they were more like return-free risks”. Well done, Nassim Taleb would have been proud – there are arguably no such things as risk-free returns anyway (at least not in Southern Europe).

Yngve Slyngstad, not yet fifty years old, started his career as a junior researcher at Norges Bank at the age of 31 after completing a whopping four Master’s degrees in Law (University of Oslo), Economics (UC Santa Barbara), Business Administration (NHH) and Political Science (University of Paris, Sorbonne), spending years backpacking around Asia, and living by himself in the wild and weather-torn Northern Norway reading Wittgenstein. Needless to say, we here at Evolution-Revolution think this is a pretty awesome guy.

May 7, 2010   2 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 [Read more →]

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

A treat: For your reading pleasure

Some recent and interesting articles, all very recommended:

An excellent article on zoophiles, animal lovers – there is more to human sexuality than I would ever have expected and somehow horses are particularly attractive

Steve Randy Waldman explains why measuring bank balance sheets (capital) is impossible

A report from Morgan Stanley on the emerging global trends of internet usage, especially mobile

Dani Rodrik on the return of industrial policy – governments can pick winners

How to make a  freestanding handstand Push-Up – my goal for the next year

Stiglitz on an agenda for reforming economics at the newly established, Soros-financed, Institute for New Economic Thinking (video)

April 15, 2010   No 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