Moving to Wordpress

I've been mening to move to Wordpress for ages but I've been very busy lately and it took me a while to pick the right domain and set everything up correctly. I've now made the switch and I'm very happy with it. All my future writings will now be at can-sar.com. I migrated my new RSS feed to point to that new destination and all of you who subscribed to this blog recently should have been moved over automatically. Those of you who still subscribe to the old feed or read the blog on the web, please go to the new location.

The reasons for my switch is that I wanted more flexibility, more features (trackbacks, delayed posting, better categories, ...), my own domain, and a more professional look. Hope to see you guys on the other side!

Let in the Smart Masses

I generally tend to be pretty skeptical of Tom Friedman's writing, hoping that he would think about some of the things he says a bit more critically before putting them out to the public as fact, and I don't agree with much of the (admittedly partially satirical) tone of his last column, but he is 100% right on the core conclusion:

We live in a technological age where every study shows that the more knowledge you have as a worker and the more knowledge workers you have as an economy, the faster your incomes will rise. Therefore, the centerpiece of our stimulus, the core driving principle, should be to stimulate everything that makes us smarter and attracts more smart people to our shores. That is the best way to create good jobs.

A government-funded venture capital fund might not be the right solution (that's a longer question I don't want to get into now) but he's right - this is also the time to get smarter, more agile, and more productive.

We don’t want to come out of this crisis with just inflation, a mountain of debt and more shovel-ready jobs. We want to — we have to — come out of it with a new Intel, Google, Microsoft and Apple. I would have loved to have seen the stimulus package include a government-funded venture capital bank to help finance all the start-ups that are clearly not starting up today — in the clean-energy space they’re dying like flies — because of a lack of liquidity from traditional lending sources.

Newsweek had an essay this week that began: “Could Silicon Valley become another Detroit?” Well, yes, it could. When the best brains in the world are on sale, you don’t shut them out. You open your doors wider.

Abolish the Penny!

I would guess that virtually everyone living in the US has at one point or another been annoyed with the penny - a coin that is worth virtually nothing, hard to get rid of, and that tends to somehow accumulate in one's wallet rather quickly. Greg Mankiw has been arguing for abolishing the penny for a while and several stores in Concord, MA have recently been trying the idea. While this is obviously not a very serious issue I do think that it's a very sensible one and I think it would change things for the (ever so slightly) better:

“Being right across from the train station, we have long lines before trains leave and pennies make it worse,” said Fersch. “Further, there is a lot of lugging them from the bank, dropping them, not being able to reconcile register receipts and so on. Plus, mining zinc is an environmental nightmare, and it costs the government more to make pennies than they are worth. Finally, they have minted thousands for every man, woman and child. Where do they all go? If they were truly worth anything they wouldn’t end up in coffee cans, vacuum cleaners or sofas. It is simply a tax, which raises no revenue.”

Finland (a country generally very open to innovative ideas) followed by the Netherlands have already abolished both the 1 and 2 Euro cent coins with great success:

A survey in 2004 found a majority of citizens wanting the one and two cent coins to be withdrawn across the eurozone, support being highest for the withdrawal of the one cent coin. However, citizens in Germany were most vocal in the support of keeping the coin. At present, the three copper coins together represent 80% of all new coins minted in the eurozone.

Having visited Finland twice I have to agree that this was extremely convenient, except when trying to get 1 and 2 Euro cents for a collector friend and having to spend 10 Euro on a set of coins worth less than 4 Euro because the 2 coins are now so hard to find.

When Genius Failed - The Rise and Fall of Long Term Capital Management

I just finished When Genius Failed - The Rise and Fall of Long Term Capital Management by Roger Lowenstein and as someone who was not following financial news back then it is very interesting to read it now given the events of recent months. The risks of excessive leverage, the increasing appetite for risk taking during prolonged economic upswings, and the lack of understanding of complex derivatives all played a major role in both the collapse of Long Term Capital Management and the current crisis:

The system of disclosure that worked so well with regard to traditional securities has not been able to do the job with respect to derivative contracts to put it plainly, investors have a pretty good idea about balance sheet risks, they are completely befuddled with regard to derivative risks.

Another common element has been Alan Greenspan's refusal to step up regulation, even after witnessing several failures that could have destabilized the entire financial system:

Greenspan's more serious and longer-running error has been to consistently shrug off the need for regulation and better disclosure with regard to derivative products. Deluded as to the banks' ability to police themselves before the crisis, Greenspan called for a less burdensome regulatory regime barely six months after it.

His recent admission that he found a "flaw" in his system was widely talked about but even know Greenspan is unsure of how "significant or permanent" this flaw is. His argument that the investors financing LTCM were putting their own money at risk and would therefore implicitly regulate it by only lending to it if it were credible is patently absurd - thinking that a market will adequately price a particular asset is one thing, thinking that a relatively small number of investors will always be able to assess the risk of a complex (and in the case of LCTM secretive) counterparty is quite another. Furthermore, it should also be clear that tolerance of risk increases when investors have not suffered major losses for a number of years and that this has historically led to excessive risk taking. LTCM itself believed that the markets were not rational in the short term and nobody should believe that individual financial institutions will be rational in their lending. As Warren Buffet points out Meriweather, Haghani, Hilibrand, and the crew had all invested almost all of their own money and still made a colossal misjudgment.

National Governments, the IMF, and Blame

I was just reading a little bit about the Greek Economy and wanted to highlight the following observation about the IMF that ends up giving it a bad name for government's mistakes:

One key feature in all this woe has to be a political process that is extremely ineffective, and driven by the fact that no one likes to hear bad news, and that the last thing a politician is able to say is tighten-up your belts now lads and lasses, we are in for a rough ride. But isn’t this just how the IMF gets such a bad name for itself, since the IMF doctors get called in just where the domestic political process breaks down, and where local politicians haven’t the ability to stand up in front of their citizens and say, it’s going to have to be like this, I’m afraid. Isn’t this what just happened in Ukraine, Hungary and Latvia? And then people say, those “nasty folk” at the IMF, they cut pensions everywhere they go, and wages are down 8% in Hungary, and 15% in Latvia once the IMF get to run the show. That is the IMF make for a convenient scapegoat, but people seldom ask themselves why wages needed reducing, or why there is no money to pay the pensions.

Granted, there are other ways to reduce a deficit and the IMF might be biased on how it wants to cut deficits but the general point stands.

Should we have let them fail?

In a recent WSJ article Oliver Hart and Luigi Zingales suggest that since the main reason behind bailing out the likes of Bear Stearns and AIG because of worries about counter-party risk the government should have instead guaranteed those obligations:

[I]t suggests that the best way to proceed is to help third parties rather than the distressed company itself. In other words, instead of bailing out AIG and its creditors, it would have been better for the government to guarantee AIG's obligations to J.P. Morgan and those who bought insurance from AIG. Such an action would have nipped the contagion in the bud, probably at much smaller cost to taxpayers than the cost of bailing out the whole of AIG. It would also have saved the government from having to take a position on AIG's viability as a business, which could have been left to a bankruptcy court. Finally, it would have minimized concerns about moral hazard.

I'd be very curious to hear more about what others think about this proposal and how workable it would have been. How exactly would the government have guaranteed some of the complex obligations and what kind of risks would it have taken on by doing so? Would this have assuaged investors' concerns?

Lots of Reading, Little Blogging

During the beginning of the Financial Crisis I spent virtually all of my reading time focusing on current events and reading articles and research papers online. I now feel I have a much more solid background on what is going on and am focusing on reading books again and while I still keep up with everything that comes in through my RSS feeds things have definitely slowed down since the beginning of the crisis. I do have several unfinished blog posts that I will post in the days ahead and will update more regularly again once I get caught up on some reading that I had to delay in favor of reading online and blogging.

I recently finished George Soros' The New Paradigm for Financial Markets which was interesting as an insight into Soros' thinking (more about that in a later post) but did not really give me any new insight into the economic troubles. After that I decided it was time to make my way through all the China books that have been sitting on my shelf, starting with the Chinese Economy, both The Chinese Economy: Transitions and Growth and Rural China Takes Off were excellent reads that I recommend highly, Grassroots Political Reform in Contemporary China, a collection of research studies on reform was less interesting.

Next up were less academic accounts of China, China Inc. and China Road, the former of which was annoying and not very deep while the latter was beautiful and insightful. I was reading them both at the same time (one on audio, the other on paper) and it really made me realize how many 'popular books' try much too hard to seem important and be liked by the reader and thereby simply become exaggerated and boring. Rob Gifford, author of China Road, never tries to force you to appreciate his work but instead gives a wonderfully natural and fun to read account of his journey along Route 312. Now I'm reading The Cambridge Illustrated History of China and next up is Chinese Civilization to be followed by 3 books on Chinese Foreign Policy.

On the fiction side I recently read A Passage to India by E.M. Forster which I loved and which made me want to go back to India again. I was horrified and saddened by the recent attacks in Mumbai having spent three days there in January, relaxing from a hectic Journey through Northern India, but I would not hesitate to go back as early as a few weeks from now. One of my favorite blog posts about the events was this heartfelt post about how terror will never succeed and how our way of life will continue (found via A Fistful of Euros).

After enjoying A Passage to India this much I am now reading A Room with a View, after reading about it in a wonderful travel article on Florence in the NYTimes that references it heavily.

Finally, I want to say how much I've come to love Audiobooks - yes, they are slower than just reading the book myself but they allow me to 'read' while I'm driving to work or working out at the gym and therefore save a lot of time. I don't think I would have as much time to read fiction without them.

Africa and the Financial Crisis

I've been writing a lot about the Financial Crisis and relatively little about African development but I found a great short little paper by Shanta Devarajan, Chief Economist of the Africa Region at the World Bank, about the impact of the crisis on Africa that combines the too. If you're curious about how the crisis has impacted other countries here's a post about it's impact in Eastern Europe and Iceland. It's late and I want to keep this short but here's the core idea followed by the five ways of how the crisis could have an impact, read the paper for more:

It is argued that the transmission mechanisms between the financial systems in Africa and the rest of the world are weak and will minimize the impact on the crisis. African financial institutions are not exposed to risks emanating from complex instruments in international financial markets because most banks in Sub-Saharan Africa rely on deposits to fund their loan portfolios (which they keep on their books to maturity); the interbank market is small; the market for securitized or derivative instruments is either small or nonexistent, and few rely on foreign borrowing to fund their lending operations. Exceptions to this position are then made for countries like Nigeria and South Africa which are seen as having meaningful transmission mechanisms with the larger financial systems in crisis.

This conventional position is now being challenged. As the immediate crisis faced in the last couple of months subsides, and policymakers begin to consider the longer term impact of the crisis in Africa, an emerging view is that the impact on the financial sector in Africa may actually be more significant and longer lasting than first assumed, and the impact on the non-financial sector in Africa will be more notable.

Impacts:

1. Weakened local investor confidence in equities and bonds on African Stock Exchanges
   
2. Return to ultraconservative lending practices 
   
3. Losses arising from central bank reserve management practices 
   
4. Renewed debate on the role of governments in the financial system 
   
5. Weakened balance sheets resulting from a downturn in the real economy
   

Finally, one obvious way the crisis will affect the real economy is through a drop in commodity prices:

Declining demand for commodities will impact African countries significantly. In Zambia for example, the economy is likely to take a hit from a share decline in copper prices (-24%ytd). As the financial crisis surges into all parts of the real economy in developed economies, African countries will experience a substantial decline in exports as the rapid pace of trade expansion in this decade decelerates sharply.