Thursday, 23 December 2010

Application season...

Every year, we see a similar pattern - applications to the ITFD program start slow in November, and then pick up from December onwards. Compared to this time last year, application numbers are up 37%, which is encouraging. What is most striking is that the quality seems to vary a lot by date of application, with really good students often applying early. We process applications until the programme is full, and urge everyone to apply as early as they can - and before the end of March if possible. Scholarships are filled periodically until they are gone, so for our applicants who need some funding, applying early is a good idea, too. So if you are thinking of ITFD, maybe the right thing to do is to sit down with a good cup of tea over the holidays, fill in the forms and write the statement of purpose (yes, we do read them, and they do matter!), and give it a shot.

Saturday, 18 December 2010

Just how great is the euro for Germany?

I am at a conference in Berlin on sovereign debt. Last night, at one of the many pleasant restaurants serving remarkably good food at reasonable prices, one of our German colleagues held forth with a view I read a lot in the newspapers - that Germany should just bear the cost of endless bailouts since its industry was "benefitting so much" from the euro. Wage and price inflation elsewhere in the Eurozone made countries uncompetitive; Germany's wage restraint paid off, at the expense of the free-spending peripheral countries. The NYT has a story on changes in export shares of European countries in the last 10 years. The allegedly unfair advantage of the euro for German exporters should matter much less with the ROW -- the exchange rate versus the dollar, the pound, the yen can still adjust. What does the chart show? Germany's export share (relative to the rest of the continent) is up -- but it grew no faster within the Eurozone than for exports to the rest of the world. This doesn't prove that exports to the Eurozone wouldn't be lower if we had the DM, and it had appreciated a lot; but it takes the wind out of the sail of those commentators who argue that swapping shiny cars for junk bonds is such a great deal for the Germans that they should happily carry on doing it forever...

world heritage

The best buildings by Lluís Domènech i Montaner in Barcelona have just been designated a World Heritage Site. I always had a weak spot for his architecture (much more than that of the ever-fashionable Gaudí). Story in the New York Times, including some awsome slides.

Friday, 10 December 2010

'tis the season ... for peddling PhDs

What does faculty do all day? I know it's a question many students wonder about. In addition to running ITFD, the department made me placement officer for the graduating PhD students. This means three things - organizing trial job talks and mock interviews, answering emails of the kind "who are you top candidates in IO and micro? which Canadians from your department (...) should we hire independent of field?", as well as sending unsolicited emails to all and sundry telling them how great our graduates are. This, plus a few dozen small administrative things, like making sure that the website for the jobmarket candidates looks ok.

After all this activity, we are now anxiously waiting for the results... this is how parents must feel when the report card arrives. We have 8 PhD candidates on the market. Combined, they have 43 interviews at this stage, or more than 5 each. Quite a few places still have to decide, others will have a second round of decisions, so I am hopeful that this will be a pretty good year. As always, the response is uneven. [update - the final number in late December was 101 interviews for 8, or more than 12 per head] Finance candidates are doing particularly well, with 15 and 10 interviews for two candidates, plus one early flyout. I am reasonably pleased with the quality of places calling, too -- the top always matters more than the average in this game - and this year our candidates already got calls from Berkeley, Northwestern, Harvard Business, Stanford GSB, UCSD, Bocconi, Warwick, Carlos III, CEMFI plus assorted central banks. Fingers crossed for this year's PhDs!

Saturday, 4 December 2010

Spain believes in education...

it pays its professors in a year what it pays its air traffic controllers in two weeks. And boy do they deliver service.

Wednesday, 1 December 2010

Investment bankers discover solution to the Euro debt problems

The solutions spells M-O-N-E-Y. German money. Lots of it.

The American journalist H.L. Mencken once joked that for every difficult problem, there was a solution that was simple, elegant, and wrong. That is what I was reminded of reading the increasingly hysterical comments being issued by various people in the I-banking community. Euro area debt problems? The end is nigh? Let's get a bailout. We have had three years of effective "blackmail" by the markets, where governments have caved in every single time, making bondholders whole at the expense of the public. The German government some weeks ago felt that enough was enough. Now the rise in bond yields is creating a crescendo of voices arguing that a "fiscal union" in the EU will solve this problem. Bloomberg ran a full story composed of nothing but London-based investment bankers sagely advising that this was the only solution. Among the more bizarre suggestions, the idea that some 350 billion of Greek, Portuguese and Irish debt gets transferred to the core countries to bring debt burdens down... I think these people are based in the wrong place.

Anyone with any knowledge of German politics will tell you that a gigantic bailout - much as our underpaid friends in the City would love it - will not happen. The whole Euro experiment was sold to the German public via a million holy oaths that this could not happen; the already weak consensus behind the euro will crumble before we see a fiscal transfer union or massive debt shifts. Some commentators are always advising that the Germans and French are just bailing out their own banks. True, in part. But that used to favor bailouts in the past; it is now becoming much harder as a political sell. Yet more money for bankers? Not the message you want to send as a politician. And don't forget -- Germany's export performance is largely built on selling to the rest of the world. While most of the EU mostly trades with the rest of the EU, Germany does sell in significant amounts to the US, Brazil, China, and the rest of Asia. Compared to that, exports to Portugal, Ireland, and Greece are miniscule. Germany needs Europe much less today than it did 20 years ago. The second mistake that people make when thinking about incentives for a bailout is to say that Germany is benefiting hugely from other EU countries not being able to devalue against a Deutschmark. True, but the point of Germany's export surpluses is to accumulate foreign assets for the day when the population is dominated by pensioners. A stronger Mark will facilitate buying up assets elsewhere, from factories and stocks to holiday homes in the sun. Bottom line - much of the current chatter about Germany having to step up to the plate for sure is, in my view, a bunch of I-bankers whistling in the dark, hoping that their trades will finally turn around...

Sunday, 28 November 2010

The bright side of the Irish crisis

These days, it is easy to remember why economics used to be known as the "dismal science". The EU finance ministers are meeting today, to put the fine print for the Irish rescue package together. One European bailout is following another; growth is mostly poor, and even where it isn't, output is not returning back to trend; and unemployment is stubbornly high. News that the last big private Irish bank was being nationalized last week seems like a small wrinkle. And yet, one can think of this detail as possibly a first ray of sunlight.

Whenever the future of the Euro is discussed, the practical difficulties of leaving are pointed out. In particular, as soon as there is a good chance that a country might leave, its banks will face a massive run on deposits; converting assets and liabilities into the new national currency will be tricky, as any mismatch will zap bank capital. But how do these problems look in a country whose banks have blown up already? Where the capital injections for the banks are so gigantic that they more or less double the national debt? And where banks mostly live on liquidity support from the rest of Europe? That place is Ireland, and somewhere, someone is hopefully thinking what I am thinking -- this is the time to get out.

The euro was a gigantic mistake in the first place, a vainglorious triumph of politics over sound economics. When the financial crisis broke out, the Queen famously asked during a visit to the LSE - why didn't anybody notice in advance? On this one, for once, many economists were actually acutely aware just how bad an idea the euro was. Barry Eichengreen wrote many articles and a book warning about foisting a new gold standard on advanced economies with massive nominal rigidities. Nobody listened.

Ireland will have to suffer massively in years to come as it is for the folly of its bankers and the stupidity of its housing bubble. It will have to live with IMF-EU imposed austerity. Why not try to get something in exchange for all that pain? A new Irish pound, introduced overnight, would quickly devalue and restore Irish competitiveness. An independent central bank could set appropriate interest rates while anchoring inflationary expectations. The banks would still have to struggle with potential asset-liability mismatches, but the problem cannot be large compared with the capital injections necessary already. And depositors have been taking their money out already. Once the new currency is in circulation, they can put it back in, as there is no uncertainty about the Irish future of the euro left.

What would this do to the rest of Europe? An Irish exit from the nightmare that the euro has become would surely see Greece, Spain, and Portugal leave, too. Depositors there would run on their banks to get euros out while they still can. Banks in some of these countries are healthier than in Ireland; an Irish exit would impose some real costs on the Club Med. And yet, much of the "health" of Spanish banks is illusory anyway, as it depends on fantasy valuations of all the brick and mortar on their balance sheets (something that the Bank of Spain is increasingly concerned and unforgiving about). A quick exit may still be better than a decade of slow, grinding deflation combined with Zombie banks and Zombie household balance sheets being kept on artificial life support before the inevitable rise in interest rates at some point pulls the plug.

When Britain left the gold standard in 1931, the governor of the Bank of England famously declared (having been aboard a ship and out of contact when the decision was made): "I didn't know we could do that." Leaving the euro may seem similarly unimaginable to many, but it may be just as feasible. In the 1930s, cutting the link quickly led to a recovery of demand, by reducing deflationary pressures. Far from the shattering blow to confidence feared by many, exiting the gold standard was actually great for business. Leaving the euro may be every bit as good.

Tuesday, 23 November 2010


too much of everything! First we had Alan Krueger yesterday, who just stepped down Assistant Secretary of the US Treasury for Economic Policy, giving the Inaugural Lecture that officially "opens" our academic year... He spoke on economic policy making - lessons from the US experience... and a good show it was!

Today we had Robin Burgess from the LSE speaking on "Weather and Death in India". Together with his coauthors, he finds that a single day of more than 36 degrees in India raises the annual death rate by about 1%, which is a huge effect... and may bode ill if all the predictions about rising global temperature are right.

A very accurate real estate idiot ranking...

goes live over at IDEALISTA. What is a flat or house worth? Whatever the value of having a roof over your head is... discounted to the present. Economists look at variables like the average rent to average house prices, and if the ratio is very low, you can normally be sure that the adjustment (back to its long-term average) comes through lower prices, not higher rents. The reason is that rents get paid out of current income, and house prices can be sustained by someone selling his house and buying a bit of extra house elsewhere... without ever being able to afford the price of the new one if he had to finance it all. In Spain, rental ratios were laughably low for some time, around the 2% mark. In the US, we are getting back to numbers around 3.5-4.5%, which seems about right; in Germany, the current ratio is 5-7.5%, meaning that rents are high relative to prices (mainly because prices are low).

All these comparisons are normally a bit doubtful because you have to believe that the average house for sale is like the average house for rent. That may or may not be true, and depends on rental law, etc. But sometimes, you can get it 100% right -- if the same house is available for renting or buying. That is what the good folks at Idealista have used to compile their list. Most of the owners listing their properties at these prices are clearly smoking something interesting -- a house in Asturias (listed without pictures) is for sale for 2.5 million €, or 2,500 p.m. Wow, that's a rental yield of 1.2%! Even the house ranked 80th (from low to high) only produces 2.66%. I would say two things. First of all, Robert Shiller must be right -- you have to believe in behavioral explanations to understand these owners. Second, the extra-slow-motion-deflation of Spain's housing bubble has a long way to go...

Saturday, 20 November 2010

Solving the US federal deficit problem

is easy and fun... at least over at the interactive NY Times website:

There, you will encounter a wide range of spending cuts and tax increases. Mix and match to solve the problem. I guess I am a mild fiscal conservative, ending up with a share of 56% spending cuts to 44% tax increases in my preferred plan. Give it a try!

Tuesday, 16 November 2010

It's a dirty job

but someone has to do it... Which student hasn't dreamed of it? One of your professor lying in the dirt before you? That's what our ITFD students got today at lunchtime, when we played a few rounds of beach volleyball. In the first pic, you can see your sincerely after getting up again, admiring the energy and hand-eye coordination of our students. In the second one, Joonas Uotinen gets ready to slam the ball hard as Rachel Lund passes it back. As days in November go, there are worse things to do at midday!
Thanks to ITFD '11 student Kart Siilart for the picture, who, in addition to having a psychology degree from Harvard and an MBA from Insead, also turns out to be a pretty decent photographer...

Friday, 12 November 2010

Good news from the bureaucratic front - we're official!

Why oh why does the EU turn every good idea into a bureaucratic nightmare? When I first heard about the Bologna ideas, I was really excited. Three-year BAs, compatible degrees across Europe, new syllabi - I could already see good education of the snappy, focused, useful variety coming to all of Europe (and not just the UK). Some years later, it's clear that the teaching Taliban have highjacked the undergraduate teaching structure; many ideas entirely unrelated to the basic idea of having compatible ideas across Europe have been tagged on. One of the really idiotic things that the Bologna process gave us is that Master's degrees now need to be certified by the national authorities -- you can get an "official" and "unofficial" master, effectively. In the US, there are universities that are accredited, and those that are not - fine. MIT is accredited, and Abraham Lincoln College in Podunk, Nebraska, is not. But the idea of perfectly well-established universities having to submit each and every course syllabus, etc., for a master to be officially approved (including those that have been taught for decades) is straight out of Kafka.

To cut a long story short, we got there -- the good fairies in the Barcelona GSE office guided us through the whole process, and starting with the class of 2011, our (and all other Barcelona GSE) masters are official - hooray!

Monday, 8 November 2010

The gold bug bites hard...

There I was, innocently trying to explain why my students should learn about the gold standard... and trotted out the "usual suspects" in terms of explanations. It's a bit like EMU, folks! It tells us about what social and political factors matter for running a monetary system! etc. And only two weeks after that problem set on the gold standard, out comes Bob Zoellick, head of the World Bank, arguing for a new gold standard. I have to say, I almost swallowed my gum when I read the headline. It's not Ron Paul, but Zoellick, who made a pretty decent trade negotiator under George W. Bush. We know that a) gold is very good if you want to kill inflationary expectations b) works disastrously if your problem is deflation c) is the worst thing you can do if your labor markets are rigid. Now, let's see what we know about the current crisis. Inflation is NOT the problem -- if anything, Bernanke and friends worry themselves sick over the fact that inflation is too low, and monetary policy doesn't have enough oooomph as a result. Labor markets are pretty rigid everywhere in the developed world. Even after a few decades of "structural reforms", we still have long-term labor contracts, unemployment insurance, etc. (and a good thing, too). The 19C labor market where workers traded their time for cash the way we trade tomatoes is long gone, and nobody except some freaks on the luny fringes of economics wants them back. So why would anyone want a new gold standard? Apparently, Zoellick feels that it would anchor inflationary expectations, etc., but he doesn't have much to say about why this should be a problem when financial markets predict less than 2% on average over the next 10 years. For my money, Keynes' verdict on gold stands - it's a "barbarous relic".

Who is afraid of currency wars?

At the Central Bank of Chile conference the other day, talk naturally turned to the threat of what the Brazilian finance minister Guide Mantega called "currency wars" -- the danger that the world is headed for major conflict over currency movements. All of this is coming from a) unease about the exchange rate of the Chinese currency, which many American politicians feel is too low b) fear in the rest of the world that American pump-priming in the form of quantitative easing will put undue upward pressure on their currencies. On the bus over to the conference restaurant, I had the good fortune of chatting with Olivier Blanchard, currently chief economist of the IMF, and as we talked (without attributing anything specific to him or the IMF) it occurred to me that the current discussion is quite similar to what we used to think about the end of the gold standard during the Great Depression. The standard story used to say - everyone devalued against gold, i.e. against each other, in a bid to improve the competitiveness of their economies. By the end, relative rates were not much changed -- but you had tremendous turmoil in between, and world trade collapsed. That's saying currency wars in the 1930s were really bad, and the implication is gloomy -- we are at it again.

The new view, pioneered by Barry Eichengreen and others, holds that devaluing against gold was good because it broke the grip of deflation. Relative exchange rates may not have moved much, but that wasn't the point -- reflating by getting the money supply up was. In that sense, if we all did a bit of quantitative easing, a bit of "currency war" might be a good thing. It's also an interesting way of aligning incentives. The standard problem in an open economy is that we want our neighbor to stimulate his economy (especially if there is a risk of inflation) - much better than to do it at home. Because QE likely has an impact on exchange rates, this "free rider" problem is mitigated - you may still benefit from your neighbor's QE, but you will pay a price through a higher exchange rate if you don't move as well. In that sense, the non-cooperative policy setting that Mantega described may be a good "second best", provided you believe that Europe is being a bit conservative in terms of monetary policy... The part of the world that really does have a problem is epitomized by Mantega's Brazil, which as been booming and certainly doesn't need more stimulus. But then, perhaps it can live with a higher exchange rate as a price for equilibrating growth around the world.

Congratulations to Fernando Broner, who wins an ERC grant

Fernando Broner, a specialist on international finance and sovereign debt, was deputy director of ITFD for its first two years and is now on the steering committee as well as teaching 2 courses (and co-directing independent study projects). He has just won an ERC starting grant award. I want to congratulate him on this important distinction -- the ERC has been at the forefront of modernizing science funding in Europe, by making it more open, competitive, and all-round sensible (i.e. more like the NSF in the US). But then, I would say that -- I got one, too, in the first round of the advanced grant scheme a few years back. Jaume Ventura, who is in charge of student affairs at ITFD and teaching courses on "contemporary problems in macro" as well as "international finance", got one last year, and so did Nicola Gennaioli, who is teaching for us in the third term... which means that 4 professors involved in running our program got a love letter from Brussels. At least as a percentage, I think this must be higher than in any other masters program in Europe... and UPF economics must have one of the highest concentrations of ERC awards, given that Fernando is bringing our total to 8:
  1. Jordi Gali
  2. Jaume Ventura
  3. Jan Eekhout
  4. Gino Gancia
  5. Nicola Gennaioli
  6. Joachim Voth
  7. Marta Reynal
  8. Fernando Broner

Friday, 22 October 2010

Antipodean Reflections

I am in Santiago de Chile for a few days, attending the 14th Annual Conference of the Central Bank of Chile. There were plenty of papers that gave food for thought (perhaps even one by yours sincerely on fiscal adjustments and unrest). The one that particularly caught my eye was by Jeff Frankel of the Kennedy School at Harvard, who looked at the work of the Chilean commission that helps to decide which share of revenue the government should save (some related musings by Jeff are here). To put things in perspective, we know that a) output volatility in the developing world is much higher than in richer countries b) that fiscal policy in LDCs is typically procyclical. If tax revenues depend a lot on resource extraction (copper in the case of Chile), there is a big temptation to just go out and spend when the big times roll. Jeff argues that Chile has much to teach to the rest to the world. As part of a commitment to running a structural surplus over the cycle, it delegated forecasts of copper prices and tax revenue to an independent commission. This might be a good idea not just in countries suffering the wild swings of the resource cycle. He neatly shows that budget forecasts are almost always too optimistic, especially in the European Union. This is largely driven by people overestimating GDP growth. I like the idea of putting more of fiscal policy into the hands of non-politicians (part of "post democratic politics", I guess). The thing I am not so sure about is if the biases Jeff documents (in a place like Ireland, say) aren't partly to do with a general tendency to overestimate improvements in good times... which might affect technical experts too. It's one thing to be in a country with commodity booms, and to realize that these tend to last only so long; it's quite another to look at Ireland in 2006 (or Singapore in 1995, or the US in 2000) and to say - this can't last.

Monday, 18 October 2010

Bad news is good news ... again

Why do I have this sense of deja vu? No, it's not because I am heading to the airport tomorrow for another conference in far-flung lands (the Central Bank of Chile is having what promises to be a good one). It's that strange sensation I get from seeing stock markets rallying hard because Bernanke and friends are promising us more quantitative easing. So let's get this right. QE 2 is being discussed because a) output growth is slowing b) unemployment is high c) the US housing market is in the doldrums d) which means that the banks will have even more problems in the future e) which all sums up to a good chance of deflation. One can debate whether more money printing by the Fed is the right answer. As for the wisdom of bidding up stocks... either it works, which means that we will have anaemic growth plus rising prices, and then we have to worry about inflation (which has traditionally been bad for stocks). Or it doesn't, and we are getting something between the Great Depression and the Japanese lost decades. Neither prospect seems much of a cause for cheer. Now, when was it when I saw this last? That's right, in the fall of 2007, when increasingly bad news led markets to expect interest rate cuts from the Fed. For a few months, the bad news was accumulating, and the markets continued to move higher. Back then, people had complete confidence in the Fed's powers to make any recession disappear in... and when people realized it wasn't quite true, things really collapsed hard. It made for a good show back then. Given how untested QE is compared to good old interest rate tools, I wouldn't be surprised if we get a rerun in a stockmarket near you before long...

Thursday, 30 September 2010

Stupid Germans and the surpluses

Talk to any German these days about economic policy, and they will soon share with you a sense of outrage that the world is conspiring against their hyper-competitive exports. The German press never talks economics - it talks business. And what's good for business is good for a country as a whole, right? So if Germany has big surpluses, it reflects highly competitive firms. The other - like Mrs. Lagarde of France - are just envious. One COULD actually make some arguments that make sense of the German pleasure in trade surpluses. An ageing country should accumulate assets; some of these should be held abroad. The strongest argument AGAINST piling up trade surpluses is that all those shiny Audis and machine tools sold to the rest of the world buy very few things that will make Germans richer, either today or tomorrow. Michael Lewis has a brilliant book called "Short" about the financial crisis. One of the recurrent themes is how the bubble in subprime really got inflated because of the superabundance of stupid German money. His latest piece on Bloomberg gives you a flavor:
The proprietary trading business turns in part on one’s ability to find the fool -- to find people willing to take the stupid side of the smart bets you are placing. One of the side effects of our seemingly endless financial crisis is to wash a lot of fools, many of them German, out of the game.
If you export lots and import little, you have to export capital, by definition - you are lending to the rest of the world. For whatever reason, German banks - many of them state-owned - have a singular ability to populate financial markets with klutzes who cannot tell garbage from fine food. The trade surpluses which should translate into a huge foreign capital stock, ready to pay the pensions of ageing Germans, instead have a habit of going up in smoke every time a Nasdaq/subprime/bond bubble bursts. The welfare implications of that are not very hard to figure out... and you won't read in the German press about it. So either the country fixes its financial system (beloved 3 pillars and all), or it should use some of those shiny cars at home.

Wednesday, 29 September 2010

Is history "fate"? The strike in Barcelona

Just this Tuesday, I was teaching the Comin, Easterly and Gong paper on whether today's riches were determined by technological development in the year 1,000 BC in the "Rise of the Global Economy" class in the ITFD. Today is the day of the general strike in Spain. By some strange accident, I was reading Orwell's "Homage to Catalonia" in the last few weeks, and - just as I was arguing in class - history really doesn't have to be spell "fate". Barcelona, the hothouse of Anarchist sentiment in the early days of the civil war, was remarkably genteel and tranquil today. Traffic flowed easily, taxis were available - with a bit of an effort - and a few posters apart, the university was quiet. Only a plume of dark smoke hanging over the Placa Universidad indicated some trouble (a police car had been torched, it turned out). In general, people seem to accept the changes to labor laws with a sense of frustrated resignation. Bizarrely, the people most likely to benefit - i.e. the young, university students, etc. - are more violently opposed than the rest. So the deeply ingrained instinct to start building barricades that Orwell describes somehow got mislaid... so big shocks - decades of Franco rule - really can change the cultural outlook and social fabric. Which reminds me of a paper I should have on the syllabus, one in the sequence of beautiful Acemoglu et al papers on institutions and economic growth. This one is on the impact of the French Revolution, and it's co-authored by our new UPF colleague Davide Cantoni...

Thursday, 12 August 2010


It's a tough job market out there. That's why it is very nice to see that our students are doing well, despite the headwinds. Clara Sofía Gómez Botero (ITFD 09-10) just got appointed as advisor to the Colombian Deputy Minister for Housing. I am particularly pleased since Clara and her team showed a lot of feel for the policy process in developing countries like Colombia as part of their policy memorandum exercise (which focused on social insurance and indirect labor costs). Good luck to you!

Friday, 23 July 2010

Euro redivivus...

or dead cat bounce? The Euro has surged since touching a recent low of below 1.20 to the dollar. After relentless news headlines hammering the common currency, and all the pundits claiming that parity was next, the market decided to turn a corner. Apparently, the upcoming double-dip in the US is even worse than all the "EU can't compete" sneers of our Anglo-Saxon friends. But make no mistake - purchasing power parity is still a long way off, and probably closer to 1.10 or so. That's true if you look at the Big Mac Index or more sophisticated measures, which the Economist just updated today. OANDA updates the Big Mac Index every day [and cites the exchange rate the other way around, i.e. you get 0.78€ per $]. Introduced by the Economist, it simply uses the ratio of Big Mac prices in different countries as an exchange rate forecast. It actually does pretty well, over relatively long time horizons. Elsewhere, Orley Ashenfelter and co-authors have used Big Mac prices to calculate ppp-adjusted wages. So, what does this mean for the exchange rate? In the short term, there is no way to tell. It's darn easy to tell really pessimistic stories about the US economic outlook (making monetary easing more likely than tightening), or do the same for Euro (another failed bond auction, anyone?). Over the medium term, I expect those Big Macs to do well at forecasting.

Damn good writing...

for the five-minute-creative-reboot; but who will fix my umlauts?

Thursday, 22 July 2010

One hell of a clever investor - Antonio Salazar

Bloomberg has calculated that, relative to the size of the economy, Portugal has the largest quantity of gold of any country. Apparently, this is the fruit of dictator Antonio Salazar stockpiling the stuff, received in no small part in exchange for things like tungsten (very useful for making armor-piercing tank rounds - I wonder where they used those between 1939 and 1945?). How you go from that to a headline like "Gold Makes Dead Portuguese Dictator Top Investor - Bloomberg" I will never know. Well, it's summer, and I suppose it beats Nessie...


Well, it's always nice to be asked... especially if it's a sign that you are known for something. Well, almost always. Recently, I found this in my inbox:

from: NN


date: Sat, Dec 5, 2009 at 18:13

subject: Bubble Help!

Dear Sir,
I am a member of an Irish University and my Economics thesis is on the link between irrationality and bubbles in the financial market, was wondering would you have any journal recommendations or articles which could help me within this topic.

Thank you
Yes, absolutely. As a matter of fact, since I work in the area, it'll be more efficient if I write the thesis for you, and send you a draft next week.

I also enjoyed this one:

from: NN


date: Tue, Apr 6, 2010 at 00:28

subject: about your paper "How the West Invented Fertility Restriction"

Dear Professor Voth,

I am UBC PhD and have some questions about your paper "How the West Invented Fertility Restriction". As i have not encountered this topic before, if you have some spare time, I would be thankful to have your ideas on these:

1) It seems that European Marriage Pattern is a puzzle that there has been many researches trying to solve the puzzle. Is there any surveys or texts you can introduce me that summrizes different ideas about this subject?

2) In your paper, you have brought some evidence that fertility restrictions through late marriage was voluntary in old days. Are there any counter arguments in the litrature? Does any other researcher interprets this fertility restrictions through late marriage, in another way?

3) And if there are any useful references for this subject.


This is after my co-author gave a presentation at UBC. The paper has 4.5 pages of references; we also spend a lot of time on possible counterarguments... Reading? A paper? You gotta be kidding. Let's write to the authors instead, and get some personalized feedback on unique questions.

Hmmm. Maybe I can magically transfor my career by trying this:

Dear Jean Tirole/Philip Aghion/Elhanan Helpman/Robert Barro,

I am a member of UPF's economics department. I would like to publish a brilliant paper. Please send me your most outstanding articles (unpublished), so that I can put my name on them and submit them to the AER.

Joachim Voth

Don't get me wrong - I love to hear from students interested in my research. I just hope that the level of interest is a touch above "help me with my homework, pls"...

Monday, 19 July 2010

How BP should have handled the spill

How to communicate in public is something I spend more time thinking about than is probably good for my sleep... I teach the research seminar at the UPF econ department, which is a second-year boot camp on research techniques for our doctoral students. A lot of emphasis is put on presenting and writing, and I actually show students Steve Jobs introducing the Ipod on youtube and then discuss with them what you can learn from Steve for our presentations.
Sometimes, one can learn a lot from bad examples, too. Little people, listen up - BP didn't quite get it right, to put it mildly (the chairman of the board, after meeting Obama, graciously spoke about the "little people" in the US affected by the spill). So, in a bid to be constructive, here is some brilliant advice from the good folks at Daily Goat on what BP should have done...

Friday, 16 July 2010

Youth unemployment

Many of our graduates are actively hunting for work now. Some already found good jobs, others are interns at interesting places (congrats to Paulina Tourn, who is currently with the WTO). Now, Edoardo Campanella (ITFD 08-09) has written an article highlighting the problem of youth unemployment in Europe. It's for project syndicate, which feeds content to over 140 newspapers worldwide. Luckily, Edoardo isn't talking from personal experience. He is currently an economic advisor to the Italian Senate, and was formerly an economist at the World Trade Organization.

Thursday, 15 July 2010

Soccer and Autonomy

This week, I was getting quite a few emails from friends from all over the world, talking about soccer. The idea that a German in Barcelona isn't THAAAAT much into soccer takes some by surprise... Of course, not everyone in Catalunya identifies with the Spanish national soccer team, even when they are winning. Last time Germany played against Spain in the Eurocup finals, some of my Catalan colleagues said "We are counting on you guys tonight." This time, when asked if he was looking forward to the cup, one colleague born and bred in Barcelona said "My country is not competing." So I wonder who the press has been talking to that claims that issues of national identity and regional autonomy have been put on a back burner by the country winning the cup. As a matter of fact, and by strange coincidence, last Saturday saw a tremendously large demonstration in Barcelona. People were protesting against the Spanish supreme court decision that denies Catalunya many of the basic rights enshrined in its "Estatut", passed by referendum here and approved by the Spanish parliament. Gone is Catalan as the official language, a right to minimum expenditure of the Spanish state here, etc.

Oddly, the decision by the supreme court may actually be good news for those who favor Catalan independence. It is a miserly and narrow-minded decision, denying a people with a different language and culture even minimal symbolic recognition. This is the kind of ungenerous, stupid reaction to small requests for autonomy that has often led to independence in the long run. Britain's treatment of "Home Rule" in Ireland is a case in point. For many years before World War I, Parliament denied the most basic forms of autonomy to its conquered province. When it finally passed some minimal delegation of powers, implementation was delayed by World War I. When the British hugely overreacted to a minor armed rebellion (by shelling Dublin from warships, etc.), the political mood completely changed. Five years later, Britain ceded control over Southern Ireland. Now, the Supreme Court decision isn't quite the same as the bloody suppression of the Easter Rising in Dublin, but it has a similar, bloody-minded feel to it. What I don't get is why there isn't more of a systematic attempt to organize civil disobedience, withholding of taxes, etc.

Wednesday, 14 July 2010

Supermodels / Rethinking my financial crises syllabus

Of course, I think of my course on financial crises as mildly entertaining, or better... but perhaps I should have a session on supermodels to spice things up a bit? 3quarksdaily has an interesting post that links some of the work on information cascades in financial markets with how any one individual becomes an acclaimed model. The answer is distinctly reminiscent of Soros "reflexivity" point -- people's reaction themselves are relevant news in financial markets, and in terms of who gets "booked" for the next fashion show. Any similarities with the market for new Ph.D.s are entirely accidental...

Thursday, 1 July 2010

The class of 2010 graduates

... and what a gorgeous-looking, fun and stylish crowd they are! It's been a pleasure to teach you. I hope you will all stay in touch -- I'll miss you!

[and here is a link to some other pics from the graduation party, including photos of the other master's programs]

Wednesday, 30 June 2010

end of term...

This year, I taught in the doctoral program at UPF (research seminar in economic history) and in the ITFD/GPEM (financial crises). While I don't have to teach, thanks to an ICREA research chair, I find that saying no is really hard - it is good fun, and it gets one to interact with great grad students.

At the end of term, I decided to chill out a bit with an old friend from high school days at the Costa Brava, two hours North of Barcelona. There is actually some spectacular diving at the Islas Medas. It's a maritime nature reserve, meaning no fishing and, as a result, some XXL-sized saddled breams and giltheads. Here you can see your sincerely hunting at 22m depth for a worthwhile shot.

Our first student from Afghanistan

Afghanistan is never far from the newspaper headlines these days... first Gen. McChrystal got himself fired as head of the US combat mission there, then there is a major attack on NATO airfields. No good news from the Hindukush? Not quite. We just got confirmation that the first student from Afghanistan is going to join the ITFD program this fall. Ms Palwasha Mirbacha did her undergraduate degree in the US, and then worked for the UN Assistance Mission to Afghanistan as well as the Office of the Chief Economic Advisor to the President. She received a full scholarship, sponsored by La Caixa.

Sunday, 27 June 2010

Latest + Greatest News: CREI Lectures in Macro

Francesco Caselli delivered the 2010 CREI Lectures in Macro the other day. He was surveying "Differences in Technology across Time and Space". One of the most interesting things I learned (out of many) was that, with the right type of correction for the hetereogeneity of human capital, we can actually explain a lot of the cross-sectional differences in output per head. The standard result in this literature used to be (after a classic paper by Hall and Jones in 1998) that most of the difference in income between, say, the US and Zaire is not down to capital or human capital, but must be "social capacity", TFP, or some measure of institutions -- in other words, something we just don't understand all that well.

The endowment view - so crucial for development agencies, etc. - instead has received scant empirical support. Francesco painstakingly goes through the evidence once more, adds a few refinements from other people (notably David Weil's work on the effects of health), and then puts in one additional variable that really makes a lot of sense -- separate effects for high- and low-human capital. Since this is correlated with physical capital, it turns out to be a pretty important thing -- suddenly, endowment differences that previously could account for maybe a third of income differences can get to about 60% or so. This is incredibly important, me thinks -- and while we of course want as much exposure for the PUP book that comes out of the lectures, I very much hope that Francesco turns this into a separate article (the QJE will surely be keen).

A few years back, when we first talked to PUP about the idea for a new series, we wondered what there was left to do - there are many lecture series. We proposed to go for young and already distinguished speakers, who deliver a synthesis of recent work. I think this installment in the series really validates the view that this was exactly the right direction in which to take things...

Friday, 18 June 2010

McCarthy is alive...

and well, and currently grilling BP. A whole string of papers in international macro and finance argues that the US is uniquely good at translating corporate cash flows into paper that someone wants to hold. This superior "security production technology" is all about respect for the law and property rights. I always thought that Enron should have put paid to much of that literature, but it is doing well. Now we have the enormously awkward spectacle of the Obama administration first putting almost unlimited liabilities on a company, with the idea of oil workers who can now no longer work on drilling rigs being compensated; then the 20 bn$ escrow account, outside the control of BP; and the grilling of Tony Hayward, CEO of BP, in front of a Congress committee that reminds me of Stalinist show trials and the worst excesses of McCarthy and friends. I am not saying that the environmental damage isn't real, or that BP should be let off lightly. But limited liability is there for a reason, as are rules on the maximum that, say, an airline can be made to pay for a crash. There is no reason to put all of the costs of a disaster on a private company, because - ex ante - this may discourage many good projects. As long as penalties are severe, firms will be careful anyway, and I don't see anything in the current share price of BP to suggest that private investors got a free lunch... So my sense is that, while the company should be made to pay a lot, the US is shooting itself in the foot, by trampling on due process and the law, and conducting its liability determination process in a way that one would have expected from Hugo Chavez.

Saturday, 15 May 2010

a fist full of billions

So the EU finally tried to get "ahead of the curve", and announced the mother of all bailouts -- a cool 750 bn € or so, but who is counting? Speculators, so the official line, caused the markets for sovereign debt to be dysfunctional. That is why the EU offered massive credit lines to Southern Europe, and the ECB is now buying bonds by sovereigns whose debt wasn't worth a great deal a week ago. As a quid pro quo, the countries in question - Spain, Greece, Portugal - are making a big show of tightening their belts, including wage cuts for civil servants, etc. What do we make of this?

The first thing to note is the German reaction. It is a little hard to communicate to people who only speak English that the poor, naive Klutzes in former Deutschmarkland actually believed in the "rules" -- no bailouts, the Euro as stable as the DM, etc. The FT was recently making fun of Germans being a little literal-minded. That may be true, but is hard to overstate the consequences of last week's events. In the minds of many Germans, this is the beginning of the end of the Euro, nothing less. It is not what they were promised, it was a lousy deal in which they gave up something they cherished - the DM - for little more than empty promises of budgetary probity and worthless paper bonds. The idea that there is "no alternative" (Merkel's pitch to the German public re the bailout) is not convincing anyone. I expect that some parties are going to try and make hay of this, or that the constitutional court will actually declare the bailout package illegal.

The arch-conservative FAZ, a daily newspaper that is as close to the CDU as the Times of old used to be to the Queen, just published a fictitious retrospective about the demise of the Euro, with 2010 as the turning point. Their idea - it won't take beyond 2013 to get there. Is it going to happen? Nobody can be sure, but I would say that the probability of an exit of Greece, Spain, Portugal, Italy has gone from 2% to 20% within the next 10 years within a week. Current austerity measures will make the recessions there much more painful; and before long, governments will be tired of budget cuts, strikes, and general unhappiness. The Great Depression ended when countries cut the link with gold, and the earlier they did it, the better they fared. The same will be true -- getting out of the Euro will be a god-sent for these countries, provided they can escape with their banking systems intact.

Wednesday, 12 May 2010

The Mother of All Bailouts

I was just in Rome for a talk at Ente Einaudi (and some plain old tourism, enjoying Richard Meier's Ara Pacis Museum) when German TV asked me to comment on the mother of all bailouts and latest perturbations of the current sovereign debt crises. For German speakers, the link is here. I am trying to say nice things about speculators, and at the same time think we have to get serious about bank reform. They didn't ask me about the rescue package, which in scope and motivation seems singularly misguided. They do want to know about what to do, and I emphasize the need for financial sector regulation. How often do we want to live with this type of blackmail, where the financial sector asks for a bailout because otherwise, the rest of the economy might suffer.

Times of distress also create a demand for cranky ideas. The Germans from 3SAT found a "visionary" in Vienna that wants to replace the Euro with the Globo -- a single global currency. I think it's a spectacularly stupid idea, and if there is something stunning about it, it's that this kind of idea is given an airing at all. But hey, people discussed Federgeld at some point, money that would lose its value if not used in transactions -- a way to tax "dead capital". The party that pushed it? Just a bunch of freaks, on the very fringe, with no chance to enter office... until they did, in Berlin in January 1933.

Thursday, 6 May 2010

Me? Worried? About Spanish banks?

My bank in Spain has recently been unusually friendly and generous. Normally, they are happy to pay me 0% interest for the balances I keep. Now, as I was asking for a routine transfer to my other account in Germany, I got a phone call - and a bit of a surprise. How about, said the friendly branch manager, 4% if you keep it here? No? How about 4.5%? No? Did the Germans offer more? What can we do to keep it? Shall we meet in person? Wow. I am so friendly with my local branch, I have actually never met my branch manager. So this was starting to sound a bit funny. I don't keep balances the withdrawal of which will threaten the survival of this bank (or any other) single-handedly, so this particular, keen advisor got me worried... but checking a bit, it seems to be a general thing. Spanish banks are effectively finding it very hard to borrow in wholesale markets; private banking clients are pulling their money out bigtime, and putting it into stable core countries; and every bank and caja is now offering 4% term deposits, which is a pretty amazing rate given that Euribor is just a touch over 1%. Now Moody's has published a small note on contagion risk from the Greek crisis for Spanish and Portuguese banks. Given that they are rapidly becoming real estate investment trusts with a banking business attached, trying to sell millions of repossessed homes, there were plenty of fundamental problems to worry about. Now, we have something similar to a bank run in the bond issuance building up. Actually, while I have no particularly insight into how the balance sheets of Spanish banks look, I think I'd rather be safe than sorry, and send a bit more dough back home...

Monday, 3 May 2010

Too much...

...going on these days. Last week, we had Mike Woodford (Columbia), who talked about how we can make sense of what the Fed (and many other central banks) were doing by tweaking their balance sheets and buying financial sector assets. It's actually surprisingly hard to break the equivalent of the "nothing matters" equivalent of Modigliani-Miller theorem. Mike gets there by a combination of the banking system doing funny things (sometimes worrying too much or too little about credit risk), and massive heterogeneity amongst agents. It all adds up in a Neo-Keynesian model... and amazingly, it was all done without anyone having worked it out beforehand. What was the old Keynes comment about policymakers being beholden by a defunct economist? Here, it worked the other way around, with practitioners going first, and theory following.

This weekend, we had a CREI-CEPR conference on the Political Economy of Economic Development. Held in the beautiful monastery in Manresa, there was an embarrassment of intellectural riches, with Tim Besley speaking on the emergence of state capacity, Jim Robinson presenting joint work with Daron Acemoglu about the monopoly of violence in Venezuela, and a whole host of other interesting papers (from local elite capture in China to war and genetic relatedness).

At the same time, we had news about the biggest bailout in history being finalized. After a mini-bounce this morning, Greek bonds have started to trade lower... it seems that the last few weeks of flip-flopping have unnerved investors a great deal. I wrote some months back that the game was entirely political - that the economics were hopeless, and that only a political decision to make Greece whole could stave off default. It seems that markets came around to that view, and now find it hard to believe that the political solution is at hand. As exercises in "shock and awe" go, this one is as yet not very successful...

Tuesday, 20 April 2010

Who makes war on whom?

Romain Wacziarg from UCLA was at UPF today, talking about his latest paper on war and relatedness. He is using the same data that he used in a paper on the diffusion of development (also with Enrico Spolaore, published in the QJE). Its based on genetic similarity analysis - an examination of the extent to which genetic code of humans shares genes that are not immediately useful for (reproductive) success. In their QJE paper, they argued that genetically similar populations are more likely to share the same level of riches. In their latest, they find that they also make more war on each other. Romain's interpretation is that cousins fight each other because they care about the same issues. The result is very intriguing, it survives controlling for distance, and it's robust to a lot of alternative specifications, such as excluding those with shared borders, etc., but I remain puzzled... do we want to think of Canada, NZ and Australia making a decision to fight Germany in World War I and II? Or is it that they are more or less compelled to fight, since Britain is fighting? In other words, what's the identifying variation (countries that are similar genetically, but not close) once you look at units of analysis that are not right next to each other?

Friday, 16 April 2010

Next stop, Portugal?

Simon Johnson and Peter Boone have some interesting things to say, thinking through the implications of the recent aid package to Greece (Baseline Scenario). They basically see the incentives firmly in favor of moral hazard throughout the Euro zone... nobody will want to tighten after the EU underwrote Greek profligacy (and after the spineless ECB decided to take Greek bonds as collateral no matter what their quality). Funny thing is, where is the rally in bond prices? After a brief pop, Greek bonds have been trading down again. Financial markets, as we all know, love a good bailout. Now that the EU has finally committed to rescuing the irresponsible, what is there to worry about?

Wednesday, 14 April 2010

Simon Johnson on Colbert Nation

A year ago, Simon Johnson, an MIT professor and former IMF chief economist was in Barcelona telling ITFD students how a seemingly small problem in US mortgages transformed into a gozilla-style financial crisis. He has now written a book (with James Kwak) called 13 bankers, which is a splendid if rather scary read. Bottom line - if we don't take the big banks apart, the US is in serious danger of becoming a banana republic run by the princes of Wall Street, and the next financial crisis will make this one look like a small hickup. Simon was recently on Colbert Nation explaining it all.

Sunday, 4 April 2010

Beware of the people who cite you...

for the wrong reasons. Over at the Daily Telegraph, Ambrose Evans-Pritchard had lunch with Carmen Reinhart, who (together with Ken Rogoff) wrote a well-timed, erudite and enormously important book on financial crises: This Time Is Different. Evans-Pritchard cites my work with Mauricio Drelichman on the debts and defaults of Philip II. He argues that Greece is a bit like Habsburg Spain -- and that default is inevitable. I actually agree with the conclusion, but I cannot agree with his characterization of why bankers lent to Castilian Crown. Mauricio and I basically say -- the defaults were anticipated; bankers made money, on average; and a default was simply a bad outcome that everyone anticipated could happen. Much like in the case of insurance, the insurer sometimes has to pay out. In good times, they collected a lot of money upfront. It all evens out.

Somewhat oddly, Evans-Pritchard drags out the old chestnut how Philip II's defaults ruined his bankers, including the Fuggers. This is what Fernand Braudel famously claimed, but we find the exact opposite -- the same banking familes who lent to Charles V also lent to Philip, and the ones affected by the early bankrutpcies (in the 1550s) are still there in the 1590s, doing a healthy business, including the Fuggers. Even a default needn't be a calamity, if you play it right.

The implications for today? I think a Uruguayan solution (ie a healthy haircut for the bondholders) would make a lot of sense. It won't be fun for the investors, but we are creating a world of monstrous moral hazard if we bail out Greece and, in turn, the French and German banks who bet that the taxpayer will always help. Will this create another Lehman-style meltdown? I don't think so. Financing costs on sovereign debt are going to go up anyway, by a bit, in the next few years; many people are worried about the overall level of debt as it is. A Greek default won't change a thing. A lot of people received higher interest on their Greek bonds (unless they bought in the last 2 years); the higher return goes with higher risk, which should materialize in their portfolios roundabout now.

Friday, 26 March 2010

Painting the World Red...

On old maps, the British Empire was always shown red... well, I thought I would color the world according to where our applicants for next year (so far) come from. As you can see, there are still some white spots, but we already have students from 33 countries who have sent in their applications...

All Greek to me...

So there is a solution to what some people have called a "Greek Tragedy" after all. In true Euro-fashion, it's a bit of a fudge -- IMF involvement in the way the Germans wanted, but some Euro-bailout, too, with a role for the ECB and EU Commission. Loans are to be at market rates, or so one reads. I wonder what to make of all this. The origins of the Greek problem are clearly not a sudden speculative attack or disequlibrium in bond markets. If you lie, steal, and cheat long enough, you get caught. Try to lie about your FICA score (for Americans) or Schufa history (for Germans) for about 10 years, and NOT see a change in your interest rates after lenders catch up with what you have been doing. So a big package via the IMF that says "boooh" to some nasty speculators is not going to do the same trick that worked so well when Brazil was in trouble in the early 2000s.

Fiscal austerity will now be reinforced by the IMF. In an earlier post, I raised some questions if that is going to work -- it's a bit like root-canal work without anaesthesia. Everybody else is trying to spend more, in a bid to ward off depression. If budget cuts are too big, you get more recession. Today brought the news that Ireland's GDP fell even more in Q4 than in Q3, which puts it on a very different trajectory from everybody else. This tells you that very severe budget cuts can backfire, as Chancellor Brüning of the late Weimar Republic could also tell you. Given the size of the adjustment needed in Greece, I doubt that public finances can be cut back to health.

So, just before we all despair, four German economists writing in the FT come up with a real solution (indirectly). They remind us that the German constitutional court put a lot of emphasis on the no-bailout clause in the Stability Pact; its last ruling said that, if violated, Germany would have to leave the Euro. Should aid to Greece really go ahead, I expect someone to sue the German government. Sure, German lawyers and judges sometimes find ways of bending the law if it suits those in power (just try watching Roland Freisler in action, or reading "Der Führer schützt das Recht", a treatise by the brilliant Carl Schmitt on why Hitler's massacre of the Nazi Party's left wing was perfectly legal). Today's bunch will of course do nothing so outrageous (and I am not trying to say that declaring "too bad" and ignoring earlier EMU rulings would be comparable to Schmitts and Freisler's transgressions. I am just trying to point out that creative lawyers and judges can justify anything -- they did award Freisler's widow a bigger pension after she sued, because he would have had a brilliant career in West Germany had he not been killed by a bomb in 1945). So there is a non-zero chance, given its earlier rulings, that the Constitutional Court would actually oblige the government to either stop support to Greece, or get out of the Euro. If you take a deep breath for a minute, and dispassionately think about the consequences, this may be actually good solution for everyone (except, perhaps, the ECB bankers who would presumably have to move away from Frankfurt). The new Deutschmark would probably revalue by a lot. The soft-currency countries who now dominate EMU would get their beloved pesetas, francs, and escudos back, but with a common design on the pieces of paper. Policy could be as loose as Spain, Portugal, Greece, Italy, France, and Cyprus like; Germany could engage in its preferred policy of reducing unit labor costs, and running big current account surpluses. Every time they get too big, the Euro would devalue against the DM, the way the lira et al. used to. Everyone is happier. Probably, countries like Holland and Austria would shadow the new DM, as they did before EMU. Now, to be realistic ... if history teaches you something, it's that countries will stick to a silly monetary standard for way too long, especially if it's seen as the ultimately proof of adulthood in terms of currency. Just think of how long it took countries to abandon the gold standard in the 1930s... and as a beautiful paper by Sachs and Eichengreen showed many moons ago, you can explain most of the variation of when countries exited the Great Depression by when they abandoned gold.

Wednesday, 17 March 2010

Is Merkel Putting Her Money Where Her Mouth is?

I just gave an interview about the Greek debt situation to Swiss Radio. No idea when they will broadcast it, but one of the things I suggested is that, if Mrs Merkel (and Mr Sarkozy, et al) really think that Greek debt is suffering from a "speculative attack", they should use their own money to buy Greek bonds. This would serve as a public vote of confidence, and she should make money hand-over-fist if her reasoning is right. Greece's 2040 bond is still trading at only 77 cents on the dollar in Berlin, Frankfurt, Munich, Stuttgart. If one really believes that the decline from 100 in mid-2007 is simply "speculation", then a buy-and-hold investor should salivate at the 6.3% return promised. If Merkel and friends are right, that'll be risk-free, if you hold the bond till 2040. On top, you get the upside of the bond rising back to where it should be (if you believe it is worth more than 77) sometime before 2040. Why do I like this impractical idea? First, it shows that Greek's travails have nothing to do with speculation. Problems with incentives in financial markets are plentiful, but this particular episode has nothing to do with a bear attack. Second, once Mrs Merkel and friends own tons of Greek debt, they cannot possibly use taxpayer funds for a bailout...

Monday, 1 March 2010

Greece and 1+1 of debt dynamics

When is Greece going to go bust? It may sound a little harsh, but without help from the outside, I see very little hope for the indebted Euro member by the Aegan to avoid such an outcome. As we teach our students in the ITFD class on financial crises, one of the easiest ways to think about debt sustainability is to ask – what would it take to stabilize the debt/GDP ratio? If you start with debt of value x relative to GDP, then debt tomorrow will grow by the interest you pay. If there is growth, more debt in nominal terms can be supported more easily, and if you generate a surplus and repay some debt, it’s all honkey-dory. Pick a growth rate you believe is plausible, and an interest rate at which the government can borrow. The number you get is what the primary surplus should be to stabilize the debt/GDP ratio. Primary surplus doesn’t mean a fiscal surplus – it just means that your revenue is greater than your expenditure excluding debt servicing costs. If you play with the basic numbers a bit, you get something like this for the case of Greece.

Here, g is the growth rate, and i is the interest rate. If growth from now on is 2%, and the Greek government can borrow at 3%, then the government only needs a primary surplus of 1.1%. This is not too hard to achieve. If, on the other hand, interest rates go to 9%, then you need a surplus of 7.8% p.a. If growth dwindles, it gets ever harder to stabilize debt/GDP ratios. At 0% growth and 9%, we are talking 10.2% of a primary surplus. So just how bad is the situation in Greece? Needless to say, the government is currently not running a primary surplus – it’s in deficit, to the tune of 7.7% (thanks to DB Research for the figure). In the table, I have highlighted in bold the combination of figures that I think are plausible in the intermediate future. I am being optimistic here – even 0% growth is a good outcome given how uncompetitive the county is, and how bad the drag from fiscal consolidation will be. We are talking here of a swing of around 15% of GDP.

Overall, I fear this is a no-hoper unless the EU rides to the rescue on a white stallion. Fiscal consolidation on the scale required of Greece is beyond even the most cohesive states. I cannot think of countries other than after a major war producing such a shift in their public finances. Germanyin the early 1930s under Brüning tried to engineer a swing in the public accounts that was of a similar magnitude (it reduced nominal spending by about 1/3 from 1928-32). The budget cuts were so severe that Brüning became known as the ‘Hunger Chancellor’. Many believe that the program of fiscal consolidation enacted by his government undid the Weimar Republic.

Let’s get back to the little table. I think that a range of 5-9% for the interest rate is pretty optimistic, too – as creditors start to worry that Greece may not repay, they will demand ever higher interest rates. This creates a self-fulfilling dynamic, of the type that some politicians have branded “speculative attack”. It is, of course, nothing of the sort – nobody is manipulating markets here, rising interest rates just mean that, as a borrower looks ever worse, creditors are not keen to refinance them. Kehoe and Cole have a very nice paper, inspired by the Mexican crisis, on self-fulfilling sovereign debt crises, and Wei Xiong of Princeton has some new work on rollover risk (as applied to private firms).

So what should be done? Many equate default with a cataclysmic meltdown. This is not entirely without reason. As Rogoff, Reinhart, and Sevastano show in their paper on serial defaults, these can seriously damage your “fiscal health” – the state institutions you need to build a modern tax state. On the other hand, there is pretty convincing literature arguing that, since governments rarely sell contingent debt, defaults are a way to achieve market completeness. Investors de facto anticipate that things can go wrong, and the higher interest they receive beforehand compensates them for the risk. Defaults are when countries collect on the ‘insurance’ they bought before. Theories in the ‘excusable default’ vein (Grossman-Van Huyck, say) require that defaults happen in verifiably bad states of the world, and are driven by exogenous events. Half of that at least applies to Greece – things really are bad. One can argue if accounting fraud and an unwillingness to create a functioning tax bureaucracy qualify as exogenous. Be that as it may, it remains unclear why the burden of adjustment should exclusively fall on the Greek taxpayers, instead of bond holders.

Sunday, 28 February 2010

Will creative accounting help to avoid the wrath of taxpayers?

It seems that the German (and possibly the French) governments are going to help Greece after all -- but not directly, but by insuring banks that buy Greek debt against possible losses. The Wall Street Journal broke the story first, and now the bloggosphere is buzzing with unconfirmed rumors. Bloomberg has an overview.
European politicians always wanted Greece to get a lot of solidarity, in terms of taxpayer euros -- they are very sensitive to Europe and the Euro looking bad. Problem was that the taxpayers in countries that didn't forge their accounts, didn't lie to the EU, and didn't borrow 13% of the GDP weren't thrilled to pay up. How do you explain to Irish civil servants whose wages have just been cut that they will have to cough up for the third world-levels of corruption and sheer unwillingness to pay taxes in Greece? Compared to that, loan guarantees via a state-owned bank look much better. There is no immediate transfer of resources, the whole thing is mildly complicated, and it can be done with an "alliance of the willing", instead of the EU as a whole. Of course, the result is exactly the same as if the taxpayers just sent a cheque to Athens -- the weaker (Mediterranean) members of the Euro now know that they can rely on the rest to help them out, Greece will use every excuse not to raise taxes and cut spending, and the cost is born fully by taxpayers in the countries with responsible policies. For those who read German, Harald Uhlig has a clever post on why none of the standard economic reasons for helping Greece hold much water over at Handelsblatt.
Personally, I think that White House head of staff Emanuel has it right. He said that "You never want a serious crisis to go waste." By not helping Greece, even at the cost of a messy default and exit from the Eurozone, the EU would make it clear to the other member states that they have to clean up their act. In particular, given that the EU is the wrong currency for Portugal and Spain as they are now, it would produce the pressure to reform labor markets and regulation so that competitiveness can be regained. Since devaluations are ruled out, it's the only way to go. If, on the other hand, France and Germany pay in the end for Greece's foibles, with a detour via KFW-Bank, I think the (already remote) chances of the right thing being done here instead go to zero. Before anything happens, we'll have to see if opponents see through the "it's only a loan guarantee" shenanigans.

Friday, 19 February 2010

Evil speculators attack...

and the Spanish government calls in the secret services. Honestly, I first thought I was reading Private Eye or The Onion when I saw the news headline "Spanish intelligence investigating market attacks". Apparently, the PM and his friends are so tired of bad news, bond market sell-offs of Spanish debt, and the IBEX market index declining that they have called in the men in the trenchcoats. They are there to investigate if there is a conspiracy against Spain, led by the Anglo-Saxon press and evil speculators. Apparently, yield spreads widening to a ~100 bp over Germany seems so inexplicable to the ruling party that the only explanation possible has to be a conspiracy. My sense is that the truly astonishing aberration has been that yield spreads ever got as small as they were in the runup to EMU and for some years afterwards. It was as if only currency risk mattered for bonds, and sovereign risk had disappeared. Debt dynamics depend crucially on the growth rate, and even without any of the fraudulent accounting trickery that Greece engaged in, you can produce a holy mess if your expected growth rate gets very low. Given that EMU was and is the wrong monetary standard to facilitate growth ine Spain, Greece, and Portugal, there is nothing strange about the bond market starting to worry. Periods of economic chaos and political angst create an atmosphere ripe for conspiracy theorists. Germans during the hyperinflation of the early 1920s could watch Fritz Lang's film "Dr. Mabuse", in which an evil genius manipulates the stock market, cheats at cards, ruins innocent maidens, and prints money. Every political class has a breaking point when it starts to ignore reality and switches to fantasy explanations of what they see and hear. Roland J. M. Bénabou has a brilliant new paper on "groupthink" (non-technical summary is here), in which he tries to explain why reality denial can emerge under certain circumstances (and why it is perfectly rational for individual agents). I think it would make for better reading on Zapatero's desk than anything that the spooks can come up with.

Thursday, 18 February 2010

Everyone's a winner?

If you have to rank, rank often -- and everyone is a winner. Economics departments get ranked too, and everyone has a ranking they like. Not entirely by accident, it will probably show that your own place is doing well. Tilburg U runs one of the more respected exercises, and the results for 2005-08 are in. UPF Economics ranked 35th in the world (31st if you only look at top 5 journals); in Europe, we were 8th, behind LSE, Tilburg, Louvain, Oxford, Amsterdam, and Toulouse, but ahead of Cambridge, Tel Aviv, Bonn etc. The ranking only counts publications until 2008, and I am sure that 2009 will help us yet further.

Thursday, 11 February 2010

Spain keeps shrinking

Spain is much in the headlines these days. Markets worry about the PIGS (Portugal, Ireland, Greece, and Spain) not being able to meet their obligations. Paul Krugman has been pointing out that the cases are very different -- that Greece lied and cheated its way into EMU is well-known, as is the fact that its fiscal policies have been utterly irresponsible for as long as anyone can remember. Spain, on the other hand, had a surplus not that long ago, and its overall debt is still less than Germany's. The problem is not fiscal recklessness, but a massive real appreciation following EMU that left the economy largely uncompetitive on world markets. Institutions - labor market institutions in particular - are not up to dealing with this kind of problem, and the time-honored solution of the good old peseta days (devaluation) is no longer on the table. Now, news from the last quarter of 2009 shows that in contrast to almost all other OECD countries, Spain is still shrinking. I was particularly amused to see the folks over at Marketwatch reporting that
"Analysts at Capital Economics said Thursday's GDP data backs up the theory that a return to solid and unsustainable growth in Spain is unlikely anytime soon."
As typos go, this one is just wonderful. I am sure they meant sustainable, but... there is so much that was utterly unsustainable about the boom in the last 10 years that one doesn't even know where to start. Building houses that nobody wants to live in, at prices no-one is willing to pay, is my #1 on the list. It also sums up nicely the problem -- the old growth model post-1999 won't work, and there is not much of an alternative in sight. The government keeps saying R+D will pull Spain out of the crisis, but that is like Greece saying that a closer look at its national accounts show a massive surplus.
This relates to another of this week' highlights: Tim Kehoe was giving here on Tuesday, giving a talk at the Barcelona GSE about lessons from the Great Depressions of the 20th century for the Spanish financial crisis. He compared Chile to Mexico, and (not entirely surprisingly) blamed divergent fortunes on the ill tidings brought by wrong-footed government intervention in the latter. A case that is not in the book that he edited with Prescott, which I think could have provided a more appropriate analogy, is interwar Britain. Britain re-entered the gold standard in 1925 at an overvalued exchange rate, hoping that the currency regime would provide "discipline" for the last 10 percent of factor cost adjustment vis-a-vis the US. Instead, it got sub-par growth while everyone else enjoyed the roaring twenties... By Kehoe's reckoning, Spain's unit labor costs are now about 135% of their 2000 level, while Germany's are at 110%. While unions were powerful in interwar Britain, I am sure they are more powerful in Spain today. There is none of the grim determination to regain competitiveness that I saw in Germany over the last 20 years, after the reunification boom and debt orgy produced a sharp decline in competitiveness. My sense is that a lost decade or two for Spain are beginning to look more likely by the day. And who knows? When Tim Kehoe presents the Catalan edition of his book in a few years (he actually speaks Catalan), there may be a chapter in it on the Spanish depression of 2008-2018.

Friday, 5 February 2010

If it looks and smells like a bubble... it's probably garlic

Via the excellent Econbrowser blog comes this intriguing snippet of the garlic market in China (originally from the Washington Post).

Wholesale garlic prices in Beijing are now 15 times as high as in March, and still rising. Jerry Lou, a Morgan Stanley China strategist who has researched the opaque market here, said speculators-- fueled by the abundant liquidity sloshing around China-- have moved into the small market and strategically driven up prices. "You need a warehouse, a lot of cash and a few trucks. That's how it works," Lou said, describing garlic speculators' tools of the trade. "Basically, what you do is try to arrest as much supply as possible, then you bid up the price. Moving garlic from one warehouse to the other, you make millions of dollars."
As I will try to teach our students next term, telling a bubble apart from fundamentals-driven price increases can be really hard... until we take Charles Kindleberger's advice seriously, which is to look not at prices themselves, but at what motivates buyers. He essentially argued that if something is a. not very useful to you b. you only bought it because you think it will go up, there is a good chance that it's a bubble. Early finance models used to rule this kind of thing out with some quick and simple assumptions about arbitrageurs attacking the mispricing instantly, but we have gotten a lot better since - we can now write ever better models in which the Chinese garlic merchants can exist (and even make money). If I had to recommend just two papers, I would go for this and this.

The interesting thing is that garlic seems to stand pars pro toto for a lot of goods -- copper, aluminum, oil all seem to have been hoarded with the same intentions. Apparently, there are a lot of Chinese pig farmers who have been stockpiling copper and nickel. When oil was trading at $130, my friend and co-author Mauricio Drelichman asked me if I thought it was a bubble, and then - after some umming and ahhhing -- said yes, and put some money on it. If someone pressed me today, I would say the same about most industrial metals and oil. Given that a. the government stimulus effect is going to go down a lot very soon b. unemployment is not looking good c. much of the bounce in industrial output was restocking, I am not convinced that oil should be around twice of what it was a year ago...

Monday, 1 February 2010

Desert news

How weird is that? I had just arrived for my New Year's vac in Muscat, Oman. Having checked into my hotel after the 7 hour flight from Frankfurt, I popped open my laptop... and found an email by former ITFD student Joel Koczwarski, who requested a reference for a job in neighboring Abu Dhabi. I am happy to report that whatever I wrote must have been useful, as I recently got the news that he is off to work for Taleem EdisonLearning, inter alia advising on school reform in the Emirate. It's a tough labor market, and it makes me proud that our students are getting pretty interesting jobs in exotic locations. I hope he finds time for some hiking and diving!

Hate Radio and the Genocide

Job market season is in full swing, and faculty is getting treated to what feels like week after week of five-course meals in a pretty good restaurant. I am organizing part of the circus this year as chair of the recruiting committee, and so I, if you want to stretch the analogy, I guess I am a bit like the Maitre d'... One of my (and everyone's) favourites this year was David Yanagizawa from the IIES in Stockholm. His job market paper looks at what explains the extent of the Rwandan genocide. It's a grim topic (maybe that's why he doesn't look very cheerful on his website pic). In particular, David is interested in the extent to which reception of a particular Hutu hate ratio station made people more likely to participate in attacks on the Tutsi minority. He uses the implications of geography for radio reception as a source of variation. The chart from his JMP illustrates the point. If you are in the "shadow" of a moutain range, you will not receive the radio signal, but chances are that you are very similar in other ways to people on the other side of the mountain. David finds that, if you were on the wrong side of the mountain and didn't get reception, you were also much less likely to go out and wield a machete against your neighbours. Radio in his model acts as a co-ordination device, and lowers the threshold for engaging in violence. While one can pick many nits with the paper and (in particular) the model, I thought it was one of the most imaginative exercises I had seen in a long time -- interesting question, interesting source of variation, potentially important results.

Thursday, 14 January 2010


Haiti's tragedy is before our eyes as we look at the news. I find myself thinking about the Lisbon earthquake of 1755. At the time, the dismay was so general that it presented a real problem for theologians - how can a benign and all-powerful God let something like this happen? Voltaire used the earthquake to undermine the arguments of Dr Pangloss in Candide [Kant was also fascinated by it, and even wrote a book trying to explain the Lisbon quake as a result of subterranean caverns full of gas shifting -- one of the first serious attempts to produce a scientific explanation]. Today, there is little discussion along similar lines. In a way, the 18th century reaction to the 1755 quake is charmingly innocent. I guess the 20th century offered so many impressive horrors that it is difficult to think that a bad earthquake accentuates the need for a theodicy.

Why did piece rates disappear?

Rosario Macera from UC Berkeley was here yesterday, giving her jobmarket paper on loss aversion and wage contracts. I am not an expert in the field, and have to admit that I haven't thought much about the fact that monthly pay is mostly fixed, and variable pay arrives on a yearly basis. If you think about it, piece rates sound just like what Dr Smith ordered -- pay changes 1:1 with measured output. Sure, measuring output can be hard (try to assess the productivity of an academic, say...), but there must be many jobs where this is possible. Nonetheless, it's super-rare. Good science is all about making one look at something that seems obvious and not in need of thought, and turning it into an interesting research question. Rosario's talk did that for me (perhaps because I know less than most of the topic). She married a pretty standard setup with some loss aversion, and derived the optimal wage contract, which ... you guessed it, looks a lot like real life.

Now, as an economic historian, I couldn't help wondering... we used to live in a world with LOTS of piece rate work, plus a daily threat of dismissal (or not being re-hired). Why is it that 19th century labor markets didn't create the same kind of long-run stability, given that workers (in a way) are willing to "overpay" for stable paychecks? Standard stories of why we get long-term contracts focus on either the rise of unions, or on the different skill requirements in modern industry. But this can't be quite right -- even in textiles, where work is (for all I know) very similar today to what it was 100 years ago, there is much less work under piece rate contracts. Ditto in the mines. So are people more loss-averse today? Does the rise of mortgage debt and auto financing mean that, despite much fatter paychecks overall, people hate any decline in their income much more? Anyway, its nice to come away from a jobtalk and have many more things to think about than before... and good luck to Rosario.

Monday, 11 January 2010

It don't mean a thing...

As the flyout part of the recruiting season is about to start at UPF, I thought it might be a good thing to put a bit of a swing into everyone's step... from my colleague Michael Greenacre comes this rather splendid reinterpretation of Duke Ellington's "It don't mean a thing... if you don't do modelling":
It don't mean a thing if you don't do modelling,

It don't matter if you're frequentist or Bayesian,
You just need a model with some alphas and betas, x's and y's, and i's and j's and k's in!

So it don't mean a thing if you don't do modelling,
[I will suggest that ITFD statistics supremo Kurt Schmidheiny adopts it as the theme song of our quant methods class]