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.