Thursday, 31 May 2012

Ode to the missing envelopes...

If you look at income statistics, things are not so bleak in Spain. Wages are falling only a bit; GDP will contract by, maybe, 2-3% this year. And then you come across statistics like this one (hat tip to marketwatch). Retail sales in Spain are falling at a rate of 10% yoy. What is going on? Partly, precautionary savings. Partly, incomes are falling much faster than measured - in the boom, the black economy grew much more than the official one, and it is all those extra payments (in little envelopes) that companies used to make that are disappearing at a fast rate. In boom times, countries love to add the black economy to their GDP statistics. If we captured how quickly it is shrivelling now, GDP growth in Spain for this year would look a lot bleaker...

Saturday, 19 May 2012

a good headline

is like a great paper title... worth its weight in gold. Remember the famous "Ford to City: Drop Dead" one by the Daily News, during the NYC budget crisis in the 1970s? Here is another contender for greatest headline (via downtownjoshbrown)

Maybe Mauricio Drelichman and I should have tried to write a paper called "Meet the Fuggers" (about the German banking family's dealings with Philip II...)

Friday, 18 May 2012

everything you need to know

about Spanish banks, lucidly explained, over at fist full of euros. The conclusions are cheerful:

Naturally the whole BFA/Bankia edifice is the first good example I will point to of the use of chewing gum and chicken wire in Spain, since it is hard to imagine a more complicated way of doing something that is almost guaranteed not to work. Basically BFA, the parent bank, was created as a bad bank, where the toxic property assets (largely land) of the seven participating savings banks were to be warehoused, supported by a mixture of preference shares, subordinated debt and own resources in terms of company shares, equity etc, plus a 4.5 billion euro “hybrid capital” loan from the government restructuring fund (FROB), which was to be paid 8% a year. Naturally the value of the toxic assets was bound to drop as time past, and I suppose the hope must have been to tranfer earnings from new (“better” – not “good”) bank Bankia to both offset losses and service the FROB loan. But things weren’t to work out that way (as could have been anticipated), since Bankia itself was created with its own property exposure (especially in the form of developer loans, many of which were on the point of “souring”) as there simply were not enough resources available to wharehouse everything. And when the new government introduced a law requiring more provisioning, well it was all over, bar the large injection of public money now needed to clean up the mess. Others were given the opportunity to kick the can a little further down the road by entering a merger, and thus offseting the write-downs against capital rather than having to charge them directly to profit and loss. But Bankia was already too big, and too about to fall over, to be able to find a “dancing partner”.
Going back to gum and chicken wire, I remember reading in the report on the Three Mile Island nuclear accident, that in the run-in to the problem maintenance had either been neglected or was completely ad hoc. The archetypal example for this was the discovery that a hole in a cooling pipe had been plugged using a basketball. There you go Mr de Guindos... go find a basketball!

Wednesday, 16 May 2012

fun paper of the week - snow and liquidity

finally, a fun finance paper with some really cool (!) identifying variation:

Based on a sample of highly leveraged Austrian ski hotels undergoing debt restructurings, we show that reducing a debt overhang leads to a significant improvement in operating performance. Changes in leverage in the debt restructurings are instrumented with Unexpected Snow, which captures the extent to which a ski hotel experienced unusually good or bad snow conditions prior to the debt restructuring. Unexpected Snow provides lending banks with the counterfactual of what would have been the ski hotel's operating performance in the absence of strategic default, allowing them to distinguish between ski hotels that are in distress due to negative demand shocks (“liquidity defaulters”) and those that are in distress due to debt overhang (“strategic defaulters”).

who said

that economists aren't working on real-world problems? Here is the abstract of a paper by Diamond and Rajan (QJE 2011):
Is there any need to clean up a banking system by closing some banks and forcing others to sell assets if the risk of a crisis becomes high? Impaired banks that may be forced to sell illiquid assets in the future have private incentives to hold, rather than sell, those assets. Anticipating a potential fire sale, liquid buyers expect high returns, reducing their incentive to lend. Privately optimal trading decisions therefore lead to a worse fire sale and a larger drop in lending than is necessary. We discuss alternative ways of cleaning up the system and the associated costs and benefits.

While one can't apply it 1:1 to the situation in Spain,  it's definitely food for thought...

ECB smoke signals

First came the news that Jens Weidmann is openly arguing for collateralizing TARGET balances in the Eurozone. If you don't breathe and live Eurobabble - in simple words: The head of the Bundesbank now thinks that the risk of a Euro breakup is so high that it wants more than just the word of the Banco de Espana, Bank of Italy, etc. that they will repay all the money they have stuffed into their banking systems. Hand over the assets; this only makes sense if the risk of exit for the Club Med is getting high, in the Bundesbank's view. Ouch.

Now it emerges that the ECB has drastically curtailed lending to Greek banks, partly as a reaction to the fact that the 25 billion € given to Greece to recapitalize banks has not been used for that purpose. Remember that Greeks withdrew about 700 million € last week, after the elections. Without ECB liquidity, the banks will implode. This, to my mind, means the writing is on the wall. The ECB's long-term liquidity program in December last year bought a bit of time for countries that run big current account deficits, but now that Spanish banks are virtually out of collateral that they can post, and with the ECB getting restrictive, everything is set for a rapid unravelling once another small shock or two occur... 

How culturally isolated are you?

Take Charles Murray's little online quiz and find out how far away you are from American "mainstream culture". Notice that the definition of American culture is singularly narrow... hunting, fishing, cheap beer, pick-up trucks. Miraculously, I managed to score not 0 but 4 out of 20 (where 20 is full engagement with US culture). But no worries - acc. to Murray, I still qualify as "your bubble is so thick you don't even know you are in one". (hat tip to CheapTalk)

Sunday, 13 May 2012

Chimps are smarter than humans

Better think twice before you call someone an ape next time... Colin Camerer just wrote what must be the most amazing paper in economics in a long time. Here is the abstract:

Chimpanzee game theory

The capacity of humans and other animal species to think strategically about the likely payoff-relevant actions of conspecifics is not thoroughly understood. Games are mathematical descriptions of canonical ways in which joint choices determine interdependent rewards. Game theory is a collection of ideas about how strategic thinking and learning determine choice. We test predictions of game theory in three simple competitive abstract games with chimpanzee and human participants. Subjects make choices on a dual touchscreen panel and earn food or coin rewards. The chimpanzee and human protocols are closely matched on experimental procedures. The results show that aggregated frequencies of chimpanzee choices are very close to equilibrium points; and choices shift with reward changes almost exactly as predicted by equilibrium theory. Remarkably, chimpanzee choices are closer to the equilibrium prediction than human choices are. Chimpanzee and human choices also exhibit unpredictability on average from trial-to-trial (a
property which is adaptive in competitive games), but individual subject-sessions show substantial predictability of choices from past choices and rewards. The results are generally consistent with the cognitive tradeoff hypothesis, which conjectures that some human cognitive ability inherited from chimpanzee kin may have been displaced by dramatic growth in the human neural capacity for language (and perhaps associated skills). As a result, chimpanzees retained the ability, slightly
superior to humans, to adjust strategy competitively and in unpredictable ways, conforming remarkably closely to equilibrium predictions from game theory.
The paper is here; there are other results pointing in the same direction (hat tip-CheapTalk)

Friday, 11 May 2012


To have a bank executive to utter these words in 2012 is truly, truly stunning (via marketwatch):

“... in hindsight, the new strategy was flawed, complex, poorly reviewed, poorly executed, and poorly monitored. The portfolio has proven to be riskier, more volatile, and less effective as an economic hedge than we thought.”
This is Jamie Dimon, explaining why the synthetic credit products that JP Morgan created blew up in their face. This is fully 5 years after the financial crisis broke out. The last time something similar to the financial crisis since 2007 happened - in the Great Depression - the US introduced the SEC; broke up universal banks via Glass-Steagal; and introduced deposit insurance. Politicians did what they are there for. They look; they learn; they regulate the craziest risk-taking out of existence. And today? No more than the mildest of wags with a finger. The fact that anyone thinks this is an excuse for big banks - which, as we now know, only exist in bad times because of the taxpayers' generosity - losing billions is truly staggering. What exactly have we done to restrain risk-taking amongst the banks since 2007? Where are the adult politicians and regulators chaining the financial hounds of hell?

Bad banks in a world of bad choices

CNN is quoting me on the Spanish banking crisis. After Bankia was taken over by the government, there will now be bad banks for every Spanish bank by government fiat. The problem is that if the government ends up shouldering the burden (even if only in part), it will blow whatever little credibility it has in bond markets right out of the water. Most of the Spanish banks and cajas are bankrupt today; it is only because the regulators let them pretend that houses in Spain are worth 3 times what they are worth in Germany (yeah right) that they are still in business. If the banks have to do the recapitalizing themselves, this won't really help, except for the illusion of clean accounting -- the reason why we worry about the banks is that they should lend, instead of nursing their wounds from hundreds of billions of misguided lending. There is no clean solution here, short of the banks defaulting on their debts. This would clearly help -- the new financial institutions stepping forward afterwards would find it a lot easier to lend. Of course, this is the step all governments have been avoiding like the plague since Lehman, and it has to be said that it is really hard to gauge the likely consequences.

What I would like to see is a significant shrinking of the Spanish banking system, with a number of bankrupt lenders not taken over, but wound up. That will give the rest more pricing power and the ability to make money off lending money. 

Friday, 4 May 2012

the no-more austerity consensus

is slowly emerging. I am not talking about having to "evacuate" the university building yesterday because of student protests. Or the asinine expectation that the ECB (one a "fact-finding" mission to Barcelona, where they sipped champagne in the most luxurious hotel in town) would introduce new measures to fight the crisis. No less a grand pundit than Paul Krugman is starting to tell people what I have been saying for two years now - at the rate at which we are going, the Euro won't survive, and it's unclear that it should. When I first said it, people shook their heads and mumbled "other-worldly economic historian". It's becoming clear rapidly that the transfers from the North of Europe won't continue, and that belt-tightening is hitting a limit in the South. Via Paul Krugman's "Conscience of a Liberal":

Austerity AlternativesRyan Avent writes what I’ve been meaning to write about the backlash against the austerity backlash. It’s all about attacking a straw man. Nobody — certainly not me — believes that, say, Spain or even France can simply go back to Keynesian policies unilaterally. Instead, the point is that if European leaders want the euro to survive, they have to recognize that the austerity thing isn’t working, and offer Europe-wide alternatives.....
For in the end, Spain and others do have an alternative to endless austerity, one that may be forced on them by events: exit the euro, with all the financial and political fallout that follows. And on the current course, that’s what’s coming.

Tuesday, 1 May 2012

Transforming Hatred

Vox just published a new piece by Nico Voigtländer and me on anti-Semitism in Germany:

Hatred Transformed: How Germans Changed Their Minds about Jews, 1890-2006

The persecution of Jews during WWII is one of the darkest and most puzzling chapters of recent history. This column asks how economics can help our understanding, particularly of how people’s attitudes to Jews have changed over time. It argues that ‘cultural economics’ shows that there is more to understanding how people behave than looking at their incentives.

How and when do people change their minds? For example, watching a popular television series like AMC’s Mad Men seems to transport us straight to another planet. It shows the lives of advertising executives on Madison Avenue in the 1960s who spend their days drinking heavily (from 9am), chain-smoking, and fornicating. While not necessarily an accurate portrayal of corporate life in the middle of the 20th century, it reminds us how deeply cultures can be transformed in a relatively short space of time. In the Western world today, attitudes towards homosexuals, pre-marital sex, and women working outside the home are radically different from what they were a generation ago (Fernandez-Villaverde et al. 2011).
At the same time, culture seems to persist over long periods of time. Italian towns that were self-governing in the middle ages are still more prosperous, citizens give more blood, and are more trusting (Guido et al. 2008). Areas of Africa affected by the slave trade continue to show lower levels of interpersonal trust (Nunn and Watchekon 2011). What accounts for the two-faced nature of culture? Why does it change so radically some of the time, while remaining unaltered over long periods?

Anti-Semitism as an indicator

In the past, canaries were used in coal mining to detect the presence of toxic fumes. Anti-Semitism serves a similar function in our study. As an attitude, it is arguably puzzling – it is extreme, clearly-defined, and dysfunctional. Germany has not been home to Jews in any significant numbers since 1945 (despite some minor inflows after the 1990s). In recent research, we look at the persistence of Jew-hatred in Germany (see Voigtländer and Voth 2012). In earlier work, we show that towns that saw pogroms in 1350, at the time of the Black Death, were still more anti-Semitic in the 1920s and 1930s (Voigtländer and Voth 2011). In this column, we examine how much of the past still matters for the present. Specifically, we ask how much of the anti-Semitism we see based on data from 1996 and 2006 reflects attitudes in the same location as far back as the late 19th century. We also examine the conditions under which hatred of this kind can be accentuated or reduced.
Germans today are on average probably not much more anti-Semitic than other Europeans (Bergmann and Erb 1997). At the regional level, however, there are considerable differences. We use data from the German Social Survey (ALLBUS) to examine attitudes towards Jews. The survey asks a battery of questions, such as “Do you think that Jews partly brought persecution in the 20th century on themselves?” Answers range from 1 (strongly disagree) to 7 (strongly agree). Figure 1 shows regional differences (at the district level) for answers to this question, based on the proportion of the population giving a score of 5, 6, or 7.
Figure 1. Distribution of extreme anti-Semitic views

you can read the rest here. If you want to read the article on which the VOX piece is based, look here. This research follows on from earlier work we did on the medieval origins of Jew-hatred in the 1920s and 1930s in Germany (now forthcoming in the QJE).

J-Pal hires more ITFD students

Congratulations to Filippo Sebastio, who will work for J-PAL (Abdul Latif Jameel Poverty Action Lab) in Bangladesh, starting this summer. He will help with evaluating policy interventions designed to reduce poverty, using the randomized experiment methodology.