Wisdom Central

CREI is holding another summer school in Barcelona. CREI's best and brightest are offering classes; I am going to talk about Sovereign Debt Crises, combining theory and empirics (both historical and recent). What's on the menu? Here is the summary:

Sovereign Debt Crises: Past, Present and Future

Instructor: Hans Joachim Voth

Selected Topics:

• Is this time different? Sovereign debt crises over the long run
• Illiquidity and insolvency: Measurement and conceptual issues
• Punishment vs reputation in theory and practice
• The price of default: Investor returns from sovereign debt, 1850-2010
• Stability at what price? Solvency, austerity, and social instability
• Regulating stability: Plans for a “New Financial Architecture”

Dates: July 2 – 6

Time: 13:30 – 15:30 h

Price: 600 Euros (Students: 400 Euros)

As you can see, I will cover a bunch of things, from a conceptual framework for sovereign debt crises, the risk of self-fulfilling "debt runs" and the absence of state-contingent debt to important empirical regularities over the last 200 years (with a detailed discussion of Reinhart and Rogoff's classic This Time Is Different). I will also talk about some of my recent research on the link between political and social instability and austerity (short summary over at VOX here).

You can sign up here. 

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.

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...