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.

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...

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.

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.

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.

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...