Friday, July 31, 2009

Don't take your eye off the ball

The global economy is still overwhelmingly driven by the USA, Europe and Japan - though you might not think so, given all the noise about the rise of China and India.

Even if one uses as the basis of calculation the fashionable but ridiculous idea of Purchasing Power Parity (PPP), the US and Europe account for around 45% of world GDP and 60% of global personal consumption spending in 2007. Over half of world exports and imports originate from these countries, as do nearly three-fourths of global outward foreign direct investment and a similar share of global mergers or takeover deals.

The rest of the world is inevitably dependent on what happens in the "driver or central economies".

The "marginal or peripheral economies" are always more badly hit than the central economies during a bust phase of the economic cycle, but the peripheral economies rise more quickly during the boom phase.

As the global economy at present bumps along an artifically-sustained bottom, the effects on the peripheral economies are patchy - the "leading peripheral economies" have maintained some sort of equilibrium overall though parts of their economies too have been hit. Meanwhile the "even more peripheral economies" have been uniformly hit.

Of course if your economy was dependent on exports, then it was more likely to be hit by the crisis.

And it is likely to continue to be hit by the crisis unless your government can stimulate internal demand.

Naturally, the more your government tries to stimulate internal demand by spending money or reducing taxes, the weaker it will get in terms of its finances (on China, which is reckoned to be an exception to this rule, I have written skeptically earlier).

A few such countries caught in this dilemma (e.g. Iceland) can try to rush into the arms of larger economic groupings for protection. Most do not have this option.

They should think seriously of adopting one or more complimentary currencies as a mechanism that can help their economies stabilise - and not just in the current crisis. Stabilisation is as much needed when nearing the top of a boom as it is needed when nearing the bottom of a bust. Sphere: Related Content

Wednesday, July 29, 2009

What kind of risk-appetite has returned?

Appetite for risk seems to have returned - but only, so to speak, for "simple risks" such as equities and bonds. There is a simple reason for the return of the risk appetite, when the fundamentals have not been sorted out: when people are paid to be "active", they HAVE to be "active" if they don't want to lose their jobs.

On the other hand, appetite for what might be called "complex risks" is yet to return (and a good thing, too?):

Chicago-based Hedge Fund Research claims to have found that hedge fund assets are still on their way down; in the final quarter of 2008 investors withdrew $152 billion while, in the 2nd quarter of 2009, withdrawals were at a lower level of $43 billion.

Though there was an increase in the value of hedge fund assets by $100 billion in the second quarter, this was entirely due to an improvement in investment performance (and that, as far as I can see, was itself due to the effects of all the stimulus packages around the world rather than any extraordinarily intelligent actions on the part of hedge fund managers - I am not implying that they were doing anything stupid, simply that they were doing, as far as can be worked out, what might be called "normally intelligent" things).

So "simple risks" may be accepted or declined with greater alacrity right now, but the appetite for "complex risks" is still declining. Sphere: Related Content

Friday, July 24, 2009

Visit to Israel (continued)

It is a fortnight since I returned from Israel and I have been too busy to put anything more down regarding it! So I know that if I don't do it NOW, it won't get done at all!

At this time of year, Israel is of course extremely hot. 43 degrees on the Golan Heights, 37 in Haifa (where we were based). Even in Haifa, and at the top of Carmel, it was so hot that I, in spite of being Indian, could only sleep because of the sea breeze which is quite strong at night.

On our drive around to Lake Galilee, I am told (and see) that the water level is 8 or possibly even 10 metres below what it should be - and it is the main source of water for the whole land! We discuss why the level has dropped. It occurs to me that the expansion of the human population around the lake may be at least one factor. The population of Israel has gone up from 800,000 at the time the country was established, to some 8 million today. All around the Lake, there is evidence of new building, mostly by expansion of old settlements, some of it along the lake but a surprising amount up the hills aorund.

However, our guide mentions that Israel has the number one position in the world for recycled water. "Guess how much of the water in the country is recycled?", he asks. I have no idea so make a wild guess: 30%? The correct answer is 85%, says our guide. "And which country has the 2nd highest amount of recycled water?", he continues. Again, no idea. This time I am so totally stumped that I cannot even offer a wild guess. The correct answer is apparently: Spain. But our guide is not satisfied by how much of my ignorance he has already exposed. "How much of the water in Spain is recylced?", he asks. Again, no idea. "Fifteen per cent", he says. I am astonished. "Only 15%?!", I ask. That is incredibly huge gap betwen the number one country at 85% and the number two country at 15%. I must check the background to that out some time....

At the beautifully preserved and maintained Orthodox Monastry in Capernaum to which he takes us, I see in the fenced-off garden, a donkey and a variety of hens, ducks, geese, peacocks and peahen - even though only one monk lives here (as far as we were told).

By contrast, when we drive a couple of minutes to the nearby Roman Catholic occupied site of the town of Capernaum, it seems very established and prosperous but not nearly so well kept. It is prosperous because of the hordes of tourists who are brought to visit it, as it has a sort of church built in such a way as to more or levitate over the supposed site of the home of Peter - you can peer down on what is left of the town. However, the simple explanation why it "must" be Peter's house don't add up: that is the largest of the structures (presumably a dwelling, though there is no evidence of that!) but we have no indication from the records that Peter was anything other than an ordinary fisherman from a human point of view.

The "white synagogue" nearby (also much visited and within the "occupied site") is only from the 4th century, and my guess is that the myth regarding which is Peter's house originated then, with the need for the newly-converted Emperor's folk to dignify the history as much as possible. The "white synagogue" is built literally on top of the synagogue which existed in the time of Jesus and to which Jesus may have gone (one can peer down to the original at one or two places, though you see hardly anything). So what you have in the splendid ruins of the white synagogue is a moden (4th century) ruin on top of the old ruin - really, nothing worth seeing for the pilgrims who come here. But, I guess, as pilgrims, they don't really come to SEE anything, they come because they acquire some sort of satisfaction from having visited the site

At the entrance to the Roman Catholic occupied territory, the bronze and larger than life size statue of Peter by some pious sculptor makes him look rather gormless.

On our way around the lake, we stop to see if there is anything at Magdala but there is only a sort of banner by the side of the road informing us that the tiny ruins (three quarters surrounded by a sort of holiday hotel site, and one quarter bounded by the road) are all that are left of a once-prosperous fishing village. However, just up the hill is the "modern" village of Migdal (which we do not see as the possible connection between the two only dawns on me some time later, when I opine that the ancient village probably went much higher up the hill - the lower part was ruined in some battle or other, while the uphill part survived and was built up again later....Again, something to be checked out when one has the time....

A bit further around the lake, I ask our guide/ driver to kindly take us off his scheduled route to follow a sign advertising "The museum of the ancient boat". The museum itself is much like most museums, but the boat takes the cake for the best thing seen on the entire tour. It is 10 metres long, and I wonder why I am moved to see it. Possibly because it is a real thing from the time of Jesus, not merely some interpretation of some ruin that you can hardly make out. The story of the finding of the boat, and its extraction from the mud of the lake, and the years and effort and money that were required to get it to a state in which it can be seen by the public - all that is very well told in the video show which is offered, and I suppose is part of the reason I am so impressed. Was this one of the boats in which Peter fished, or any of the others who are mentioned in the historical records? Was this a boat in which Jesus himself travelled on one of his many recorded and unrecorded journeys across the lake? These are among the questions that the museum poses in written form near the exhibit. The questions are interesting, but not as interesting as the exhibit itself, though another of the signs there shows all the different kinds of wood that went into the boat, from which it can be deduced that the boat was used over a long time, and (as it was repaired again and again by employing different kinds of wood) was used by relatively poor people, at least at some point in time - presumably as the entire region went from prosperity at the time of Jesus to poverty following the destructio of Jerusalem by the Romans in 70 AD.

I observe that the northern end of the lake is stony and arid, but the middle starts being more hospitable nad the southern valley of the Jordan seems quIite productive and almost green.

We start driving up the Golan Heights, which I mentioned earlier, though we visited it almost at the end of our day-long tour. It is not only extremely hot, even the air is hot. In north India, we call the hot summer wind that blows the "loo". The Heights are what may be described as a single strip of hills, between 1000 and 1300 metres high between the river Jordan on one side, and the plain with the Sea of Galilee on the other. From the Heights, one can see right across the whole plain of Galilee (Israel is a tiny country, and relatively thin). I had not realised it quite so starkly earlier: whoever controls the Heigts controls the water supply for at least the whole of the northern part of the country. From the viewpoint of their national defence, it would not just be extremely stupid for Israelis to give up the Golan Heights, it would be tantamount to national suicide.

On the heights, there are several disused bunkers originally built by the British to keep an eye on what is today Syria and Jordan. I have never actually visited the site of a bunker earlier. All around there are signs warning visitors to keep to the market paths as mines were laid down all around and there are still many unexploded ones that may still be live. However, the bunkers could be a good tourist attraction - specially for children - and it would not take that much money to get them cleared and cleaned....

The Golab heights seem to have both Arab and Jewish settlements but both seem relatively new - or at least not ancient.

I know a bit about Judaism but had not realised the distinction between those Jews who are secular, those who are "merely" observant of the religious lawas, versus the "religioius" do no work nor serve in the army and have to be maintained out of the taxes of those who do work! It appears, however that the religious seem very well organised and have been able to defend their benefits successfully so far.

It is a pleasant and unevetful drive back to Haifa. On the outskirts, a former dump is being beautified _ there are aertistically shaped margins that have been bricked out and various flora planted. However, cows are wandering the area freely as we drive past on our last evening here - reminding me of India once again.

In Haifa, I am startled to see a sign announcing "George Eliot Street". Why does Haifa name a road after George Eliot, I ask my guide. This time it is his turn to appear ignorant. Another thing I must check out some time.

Truth to tell, I have seen hardly anything in the week or so I have spent in Israel. But I too feel a curious sense of satisfaction at having been here and seeing whatever little I could see.

BTW, I did not see a single tank in my entire week there (though my wife tells me that she saw one). I did see soldiers with guns, but they were either manning security check points for tourists in Jerusalem (I will post something on our few hours in Jerusalem, when possible) or they were on trains riding to and from their training. Each Israeli, man or woman, has to give THREE YEARS of life to the military. That is extraordinary, but not so extraordinary as how little the normal rhythm of life is impacted by security considerations compared to the portrayal of Israel in the media. When we mentioned to a few friends and relatives that we were going to Israel, the instant and universal reaction was: "Dangerous!". Actually, except for the soldiers with guns on the trains, the land was entirely normal. The hotels were nearly fully booked, whether those top of the range or those that are youth hostels.... No we didn't stay in either. Sphere: Related Content

Should a Eurozone Bond be created?

The admirable Dr. Otmar Issing has just published a persuasive piece arguing against the creation of such a bond, though his argument is undercut by the fact that, basically, Northern/ Western Europe has committed to social and political rescue of at least the western part of the old Soviet empire - with huge costs that have anyway been paid, and are being paid, by Western Europe (principally Germany).

Issing's article is here

What do you think? Sphere: Related Content

Monday, July 20, 2009

Whatever happened to checks and balances?

In the UK, as in the US, the current mood is for renewed centralisation.

This too is a kind of bubble.

I see in this morning's FT that the Tories (the UK's Conservative Party) would like to abandon Britain’s tripartite system of financial regulation and transfer all the powers to the Bank of England.

Though the intention is noble, and the instinct is more sweeping, this is in substance very similar to the Obama proposals in the USA (no surprise to see the Tories following the US Democratic Party now!).

However, systemic risk does not come only from the banking sector, or even from financial institutions.

Systemic risk comes from the system as a whole :)

Though the immediate cause may come from a particular sector of course....

In the Asian crisis (which sank just about all the Asian Tigers, so completely that they still have not properly recovered!), the primary cause was political....

That is why it is best to keep the wider issue of systemic risk separate from the narrow technical questions of banking regulation as well as from the broader questions of financial services regulation.

I stand by my suggestions for a Global Systemic Risk Regulator, made in my piece in the New York Times on 30 June:

See too the earlier piece, also published by the DealBook section of the NYT, evaluating the Obama proposals as a whole, which is at: Sphere: Related Content

Thursday, July 16, 2009

Will the recession really be over "by the end of this year"? If so, what does that mean?

At the start of the current recession, the consensus view was that it would be a short and shallow one lasting some eight or nine months, like the recessions in 1990-91 and 2001.

Nouriel Roubini and other "doomsters" (such as me) argued that the recession would be deep and long-lasting, and we have been proved right so far. Roubini argued that the recession would last 24 months, and we are more than 10 months beyond the consensus forecast at the time the recession started - and have only some 5 months left of the recession, according to Roubini's forecast. My view is that the recession could end very soon if the US Congress tackles the key issues of the ack of transparency, the multiplication of leveraged speculation, and the speculation (about which I have written and spoken extensively, most recently by invitation at the Israeli Chambers of Commerce in Israel).

The US Congress is debating those very issues right now - and the question is whether or not they choose to address those issues at least as vigorously as suggested by the Obama proposals. In my articles published in the New York Times Online ("DealBook" section) a couple of weeks ago, I have argued that a more vigorous approach would be even better. But at least the response of Congress should be no weaker. Provided that were to be so, then the recession could end within days.


Whether we see sustained recovery depends on further factors, specifically how quickly employement returns to the US economy, and how quickly the US consumer is able to and does starts$ spending again - but this time out of savings, not merely by increasing debt!

Households in the US are already overloaded with debt, as is the corporate sector, and of course also the government with its now unbelievably massive fiscal and public debt.

A renewed bout of recession will therefore remain as a risk. The "bottoming out of the recession" has been based entirely on governments' unsustainable explosion in monetary and fiscal easing - and it will not be easy to get the timing and size of the withdrawal right.

Fundamental questions remain to be answered about the nature of the global economic system that we have at present. I have argued consistently over several years that the human and ecological consequences of the current economic system are set to destroy humanity - much sooner than consensus predictions have indicated even recently.

At the very minimum, questions of ecology and social justice need to be integrated into global economic and financial rules. It is just possible that we may still succceed in the first (environmental issues) at the Copenhagen conference this year. There are also attempts to renew the Doha round to get the WTO talks going again - and, if so, there will be a chance to get issues of worldwide social justice included in any new WTO treaty. However, these represent more or less our last chances to tackle these issues. Ideally, we should go beyond the ecological and social issues to the psychological, cultural and spiritual issues that are at the heart of the repeated crises that are endemic to the nature of the current economic system.

Some of us have already been addressing those issues for ages, others of us have begun to address those issues more recently, and I hope and pray and wish that all of us may begin to see and address these issues urgently and as soon as possible. Sphere: Related Content

Wednesday, July 15, 2009

Is an FDR-type "bank holiday" on the cards?

The Blogosphere has been busy with a lot of chat on the subject. Roughly half the hits for a Google search for "fdr bank holiday" show up on a search for "fdr bank holiday 2009".

I'll tell you what interested me:

If I was Obama, and I had this at all in mind, I would have acted on this by now.

Of course, it is possible that the administration's judgment is that the public needs to be prepared before such a move is made, whenever that may be necessary.

Should that be the case, then it would of course be useful to encourage extensive discussion of this on the Blogosphere before drawing more traditional media into the discussion, and finally announcing such an actual move.

However, a week is a long time in politics and it remains to be seen whether such a drastic move will be thought necessary. Because the consequences will not be pretty: in 1933, the US was pretty isolated from the rest of the world, and vice versa....

It is doubtful if the result would stop at greater bank & system control, fewer banks & a lower US Dollar. The impact on US Treasuries, and on Emerging Markets would be terrible.

Greater bank and system control is already being sought by legislation being considered by the US Congress. Banks are going out of business by the day, though that gets hardly any publicity. And a lower Dollar can be more predictably and efficiently obtained by other measures.

So the supposed main advantages of a "bank holiday" are already on the way to being obtained (we hope!). Any additional advanatages of such a possible move are more uncertain than in 1933. And the disadvantages of a "bank holiday" might be horrendous. Sphere: Related Content

UK Government Minister's behaviour descends to new low in the battle regarding public broadcasting

Ben Bradshaw, the UK Culture Secretary, is thoroughly emotionally-committed to the so-called "Digital Brain" proposals which include, among other things, the idea that the Licence Fee, which is paid by everyone in the UK who owns a TV, should be shared by organisations other than the BBC (at present, the Fee goes entirely to the BBC; this is because other organisations are expected to raise their funding from the market).

In an interview with the Financial Times yesterday, Mr. Bradshaw described the leadership of Mark Thompson, the BBC director-general, and of Sir Michael Lyons, chairman of the BBC Trust, as “wrong-headed” and claimed not only that opposition to government plans to share some of the licence fee with rival broadcasters was “self-defeating” but even that the BBC staff themselves were in favour of the Bradshaw proposals - something whose veracity can easily be checked, if necessary, but is wholly denied by Mr Thompson, who says that he has "seen absolutely no evidence that the BBC is anything other than fully united" against the Bradshaw proposals.

Splitting the licence fee is a move designed to weaken public broadcasting in the UK and, as the BBC is the premier broadcasting organisation in the world, that would have tremendous negative consequences on public broadcasting around the world - as well as on the future of democracy, as I have argued elsewhere. What is needed, rather, is to strengthen public broadcasting.

The BBC is not a perfect organisation, but it is an important bastion of human and humane values - and it is open to public scrutiny in a way that few other media organisations are.

Splitting the licence fee would undoubtedly lead in time to using the licence fee for wider purposes that are at present supported by general taxation.

The net effect of would be a continued weakening of the BBC, and eventual loss of independence from market forces for the BBC.

In any case, the Culture Secretary has indulged in uncultured behaviour in descending to personal attacks on Mr Thompson and Sir Michael.

We all have uncontrolled moments, so I do not call for Mr. Bradshaw's resignation. However, I do call on him to apologise to Mr. Thompson and Sir Michael.

And I call on him to withdraw the thoroughly damaging proposal that the Licence Fee be shared by other organisations whose role historically has been, and is today, to raise their funding from the financial and advertising markets. Sphere: Related Content

They may or may not be politically or selfishly motivated, but they agree with the Guptara plan for financial systemic risk oversight

This morning's Financial Times reports that a coalition of investors, analysts and ex-regulators makes proposals very similar to mine, regarding how best to monitor financial systemic risk (that is, the risk of global recession). See:

I have not seen the 39-page document prepared by the group. Apparently, FT has seen it.

The FT's summary is that the document calls for the creation of an independent body ("the Systemic Risk Oversight Regulator" - horrible name!)to police risks across the financial sector, with full-time staff led by a chairman and four members appointed by the president and confirmed by the Senate, accountable to Congress. William Donaldson, a co-chair with fellow former SEC head Arthur Levitt of the Investors’ Working Group, told the FT the new agency should have “carte blanche to go everywhere it wants . . . to find systemically weak areas within the system”.

All these are exactly in line with the proposals I made in the New York Times DealBook section on 30 June:

The earlier piece, also published by the DealBook section of the NYT, evaluating the Obama proposals as a whole, is at: Sphere: Related Content

Monday, July 13, 2009

The state-organised looting of the US taxpayer

The Congressional Oversight Panel's Report for this month (July) focuses on the issue of what the right price is for repurchases of TARP warrants.

You may recollect that TARP (The Troubled Asset Relief Program) was created by the US government to purchase assets and equity from financial institutions in order to save them from possible bankruptcy (TARP is the largest component of the steps taken by the government last year). TARP Warrants are simply the Warrants that were issued to purchase the troubled financial institutions' assets and equity. As the economy stabilises and these banks' financial situation improves, these institutions naturally want to repurchase their assets and equity in order to free themselves from government influence and interference. The question is: what is the right price for these Warrants?

In its Report, the Panel report compares its estimates with other estimates, based on high, low, and best assumptions for key variables.

Applying its calculatons to the warrant repurchases by eleven banks that have already been approved by the US Treasury, the Panel estimates that the price paid was only 66% of the Panel's best estimate of their value.

Concretely, the Panel estimates that an additional US$10 million should have been paid.

In other words, that is US$10 million that the taxpayer should have received and has not received.

Naturally, the question of what the "correct" price is for such warrants is a ticklish one.

The simplest way of settling the question would be to let market forces have their way. Here is an important product for which there is a worldwide market. No need for the US Administration to distort that market.

Let there be auctions.

That is the only way to ensure that the taxpayer does not continue to be looted. Sphere: Related Content

Sunday, July 12, 2009

A friend asks: Is development more powerful than religion?

Responding to my post titled: "Why would 6 out of 10 Muslims oppose building a mosque in their area?", a friend asks: "Is development more powerful than religion?"

My response: Almost all religions have been anti-development. The exceptions are Judaism, Buddhism, and Protestantism - and (because I consider them religions too), Marxism and Casino Captialism of the sort that emerged with President Reagan and Mrs Thatcher).

Of these, the only ones that produced development without any negative effects were Early Buddhism and the Radical Reformation (i.e. the Radical Protestants).

Buddhism's developmental impact declined once it started being corrupted into the various forms it takes today (excluding Reformed or Christianised Buddhism in the West).

Islam, on the other hand, has had a mixed history. Whenever Islam has been open to non-Islamic views, it has been pro-development. However, Islam has at various times in different parts of the globe, turne in on itself and become what has been called "Islamist". That kind of Islam has always been anti-development.

In fact, development has taken the fangs from most traditional relgiions. Judaism and Radical Protestantism (Evangelicalism) produced the modern world. But Radical Protestantism is what thrives best in it - if measured by the rate of growth of the religion concerned.

Of course, Evangelicalism also produces its own corruptions. Which is why I am not an evangelical but a simple follower of Jesus the Lord. Sphere: Related Content

Friday, July 10, 2009

Soros on the nature of markets

In an interview to the UK´s DIRECTOR magazine, Soros quarrels (as I do) with the academically-dominant hypothesis of "efficient markets" (that is, that prices are the efficient outcome of perfect knowledge in the market)

However, he puts the alternative much more succinctly and elegantly than I have ever done

He says that markets, so far from being self-correcting, are shaped by the ingorant biases of market players, and those biases can be self-fulfilling.

I take it that he means that those biases can be self-fulfilling at least in the short term. I would amplify that by adding, that such self-fulfilling biases can exist as long as the result is somewhere within shouting distance of reality. When the results of these biases get too far out of sync with reality, unfortunately reality always strikes back.

For the full interview, see Sphere: Related Content

Moral choices

Following one of my posts, my friend Jay Rosen asks "Is it morally superior for a person to give their wealth to their family or to strangers? To refine the dilemma, If I could save one child, mine or an identical child who is not mine, which is morally the best choice?"

Actually, the two cases are quite different. In the first case, presumably we are speaking about what wealth remains after having completed the "normal" duties of taking care of and educating your child(ren).

In both cases, the primary duty is of taking care of those who are given to you by God to look after - and primary relationships come before secondary relationships. So necessary minimum care for yourself and your spouse comes first (on the grounds that we cannot and should not love others more than ourselves, but only as much as ourselves), care for parents precedes care for children, care for friends precedes care for non-friends (as is very clear from the direct teaching of Jesus the Lord himself regarding giving even to God having a lower priority than taking care of one`s partents).

However, minimum demands for each of these categories comes before higher demands from others, as Jesus also makes clear in the story of the Good Samaritan.

In the two cases above, the same principles apply. Which means, in the first case, that it is more moral to give the money to strangers, provided you have fulfilled your responsibilities to your elders and your children. In the second case, if you can only save one child, it should be that of your own - because the life of your own child comes before the life of another child. That is not only more moral, it is also more normal or instinctive.

I am sure that others may reach other conclusions regarding these two cases, but in each case we have to look beyond the decisions themselves to the principles on which the decisions are based and, in turn, beyond the principles to the authority who gives sanction to those principles. Sphere: Related Content

Wednesday, July 08, 2009

South Korean President follows the spirit of Jesus the Lord and of Gandhiji

A story on CNN has just announced that South Korea´s president is to to donate the bulk of his wealth (some $26 million)to set up a youth scholarship program

Will politicians in Third World countries be inspired to follow this example?

I greatly doubt it.

But how about making such donation compulsory for all those who are elected to the top political offices? That would sort out those who genuinely want to serve their people from those who are merely power hungry.

Anyway, I want to salute President Lee Myung-Bak, and wish him many years of not merely serving his people, but leading them to greatness. Sphere: Related Content

Tuesday, July 07, 2009

What caused the housing bubble?

Mark Thoma, the doyen of economics bloggers, asks this question in his latest blog.

His post is occasioned by Edward L. Glaeser´s discussion of the subject, at

Thoma, as always, generously quotes Glaeser, who discussed the possible roles of Alan Greenspan´s loose monetary policy, lower interest rates and increased availability of credit, concluding that the only explanation that makes sense is the "rise in optimistic beliefs about housing price appreciation ....even if those beliefs were held by only a small share of the population....Yet even if ridiculously rosy beliefs are a major part of bubbles, we cannot say that we understand those bubbles until we understand the sources of such beliefs"

Thoma takes on the task of traying to explain the sources of those beliefs, and comments. "I don't think people believed that housing prices would never, ever go down, what they thought is that housing prices would go up in real terms, on average, over time - that housing was a good long-run investment....(though) the belief that real housing prices rise over time is false, the evidence suggests that real housing prices are relatively flat over the long-run. Because people expected prices to rise on average when they should have expected them to remain flat, the correction... was far larger than anticipated and many homeowners weren't able to simply ride out the short-run variation like they thought they would be able to do. But this still leaves a question unanswered. Why did people have this false belief about the long-run trajectory of prices? Shiller explains that this happened because people believed that both land and building materials were becoming relatively more scarce over time, a belief he says is false, but that just pushes the "but why did they believe that" question back one step from housing prices to the prices of land and raw materials.,,,People are told (or were at that time) that stock markets are a great long-run investment. If you have the time to ride out the short-run fluctuations you can earn 8% per year. Just dump your money in an index fund that duplicates the market portfolio, and forget about it until many, many years later and you will do fine. Risk adjusted real returns on assets ought to equalize across markets through arbitrage, so shouldn't housing yield a real return similar to stocks (adjusting for risk)? Shouldn't there be a real return on housing just like in stock and other asset markets, and if so, doesn't that mean real prices will rise on average over time? This still requires beliefs about long-run prices at odds with (Shiller's) evidence though.

"One more note. I may be wrong to assert that people thought that housing prices would rise forever. If you know that there is a bubble in an asset market, but you believe you can sell fast enough once the market hits a turning point to still make a profit, or at least not lose much in any case, then you may be willing to make an investment that tries to exploit the short-term surge in prices. But while I think that may apply to stock markets, or other markets where assets can be sold quickly (the belief that is, the reality is quite different when everybody tries to sell at once), I'm not sure this applies to housing where sales can be notoriously slow. But it's still possible that people would know there is a bubble in housing prices, but still be willing to make an investment because they believe that housing prices would fall so slowly that, if necessary, they could sell their house before taking a loss. It just doesn't seem to me that this explanation works as well in housing as it does in stock markets".

No. And i doubt if most people were financially or economically literate enough to even understand that "Risk adjusted real returns on assets ought to equalize across markets".

But there is a simple explanation of the reason for the housing bubble that seems to me to have been overlooked by both Glaeser and Thoma. what if far more people felt they understood, and therefore felt able to play in, the housing market than in the stocks/funds market? In other words, what if far more people, who were less financially literate, were trading in houses than were trading stocks? Sphere: Related Content

Monday, July 06, 2009

On a brief visit to Israel

here is what struck me

- Security at the airport of departure was a little more elaborate than the usual, but not remarkably so (I guess the security guys in El Al are trained to make it appear inconsipicuous)

- no one queued at the Gate to airplane in the airport. I guess that is typical of the hard-driving individualism that marks Israel today?

- on board the flight, the staff were certainly the most attentive I have ever experienced - not excluding any of the other airlines that have had my praise so far

- however, there was no apology for the airplane landing late!

- I have visited Israel only once earlier - 26 years ago! My recollection of Ben Gurion Airport is of a rather sleepy place, more or less comparable to Basel Airport. So I was totally unprepared for the monumental but attractive (as monumental as the largest US airports, but even more attractive) place that the airport at Tel Aviv has become. There is a spacious, alegant, pleasant and well organised green circular area which you approach off the landing area, and then go off this to collect your baggage and so on

- at the border, the officers (guards?) were in smaller booths than is usual in Switzerland, but the booths are staggered one slightly behind the other, for greater privacy

- in the baggage area, I am impressed by the steering ability of man with an extraordinarily long "snake" of luggage trollies - till I discover that the "snake" is driven by some sort of engine from the rear (very clever, haven´t seen that anywhere else - have the Israelis imported this from somewhere? Are they exporting it?)

- when we emerge from the airport and drive up the coast towards Haifa, I find that we are sort of cutting through at least a part of Tel Aviv. To my eyes, the city is halfway between Frankfurt and any city in the US - but much larger

- for a sunday afternoon, the traffic was incredible - very busy 3 or 4 lane highways all the way till just short of Haifa almost at the northern extremity of the country

- signs of hard work and industry everywhere - you can see the effects of Israeli activity in patches, transforming the land from its original Arab aridity to something more like central or south India

- Unlike the airport where no one queued, on the road, there IS lane discipline. The result is a moving traffic jam doing around 30 at the worst for a few seconds but moving along mostly pretty smoothly at about 120 kmph

- The roads here are much better than in Switzerland now

- During the 90 minute journey from Airport at Tel Aviv to Haifa, we see not a single tank, not a single soldier, not a single gun.

More anon. Sphere: Related Content

Saturday, July 04, 2009

The New Immorality of the British Government

No, I am not referring to the "snout in the trough" syndrome, reprehensible as that is.

I am referring to something much more important.

Conservative American radio host Michael Savage has been banned from entering Britain by the Home Secretary. Michael Savage questions Global Warming and says unpleasant things about governments and minorities. However, he has no criminal record.

As a member of a minority myself, I would defend to the death his right to say nasty things about me and mine and people like me. Certainly he has a fundamental right to criticise not only his own government (that of the USA) but also every other government if he wishes to.

That is precisely what freedom of speech is about.

Increasingly, countries around the world have passed or are currently passing "thought crime prevention bills" (the US one is titled the Violent Radicalization and Homegrown Terrorism Prevention Act of 2007) to punish citizens who advocate "extreme violence, hatred, extreme views, conspiracy theories - such as the one that 9/11 was an inside job.

However, if people didn't have the right to argue their point of view about 9/11, then the truth about 9/11 would never be known.

There is no definition of "thought crime" that makes any sense.

If anyone advocates violence on the part of individual citizens or groups of citizens, then it is right to prosecute or ban such a person.

Short of the advocacy of violence, every has (and should have) the right to argue their point of view.

That is why the British government's ban on the Dutch MP Geert Wilders from entering the UK was not only morally terrible and politically inept in view of the UK's relations with fellow-EU countries, but an attack on freedom of expression - a fundamentally element not only of the UK?s tradition and constitution, but of what makes the whole of the West so fundamentally different from the rest of the world. Sphere: Related Content

Why would 6 out of 10 Muslims oppose building a mosque in their area?

A friend brings the following Press Release to my notice, which I offer without comment at present:

Wednesday 24th June
Most local residents prefer mixed-use development finds ComRes survey

In the first-ever survey of local opinion about the mega-mosque proposed for West Ham, close to the site of the 2012 Olympics stadium, nearly 7 in 10 Newham residents (68%) said they would prefer a mixed-use development of houses, shops and community
facilities to the 12,000-capacity complex proposed by Islamic sect Tablighi Jamaat.

In the survey undertaken by ComRes, nearly 6 in 10 of Muslim residents in Newham (58%) also said they would prefer a mixed-use development for the site.

However although Tablighi Jamaat have indicated publicly over the past 15 months that their proposals for the site will include a Muslim conference centre, an Islamic school for 500 boys as well as 12,000-capacity prayer halls, around 8 in 10 of all residents say they have not been given enough information about the proposals (75%) and that they need more as the proposals are likely to have a significant impact on the local community (81%).

"These first results are provisional as far as we are concerned and must be treated with caution," said Cllr Alan Craig, leader of the Christian Peoples Alliance opposition group on Newham Council, who commissioned the survey. "But they are helpful as Newham people have not previously been consulted - they have been kept in the dark by Newham Council and Tablighi Jamaat. We need to know what local people - including Muslims - think about this massive project on our doorstep. And they are saying they need more information.

"But what is clear is that a significant majority of local people would prefer a mixed-use development instead of the mega-mosque proposals," continued Alan Craig. "This is not surprising. However we plan to undertake further polling to give people a voice as our campaign against the project grows."

Last week Newham Council confirmed they have been in dialogue with the mega-mosque
site owners and are currently engaged with them in the pre-planning application process.

On Saturday (20th June) Cllr Craig and his team held a successful Have-Your-Say mega-
mosque consultation event at West Ham in order to encourage participation of local
residents in the issue.

Queries: Visit

ComRes Survey: ComRes conducted 300 telephone interviews among Newham residents
between 10th-11th June 2009. Results were broken down by age, electoral ward, gender, ethnicity, religion and social grade and comparisons were made where appropriate.

ComRes is a member of the British Polling Council.

Full results tables can be found at Sphere: Related Content

Friday, July 03, 2009

How Robust is your National Economy?

As most of my readers know, the New York Times Online (DealBook section) published this week my proposals for a robust early-warning mechanism for global systemic risk in finance, economics and business.

As long as such a mechanism is not put in place, there are some penetrating questions that you can ask regarding the situation of your own national economy.

These questions are raised and published in this month's issue of Fast Future Bulletin, a monthly(ish) newsletter produced jointly by Rohit Talwar of Fast Future Research and Ian Pearson of Futurizon:

"1. Will the current regulatory system and the changes planned in the near future prevent your banks from creating crises such as the one we’ve just experienced?

"2. Do your governments now have better early warning systems and coping mechanisms to detect and deal with future banking crises while they are only weak signals?

"3. Does your economy have the financial resources to manage another bail out on the scale of the one we’ve just experienced?"

I would modify the wording to address the "financial system and cultural values" rather than merely "banks" (as these are now rather weak things compared to all the other players in the field). Sphere: Related Content

Why the so-called "stress tests"

I have publicly said that the US "stress tests" for banks are rather "relaxation tests".

For an explanation of the fundamental flaws in the US tests (which are now being adopted worldwide!), see: Sphere: Related Content

How governments are providing money. and how they hope to take it out again, just in time

A friend sends me the following, which has apparently been doing the rounds for some time, though I cannot find "brilliant world economics" on the internet.

Anyway, I had not seen the material earlier, and I post it here for its humour, which is painfully close to the bone:

It is the month of August, on the shores of the Black Sea . It is raining, and the little town looks totally deserted. It is tough times, everybody is in debt, and everybody lives on credit.
Suddenly, a rich tourist comes to town.
He enters the only hotel, lays a 100 Euro note on the reception counter, and goes to inspect the rooms upstairs in order to choose one.
The hotel proprietor takes the 100 Euro note and runs to pay his debt to the butcher.
The butcher takes the 100 Euro note, and runs to pay his debt to the pig farmer.
The pig farmer takes the 100 Euro note, and runs to pay his debt to the supplier of his feed and fuel.
The supplier of feed and fuel takes the 100 Euro note and runs to pay his debt to the town's prostitute that in these hard times, gave her "services" on credit.
The hooker runs to the hotel, and pays off her debt with the 100 Euro note to the hotel proprietor to pay for the rooms that she rented when she brought her clients there.
The hotel proprietor then lays the 100 Euro note back on the counter so that the rich tourist will not suspect anything.
At that moment, the tourist comes down after inspecting the rooms, and takes his 100 Euro note, after saying that he did not like any of the rooms, and leaves town.
No one earned anything. However, the whole town is now without debt, and looks to the future with a lot of optimism.....
And that, ladies and gentlemen, is how governments are doing business today. Sphere: Related Content

If you want to understand how to create financial bubbles so you can benefit from them

I have just re-read Huffpost "Goldman Sachs: The Great American Bubble Machine"

It is a great piece. Probably one-sided, in that at least some GS employees and alumni are undoubtedly people of commonsense and conscience...

When I read that piece, a lot of US government moves suddenly started making sense.

Essentially, many of these moves are not about creating or maintaining a level playing field, they are about eliminating competition and establishing domination.

That's fine when it is a company that is trying to do it. It is not fine when a government starts doing it for one company or a small group of companies or even a big group of companies. A government should not be about merely promoting the interests of the stockholders of a particular company or group of companies. Government should be about serving all citizens.

Any government that does not do that eventually loses credibilty and damns its own country (including, by the way, all the stockholders in its companies). Sphere: Related Content