Κυριακή, 28 Φεβρουαρίου 2010

Alternative Analysis for the crisis.

( δομή της διάλεξης μου στο London Greek Business Community και σύντομα στο American Institute of Diplomacy)

The Leggacy of the Economic Crisis:governmental hedonism and the next policymakers' mistake

- Chicago Schools New Theory(Fama, Cohrane,Thaler)

''Do not blame the efficient market hypothesis for the over- investment effect of the state and credit money injection! It wasn’t just housing bubble. Corporate investment was very high. All forms of investment were very high. Somewhere in the world people were saving a lot—the Chinese, for example. They were providing capital to the rest of the world. The U.S. was consuming capital like it was going out of sight''

Understanding the functioning of free economies

-how to preserve them,

- how to solve the problems that arise in them,

- how to capitalize on their strengths.

Current examples of false analysis for markets‘ crisis

Subrime market :

-Misguided Blame :government policy, not a failure of the market

-Act of 1999, also known as the Gramm-Leach-Bliley Act, blamed as a source of recent problems, but that act opened the door for financial firms to diversify:

-JPMorgan Chase could not have acquired Bear Stearns ,nor Bank of America(it is not the Act’s fault that the Fed
sweetened the Bear Stearns acquisition at taxpayer expense and forced Bank of America to acquire Merrill Lynch).

-Goldman Sachs and Morgan Stanley become bank holding companies when it became clear that they could no longer survive as investment banks

Origins of the Financial Crisis

-Unusual monetary policy moves and novel federal regulatory interventions.

-Poorly chosen public policies distorted interest rates and asset prices, diverted loanable
funds into the wrong investments, and twisted normally robust financial institutions into unsustainable positions

-Default rates on nonprime-mortgages rose to unexpected highs.

-Firms directly holding mortgages saw reduced cash flows. Firms holding securitized mortgage bundles (often called “mortgage-backed securities”) saw the expectation of continuing reductions in cash flows reflected in declining market values for their securities

-Countrywide Financial, the investment banks Lehman Brothers and Merrill Lynch, and the government-sponsored mortgage purchasers Fannie Mae and Freddie Mac, went broke or had to find a last-minute purchaser to avoid bankruptcy

The Federal Reserve Expands Credit

-From early 2001 until late 2006, the Fed pushed the actual federal funds rate below the estimated rate that would have been consistent with targeting a 2 percent inflation rate.1

-The demand bubble thus created went heavily into real estate. From mid-2003 to mid-2007, while the dollar volume of final sales of goods and services was growing at 5 percent to 7 percent, real estate loans at commercial banks were growing at 10–17 percent

-Credit-fueled demand pushed up the sale prices of existing houses and encouraged the construction of new housing on undeveloped land

Fanie Mae/Freddie Mac : state’s lovers

- 1992, Congress pushed Fannie Mae and Freddie Mac to increase their purchases of mortgages going to low- and moderate-income borrowers.

-1996, the Department of Housing and Urban Development (HUD) gave Fannie and Freddie an explicit target—42 percent of their mortgage financing had to go to borrowers with income below the median in their area. The target increased to 50 percent in 2000 and 52 percent in 2005.

-The hyperexpansion of Fannie Mae and Freddie Mac was made possible by their implicit backing from the U.S. Treasury.

- To fund their enormous growth, Fannie Mae and Freddie Mac had to borrow huge sums in wholesale financial markets.

Credit crisis or economic crisis ?

-to explain the decline in real estate prices we have to explain why they declined in places that didn’t have subprime mortgages !

Corporate Debt market :

- Modigliani-Miller world = zero transaction costs/leverage problem

( Suppose the government stepped aside and let these institutions fail. How long would it have taken to have unscrambled everything and figured everything out ? )

- A financial market in which failed enterprises like Freddie Mac or AIG are never shut down΄΄…. is like an American Idol contest in which the poorest singers never go home΄΄(Lawrence H. White)

-The closure of Lehman Brothers (and the near-closure of Merrill Lynch), by raising the interest rate that the market charges to highly leveraged investment banks, forced Goldman Sachs and Morgan Stanley to change their business models drastically

- The most effective and appropriate form of business regulation is regulation by profit and loss ?

Stock markets :

- stock returns went up to 60 % a year

( measure of volatility was running at about sixty per cent, non- effective and almost stupid to give credit ,STARTING FROM FANIE MAE/FREDIE MAC ,in those circumstances )

National Debts :

- Analysis of official Net Debt, % GDP and the Total net liabilities (on and off balance sheet), % GDP (2010 projections) for European Countries and USA

- The primary fiscal balances governments should be running in order to stabilise on-balance sheet debt to GDP ratios (% of GDP)

- Fiscal credibility gap – difference between required and actual primary surplus (% of GDP)

- Permanent fiscal contractions required to stabilise off-balance sheet liabilities (% of GDP)

Questions for the Policymakers

-How to use their formidable regulatory and supervisory powers to deal with various types of
potentially destabilizing prices inflation?

-How they should incorporate a view on asset prices into monetary policy decision making? ( it is NOT the Fed’s job to try and estimate the correct or fair value
for asset prices!)

- Can they have predictions for a bubble in all asset markets at the same time?

No easy answers to these old Questions

- the models used to assess the appropriate monetary policy are narrow and inflexible

- Where do we draw the line on what prices matter?)

Imbalances and Bubbles

-Policy makers have to distinguish between relative and absolute price movements, while also
linking broad price increases to money and credit expansion.

-we have to evaluate developments in key asset markets properly and quickly.

A new tool : Broad Price Index

-Prices from currently produced goods and services (both consumer and producer prices) as well as real and financial asset prices.

- Taylor rule, a guidepost for the official level of interest rates based on the standard consumer price measure vs Carson-Shen rule, an alternative measure of official rates.

Πέμπτη, 18 Φεβρουαρίου 2010


Παραθέτω την συνταγή και όποιοι γνωρίζουν αγγλικά, θα καταλάβουν αν έπιασε η θεραπεία


• Raúl Alfonsin elected president,$45 billion due to IMF, World Bank, US Export Import Bank and private US banks 1989
• Following a currency crisis resulting in 15-fold jump in prices, Alfonsin resigns.
• Replaced by Carlos Menem
– pro union, nationalist economic policies.
– Under pressure from IMF, he appointed Domingo Cavallo as economy minister (junta-era official & corporate-friendly)
– Buenos Aires stock market spiked 30%
– Cavallo stacked government with Friedman students – “Chicago Boys”
• Massive cuts to public spending
• New currency – peso –pegged to US dollar”
• Sold off riches of the country – (including the oil company, YPF,
post office, telephone, gas, electricity and water utilities): 90%
of all state enterprises by 1994
• Fired 700,000 workers


• 2000
– over 50% of country below poverty level
– Unemployment over 20%
• 2001
– Argentina’s economy collapsed
• 2002
– defaulted on $805 million debt to World Bank
– Peso's 11 year-old tie to the U.S. dollar was rescinded,
resulting in a major depreciation of the peso and a spike in
• 2002
– Unemployment as high as 25% by late 2002 and the lowest real
wages in sixty years

• Néstor Kirchner, social democratic elected president:
– Restructured defaulted debt with a steep discount (about 66%) on most bonds
– Paid off debts with the IMF.
– Renegotiated contracts with utilities.
– Nationalized some previously privatized enterprises.
– Pursued vigorous income policies and public works investments.
• Néstor’s wife, Cristina Fernández de Kirchner elected president:
– Following massive agrarian protests and lockouts,
robust economic growth returned and double-digit inflation eased somewhat
– The global financial crisis has since prompted Mrs. Kirchner
to step up her husband's policy of state intervention in troubled sectors of the economy.

Παρασκευή, 12 Φεβρουαρίου 2010


Professor's Murfhy's framework for the Stimulus Package

Let G = increase in government spending
1-α= value of a dollar of government spending (αmeasures the inefficiency of government)
Let f equal the fraction of the output produced using “idle” resources.
Let λ be the relative value of “idle” resources
Let d be the deadweight cost per dollar of revenue from the taxation required to pay for the spending

When Will the Stimulus Add Value?

- The net gain is the value of the output produced less the costs of the inputs and the deadweight loss

- In terms of the previous notation we have:

Net Gain = (1-α)G –[(1-f)G + λfG] –dG
Net gain = (f(1-λ) –α–d)G

A positive net gain requires that: f(1-λ) > α+d

Difference of opinion comes from different assumptions about f, λ, α, and d

The new assumptions

- Government in general is inefficient

-The need to act quickly will make it more inefficient

-The desire to spend a lot in a short period of time will make it more inefficient

-Trying to be both stimulus and investment will make it even more inefficient

- 1-f likely to be positive and may be large.

- With a large fraction of resources employed(roughly 93%) much will
be drawn from other activities rather than “idle” resources .

- Ricardian equivalence implies that people will save to pay for future
taxes reducing private spending

- λ is non-zero and likely to be substantial
(People place positive value on their time,unemployed resources produce value through relocation e.g. mobility & job search)

- d is likely to be significant
(Wide range of estimates of d ,estimates based on taxable income)

With these parameters the stimulus package is likely to be a bad idea!

Αμετανόητοι Chicago boys....


SOCIETE GENERALE-Global Strategy Team

Popular Delusions: Government hedonism and the next policy mistake

''What you as the City of London have done for financial services, we as a government intend to do for the economy as a whole”- Gordon Brown speech to bankers, Mansion House June 2002.

Behavioural psychology applies to central bankers, regulators and politicians as much as it does to investors. In promising to ‘fiscally retrench tomorrow’, finance ministers are exhibitingthe behavioural phenomenon of overconfidence in their future self-control. The bitter fiscal medicine required to stabilise debt levels won’t become more palatable today relative to tomorrow until the bond market makes it so. It can only do this through higher yields. Thus,Ireland and perhaps now Greece lead the way. For the Japanese it’s too late.

Why should behavioural psychology be seen as something applying only to investors? Behavioural finance is a well defined sub-discipline in its own right. But where is behavioural politics, behavioural central banking, or behavioural regulation? Remember
the Fed policy statements around the end of the 1990s? The ones that kept referring to the technology-enhanced’ rate of GDP growth? Wasn't this herding around a bad idea the very
same herding then fuelling the NASDAQ bubble?

And as the housing bubble inflated, Bernanke in a quite staggering display of logical sloppiness, concluded that the risk of a housing collapse in the future was small because there had never been one in the past. Weren't they then guilty of framing their analysis in a way guaranteed to preclude an uncomfortable conclusion? If you don't expect to see something,you are less likely to see it. Similarly worthy logic was used when sub-prime rolled over,and Bernanke concluded that there was no risk of contagion to the rest of the economy yet ! Wasn' t this over-weighted?

It probably was, and it probably demonstrates that central bankers are as prone to be as systematically silly as the rest of us ! Indeed, just last year a study by Bernanke concluded that “monetary policy was not a primary factor in the housing
bubble”. I don't want to pretend I am any kind of behavioural expert, but isn't this the well documented ''attribution bias''by which people attribute positive outcomes to themselves,
but negative ones to others?

So here we are today, with regulators rounding on investment banks, hedge funds and tax havens, apparently in denial of the reality that the problem was not the regulations but
the regulators ! After all, heavily regulated institutions like Fannie Mae and Freddie Mac were at the epicentre of the crisis (as was AIG, whose financial services business model was the
facilitation of ''regulatory arbitrage'' around Basle capital requirements). Not that it makes any difference. The regulators are merely bowing to pressure applied by politicians whose
understanding today is as flawed as Gordon Brown' s was in the Mansion House back then.

If this sounds like a rant then I apologise it isn' t meant to be one. We are all fallible and policy making is an impossible job. But that means policy mistakes are inevitable, and I believe we are seeing one right now....

Oscar Wilde said he could resist anything but temptation. But doing something you know you shouldn' t is easier if you can convince yourself that this will be the last time you indulge, that
you won't do it again. So we convince ourselves that since we'll be strong in the future, we can still indulge today. Whether it's smoking, eating too much or going to the pub instead of
the gym, we delude ourselves into thinking that we will take the more difficult path next time.

A few years ago, two economists actually looked at the issue using gym membership data. They found that in a club in which non-members could pay a no-strings fee of $10 per visit, people preferred to pay the $70 per month for unlimited access. And since members only
attended 4.3 times a month on average, they ended up paying an average $17 per visit. The authors concluded this to be clear evidence of overconfidence about future self control.
Investors understand the affliction all too well: a stock trades at £10 and we tell ourselves that we are buyers at £8. But how many of us buy when it gets to £8? Some of us do, but most of
us don' t. Most ofus (I can' t be the only one!) convince ourselves that it's going lower still:
“I’ll buy at £7” becomes “I’ll buy at £6” and by the time it's back at £8we're “waiting for a pullback”. Each investor has their own way of circumventing this problem. But at root, such
poor decision-making is a consequence of our fundamental underestimation today of the discipline and even courage we will require in the future.

G7 ''committed'' itself to the path of further stimulus and they presented it as though it was somehow a difficult decision: ''the position for most countries is to support the economies now, and get the budget deficit down as the economy recovers.'' said the UK's Chancellor, Alistair Darling, nodding earnestly. Well, it got me thinking about how much governments need to retrench to stabilise existing debt to GDP levels. And although I consider myself fortunate enough to have forgotten most of the economics I learned at university, one lesson which was useful, or in any case has stuck with me, is of the arithmetic behind government debt sustainability.

There are lots of books containing lots of equations outlining lots of limits and theorems about the dynamics of government debt sustainability, but the basic intuition is that if I am a finance
minister mulling out how much money I should be borrowing, I want my GDP growth (and therefore my tax revenue growth) to pay the coupons on any debt I take on today. If the GDP growth rate equals that interest rate, the incremental revenue flowing into my coffers thanks to the incrementally higher level of GDP covers my coupon payments. I don' t need to borrow any more money and my debt ratios are stable. But if the interest rate is higher than GDP growth, my
incremental tax revenue won' t cover interest payments. I'll be in deficit and I'll have to issue more debt to plug the gap and my debt ratio will rise. The only way I can prevent further debt
growth is by running a primary budget surplus (i.e. a surplus excluding interest payments).

There are nuances and qualifications to this arithmetic, and limitations too, but in essence the fault line between sustainable and unsustainable debt dynamics can be summarised as:
maintaining a stable debt to GDP ratio requires governments to run a primary balance proportionate to the difference between interest rates and GDP growth.But if it is difficult to summon the political courage today, why will it be easier tomorrow?

Τρίτη, 9 Φεβρουαρίου 2010


Να απεργήσουμε,να μην εργαστούμε,να διεκδικήσουμε...
Να κινήσουμε την μηχανή της διαμαρτυρίας, αλλά κάποτε να γυρίσουμε και τον τροχό της οικονομίας, τον ιμάντα του κέρδους, τον αγωγό της υπεραξίας...
Να διαδηλώσουμε, αλλά και να στοχαστούμε σύντροφοι..
Να σκεφτούμε το ''Δικαίωμα στην τεμπελιά'' του Λαφάργκ,το προλεταριακό μανιφέστο του πεθερού του,Μαρξ, τους αγώνες των εργατών σε όλη την γή...
Και απο Πέμπτη, να ξανακαθήσουμε στα σύγχρονα εργοστάσια παραγωγής: σε τράπεζες ,γραφεία, πολυεθνικές, δημόσιες υπηρεσίες, ωστε να εισφέρουμε τον χρόνο μας στο απρόσωπο εργοδοτικό καθεστώς, στο αντικοινωνικό και παρασιτικό κύκλωμα των τοκογλύφων της χρηματιστηριακής διεθνούς και των πολιτικών τους νταβατζήδων...
Δεν απεργώ, γιατί δεν δουλεύω σύντροφοι...
Αποσύρθηκα και δρώ απ έξω, όχι απο μέσα...

Τετάρτη, 3 Φεβρουαρίου 2010


Ζούμε μια πρωτοφανή κατάσταση αργού θανάτου των ατομικών επιθυμιών και των συλλογικών οραμάτων. Στην μηχανική των οικονομικών συστημάτων, δεν υπάρχει ΜΙΑ Αριστερά που να μπορεί σήμερα να γυρίσει σωστά τους ιμάντες του κέρδους και να αναδιανείμει πλούτο στις μάζες.
Επειδή το εξωτερικό συστημικό άγχος της υπερπροσπάθειας μετοικεί σε μεγάλο βαθμο εντός της διχασμένης μας υποκειμενικότητας, μεγαλώνει ο ατομικός φόβος μιας αποτυχίας ή της χρεοκοπίας ψυχής και περιουσιών...
Η δομική οικονομική κρίση στηρίζεται και στην ενδοψυχική εμπλοκή, στην νευρωτική διαστολή των ατόμων, που απεικονίζεται στην δήθεν συλλογική νοημοσύνη των ΜΜΕ,ως μια κατάσταση παθητικής αποδοχής των δρώμενων(οι κοινωνίες σερβίρουν στα μέσα αυτά που τις αποχαυνώνουν. ο Μαρξ,εάν υπήρχε στην εποχή του η τηλεόραση, θα την όνομαζε-υποθέτω- μέσο παραγωγής υπερεξουσίας( κεφαλαιοκρατών και πολιτικών).
Η επικληση μιας Αριστεράς, ως ιδεολογία και κινηματική συμβολοποίηση κοινωνικής δικαιοσύνης, δεν μπορεί να αποσοβήσει δομικές ανισορροπίες διοτι μετέχει σε αυτές, είναι μέρος της δομημένης και συντεταγμένης πολιτειακής οργάνωσης των κοινωνιών. Επιτέλους, ας θυμηθούμε την μεγάλη μαρξιστική συμβολή στην α-δυνατότητα του οργανωτικού Συμβολικού θεάτρου της ανατροπής: η προτροπή για για τους προλετάριους να ενωθούν, ηταν περισσότερο σαν ευχή του γεροΚάρολου, μάλλον απωθημένη, προιόν της εσχατολογικής του προσέγγισης για την συλλογική νοημοσύνη των καταπιεσμένων ,την ασυντόνιστη δράση των ατόμων που εξεγείρονται στους αδυσώπητους νόμους της Αγοράς.
Πιθανολογώ, οτι αν ζούσε σήμερα , και ξανάγραφε το Κεφάλαιο ,ίσως να έμπαινε στον πειρασμό να αλλάξει και τον τίτλο :'' Η ΑΓΟΡΑ'')