"Des waerelds doen en doolen, is maar een mallemoolen,"

"Des waerelds doen en doolen, is maar een mallemoolen," engraving from Het Groote Tafereel der Dwaasheid, 1720.

"The actions and designs of the world go round as if in a mill." South Sea bubble financial crisis.

Monday, January 31, 2011

Political embeddedness and the price of oil

Prices of WTI went up significantly on Friday 29.01. Crottaz. O. asks if we are at the beginning of an increase in oil prices due to the risks of propagation of political unrest and revolution spreading throughout the arab world, especially into Algeria and Lybia, which produces together up to 5% of world oil.

The analysis reflects the political embeddedness underpinning this situation. In an excellent post, John Quiggin links the "Arab exception" - the idea that the concept of democracy is not really applicable in Arab countries and that foreign policy therefore amounts to a choice of which dictator to support - to the idea of oil as a special case. The idea of the "Arab exception"

...rests on the assumption that the existing governments are less than legitimate, and can be dealt with in terms of traditional Great Power politics, with spheres of influence, secret deals and so on. Even weak democratic states display much more effective resistance to external interference in their domestic affairs than do typical autocratic regimes. The point applies most obviously in relation to oil. The idea that the US can legitimately use its military power to ensure continued access to oil resources rests, in large measure, on the (not entirely unfounded) assumption that those controlling the resources are a bunch of sheikhs and military adventurers who happened to be in the right place, with guns, at the right time. Without the Arab exception, the idea of oil as a special case, not subject to the ordinary assumption that resources are the property of the people in whose country they are found, will also be hard to sustain.

Sunday, January 30, 2011

Bankers have feelings too, you know

From the FT
"We need to stop authorities around the world throwing sticks and stones at us. We should be past that now" said one banker in Davos. 
As fear about inflation is mounting, some feel it is time now for governments and banks to make peace. But as the financial industry is complaining about regulation and low interests rates, it feels we are still in the "waaaaah Street" narrative Max Abelson described, where the issue is not entirely about policy, but about insults and emotions. Finance, after all, seem to care about the public's opinion (still from Abelson's piece): 
"We've been ostracized," another source said. "I went to jury duty about a year ago, and when I said I'm in investment banking, the people in the jury room were making ugh sounds, and I'm like, fuck you. I'm proud of what I do. And I think this firm did a lot to get the recovery going. Somewhere ranked below a pimp and well operator is not right."

Thursday, January 27, 2011

The Politics of reports II

19 days of public hearing, 700 interviews, 3 different explanations of the financial crisis and a sad loss of credibility.  More on that from The Economist.

Wednesday, January 26, 2011

The Politics of reports

The Financial Crisis Inquiry Commission will issue tomorrow its final report which puts the blame mainly on Wall Street, says the FT. The book-length publication is however endorsed only by Democrats. A dissenting explanation is planed to be published by Republicans, while another Republican commissioner will issue a third one, focusing on the role of the government in the housing market.

Tuesday, January 25, 2011


Robert Shiller points to a contradiction: There never was so much interest in popular economics while economists, on the other hand seem, to have lost credit among the general public. The reason for that, Shiller says, is that economics has become more sexy because it has become more open.

After a decade of intense use of mathematical models and prior to the current financial crisis, financial economists thought of themselves as physicists. Science had won, thanks to the efficient market hypothesis. And Bachelier. But the financial crisis showed us that the models were not only misused, but were clearly inappropriate to capture fully the securities' price movement of stock markets. This crisis should have never happened according to these models. The overconfidence in scientific financial economics, because, huh...it's not like it's the first time predictions are wrong. Theoretically the LTCM crash did not exist either, neither did many other spectacular price movement. That impressive series of miscalculation, which culminated with the present one, gives scholars like G. Akerlof an argument when pointing at the efficient market hypothesis as one of the cause for the current mess:

Something went wrong and it is legitimate to ask. The soul-searching resulting from it might be painful, but as economists realize that economics is a human science, the public seems to enjoy. It is refreshing and it sells books.

Monday, January 24, 2011

Russia's financial freedom

The 2011 Economic Freedom Index was released by the Heritage Foundation and the Wall Street Journal, where Russia ranked 143, squeezed between Seychelles and Ethiopia. Here's what the report says about financial freedom in Russia: 

As far as the Financial Freedom Index is concerned, Russia’s small, undeveloped financial sector remains vulnerable to heavy government influence, the report noted. State-owned banks continue to dominate the banking sector and account for over one-third of the sector’s total assets. Despite improvements to the banking regulation in 2006, bank supervision and transparency are insufficient, the report says, stressing that the more than 1,000 licensed and registered Russian banks are generally small and undercapitalized. Another drawback, according to the report, is that capital markets are relatively small and are dominated by energy companies. However, the global financial turmoil appeared to have provided an impetus for bank consolidation with more than 60 banks eliminated. But the government prevented the closure of large lenders while channeling large amounts of state funds to prop up failing financial institutions, according to the authors."

And here's a graph of the financial freedom in Russia (in blue) vs world average (in black):

So on the one hand, the report draws a rather pessimistic picture of the institutions supporting the Russian financial sector, but on the other hand, complex financial instuments are also sold in the Russian market (and good luck finding structured products in Ethiopia). 

Is this combination of institutional backwardness and complex financial instrument a problem ? Is there any effects on the level of financial litteracy and/or the level of public trust ? What are the institutions needed to support a complex financial sector ? 

Does it really matter ? I hope so, because this is what I am writing my PhD about. 

Sunday, January 23, 2011

Banking and Emotions

It appears that emotional factors could play a role in banking relationhips, after all. Here's an article about a study by Finance Prof. Cocca, Linz University. I concede that it's not really  breaking news. And the article has nothing substantial to say on how emotions affect banking relationships, except that age difference matters (the older the banker, the better) and that less than 15% of clients in Switzerland get consulting from women (a disgrace). That being said, let us applaud the effort of the mandating bank that paid for the study. It is at least a useful way to polish a corporate image. 

Saturday, January 22, 2011

Gaming the system

No one expresses it better than Jon Stewart when it comes to Goldman Sachs and how they seem to be so good at bypassing rules: mmmm...these fucking guys. So while we learn in the economist or the FT that Goldman engaged itself in an exercise of public self-examination, we are also reminded of the set of clever moves they made back in December 2008, the notorious month that never existed. They first changed their status from investment bank to commercial bank to avoid a disaster and switched the start of their fiscal year from December to January. Needless to say, huge losses were booked that very month of December 2008 which never appeared on public report. We know now also that a vast load of stock options ($ 1.7 billion worth now $ 7.6 billion) were granted that same month. And it did not show up in any report either.

Mmm...these fucking guys.

Tuesday, January 18, 2011

Financial foundations of capitalisms

As it appears, we are all Chinese now, we might as well promote a new book:"Red Capitalism: The Fragile Financial Foundation of China's Extraordinary Rise" by Carl E. Walter and Fraser J.T. Howie on the interplays between finance, law and economic growth in China. Even the brief Q&A with Carl Walter about his book on Economix shows that institutional paths always deviate from the Western blueprints. Now obviously when you decide to write a book about the fragility of the Chinese financial sector, you have to select what you will talk about and it's not surprising Walter and and Fraser do not mention norms, habits and the different cultural settings into which the Chinese financial sector is necessarily embedded. I would love to stumble across a book that takes these factors more into consideration when looking at financial structures. 

"China’s banks as modernizing financial institutions are less than 10 years old" says Walter. So had this young banking sector the time to pick up the specific norms on which sound banking practices are built ? The last generation of explanation for financial crisis highlights that we need more than just prudential regulations to avoid financial turmoils. I would guess these norms are close to what Krugman had in mind when he said Western financial systems slowly switch from "boring banking" to "fancy finance".

Monday, January 17, 2011

The Russian Stock Market

The Russian stock market has to overcome the problems that it inherited as a legacy from the mass privatization and loans-for-shares program that took place during the 1990s. It grew quickly after 1998 and then continued to boom from 2000 to the 2008 crisis. However the issues that reforms need to address - problems with regulatory agencies, extensive corporate conflicts, unclear property rights and the dearth of domestic investors - are a reflection of Russia's broader societal problems. My piece for the Russian Analytical Digest about that here.