"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, April 25, 2011

The return of Political Economy

Finns rarely make the headlines, but their support of euro-skeptic True Finns has pushed political risks into the spotlight. Political economy is back and yes, how people think, vote and the varying frameworks embedding how they organize still matter.

The added value of rating agencies

The S&P alarm on US debt on April 18th moved stocks markets and triggered a lot of comments. The recurring ones are about the added value of Credit Rating Agencies (CRAs). The very existence of CRAs is being questionned every time financial news put them in the front row because it still not clear whether or not they passed a “market test”. Do they provide any extra information?

If the added value of CRA’s in the US is still a questionable, no wonder the rating industry has suffered a lot of criticism with regards to applying ratings to developing economies, especially after the Mexican and Asian crises. Ratings could indeed favor procyclical behavior or could be sticky, in that they would simply react to macro-economic parameters or market news, reinforcing arguments which claim they are, evidently, behind the market, since they use publicly available data. For Powell

while the rating agencies do not necessarily add to the sum of underlying knowledge, they change the degree of “common knowledge”. In other words, each analyst may have known what S&P knew, but they did not know for sure what all the others knew. All are now sure that at least all know S&P’s views.

So S&P issued a “warning” on US debt, stock markets then plunged and I am still wondering how information is treated where it matters. Because, as Krugman noted, the 10-year bond rate did not seem to integrate the S&P signal.

Wednesday, April 13, 2011

Robots are going to the BRIC

HFT growth has supposedly peaked in Western Europe, so the industry is moving to the BRIC markets where exchanges are modernizing their systems to charm these players. The Russian legal system regarding financial transactions is incoherent and  full of contradictions and supervision of regular trading is already a challenge. If HFT is an issue in countries with sophisticated regulatory structures (notwithstanding the huge lack of funding) and has blurred the lines between cheating, betting and investing, I truly wonder how the practices associated with HFT will adapt to a weak institutional environment like Russia.

Hostages of Wall Street ?

The political weight of Wall Street - that increased over the past decades - could be viewed as a stage of a financialization process. Proponents of this concept have advanced the idea that the financial sector is increasing in size and taking a life of its own. The phenomenon can express itself in terms of the increasing level of debt as percentage of GDP. For example the total debt in the U.S. rose from 140 percent to 328.6 percent from 1973 to 2005. Pay increased dramatically, so did the financial-industry profits as a share of U.S. business profits. 

The U.S. financial sector gained so much power that S. Johnson, former chief economist at the International Monetary Fund and a professor at the MIT, actually argues that it has become a kind of oligarchy:
There’s a deeper and more disturbing similarity: elite business interests—financiers, in the case of the U.S.—played a central role in creating the crisis, making ever-larger gambles, with the implicit backing of the government, until the inevitable collapse. More alarming, they are now using their influence to prevent precisely the sorts of reforms that are needed, and fast, to pull the economy out of its nosedive.
The inside job, a film directed by Charles Fergusson, does a great job at describing the rise of the financial leviathan, depicting the "Wall Street - Washington corridor" that Johnson wrote about. It has become a ideology battle that involves government and their regulatory agencies, investment banks and investors and academic. For the Universities - Wall Street corridor, see J. Fox.

Wednesday, April 6, 2011

Financial Terminator

High Frequency Trading is thrilling for someone interested in the social meaning and function of finance, because it now uses technology to bridge finance and philosophy. What are Quants to answer B. Ritholz' worries about the new Robot Uprising ?