Hypo Group Alpe Adria

The “Independent Commission of Inquiry for the Transparent Investigation of the Events Surrounding the Hypo Group Alpe‐Adria” published its report in December 2014. The summary of the abstract:

The events surrounding HGAA are characterised by undesirable developments and mistakes on the level of the Land and of the Federation. The quick expansion of the bank was only possible due to the liability of the Land of Carinthia, without the latter having been able to fulfil the respective obligations. When the crisis became obvious, the responsible decision‐makers refrained from adequately processing the necessary information, from examining the legal framework to a sufficient degree and from proceeding in a strategic way by developing alternative scenarios and making decisions based on those scenarios.

This began with the Land of Carinthia maintaining its liability for the debts of HBInt and HBA in spite of the rapid expansion abroad. The Land was responsible for a bank whose management tried to exploit the business opportunities in South Eastern Europe without being equipped with the necessary risk management systems and control mechanisms. It is not apparent that the auditors, the bank supervision and the Land of Carinthia (Kärntner Landesholding) made sufficient use of the opportunities open to them in order to work towards limiting the risks.

This continued with the decision of the Republic of Austria to purchase all shares of HBInt without sufficiently examining alternative scenarios and implementing them into a negotiating strategy.

And it ended ‐ in relation to the investigation period ‐ with the lack of a strategy for the time after the nationalisation: The State aid proceedings were not conducted with the necessary commitment; the decision on the establishment of a bad bank was delayed based on extraneous motives; the reappraisal of the past became an end in itself.

Against this background, the Land of Carinthia must be blamed for maintaining its liability thereby enabling the bank to expand abroad despite a lack of sufficient control systems. As regards the Federation, it must be held that the nationalisation cannot be referred to as „emergency nationalisation”, because it was – at least as regards its embodiment – not the only alternative. And it cannot be conceded that as the sole owner of HBInt the Republic of Austria took its decisions for the benefit of the bank and of the public.

Ayn Rand‘s “Atlas Shrugged”

Ayn Rand‘s master work about mind, productive man and his liberation. More than a thousand pages long but rarely tiresome (except for John Galt’s radio speech) the novel blends thriller with common economic sense and Rand’s philosophy of objectivism.

The economics makes sense—incentives matter and give rise to a trade-off between efficiency and equity; but it is crude—market failure is neglected. The most interesting element in the incentive problem faced by the government sponsored “looters” and “leeches” is the sanction of the victim.

The philosophy (as summarized at the end of the paperback) is less convincing; it certainly does not follow from the economics. Much more on objectivism on the website of the Ayn Rand Institute.

Debt Supercycle rather than Secular Stagnation

In a Vox column, Ken Rogoff argues that the world economy experiences a “debt supercycle” rather than the onset of secular stagnation in the West.

Rogoff argues that macroeconomic developments since the financial crisis are in line with historical experience, as documented in his book “This Time is Different” (with Carmen Reinhart): A large fall in output followed by a sluggish recovery; deleveraging; protracted higher unemployment; and a strong rise of the government debt quota are typical after a boom and bust of house prices and credit.

According to Rogoff, policy makers should have implemented more heterodox policies including debt write-downs; bank restructurings coupled with recapitalisations; and temporarily higher inflation targets. Rogoff supports the (in his view, orthodox) fiscal policy responses that were adopted but criticizes that many countries tightened prematurely.

Rogoff acknowledges that secular forces shape the macroeconomy, in particular population ageing; the stabilization of the female labor force participation rate; the growth slowdown in Asia; and the slowdown or acceleration (?) of technological progress. But

[t]he debt supercycle model matches up with a couple of hundred years of experience of similar financial crises. The secular stagnation view does not capture the heart attack the global economy experienced; slow-moving demographics do not explain sharp housing price bubbles and collapses.

Rogoff doesn’t accept low interest rates as an argument in favor of the secular stagnation view. Rather than reflecting demand deficiencies, low interest rates (if measured correctly—Rogoff expects a utility based interest rate measure to be higher) could reflect regulation (favoring low-risk borrowers and “knocking out other potential borrowers who might have competed up rates”) and to some extent central bank policies.

Rogoff argues that the global stock market boom poses a problem for the secular stagnation view. He proposes changed perceptions about the likelihood and cost of extreme events (Barro, Weitzman) as factors to explain both low real interest rates and the stock market boom (after an initial asset price collapse during the crisis).

Regarding policy prescriptions to expand public investment in light of the low interest rates, Rogoff notes that

it is highly superficial and dangerous to argue that debt is basically free. To the extent that low interest rates result from fear of tail risks a la Barro-Weitzman, one has to assume that the government is not itself exposed to the kinds of risks the market is worried about, especially if overall economy-wide debt and pension obligations are near or at historic highs already. [Moreover] one has to worry whether higher government debt will perpetuate the political economy of policies that are helping the government finance debt, but making it more difficult for small businesses and the middle class to obtain credit.

Rogoff considers rising inequality to be problematic (and a possible factor for higher savings rates):

Tax policy should be used to address these secular trends, perhaps starting with higher taxes on urban land, which seems to lie at the root of inequality in wealth trends

He concludes that the case for a debt supercycle is stronger than for secular stagnation:

[T]he US appears to be near the tail end of its leverage cycle, Europe is still deleveraging, while China may be nearing the downside of a leverage cycle.

US Purchasing Power

In a Vox column, Bob Hall argues that in the US, “the standard of living stopped growing around 2000. Family purchasing power today is just the same as in that year.” Hall identifies drivers of a “US secular supply stagnation.” In particular, he sees

no sign of a reversal of the decline in labour’s share of total income …

no sign that a burst of productivity growth will make up for the complete stall in productivity growth around the crisis …

no sign suggesting a departure from the decline in labour-force participation.

Syriza’s Left Wing

In the FT, Kerin Hope and Tony Barber portray left-wing members of the Greek Syriza government. These include:

Panayotis Lafazanis, minister for productive recovery, energy and the environment. He is quoted as saying “My way is no memorandum [Syriza’s term for the bailout agreement], no euro”.

Nikos Voutsis, minister for the interior and administrative reconstruction. He has reversed hiring restrictions; performance evaluation; wants to reinstate the municipal police force; and favors softer policing and more lenient treatment of prisoners.

Aristides Baltas, minister of culture and education. He is quoted as saying that education “should not be governed by the principle of excellence . . . it is a warped ambition.” He wants to eliminate restrictions on the duration of undergraduate studies; abolish university entrance exams; ban police from campuses; and grant students decisive powers to elect university officials.

“Bankensektor im Umbruch (Structural Changes in Banking),” FuW, 2015

Finanz und Wirtschaft, April 18, 2015. PDF. Ökonomenstimme, April 20, 2015. HTML.

  • Banks increasingly face competition in bread-and-butter businesses like term deposits, lending and payments.
  • Two trends shape the sector’s changes: Falling trust in banks, both at the political level and by individual clients; and the rise of the internet.
  • Trust has been squandered. But with cheap access to information, it also has lost importance.
  • Asymmetric information in financial markets might become less of a friction. This could turn into an existential threat for banks.
  • When trust is less important and technology more versatile, increasing returns to scale in the provision of financial services might be a thing of the past. And so the universal bank. New regulatory and tax regimes could foster the process of structural change.

Here are some links to background information:

Nevada Shell Companies, Elliott and Argentina

The Economist reports about Nevada shell companies. In its eternal struggle against the Republic of Argentina, Elliott Management is inquiring about several shell companies in the state. They are suspected to own funds that might have been stolen from the Republic. The hedge fund reasons that it is entitled to those funds because they belong to Argentina, and Argentina owes 2 billion dollars to Elliott according to earlier court rulings. Elliott sued in Nevada for information on the shell companies and has been partially successful.

Sovereign Money in Iceland?

Iceland is considering fundamental monetary reform. A report (PDF) by Frosti Sigurjónsson, Member of Parliament, discusses problems under the current fractional reserve system as well as possible alternatives. The report was commissioned by the prime minister (website of the Prime Minister’s office).

The report argues that the Central Bank of Iceland lost control over the money supply. Commercial banks lent pro-cyclically; they effectively forced the Central Bank to provide base money when needed; the Central Bank’s interest rate policy didn’t suffice to keep the growth of broad monetary aggregates in check; money creation by commercial banks shifted seignorage revenue from the Central Bank to commercial banks; and the deposit insurance accompanying the fractional reserve system encouraged risky lending, distorted competition and gave way to taxpayer funded bailouts when systemic banks collapsed.

The report discusses the Sovereign Money proposal (Fischer 1930s; Huber and Robertson 2000; Dyson and Jackson 2013) according to which all physical and electronic money is created by the Central Bank; commercial banks administer transaction payments and serve as intermediaries; new money is brought into circulation by way of transfers from the Central Bank to the Treasury; and the Central Bank may also lend funds to commercial banks which in turn lend these funds to businesses.

The report recommends that either the Central Bank proactively enforces credit controls or, preferably, that money power is secured with the state owned Central Bank (p. 17). The report recommends to commission a feasibility study of the implementation of the Sovereign Money proposal in Iceland.

The report also discusses narrow banking proposals (see my earlier posts here, here or here) and Laurence Kotlikoff’s Limited Purpose Banking model (see my earlier post here).

Concerning the Sovereign Money proposal, I remain favorable as far as the analysis of the problem is concerned but rather skeptical regarding the proposed solution. In particular, I remain very skeptical as to whether a Sovereign Money regime could be enforced at all. I have previously described and evaluated the Swiss version of the Sovereign Money proposal—the “Vollgeldinitiative.” And I have made an alternative proposal for monetary reform (see also here).

Universities

The Economist featured a special report on universities. Some elements:

On the value added of university education (see this article):

Employers are not much interested in the education universities provide either. Lauren Rivera of Northwestern University’s Kellogg School of Management interviewed 120 recruiters from American law firms, management consultancies and investment banks. Their principal filter was the applicant’s university. Unless he had attended one of the top institutions, he was not even considered. “Evaluators relied so intensely on ‘school’ as a criterion of evaluation not because they believed that the content of elite curricula better prepared students for life in their firms…but because of the perceived rigour of the admissions process,” Ms Rivera wrote. After the status of the institution, recruiters looked not at students’ grades but at their extracurricular activities, preferring the team sports—lacrosse, field-hockey and rowing—favoured by well-off white men.

On rankings (see this article): More than 50 of the top 100 universities (according to the Shanghai ranking) are located in the US. Switzerland has the highest density of these institutions per capita (6.2 top universities per 10m people, next is Sweden before the Netherlands).

On public and private funding (see this article):

20150328_SRC420

Pupils Loose Handwriting Abilities

In the FAZ, Heike Schmoll reports that more and more German pupils (even those attending Gymnasium) lack the ability to write by hand, legibly and for an extended period. Culprits include digitalization; lack of practicing; and receding fine motor skills.

Teachers criticize a broader trend in the curriculum to de-emphasize language related skills.

Der Präsident des Deutschen Lehrerverbandes, Josef Kraus, forderte die Kultusminister der Länder auf, das Schreiben mit der Hand verstärkt in den Blick zu nehmen. „Die zunehmenden Probleme vieler Schüler mit der Schreibschrift muss sich auch eine Schulpolitik ankreiden lassen, die dem Schreiben und insgesamt der sprachlichen Bildung immer weniger Bedeutung beimisst“, sagte Kraus in Berlin. Er verwies auf den immer weiter reduzierten Grundwortschatz von 700 Wörtern, die Schüler am Ende der ersten vier Klassen aktiv beherrschen müssen, auf den Einsatz von Lückentexten und vorformulierten Antworten sowie vielen Fotokopien, die Schüler täglich erhalten.

They argue that the trend is worrying, not least because handwriting quality and ability to learn go together.

In der Tat gibt es einen in anderen Studien nachgewiesenen Zusammenhang zwischen dem motorischen und dem visuellen Gedächtnis. Wer mit der Hand schreibt, entwickelt eine visuelle und motorische Darstellung und steigert durch das Zusammenwirken zweier Gedächtnisbereiche den Lerneffekt. Kraus kritisierte eine „angestrengte Erleichterungspädagogik“, die für ständig sinkende Anforderungen sorge.

See also this blog entry on longhand note taking.

MIT Economics

In MIT’s Rise to Prominence: Outline of a Collective Biography, Andrej Svorenčík summarizes facts about the MIT economics department. A part of the abstract:

By reconstructing the network of MIT economics PhDs and their advisers, this article furnishes evidence of how MIT rose to prominence as documented by the numerous ties of Nobel laureates, Clark medalists, elected officials of the American Economic Association or the Council of Economic Advisers to the MIT network. It also reveals the MIT economics department as a community of self-replicating economists who are largely trained by a few key advisers who were mostly trained at MIT as well. MIT has a disproportionate share of graduates who remain in American academe, which may be an important factor in MIT’s rise to prominence. On a methodological level this article introduces collective biography, or prosopography, a well-established historiographical method, to the field of the history of economics.

Deflation and Growth

In a BIS working paper (abstract page) Claudio Borio, Magdalena Erdem, Andrew Filardo and Boris Hofmann analyze the link between growth and deflation from a historical perspective. They conclude:

First, before accounting for the behaviour of asset prices, we find only a weak association between goods and services price deflations and growth; the Great Depression is the main exception. In some respects, this confirms previous work. Second, the link with asset price deflations is stronger and, once these are taken into account, it further weakens the association between goods and services price deflations and growth. Finally, we find some evidence that high private debt levels have amplified the impact of property price deflations but we detect no similar link with goods and services price deflations.