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Showing posts from October, 2011

Higher Education Bubble?

The Economist has an interesting article this week on student loans in America - click here.  As university tuition fees in the US have risen faster than inflation over the past decade, so has the level of student indebtedness.  This raises the question: has there been a higher education bubble in the US fuelled by easily-available debt?  If so, what are the consequences for US colleges?  What are the lessons for the UK as it embraces higher tuition fees?  Notably, unlike other debts, student loans cannot be shed by going into bankruptcy!
I came across the following documentary recently.  It is far-fetched and sensationalist, but there are some interesting points made concerning the bubble in US higher education.  Please note that the documentary is from the notorious National Inflation Association, which has been implicated in a pump and dump scam - click here.   

Economics and the Reformation

31st October is Reformation Day.This day is a civic holiday in several countries and is celebrated in certain parts of the church in the US.On 31st October 1517, Martin Luther nailed his 95 theses to the church door in Wittenberg, an event which started the Reformation.Luther is regarded as one of the most influential men to have lived in the past 500 years - click here to learn more about Luther.

Beginning with Max Weber, economists and economic historians have debated the effect of the Reformation on economic development.  Recently, Sasha Becker (Warwick) has been doing lots of interesting work looking at the economic impact of Luther and the Reformation.For example, in one of his papers, he shows the positive impact of Luther’s ideas on the female education gap – click here.

China and the EU

The EU is looking to China to help with its financial mess.Although this says all sorts of things about Europe’s view of itself as superpower, the more interesting issue is why China is prepared to do this.Several theories abound.First, China’s economic miracle has a lot to do with export-led growth, and the EU is one of China’s main markets.If the EU implodes, this will have major consequences for China.Second, as part of it export-led growth policy, China holds huge reserves of foreign currencies and financial assets in order to keep the yuan undervalued.It therefore has reserves to invest, and European bonds may provide a good return if underpinned by German guarantees.Third, and possibly most worrying for global stability, is that China sees itself as a world superpower and wants to extend its soft power and influence by helping the EU.

CEO Pay on the Rise (Again)

A report released today has found that the average pay for FTSE 100 directors increased by 49% in the past year.  This is at a time when the average real pay of most citizens has decreased by close to 5% and the returns on the FTSE 100 have been negative!  Is this not more evidence (if it was needed) of growing wealth inequality in our society? 
There are many economists who suggest that high pay incentivizes directors and solves what is known as the agency problem.  However, high pay appears to be more due to managerial opportunism. 
What needs to happen to reform CEO pay?  First, stock options as a form of compensation have to go.  Second, my work with Gareth Campbell (click here) suggests that directorial share qualifications, which were common until the early twentieth century, should be re-introduced as managers face a downside to their bad decision-making.  Third, golden parachutes need to be removed - why should executives be rewarded for bad performance?  Fourth, the practice …

The Wizard of Oz

Once again, I have a post which will appeal to the younger as well as the older audience.

The Wizard of Oz, which won two Oscars in 1940, is part of cinematic history in that it was one of the first multi-colour movies.  The movie is based on a novel of the same title by L. Frank Baum. 
Baum’s novel is an allegorical story about a debate in the 1890s surrounding which monetary system the United States should adopt – should it stay on the Gold Standard or should it adopt a bimetallic standard consisting of silver and gold?Should the currency be backed by gold or by silver and gold?
‘Oz’, of course, represents gold (Oz = ounce of gold), and Dorothy and her friends travel along the yellowbrick (gold again) road, which ultimately leads to nowhere.In the novel, Dorothy wears silver slippers (in the film version she wears ruby slippers so as to show off the new colour technology), and these represent silver coinage.Dorothy represents the ordinary American (honest, kind and plucky), who was be…

Superstars and Earnings Inequality

A new report from the U.S. Congressional Budget Office reveals that the earnings of the top richest 1% grew by 275% betwen 1979 and 2007 - click here for report.  The report suggest that the rise of superstars in business, Wall St, sport and entertainment is largely responsible for this rise. But why has this supertsar culture arisen over the past 30 years?  Click here for NY Times coverage of this report.

Psychology and Economics

Daniel Kahneman, a Nobel prize winner in economics, is one of the founding fathers of what is known as behavioural economics.  This branch of economics argues that the rational man of economic theory is like the Tooth Fairy - a fiction.  Kahneman argues that when humans make decisions, they are subject to biases, fallacies, effects, illusions, and commonly use heuristics.


Kahneman's work has even affected financial economics.  For example, Kahneman and Tversky’s prospect theory implies that people underweight probable outcomes in comparison with certain outcomes.Thus Kahneman-Tversky investors may prefer the certainty of dividends in comparison to merely probable capital gains.Investors may have a preference for dividends for other behavioral reasons such as self-control, regret aversion or mental accounting.


Kahneman has just published a new book, which is an overview of his life's work, where he discusses how human irrationality affects our decision making.  You can read a rev…

Bank Reform

Last night, Andrew Haldane (Executive Director at Bank of England with responsibility for financial stability) gave the Wincott Annual lecture (available here).  In it he argued that the evolution of British banking system away from a regime where bank shareholders have a responsibility to meet shortfalls between their assets and liabilities towards one where they have limited liability has resulted in a banking system where bank managers have become risk-taking junkies.  I was pleased to see him argue thus, particularly as he cites my solo- and co-authored work in this area - click here for a recent example.

Haldane suggests that the risk-taking incentives of banks need to be curbed by public policy.  He makes four specific proposals.

1. Banks need to hold higher levels of equity capital and the tax advantage of using debt finance should be removed.
2. Banks should hold contingent convertible securities (CoCos) which have market-based triggers.
3. A change in voting rights of banks, wher…

Wall Street's Man

President Obama has raised more campaign finance from Wall Street than the total raised by the seven Republican candidates - click here.  Even though Wall Street is disaffected with Obama (see previous post), it is still backing him.  Why?  The answer may be that he is Wall Street's puppet.  After all, many of the policies implemented by the Obama administration have been favourable to (and even devised on) Wall Street.  In addition, Obama has not sought retribution from Wall Street for the financial and economic mess they have created.  Conclusion - Obama is Wall Street's man, and this means he is likely to be re-elected.

Railway Mania

Congratulations to Dr Gareth Campbell, a colleague and former PhD student, who has just had his paper entitled “Myopic Rationality in a Mania” accepted for publication by Explorations in Economic History.This paper, which was the central chapter in his dissertation, argues that the British Railway Mania of the mid-1840s was not due to individual or collective investor irrationality.This mania has been described as one of the greatest ‘bubbles’ in history as railway stock prices doubled in value between 1843 and 1845 and then subsequently collapsed over the rest of the decade.
Gareth’s main argument is that railway share prices were priced in a rational way given past, current and future railway dividends.Where investors seemed to have come unstuck is that they did not fully anticipate the collapse in railway company dividends which took place in the late 1840s – in other words, they suffered from myopia.

As we are living in the aftermath of a housing bubble, the questions raised by Gare…

The Economics of Global Warming

The Berkeley Earth Project, an independent study of global warming, has found that the earth has become a degree warmer over the past half century.  However, the statistical uncertainty surrounding pre-1920 estimates makes it very hard to say much about long-term trends - click here for graph.  This is one of my concerns with the global warming debate - we simply don't have trustworthy long-run data which looks at temperature changes over the last millennium (or two). 
My second concern with the global warming debate is that it is very hard to prove any sort of casual link between global warming and human activity.  The scientists may be able to show correlation between global warming and our production of carbon dioxides etc., but correlation is not causation.
My third concern with the debate is  that those who are sceptical or agnostic are stereotyped as flat-earthers or intellectually-challenged crackpots.  This only stifles debate and the progress of science itself.  
My final co…

Great Depression 2.0

Ahead of this weekend's summit of EU leaders, Nouriel Roubini has been touring Europe, speaking to policy-makers and economists.  He argues that if the world is to avoid a slide into depression, some radical policies need to be implemented by European leaders as well as the ECB.  In addition, the UK, US and emerging economies have a role to play in staving off Great Depression 2.0.  A brief synopsis of Roubini's policy recommendations are available here.

Art and Money

What is your preference: Flemish baroque or French impressionism?Rubens or Monet?Even if you do not appreciate art, you may be interested to know whether or not art is a good investment over the long run.Well to help answer this question, Christophe Spaenjers and his co-authors have recently published a fascinating paper in the American Economic Review, which looks at the relationship between art prices, the equity market, and income inequality over the long run – click here.The most interesting findings are that there is a long-run relationship between returns on the equity market and art prices and that increases in income inequality result in higher art prices.In other words, as the elite become wealthier they engage in conspicuous investment in and consumption of valuable and exotic assets, which bids up the prices of these assets.

An earlier version of Christophe’s paper was presented in a seminar at the EFIRG at Queen’s University, and the paper uses an equity index constructed b…

Irish Credit Unions

Prof. Donal McKillop (Queen's University Belfast), an international expert on credit unions, is currently chairing the Irish Commission on Credit Unions.  The Commission's interim report was released on Friday past.   


The total arrears of Irish credit unions stand at about €1 billion, and 27 of Ireland's 408 credit unions are seriously undercapitalised.  The following are some of the main recommendations made by the Commission: 

1) Set up a “stabilisation fund”, financed by credit unions, to stabilise viable institutions.
2) The Central Bank should have “resolution” powers to foreclose credit unions.
3) Credit union are to appoint a risk management and compliance officer as well as develop an internal audit function.
4) Some form of prudential regulation should be introduced.

The final report of the Commission is released in March.

Goldman Sachs

Goldman Sachs posted a third quarter loss today - click here.  Yet more doom and gloom for Wall Street.  After receiving large bailouts from the Obama administration, it seems that Wall Street are turning against Obama.  According to this article published in Slate, the explanation for this is simple: Wall Street blames Obama for the country's ongoing economic woes.

Inflation!

Inflation is on the rise again in the UK - the CPI rose to 5.2% from 4.6% last month, and RPI rose from 5.2% to 5.6%.  Click here for Office of National Statistics figures.

Inflation diminishes real income, savings, and investments.  It can be particularly hard for the less affluent members of society.  However, inflation usually benefits those who have large amounts of debt as it reduces the real value of their loan. 
So what are the prospects for future inflation?  In my opinion, with another round of Quantitative Easing on the cards (see previous post), inflation can only get higher.  Indeed, with such high government debts, higher inflation may be in the self-interest of debt-laden Western democracies.  In effect, inflation can be viewed as a partial default on government debt.

BlackBerry Update

After my earlier post on the BlackBerry outage, Dr Graeme Acheson, a co-author, friend, and the proud owner of a BlackBerry, has pointed out to me that there were some positive externalities associated with BlackBerry's outage - reduced road traffic accidents.  Click here for more details.

Financial Crisis and Social Unrest

At the weekend, a series of Occupy-Wall-Street-inspired protests were staged across the financial capitals of the world - see here.  You can read more about the Occupy campaign on their website.

Why have these protests been taking place?  Firstly, the median wage in the US (and other developed economies) has been constant for decades.  In the meantime, the distribution of wealth and income has become extremely unequal (see previous post).  Secondly, the bailout of Wall St and the resultant austerity suffered by the average person has exacerbated inequality (perceived or otherwise) in the West.

A recent working paper (click here) by Jacopo Ponticelli and Hans-Joachim Voth looks at the relationship between fiscal austerity and social unrest over the twentieth century.  They find (unsurprisingly) that fiscal retrenchment is followed by social instability, and that this instability is more severe when there are fewer checks on the executive branch of government.

BlackBerry Crumble?

BlackBerry's network was down during much of the past week - this affected academics, teenage texters, as well as City professionals and businesspeople who rely heavily on their BlackBerrys.  See here for some funny tweets on the outage.
This is yet more bad news for Research in Motion, the company which owns the BlackBerry brand.  First, there is the competition, with  the iPhone 4 proving to be a big hit with consumers (click here).  Second, there was the negative publicity during Britain's summer riots, with many rioters using their BlackBerrys to co-ordinate looting (click here).
BlackBerry's network failure would have had a detrimental effect on teenage texters. A recent study found that the average American girl sends 4,000 texts per month!  Niall Ferguson has recently argued that texting is making kids stupid.  He has suggested that parents remove mobile devices from their kids and send them to book camp, where they spend two weeks reading and discussing classic liter…

Money, Money, Money

In my copious spare time, I am a notaphilist (i.e., a collector of bank notes).  In the not too distant past, individual banks issued their own notes.  However, today, apart from in N. Ireland and Scotland, central banks around the world have a monopoly of the note issue in most economies.At Feb. 2011, Northern Irish and Scottish banks had a staggering £1,900m and £3,500m of notes in circulation respectively.As regular travellers across the Irish Sea realise, these notes are not legal tender.

What is special about banks in N. Ireland and Scotland that they can issue their own notes?  Simply, it is an accident of history.  As legislation was passed which centralised the note issue in England in the Bank of England, Scottish and Irish banks were given certain exemptions.  The result today is that these banks can issue their own notes.
N. Irish and Scottish Banks, however, have to hold backing assets (i.e., Bank of England reserves) to back their note issue.  In other words, for every £1 o…

Bankers and Monetary History

The recent death of Professor Leslie Pressnell (obituary here) reminded me of the time when economists, bankers, and City professionals would have been familiar with and taken courses on monetary history.  Pressnell, an expert on English banking during the Industrial Revolution, was a leading advocate of the need for such courses.  Indeed, had the current generation of economists and bankers courses in monetary history, the crisis of 2008 might  not have happened.  It would be a befitting memorial to Professor Pressnell if you looked to the past in order to understand the present.  Here is a good place to start

Grade Non-disclosure

Imagine not having to disclose your degree performance until after you have been hired - see here for how this practice is common amongst top US business schools.  This may explain why MBA students at top B-schools party so much!

EuroZone Crisis

Let me be upfront on this issue - I was, I am and I will continue to be a Eurosceptic.   Monetary union was a political decision, not an economic one.  The hubris of the European political elite meant that they rushed ahead with the euro project, virtually ignoring the views of their electorates.
As much as I want to gloat, the seriousness of the situation is such that the political and social stability of Europe (which was the original raisin d'ĂȘtre of the European project) is at risk.  How can we fix the EuroZone?  Do the European elite and the German electorate have the appetite to bail out their EuroZone partners?  Economists and commentators have a variety of suggestions.  You can listen to Prof. Philip Lane's proposal here
My own view is that the euro cannot be saved in its current format.  The big question is whether its collapse will result in wider political and social upheaval.

The Squeezed Middle

The Institute for Fiscal Studies has forecasted huge declines in living standards over the next couple of years - they reckon that median incomes will fall by about 7% in real terms (click here).  Although, the phenomenon of the squeezed middle has been recognised by sociologists and economists for a long time, the recent crisis has exacerbated the situation for the middle classes in the UK (and other economies).  First, the value of the main asset of the middle classes (their homes) has collapsed, with the result that many are in negative equity.  Second, middle classes savings have been hit by negative real interests.  Third, they have taken large real pay cuts.  Fourth, the value of their pension has been eroded.  Fifth, universal child benefits are set to disappear and university tuition fees have trebled.  I could go on....
Recent work on long-run income and wealth inequality shows that Western society has become more unequal since the 1970s- see, for example, my own work on Iris…

Netflix

Netflix, the US DVD rental and video streaming company, have recently had some troubles as customer numbers fell dramatically following a 60% price increase accompanied by an announcement that it was spinning off its rental company from its streaming company.  However, it has announced today that it is abandoning this plan (click here). 

From August, Netflix's stock price has fallen from circa $300 to $125 today.  See Sunil Gupta from HBS comment on Netflix's basic errors of judgement.  The Netflix case is an example of how corporate executives can destroy shareholder value through poor decision making.  It is also an example of why executives need to understand economics more than other disciplines taught in business schools.  Given the competition in this sector plus the price elasticity of demand, Netflix executives should not have made such a strategic blunder.

Nobel Prize in Economics

The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel 2011 was awarded to Christopher Sims (Princeton) and Thomas Sargent (NYU) "for their empirical research on cause and effect in the macroeconomy". 
Once again Armen A. Alchian was overlooked despite his seminal and influential contributions to economics - see, for example, his 1972 American Economic Review article and his 1950 Journal of Political Economy article.  His 1972 article with Harold Demsetz was one of the most influential articles published in the AER's first 100 years - see here.  Notably, neither of the 2011 winners make this list.

Blog updates

I am now on Twitter so that you can get updates whenever I post.  You can also receive updates via email.  See the righthandside of your screen.

Fidelity Fiduciary Bank

My sister, a primary school teacher,suggested that I make my blog accessible to a younger audience. Unable to resist this challenge, I thought I would draw some economic lessons from Mary Poppins, Disney's supercalifragilisticexpialidocious children's movie.

The father of the two children in the movie is a banker, and one day he brings his children to the bank to encourage them to deposit their tuppence in the Fidelity Fiduciary Bank rather than waste it on bird food. The chairman and directors of the bank sing a song (click here), which emphasizes the uses to which banks put deposits as well as the power of compound interest.

In the middle of the song, the chairman states that if the banks of England fall, England itself will fall. Like the chairman of the Fidelity Fiduciary Bank, I believe that the unprecedented banking collapse and ongoing financial crisis could signal the end of our democracy and the dominance of the West.  I don't want to sound like a jeremiad blogger…

Moody's downgrade

Moody's has downgraded the senior debt and deposit ratings of 12 UK financial institutions, including Nationwide, RBS and Lloyds-TSB.  See their reasoning here.
Moody's seems to believe that the UK government's commitment to have no further bank bailouts is credible.  However, there is what economists call a time-inconsistency problem with this type of commitment.  In other words, when it comes to the crunch, politicians will expediently go back on their verbal commitment. 
The big mistake made by governments around the world during the 2008 crisis was to bail out the creditors of large financial institutions.  It is okay reimbursing small retail depositors out of taxpayer funds, but it is something entirely different to bail out large creditors.  In the parlance of the market, these creditors should have been forced to take a haircut - short back and sides all round!  Unfortunately, that didn't happen, and as consequence, taxpayers in Western democracies will possibl…

DeLorean

It is 30 years since the first DeLorean DMC-12  rolled off the production line in Belfast.  This iconic car, made famous in the Back to the Future movies, was one of my favourite cars as a child.  Graham Brownlow, a colleague and friend from QUMS, is currently writing a paper on the DeLorean company - I can't wait to read it!

Quantitative Easing

The Bank of England yesterday announced another round of quantitative easing (QE).  This is where the central bank creates new money (either via the printing press or by increasing bank reserves on deposit at the central bank) and uses that newly-created money to buy long-dated government bonds.  When I took monetary economics as a student, this was known as monetising the government debt.

Why does the central bank do this?  The main stated objective is to lower long-run interest rates so as to stimulate borrowing and investment.  However, banks are still repairing their balance sheets and businesses are reluctant to borrow so it is doubtful that QE will have the desired effect.  The main unstated objective may be to drive down sterling so as to help British exporters - notably sterling is now at 15-month low against the dollar. 

My fear with QE is that it will result in higher inflation (RPI is currently at 5.2%).  This, of course, reduces (in real terms) the amount the government a…

Steve Jobs

Steve Jobs, the founder and former CEO of Apple, died this morning.  He has rightly been described as a visionary and genius.  Apple is one of the world's largest and most profitable corporations thanks to Steve Jobs.  This raises a whole bunch of questions of interest to economists.  First, are public companies which are run by their founders more successful than those run by professional managers?  Second, how do public companies address succession issues whenever a founder CEO steps down?  Third, how can an economy encourage innovation and innovators?  For an interesting view on this from an historical perspective, see this recent paper by Tom Nicholas and others.

Keynes vs Hayek: The Rematch

Lord Keynes vs F.A. Hayek

Keynes vs Hayek

An economic rap!

University fees

University fees is a subject close to the hearts (and pockets) of most students.  The NI Executive plans to cap fees at £3,500 for home and other EU students from 2012.  Students from the rest of the UK will be charged up to £9,000.  English taxpayers who provide huge annual subventions to the Northern Irish public purse are bound to be chagrined by this pricing policy.  Notably, this discriminatory pricing policy is being challenged in the courts

Across the Atlantic, students in the US can expect to pay $20,000 per annum for mediocre colleges.  However, large endowments  and needs-blind admission policies ensure that talented individuals from less privileged backgrounds can attend a US college.