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Showing posts from December, 2011

Financing Christmas

Tim Harford has an interesting post on the financing of Christmas.  In the past, families saved up for Christmas, but today Christmas is largely financed by credit cards.  In Harford's words - "Christmas is now financed in arrears, not in advance".  Credit is readily available, and, as a result, people can end up spending more than they can really afford.  Does this mean that credit card companies are exploiting people's weaknesses?  How much have credit cards contributed to the growth in consumer spending? 
Christmas, however, is not about money or finance! 
I will be taking a break from blogging for a couple of weeks unless the EuroZone collapses in the interim.  On that pessimistic note, may I wish you a Merry Christmas and a prosperous 2012. 

Wealth Inequality in the Roman Empire

Walter Schiedel and Steven Friesen, two historians of the Roman Empire, have recently attempted to estimate wealth inequality in the Roman Empire when it was at its zenith using papyri ledgers, previous scholarly estimates, imperial edicts, and Biblical passages.  Schiedel and Friesen estimate that in 150 AD, the top 1% of Roman society controlled 16% of the wealth, less than half of what America’s top 1% control today!  It is also much lower than wealth concentration in N. Ireland - according to the estimate in my recent OEP article, the top 1% of population back in 2001 controlled 22% of the wealth.  I have no doubt that that figure is much higher for 2011.  You can read more about Schiedel and Friesen's work here.

Equity Withdrawal in 2007

A Financial Times report published today reveals the high level of equity withdrawal in the run up to the credit crunch in the summer of 2007.  It is particularly worrying that equity withdrawal was highest in some of the poorest regions of the UK.   Northern Ireland comes out top of the bunch - 74% of those re-mortgaging their properties in the province in 2007 withdrew equity.  As a result, those who extracted large amounts of equity may owe more on their mortgage than the actual value of their property even though they bought their home well before the bubble began.

Marriage Tax Breaks

Nick Clegg has criticised Conservative plans to give tax breaks to married couples (click here).  The Conservative plan is to allow tax allowances of up to £150 per year to be transferred between spouses.  For example, an unemployed husband could transfer £150 of his tax allowance to his wife.  Are there good economic reasons why a government would do this? 



Well-raised and socialised children provide a positive externality (i.e., benefit) to society.  Mother or fathers who take career breaks to raise children typically do so at their own expense.  In other words, society gets the benefit, but a family bears the cost.  There is therefore an argument for subsiding parents through the tax system by allowing transferable allowances (although £150 is a paltry amount).
The next question is whether this should be provided to both unmarried and married parents.  The statistics and majority of evidence clearly show that the latter provides a more stable environment in which to raise and nur…

Paul Krugman on China

Paul Krugman has added to the choruses of warnings regarding the Chinese economy (click here).  According to Krugman:

...it’s impossible not to be worried: China’s story just sounds too much like the crack-ups we’ve already seen elsewhere. And a world economy already suffering from the mess in Europe really, really doesn’t need a new epicenter of crisis.

Taxing the 1%

In a recent paper, Piketty et al. suggest that

"The top 1% of US earners now command a far higher share of the country's income than they did 40 years ago. This column looks at 18 OECD countries and disputes the claim that low taxes on the rich raise productivity and economic growth. It says the optimal top tax rate could be over 80% and no one but the mega rich would lose out."
You can read Piketty et al.'s VOX piece on the taxation of the mega rich here.

Game Theory and Toilet Seats

I love Game Theory - it can be a very powerful tool for examining social interactions and human behaviour.  Game Theorists apply their logic to everything from military strategy to the position of toilet seats!  Click here to read a post on "Why women should put the toilet seat up!".


China's Credit and Property Bubble

Property prices in Beijing fell 35% between October and November and the Shanghai stock index has fallen 30% since May.  As much investment in China has been financed by credit, does this mean that the Chinese economy is in trouble?  Is it about to experience its 2008 crisis in 2012?  What will be the effects for Western economies should China experience a financial crisis and massive deleveraging?  Click here to read more.

Financial Illusions?

This post follows on from my previous ones on behavioural economics and neuroeconomics.  I have always been fascinated by optical illusions - you can find Shepard's two tables (see figure below) and other famous examples here.


© 1990 Roger N. Shepard


The question, of course, is whether we can be fooled / duped whenever it comes to making economic decisions.  Are there such things as financial illusions?  With regards to the recent housing bubble, were those who bought in the boom years duped by a financial illusion?  Did they really believe that houses would keep appreciating? Why did they pay such a high price for their house whenever the long-run link between house prices, income, and rental yields suggested that house were overpriced?

One possible alternative to the financial-illusion hypothesis is that they were purchasing houses with borrowed money and therefore didn't care.  In the US, for example, mortgagees can walk away from their houses and are not liable to repay the…

Neuroeconomics

Continuing on the theme of yesterday’s post: could future economic research be conducted in Medical schools rather than Economics departments?A growing branch of economics is neuroeconomics (click here for its learned society), which is where neural scientists and economists study the human brain in attempt to get a handle on economic behaviour.Robert Shiller, a leading behavioural economist, believes that the future of economics lies in a better understanding of how Keynes’s idea of animal spirits (our emotions and our less-than-rational psychological make-up) affects our behaviour.You can read an op-ed piece by Shiller here and his co-authored book with George Akerlof is here.

Nudge

I have recently read Thaler and Sunstein's Nudge.  Thaler is a founding father of behavioural economics and Sunstein is a Harvard law professor, who currently works for the Obama administration.

Nudge is a manifesto for what its authors call Libertarian Paternalism, the idea that governments should design choice architecture to nudge people in the direction that the State (or its expert advisers) thinks is best for individuals and society.  In this world, people are 'free to choose' (to quote the title of the Friedmans' famous book), but government determines the choices people face and may even nudge them in the direction of one particular choice.

The problem with this, of course, is that governments and their advisers as well as their lobbyists have incentives to nudge us in directions which are not optimal for us or society, but which benefit the government and its supporters or financial backers.  See here for more on this critique.
The behavioural economics in Nudge …

Royal Bank of Scotland Failure

The Financial Services Authority report into the failure of RBS has just been released - the report can be read here.
According to the FSA report, the collapse of RBS was due to a combination of the following factors: significant weaknesses in RBS’s capital position, as a result of management decisions and permitted by an inadequate global regulatory capital framework;over-reliance on risky short-term wholesale funding, which was permitted by an inadequate approach to the regulation of liquidity;concerns and uncertainties about RBS’s underlying asset quality, which in turn was subject to little fundamental analysis by the FSA;substantial losses in credit trading activities, which eroded market confidence. Both RBS’s strategy and the FSA’s supervisory approach underestimated how bad losses associated with structured credit might be; the ABN AMRO acquisition, on which RBS proceeded without appropriate heed to the risks involved and with inadequate due diligence; andan overall systemic c…

Entente Cordiale Est Mort

In sidelining Britain, France has completely thrown its lot in with Germany.  Ambrose Evans-Pritchard at the Daily Telegraph (you can read his blog here) suggests that the Merkozy alliance will not last:

"Does France, for that matter, really want to be locked into a clammy embrace with an ever stronger Germany? The whole purpose of monetary union for Paris was to tie down a reunited Germany with silken cords. France now finds its own hands tied because of EMU, reduced to a humiliating side-kick.  But the vain and hysterical little man now in the Elysée will soon be gone. A leader will emerge once more with a "certaine idée de la France".


There is also a good article over at the Daily Telegraph on Cameron's adroit handling of Merkozy, his rabid Eurosceptic backbenchers, and members of his Europhile LibDem cabinet.

Britain and the EU: In or Out?

David Cameron's withdrawal from an EU-wide treaty to deal with the debt crisis was the right thing to do as the treaty on the table won't fix the crisis and threatened the position of the City as the world's premier financial market.  However, it not leaves Britain as potentially the only member of the EU not to sign up to the deal.  Consequently, Britain may be marginalised and full withdrawal (or ejection) from the EU may be just around the corner unless the Euro collapses first, which is becoming more likely every day.  The treaty needed two things to save the euro - (a) the ability to have fiscal transfers to economies hit by demand shocks (e.g., the PIIGS) and (b) a change in the ECB's mandate, which would enable it to monetise the debt of EU sovereign states.



Inequality

Robert H. Frank, author of the Darwin Economy, has a series of interesting articles on income inequality over at Slate.  Click here to access them.

He examines why inequality matters (expenditure cascades), the reasons for growing inequality (technology and "winner-take-all markets"), and ways to remedy inequality (progressive consumption taxes).

Payday Loans and Usury

A report out today from R3 finds that millions of Britons take out high-interest payday loans.  These loans, if paid back on pay day, usually charge a low interest rate, but if they are not paid back, the interest rate can go as high as 4,000%!  
In the past, usury laws existed to prevent lenders charging high interest rates.  This was largely based on the Old Testament, where the justification for usury laws was the protection of the poor and vulnerable.   Do we need to revisit such laws?  Or maybe we need to rethink our whole attitude as a society to material things, consumer goods, and debt.  After all, easy access to credit was at the root of the housing bubble and subsequent financial crisis. 

RBS and Inside Job

Last night, BBC2 broadcast RBS: The Bank That Ran Out of Money.  It is well worth watching - you can catch it over at BBC iPlayer by clicking here.

Tomorrow night at 9pm, BBC2 will broadcast the Oscar-winning documentary Inside Job.  This is a must-see film.


OECD Report on Wage Inequality

The OECD have released a report today, showing that wage inequality has increased over the past 30 years across most advanced economies - click here for details.  The graph below shows that the Gini coefficient of income inequality increased across most OECD countries between 1985 and 2008.

More Austerity for Ireland

The text and footage of Enda Kenny's pre-budget address to the nation can be found here.  Can the Irish people take more austerity? 
My fear is that austerity for years to come will only result in the empowerment of political parties who will take Ireland in a backwards and inwards-looking direction.  European (German) leaders need to wake up and realise that harsh austerity measures can only result in long-term political instability in the PIIGS. 

Nick Clegg on Executive Pay

Nick Clegg the Deputy Prime Minister, in a televised interview, outlined some proposals regarding restraints on exorbitantly high executive pay - click here for the interview and details. 
Why does the government have the right to interfere in the internal workings of a company?  My perspective on this is a straightforward one - corporations can only exist in the first place because the State permits them to have the fiction of a separate legal personality, which enables companies to enter contracts etc. as if they were individuals.  In other words, the corporation is a creation of the State and, as such, surely the State has the right to interfere in its internal workings?  Whether such interference will be effective or efficient is an entirely different question. 
You can read my article with Charlie Hickson on the history of the corporation here.

Making the Market

I have recently finished reading Paul Johnson's Making the Market: Victorian Origins of Corporate Capitalism.  It is an extremely well written, enlightening and perceptive book.  Johnson makes excellent use of pivotal anecdotes to get his point across. 

The basic point of the book is that to understand corporate capitalism (i.e., an economic system dominated by companies), we need to go back to the origin - the era in which the modern corporation was developed.  Johnson argues that the judicial and political development of both corporate personality and limited liability ultimately resulted in an abdication of directorial responsibility.  This resulted in a moral ambiguity which was ultimately accepted by Victorian society.

Johnson (p.233) concludes his book by reminding us that the 'market' is a 'human construct of intriguing complexity and constant change' and that the 'reluctance of economists..... to recognise and embrace this messy complexity has done littl…

Is the Fed the International Lender of Last Resort?

Stock markets around the globe reacted positively to yesterday's announcement by the Fed that it was reducing the rate at which its lends dollars to other central banks and hence the international banking system.  Does this mean that the Fed has become the international lender of last resort?  It is certainly a major step in that direction.  However, it also signals that the Fed (and other central banks) believe that the Eurozone is going to implode.  If that happens, major European banks will face massive liquidity problems as depositors and lenders run banks before the euro is devalued.  The Eurozone endgame began yesterday. 

Four Decades and Counting

I am 40 today!  This milestone has got me thinking and reminiscing about events which have occurred during my lifetime.  Below are the 10 most significant economic/financial events that occurred during my lifetime and which had an impact on my thinking at the time.  The collapse of Bretton Woods would be in here if I could remember back that far.  In retrospect, I would probably have a different 10, but these 10 events all made an impression on me at the time.  
1. Winter of Discontent (1978-79) – an economic meltdown that scarred a seven-year-old boy from Co. Tyrone.
2. Irish Punt breaks link with Sterling (1979) – all of a sudden my classmate from south of the border had to pay more for his 1/3 pint of milk!
3. Flotation of TSB (1985) – this resulted in my first share ownership.
4. October Stock Market Crash (1987) – this taught me that shares can go down as well as up!
5. German Reunification (1990) – the economic powerhouse of Europe became even more powerful.
6. Maastricht Treaty (199…