China's Stock Market Woes

Back at the start of June, I predicted that China's stock-market bubble was about to burst - click here. Over the summer, we saw the Chinese government attempt to pump liquidity into the bubble to keep it inflated, but if anything this backfired. So the big question for investors in the rest of the world is whether the turmoil in China's stock market is simply a bubble bursting or a bellwether of future economic difficulties for China? If it is the former, then investors in the West have nothing to fear. However, if it is the latter then the slowing of China will have major repercussions for those who export to China and for those who have benefited from the boom in commodity prices thanks to huge demand from China for raw materials and food.

As I highlighted in my post back at the start of June, China had all the ingredients for a classic stock-market bubble. However, its economy does have some major flaws which only a major shift in China's political institutions can address. If China cannot fix its political institutions (i.e., introduce some form of democracy), then it may be doomed to be the next country to permanently remain a middle-income economy e.g., Argentina or Greece. In other words, without major reform, China's growth will slow and stay low for a very long time.

Source: Radio Free Asia

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.

Boom and Bust: A Global History of Financial Bubbles

Boom and Bust: A Global History of Financial Bubbles, co-authored with my colleague Will Quinn , is forthcoming in August. It is published by Cambridge University Press and is available for pre-order at Amazon , Barnes and Noble , Waterstones and Cambridge University Press .

The Failure of Herstatt Bank

As an undergraduate, I was taught about the failure of Herstatt Bank in 1974 and Herstatt risk. This bank was only the 35th largest bank in Germany at the time so why would anyone be interested in studying its failure? Herstatt failed because of its involvement in risky foreign exchange business. When it closed its doors on 26 June 1974, counterparty banks (mainly in New York) had not received dollars due to them because of time-zone differences - this is known as settlement risk. The cross-jurisdictional implications of its failure resulted in the Bank for International Settlements setting up the Basel Committee on Banking Supervision and Herstatt's failure was a key reason for the establishment of real-time gross settlements systems, which ensures that payments between two banks are executed in real time. The Bank of England's Ben Norman has an interesting post on Herstatt over at the Bank's new blog ( Bank Underground ). As well as giving an excellent overview of

Finance: Past, Present and Future

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