The Political Economist

The third volume of "What I've been reading" is centered around bubbles, animal spirits, crises, and its predictors (real and self-proclaimed). I'll start chronologically: Shiller, Robert (2005) Irrational Exuberance . Second edition. Princeton University Press In the sequel of his highly acclaimed first edition that predicted the 2000/2001 crisis a few months before it happened, Shiller continues to debunk the rationality assumption in market behavior as he draws out a specific set of psychological, cultural and structural factors that can be held responsible for bubbles and wide-range volatility on financial markets. His price-earnings (PE) ratio (what eventually landed him a Nobel prize ) as a method to predict when the market is due for correction is what got him the well-deserved critical acclaim. The PE ratio (pictured below, real time data  available here ) measures "how expensive the market is relative to an objective measure of the ability of co...

In a series of texts on the 5 year "anniversary" of the financial crisis (see among others  the Economist , Financial Times , Wall Street Journal , New York Times ,  Bloomberg ), many commentators and economists are reminiscing on the panic that surrounded the world of finance at the time following the infamous bankruptcy of Lehman Brothers. More importantly they are all drawing lessons for today, evaluating how far we have gone from the crash and how much we have learned. I was planning on making a few of my own contributions to mark the troublesome events from the fourth quarter of 2008, and I will start by looking at where Fannie Mae and Freddie Mac, those two "evil" Congress-led, HUD goal-obliging, government-sponsored enterprises are today. Financial Times has the numbers stating that 5 years after their $189bn government bailout Fannie and Freddie are actually quite profitable.  As the US housing market is recovering from its arguably worst slump in hi...

Did you know that the prices of housing units in Beijing are higher than those in Manhattan? Could the reason for this be the lack of supply of land (as it is in Manhattan)? Or is it due to speculation that's even further fueling the Chinese housing boom ?  The last scenario might be more suitable to explain the situation. The Chinese are, like the Americans 10 years ago, and the Japanese 30 years ago, "flipping houses", to use the popular term.  And here is the result: Source: Quartz The graph represents growth rates of housing prices in 4 major Chinese cities. Land parcels are being sold for record prices. In Beijing $1100 was paid for a square foot of a residential parcel (compared to Manhattan's average of $323, with the highest bid being $800). Other cities have also experienced a rapid recent growth in real estate prices and land for commercial use. The logical explanation would be that supply is scarce so land prices must go up. This could be true ...

On Thursday last week I participated at the ZSEM and Bloomberg Investment Conference , entitled " Redesigning Global and Regional Finance ". In addition to a series of interesting speakers, the keynote address was done by Richard Koo , Chief Economist at Nomura Research Institute, and the main advocate of the "balance-sheet recession" argument. This is, after all, the argument he is presenting in his 2008 book " The Holy Grail of Macroeconomics " (the idea has received a lot of attention in mainstream economics ).  The presentation itself was excellent. He has managed to keep my undivided attention for the whole two hours, which is even more surprising since I didn't agree with some of his major points. Not since Arthur Laffer at the IEA last year has a speaker caught me with so much enthusiasm.  Anyway, his major argument is that the current crisis is a "balance-sheet" recession, a term relatively new to the economic science, primari...

"Tracking the recovery" section continues in its third edition from the start of the blog. The first version was done in February last year (featuring final data for January or December), while the second version was done by the end of July, beginning of August (featuring final data for May and June). Things were in much turmoil at the time, with severe confidence and uncertainty problems in the beginning of the year following the panic of November 2011, and significant volatility of confidence in the months to come following events such as Greece elections, Spanish bank bailout and other exogenous shocks. Notice that the pattern has more or less continued, except now the most recent exogenous shocks were Italian elections and the Cyprus bailout . The effects of these events on confidence will be seen later in the year, probably in the September edition of the Tracking the Recovery section.  In the first version back in February 2012, I presented an overview of busi...

Similar to what I did last year , this year I will once again analyze the new UK budget announced yesterday by the (downgraded) Chancellor George Osborne.  The initial reaction is actually better than last year, except for some policies which haven't changed and some new woeful ideas. You can read summaries of the budget from a variety of sources: Financial Times , BBC , Telegraph , Guardian , CityAM , think tanks ( ASI , IEA , CPS ) or watch this interesting video from the FT: Before we move on the budget itself, the UK Office for Budget Responsibility  issued their revised growth forecasts, and things still look rather gloom for the UK. Growth was revised to 0.6% this year and 1.8% in 2014. (Last year the prediction was 0.8% in 2012 and 2% in 2013 - so take the prediction for the recovery in 2014 with slight suspicion, as it always is with growth forecasts). Employment figures still seem to be increasing (even above forecasts), and with stagnating GDP this...

There was an article in the Guardian over the weekend endorsing Paul Krugman to become the next US Treasury Secretary. Apparently the initiative came from actor Danny Glover who started a petition online.  Here are a few central points in favour of prof. Krugman's candidacy:  "Krugman would be tough to oppose on any substantive grounds. He has a Nobel Prize in economics (also the John Bates Clark award for best economist under 40). The New York Times columnist is probably the best-known living economist in the United States, and perhaps the world." What credentials! If only the author has explained which are these substantive grounds? Liquidity-trap economics I presume?  He continues: "Krugman has been right about the major problems facing our economy, where many other economists and much of the business press have been wrong. A few examples: he wrote about the housing bubble before it collapsed and caused the Great Recession..." (continued...

In an interview for Business Insider , the chief economist of Goldman Sachs, Jan Hatzius, predicts an acceleration of US economic growth in the second quarter of 2013. Business Insider points out that Mr Hatzius had the foresight to predict the housing boom in 2007 (so at least a year after Shiller, Roubini, Schiff and many others ), and has a unique framework for analyzing the economy. After all, he is the top economist of Goldman Sachs which is by itself worth (some sort of) admiration.  He stressed out the following chart depicting the relationship between private sector savings and government budget deficits (click to enlarge):  Source: Goldman Sachs (2012) "The US Economy in 2013-2016: Moving Over the Hump" via Business Insider Here's the logic behind it:  "The chart demonstrates a critical economic concept: Government deficits (the grey line) are essentially the mirror image of private sector savings (the dark black line). When the priv...