Feb 25, 2012

Weekend Links

How many years has the economic crisis set back the most affected countries?

China's foreign exchange reserves move the Euro.

Is an engineering degree better than an MBA if you plan to start a company?

Marketing dollars vs. the time spent by consumers on different categories of media.

With more investors entering the market and less interest in homeownership, the US is seeing the number of homes rented increase.

Feb 2, 2012

Debt policy follow up

I recently wrote about the importance of the accumulated debt in the worlds current financial troubles and am heartened to learn some of the mainstream is not thinking that differently.

Martin Wolf both agrees that central banks need to pay more attention to aggregate leverage levels and that tax codes should remove incentives that encourage debt.  That these changes made his short list of 7 ways to fix the system is very encouraging.

Paul Krugman also points to the growth of debt as the primary reason the economy was unsound from 2003 to 2007.  Repeating this simple narrative will eventually lead to enacting the prescribed solutions.

Now that the failure of austerity is rapidly becoming apparent, I am hoping new policy measures will be aimed at the structural issues that led to debt build up while returning to the old standard practice (it became unfashionable in 2010 as I recall) of counter-cyclical monetary and fiscal policy.

Jan 27, 2012

The MF Global fallout and other links

  • I am surprised the markets shrugged off the MF Global loss of client funds so easily.  I am hopeful that the end result will be tighter restrictions to prevent such losses in the future.  Until this happens though I would have thought risk premiums might need to widen generally or a least some other brokers might suffer as customers gravitated towards the strongest.
  • A retrospective on housing market declines that looks at where Australia might be in that process.  Real estate still seems expensive in Australia and with China likely to be shoring up its economic growth this year, I don't think AUD interest rates will be adding price support to housing.
  • A study that looked back at asset backed securities and their ratings histories found that the securities included in CDOs later experienced worse ratings downgrades.   The conclusion implied that CDO sponsors were exploiting some kind of information advantage to skew the results that the buyers experienced.  This was the case even when controlling for yield which is where I would normally expect default expectations to be priced.  The authors looked at the entire asset-backed universe but CDOs were concentrated in the housing and commercial real estate sector.  I may have missed where the ABS sector was controlled for but if it was not controlled for I could see how warped investor demand for housing CDOs led to warped housing prices and ultimately very poor performance of housing ABS without needing asymmetric information between CDO sponsors and buyers.  I don't know what really happened of course, but the explanation from the authors seems like an elaborate and difficult application of exceptionally good ex-ante judgement.  Such good judgement is both valuable and rare so it is best applied with simpler strategies and fewer moving parts to depend on.

Jan 8, 2012

Debt and Occupy Wall Steet

I liked this essay's explanation of the zeitgeist behind the Occupy movements.

I think there is a simpler story though to be told about modern economic growth being driven primarily by increased private debt levels.  (Update: my view expressed here is heavily influenced by Steve Keen's writing.)  It is less malevolent than the corruption of politics by money explained by the linked essay and simpler to address.  

My story would be that constantly increasing debt levels of the past 3 decades created false demand that was unsustainable when the debt growth stopped.  The extra demand smoothed out the business cycle while the debt grew creating a self fulfilling "great moderation" of stable dependable economic growth that allowed and incentivising high debt levels.

High debt levels benefit asset owners by driving up prices and lenders by increasing interest payments which also explains the shifts in wealth distribution.  There was also a kicker to the wealth concentration at the end of the debt build up where "the 99%" were convinced to take on large debt loads to purchase houses which, as an un-productive asset, require either the owners salary or price appreciation to enable the interest payments.

Recognising the current imbalances as a debt problem would add "eliminating tax incentives for debt funding" and possibly   add "managing the aggregate debt level" to the responsibilities of the world's central banks.  

I don't think this is a difficult narrative for people to understand and I imagine most are aware of the increased presence of debt in their lives.  While discussion of the government debt level is a popular media topic and the level of education loans is starting to make headlines there is much less discussion of the overall private debt level making me think that the majority of people are still looking for a return to the good old days of steady debt growth.