Russian vs. Chinese Growth Rates

...Is the topic of my working paper right now. Its interesting stuff, given that both economies entered the 1990s as categorically Communist and have since engaged in liberalizing reforms (but to varying degrees and styles). The result has been spectacular growth for China but medicore stagnation for Russia; I'm trying to find out why.

I'll post it when its done.

Paul Krugman on Europe

And we're back to Europe. Here's an interesting takedown of the continuing Fourth Death of Europe (no points for guessing what the first three were).

http://www.nytimes.com/2012/04/16/opinion/krugman-europes-economic-suicide.html

Mark Thoma on Sticky Wages

Awhile back I outlined two models for the business cycle, both of which were predicated on "sticky" prices, which includes sticky wages. Mark Thoma at economistsview blog has an interesting post on the subject. Check it out.

http://economistsview.typepad.com/economistsview/2012/04/evidence-of-nominal-wage-rigidities.html?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+EconomistsView+%28Economist%27s+View%29

Crisis and Regulation, part two: Enter the Investment Banks

At the end of Crisis and Regulation Part One I said that mortgage lenders packaged mortgages they had made together into mortgage-backed securities, and then sold them to "someone else." This meant that because they quickly unloaded the mortgages, mortgage standards declined, which many loans given to the NINJAS. The "someone" who bought these mortgage securities were the investment banks- think Goldman Sachs, Bear Sterns, Lehman Brothers, Morgan Stanley ect.

Now a word about invesment banks: the process of investment banking is essentially the inverse of the process of commerical banking. Investment banks purchase securities from issuers and then sell them to the final investors. For example, investment banks are how firms sell stock when they wish to issue more: Goldman Sachs will purchase x number of shares from Apple and then sell those shares to the general public; the margin between the purchase price from the issuer and the price they get from the public is their profit. So investment banks act as an intermediary between those selling assets and those wishing to buy them, as opposed to commerical banks that act as an intermediary between people buying assets (depositors) and those selling them (borrowers). But the big difference between investment and commercial banks is that investment banks do not hold assets on their balance sheets for very long; its a quick-turnover business, at least if done profitably: they want to flip the securities they have underwritten to a buyer quickly to get the margin of profit, as opposed to commerical banks who hold their liabilities (deposits) and assets (loans and other securities) on their balance sheets for a longer period of time.

But what are the implications of this for the financial crisis? Well, the investment banks were the critical link in the securitization chain that spread the risk of mortgage default from the originators of the mortgage to the broader financial system; if the investment banks had not underwritten the mortgage securities from the originators and sold them to other investors (such as commerical banks, pension and mutual funds, sovereign wealth funds, ect) the financial contagion would not have happened...

but why was it all able to go so wrong?

Germany's Current Account: World's Biggest Surplus

I thought this was interesting: Germany now has the world's largest current account surplus, while we have the world's largest current account deficit. What's really fascinating is that Germany surpassed China; think about the implications of that on a per capita basis. Scott Sumner reports:

http://www.themoneyillusion.com/?p=13760&utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+Themoneyillusion+%28TheMoneyIllusion%29

Here's that interesting piece by the guy who left Goldman Sachs...

I thought this was an interesting bit of candor from someone who actually worked in the depths of the financial services industry. And seeing as how I'm in the mist of a series of posts on the subject of the financial crisis, quite appropriate. Follow the link and the NYT won't dock you one free article view of the month. Enjoy.

http://www.nytimes.com/2012/03/14/opinion/why-i-am-leaving-goldman-sachs.html?pagewanted=all

Crisis and Regulation, part one

I watched Inside Job for the first time this week, and it got me thinking about financial regulation and the crisis of 2008. What struck me most about the whole thing was how ill-designed the subsequent Frank-Dodd regulatory bill was.

To start with, lets investigate my diagnosis of what caused the financial crisis, and what did not. The crux of the problem was asymetric information, where one side in a transaction has more information than the other. With asymetric information, markets cannot funciton efficiently because supply and demand equilibrium rely on both parties maximizing their utility; with asymetric information, prices will either be too high or too low, depending on whether the buyer or seller has the information advantage.

This was exactly the situation that arose in the market for mortgage-backed securities. Mortgages of individual homeowners were combined into securities and sold by the original lending institution. The mortgage payments from the mortgages that comprised the security than went to the new owners of the security.

Many of these securities were backed by mortgages that were given to NINJAS- no, not those ninjas, but people with No Income, No Job, No Assets- obviously the type of person who is likley to default or at least be delinquent on their mortgage. But the originators of these loans did not care, because once the made the loan, they simply combined the bad mortgages into mortgage-backed securities and sold them to someone else.