September 2008

Gros, Micossi, 30 September 2008, 16002 reads

Europe’s largest banks are highly leveraged and thus vulnerable, as Fortis showed. But some of these banks are both too large to fail and too big to be rescued by a single government. The EU should: (1) urgently pass legislation to cover banks with significant cross-border presence and empower the ECB to provide direct support, and (2) create an EU-level rescue fund managed by an existing institution like the European Investment Bank.

Alesina, 30 September 2008, 15578 reads

In Italy, microfirms held by women pay a higher interest rate with respect to those firms managed by men. This column tests and rejects many possible explanations for this differential interest rate. Discrimination cannot be ruled out.

Danielsson, 29 September 2008, 17625 reads

Complex financial models and intricate assets structures meant extraordinary profits before the crisis. Markets for structured products became overly inflated as even the banks did not have a clear view of the state of their investments. Given complexity's role in today’s mess, future regulation should focus on variables that are easy to measure and hard to manipulate (e.g. leverage ratios).

Laeven, Levine, 29 September 2008, 21180 reads

When the storm passes, bank regulation will top the global policy agenda. This column presents new evidence that a bank’s private governance structure influences its reaction to bank regulation. Since governance structures differ systematically across countries, one-size-fits-all regulation may be ineffective. Bank regulations must be custom-designed and adapted as financial governance systems evolve.

Eichengreen, 28 September 2008, 45403 reads

The Paulson Plan, whatever its final form, will not end the crisis quickly. Unemployment will rise but will the most serious credit crisis since the Great Depression bring about a new depression? Here one of the world’s leading economic historians identifies the relevant Great-Depression lessons. We won’t see 25% unemployment as in the 1930s, but double digits are not out of the question.

Hazan, 27 September 2008, 36316 reads

The World Health Organisation recently argued that improving the longevity of the poor is not only an end in itself but also a means to achieving economic development. This column presents contrary evidence from the history of the US.

van der Ploeg, Veugelers, 27 September 2008, 13917 reads

International rankings indicate that European countries lag in higher education, research, innovation, and growth. This column argues that enhancing competition and governance are the key aspects of potential reform. But the most important recommendation is to invest in more data and analysis to support evidence-based reform.

Freytag, Draper, 27 September 2008, 18664 reads

The South African current account deficit has grown to large proportions in recent years, triggering strong reactions generally driven by a mercantilist bias. But this column says that wise policies will improve the competitiveness of South African firms in the long run, while possibly exacerbating the current account deficit in the short run.

Persaud, 27 September 2008, 10806 reads

This column suggests that TARP is the wrong solution, but it might buy time to develop a better plan. Such a plan could involve a private debt-for-equity swap with the government co-investing in the equity. This would put tax payers in hock for something like $70bn rather than $700bn. Managers and shareholders would take the biggest hit, but bond holders would share the pain.

Sarr, Bulte , Meissner, Swanson, 27 September 2008, 16470 reads

It is well known that resource wealth may be a “curse” for some countries, as resource booms are translated into lingering ill effects. This column blames unstructured financial investments.

Gros, 27 September 2008, 24658 reads

How much are the toxic assets worth? A bit of logic and a straightforward application of the Black-Scholes formula suggests that if current expectations of house price declines are right, securities built on subprime mortgages might be close to worthless. The key is that US mortgages are ‘no recourse’ loans, i.e. debtors can walk away from the mortgage without being held personally liable, a feature that gives homeowners a virtual put option.

Severgnini, 26 September 2008, 14052 reads

Drawing on records from ‘Calciopoli’, a judicial inquiry into corruption in the Italian soccer league, Tito Boeri and Battista Severgnini have investigated what drives match rigging, including referees’ career concerns, competitive balance and media concentration. In an interview with Romesh Vaitilingam, recorded at the annual congress of the European Economic Association in Milan in August 2008, Severgnini discusses their findings.

Snower, 26 September 2008, 10510 reads

The world has a new forum for formulating solutions to global problems. In this column, its founder, Dennis Snower, President of the Kiel Institute of World Economics, explains the goals of the Global Economic Symposium – something like Davos but where the economics is the focus instead of the window dressing.

Spaventa, 26 September 2008, 9157 reads

Bernanke and Paulson's Troubled Assets Relief Program (TARP) is not perfect, but it is a good start. Both aspects of the problem – assets’ illiquidity and shortage of capital – should be addressed in sequence. By removing troubled assets from the banks’ books, TARP would remove uncertainty. This will encourage private injections of capital and provide better information for public intervention if they prove necessary.

Leamer, 26 September 2008, 10724 reads

At the Global Economic Symposium in Schleswig-Holstein in September 2008, Edward Leamer of the University of California, Los Angeles spoke at a session on inequality and globalisation. Afterwards, he talked to Romesh Vaitilingam about his concept of ‘neurofacturing’ (creating value through knowledge work rather than physical labour), its rising significance in the world of the personal computer and the internet, the impact on inequality and the implications for our education systems.

Buiter, 25 September 2008, 18709 reads

The Paulson Plan addresses market illiquidity for toxic assets but the real problem is a lack of bank capital and the risk of widespread insolvency. Fixing this requires a government injection of new bank capital or a forced conversion of bank debt into equity. This column argues against the former as it would further socialise the US financial system. The Package needs some work, but Congress must stop its infantile posturing and act soon.

Baldwin, 25 September 2008, 27900 reads

WTO negotiations collapsed in July 2008 when India and the US could not agree on the details of a “special safeguard mechanism” in agriculture. The mechanism would allow developing countries to raise import duties on agricultural products in response to import surges without an injury test. Here one the world’s leading trade economists proposes a mechanism design that reconciles the US and Indian positions and could put Doha back on track.

Boarini, Oliveira Martins, 24 September 2008, 38583 reads

OECD governments spend a lot on education, but are their investments paying off? This column analyses how public policy affects individuals’ decisions to invest in education and identifies opportunities for reform.

Frankel, 23 September 2008, 16089 reads

Here one of the world’s leading international economists, a former member of Clinton’s Council of Economic Advisors, comments on the growing consensus that the Paulson Plan has got the wrong end of the stick.

Eichengreen, 23 September 2008, 39705 reads

The crisis solution depends upon its causes. Here one of the world’s leading international macroeconomists explains how the world got into this mess. This is the ‘Director’s cut’ of his 18 September 2008 column on Project Syndicate.

Karolyi, Stulz, Doidge, 23 September 2008, 15014 reads

Foreign firms are increasingly delisting from US exchanges. Some blame the Sarbanes-Oxley Act for undermining US competitiveness. This column shows that there is little evidence that greater regulation hurt foreign listing in the US. The firms deregister after performing poorly.

Wyplosz, 22 September 2008, 18318 reads

The world’s bankers created a reckless mix of lending and securitisation that exploded in their faces last year; they’ve stonewalled since. It would be criminal to bail them out, but spilling blood for its own sake is foolish. Here one of the world’s leading macroeconomists explains how the ‘Paulson Package’, history’s largest bet, might work and might not cost taxpayers too much. It’s too early to know which label to apply: “bailout” or “shrewd cleansing operation”.

Holden, Alesina, 22 September 2008, 14529 reads

In theory, presidential candidates should clearly articulate their platforms as they move to persuade the median voter. But candidates are often ambiguous and do not tack to the centre. Recent research documents how money-politics pulls candidates away from the median and encourages ambiguity.

Calomiris, 22 September 2008, 15557 reads

This column, posted 19 September on an FT forum, suggests a better way of ending the financial crisis. Instead of buying toxic assets, the US government should buy preferred stock capital in ailing banks that could raise matching private sector equity. This would avoid the intractable problems of how the government should value the toxic assets and directly address the banks' immediate problem – a lack of bank capital.

Zingales, 21 September 2008, 74413 reads

This weekend’s decisions will shape the type of capitalism we live with for the next fifty years. Here one of the world’s leading financial scholars, Chicago Business School Professor Luigi Zingales, argues that bailing out the financial system with taxpayers’ money is wrong. He discusses an alternative – forced debt-for-equity swap or debt-forgiveness.

Gros, Micossi, 20 September 2008, 90898 reads

The radical moves in the US have direct implications for European banks and indirect implications for European governments. This column discusses the likely channels and notes that several European banks are both too big to fail and may be too big to be saved by their national governments alone.

Puri, Zarutskie, 19 September 2008, 19785 reads

Venture capital has rapidly ascended as a major source of start-up financing in the last twenty years. This column summarises research that takes an in-depth look at firms financed by venture capital. Such financing significantly increases firms’ chances of survival in their early years and speeds their investment and growth.

Yamarik, 19 September 2008, 45019 reads

A good deal of the direct cost of education is subsidised by governments – supposedly because education generates external returns for society. This column argues that there is little evidence of such returns. If there are reasons to subsidise education, they don't include economic externalities.

Tille, 19 September 2008, 7331 reads

Cédric Tille of the Graduate Institute in Geneva talks to Romesh Vaitilingam about the enormous growth in most countries’ holdings of external assets and liabilities since the mid-1990s, and its consequences for current account volatility and international economic linkages. The interview was recorded at the annual congress of the European Economic Association in Milan in August 2008.

Persson, 19 September 2008, 11449 reads

At the annual congress of the European Economic Association and the Econometric Society in Milan in August 2008, Torsten Persson, director of the Institute for International Economic Studies in Stockholm, delivered his Econometric Society presidential address on ‘State Capacity, Conflict and Development’ Afterwards, he spoke to Romesh Vaitilingam.about his research on these issues, preliminary findings of which suggest that rising commodity prices increase the chances of civil war breaking out in poor countries.

Voth, 18 September 2008, 27734 reads

Around the globe, politically connected firms are more valuable. Nazi Germany was no different, though historians have lacked convincing evidence to prove that claim. This column shows that Nazi-linked firms reaped astoundingly large returns when Adolf Hitler came to power.

Bovenberg, Vollebergh, 17 September 2008, 13847 reads

The EU plans to auction permits for the next phase of emissions trading, rather than giving them away for free as in the past. This column explains why the new scheme is a significantly better policy and proposes compensation measures to redress the complaints of industries opposed to the new climate change policy. Harmonised EU action may be required.

Lindé, Svensson, Laséen, Adolfson, 16 September 2008, 30674 reads

Over the last couple of years, central banks have started to build and estimate dynamic stochastic general equilibrium models. In this column, Lars Svensson, Deputy Governor of Sweden’s central bank, and coauthors discuss what needs to be taken into account when using such models for policy analysis and forecasting.

Alesina, Zhuravskaya, 15 September 2008, 42934 reads

Research on a large new dataset suggests that regional segregation within a country is associated with worse government – even after controlling for reverse causality.

Cohen, 13 September 2008, 32368 reads

Jeffrey Frankel and others predict that the euro could surpass the dollar as the premier international currency relatively soon. This column argues that predictions borne of economic formalism unrealistically neglect the political forces shaping international currencies. Politics may ensure the dollar’s dominance for some time.

de Araujo, 13 September 2008, 10969 reads

India has the most HIV infections in the world, with prevalence as high as 1.13% in some states. This column explains why preventive policies should focus on increasing condom distribution and awareness among the poor and uneducated.

González-Hermosillo, Hesse, Frank, 13 September 2008, 16215 reads

The recent credit crisis started as a credit shock and then rapidly promulgated in the form of market and funding illiquidity before inducing solvency problems at some financial institutions. This column presents empirical evidence mapping the transmission channels of the crisis.

Chinn, Cheung, Fujii, 12 September 2008, 14944 reads

For years, policy analysts and policy makers asserted that the Chinese currency was substantially undervalued. This column shows that statistical and data uncertainties should humble those making strong claims about the renminbi’s value.

Burda, 12 September 2008, 12767 reads

Supply side reforms have had a positive impact on the labour market in Germany, raising job creation and reducing the unemployment rate. At the European Economic Association meetings in Milan in August 2008, Michael Burda of Humboldt University in Berlin discussed these achievements and future prospects for the German economy with Romesh Vaitilingam.

Lazear, 12 September 2008, 9009 reads

At the Global Economic Symposium in Schleswig-Holstein in September 2008, Edward Lazear – economics professor at Stanford University and currently chairman of the US Council of Economic Advisers – delivered a speech on the performance of the US economy over the past ten years. Afterwards, he recorded an interview with Romesh Vaitilingam.

Teulings, Bovenberg, 11 September 2008, 12139 reads

Should the management of a company take account of the interests of its workers, customers, suppliers and shareholders, as in the Rhineland model? Or should the management further only the interest of the shareholders, as in the Anglo-Saxon model? Here’s a one-handed answer.

Bagues, Zinovyeva, Sylos Labini, 10 September 2008, 20417 reads

Some European governments aim to promote their universities’ performance in international rankings by creating financial incentives. This column explains that such policies can backfire, taking the example of recent research on Italy. Policy makers should be very cautious in using students’ academic performance as a proxy for university value.

Geraats, Giavazzi, Wyplosz, 09 September 2008, 17692 reads

Recent data suggest that the ECB’s credibility is worryingly low on the inflation-fighting front. This column explains how improved ECB transparency and communication could help it to regain credibility with markets and investors.

Maoz, Doepke, Hazan, 08 September 2008, 56493 reads

Europe faces a fertility crisis, but not for the first time. The 1930s saw a similar situation but fertility recovered in the 1950s. This column assesses the historical lessons. The news is not good. Recent research shows that the post-war baby boom happened because young women were denied opportunities in the labour market due to discrimination and competition with older women who acquired job experience during the war.

Rogoff, Rossi , Chen, 08 September 2008, 51240 reads

In a recent speech, Fed Chair Ben Bernanke highlighted the difficulty of obtaining a meaningful gauge for future commodity price movement, noting the inadequacy of forecasts based on commodity futures signals. Looking at exchange rates may be a promising alternative.

Bergstrand, 06 September 2008, 45010 reads

European economic integration is 50 years old this year. Most analyses suggest that it had a rather small international trade impact. This column argues that these results are incorrect. A properly specified empirical analysis suggests far larger economic effects, since traditional models ignore the self-selection in their calculations.

Cascio, 06 September 2008, 47366 reads

Parents are increasingly delaying their children’s entry into school to give them the advantage of being older than their classmates. But this column says they have it all wrong – children who are relatively older lag in academic achievement.

Voth, 05 September 2008, 8482 reads

From Indonesia and Malaysia to Italy, politically connected firms are more valuable than their less fortunate competitors. Yet a key event in the history of the twentieth century has not been examined in terms of the value of political connections: the Nazi rise to power. In an interview recorded at the annual congress of the European Economic Association in Budapest in August 2007, Joachim Voth talks to Romesh Vaitilingam about his research with Thomas Ferguson on this question.

Wang, 05 September 2008, 47912 reads

A random walk is (in)famously a better predictor of short-term exchange rates than models emphasising economic fundamentals. This column explains recent literature that has addressed the puzzle by considering an asset-pricing approach. Fundamentals (and expectations of them) are still relevant.

Glaeser, 05 September 2008, 10344 reads

Edward Glaeser of Harvard University talks to Romesh Vaitilingam about the lessons from his research on how falling costs of communication and transportation have been kind to idea-producing cities like New York, Boston and London and devastating to goods-producing cities like Cleveland, Detroit and Glasgow. The interview was recorded at the American Economic Association meetings in New Orleans in January 2008.

Budd, 04 September 2008, 13060 reads

Shared capitalism aims to motivate employees by giving them a greater financial stake in their companies. Recent research shows that many workers do not know about or understand such plans. How can such plans work if employees don’t know they exist?

Baldwin, 04 September 2008, 20002 reads

Today’s globalisation is operating with higher resolution. It is not enough to think of skill groups and sectors; the impact is more unpredictable, sudden and individual than in the past. This column assesses how high-resolution globalisation differs and how governments need to respond to make it work.

Freeman, Bryson, 03 September 2008, 18621 reads

Shared capitalism schemes, in which workers are given larger financial stakes in their employers, are growing in popularity. This column summarises recent evidence that may explain the growth – shared capitalism seems to boost productivity.

Cantillon, Yin, 02 September 2008, 15600 reads

In the “battle of the Bund,” trading of German government bonds shifted from London to Frankfurt in less than a decade. This column analyses that famous financial episode and assesses the potential for new financial exchanges to dethrone incumbents.

Hau, Rey, 01 September 2008, 34701 reads

The sustainability of the US current account depends on foreigners’ willingness to holding US assets. This column discusses new micro-econometric evidence that equity funds rebalance in reaction to increased exchange rate risk. In short, there is a limit to foreigners’ holding of US assets; the US will either have to run a trade surplus in the future, or the dollar must fall to deflate the value of foreigner’s holdings.

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