Lecture Alert - The Subprime Crises by Professor Robert J. Shiller (Yale/irrational exuberance fame)

Above is probably one of the world's first book signings on an ipod. I bought Prof. Shiller's book on amazon a week ago, so i convinced him to sign on my ipod during his book signings after the public lecture today since i didn't want to buy another book. The que was so long, i believe he might be still signing while i write this now.

The lecture was fairly short but covered a few interest points. First, it was also a first for a lecture, at least when i have attended to show a disclaimer slide before the proceedings started.

Prof. Shiller wants us to think outside the G20 communique on the causes of the subprime crises. Immediately he went on the political road (with OBAMANIA, who can blame him?) and blasts the Treasury Secretary-elect Timothy Geithner for failing miserably and having no clue about the crises before the bubble burst. Shiller is probably right here, since he served as an advisor to the NY Fed until recently. Why did he leave? Well, if someone keeps bringing up the possibility of bubbles bursting in the ancien-regime what is known as the NY Fed, people look the other way. This is what happened when Timothy Geithner, protege of Larrry Summer brought his "own crew" to the NY Fed and Shiller had to leave. I never got the chance to ask my question during the lecture on what his thoughts were on who should have been really offered the Treasury position.

Moving on, Prof. Shiller changed tracks and argued a lot of problems today were due to "Group Think" - a concept in psychology where people, in this case very ambitious people who try to minimize conflict and reach consensus without testing ideas properly.

He states the emergence of a strong civil society is very important in such a crises.

Later, he recalls how much Keynes is relevant today, who not only was the architect of post WW1 world economic order but a man he deeply admires (Shiller is already working on a new book called Animal Spirits with George Aklerof based on Keynes original animal spirit thesis

"A general bonfire is so great a necessity that unless we can make of it an orderly and good-tempered affair in which so serious is done to anyone, it will, when it comes at last grow into a conflagration that may destroy much else as well."

Maynard John Keynes (The Economic Consequences of the Peace, p. 160)

Sources of Bubbles -

1. Perception

2. Amplification mechanism

3. Cultural factors

4. Psychological factors

What solutions are on the table to fight this subprime crises mess?

US and UK are leading the way in following the Keynsian debt stimulus package. But will such a fiscal stimulus work?

Shiller believes that the Keynesian multiplier is too old to suggest it would work fine. He believes Alister Darling's recent budget proposal of borrowing 20 billion pounds while announcing increase in taxes in two years time concomitantly was stupid. Expectations always play a big role in this world.

Prof Shiller proposes a few solutions of his own -

Creating clearing houses for debt could be a way of dealing with systemic crises. Bailouts are always an option as well.

Long term solutions he proposes -

1. New information infrastructure

- comprehensive financial advice for the poor (just like what rich wigs get when they enter a wealth management office: look at the big picture)

- new financial watchdog (Howard Davies was the chair for the lecture, and should have pointed out how badly his Alma-mater the FSA failed in the UK)

- Default option financial planning

- improved financial disclosures

- improved financial database

- new system of economic units of measurements for the economy.

- CONTINUOUS WORKOUT MORTGAGES: a term he devised in the book where govt. offer incentives for banks to continuously renegotiate with clients in times of peril.

Finally, Prof. Shiller gave a bit of useful advice: the FINANCIAL GURUS that are on CNBC, Bloomberg everyday are really not that special. He thinks the NY taxi driver that dropped him off at the airport when he was travelling to the World Economic Forum this year probably knew a lot more than most participants he met there. (Honest admission and a thunderous applause swept the Old Theater.)

Zshillerrerereree

Old Theatre

LSE

26 Nov 2008

The future is here... this is absolutely amazing.

Lines have been drawn finally between Labour and the Conservatives ....

What is interesting is that David Cameron has proposed that he will slow the rate of increase of Government spending if the Tories come to power. This means the Tories plan to get elected on a platform of more prudent economic plan which includes lowering the future increase in funding that would have been available to schools and the NHS for example.




British daily political drama is par excellence....

Without Obama, this is how the G20 meeting in Washington was like...

Lecture Alert - The Ascent of Money by Niall Ferguson

I had some expectations before going to this lecture after reading Niall Ferguson's several books on Empire and watching him several times chit-chat with Fareed Zakria on CNN.

(Telegraph Review of the Book for further background) 

Nicely puts the current crises in perspective: "Money doesn't make the world go round, but "it does make staggering quantities of people, goods and services go around the world,"" according to Niall Ferguson.


along with this lecture I attended, makes it a convenient way of not reading the book, but coming to grips with its main points.

Ferguson starts the lecture by going over how debt securities, stock market capitalization and exchange traded derivatives (each more than 50 trillion) has over-taken World GDP (48 trillion). This relative growth of finance has "outgrown our planet earth" believes Ferguson. Mocking the uber-quoted Goldman Sachs report over 2 years ago on the BRIC - Brazil, Russia, India, China - economies, he amuses the the lecture crowd with dramatizing the current the global liquidity crises where the "BRICs are dropping like BRICKS".

Going back in history (aside from being irritated by the Lecture Theatre's dysfunctional PowerPoint remote), he takes the current crises vis-a-vis the 1914 economic crises. In fact, Ferguson believes the 1914 crises (different to the extent it was caused due to a geopolitical shock) was much bigger than the Great Depression, but was suppressed by Governments all over the worlds through various instruments.

Recalling an invitation to the Bahamas to lecture some Hedge Fund whiz-kids almost 2 years to the day of this lecture, he recounted how the Hedge Fund Scrooges failed to heed his warnings on the forthcoming crises and instead told him that they should rather watch Marry Poppins next time. Considering there was a "run on the Banks" in Marry Poppins, this stirred a few laughs in the crowd and Ferguson happily agreed with the short-sighted hedge fund magnets on their movie choice.


Going back to why this lecture is important, Ferguson reminds everyone that Northern Rock was the first British bank to fail since 1866; this lack of appreciation of financial history is the main problem right now.

Swinging from Ancient Mesopotamia where clay tablets were used as money (these tablets can be found in the British Museum even today - quite robust) to Potosi in Bolivia - main source of silver for the Spanish Empire in the 16th Century - Ferguson cites that the failure of the Spanish Empire to understand to the true meaning of money led to the first European-wide inflation. Disregarding the loss of life that resulted in mining silver, the Spanish Empire kept wanting more to finance wars; however inflation was only natural since they could not understand what money meant. Here Ferguson drives his main point: Money is not metal, but based on relationship and trusts. (UBS ADVERT maybe?)

Then Ferguson handsomely dips into the Renaissance where the Medici family made MONEY respectable by utilizing economies of scale. How a breakdown in trust had led us from Medicis to Lehman Brothers has led us to some sort of blame game. Hailing Fractional Banking at par with Newton's discoveries, Ferguson believes that Fractional Banking has been crucial in our growth as it has led to the creation of credit like never before seen in our history.

Not only have Bankers abused trust, Ferguson gave a cold caveat: European Banks are even more leveraged than US Banks. What does this mean? Well, simply that the crises will become was worse in the European Theatre than we imagine right now.

Charting out to the next part of the lecture, Ferguson tries to explain the rise of the Bond Market as an integral part of finance. Bonds were initially instruments for financing Government debt, but now the Bond Market encompasses mortgages in the form of Collateral Debt Obligations (CDOs), and no wonder we have no idea what is going on in this world. Such archaic instruments make it hard for anyone to understand all the risks involved. He praises Nathan Rothschild (maybe because he has written a book about him) for single-handily internationalizing the Bond Market by getting Prussia, Russia, Brazil, Spain to the London Bond Market. (Sell bonds to wage wars - a good idea.)

The third part of the lecture is on the Stock Markets. Invented in Amsterdam to finance the Dutch East Asia Company, they have grown beyond imagination. They essentially price future relative price earnings into present price - clearly this is what makes them volatile. Ferguson gives the example of John Law (1720) just after the Napoleonic Wars and how the Mississippi Cornucopia led to the first bubble in France.

What causes financial bubbles?

1 - great expectations
2 - Lack of monetary authority

He criticizes Ben Bernanke's infamous speech in 2005, "The Great Moderation", where Bernanke wrongly prophesies that bubbles were over. Ferguson further believes the US Feds' focus on inflation, and lack of focus on asset-price inflation thereof, is a large reason why we are in such a mess right now. Interesting......


Fourth part is the insurance industry. First invented in Edinburgh, the industry made a lot of money by calculating risks that follow a normal-bell curve with incidents around the mean. Ferguson compares financial risks to earthquakes that are a lot bigger and harder to calculate. An example from history was the Tokyo-Yokohama earthquake that destroyed the Japanese insurance industry. He feels this is precisely why we need Welfare states to insure against big incalculable risks like earthquakes and financially busts.


Fifth part of the lecture focused on Real Estate. Ferguson looks to the Great Depression where a great leap led to greater ownership of land. According to him, Property Ownership Democracy championed by Regan and Thatcher makes a lot of political sense, but has financial limits. This obsession with property ownership as a the sole form of wealth generation for most of us is a bad idea, since property prices can swing both ways.

He blasts NINJA - No Income, No Job, (and) no Assets - loans

Finally, he talks about the financial crises as a global crises. CHIMERA, a portmanteau of China-US relations holds the key for our future declares Ferguson. On a funnier note, he explains CHIMERA is like marriage: "One does all the saving, while the other does all the spending." This analogy probably brought out the most applause during the lecture.




Ferguson ends by reiterating that the Western Financial System much like Democracy is bad, but it's the best system we have been able to develop so far, so we have no choice but to accept bubbles and busts. Three reasons contribute to such a cyclical roller coaster: 1) our own psychology; 2) future uncertainly; 3)evolutionary character of the financial system.








Date: Thursday 6 November 2008
LSE

Noam Chomsky is one of the Polemicist of our generation.

I just find it hard to keep up with all his writings and lectures, and find it harder to imagine how he finds the time to engage the world with so much thought-provoking output.

Emerging Framework of World Power, Noam Chomsky

Noam Chomsky, professor, linguistics, MIT Exploring the repercussions of the attacks on September 11, 2001, Noam Chomsky talks about the war on terrorism, US involvement with Afghanistan, and the long-term implications of America's military attacks abroad. His extensive knowledge of American

policy in the Middle East and South Asia sheds light on the new contours of world power while posing important and troubling questions about our country's role in international affairs.

The World Expects Obama to deliver on promises (so do I)....

YES, we can ..................... SOLVE CLIMATE CHANGE

"All across the world, in every kind of environment and region known to man, increasingly dangerous weather patterns and devastating storms are abruptly putting an end to the long-running debate over whether or not climate change is real. Not only is it real, it's here, and its effects are giving rise to a frighteningly new global phenomenon: the man-made natural disaster."


"Today we're seeing that climate change is about more than a few unseasonably mild winters or hot summers. It's about the chain of natural catastrophes and devastating weather patterns that global warming is beginning to set off around the world.. the frequency and intensity of which are breaking records thousands of years old."


"The issue of climate change is one that we ignore at our own peril. There may still be disputes about exactly how much we're contributing to the warming of the earth's atmosphere and how much is naturally occurring, but what we can be scientifically certain of is that our continued use of fossil fuels is pushing us to a point of no return. And unless we free ourselves from a dependence on these fossil fuels and chart a new course on energy in this country, we are condemning future generations to global catastrophe."

Barack Obama

Obama's Economists

If the World is facing the most severe crises since the Great Depression, Obama's Economic policy advisers are some very famous academics and policymakers ready to step in-

* Jason Furman (director of economic policy)
* Austan Goolsbee (senior economic policy advisor), University of Chicago tax policy expert
* Karen Kornbluh (policy director)
* David Cutler, Harvard health policy expert
* Jeff Liebman, Harvard welfare expert
* Michael Froman, Citigroup executive
* Daniel Tarullo, Georgetown law professor
* David Romer, Berkeley macroeconomist
* Christina Romer, Berkeley economic historian
* Richard Thaler, University of Chicago behavioral finance expert
* Robert Rubin, former Treasury Secretary
* Larry Summers, former Treasury Secretary
* Alan Blinder, former Vice-chairman of the Federal Reserve
* Jared Bernstein, Economic Policy Institute labor economist
* James Galbraith, University of Texas macroeconomist
* Paul Volcker, Chairman of the Federal Reserve 1979-1987
* Laura Tyson, Berkeley international economist, Bill Clinton economic adviser
* Robert Reich, Berkeley public policy professor, former Secretary of Laborweblog
* Peter Henry, Stanford international economist
* Gene Sperling, former White House economic adviser
* Heidi Hartmann, President, Institute for Women's Policy Research

Other prominent economists who support Obama:

* Brad Delong, Berkeley macroeconomist
* Joseph Stiglitz, 2001 Nobel laureate
* Edmund Phelps, 2006 Nobel laureate (see blog history)
* Ray Fair, Yale macroeconomist
* Dan McFadden, 2000 Nobel laureate
* Robert Solow, 1987 Nobel laureate

A Post-Racial President in a POST-American World

Three things helped Obama Win -

1) Internet
2) George W Bush
3) Financial crises


With a Declaration of "Interdependence", i am keen to see how bipartisan President Obama really is when he picks his cabinet.