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FT: [The size of the Spanish black economy] helps to explain one of the more embarrassing economic mysteries of modern Spanish society: an extraordinarily high rate of official unemployment without much of the civil unrest and popular anger that such a problem would normally generate. If it were true that 4.9m people, or more than 21 per cent of the workforce, were jobless, Spain would not be as peaceful as, barring a few demonstrations, it has so far been, say economists and business leaders.

It is an open secret that the Spanish jobless rate – double the European average – is a fiction. Hundreds of thousands of people claim unemployment benefit when they actually have some kind of work; millions are not registered as working, which means that neither they nor their employers are paying social security contributions. One proof, say employers, is that when unemployment fell to 8.5 per cent at the height of the boom in 2006-07, they could find no workers to hire. Yet that figure, the recent Spanish minimum, is high enough that it would be associated with a deep economic recession in almost any other industrialised country. [Story]


unemployment1Bloomberg: U.S. joblessness would be much higher if Americans dropping out of the workforce were taken into account, according to Albert Edwards, a global strategist at Societe Generale.

“The impression that unemployment has fallen” results primarily from a drop in the participation rate, Edwards wrote yesterday in a report. The rate is the percentage of working-age people who are looking for a job or already have one. Story

Abstract: The “shadow” banking system played a major role in the financial crisis, but was not a central focus of the recent Dodd-Frank Law and thus remains largely unregulated. This paper proposes principles for the regulation of shadow banking and describes a specific proposal to implement those principles. We first document the rise of shadow banking over the last three decades, helped by regulatory and legal changes that gave advantages to the main institutions of shadow banking: money-market mutual funds to capture retail deposits from traditional banks, securitization to move assets of traditional banks off their balance sheets, and repurchase agreements (“repo”) that facilitated the use of securitized bonds in financial transactions as a form of money. All of these features rely on an evolution of the bankruptcy code that allows securitized bonds to be used as a form of privately created money in large financial transactions, a usage that can have significant efficiency gains and would be costly to eliminate. History has demonstrated two successful methods for the regulation of privately created money: strict guidelines on collateral (used to stabilize national bank notes in the 19th century), and government-guaranteed insurance (used to stabilize demand deposits in the 20th century). We propose the use of strict rules on collateral for both securitization and repo as the best approach for shadow banking, with compliance required in order to enjoy the safe-harbor from bankruptcy.

Regulating the Shadow Banking System, Gorton & Metrick

via Marginal Revolution

related items:
Shadow Banking : Federal Reserve Bank of New York Staff Reports

Greg Mankiw points to the following quotation from John Hicks:
"Of all great economists, Mr. Keynes is probably the most Impressionist; the General Theory, in particular, needs to be read at a distance, not worrying too much about detail, but looking principally at the general effect."

The Monetary Theory of D.H. Robertson", 1942, Economica
My take: In case you like art and worry about detail, you might garner some inspiration from this painting:


Quentin Massys (1465–1530), The Tax Collectors

If I had to think of an impressionist painting that reminds me most of Keynes and the aftermath of fiscal illusion, I'd probably go with L'Absinthe by Edgar Degas.

In economics the questions are always the same - only the answers change:

Estimated impact on GDP of a permanent increase in government purchases of 1 percent of GDP (Cogan et al.):
fiscalmultCogan et al. (Feb 2009) conclude:
In this paper we used a modern empirical approach to estimate government spending multipliers.. We focused on an empirically estimated macroeconomic model - the Smets-Wouters model - recently published in the AER.

We find that the government spending multipliers from permanent increases in federal government purchases are much less in new Keynesian models than in old Keynesian models. The differences are even larger when one estimates the impacts of the actual path of government purchases in fiscal packages, such as the one enacted in Feb 2009 in the US or similar ones discussed in other countries. The multipliers are less than 1 as consumption and investment are crowded out. The impact in the first year is very small. And as the government purchases decline in the later years of the simulation, the multiplier turns negative.

The estimates reported here of the impact of such packages are in stark contrast to those reported in the paper by Christina Romer and Jared Bernstein.
Crowding out of consumption and investment in the Feb 2009 stimulus legislation:crowdingout

keywords: gamma, vega, convexity (i.e. not some mystery Black Swans), complexity (stocks vs. tranches of CDOs), right-way contract, swapping country risk, systematic alpha, naked vs. covered

Click here if you use IE and can't see the clip.

via Infectious Greed

glsttop2The Economist:
MANY economists are unsettled by the idea of a generation of “Depression babies”—people who grew up during the Depression and, scarred by the poor stockmarket returns of their formative years, were unusually risk-averse in their investments throughout their lives. Standard models assume that individuals use all available information about the present and past to make financial decisions, not that choices are disproportionately affected by their personal economic experience.

Yet new research from Ulrike Malmendier of the University of California at Berkeley and Stefan Nagel of Stanford University seems to confirm that people born at different times make very different financial choices, even in similar economic environments. Here is the whole story. Here is the paper.

DuBridge Distinguished Visitor Lecture
California Institute of Technology

skilledwomanThis paper* explains why modern societies are less polygynous than less-developed societies:

Men in less-developed economies prefer quantity over quality [=skill] in wives and children. The explanation is rather intuitive. Rich men in less-developed economies are not efficient at producing quality children because they tend not to have high human capital themselves. Therefore, they have a low demand for quality children and, consequently, a low demand for quality women who can help them produce quality children. As a result, women in less-developed societies are valued only for the quantity of children they can produce, and not the quality. This makes all women very close substitutes for one another, which keeps the price of all women low enough for richer men to acquire multiple wives.

In more advanced economies, richer men tend to have high human capital and, therefore, they are more efficient at producing human capital in children. This creates a high demand for quality in children and in women, because quality women are complements in the production of high-quality children. Thus, all women are not close substitutes in the marriage market in advanced societies. Higher-quality women are a scarce resource, which drives up their price in the market marriage market and makes polygyny less affordable for wealthy men.

The main implication of the model can be summarized as follows: male income inequality generates polygyny, but female inequality in the marriage market reduces it. As the return to human capital increases, women who can create high-quality children more efficiently are increasingly valued in comparison to low-quality women.

The main empirical prediction is that the composition of inequality, not just the level, is an important determinant of the degree of polygyny in society. Secifically, societies should be more polygynous in countries where variation in overall wealth inequality is determined more by differences in nonlaber income (capital and inherited wealth) versus income variation generated by differences in the levels and returns to human capital investments.

* Eric Gould et al., The Mystery of Monogamy, American Economic Review, American Economic Association, vol. 98(1), pages 333-57, March 2008.

Hayek and the Economics of Capitalism
2008-01-29 18:00 s.t., University of Vienna