This week
the main themes are the need for banking reform – limiting the scale and scope
of banks, and the resistance to, and perhaps futility of such efforts. The IMF’s
recent economic outlook pointed the underestimation of fiscal multipliers. This
is just a fancy way of stating that making budget cuts tends to lower growth
and thus the previous “cult of austerity” was wrong.
 |
| The IMF's revision of fiscal multipliers is questionable |
My view on this: the potential losses first had to be moved from the evil banks to the official sector. IMF and everyone else knew perfectly well that austerity would not work. It was needed to keep the PIIGS “alive” for the time it took to transfer the banks’ eventual losses to tax payers and central banks. Austerity policies gave both time to do this, but more importantly, made it politically possible.
Now that
the losses have been moved to the official sector, they can finally start restructuring
the sovereign debts and recapitalize the banking system from mutual rescue
vehicles.
Previously on MoreLiver’s
REGULATION
Regulatory Omniscience is A Fictional Conceit – The
Psy-Fi Blog
If you’re a
regulator you’re likely to be conditioned by motivated reasoning: you should
want more stringent regulation because, after all, that’s what you get paid to
do. You’ll base the need for more rules
on reasoned analysis, but your analysis will be directed by your incentives. Regulators
are human; ergo, they’re subject to behavioural bias.
Why are we bailing out the banks? Part One. The
Simple Answer. – Golem
XIV
A full five
years of pumping money in to the banks and still our leaders will not even
consider that they might be wrong. They still insist, as they have from the
start, that “There is no alternative’. Call it bail outs, call it QE, call it
monetary policy, rescue or suicide, it doesn’t matter. What matters is we’re
still doing it.
Will the
new Basel rules make monetary policy less
effective? This column looks at how banks responded to the introduction of the
Dutch quantitative liquidity requirement. It concludes that a liquidity rule
does influence lending rates and volumes in the interbank money market. These
effects, however, are at least partially intended and the overall effect of a
binding liquidity rule is still positive.
Why banks shouldn’t trade – Felix
Salmon / Reuters
So banks
therefore have two big reasons to move into trading: the paper calls the first
one “time inconsistency”, and the second one “risk shifting”. The problem is
that both of them make only a limited amount of sense at the margin, in small
doses. In large doses, the benefit goes away — as we can see by the fact that
trader-heavy investment banks nearly always trade on the stock market at very
low multiples of earnings or of book value.
The risks of trading by banks – voxeu.org
Liikanen, Vickers, and Volcker all question
current banking-trading links. This column offers analytic scaffolding for
thinking about the separation of banking and trading. Banking generates low
risk returns from relationship-based activities; trading generates high-risk
returns from short-term concentrated positions. The two are linked since
trading allows banks to profit from the ‘spare’ banking capital, but deeper financial
markets magnify problems of managing and regulating trading by banks.
Credit/mezz funds create a major hole in the
Volcker Rule – Sober
Look
The purpose
of Volcker Rule is to focus the bulk of banks' capital on its primary business
of lending. Seems clear-cut, right? But what if a bank invests in a finance
company whose primary business is lending to corporations.
Stability through simplicity – The
Physics of Finance
We can and
should work hard to explore the space of what might happen, and so gain some
forewarning of dangers, but we will still encounter surprises and we should
expect to do so. So our approach to regulation ought to be centered on that
premise -- that we face a world of uncertainty.
ECONOMICS
OECD: Foreign Investment in Sharp Fall – WSJ
Uncertainty
about the outlook for the global economy and fears of rising protectionism have
led to a sharp fall in foreign investment by businesses, the Organization for
Economic Cooperation and Development said Thursday.
Tide barriers – The Economist
Capital
controls would work better if there were some international norms
A Global 1937 – Krugman / NYT
There were
many warnings to the effect that we must not repeat the infamous mistake of 1937,
in which FDR was persuaded to focus on balancing the budget while the economy
was still weak, terminating the recovery from 1933 and sending America into the second leg of the Great
Depression. And what policy makers proceeded to do was, of course, to repeat
the mistake of 1937.
Blogs review: Can we all be more like
Scandinavians? – bruegel
An
interesting debate about the trade-off between innovation and redistribution
has sparked over the (admittedly wonky) paper by Daron Acemoglu, James Robinson
and Thierry Verdier in which the authors argue that the "cuddly"
capitalism of Europe could not sustain high levels of growth in the absence of
the "cutthroat" capitalism of America. Entrepreneurs in those
ruthless economic models bear more risks – and thus move the technology
frontier faster. While still in Working Paper format and written for an
academic audience, the paper was picked up by several bloggers who criticized
the premises, the methodology and the conclusions.
Welcome to the ‘Desert of the Real’ — a
postmodern economy
– alphaville
/ FT
Volatility
guru Christopher Cole, who heads up the volatility fund Artemis Capital
Management, is known for making interesting arguments when it comes to
volatility and risk…His latest note, though, takes us to an entirely new
dimension of market abstraction.
Global liquidity: concepts, measurements and
implications from a monetary policy perspective – ECB
(pdf)
Money as a passion, not a standard – alphaville
/ FT
Are money
and value, much like time, a function of relativity rather than a definable and
quantifiable substance?
History, gravity and international finance – ECB (pdf)
Interdependence and contagion in global asset
markets – ECB (pdf)
IMF: Austerity is much worse for the economy
than we thought – Wonkblog
/ WP
Robustness of IMF data scrutinized – Global
Economy / FT
IMF Admits It Prescribed Wrong Medicine; Is IMF
Short for I Must Fail? – Mish’s
Opening Remarks By Christine Lagarde, Managing
Director – IMF
Bank of
Japan-IMF High-Level Seminar “Challenges of the Global Financial System: Risks
and Governance under Evolving Globalization”
Times Like This Are Different – Krugman
/ NYT
More on multipliers: why does it matter? – Not
the treasury view
Multipliers: using theory and evidence in
macroeconomics – mainly
macro
Transcript of a Press Conference on the Global
Financial Stability Report – IMF
This
article examines an equity pairs trading strategy using daily, weekly and
monthly European share price data over the period 1998–2007. The authors shows
that when stocks are matched into pairs with minimum distance between
normalised historical prices, a simple trading rule based on volatility between
these prices yields annualised raw returns of up to 15% for the weekly data
frequency. Bootstrap results suggest returns from the strategy are attributable
to skill rather than luck, while insignificant beta coefficients provide
evidence that this is a market neutral strategy. Resistance of the strategy’s
returns to reversal factors suggest pairs trading is fundamentally different to
previously documented reversal strategies based on concepts such as mean
reversion.
Tactical Asset Allocation for Dummies – Turnkey
Analyst
“you don’t win by predicting the future; you
win by getting the odds right” – Farnam
Street
Blogs review: The Events Study methodology – bruegel
The event study approach – a methodology in
finance and economics used to detect the presence of event-induced returns
within a period – has become ubiquitous in recent debates about the impact of
unconventional monetary operations. But its identifying assumptions are
generally not very well understood. In this review, we explain the different
steps followed by researchers to perform event-study analyzes; we point out
some of their pitfalls, based on recent discussions following the latest
Jackson Hole meeting; and we illustrate its growing popularity in a variety of
fields.
MARKETS
Death of a market – Sober Look
Volumes on
SovX, particularly SovX Western Europe have collapsed. The chart below from BNP Paribas shows how this market is
beginning to disappear. Positions from the older series are still outstanding,
but the new series now barely trade.
Buffet vs Modigliani-Miller – The
View from The Blue Ridge
We think
the same behavioral errors that tempt “gamblers” to buy lottery tickets, seduce
“investors” to speculate in high risk stocks.
The result: a structural overvaluation in excitement and a systematic
undervaluation in high quality stocks.
Macro hedge funds stink at market timing – Sober
Look
And now they
are positioned with a long bias. Given Macro funds' average track record
recently, that bet does not bode well for the equity markets going forward.
Notes from The Big Picture Conference – The
Big Picture
Citi On The Five FX Issues Waiting To Play Out – ZH
QE,
electoral politics and fiscal cliff, emerging markets, euro, reserve managers
Meet The People Behind The Vacuum Tubes In The
World's Largest HFT Shop – ZH
OTHER
Book Bits – The
Capital Spectator
Reckoning with Risk 12/12: The Greatest Risk
of All – Above
the Markets
Final piece
of a 12-part article – see the bottom of the post for links to the previous
ones.
You're an Idiot. Statistically Speaking. – The
Motley Fool
Statistically,
the SEC found that American investors --
regardless of age, race, or gender -- "lack basic financial
literacy," and that they generally do not understand even "the most
elementary financial concepts such as compound interest and inflation."
How do skirts differ from computers? – John
Kay
But there
is no right or wrong answer. In all problems of this kind, the relevant measure
is specific to the particular purpose you have in mind.
Taking Hard New Look at a Greenspan Legacy
(2008) – NYT