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Sunday, October 21

21st Oct - Weekender: Regulation & Economics

This week’s edition has sections on Regulation/Risk, Markets, Economics, Nobel prizes and Citigroup. The just resigned CEO of the bank made a cool one billion dollars from the bank.  Your tax dollars at work. For fuck’s sake… EDIT: Calendar updated.

Coming up soon: Weekender: Off-Topics & Views. Don’t miss my previous posts:

Previously on MoreLiver’s:

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Pick Your PoisonStreetwise Professor
Back in the summer of 2011, I wrote that segregation could make the markets more fragile, because it would tend to reduce credit (mainly intraday credit) used to finance variation margin.  This is important, because the markets depend on using credit to fund margin payments.  If this credit freezes up, the markets will freeze up.  Indeed, a cleared system works on such tight deadlines that an interruption of credit can be catastrophic. 

Forcing frequent failuresInterfluidity
I’m sympathetic to the view that financial regulation ought to strive not to prevent failures but to ensure that failures are frequent and tolerable.

Financial ecosystems can be vulnerable tooOpinion / FT
In general, greater complexity – more species and more interactions among them – tends to make the system more vulnerable to environmental shocks…Instead of addressing these fundamental issues, recent regulatory changes seem to be adding further complexity.

European Commission to Make Life Harder for Brokers?riskheads
A recent review by the European Commission is likely to have serious implications for insurance brokers across the EU including the UK. The new rules are likely to be signed into effect during 2013 and with the exception of life products (which have a 5 year grace period in the directive) all insurance products are likely to be affected immediately.

Not making the grade: Report card on global financial
While financial reform is underway around the world, this column argues that much more needs to be done.

Basel III is simpler and strongerBIS (pdf)
Ingves, Governor of the Sveriges Riksbank and Chairman of the Basel Committee on Banking Supervision, published in the Wall Street Journal, 15 October 2012.

Basel III regulatory consistency assessment (Level 2)
Japan BIS (pdf), USA BIS (pdf), EU BIS (pdf)

The Ultimate World Economic ScorecardZH
Barclays' Julian Callow provides everything you need to know about financial balances and economic performance (but were afraid to look) in one handy table.

Reinhart-Rogoff vs. Bordo-Haubrich (with grandstanding by John Taylor)noahpinion
If you follow econ blogs at all, you'll have been reading lots about the dustup between Carmen Reinhart & Kenneth Rogoff, whose research argues that financial crises cause slow economic recoveries, and Michael Bordo & Joseph Haubrich, whose research argues that recoveries after financial crises are usually very rapid.

Financial CrisesNew Monetarism
There are good reasons to think that recessions are not alike, and that the most recent recession has features that are different from previous ones in the United States - and different in important ways from episodes where we think that there was some element of "financial crisis." Even if we could figure out the Great Depression, and understood completely the policies that would have been appropriate at the time, that would be no guarantee of success under current conditions.

When Taleb met DaviesFelix Salmon / Reuters
This morning, Nassim Taleb returned to Twitter, posting one of the technical appendices to his new book. And immediately he got into a wonderfully wonky twitterfight/conversation with Daniel Davies.

Uncertainty weighing on the global
Bouts of elevated uncertainty have been one of the defining features of the sluggish recovery from the global financial crisis. This column explores the role of uncertainty in driving macroeconomic outcomes using data from a large group of advanced countries over the past 40 years. It concludes that uncertainty appears to hinder growth.

The origins of our current woes - and the way to escape from themThe Telegraph
Why are we here, in the worst recession for over 70 years? Unless we uncover the answer we won’t be able to address the more important issue of when and how we can hope to come out of it.

Is the Financial Sector Worth What We Pay It?Somewhat Logically
The financial crisis and subsequent Euro problems show that we are paying vast sums for a system that, as Joseph Stiglitz, former chief economist of the IMF, points out, doesn’t allocate capital where needed, causing capital flows that are pro-cyclic, exacerbating peaks and lows of business cycles.  

What is math, and why should we use it in economics?Noahpinion
In my last post, I pointed out that the Nobel Prize-winning work of Lloyd Shapley and Al Roth, makes heavy use of mathematics, and indeed would be completely impossible without math. This, I said, is evidence against the idea that economics doesn't need (or shouldn't use) math. But then some commenters asked me: What do you mean by "math"? And I thought that was an interesting question.

A Reinhart & Rogoff updatealphaville / FT
Reinhart & Rogoff, the doyens of financial remembrance, are back with a new paper and a Bloomberg piece containing some entertaining irritation. Their main aim is “to dismiss the misconception that the U.S. is somehow different. The latest financial crisis, yet again, proved it is not.”

My view on inflation targetingBIS (pdf)
Jansson, Deputy Governor of the Sveriges Riksbank, at Karlstad University, Karlstad, 11 October 2012.

The recovery and monetary policyBIS (pdf)
Fed’s Dudley at the National Association for Business Economics Annual Meeting, New York City, 15 October 2012.

US monetary policy and international implicationsBIS (pdf)
Bernanke at a high-level seminar "Challenges of the global financial system: risks and governance under evolving globalization", sponsored by the Bank of Japan and the International Monetary Fund, Tokyo, 14 October 2012.

Has the IMF Missed the Point on Public Debt Overhangs?PIIE
On the basis of these observations, I would suggest very different policy conclusions. The first aim of economic policy in a country with large public debt must be to avoid default…Second, time is vital…. sudden action leads to greater public expenditure cuts

Heterogeneity at the IMFmainly macro
Their self criticism about the impact of austerity is both unusual and commendable in equal measure. They also appear to recognise that pushing Greece further than it can or should go is stupidity of the highest order. They are producing some of the best policy orientated empirical macro research at the moment. Yet this is the same IMF that in May co-hosted a conference on Latvia that looked very much like a PR job for the benefits of short sharp shock austerity. The IMF’s attitude to austerity remains nuanced and country specific.

Misusing cyclically adjusted budget deficitsmainly macro
Does this mean looking at cyclically adjusted budget deficits is a bad idea, if the adjustment itself is so uncertain? The answer is clearly no. It makes sense to run surpluses in a boom and deficits in a recession.

Different approaches to austeritymainly macro
It seems likely that a good part of current austerity plans involve temporary fiscal changes designed to reduce debt levels, and so the differences between the multipliers of tax and spending changes will apply. For countries like the UK, that have focused on spending cuts, the knock on effects on output will be relatively large, whereas for countries like France the impact of austerity may be more moderate (although still unwelcome).

1933 And All ThatKrugman / NYT
What all this also tells us is the folly of using growth from the recession trough as a measure of success: the worse you screw up the original response to the crisis, the better this measure looks!

Bubble, Bubble, Conceptual TroubleKrugman / NYT
Basically, it takes much more clarity and unity to pursue either discretionary fiscal expansion or unconventional monetary policy than it does to cut the Fed funds rate, and few countries manage to display that kind of clarity and unity. And that, in turn, is why it took a war to end the Great Depression; there’s nothing special about military spending from an economic point of view, but as a political matter Hitler managed to override the usual objections to stimulus.

Arrow v. Taylor Debate at Stanford   EconoSpeak
Based on this summary, Taylor is very confused about the role that fiscal policy plays during a recession even after Arrow stated the standard Keynesian position when the economy gets stuck in a liquidity trap

HistorySquared’s dailies (good and quick!):

A Nobel Prize for Idiots, Signifying Only BiasView / BB
It is hard to imagine anything more wrongheaded than last week’s decision by the Nobel Committee to award its Peace Prize to the European Union. Until, that is, one is reminded of the frauds, terrorists, totalitarians and world- class idiots who have won the award over the past 20 years.

On Nationalism And Extremism In A Nobel-Peace-Prize-Winning EuropeZH

A new narrative for Europe euobserver
[Opinion]: Few could dispute the Nobel committee’s assessment the EU has helped turn a continent of war into a continent of peace, but many have questioned its timing.

Van Rompuy, Barroso and Schulz to collect the EU’s Nobel togetheralphaville / FT

Barroso and Van Rompuy win battle for Nobel limelighteuobserver

Noble MatchingMarginal Revolution
In honor of the Nobel prizes to Al Roth and Lloyd Shapley, here is a primer on matching theory. Matching is a fundamental property of many markets and social institutions. Jobs are matched to workers, husbands to wives, doctors to hospitals, kidneys to patients.

An Unusually Worthy Nobel Prize Why Nations Fail
Both men have done foundational work in the theory of matching, markets and market design — work that deepens our understanding of how our society allocates resources, which doesn’t just happen through the miraculous invisible hand of the Walrasian auctioneer.

The 2012 Nobel Prize to Shapley and RothConversable Economist
The Nobel prize to Shapley and Roth is one of those prizes that I suspect I will have a hard time explaining to non-economists. The non-economists I know ask practical questions.

Al Roth Takes Home the Nobel PrizeFreakonomics
The type of economics he is best known for is what is called “Market Design.”  Essentially, it means bringing market-type thinking to areas in which historically non-market allocation mechanisms have been used.

A Nobel for economics that really worksNoahpinion
There are cases in which economics works, in which it does discover "laws", and in which difficult math is absolutely essential. For example, consider the theories that won the Economics Nobel Prize this week.

To win the Nobel Prize in Economics, it helps to wield math. Lots of itQZ
The winners—Alvin Roth of Harvard and Lloyd Shapley of UCLA—are joining the ranks of some serious math nerds in a field increasingly flush with equations.

A Nobel Prize for Market DesignDigitopoly
Last night, I tweeted that I thought the Nobel prize for economics would be awarded for the field of practical market design. And, that is indeed what the Nobel committee announced today.

U.S. Economists Win NobelWSJ
Shapley and Roth Improved the Way People Are Matched With Limited Resources

What Does It Feel Like To Win a Nobel Prize?Slate / New Scientist
Memorable quotes from this year’s winners.

Nobel Goes To Economists Who Actually Solved Problems In The Real WorldNPR

Pandit quits Citialphaville / FT

The Pandit yearsalphaville / FT

You Can’t Be Half a GangsterThe Reformed Broker

Citigroup’s $900 Million Man Departs Abruptlynaked capitalism

Citi’s Chairman Steps Up to a Decisive RoleDealBook / NYT

Citigroup Agreed to Carve Out Hedge Funds Before Pandit’s ExitBB

Citigroup and Vikram Pandit: Pray as you goThe Economist

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