Country and Western Meets Central Banking

Merle Hazard is country singer who sings about central banking, mortgage-backed securities, recessions, Greek debt, inflation etc.. His catalogue is available here and below is his most recent release - "Dual Mandate".

So Bad, Its Good ...

“Chick Chick” by Chinese pop group Wang Rong Rollin from China I think. Its Old McDonald's Farm on acid ... Its pretty ridiculous but fun and hypnotic. A kick ass music video... I predict this will be very big globally for a few months. Being different makes people sit up and take notice as we all get jaded with what is out there. Of course some will say that its a ripping off from Ylvis' What Does The Fox Say ... if you put the two side by side, you can say some parts were similar but 'greatness' often results in copycats, and Chick Chick is a lot more fun, really makes you smile. I think this will go viral globally in a big way.

British Financial Crises Since 1825

I have a chapter in a book which has just been published by Oxford University Press. The book is entitled British Financial Crises Since 1825. My chapter looks at the role capital and extended shareholder liability played in assuring British banking stability from 1826 until the 1930s, a theme which is developed at length in my new book Banking in Crisis. My colleague Gareth Campbell also has a chapter in the same book. His chapter looks at the Railway Mania and and the 1847 commercial crisis.

House Prices since 1870

Katharina Knoll, Moritz Schularick and Thomas Steger have a really nice paper and Vox column looking at house prices for 14 economies from 1870 to 2012. They find that house prices stayed constant from 1870 to circa 1950, but rose strongly in the second half of the twentieth century. They also find that it is increasing land prices, not construction costs, which have driven this increase. Notably, their findings imply that real house price growth has outpaced income growth by a substantial margin.

Strangely, Knoll et al. do not explicitly acknowledge the relationship between the great mortgaging, which Schularick identified in previous work, and this increase in house prices (see previous post on this). For me, this explains a large part of what they find, particularly the large increase from the late 1990s. Instead, they argue that land increasingly became a fixed factor due to a land-augmenting decline in transport costs from circa 1950 onwards. In addition, zoning regulations on land use may have further restricted the supply of land.

Source: http://www.voxeu.org/article/home-prices-1870

Apa Lagi Amerika Mahu

For my life I could not understand why the US mid term election came to be a snub against Obama... I mean although he is not a big fanfare guy, he has "righted" the many wrongs from the Bush administration, if you can call it that.

Stock markets at all time highs, gasoline low, interest rates low, did not go to war, best OECD growth, hunted and killed Osama, inflation benign, jobs up and up...

A Solution to 'Too Big to Fail'?

The Financial Stability Board has today issued a consultation on a proposal for a common international standard on total loss-absorbing capacity (TLAC) for global systemic banks - the proposal is here and BBC news coverage is here. In plain English, G20 governments don't want their taxpayers to bear the losses associated with the failure of large banks in the future. For a long time, governments around the world have had a too-big-to-fail policy when it comes to systemically important banks.  Consequently, governments will save them at any cost when they get into trouble. Perversely, this too-big-to-fail policy actually makes banks more likely to fail since it encourages banks to take excessive risk in the knowledge that they will be bailed out.

Two key parts of the proposal are (a) to increase the capital requirements for the 28 or so globally-systemic banks and (b) to make resolution of failed banks easier by converting debt into equity and having living wills. I foresee at least three problems which make me sceptical. First, the solution has to be applied globally, but competition between countries will result in them lowering the standards applied to banks in their jurisdiction. This happened in the 1980s whenever Japanese banks were able to out-compete their Western rivals because of a laxer regulatory capital regime in Japan. Second, there is a time-inconsistency problem in that governments may say 'we will never bail out a large bank again', but when a bank gets into trouble, it is optimal for a government to renege on their prior commitment to not bail out banks. Third, these proposals misunderstand the role of capital in banking. As I argue in Banking in Crisis, capital exists to prevent banks taking too much risk ex ante rather than as something which absorbs losses ex post. 

New Board Game - How Big Is Your Pond

I blogged about this about 5 years ago. Its a fun game. As investors or banking/finance professionals in the markets, we need to get a grip and look at where we are in the whole scheme of things. No matter how"great" we are its only in a very tiny pond. Of course I am not belittling ourselves here, big pond small pond, still a pond ... but don't let it get to our heads when it comes to why we are only a small boat in a sea storm whose waves could sometimes overwhelm our tiny boat, no matter how well built it is.

As things stand, just the US markets alone is as big as the next 7 markets COMBINED: Japan, China, HK, UK Canada, France and Germany all totaled up.

Hence thats why we mainly look to the US for direction. The blog post below on how big each state's GDP is in terms of another country would show beyond a shadown of a doubt why America is the world in business, trade and finance.

Thursday, February 13, 2014

Why Global Investors Keep Looking To United States For Guidance

Thats the first thing you learn when you step into an investment career, but do we know why. I mean, we know its big, but just how big? This map shows clearly why. It dissects out the states of the United States and correspond that to a country with the similar GDP for that state. 

Its an incredible map as it puts into perspective just how important that entire economy is ... its like over 50 countries .... That may partially explain why most Americans do not travel much, they have most of what they need there. For us, we may need to travel for business, but for them traveling within a few states there is like making business contacts with a few countries.

We also give Americans a hard time when we find out how few actually travel outside of America ... but just trying to cover a few states is already like covering a few countries, and each of the states are actually quite different in their make up and essence.