Stephanie Flanders explains Quantitative Easing in 60 seconds
This has to be amongst the best 60 seconds of Economics you’ll ever see on television. The superb Stephanie Flanders takes a leaf out of the RSA playbook to explain the basic theory behind quantitative easing. Wonderful!!
read more...»Unit 4 Macro: Money, Debt and the New World Order
“All money these days is really a form of debt from somewhere else. We know now in 2012 that our debts cannot be repaid in full.”
Philip Coggan from the Economist was on fine form at the LSE last week when he spoke to a packed audience in the new academic building on the subject of his latest book. When trust in the monetary system breaks down we are in a very difficult place and, in a wonderfully broad historical sweep Philip Coggan offered some revealing insights into what a reformed global monetary system might look like in the years ahead.
read more...»Unit 4 Macro: Exchange Rate Economics - Where next for the US Dollar?
Is the US dollar going to be knocked off its perch as the only true global currency? Professor Barry Eichengreen, the author of Exhorbitant Privelege argues that there are strong reasons to believe that the US dollars’ position in the world financial system will decline in the years ahead.
The US dollar has been for many years the world’s most powerful currencies but this power seems to be waning as other currencies rise in significance and the US economy struggles to recover from their financial and economic crisis and the fiscal challenge. Eichengreen argues that there will be three truly global currencies going forward - the dollar, the Euro and the remnimbi.
read more...»Unit 2 Macro: Should the EU introduce a Tobin Tax?
AS Economics student Freddie Bickford-Smith looks at some of the argument surrounding proposals to introduce a financial transactions tax in the EU. I will post another essay on this topic from a fellow student, offering an alternative perspective from that developed here!
Following the financial crisis of the past few years, and the amassing of blame on the financial sector for it, it has come to the attention of many - including the European Commission - that there must be a way of rectifying the situation, and promoting greater economic stability.
One popular suggestion is the ‘Tobin Tax’, an idea proposed by Professor James Tobin (the Nobel prize-winning American economist) for a tax on worldwide financial transactions
read more...»Eurozone crisis - a selection of resources
How to deal with this in school? I cannot be the only teacher who is struggling to keep up with the eurozone developments myself, let alone help my students to make any sense of it. Some searching this morning has come up with a variety of articles, graphics and interviews which range from the very basic such as the one-minute video reports from Robert Peston, which might be helpful to an AS student who is just starting to get to grips with the principles of macroeconomics, to some analysis of actual and potential threats to the UK economy and graphics showing the interrelated borrowing between the eurozone countries, which might help the ambitious A2 students to stretch themselves. These are listed below, with a brief description of each one. I am sure that you will have many more to add to the list.
read more...»Unit 1 Micro: Has the time come for a Tobin Tax?
This week I am setting my AS micro students a question on proposals for a Tobin Tax - partly because it is hugely topical and also as a way of developing their evaluation skills on paper and coming to a reasoned final conclusion. Here are some of the links to suggested reading and some video shorts on this topic:
read more...»Unit 1 Micro: Economists attack food price speculation
Food prices are now rising by up to 10% a year in Britain and Europe and a new forecast from the United Nations predicts that prices can be expected to rise at least 40% in the next decade. Whilst conventional theories of changes in supply and demand conditions can be used to explain some of the increase in food prices, many economists are concerned that speculation by hedge funds and other investors has amplified the natural volatility of prices driving food prices away from fair values and contributing to a huge rise in global food poverty and hunger. These days, cocoa, fruit juices, sugar, staples, meat and coffee are all now global commodities, along with oil, gold and metals.
Is this the moment to legislate to limit the scope for speculative activity in food markets? The video below provides an excellent introduction to speculation in food markets - it features Neil Kellard, Professor in Finance at the University of Essex
read more...»Unit 4 Macro: EU proposes a “Tobin Tax”
This morning the EC has proposed a financial tax (akin to a Tobin Tax) although going further to encompass various financial transactions, not just currency ones.
Unsurprisingly, the UK will be hit hardest by this with over 80% of the revenues for this tax (estimated to raise £50 bn a year) to come from London, given its comparative advantage in financial services.
Is this really a feasible concept, in a globalised world, with mobile financial flows and footloose capital?
Cue the drain to U.S for many firms if it becomes a reality?
Bill Nighy appeared in this video last year supporting the idea of a tax on financial transactions.
Mixing with the Nobel Economists
Is Europe and the United States facing a decade of very slow growth as their economies struggle to emerge from the global financial crisis? Peter Day’s In Business programme has been attending a conference of some of the world’s top Nobel Prize winning economists to hear their thoughts about approaches to stimulate innovation and growth and take economics as a discipline into new directions
read more...»Keynes vs Hayek - how to solve an economic crisis
As major economies are buffeted by crisis again, the excellent Keynes vs Hayek debate held at the LSE last month is thrown into ever sharper context. You can hear the 30-minute radio programme made from the debate here on BBC i-player, or download it as a podcast. There is also an article here introducing the opposing arguments, which students could use in September to analyse the changes to the global economic situation - no doubt there are still many twists and turns to come in the next month for them to work with.
The Big Money Test - a behavioural economics experiment
Significant effort is made by teachers, companies and the government to try and educate people about managing their financial affairs, but often to no avail. Indeed, the book Nudge suggests that even financial experts often struggle to make the ‘right’ or ‘best’ decision. A new experiment has been designed that aims to examine how people make financial decisions - and you can take part! Firstly, visit this BBC website to find out a bit more about the experiment, then look at what is being termed ‘money sanity’ here, before taking the Big Money Test.
EU Economics - Portugal Reaches for Bail Out
Portugal has requested an emergency bail out from the European Union to address it’s sovereign debt crisis. It becomes the third Euro Area economy to require help from European partners in the wake of bail outs for Ireland and Greece.
The move came after the Portuguese government was forced to pay an interest rate of more than 5% for borrowing money for just one year and in the expectation of the European Central Bank raising policy interest rates in the near future. The Portuguese economy has a major state-sector debt crisis as our Timetric chart below shows. And the economy has been performing poorly for several years with rising unemployment and a steep fall in relative living standards. Already several of Europe’s new economies (including Slovenia and the Czech Republic) have overtaken Portugal in terms of income per capita (PPP adjusted). Portugal’s long-term credit rating was downgraded by Moody’s by one notch to Baa1 earlier on this week.
BBC: EU austerity drive country by country
Independent: Portugal seeks €80bn bailout as third nation falls to eurozone crisis
Guardian: Portugal’s bailout was all but inevitable
Bloomberg: Goldman Sachs Says Portugal Is Last Euro Nation to Seek Bailout
Independent, Sean O’Grady: If Spain fails, it will be too expensive to save
read more...»
Wildcard Wednesday - financial jargon
A BBC news story from earlier this month on confusing financial jargon provides the inspiration for today’s extension activity. The National Employment Savings Trust (NEST) is concerned that many consumers struggle to understand the choices that they are making with regards to selecting pension plans and knowing what to do with them when the time comes to retire, just because the wording used in the policies is full of jargon.
read more...»Regulation and the banking industry: reflections from Davos
If, like my school, you haven’t entered students for Unit 3 in January but are teaching both A2 units side-by-side for June examination, you might be looking for examples of competition policy and regulation to offer your students in the coming weeks. The report of the Independent Commission on Banking and the focus on regulation at last week’s Davos meeting are very well timed; this report filed today by Tim Weber of the BBC gives a neat summary of the time leading up to Lehman’s collapse, and offers a rather chilling conclusion from informal dinner-table discussions with the world’s top bankers that it is unlikely that regulators can, in practice, untangle the systemic risks in the financial system that make it imperative for government’s to step in and support failing banks.
If you would like to follow this up as an example with students, you might try some of the following links. There are numerous articles assessing the report of the ICB - just a couple are given here.
read more...»Shorting the market - the vultures target HMV
A few weeks back we focused on the problems facing UK retailer HMV. Weak sales and a difficult financial position have made the business a target for hedge funds who decide to short the stock anticipating a further fall in the company’s share price. This Guardian article looks at the stocks on the UK FTSE that lead the list of shares being targeted by the short-sellers.
Short selling is a strategy used by investors who expect the price of a stock to fall. It involves selling shares by borrowing them from another institution and then betting that they can buy them back at a lower price and profit from the difference. Short selling became a high profile and controversial tactic during the global financial crisis when many fragile banks were the targets of the stock market vultures and some were forced to accept nationalisation and emergency financial support.
Will the Bank use QE as a hangover cure?
Yesterday Mervyn King coined another acronym to describe the decade ahead - his assessment is that this will be the SOBER decade - “a decade of savings, orderly budgets, and equitable rebalancing”.Some analysts are seeing his speech last night, reported here by the BBC website, as a signal that the Bank of England are contemplating more quantitative easing in the near future.
The Governor of the Bank said that at present the amount of money in the economy was still “barely growing at all” - figures released by the Bank this morning show that seasonally adjusted provisional figures for ‘broad money’ in September are as follows: M4 decreased by £5.5 billion (0.3%), compared with an average monthly increase for the previous six months of £0.8 billion. The twelve-month growth rate fell to 0.9% from 1.9% in August. M4 lending decreased by £0.7 billion (0.0%) in September. The twelve-month growth rate fell to 0.0% from 0.7% in August .
Last night the Governor said that it was a “key role” for the Bank to provide stimulus when the economy was in need, so the judgement will depend on how great that need is, and which are the greatest risks facing us - inflation, or lack of growth.
The Battle of the Metaphors
The implementation of the Dodd–Frank Wall Street Reform and Consumer Protection Act – 2010 - is currently being discussed by members of the Financial Crisis Inquiry Commission. Vice Chairman Bill Thomas suggested that the regulatory architecture being created might stifle financial innovation and used the metaphor of a child playing in the snow. Ben Bernanke (Fed Chairman) later in the hearing had a metaphor of his own. He likened the subprime crisis to the dangerous bacterium E. coli.
read more...»Typical 2689% APR…Eh??
When a friend’s Facebook status mentioned a website offering loans for a TV at 2689% APR, I was intrigued. It sounds astronomically high, doesn’t it? – The answer, as always in Economics, is that “...well it depends…”
Firstly, APR stands for annual percentage rate and is the interest payable on the amount borrowed and other charges expressed as an annual rate of charge.
Secondly, the website in question is called Wonga.com - “Wonga provides small and super-flexible loans around the clock. We’re here to help solve urgent and short term cash flow problems.
Wonga’s business model is based on lending money (maximum £400) for short durations (maximum 30 days).
read more...»Are we on the cusp of a second banking crisis?
Paul Mason reports here on fears of a second banking crisis - closely tied to the sovereign debt crisis. “Across the European banking system there is too much unfinished business” - there is much to be done to cleanse the system of bad assets and recapitalize the banks? Given the scale of public sector debt and the lack of room for further bail outs - are some banks too big to save? Will banks have to agree a hair-cut on their existing loans? Is a bank tax needed to create a new bail out fund?
This radio 4 Today programme discussion between George Magnus and Robert Peston is also worth a listen: Eurozone crisis ‘has ensnared’ governments
Euro Land and Optimal Currency Areas - A Valentine’s Day Massacre
In A2 macro when we teach the economics of a single currency, it is not long before the idea of an optimal currency area makes an appearance. The crisis facing Greece and a number of other Euro Zone countries has laid bare the structural flaws in the monetary union project. Euroland is a long way from being an optimal currency zone.
read more...»Spain adds to the Euro’s woes…
As if having Greece going into meltdown was not enough for the euro currency to shoulder, Spain yesterday added to this burden… the Spanish government was forced to rescue one of its biggest regional banks: the central bank has taken operational control of Cajasur, which needs an urgent cash injection of €500m.
There has been a fresh bout of horizontal integrations announced in a bit to make their balance sheets more stable - Caja Mediterraneo, Grupo Cajastur, Caja Extremadura and Caja Cantabria want to form a bank with €135 billion in assets, to make it the country’s 5th largest lender.
This is all a time when the IMF has just delivered a bearish analysis on the Spanish economy:
“The challenges are severe: a dysfunctional labor market, the deflating property bubble, a large fiscal deficit, heavy private sector and external indebtedness,” the report said.
Do troubles for the euro know no end…?
Roubini at the LSE - governments run out of policy bullets
The LSE was packed tonight for a talk and discussion with Nouriel Roubini. It was an occasion to help launch his latest book “Crisis Economics” and Roubini started by arguing that financial crises are now more common than is supposed. Economics textbooks pay lip-service to crises and the conventional wisdom is that systemic crises in the markets are irregular and few and far between. Dr Doom takes a completely different stance believing that the sorts of crises that have dominated the headlines in recent years are best described as White Swans rather than the Black Swans beloved of Nicholas Taleb.
The Roubini lecture is now available on video using this link
read more...»The Financial Crisis and Beyond
Modern economies run on credit and so the collapse in confidence and lending within the international financial system in 2007-09 was bound to bring about a series of after-shocks to global demand, trade and jobs. In this sense, the economic and political crisis in Greece represents a stark example of the ripple effects of the credit crunch as we edge our way forward in an age of instability.
This to me was the key theme running through David Smith’s talk at the Keynes Society on Thursday night. Followers of David’s columns in the Sunday Times will appreciate his unerring ability to capture the essence of what really matters in the economics and business domain. In his presentation David’s narrative provided a tremendously clear overview of the background to the crisis, the shape of the inevitable recession that followed. And, more pertinently, prospects for the UK economy in 2011 and beyond.
read more...»Contagion spreads…
After Greek’s junk status downgrade yesterday, as well as Portugal’s downgrade; S&P today downgraded one of the other PIIGS, Spain as the contagion effect takes hold… Last night’s (Wednesday) Newsnight discussed the potential contagion ( from 27 minutes).
With Spain’s economy making up 8.5% of the EU GDP, this downgrade has bigger consequences than Greece’s.
Could the UK be next?
Greek junk status timeline
This informative interactive graphic from the FT shows the rapid rise in Greek government yields over the past year, resulting in yesterday’s downgrade to junk status.
When S&P warns holders of Greek debt that they only had an “average chance” of between 30% and 50% of getting their money back in the event of a debt restructuring or default, its going to have consequences…
One result of going junk (or sub-investment grade…) is that many financial institutions (including pension funds) are not allowed to hold such investment instruments, which will lead to a big sell-off of these, causing the yields to rise further.
As the fears of contagion spread, Portugal was also downgraded and the Vix index, a measure of “fear” in the US stock market, rose by more than 30 per cent, its biggest one-day jump since the height of the financial crisis in October 2008.
The moves highlighted the potential that the Greek crisis – the result of too large a debt load and expectations that it may default or have to restructure that debt – could spread and have knock-on effects on the global economy.
In this month’s edition of Economax, there is an in-depth article on Greece’s fiscal crisis.
The (sovereign) default option is costly
No rich advanced nation has defaulted on sovereign debts since the end of the second world war but should the default option seem attractive governments should beware the longer term costs and consequences. The Economist this week has a feature on some recent research into the impact of sovereign debt default focusing in particular on the experience of Argentina. Three major effects are identified:
read more...»Lessons for economists from the crisis
Larry Elliot has a superb piece in today’s Guardian on the challenges facing the economics profession in the fallout from the global economic crisis. He flags up a new book by David Smith “The Age of Instability: The Global Financial Crisis and What Comes Next ” which is now available through Amazon and will be a great read for ambitious AS and A2 students. And he flags up the first major meeting of the George Soros funded Institute for New Economic Thinking which is meeting appropriately enough in Cambridge. Reading through the agenda for the conference it looks like a gold mine of top quality speakers and sessions - sadly by private invitation only!
The director of the Soros-funded Institute is quoted as saying
“Too much of modern economic theory relied on sophisticated mathematical models to predict market behaviour. A broader, interdisciplinary approach to economics, taking in history, psychology, natural science — to deal with issues such as climate change — and even literature was now needed”
Larry Elliot argues in his piece that
“There is no need to reinvent the wheel. It’s more important to strip away the layers of complexity that gave big-picture economics a spurious and dangerous exactitude in advance of the crisis. The big lesson in economics from Keynes is that we know less than we think we do, and that there is a vast difference between the output of economic models and the actual behaviour of individuals.”
Read: Rescuing economics from its own crisis
The Times reports that George Soros is to create a new economics institute at Oxford University.
Death to the speculators!
There’s been lots of discussions in the news these last few months about the power of speculators against sovereign debt. My students have been asking about this so I thought I’d write a short note here about it:
- There has been a lot of naked short selling of sovereign debt recently, particularly Greece debt.
- A naked position (also known as an uncovered position) in derivatives speak is when the seller of an option does not have the corresponding position in the underlying security
- A short sell is a strategy to aimed at taking advantage of an expected fall in prices
Presentation on Fiscal Deficits (ATTACHED THIS TIME!)
(Presentation attached this time!)
Given the Budget 2010 scheduled for next week, and given the importance of the budget deficit to the election campaign, here are some useful resources on the current fiscal situation in the UK:
- Following on from the economists’ letter last month, today, the EU also called for a quicker tightening of the UK’s fiscal position
- A video discussion here between Stephen Timms and Ken Clarke on how Labour and Conservatives would tackle the UK’s deficit - and how there is no clear message from any party on how they would actually achieve it!!
- And finally a PDF document here (which has been compiled by us at Merchant Taylors’ - thanks to Andrew Ellams and Harriet Thompson for their assistance on this!) which may be of use: FISCAL_POLICY_09-10_MTS.pdf
Sovereign debt hot spots
An interesting summary of the sovereign debt worries of a cluster of countries courtesy of the Wall Street Journal
