Michael Kevane

There have been many spikes in the euro zone’s crisis fever in the past, of course, with a bailout here or a stopgap measure there seeming to calm things for a while. But this time, Europe may have reached a moment when the currency union’s survival depends on a powerful, convincing response.

Greece, progenitor of the debt debacle, is in political turmoil once again, and this time it is in danger of dropping out of the euro zone altogether. Spain, with one of the region’s largest economies, is in the grip of a banking crisis, and there is a growing sense that the danger to Spanish banks is of an entirely different order of magnitude from that in suffering but small Greece.

The clearest danger signal may be the euro currency itself. It is at a two-year low against the dollar, as investors who can do so are pulling money out of the euro region.

via Central Banker Says Euro Zone Structure Is ‘Unsustainable’ – NYTimes.com.

China’s currency dropped further in May against the dollar than in any other month since the Chinese government began allowing the renminbi to appreciate gradually in the summer of 2005, in a currency market shift that could help Chinese exports but worsen trade friction with Europe and particularly the United States.

….

China may have another motive in allowing the renminbi to decline against the dollar in the past month: the dollar’s strength. The euro has been sliding against the dollar this spring, and because the renminbi is effectively linked to the dollar, the euro has also been very weak this spring against the renminbi.

This has hurt the competitiveness of Chinese exports to Europe — and China exports slightly more to Europe than to the United States. Even with the renminbi’s decline against the dollar in May, the renminbi still rose 5.5 percent against the euro during the month.

via China Lets Currency Weaken, Risking New Trade Tensions – NYTimes.com.

There is a huge developing story in China’s currency, the renminbi. After years of structural under-valuation, things are changing. China faces what we have described before as a “dollar shortage” problem, a situation it last faced on a major level in 2008.  This might seem counterintutive given China’s large stock of US Treasuries, but we promise, this is a real and growing problem. As it stands, China sits on a huge pile of Treasuries it can’t openly liquidate for fear of sending the wrong signal to the Treasury market, as well as fear of moving the underlying.

But at the same time it is finding it ever harder to absorb dollars from the system, because fewer surplus greenbacks are making their way into China via trade. Ordinarily, China offers traders the chance to exchange dollars — received through their business practices — for renminbi at the standing PBoC renminbi rate. This bid is always attractive for traders because on a structural level it is undervalued versus the dollar. (Traders get more renminbi than they probably should.)

Since this creates an excess renminbi liquidity issue, the government simultaneously offers yuan-denominated bills to the market so as to absorb the huge amounts of yuan-denominated cash that it creates. But, whilst this creates big yuan-denominated liabilities for the government, the process also creates large dollar-denominated assets, which are usually reinvested into dollar-denominated “safe” securities like Treasuries (or GSE paper before 2008).

via FT Alphaville » Why China’s RMB exodus IS the story.

House Prices Plunge in Chinese Ghost Town – YouTube.

via No Guarantee « Patrick Chovanec.

In early April, Caixin magazine ran an article titled “Fool’s Gold Behind Beijing Loan Guarantees”, which documented the silent implosion of Zhongdan Investment Credit Guarantee Co. Ltd., based in China’s capital. “What’s a credit guarantee company?” you might ask — and ask you should, because these companies and the risks they potentially pose are one of the least understood aspects of China’s “shadow banking” system. If the risky trust products and wealth funds that Caixin documented last July are China’s equivalent to CDOs, then credit guarantee companies are China’s version of AIG.As I understand it, credit guarantee companies were originally created to help Small and Medium Enterprises SMEs get access to bank loans. State-run banks are often reluctant to lend to private companies that do not have the hard assets such as land or implicit government backing that State-Owned Enterprises SOEs enjoy. Local governments encouraged the formation of a new kind of financial entity, which would charge prospective borrowers a fee and, in exchange, serve as a guarantor to the bank, pledging to pay for any losses in the event of a default. Having transferred the risk onto someone else’s shoulders, the bank could rest easy and issue the loan which it otherwise would have been reluctant to make. In effect, the “credit guarantee” company had sold insurance — otherwise known as a credit default swap CDS — to the bank for a risky loan, with the borrower forking over the premium.

A number of readers, both at this blog and other places, have been asking for an explanation of what IS-LM is all about. Fair enough – this blogosphere conversation has been an exchange among insiders, and probably a bit baffling to normal human beings (which is why I have been labeling my posts “wonkish”).

[Update: IS-LM stands for investment-savings, liquidity-money — which will make a lot of sense if you keep reading]

So, the first thing you need to know is that there are multiple correct ways of explaining IS-LM. That’s because it’s a model of several interacting markets, and you can enter from multiple directions, any one of which is a valid starting point.

via IS-LMentary – NYTimes.com.

After weeks of speculation and debate, Egyptians went to the polls on Wednesday to cast ballots in the Arab world’s first competitive presidential election.

via The New York Times – Breaking News, World News & Multimedia.

Inside Job clip ‘Mishkin Looks Bad’ – At UK Cinemas February 18th – YouTube.

The Mexican Peso Crisis of the Mid-1990s – YouTube.

Mishkin on Lessons from the Crisis.

In our MBA curriculum reform we tried to convince part of the faculty to go this route, and they were completely opposed, with no interest in listening or experimenting. How about a randomized experiment for what works to get faculty to adopt new teaching technologies for their schools?

Without diminishing learning outcomes, automated teaching software can reduce the amount of time professors spend with students and could substantially reduce the cost of instruction, according to new research.In experiments at six public universities, students assigned randomly to statistics courses that relied heavily on “machine-guided learning” software — with reduced face time with instructors — did just as well, in less time, as their counterparts in traditional, instructor-centric versions of the courses. This largely held true regardless of the race, gender, age, enrollment status and family background of the students.

via Report: Robots stack up to human professors in teaching Intro Stats | Inside Higher Ed.

HT: Marginal Revolution

The online version of this article here in Perspectives on Psychological Science 2012 7: 221.

Abstract
By 2025, when most of today’s psychology undergraduates will be in their mid-30s, more than 5 billion people on our planet will be using ultra-broadband, sensor-rich smartphones far beyond the abilities of today’s iPhones, Androids, and Blackberries. Although smartphones were not designed for psychological research, they can collect vast amounts of ecologically valid data, easily and quickly, from large global samples. If participants download the right “psych apps,” smartphones can record where they are, what they are doing, and what they can see and hear and can run interactive surveys, tests, and experiments through touch screens and wireless connections to nearby screens, headsets, biosensors, and other peripherals. This article reviews previous behavioral research using mobile electronic devices, outlines what smartphones can do now and will be able to do in the near future, explains how a smartphone study could work practically given current technology (e.g., in studying ovulatory cycle effects on women’s sexuality), discusses some limitations and challenges of smartphone research, and compares smartphones to other research methods. Smartphone research will require new skills in app development and data analysis and will raise tough new ethical issues, but smartphones could transform psychology even more profoundly than PCs and brain imaging did.

Excerpt:

Lieberman, Pillsworth, and Haselton (2011) reasoned that women near peak fertility in their cycle should reduce contact with male kin to minimize the risks of incest and genetic inbreeding. Analyzing itemized cell-phone bills from female college students who retrospectively reported the sex, age, relationship, and emotional closeness of each caller, they found that women at peak fertility talked less (in call number
and duration) with their fathers but more with their mothers, consistent with incest avoidance.

HT: Marginal Revolution

From Kun Guo and co-authors, confirmation of an earlier finding that dogs, like humans, exhibit left gaze bias to better and more quickly read emotions (more likely expressed on right side of face) in humans.

Sensitivity to the emotions of others provides clear biological advantages. However, in the case of heterospecific relationships, such as that existing between dogs and humans, there are additional challenges since some elements of the expression of emotions are species-specific. Given that faces provide important visual cues for communicating emotional state in both humans and dogs, and that processing of emotions is subject to brain lateralisation, we investigated lateral gaze bias in adult dogs when presented with pictures of expressive human and dog faces. Our analysis revealed clear differences in laterality of eye movements in dogs towards conspecific faces according to the emotional valence of the expressions. Differences were also found towards human faces, but to a lesser extent. For comparative purpose, a similar experiment was also run with 4-year-old children and it was observed that they showed differential processing of facial expressions compared to dogs, suggesting a species-dependent engagement of the right or left hemisphere in processing emotions.

via PLoS ONE: Reading Faces: Differential Lateral Gaze Bias in Processing Canine and Human Facial Expressions in Dogs and 4-Year-Old Children.

Two college professors, Chris M. Herbst and John Ifcher, are challenging the collective, if counterintuitive, wisdom. Being a parent, they say, really does make people happier than the alternative — in part because over the past few decades, those who aren’t parents have been becoming gradually less happy.

Dr. Herbst, an assistant professor of public affairs and social work at Arizona State University, and Dr. Ifcher, an assistant professor of economics at Santa Clara University, set out to critically assess the body of research that led to the generally accepted “parental happiness gap” — repeated findings showing that parents are less happy, experience more depression and anxiety, and are more likely to be unhappy in their marriages than those who are not parents.

….

What the two researchers found, in a paper titled “A Bundle of Joy: Does Parenting Really Make You Miserable?” presented at the annual Population Conference of America, suggests that the balance of happiness is shifting, and that ultimately, we who protest as parents may be proved right. But it’s not necessarily because we’re getting happier. Rather, parents’ happiness has held steady over time, while the absolute happiness of those who aren’t parents responding to questions like “Taken all together, how would you say things are these days — are you very happy, pretty happy, or not too happy?” decreased from 1972 to 2008.

via Having Children Makes You Relatively Happier, Research Finds – NYTimes.com.

One-Time Transfers of Cash or Capital Have Long-Lasting Effects on Microenterprises in Sri Lanka

Suresh de Mel, David McKenzie, Christopher Woodruff in Science 24 February 2012:Vol. 335 no. 6071 pp. 962-966DOI: 10.1126/science.1212973

Abstract: Standard economic theory suggests that one-time business grants can have at most temporary effects, and accordingly, policies to increase incomes of the self-employed in developing countries typically rely on sustained engagement. In contrast, we found long-lasting impacts from one-time grants given in a randomized experiment to subsistence firms. Five years after we gave $100 or $200 to 115 of 197 male and 100 of 190 female Sri Lankan microenterprise owners, we found 10-percentage-point-higher enterprise survival rates, and $8-to-$12-per-month-higher profits for male-owned businesses that received the grants. Female-owned businesses showed no long-term or short-term impacts. Our follow-up investigation interviewed 94% of the original sample and collected survivorship data from the remaining 6%, demonstrating that tracking long-term outcomes is both feasible and worthwhile. The results suggest that one-off grants may have lasting impacts on some types of subsistence firms, challenging the view that sustained engagement is always required.

via One-Time Transfers of Cash or Capital Have Long-Lasting Effects on Microenterprises in Sri Lanka.

Rising import costs (particularly food inflation) are nearly impossible to control when the currency weakens this much.

Credit Suisse: With India looking rather stagflationary at present, the Reserve Bank of India faces somewhat of a dilemma. Does it ease policy further on the basis that economic growth is very weak and core inflation soft or keep rates unchanged as it worries about headline inflationary pressures?

The Reserve Bank of India (RBI) will likely cut rates again, simply because the core inflation remains relatively tame (core inflation as measured by RBI actually declined 0.1% due to a slowdown in manufacturing demand). But the outlook for growth is far from certain. With currency weakening, inflation could become difficult to control while growth is showing signs of slowing. These are the signs of stagflation.

via Sober Look: India facing stagflation.

I wonder if Greece was actually sanctioned?  I can’t find relevant news articles, but this one suggests they were not (it suggests Hungary will be first country sanctioned).

EU FINANCE ministers have backed a European Commission plan to impose financial sanctions against Hungary over its budget deficit, the first such move against any member of the union.

The development, if followed through by the ministers, would see Budapest deprived of some €495 million in EU cohesion funding.

The procedure against Hungary represents a key test of a new system to toughen the enforcement of EU budget rules, one which will be underpinned by Europe’s new fiscal treaty.

A good short article by Mark Spiegel:

The Growth and Stability Pact proposes regulations which strengthen the surveillance of budgetary positions and defines the procedure for handling excessive deficits. Under this pact, each EMU member is committed to a medium-term budgetary position of close to balance, or surplus. This policy allows for some movements of the budget deficit over a business cycle due to “automatic stabilizers.” For example, budgets which are balanced under full employment will go into surplus and deficit by themselves during booms and busts respectively, due to fluctuations in government revenues and social spending. Nevertheless, the stability pact forbids countries from running government deficits in excess of 3 percent of gross domestic product.

The surveillance measures are designed to insure that nations which are in danger of violating budgetary guidelines are identified early. Member states will be required to publicly announce stability programs which specify their budget objectives and make plans for adjustment in the government budget as needed to achieve compliance. The European Commission and the European Council will also monitor countries’ budget positions to give early warning to a member state whose budget path appears to be headed towards excessive government deficit.

The more controversial component of the Growth and Stability Pact concerns the provision of sanctions for nations running excessive deficits. The Commission will prepare a report whenever a nation’s actual or planned government deficit exceeds the 3 percent benchmark. The stability pact does make exceptions for excessive deficits resulting from major economic downturns. In order to qualify for exception, however, countries must suffer an annual fall in GDP of at least 2 percent. Such a downturn would be severe; for example, France has not experienced a downturn of this magnitude in the post-war era.

Should the European Commission report an excessive deficit, the Economic and Financial ECOFIN Committee will then report an opinion to the European Council concerning the Commission report. The European Commission, taking the ECOFIN report into account, will then recommend to the European Council whether or not to excuse an excessive deficit as exceptional.

The stability pact gives the European Council some discretion in making the decision whether or not to excuse the excessive deficit. In particular, it may consider an annual fall of less than 2 percent of exceptional nature in “… light of supporting evidence, in particular on the abruptness of the downturn or on the accumulated loss of output ….” The European Council Resolution on the Stability and Growth Pact provides a benchmark value of a 0.75 percent decrease in real output for an “abrupt downturn” meriting exception.

If the European Council does decide that an excessive deficit exists, it will set clear deadlines for policy adjustments. Countries with excessive deficits are expected to begin taking action within four months of the identification of a violation, and the deficit should be brought into compliance within a year of identification of a violation. If a member state fails to comply with the recommendations of the European Council, sanctions are to be imposed on the country in violation within ten months of identification of a violation. However, if the European Council perceives that the violating nation is complying with its policy recommendations, it may hold the sanctions in abeyance and continuously monitor the offending nation until its deficits are at acceptable levels.

In the event that sanctions are implemented, the stability pact calls first for countries to contribute non-interest bearing deposits of a fixed component, not to exceed 0.2 percent of GDP, and a variable component equal to 0.1 times the excess of the government deficit as a percent of GDP over 3 percent. The overall sanction amount cannot exceed 0.5 percent of GDP. There is still a difference of opinion concerning how this ceiling should be applied. Germany, the Netherlands, and the European Commission want the fines to be applied cumulatively, while most other member states want 0.5 percent of GDP to represent an “absolute ceiling,” even for a deficit which persists for a number of years.

In 2001, just after Greece was admitted to Europe’s monetary union, Goldman helped the government quietly borrow billions, people familiar with the transaction said. That deal, hidden from public view because it was treated as a currency trade rather than a loan, helped Athens to meet Europe’s deficit rules while continuing to spend beyond its means.Athens did not pursue the latest Goldman proposal, but with Greece groaning under the weight of its debts and with its richer neighbors vowing to come to its aid, the deals over the last decade are raising questions about Wall Street’s role in the world’s latest financial drama.As in the American subprime crisis and the implosion of the American International Group, financial derivatives played a role in the run-up of Greek debt. Instruments developed by Goldman Sachs, JPMorgan Chase and a wide range of other banks enabled politicians to mask additional borrowing in Greece, Italy and possibly elsewhere.In dozens of deals across the Continent, banks provided cash upfront in return for government payments in the future, with those liabilities then left off the books. Greece, for example, traded away the rights to airport fees and lottery proceeds in years to come.Critics say that such deals, because they are not recorded as loans, mislead investors and regulators about the depth of a country’s liabilities.

via Wall St. Helped Greece to Mask Debt Fueling Europe’s Crisis – NYTimes.com.