ITFD Student Blog

Ecuador Plays Bond ‘Market for Fools,’ Aberdeen Says

2009-06-23T15:55:00.000+02:00

Ecuador Plays Bond ‘Market for Fools,’ Aberdeen Says

June 16 (Bloomberg) -- Ecuador President Rafael Correa “played the market for fools” by defaulting on $3.2 billion of debt six months ago and then repurchasing the bonds at less than 40 cents on the dollar, Aberdeen Asset Management Plc said.

The government’s bonds due in 2015, the only of three global notes Correa kept servicing, rose to an eight-month high today, a day after Standard & Poor’s raised the country’s rating to CCC+, two levels higher than when he defaulted in December. Ecuador has bought back 91 percent of the defaulted bonds due in 2012 and 2030, Finance Minister Maria Elsa Viteri said June 11.

“Ecuador won,” Edwin Gutierrez, who manages $5 billion at Aberdeen and sold his Ecuador holdings before the default, said in a telephone interview from London. Correa’s government “played the market for fools. Remind me never to play poker with that guy,” he said...

http://www.bloomberg.com/apps/news?pid=20601013&sid=aQ7ZViOQQ4mI

How rigged was that election?

2009-06-23T04:17:00.001+02:00

http://www.pollster.com/blogs/roundup_analyses_of_fraud_in_i.php

On Happiness

2009-06-15T03:56:00.008+02:00

"Tis nothing good or bad
But thinking makes it so"

-Shakespeare

"The great source of both the misery and disorders of human life, seems to arise from over-rating the difference between one permanent situation and another. Avarice over-rates the difference between poverty and riches: ambition, that between a private and a public station: vain-glory, that between obscurity and extensive reputation. The person under the influence of any of those extravagant passions, is not only miserable in his actual situation, but is often disposed to disturb the peace of society, in order to arrive at that which he so foolishly admires. The slightest observation, however, might satisfy him, that, in all the ordinary situations of human life, a well-disposed mind may be equally calm, equally cheerful, and equally contented. Some of those situations may, no doubt, deserve to be preferred to others: but none of them can deserve to be pursued with that passionate ardour which drives us to violate the rules either of prudence or of justice; or to corrupt the future tranquillity of our minds, either by shame from the remembrance of our own folly, or by remorse from the horror of our own injustice."

-Adam Smith

Tied up

2009-05-22T00:50:00.007+02:00

One of those things that I hear about all the time but rarely see actual numbers for is tied aid. This is a policy that forces aid recipients to spend their new found money on donor-country goods and services. For USAID tied aid is the law!

Check out this report.

"Under the Foreign Assistance Act of 1961, if a USAID mission wants to purchase goods or services locally, it
must request a waiver of the law on a case-by-case basis."

Typical US dastardlyness.

source: cgdev.org

Rawlsian Justice and Jurgen Habermas

2009-05-11T19:45:00.002+02:00

Since Sala-i-Martin insists on teaching us morality during our growth class and does so, in particular, through the teachings of John Rawls, I thought this link might prove interesting. It provides a good overview of Rawls' arguments, including his famous "original position" and "veil ignorance," which are considered the conceptual cornerstones of contemprorary liberal-democratic theory. Moreover, this overview of Rawls is written by another very famous philosopher, Jurgen Habermas. Enjoy...

Trucks

2009-05-10T00:43:00.008+02:00

If, like me, you have been wondering how Detroit/The Big Three got into all this mess here is a post for you.

It always struck me as hardly believable that tastes (or environment) in the US were so completely different from the rest of the world that The Big Three would focus production on such monstrosities like the Hummer H1 H2 H3, the Ford F-150, or the Dodge Ram. Sure there is more space and there are wider roads in the US, but come on, these trucks are ridiculous! People must have been buying these things to make up for some sort of genital deficiency!?

This post by Robert Lawrence makes it all quite clear. By utilizing the "what you lack in other stuff, you can make up for with a truck" method of advertising, the clear message of "this truck has balls, so don't worry if you don't", as well as a 25% import tariff on imported trucks to keep the incentive to innovate shrunken, The Big Three penetrated the American machismo psyche with big limp trucks! They simply couldn't keep it up it when oil/credit hit the fan (but now I'm just mixing metaphors).

Great YouTube Source

2009-04-27T14:27:00.005+02:00

The Khan Academy on YouTube is a great source of amazingly clear presentations explaining everything from the Geithner Plan to Venture Capital and Capital Markets.

Check it out!!!

They also have great videos on math!

(source: baselinescenario.com)

Paris Club principles...

2009-03-07T18:16:00.002+01:00

This caught my attention. Check-out the Paris Club's list of principles that guide their debt renegotiation deals. Interestingly (though not terribly surprising), to get a renegotiation deal countries need to have demonstrated "a track record of implementing reforms under the IMF." Also of interest, the Paris Club contains every member of the G8 and yet remains an "informal group of creditors," rather than a formal institution.

Can I buy your cat?

2009-03-06T19:55:00.004+01:00

Vanity Fair has a very entertaining piece on the Icelandic finance bubble. More story than financial analysis its an easy read, and there are some gems:

Maybe because there are so few Icelanders in the world, we know next to nothing about them. We assume they are more or less Scandinavian—a gentle people who just want everyone to have the same amount of everything. They are not. They have a feral streak in them, like a horse that’s just pretending to be broken.

You have a dog, and I have a cat. We agree that they are each worth a billion dollars. You sell me the dog for a billion, and I sell you the cat for a billion. Now we are no longer pet owners, but Icelandic banks, with a billion dollars in new assets. “They created fake capital by trading assets amongst themselves at inflated values,” says a London hedge-fund manager. “This was how the banks and investment companies grew and grew. But they were lightweights in the international markets.”

Krugman on US policymakers

2009-03-04T14:11:00.002+01:00

Krugman makes a good point here. Too bad he leaves out two possibilities in the end: "... or both or neither!"

Christina Romer's Case for Fiscal Stimulus

2009-03-02T16:52:00.002+01:00

In a new press release Christina Romer, Chair of the Council of Economic Advisors in the US, defends the Obama admistration's nearly $800 billion fiscal stimulus. She discusses her views on the effects of fiscal policy and then discusses the rational behind the timing and choice of spending programs in the Recovery Act.

In setting out her position she makes clear her disagreement with Barro over the size of the multiplier. In particular she argues that Barro's approach suffers from omitted variable bias as he advocates using periods of war to look at spending and output. Her own research, with her husband David Romer, isolates periods in which tax changes are uncorrelated with output and attempts to guage their effect. She reports that her findings indiciate "a tax cut of 1% of GDP raises GDP by between 2 and 3% over the next three years".

She acknowledges that conducting similar resarch for government spending is all the more difficult due to the liklihood of omitted variable bias but believes that this will bias the estimates of the multipliers downwards. The estimates of the effects of the recovery package conducted by Romer and Bernstein suggest that, using conventional multiplier estimates, "a tax cut has a multiplier of roughly 1.0 after about a year and a half, and spending has a multiplier of about 1.6".

Her rebuttal to accusations that fiscal policy is less effective in the precence of malfunctioning financial markets is the following:

I think it is possible that fiscal policy will have even more oomph in this situation. When households and businesses are liquidity-constrained by reduced lending, any money put in their pockets is more likely to be spent.

This assumes that households are currently illiquid (or even insolvent) and therefore have to spend any extra money given to them. What about those housholds who are not below this threshold? If they've experienced negative wealth effects from a fall in asset prices or are concerned about their future income (i.e. job), are they not more likely to save? This will only be worsened by credit market imperfections which prevent households from smoothing by borrowing and force them to save, even when it is not optimal to do so.

Bank "takeover" vs. "nationalization"

2009-03-02T16:03:00.003+01:00

Here are the results from a new Gallup poll that shows Americans' stances on bank nationalization. If described as a temporary "takeover" 54% are in favor. However, if described as a "nationalization" approval drops to 37%! Feel free to interpret this any way you want.

1929 Stock Movements: Intangibles or Animal Spirits?

2009-02-26T13:37:00.006+01:00

Cyclotronic Readings of Animal Spirit Ectoplasm Levels and Real Effects on Stock Price Fluctuation.
By: J. Antonio Montecino and R. Kalev Raudsepp-Hearne

ABSTRACT:

DeLong and Shleifer (1991) argue that stock market prices in 1929, driven by irrational investor sentiment, were overvalued by as much as 30%. However, in recent years the literature has converged on a new approach of considering the impact of "intangibles" on stock valuations. McGratten and Prescott (2004), for instance, conclude that once the value of intangible assets are taken into consideration 1929 stock prices appear, if anything, undervalued. However, McGratten and Prescott, disgracefully, failed to directly measure intangibles. Building up on their work, Nicholas (2005) employs a sophisticated methodology to directly measure intangibles with the added dimension of time(!). However, despite strong evidence that stock market prices did reflect changing fundamentals driven by intangibles, no scholar to this date has attempted to empirically observe what Keynes referred to as the market's pervasive "animal spirits."

We propose a new approach to settle this debate once and for all: to directly measure the "animal spirits" present in the 1929 stock market. Following the seminal work of Dr. Peter Venkman and Dr. Egon Spengler (see Ghostbusters, 1984 and Ghostbusters 2, 1989), this paper sets out to document the fluctuations of animal spirits responsible for the 1929 stock market boom and subsequent collapse. Adapting Venkman et al.'s methodology, cyclotron readings of 1929 spirit levels reveal conclusive evidence that stock market prices were not being driven by fundamentals. In fact, our analysis reveals a strong positive co-movement between ectoplasm levels and stock market prices.

A cyclotron reader uses similar technology to a proton collider. Protons are accelerated to near the speed of light, causing electromagnetic field fluctuations that capture the perturbations caused by the animal spirit's ectoplasm. As the cyclotron can only observe absolute values of ectoplasm levels, it cannot directly determine whether an animal spirit in question is positive or negative. We control for this measurement problem by instrumenting Slimer's reactions to the presence of positive or negative spirits. It is also important to control for the presence of positive ectoplasm externalities, which would significantly bias the results (like crazy).

Our results show that in the stock market peak in September, 1929, positive ectoplasmic fluctuations increased by 3.62 standard deviation points. Similarly, during the subsequent crash we document a strong, statistically significant and robust reversal of the ectoplasmic polarity. We show using our data that stock market reactions are indeed slightly lagged behind major ectoplasmic events, which allow us to identify a causal relationship between animal spirits and stock prices. We conclude by estimating the ectoplasmic coefficient of lag and suggesting avenues for further research.

"Auntie can guess better than anybody"

2009-02-26T13:22:00.002+01:00

If you're in need of a bit of a giggle, have a look at what these folks from investment discussion site Bogleheads have named their hedge funds in this online trading game.

About bubbles...

2009-02-26T01:22:00.002+01:00

“A bubble is an upward price movement over an extended range that then implodes” Charles Kindleberger (1978)

“Any unsound undertaking accompanied by a high degree of speculation” Palgrave, Dictionary of Political Economy (1926)

"How do we know when irrational exuberance has unduly escalated asset values, which then become subject to unexpected and prolonged contraction...?" Alan Greenspan (1996)

“When everyone rushes in the same direction, it is hard for financial speculators to stand aside and recall the lessons of past stampedes” Financial Times, “The Madness of Crowds”, December 22, 1998

Wired mag makes sense of what went down on Wall St.

2009-02-26T00:55:00.005+01:00

click here (via Mankiw) ;)

Enjoying the sun after the mid-term exams

2009-02-26T00:49:00.007+01:00

EconLib, EconLog, EconTalk

2009-02-25T12:50:00.002+01:00

Having just linked to EconLog, the blog by Arnold Kling, Bryan Caplan, and David Henderson, I thought it would be worthwhile pointing out that the website that EconLog is part of, the "Library of Economics and Liberty", has some other interesting resources: As well as the blog it also hosts an Encyclopedia of Economics and a great podcast series known as EconTalk.

Fiscal Stimulus, Fiscal Inflation, or Fiscal Fallacies?

2009-02-24T18:44:00.003+01:00

John Cochrane at Chicago Booth has an essay/review on the use of fiscal stimuli to combat recessions. He provides a much more comprehensive overview of the arguments currently being propounded by Barro and Fama/French (see Jasper's previous blog post "Krguman vs. ..."), which given the current mud-slinging, is quite welcome relief.

Edit: Thought I'd add some entertaining quotes from Arnold Kling at EconLog (another interesting weblog). Via The Filter.

"The main reason for supporting large stimulus rather than small stimulus is that small stimulus efforts have a track record of failure. That's the logic that gave us the Somme Offensive."

"Certified macroeconomists were badly polarized in the early 1970's, with Chicago types essentially denying the idea of involuntary unemployment and the MIT types clinging to macroeconometric models. By the late 1970's, the arguments were over. The models had all sorts of problems, and everybody gave up on them, although people had different reasons for doing so. Methodologically, everyone agreed to work on irrelevant math probems, and substantively everyone agreed that reasonably stable money growth would lead to a reasonably stable economy."

A gem to contradict conservative (read anti-gov't) economists who quote Smith all the time.

2009-02-24T14:36:00.000+01:00

"The third and last duty of the sovereign or commonwealth is that of erecting and maintaining those public institutions and those public works, which, though they may be in the highest degree advantageous to a great society, are, however, of such a nature that the profit could never repay the expense to any individual or small number of individuals, and which it therefore cannot be expected that any individual or small number of individuals should erect or maintain. The performance of this duty requires, too, very different degrees of expense in the different periods of society."

A classic bit of Veblen (1857-1929)

2009-02-24T14:17:00.000+01:00

"In all the received formulations of economic theory, whether at the hands of English economists or those of the Continent, the human material with which the inquiry is concerned is conceived in hedonistic terms; that is to say, in terms of a passive and substantially inert and immutably given human nature. The psychological and anthropological preconceptions of the economists have been those which were accepted by the psychological and social sciences some generations ago. The hedonistic conception of man is that of a lightening calculator of pleasures and pains, who oscillates like a homogenous globule of desire of happiness under the impulse of stimuli that shift him about the area, but leave him intact. He is neither antecedent nor consequent. He is an isolated, definitive human datum, in stable equilibrium except for the buffets of the impinging forces that displace him in one direction or another. Self-imposed in elemental space, he spins symmetrically about his own spiritual axis until the parallelogram of forces bears down upon him, whereupon he follows the line of the resultant. When the force of the impact is spent, he comes to rest, a self-contained globule of desire as before. Spiritually, the hedonistic man is not a primer mover. He is not the seat of a process of living except in the sense that he is subject to a series of permutations enforced upon him by circumstances external and alien to him."

Crook on Playing Nice

2009-02-20T00:37:00.000+01:00

Referring readers to posts by Krugman and responses from Barro via email, Clive Crook at the FT has made it clear that he thinks the most damaging part of the current tête à tête over the Obama stimulus package in the blogosphere is not that it might reveal a rather serious lack of knowledge on the part of many macroeconomists when it comes to questions of prime policy relevance, but instead that it undermines public confidence in their ability to carry out a reasonable and mature debate. He points out that all too often this means that those on both the left and the right of American politics end up ignoring the arguments and stick to their dogmatic beliefs.

The email exchange with Barro in the post is a worthwhile read, and it finishes with an interesting point, particularly relevent to some of our recent classes:

One thing I think you need to be clear on is the distinction between Ricardian equivalence and Keynesian multipliers. The first bears, for example, on how a deficit-finance tax cut affects aggregate demand. The Ricardian view is no effect, and the “standard” view is that the effect is positive but less than one. The multiplier has to do with how a change in aggregate demand affects output. It is possible to have a large multiplier even with Ricardian equivalence, and it is possible to have a small multiplier even without Ricardian equivalence.

Borrowing Beds From Infinity

2009-02-15T19:27:00.000+01:00

Juan: "So a hostel has infinite beds. But all the beds are full up with stinky travelers. All of a sudden, another traveler checks into the hostel. How can they be accommodated? Simply shift over all the other sleeping people to make a free bed."

Rory: "If r< n thats why a government can borrow from infinity."

Joel: "I'd like to be a government"

Juan: "I'd like to be the hostal"

Joel: "What!? How would you get through all that laundry?"

Krugman vs. well pretty much everyone else

2009-02-06T22:27:00.001+01:00

Paul Krugman has a sharp pen. Here he is on Eugene Fama's piece I posted earlier. And here he is again, this time on Robert Barro's take on the stimulus plan.

Obviously, comments like these don't go unanswered. Here's Fama, and here is Barro (in a rather terrible interview, who is this interviewer?!).

Enjoy!

Poverty Action Lab

2009-02-01T12:41:00.000+01:00

J-PAL has a good set of sources on conducting randomized trials and experiments in development economics. Good background reading for Design and Development.

They also have a fantastic jobs page with research assistant positions all over the world - definitely worth a look!

Eugene Fama on Bailouts and Stimulus Plans

2009-01-17T20:12:00.000+01:00

Eugene Fama gives his view on the US governments actions to fight the crisis. A good addition to the readings for Monday's Macro class, Crowding Out and Ricardian Equivalence applied to today's situation.

Chile's Pension Fund

2009-01-14T12:34:00.000+01:00

I just found this article and thought it is particularly relevant for next week's Macro topic on pension reform.

Prescriptions for Poverty

2009-01-13T19:54:00.001+01:00

Though a little old this article has an interesting interview with Esther Duflo and Abhijit Banerjee. They discuss the Poverty Action Lab at MIT as well as the ethical aspects of using the poor as part of economic experiments.

Bailout, Italian-style

2008-12-13T17:51:00.000+01:00

From Gregory Mankiw's blog:

The WSJ reports:

"The world is bailing out banks and car companies. Italy is coming to the rescue of parmigiano cheese.

In an effort to help producers of the cheese commonly grated over spaghetti, fettuccine and other pastas, the Italian government is buying 100,000 wheels of Parmigiano Reggiano and donating them to charity.

Though demand for parmigiano is strong in Italy and abroad, producers have been struggling for years to make money, putting the future of Italy's favorite cheese at risk."

An economist might suggest letting a few producers fail, so supply shrinks, prices rise, and the remaining producers become more profitable. In fact, that same logic might apply to some other industries as well.

Fear and greed...

2008-12-02T07:42:00.000+01:00

The Vix Index reached an all time high of 80.86 on the 20th of November. The Vix Index is a measure of implied volatility backed out from option prices on US stocks. It is commonly referred to as the "fear index", below chart shows why.

I guess a lot of people have been buying puts lately...

Gapminder and TED.com

2008-11-17T15:04:00.000+01:00

If you havn't seen this amazing site its worth a look. Gapminder is incredible presentation software and is really useful for learning about global trends. This fellow in this pic is Hans Rosling. He gives a really eye opening talk using the software on the site. Definitely worth a look.

Also TED.com has a few presentations with gapmider as a tool and is an incredible website. Check it out!!!

2008-11-12T22:05:00.000+01:00

Obama and Latin America

2008-11-06T10:45:00.000+01:00

As Jasper put it, D-Day is now behind us and, fortunately, Obama won. Now we must start to ask difficult questions about whether or not his presidency will signal meaningful change for the issues that matter to us. I personally am most concerned with his policy towards Latin America. Will he continue with business as usual, employing the same old "carrot and stick" diplomacy and resurrecting the Monroe Doctrine? Or will he scrap Plan Colombia, cease labeling countries as friends or foes, end the embargo on Cuba and make amends with Venezuela?

The answers to these questions are not immediately obvious. Especially since Obama has never visited Latin America and, during the presidential campaign, echoed many of the Bush administrations talking points regarding the region's leftist governments. Did he refer to Chavez and Castro as "enemies" purely because he wanted to win Florida (which he did)? Or is he out of touch with the region's political reality?

As any of you who casually follow the news know, the U.S. has insisted on labeling Chavez a dictator and enemy of the U.S. Despite these claims, it's important to recall that Venezuela's relations with Washington began to deteriorate when Chavez criticized Bush for invading Afghanistan, not due to a fundamental desire to antagonize the U.S. It is also worth recalling that there is significant evidence that the U.S. had a hand in the failed 2002 coup against Chavez. Nevertheless, Chavez has on numerous occasions stated his desire to normalize diplomatic relations with the U.S., especially with an Obama administration. In fact, just yesterday, Chavez reiterated this aim, saying:

"I truly wish (the new president of the United States) to change the imperialist vision; I wish him to suspend the blockade on Cuba (which has been effective since the 1960's); everybody has been asking for it for a long, long time."

The ball's in your side of the court Obama.

Where Colombia is concerned Obama's policy approach is not overwhelmingly obvious either. Obama has given mixed messages about his stance on Uribe's administration. During the Democratic primaries he scored points on Clinton by criticizing her endorsement of the Colombia-U.S. FTA, citing human rights concerns. However, he has somewhat inconsistently praised Uribe's supposed progress in curbing cocaine production and, significantly, failed to condemn Colombia's violation of Ecuador's territorial sovereignty last March (when Colombia bombed a FARC camp in Ecuador).

In this sense, a better indication of Obama's possible approach to Colombia would be to look at Biden's record, which, to be sure, is quite mixed. Back in 2000 Biden was a strong supporter of Plan Colombia but has since balanced his stance.

Where Brazil is concerned, relations with the U.S. have never been strained (just check out this picture for evidence). Lula was quick to congratulate Obama, expressing optimism for the future of U.S.-Latin American relations.

Ecuador's President, Rafael Correa, was more cautious though, stating that he didn't think too much would change for Latin America with Obama as President. Evo Morales, on the other hand, called Obama's election "historic." As Bolivia's first indigenous President, Evo Morales knows a thing or two about historic elections though.

US elections

2008-10-31T16:06:00.000+01:00

After dominating the global news for more than two years, D-day is finally approaching. I'm sure that all of you have read more articles, opinions and columns about this election than you wanted to, but still I think that you should have a look at the two articles from this week's Economist.

They have a very balanced article on the pros and cons of Obama for president (although they support him fully they still remain objective, a feat not many newspapers can claim) and they also have a funny article on the accuracy of polls (hope this doesn't scare the Obama fans out there!).

Link below, enjoy!

http://www.economist.com/daily/chartgallery/displayStory.cfm?story_id=12502492&source=features_box4

http://www.economist.com/printedition/displayStory.cfm?Story_ID=12511171

Simin's birthday

2008-10-21T00:07:00.001+02:00

Joel's Birthday

2008-10-21T00:02:00.001+02:00

Living in Barcelona

2008-10-13T01:11:00.001+02:00

Barcelona is a wonderful place to live in.
It’s full of interesting places, things to do, opportunities to have fun
It has a typical Mediterranean climate. Until now it has always been sunny, even in those days that we have to spend in the library to study :( . The beach is very close to University…maybe sometimes we should go to study there!
These pictures represent Rory’s bike-path from his home to University. He passes from Diagonal, then near to Arc de Triomf, then he goes around the UPF library to finally get to Barcelona GSE. The city is very “bike-friendly”; I think that in a month all of us will have a bike!

drink in Born

2008-10-08T12:44:00.000+02:00

On first October we met all together, students and professors, at Miramelindo, a very nice bar in Born. It was our first “master drink”! It was great because we had the occasion to know each other better, talk about our lives, our projects, our ideas in a very and, for me, unusually informal way.

I hope that there will be other nights like that one!

Class composition

2008-10-07T12:43:00.000+02:00

We are 18 people from all over the world. The countries represented are:
Belgium, Canada, England, France, Iran, Italy, Lituania, Portugal, Russia, Slovakia, Spain, Turkey and USA.
The highest percentage is from Italy. Italians, like the parsley, are always everywhere!

Welcome to our blog!

2008-10-07T12:10:00.000+02:00

Hi! I present you our new blog!!

Here we can post interesting articles, new models, or simply opinions about living in Barcelona, lectures and normal life.

In this way we can create our little "internet" world and help some peolple who want to join us next year in the Barcelona GSE!

The master has already started, and we will have a very hard year so GOOD LUCK!