From the BBC: Penang abandons pro-Malay policy:
The Malaysian state of Penang says it will no longer follow a controversial central government policy favouring ethnic Malays above other citizens. ... Lim Guan Eng was sworn into office as head of state in Penang, after his Democratic Action Party (DAP) won a convincing election victory.
From the Star newspaper:
The new Penang state government will have two deputy chief ministers - Penanti assemblyman Mohammad Fairus Khairuddin of PKR and Prai assemblyman Dr P. Ramasamy of DAP. ... Chief Minister Lim Guan Eng told a press conference at his office in Komtar on Wednesday that the two would be appointed Deputy Chief Minister I and II respectively. ... He said the appointment of the two deputies was the right choice to effectively represent all Penangites. ... Asked for his response to the appointment, Mohammad Fairus, a 32-year-old business management consultant, said this was a new era of politics put forward for the people and he humbly gave his commitment to serve all Penangites. ... Political scientist Dr Ramasamy, 58, said the people wanted democracy, justice and dynamic change, and he would work hard for the people.
Also in Wikipedia:
Penang
The opposition dealt a heavy blow to the Barisan Nasional government by taking the state of Penang. Although Penang was regarded as a hotly contested state, the outcome unexpectedly turned out to be a landslide win with the opposition, the DAP gaining the majority of the state seats. Many seats saw the opposition winning over two-thirds of the votes, rather than the usual 50-50 distribution. BN only won 2 of the 13 parliamentary seats and 11 of the 40 state seats, its worst performance in Malaysian history. The Democratic Action Party (DAP) will form the next government in Penang with Lim Guan Eng, who is also the party's Secretary General, as its designated next Chief Minister.[50] ... In terms of party landscape, Gerakan, which has led the state since 1969 was defeated, and essentially out of the political landscape, winning only 3 state seats and 2 parliamentary seats (none of which were in this state), not being able to hold on to a single seat in state or federal level—over 30 years of rule gone in one night. Some interesting individual constituencies include Jeff Ooi, who rose to fame with his blog that was constantly critical of the ruling government and made his first foray into politics this election under the DAP, winning the Jelutong parliamentary seat. ... Another significant blow was the defeat of Gerakan President, Tan Sri Dr. Koh Tsu Koon, who was looking to move up from state politics, decided not to run for his state seat and subsequently gave up his Chief Minister post of 18 years, to challenge the Batu Kawan parliamentary seat. Some speculated this was part of a larger ambition to be a cabinet member, only to lose to newcomer P. Ramasamy of the DAP by a large margin of 9,485 votes.
Questions remain: Will there be transition to a more participatory pluralistic democracy? I have no idea what that means but am trying to say:
1. Larger turnouts
2. Votes are not along racial lines
3. More press and freedom and individual political freedom
Will there be violence?
Wednesday, March 12, 2008
On Liquidity and Leverage
"Liquidity and Leverage" by Tobias Adrian and Hyun Song Shin sounded promising:
Our findings also shed light on the concept of "liquidity" as used in common
discourse about financial market conditions. In the financial press and other market
commentary, asset price booms are sometimes attributed to "excess liquidity"
in the financial system. Financial commentators are fond of using the associated
metaphors, such as the financial markets being "awash with liquidity", or liquidity
"sloshing around". However, the precise sense in which "liquidity" is being used
in such contexts is often left unspecified.
In general, I thought the paper's writing could be tightened. The above quote from the introduction needs to make it explicit that the kind of liquidity that is being talked about in the press is the funding liquidity that is in the paper. I know, I know, for some people like me, I need to be based over the head with things mainly because I'm not versed in the financial jargon. The abstract was meaningless to me because of my lack of familiarity. I may as well have been reading something about game theory. The paper is a nice length and readable although the section on existing literature seems to be standing by itself. The authors didn't try too hard to tie together the literature with what they are doing. It looks as though a referee made them put it in and they did.
1. The main item that I thought the authors should have emphasized more was the implications of the forecastability of the VIX index of implied volatility using aggregate intermediary balance sheet size (again, the authors could be less jargoned as just say size of short term lending measured using repos). If I'm reading this right, they are saying that "risk appetite" (again they need to make this term clearer) as proxied by the VIX can be forecasted. What are the implications? If we use the repos position as a predictor for future volatility then can we expect increase use of repos in the next period? Some papers have shown that merger activity increases as share prices increases -- can these be tied to the use of repos?
2. My main interest in the paper was the increase in liquidity that could be accounted for by marking to market. Unfortunately this was not attempted (and I don't know if it can). The authors use the repos positions of five investment banks to empirically verify the procyclity of marked-to-market leverage. This put a damper on things since the introduction seemed to indicate that they would address what it means to be awash in liquidity. If 5 investment banks can wash the world in liquidity then the financial system can't be too stable.
3. The abstract really needs to be catchier which means shorter sentences. Here's my 2 cent rewrite:
In a financial system where balance sheets are continuously marked to market, asset price changes show up immediately in changes in net worth. When asset prices go up, financial intermediaries increase their use of leverage. Marked-to-market leverage is strongly procyclical. The aggregate consequence of this behavior is to increase the risk appetite of financial intermediaries. Changes in the marked-to-market-leverage can predict innovations in risk appetite as proxied by the VIX index. The aggregate liquidity in the financial system can now be clearly seen as the rate of change of the balance sheets of financial intermediaries.
Our findings also shed light on the concept of "liquidity" as used in common
discourse about financial market conditions. In the financial press and other market
commentary, asset price booms are sometimes attributed to "excess liquidity"
in the financial system. Financial commentators are fond of using the associated
metaphors, such as the financial markets being "awash with liquidity", or liquidity
"sloshing around". However, the precise sense in which "liquidity" is being used
in such contexts is often left unspecified.
In general, I thought the paper's writing could be tightened. The above quote from the introduction needs to make it explicit that the kind of liquidity that is being talked about in the press is the funding liquidity that is in the paper. I know, I know, for some people like me, I need to be based over the head with things mainly because I'm not versed in the financial jargon. The abstract was meaningless to me because of my lack of familiarity. I may as well have been reading something about game theory. The paper is a nice length and readable although the section on existing literature seems to be standing by itself. The authors didn't try too hard to tie together the literature with what they are doing. It looks as though a referee made them put it in and they did.
1. The main item that I thought the authors should have emphasized more was the implications of the forecastability of the VIX index of implied volatility using aggregate intermediary balance sheet size (again, the authors could be less jargoned as just say size of short term lending measured using repos). If I'm reading this right, they are saying that "risk appetite" (again they need to make this term clearer) as proxied by the VIX can be forecasted. What are the implications? If we use the repos position as a predictor for future volatility then can we expect increase use of repos in the next period? Some papers have shown that merger activity increases as share prices increases -- can these be tied to the use of repos?
2. My main interest in the paper was the increase in liquidity that could be accounted for by marking to market. Unfortunately this was not attempted (and I don't know if it can). The authors use the repos positions of five investment banks to empirically verify the procyclity of marked-to-market leverage. This put a damper on things since the introduction seemed to indicate that they would address what it means to be awash in liquidity. If 5 investment banks can wash the world in liquidity then the financial system can't be too stable.
3. The abstract really needs to be catchier which means shorter sentences. Here's my 2 cent rewrite:
In a financial system where balance sheets are continuously marked to market, asset price changes show up immediately in changes in net worth. When asset prices go up, financial intermediaries increase their use of leverage. Marked-to-market leverage is strongly procyclical. The aggregate consequence of this behavior is to increase the risk appetite of financial intermediaries. Changes in the marked-to-market-leverage can predict innovations in risk appetite as proxied by the VIX index. The aggregate liquidity in the financial system can now be clearly seen as the rate of change of the balance sheets of financial intermediaries.
Can the Fed engineer a turnaround?
The following makes me think NOT.
1. Rogoff on inflation risks:
The U.S. is now ground zero for global inflation. Faced with a vicious combination of collapsing housing prices and imploding credit markets, the Fed has been aggressively cutting interest rates to try to stave off a recession. But even if the Fed does not admit it in its forecasts, the price of this "insurance policy" will almost certainly be higher inflation down the road, and perhaps for several years.
2. Asking too much of Monetary Policy:
What's an example of a problem you can't solve with monetary policy? Suppose you were convinced that house prices in the United States were at the moment substantially higher than they should be relative to the price of other goods and services. How could that have happened, an economist would want to ask, and let's suppose that the answer is that a credit market profoundly distorted by moral hazard problems loaned vast sums to households that could not reasonably be expected to be repaid if real estate prices stopped rising. The purchase of the properties financed by those loans drove up the price of housing relative to what it would have been (and should have been) with a correctly functioning credit market, so now the relative price of housing must fall.
3. Why Monetary Policy Cannot Stabilize Asset Prices:
Whatever merits such a stabilisation policy has in theory, our research suggests that in practice, monetary policy is too blunt an instrument to be used to target asset prices – the effects on real property prices are too small, given the responses of real GDP, and they are too slow, given the responses of real equity prices. In particular, there is a risk that setting monetary policy in response to asset price movements will lead to large output losses that exceed by a wide margin those that would arise from a possible bubble burst.
Is there still any disagreement over whether the current subprime crisis is rooted in liquidity or solvency? This will probably not be settled but it's straightforward to recognize that it may well be a little of both or a lot of one and a little of another. It's hard to gauge what the Fed is trying to do but it does seem like it is trying to solve the subprime crisis as a liquidity crisis. My two cents:
1. Recognize that for some institutions that it is a solvency issue. There will be a class of securities/mortages (the ability to identify these is left to the imagination for now since I don't know) that will never ever be repaid.
2. For others, again depending on the ability to identify their class of securities, this might well be a liquidity issue.
3. Assuming that the same institutions who invested in these securities can classify them as toxic or possibly non-radioactive then a workout perhaps similar to the Resolution Trust for S&L can be created for the toxic securities (and its underlying assets -- again assuming these can be identified).
4. Issues: a) a systematic workout to avoid a spiral of declining asset prices leading to asset prices close to its class also falling leading to the "death spiral" scenario.
b) Help those that can most easily be helped first. This may well be those who are healthiest or they may well also be those that are weakest. By working through the weakest institutions first and using a small enough pool of toxic securities can avoid the death spiral scenario.
c) Institutions are not going to willingly disclose all this information. Moral suasion may have to come into play.
5. If this could be done it probably would have been done now.
Paul Krugman is right. There has not been any real meaningful analysis of the problem. His figures assume that all the toxic securities have the same demand and supply curves but it may only apply to some and differ in degrees with others. It's good to see him doing economics again.
1. Rogoff on inflation risks:
The U.S. is now ground zero for global inflation. Faced with a vicious combination of collapsing housing prices and imploding credit markets, the Fed has been aggressively cutting interest rates to try to stave off a recession. But even if the Fed does not admit it in its forecasts, the price of this "insurance policy" will almost certainly be higher inflation down the road, and perhaps for several years.
2. Asking too much of Monetary Policy:
What's an example of a problem you can't solve with monetary policy? Suppose you were convinced that house prices in the United States were at the moment substantially higher than they should be relative to the price of other goods and services. How could that have happened, an economist would want to ask, and let's suppose that the answer is that a credit market profoundly distorted by moral hazard problems loaned vast sums to households that could not reasonably be expected to be repaid if real estate prices stopped rising. The purchase of the properties financed by those loans drove up the price of housing relative to what it would have been (and should have been) with a correctly functioning credit market, so now the relative price of housing must fall.
3. Why Monetary Policy Cannot Stabilize Asset Prices:
Whatever merits such a stabilisation policy has in theory, our research suggests that in practice, monetary policy is too blunt an instrument to be used to target asset prices – the effects on real property prices are too small, given the responses of real GDP, and they are too slow, given the responses of real equity prices. In particular, there is a risk that setting monetary policy in response to asset price movements will lead to large output losses that exceed by a wide margin those that would arise from a possible bubble burst.
Is there still any disagreement over whether the current subprime crisis is rooted in liquidity or solvency? This will probably not be settled but it's straightforward to recognize that it may well be a little of both or a lot of one and a little of another. It's hard to gauge what the Fed is trying to do but it does seem like it is trying to solve the subprime crisis as a liquidity crisis. My two cents:
1. Recognize that for some institutions that it is a solvency issue. There will be a class of securities/mortages (the ability to identify these is left to the imagination for now since I don't know) that will never ever be repaid.
2. For others, again depending on the ability to identify their class of securities, this might well be a liquidity issue.
3. Assuming that the same institutions who invested in these securities can classify them as toxic or possibly non-radioactive then a workout perhaps similar to the Resolution Trust for S&L can be created for the toxic securities (and its underlying assets -- again assuming these can be identified).
4. Issues: a) a systematic workout to avoid a spiral of declining asset prices leading to asset prices close to its class also falling leading to the "death spiral" scenario.
b) Help those that can most easily be helped first. This may well be those who are healthiest or they may well also be those that are weakest. By working through the weakest institutions first and using a small enough pool of toxic securities can avoid the death spiral scenario.
c) Institutions are not going to willingly disclose all this information. Moral suasion may have to come into play.
5. If this could be done it probably would have been done now.
Paul Krugman is right. There has not been any real meaningful analysis of the problem. His figures assume that all the toxic securities have the same demand and supply curves but it may only apply to some and differ in degrees with others. It's good to see him doing economics again.
On having goals
By Lauren. Definitely an uplifiting piece. I wonder about my goals in life.
1. Learn to play the guitar
2. Learn to play them drums. (May be too late for this.)
3. Write a book.
4. Stress less - hit the pause button more.
And definitely be a better parent (whatever it may mean).
1. Learn to play the guitar
2. Learn to play them drums. (May be too late for this.)
3. Write a book.
4. Stress less - hit the pause button more.
And definitely be a better parent (whatever it may mean).
What is home?
Richard Ford's contemplation on what it means to be home made me wonder the same thing.
1. Home is where the heart is.
2. Anywhere I hang my hat is my home.
3. Money can buy a house but not a home.
4. Place of birth.
5. House with fixed address.
There is a sense of "homeyness" that I sometimes feel when I sit down in the morning and enjoy a morning cup of coffee or watching the kids play. But then this feeling goes away sometimes when we have visitors or sometimes, this sense increases with other visitors. There is also the feeling of familiarity when we come back from a trip that qualifies as homeyness. I've lived in different places and have not actually been able to call most of them home. When I go back to Malaysia, it doesn't have the same homey feeling. Sometimes when we're in Maine where I went to college I have a feeling of home even though I don't live there. But here in Washington, with my family, I'm definitely home.
1. Home is where the heart is.
2. Anywhere I hang my hat is my home.
3. Money can buy a house but not a home.
4. Place of birth.
5. House with fixed address.
There is a sense of "homeyness" that I sometimes feel when I sit down in the morning and enjoy a morning cup of coffee or watching the kids play. But then this feeling goes away sometimes when we have visitors or sometimes, this sense increases with other visitors. There is also the feeling of familiarity when we come back from a trip that qualifies as homeyness. I've lived in different places and have not actually been able to call most of them home. When I go back to Malaysia, it doesn't have the same homey feeling. Sometimes when we're in Maine where I went to college I have a feeling of home even though I don't live there. But here in Washington, with my family, I'm definitely home.
Paying for the view with higher gas prices
This idea is definitely not new - river/ocean view rooms tend to cost more. Resorts/hotels in places with great views can charge more without having to provide much in terms of service/cleanliness/value. This article in the NYT seems to indicate that almost everything is more expensive in places with wonderful views.
Locals have gotten used to paying a lot for a little, as almost everything has to be trucked in from big towns up and down the coast. A twelve-pack of Budweiser costs nearly $15, and a small coffee at the general store is more expensive than at the average Starbucks. ... “You’re paying for the view,” said Brian Boyer, another of the service attendants at Amerigo. “And the entertainment.” ... And Gorda is not alone in pricey petrol along the coast. In Cambria, 35 miles south, the price of regular at the Chevron station was $3.95 on Tuesday. In Big Sur, the tourist-friendly hideaway 40 miles north, a gallon of regular went for $4.80 at one Shell station.
It's more than just the view that makes everything cost more - it's also the remoteness. I'm thinking of small island economies that need to have everything shipped in e.g. Maldives, Fiji, or closer to the U.S. the smaller Hawaiian Islands and other more small islands (San Juan Islands?) or remote (usually landlocked) countries like Bhutan, Nepal, Liechstenstein(?)
Locals have gotten used to paying a lot for a little, as almost everything has to be trucked in from big towns up and down the coast. A twelve-pack of Budweiser costs nearly $15, and a small coffee at the general store is more expensive than at the average Starbucks. ... “You’re paying for the view,” said Brian Boyer, another of the service attendants at Amerigo. “And the entertainment.” ... And Gorda is not alone in pricey petrol along the coast. In Cambria, 35 miles south, the price of regular at the Chevron station was $3.95 on Tuesday. In Big Sur, the tourist-friendly hideaway 40 miles north, a gallon of regular went for $4.80 at one Shell station.
It's more than just the view that makes everything cost more - it's also the remoteness. I'm thinking of small island economies that need to have everything shipped in e.g. Maldives, Fiji, or closer to the U.S. the smaller Hawaiian Islands and other more small islands (San Juan Islands?) or remote (usually landlocked) countries like Bhutan, Nepal, Liechstenstein(?)
What makes a Mandarin Oriental a Mandarin Oriental?
Or a Four Seasons a Four Seasons -- not to the customer. Well, yes partly to the customer. In other words how do these hotels maintain a high level of service. Being a service oriented trade means relying on its workers to provide the service. Do these workers get paid more than say, a hotel employee at a Best Western? Or do the hotels rely on more workers but still at low pay and use a "management style" that trains the staff to be more attentive?
Likewise, is being a waiter at a Morton's different than being a waiter at an IHOP? What kinds of people work as waiters at Morton's vis a vis a Perkins? Is there self selection or selection by the restaurant such as in a matching game?
Likewise, is being a waiter at a Morton's different than being a waiter at an IHOP? What kinds of people work as waiters at Morton's vis a vis a Perkins? Is there self selection or selection by the restaurant such as in a matching game?
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