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Posts Tagged ‘Credit Markets’

University students sign petition over impossible economics exam

February 1, 2015 Leave a comment

A HT to Jane Hickey for this story about University economics exams. Final year economics students from the University of Sheffield are protesting vigorously about about their final exam as there were compulsory questions on topics which they had never been taught. According to the BBC one student said:

“We had been told it was not a maths-based paper.

“We feel misled and angry.

“Every part of the question was, ‘Calculate this, partially differentiate that.'”

Below is an image of the question.

sheffield eco paper

It seems that most major degrees in economics still focus on the neoclassical ideology and associates humans as perfectly rational walking calculators working out their utility for each purchase. The main model of consumer behaviour assumes that we never buy anything until we’ve calculated the impact on, for example, our retirement fund, and we’re so good at maths we use interest rates to compute our pleasure, over time, after buying something. However I know there is a movement for change in the composition of Economics Degrees which is discussed in the Diane Coyle edited book “What’s the use of Economics”, which examines what economists need to bring to their jobs, and the way in which education in universities could be improved to fit graduates better for the real world.

“US economist Philip Mirowski recounts how a colleague at his university was asked by students in spring 2009 to talk about the crisis. The world was apparently collapsing around them, and what better forum to discuss this in than a macroeconomics class. The response? “The students were curtly informed that it wasn’t on the syllabus, and there was nothing about it in the assigned textbook, and the instructor therefore did not wish to diverge from the set lesson plan. And he didn’t. In the 1970s at Cambridge “There were big debates, and students would study politics, the history of economic thought.” And now? “Nothing. No debates, no politics or history of economic thought and the courses are nearly all maths.”

Also have a look at this video from the New Economics Foundation – again it debates the value of mathematical models and neoclassical theory. Does the market actually reach equilibrium? I like Steve Keen’s comment – “the pirate obsession of Economics – they love X marks the spot”. It also includes Joseph Stiglitz, Gillian Tett, David Tuckett, Stephen Kinsella, John Kay, David Weinstein, and Dirk Bezemer.

Global Financial Instability Flow Chart

February 24, 2014 Leave a comment

Below is a flow chart that shows some of the causes of financial instability in the global economy. Below are the the main points:

* The mismatch in the banking system with regards to paying debt
* Low interest rates and lack collateral required means more lending
* Good debt – productive use in capital investment (however very limited in most countries)
* Bad debt – non-productive assets used for speculation purposes (popular with investors)
* Capital Flows – Governments can fund current a/c deficits with borrowing from overseas
* From this further increases in the supply of money and therefore lending.
* Ends with a property bubble.

Financial Instability

How The Economic Machine Works

December 3, 2013 2 comments

Very good video from Ray Dalio in which he believes that the three main forces that drive most economic activity are:

1) trend line productivity growth,
2) the long-term debt cycle and
3) the short-term debt cycle.

What follows is an explanation of all three of these forces and how, by overlaying the archetypical short-term debt cycle on top of the archetypical long-term debt cycle and overlaying them both on top of the productivity trend line, one can derive a good template for tracking most economic/market movements. While these three forces apply to all countries’ economies, in this study we will look at the U.S. economy over the last 100 years or so as an example to convey the Template.

University courses in economics – too much maths and not enough debate.

November 5, 2013 Leave a comment

Many thanks to A2 student Annie Huang for this article by Aditya Chakrabortty in The Guardian Newspaper. It discusses the fact that most major degrees in economics still focus on the neoclassical ideology and associates humans as perfectly rational walking calculators working out their utility for each purchase. The main model of consumer behaviour assumes that we never buy anything until we’ve calculated the impact on, for example, our retirement fund, and we’re so good at maths we use interest rates to compute our pleasure, over time, after buying something. He mentions the movie documentary “Inside Job” which showed how some of the best minds at American universities had been paid by Big Finance to produce research helping Big Finance. He tells the story of an economics lecturer being asked by students to discuss the Global Financial Crisis.

“US economist Philip Mirowski recounts how a colleague at his university was asked by students in spring 2009 to talk about the crisis. The world was apparently collapsing around them, and what better forum to discuss this in than a macroeconomics class. The response? “The students were curtly informed that it wasn’t on the syllabus, and there was nothing about it in the assigned textbook, and the instructor therefore did not wish to diverge from the set lesson plan. And he didn’t. In the 1970s at Cambridge “There were big debates, and students would study politics, the history of economic thought.” And now? “Nothing. No debates, no politics or history of economic thought and the courses are nearly all maths.”

Click below for the full article.

Mainstream economics is in denial: the world has changed

Also have a look at this video from the New Economics Foundation – again it debates the value of mathematical models and neoclassical theory. Does the market actually reach equilibrium? I like Steve Keen’s comment – “the pirate obsession of Economics – they love X marks the spot”. It also includes Joseph Stiglitz, Gillian Tett, David Tuckett, Stephen Kinsella, John Kay, David Weinstein, and Dirk Bezemer.

5th Anniversary of Global Financial Crisis

September 14, 2012 Leave a comment

August 2008 signified the start of the GFC when the French Bank BNP Paribas froze three money market funds which had taken heavy losses on US subprime mortgages. Immediately the ECB and the US Fed entered the fray and injected cash of 90bn to ensure that bank lending didn’t grind to a halt. The subprme debacle was merely the first in a series of major failures.

Keynes said in 1931

“We are today in the middle of the greatest catastrophe – due almost entirely to economic causes – of the modern world”

When Lehman brothers collapsed in 2008, even cautious forecasters expected recovery in three or four years. However, governments are grappling with an appropriate policy that will achieve growth when you are trying to implement austerity measures at the same time.

Even in 2007 the US the Fed was concerned about the looming threat of a credit crunch and proceeded to drop its key borrowing rate by 50 bps to 5.75%. Although soon after Ben Bernanke stated that the housing market collapse would have a limited impact on the economic growth in the economy. Bernanke obviously was too optimistic about the state of the US economy and soon after the Lehman Brothers collapse the credit crisis had officially begun.

Total debt levels in the US, UK and the eurzone are now higher than in 2007.
We are currently seeing soft data in all three time zones. The Week magazine came up with some thoughts about this:
* Too much saving – the results of exorbitant imbalances in trade and capital flows
* Asia’s saving growth flooded the global bond market, which enabled the West to continue running huge current account deficits until the economy was slowed.

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Kevin Slavin: How algorithms shape our world

March 28, 2012 2 comments

Although I have mentioned this TED talk on a previous post – The Fear Index – I thought it deserves a separate post for people to view the presentation.

Kevin Slavin argues that we’re living in a world designed for — and increasingly controlled by — algorithms. In this riveting talk from TEDGlobal, he shows how these complex computer programs determine: espionage tactics, stock prices, movie scripts, and architecture. And he warns that we are writing code we can’t understand, with implications we can’t control.

The mathematical equation that caused the financial crisis?

February 17, 2012 Leave a comment

The Black-Scholes equation (see below), named after economists Fisher Black and Myron Scholes, brought a new dimension to derivative trading on financial markets. It enable traders to price derivative contracts before they matured – The Guardian likened it to “buying or selling a bet on a horse, halfway through the race.” The equation itself wasn’t the problem as its limitations were clearly defined, however it was how it was used in the market that brought about the complications. The equation became the industry-standard way of assessing the value of derivatives before they matured but this also led to derivatives themselves becoming commodities that could be traded in their own right.

According to The Guardian, by 2007 the international financial system was trading derivatives valued at one quadtrillion dollars a year – 10 times the total value of all products made by the world’s manufacturing industries over the last century. The drawback of the equation was that it made things even more complicated and companies employed financial engineers (mathemeticians basically) to analyse the markets. However the system came unstuck when markets became irrational and reliability on the equation was lost.

Over the last century the later part of financial crises tend to have been caused by herd mentality. This makes markets extremely volatile to sudden booms and slumps in prices.

“By studying ecological systems, it can be shown that instability is common in economic models, mainly because of the poor design of the financial system. The facility to transfer billions at the click of a mouse may allow ever-quicker profits, but it also makes shocks propagate faster.”

However, the equation wasn’t the major cause of the financial crisis. There are other variables that were influential namely:

– regulatory framework did not keep pace with financial innovation
– predatory lending – enticing borrowers to enter into “unsafe” or “unsound” secured loans
– easy credit conditions – very low interest rates
– housing bubble – the average US house price increased by 124% between 1997-2006
– financial Institutions became highly leveraged, increasing their appetite for risky investments and reducing their resilience in case of losses

According to Ian Stewart in The Guardian:

“the system is too complex to be run on error-strewn hunches and gut feelings, but current mathematical models don’t represent reality adequately. Teh world economy needs an overhaul and requires more mathematics not less.”

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