Monday, July 5, 2010

Recent Readings

I recently finished two books: Superfreakonomics and Freefall. Very different of course, but both have interesting things to say. About the Levitt and Dubner's the one chapter on global warming its very interesting. The book overall is better than the first one. At least is more relevant in its topics and less anecdotic.

The Stiglitz's Freefall has interesting thoughts on what went wrong in the U.S. before and during the crisis, but is rather repetitive. Each chapter goes on and on how bankers and policy makers abused taxpayers with the bailouts. On the bright-side however, it explains really well all the informational problems that financial markets have. And all pending regulations to overcome this informational issues. In particular the chapter on reforming economics is interesting as a summary of how the macro science developed in the last thirty years and places over the table that frictions in financial markets should play a central role in modelling.

Superfreakonomics relies on the modern techniques of econometrics for empirical micro. I must say that even though there are updated references on the topic like the Angrist and Pishke's book causality issues are far from well developed as I see them. I'm no fan of econometrics anyway but at least economists are increasingly happy with the answers the counterfactual approach yields, that means that progress has been made (I'm not sure if current state of affairs is good enough).

If you read the Freefall book and you are interested in the new ways the macro should expand you will find valuable ideas. Just be patient while professor Stiglitz unload his fury on the "pure-market-believers". One thing I really dis-like about the book is its continuous reference to an unfair wealth redistribution from taxpayers to bankers. Is not that he is wrong. There was indeed a redistribution in the named direction. It is also true, however, that the U.S. economy has been living beyond its means. That is true for all economic activities and all income levels. My guess is that Raghuram Rajan's new book addresses the same topic from a more centered perspective.

It would be interesting to see if at some point in history taxpayers did not pick the tab after a banking crisis. I'm trying to learn about this in Reinhart and Rogoff's recent book. Mexico had its own episode of banking crisis in the second half of the 90's decade. And yes, taxpayers paid bankers' lack of care on credit allocation. Citizens lost their mortgaged homes. Credit card interest rates hit new historic ceilings. Long-story short, after fifteen years of the banking crash there is still outstanding debt issuance from the official entity on charge (IPAB). But just as true is the fact that there was no other way to fix the problem.

I'm a bit puzzled by the saying of Reinhart and Rogoff: the "This time is different" syndrome. Today Spanish banks are under pressure to get funds in international markets. This is a direct result from the fiscal deficit that Spain faces and the problems that Greece faced recently. Spanish banks are debtors of more than 50 per cent of Mexican savers. Whenever someone asks whether or not there will be problems for the Mexican subsidiaries the prompt answer is: this time is different. It may be so. In fact this banks may well manage to separate their business in each country they operate. The truth is nobody knows because there is no acces to their (full) balance sheets.

After serious thinking I find that is not possible to continue learning macroeconomics without looking at the financial crisis. Not only the current one, but to have a comprehensive view of them. To complement Reinhart and Rogoff's reading I choose Roubini's about the economy at crisis, he was one of the few that saw the crisis coming.