April 17, 2011

Higher Education: The latest bubble?

"... higher education fills all the criteria for a bubble: tuition costs are too high, debt loads are too onerous, and there is mounting evidence that the rewards are over-rated. Add to this the fact that politicians are doing everything they can to expand the supply of higher education (reasoning that the "jobs of the future" require college degrees), much as they did everything that they could to expand the supply of "affordable" housing, and it is hard to see how we can escape disaster."




After 4 years of going from one grad school to the other, I read this article with a certain degree of nervousness. Take a look: GO TO ARTICLE HERE

April 16, 2011

Financial Regulation, Economic Growth and the Effects of the Basel III Regulatory Framework


Financial industry leaders and free-market advocates have argued that the Basel III capital requirements regulation will have a significant impact on banks operations. The general expectation is that the regulation will generate a large contraction in lending activities that will ultimately result in a negative impact on economic growth.

In economics, the relationship between a highly developed financial system and economic growth has been a central topic for economic research. In the early stages of macroeconomic studies, many economists observed that there is a positive correlation between a large financial system and GDP growth. The idea is that a well-developed financial system will foster lending to productive activities, acting as an engine for economic development. However, other economists argue that the causal relationship between the variables is not clearly established, debating that a large financial system will only develop as a consequence of economic progress.

In a more recent set of academic articles there has been an attempt to establish a causal link between financial development and economic growth. There is now sufficient scientific evidence to say that a large financial system plays a crucial role in economic development. However, with the recent financial crisis, the academic community has become skeptical about the true nature of the causal link between finance and economic growth. For example, many economists from the US are studying the financial crisis observing that when the financial sector becomes disproportionally large compared to other productive sectors in the economy, the causal relationship that goes from financial development to economic growth is no longer sustained. Furthermore, it is empirically clear from the financial contagion triggered by the subprime mortgage crisis, that the effects of modern financial innovation (securitization practices) can have a devastating impact that transcend national boundaries and affect the global economy.

In the light of the recent financial crisis and in an attempt to make the international financial system safer, the Basel Committee for Banking Supervision established (in July, 2010) the normative for target ratios and capital requirements to which banks must comply to maintain sustainable risk levels. Also, it established the timeline to reach the specific liquidity and risk management requirements desired under the Basel III regulatory standards. The impact of the regulation is to be expected substantial and to significantly affect the functioning of the international financial system. In particular, it is expected that the ROE of European Banks will decrease up to 4.5% from its pre-crisis level of 15%. Also, it is believed that European Banks will compensate by decreasing costs in the form of layoffs that would further impact the macroeconomic balance of the EU. Cost rises may be expected to pass on to customers as expensive banking services and increased funding costs. Economically speaking, the total expected impact of Basel III implementation on GDP growth is about -0.15% annually.

On the other hand, the long run socio-economic impact of the Basel III normative is seen as positive. In the short run, it is expected that the lending spreads could increase by 6 basis points for each 1% increase in the capital ratio requirements, assuming that banks will level their ROE at 10%. Nonetheless, the potentially catastrophic effects of a new financial crisis are many times higher that the short run effects of higher costs of funding. In fact, a financial crisis can permanently deviate GDP growth from the trend and the economy may not be able to recover or catch up to the previous direction in the short run. Banks on the other hand, have more pessimistic side of the story and argue that smaller banks will significantly suffer from the regulation and pay for the wrongful doing of large multinational investment banks. Furthermore, the financial industry has argued that the new capital requirements will deeply affect bank profits and lead to a reduction of lending with negative consequences to the economy. While it is not certain that higher capital ratios will decrease banks profits, most economists agree on the fact that is most necessary to establish regulatory mechanisms in order to avoid a new financial crisis that could severely damage the global economy.

The general consensus agree on the fact that a solid financial regulation framework that ensures that no financial player has sufficient risk to put in jeopardy the whole system, is necessary to avoid over speculation and poor risk assessment. Under such a view, the long term safety and stability of the financial system more than compensates for the short run costs of regulatory implementation and the slowdown in GDP growth.

References:

Arcand, JL, E Berkes, and U Panizza (2011), “Too Much Finance?”, unpublished.

McKinsey & Co. (2010), "Basel III and European banking: Its impact, how banks might respond, and the challenges of implementation"

April 12, 2011

Which countries are most in favour of the free market?

Interesting infographic taken from The Economist/blogs. You can read the full article here.

It calls my attention to see that Italy is moving up in the chart and now is in the fourth position ahead of the US. However, only 20% of Italian respondents believe that the free-market model is the best way for the economy to go.

First place goes to Germany which is the most competitive economy in Europe. In Germany almost 30% of German respondents believe that free-markets work best.

April 10, 2011

Top 20 Articles in Economics by The American Economic Review (AER)

On February 2011, the American Economic Review (AER) reached its 100 anniversary. Established in 1911, the AER is among the oldest and most respected scholarly journals in the economics profession. A journal where only the most respected scientists publish their articles.

To celebrate this occasion,  economists like: Kenneth J. Arrow, B. Douglas Bernheim, Martin S. Feldstein, Daniel L. McFadden, James M. Poterba and Robert M. Solow, had the responsibility of selecting the "Top 20" articles published during its first 100 years. The selection criteria was based on  sheer intellectual quality, influence on the ideas and practices of economists, and general significance or breadth. 

The list of the selected (Top 20) articles can be found here. There is also a direct link to each of the winning articles in the link above. 

It is Interesting to see that most of the articles belong to Nobel Prize winners (12 out of 20). 

Luckily, I had the change to review many of them during my immersion in Economics. I hope you find them instructive as I did. Enjoy!

CO2 abatement: Exploring options for oil and natural gas companies

This a very interesting article about carbon emission and the oil & gas industry from McKinsey Quarterly. You must subscribe to reed it ... but the subscription is free! just click on the link below and follow the steps:

" ... Oil and natural gas companies play a central role in CO2 emissions. How can the industry meet the challenge from climate change regulations?" 


Read Article Here