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Some UAE banks are seeing up to 2,500 customers leave the country every month without paying off their credit card bills, a number that could rise in June, a senior RAK Bank official said on Sunday…
RAK Bank recovers around a quarter of the debt that goes unpaid as a result of one of the customers leaving the country, Martin said.
I’m surprised the recovery rate in these cases is as high as 25%, frankly: chasing down debtors who live abroad is non-trivial and always expensive. But then again, I’m sure that many of the credit card balances in question are pretty enormous: as Julie Sherrier notes, Dubai is known as something of a shoppers’ paradise. If the credit card debt rises into six figures, which I’m sure it does on occasion, it’s be worth fighting for.
In the blogosphere, 2=trend, and recently two high-profile financial journalists — Alan Beattie of the FT and Justin Fox of Time — have come out with heavyweight new books of economic history. Beattie’s False Economy looks at global development, while Fox’s The Myth of the Rational Market looks at the history of the efficient markets hypothesis. What I didn’t know until today was that Beattie and Fox are both distant relatives of misguided liquidationists — something which came out when I asked them both about economic history.
How relevant is economic history at times like this, I asked. Can studying history prevent us from repeating past mistakes, or does it just end up forcing us into committing new ones? And how much of a good thing is it that an economic historian is chairman of the board of governors of the Federal Reserve?
Beattie replied first:
- yes, I think it definitely helps when looking at such once-in-a-century events to have a discipline which focuses on specific similar episodes in the past, not least because the sample size is so small. And that does seem to be having some effect on the policy response now. Despite the best efforts of some, I don’t think the Montagu Norman/Andrew Mellon liquidationist instinct or the 1930s “Treasury view” on deficit spending are getting much serious traction in the US or UK, for example. (Irrelevant trivia: I am very distantly related by marriage to Andrew Mellon – something like a third cousin three times removed. She divorced him in a spectacular case involving all sorts of legal shenanigans and managed to walk off with a sizeable chunk of the Mellon loot, though not a nickel has trickled down to me.)
- but of course you need to learn the *right* lessons and pick the right comparator. the current German reluctance to increase fiscal stimulus, for example, seems to be assuming that this is a 1920s/1970s inflationary situation, not a 1930s deflationary one.
- it is good that an economist *who is also an economic historian* is Fed chairman. Not sure you’d want someone who was reading entirely out of the previous playbooks without also being able to recognise that the monetary transmission mechanism has changed out of all recognition. The General Theory is a bit light on what to do about credit default swaps, for example.
Then Justin weighed in:
My book is basically the story of a bunch of guys who decided to ignore financial market history (the dodgy parts, at least) in order to create more elegant models of financial markets’ future. That didn’t work out so well, so yeah, knowing economic history would seem to be useful. But Alan’s right that there are lots of different lessons that can be drawn from the past, and sometimes people draw the wrong ones. I too am related to a liquidationist, by the way—George Washington Norris, the hard-line president of the Philly Fed in the early 1930s, was my great great uncle.
On Bernanke, I’d certainly rather have somebody with his background in that job than an ahistorical rational expectations type who believes bubbles and panics don’t happen. He’s not really a historian, though. He’s a macroeconomist who’s done some research on the financial system breakdown of the early 1930s. He’s worked really hard to avert such a breakdown over the past two years, and on balance that’s a good thing. But he hasn’t really been a student of what causes financial crises in the first place. Still, he’s an open-minded guy who reads a lot, so maybe he’ll figure it out.
I’d be interested in what Brad DeLong — one of the foremost economic historians of our own time — thinks about whether the “Treasury view” is getting much serious traction — I suspect he might have killed it before it had a chance to spread widely, and it certainly doesn’t seem to have been mentioned much since January 20. And in general I think that economic historians are having something of a day in the sun right now, with lots of people looking back to previous economic crises around the world, and fewer people finding modern theory-based economics particularly helpful from a policymaking perspective. Maybe economic history is a classic countercyclical asset.
Update: Brad DeLong comments:
The “Treasury View” that fiscal policy will be ineffective–well, in the past two months I have seen it advocated by Pete Klenow, Luigi Zingales, Michele Boldrin, Niall Ferguson, and Nobel Prize winners Gary Becker, Edward Prescott, and Robert Lucas. Of these, only Pete Klenow had even a half-coherent argument.
I’m fascinated that after roundly rejecting GM’s offer to swap their bonds for equity in the existing company, GM’s bondholders seem to have embraced with alacrity GM’s new offer to swap their bonds for equity in a new, post-bankruptcy company. It’s increasingly obvious, it if wasn’t clear all along, that the old exchange offer was in neither GM’s interest nor in that of the bondholders, and that bankruptcy is necessary to allow GM to shed certain obligations — especially obligations to its dealerships — which would otherwise hobble it for the foreseeable future.
The new plan essentially constitutes the nationalization of GM: the US government will own 72.5% of the common equity, plus another $2.5 billion in preferred stock. I can see why bondholders like it: the US will be extremely hesitant to let any state-owned company default, and it won’t sell off its stake until GM’s future viability is assured.
Everybody was worried that a GM bankruptcy would be vastly more complicated and fraught than the Chrysler bankruptcy, given that it has orders of magnitude as many creditors as the private Chrysler. But today’s news gives me some hope that both bankruptcies might go relatively smoothly, as planned and hoped. Although I still have no idea why GM’s shares are trading at over a buck apiece, valuing the existing common equity — which will be wiped out — at more than half a billion dollars.
From a narrow sovereign credit and ratings perspective, said Fitch’s David Riley, the huge spike in the US government deficit “is the right policy response”. His point was that we’re in a historically very rare period when both companies and households are deleveraging — they’re not borrowing, they’re not spending, and the government has to step in and make up the difference, lest we suffer an even worse recession and the destruction of massive amounts of value and potential economic growth.
If you’re worried about the ratings agencies’ view of the US government, then, (which you shouldn’t be), don’t worry about Fitch. Or at the very least, to the degree that Fitch does get worried about US creditworthiness, it would be even more worried were it not for the fact that the government is going to run a $2 trillion deficit this year.
David Riley, the head of sovereign ratings at Fitch, gave the first big presentation at the Fitch banking conference today — and quite rightly, too. The future of banking is inextricable from public finance and macroeconomics: looking at things on a bank-by-bank level ensures that you’ll miss the big picture. His presentation was a good one, and definitely worth blogging.
Riley’s message was simple, after a recap of what happened in the Great Depression and in Japan and in Sweden: the faster that governments move the better, and the stronger their initial response the better. Don’t worry, at least in the short term, about inflation, in an environment such as this one which is fundamentally disinflationary: instead, worry about a multi-year decline in the total quantity of bank credit, which will continue even after the recession has ended, and which will put a medium-term cap on future growth.
Riley was not impressed, in hindsight, with the ad hoc way in which policymakers first addressed the crisis, before Lehman’s collapse: the way they tried to put out fires at places like the monolines or Northern Rock or Bear Stearns, without really tackling the problems of the financial sector more generally.
After Lehman, however, there was much more system-wide intervention, with deposit guarantees being raised, the Fed injecting huge amounts of liquidity into the banking system and the economy as a whole, and the Treasury playing along too with TARP and all the rest. Post-Lehman, said Riley, the international policy response “has been pretty impressive, and well coordinated across countries”.
Interestingly, Riley noted that European households are much more reliant on bank financing than US households are: historically about 80% of their financing comes from the banking sector, compared to about 30% in the US. That probably explains why the Fed has been doing so much in the capital markets (and why the government needed to nationalize Fannie and Freddie), while the ECB hasn’t bothered. But Riley’s charts also showed that Europe is continuing to borrow — at lower rates than in the past, to be sure, but still significant sums — while the US household sector is actually paying down its debts these days, for the first time in living memory.
Riley said he’s not worried about inflation just yet, but that he will be worried about inflation if the government waits too long before unwinding its current fiscal stimulus efforts. On the other hand, it can’t do that too soon, either.
“I think that there is a serious risk that we get a W-shaped recession”, he said, with the current fiscal stimulus running its course over the next year and the economy falling back into recession. “As we saw in Japan,” he said, “if you tighten policy too soon, if you leave it too late, then you start getting concerns about solvency and inflation risk.” Guess he’s happy he’s not a central banker these days.
One of the more challenging and interesting aspects of being a financial journalist is trying to define terms like convexity and covariance for a lay audience — it’s not easy. So I was particularly taken with Justin Fox’s one-sentence definition of alpha in his new book on the efficient markets hypothesis:
Alpha is a portfolio’s performance minus the performance of a hypothetical benchmark portfolio of equivalent risk.
Elegant, eh? It’s a shame, in a way, that it arrived just as the reputation of CAPM is hitting new lows and the race for alpha is looking increasingly laughable.
Since moving onto Twitter, I’ve pretty much stopped the daily linkfest, moving the quick hits onto there. But there’s no reason they shouldn’t continue to exist in blog format too. So here are some of my most recent tweets. Is there an easy way to automate this kind of thing?
# Pequot Capital closing. End of an era, but there won’t be too many tears.
# My new strapline, explained by Andrew Leonard
# Sotomayor’s a foodie! My mouth is watering, I could do with some lengua y orejas de cuchifrito right now
# The Manichean history of teabags and douches
# Moody’s said that the USA’s Aaa rating is stable “even with a significant deterioration in the US govt’s debt position.”
# I wouldn’t pay $2 at the newsstand for a print version of the daily NYT. Who would?
# Martin Feldstein knows from recessions. And he reckons this one won’t be over until 2010
# Mark Thoma has your daily Sachs vs Easterly-and-Moyo links. All very predictable and boring.
# Warren Buffett’s long-time excuse for not paying a dividend doesn’t work any more. But he’s still not paying a dividend.
# The comptroller of the currency is “totally unsuccessful”. Time for the entire OCC to go.
# Obama’s White House is just as addicted to needless secrecy as any other administration
# It has been Far Too Quiet of late… “maybe we are on the verge of a financial Krakatoa“
# Interesting S&P500/gas price chart — but what’s the significance of the 403 level?
# David Brooks Fail: Brad DeLong brings Godwin’s Law down on the hapless columnist
Allison Hoffman of the Jerusalem Post brings us up to speed on the Brandeis affair — if you haven’t been following it, the small Jewish university decided last year to close down its art museum and sell off its contents, only to backpedal desperately in the face of a massive public backlash. Where are we now? Well, the Rose is essentially dead — its donors have rescinded their pledges, artists are asking for artwork back, the director has been fired, and it has no chance of being able to raise a penny in new money any longer. That’s the downside, for Brandeis, whose own reputation has been trashed in the process. And the upside? Pretty much nonexistent: no art has been sold, no art will be sold for the next couple of years at least, and confusion reigns on campus and beyond.
A case study, in other words, in how not to make and implement hard decisions in the face of an economic crunch. Now, remind me why Jehuda Reinharz is still president?