A European Banking Union

"As for the space shuttle Challenger that exploded because of a tiny O-ring seal failure in the right rocket, banking union would be as effective as its weakest component."
Jean Pisani-Ferry, Financial Times 18, September 2012

Discuss

"Religion and art spring from the same root and are close kin. Economics and art are strangers." - Nathaniel Hawthorne

Ngozi Okonjo-Iweala's vision of the world bank

The financial times today contains a tribune from Ngozi Okonjo-Iweala a Nigerian political woman who was educated at Harvard, MIT and represents the changing face of the World Bank. She is currently the Finance Minister of Nigeria. Her interview with the institution was held yesterday. 


As she writes, nearly 70 years after the creation of the World Bank the world has changed. Where emerging countries were once dependent on the World Bank they have grown to be world powers and real players on the international economic scene.  

The other two candidates are José Antonio Ocampo, a Columbian economist and political figure who is currently a Professor of Professional Practice in International and Public Affairs and Director of the Economic and Political Development Concentration at the School of International and Public Affairs, Columbia University. His interview is being held today. 


The final candidate is Jim Yong Kim a Koran-American physician who is the incumbent President of Dartmoth  College, the first Asian-American to assume the post of president in an Ivy League institution. His interview will be held tomorrow. 


After first hearing the news that Jeffrey Sachs contemplated this role, another American in a long line,  (apart from one American-Australian, James Wolfensohn) how things have changed in the last few weeks. The future of the World Bank is surely changing and it will certainly start from within. 

Through the looking glass

“The quiet revolution” by Alan Blinder still has something to teach us. Although a little older, 2004, which in this world of whirlwind legislative change could render Blinder’s book obsolete Howard Davies says we should read it, and so read it we shall.

Central banks have been notoriously opaque, although of course things are changing. Consequently, in the footsteps of Lewis Carroll, we have been drawn through the looking glass of central banking. Many newspaper articles, papers and statements have repeatedly told us that transparency is good and so we've been persuaded that seeing what’s on the other side would indeed be beneficial. Why is that though? What benefits does this actually bring? What exactly waits for us on the other side of the looking glass.

Well, when it comes to central bank transparency Blinder comes to the rescue. He reminds us why both politically and economically transparency is a positive thing.

Politically he states that making the central bank more transparent enhances democratic accountability and also proves the quality of monetary policy. He does indeed remind us that a central bank is a democratic institution. It’s logical when you think about it - it’s there with the authority of the government and the government and the government are there with the power of the people. It is commonly created by an act of legislature or parliament, the ECB having been created by an international treaty is an exception to this rule. Interestingly, it’s not accountable to the government of any country. The improvement of monetary policy comes from the clarity of objectives which are set out when a bank is forced to be transparent.

Economically his argument centres around this. Central banks work their will by manipulating some very short-term interest rate, they are actually of little consequence but clear the market in which over night reserves are lent inter-bank. What does matter however is that these changes somehow influence the interest rates and asset prices that really matter (bank loan rates, corporate bond rates…) The links between these two however are sometimes quite loose. If then, through transparency we can strengthen these links the effects of monetary policy on the economy would be more predictable – and boom we’d have a more effective macroeconomic stabilizer.

What’s more interesting, and which is always fascinating about markets is the role of expectations. He states that actually since the policy of the central bank plays on expectations then by training the market about expectations would indeed help to increase the effectiveness of policy. And how can we achieve this, guess what, through transparency. By moving the hoop clearly and in a predictable way he feels the lion is more likely to jump where the central bank wants it to.

So, a few of Blinder’s thoughts, about why central banking transparency is beneficial. Why indeed going through the looking glass is so appealing and that hopefully the world that awaits us on the other side is not so crazy and topsy-turvey but in fact the reality we’re waiting for. Who know’s maybe Alice is looking in and we’ve been on the wrong side all along.

Blinder, Alan S., The Quiet Revolution, Yale University Press, 2004.

Playing Games

So we’ve got ourselves 1000 Sciences Po students, 200 courses, a choice of around 9 courses and a multitude of timetable combinations. Do these course choices manage to escape the realms of Game Theory. Not likely, add to that mix that you have a whole range of emotions and payoffs to take into account and I think we’ve got ourselves an interesting Game to analyse.

That’s right our course choices are a game – In the words of Mary Poppins – oh yes I’m quoting Mary Poppins - “In every job that must be done, there is an element of fun. Find the fun and *click* the job’s a game”.

Let’s simplify things and see what we come up with. I’ve taken two hapless students and placed them in separate rooms, just to add atmosphere to the situation. They can choose between three courses.

So what have we got:
Players: all students I = {1,2}
Strategy Sets: Si = S1 = S2 = {Maths, Security}
Payoffs:
Player 1 Maths: + 7 career,  - 4 hates maths, + 3 good teacher
Player 2 Maths: +7 career, + 2 likes maths, +3 good teacher
Player 1 Security: +3 career, +5 likes subject, +1 ok teacher
Player 2 Security: 0 career, +3 likes subject, +1 ok teacher
Player 1 and 2: Maths, Maths, (+10 player 1 – work together)(+5 player 2)
1. Maths 2 Security (-1 player 1 – work alone)(0 player 2)
2 Security 2. Maths (+0,+0)
Security Security (+2, +2) camaraderie.

			Student 2
		Maths	Security
Student 1	Maths	(16, 17)	(5, 4)
	Security	(9, 12)	(11, 6)

So which one should they choose?

(For those who haven’t seen the match please look away now)

Through iterated deletion of dominated strategies student two will choose Maths so there’s only one Nash Equilibrium – Maths, Maths.

Next term when you’re choosing your courses, remember don’t worry, it’s all just a game… and furthermore that’s how you ended up with ‘that’ class!

Lazy thinking

At first I just wanted a space to talk about what I’d done that week then I thought about it a little bit more.

“Any man who reads too much and uses his own brain too little falls into lazy habits of thinking” Einstein

Now, according to Freedman who explores Chicago Fundamentalism “Economists can’t read”. Does that mean “economists” or “economic policy thinkers” can escape these lazy habits of thinking? Not so quick.

We now have a double problem. “Economists cannot write because economists have never learned how to read”, and they still may be doomed to lazy habits. (1)

Freedman highlights a fundamental problem that economists, and academics, do not usually read what’s on their page. They become trapped in a world of simple literacy where picking up a book means just reading words and finding arguments means hand picking those that support your own. Consequently, opponents arguments are banished to the arena of illogic and the thought process becomes lazy.

Perpetuated by the rigid editorial work of renowned journals, and what seems to be the style that journal consumers demand, economists have developed a “lame rhetoric”.

A remedy for lazy habits and lame rhetoric is not hidden in the Amazonian rainforest. It comes from intellectual practice based on intellectual liberty. A potion of reading, really, writing, unabashedly, and thinking openly could be the remedy of these problems.

Consequently, this space is to try and overcome this. Not only that though, I’d like this space to be an open arena for thought. A place to:

• Discuss theories, concepts?
• Somewhere just to publish what you think
• Write down anything you want to clarify yourself.
• Anonymous or named, as you like?

Although I battle with the problem that so much of what is being written is hot air, after much consideration I started to realise we needed this hot air. First of all, from a selfish perspective, if you really want to internalise something you have to externalise it first. Secondly, real discussion, real thought only comes from continual debate. This is a humble place for all that.

(1) Freedman, Craig F. “Chicago Fundamentalism", Ideology and Methodology in Economics” World Scientific Publishing. Co. 2008. p. 285.