EU Commission Authorities Protecting The Greeks

We should thank the European Commission competition authorities for doing the obvious, something that the Greek authorities did not do, for the usual reasons of collusion and corruption. I am of course talking about the proposed merger between two of Greece’s largest airlines, Aegean and Olympic Air. The competition authorities declined the proposition on the grounds that it would create a monopoly. They state,

“This would have led to higher fares for 4 out of 6 million Greek and European consumers traveling on routes to and from Athens each year.”

It is interesting that the commission rarely uses its veto on mergers. You may read the article here.

Burton Malkiel’s Interview About Efficient Markets

The Stock Market Is Here

It has been a great come back! Motivated by today’s crossing of DJIA of the 12,000 level, which with certainty is going to be heralded in the media, I wanted to remind a few facts. First, where were we before we get into this mess? We (DJIA) hit a level of 14,093 on October 8, 2007. Then we landed at 6,626 on March 2, 2009, and since then we have been going up and up until today we crossed the 12,000 mark. If you ask me where it is going to go, I will have to say that “I do not know”. However, it is more likely that will go higher than lower. Apart from the ongoing slow worldwide economic recovery, an important factor that can affect significantly the “near” future market returns is the positive feedback by the media. The index is climbing higher with no big hiccups and quite low volatility, VIX is at  16.71, a level we crossed, moving upwards, in July 2007 and we revisited in October 2007, as well as a few other times since then, which was the market’s high. For all these reasons, I see an upward movement in the overall market as being more probable than otherwise, even though the fact that we have not seen any serious disruptions in the up-trend makes me cautious. The market is back, good news come from a lot of directions, the news will be heralded, the hype may catch on again, the market probably will continue higher, but be cautious about when a correction, or a turn may come. The turn is not very probable. For it to happen, the bad news will have to be quite significant.

Sheer Regulators’ Incompetence

The failures of SEC in identifying Ponzi schemes or even following up after people pointed them out to the authorities are known and monumental. So, perhaps one more failure would not be of surprise or worthy to be mentioned. However, here I report the latest one, the failure to uncover a 500 million Ponzi scheme run by Westridge Capital Management that lasted more than a decade, in Los Angeles.

Other notable failures of SEC officials to uncover such practices include the Madoff scandal. Here are some older articles on the subject. Article 1, article 2.

With all this new regulation in place, the question that we still have to answer is who is going to do the job. It is not merely a matter of less regulation, but of sheer incompetence of people to perform their tasks, that brought us, to a big extent, where we are today.

A Paper on Greece’s Woes

My appointment at NYU has taken a toll on my time devoted on this blog. However, here is a paper I meant to include in the information about Greece’s economic problems. The article, written by well known academics Meghir, Vayanos and Vettas, not only identifies the causes of the Greek crisis but also proposes measures in order to get out of it as fast as possible. Hope you enjoy it.

Bar Stool Economics

This fictitious story has circulated a lot through emails, however I find it worthwhile to be posted here. 

Suppose that every day, ten men go out for beer and the bill for all ten comes to $100. If they paid their bill the way we pay our taxes, it would go something like this:

The first four men (the poorest) would pay nothing.
The fifth would pay $1.
The sixth would pay $3.
The seventh would pay $7.
The eighth would pay $12.
The ninth would pay $18.
The tenth man (the richest) would pay $59.

So, that's what they decided to do. The ten men drank in the bar every day and seemed quite happy with the arrangement, until one day, the owner threw them a curve.
"Since you are all such good customers", he said, "I'm going to reduce the cost of your daily beer by $20". Drinks for the ten now cost just $80.
The group still wanted to pay their bill the way we pay our taxes so the first four men were unaffected. They would still drink for free. But what about the other six men - the paying customers? How could they divide the $20 windfall so that everyone would get his "fair share?"
They realized that $20 divided by six is $3.33. But if they subtracted that from everybody's share, then the fifth man and the sixth man would each end up being paid to drink his beer. So, the bar owner suggested that it would be fair to reduce each man's bill by roughly the same amount, and he proceeded to work out the amounts each should pay.

And so:
The fifth man, like the first four, now paid nothing (100% savings).
The sixth now paid $2 instead of $3 (33%savings).
The seventh now pay $5 instead of $7 (28%savings).
The eighth now paid $9 instead of $12 (25% savings).
The ninth now paid $14 instead of $18 (22% savings).
The tenth now paid $49 instead of $59 (16% savings).

Each of the six was better off than before. And the first four continued to drink for free. But once outside the restaurant, the men began to compare their savings.
"I only got a dollar out of the $20," declared the sixth man. He pointed to the tenth man, "but he got $10!"
"Yeah, that's right," exclaimed the fifth man. "I only saved a dollar, too. It's unfair that he got ten times more than I!"
"That's true!!" shouted the seventh man. "Why should he get $10 back when I got only two? The wealthy get all the breaks!"
"Wait a minute," yelled the first four men in unison. "We didn't get anything at all. The system exploits the poor!"
The nine men surrounded the tenth and beat him up.
The next night the tenth man didn't show up for drinks, so the nine sat down and had beers without him. But when it came time to pay the bill, they discovered something important. They didn't have enough money between all of them for even half of the bill!

And that, boys and girls, journalists and college professors, is how our tax system works. The people who pay the highest taxes get the most benefit from a tax reduction. Tax them too much, attack them for being wealthy, and they just may not show up anymore. In fact, they might start drinking overseas where the atmosphere is somewhat friendlier.

Beware Of Greeks Bearing Bonds

Here is the article by Michael Lewis on the Greek crisis and its origins. A very good read.

Alekos Papadopoulos’ Truths

Still, after more than 12 months since the beginning of the crisis in Greece, Greeks do not want to realize the situation they are in. Alekos Papadopoulos though, ex minister of finance, takes up the role of letting the public know how bad the situation is in Greece – something the politicians still do not want to reveal to the public -- and what is needed in order to to have a chance after many years of austerity and recession. Here is a must read article of a short version of  Alekos Papadopoulos talk at ELIAMEP, in Greek.  The whole speech can be found here. Some of the measures he proposes are:

“Σύμφωνα με μελέτες, το 30% περίπου του σημερινού κράτους είναι περιττό. Γι’ αυτό πέρα από τις καθολικές αποκρατικοποιήσεις των δημοσίων επιχειρήσεων προτείνω όλως ενδεικτικά την άμεση κατάργηση τμημάτων πανεπιστημίων και ΤΕΙ, δημοτικών επιχειρήσεων, ατροφικών νομικών προσώπων δημοσίου και ιδιωτικού δικαίου, άεργων διπλωματικών αντιπροσωπειών, στρατοπέδων, συγχώνευση μητροπόλεων, κατάργηση απολιθωμένων κρατικών υπηρεσιών, αποκεντρωμένων υπηρεσιών και γενικών γραμματειών διαφόρων υπουργείων. Περιορισμό του μεγάλου αριθμού στρατηγών, ναυάρχων, πτεράρχων και ταξιάρχων των ενόπλων δυνάμεων και των σωμάτων ασφαλείας, περιορισμό του πολυάριθμου διδακτικού προσωπικού με αύξηση των ωρών διδασκαλίας, δραστική περικοπή κατά 70% τουλάχιστον των πολυάριθμων Γενικών Διευθυντών και Διευθυντών υπουργείων και οργανισμών, δραστική μείωση του μεγάλου αριθμού των αντιπροέδρων των Ανωτάτων Δικαστηρίων και τέλος εξορθολογισμό ή κατάργηση και άλλων πολυάριθμων αφανών δημοσίων καταλυμάτων, τα οποία περιθάλπουν χρόνια τώρα τον κρατικό ανορθολογισμό”.

Two Opposite Articles On WSJ

Here are two opposite articles on WSJ published on the same day. The first one, accuses the FED’s policy for bringing into a difficult position Brazil and the rest of the world, and even accuses the U.S. for mindlessness and purposeful action to damage the other countries. The second one, explains that buying medium to long-term Treasuries is a valid monetary policy of the FED in order to stimulate the economy. The first one is written by a journalist. The second one by Alan Blinder, economics professor at Princeton. Who speaks logic is your call. Just read them.

World’s Debt

The above picture, published in the Economist shows the levels of government debt in 1932 and 2009. Another very interesting interactive page provided also by Economist, is the one that shows the levels of debt as well as the the measures of debt per person and the debt as % of GDP, for the globe for the last 11 years. It can be found here.

The Evolution Of The Greek Debt From The 60s

Greece’s 2010 Deficit At 9.3%

Greece’s deficit for 2010 has been revisited upwards to 9.3%, much higher than the 7.8% target for 2010. An article in Greek.

China’s Dagong Credit Rating Firm Lowers U.S. Credit Rating

China’s Dagong credit rating firm lowers U.S. credit rating from AA to A+. At the same time Moody’s rates the U.S. credit at AAA, the highest credit rating according to the same firm. You can read about today’s developments on Bloomberg, on Barrons, on MarketBeat and other sources.

Even though the reasons why the credit rating of the U.S. may come under pressure is self evident, it is interesting to see how the articles treat the downgrade by the Chinese firm. They clearly state that their downgrade may be politically motivated and connected with the exchange rates war that is currently ongoing.

Bloomberg’s article mentions that Dagong’s application to become a Nationally Recognized Statistical Rating Organization in the U.S. was denied by the SEC. And Barron’s article mock’s the logic of Dagong’s report that the U.S. has been using the “virtual” financial economy to improve its GDP numbers.

El-Erian On Bloomberg About Greece

In a conference organized by the magazine Economist El-Erian, the CEO of PIMCO, talked about the choices of Greece and the likelihood of default. The Bloomberg article can be found here. In El-Erian’s own words:

“It’s in Greece’s interest to default as long as you can contain the contagion to other countries and it is done through orderly restructuring and repricing to retain competitiveness. Like Latin America’s “lost decade” in the 1980s, the alternative doesn’t promise growth and employment generation,” he said.

“I have never seen an 11 percent adjustment on the fiscal side being delivered” under the current program’s assumptions, said El-Erian, who worked at the IMF for 15 years. “Eleven percent is heroic.”

“The fiscal adjustment that Greece needs to do is unprecedented,” Giada Giani, senior European economist at Citigroup Inc., said at a conference in Brussels today. “There is a limit to the amount of fiscal tightening a country can bear and support without the tightening becoming self-defeating, so detrimental for economic growth that it doesn’t really deliver an improvement.”

I Am Not Alone

Krugman annoys others, too. Not just me. I just came across a piece by David Backus, a professor at NYU Stern, which describes his irritation by Krugman. I cannot agree more with David when he says that.

“And to be fair, there are two Paul Krugmans.  I admire the brilliant expositor of economic ideas.  I’m less enchanted with the political partisan who can’t resist using cheap debating tricks in what could be a useful exchange of ideas.  Even worse, he sometimes mixes the two, disguising politics as economic analysis.”

Negative TIPS Yields!

Indeed it sounds as impossible, but it is a reality. Even though it initially sounds as a very-very bad thing about the economy, it is the opposite. It means that investors believe that we will have inflation and they even accept a negative yield. So strong is their belief that prices will increase. This may prove right or wrong. This conviction is definitely due to the QE2. TIPS investors bet that the program will work and we will have inflation. Remember that for TIPS the face value is not fixed, like in Treasuries. The face value increases or decreases according to the inflation rate. Hence, negative yields can exist and it can be rationalized by a big probability of inflation, or higher values of inflation than previously thought, or both of the above.

Here I give some articles on this phenomenon. Article in Yahoo!Finance, in Bloomberg, in Reuters and in FT.

Roubini about Greece and Europe

An article with the interesting opinions of Roubini on Greece, Europe and Euro. The article is in Greek.

Pissarides, Azariadis and Ioannides’ Article On Kathimerini

In Kathimerini.gr the Nobel laureate economists Christopher Pissarides together with economists  Costas Azariadis and Ioannis Ioannides give their opinions on what the policies that will bring the Greek economy out of its dark state are. The main emphasis is on policies that enhance growth by making structural reforms in all the economic activity in the country, enhancing the private sector by reducing corporate taxes and by convincing the public that an unprecedented effort to transform the whole country is taking place in order to get behind these efforts themselves. In the article you will find a lot of interesting data about the Greek economy. The article can be found here and it is in Greek.

A Greek Cypriot Along With Two Americans To Receive The Nobel Prize In Economics

Christopher Pissarides, a Greek Cypriot born in Nicosia and faculty at LSE was awarded the Nobel prize in economics for 2010, along with Peter Diamond from MIT, and Dale Mortensen from Northwestern University, for their contributions in search theory and its applications. The Swedish Royal Academy of Sciences stated that they are nominated the prize “for their analysis of markets with frictions”.

Here is the link to the official announcement and here is the official document from the prize committee highlighting the contributions of the prize recipients.

The Real Estate and Credit Meltdown Discussion From USC

A good discussion that took place before I start my blog but I think it is good to include in order to get a better understanding of what happened, where we are, and where we are heading.