Monthly Archives: March 2008

The new GEM report is out

The Global Entrepreneurship Monitor (GEM) 2007 Executive Report is out.  One interesting (and disappointing) finding is that in Russia, low (the lowest of 42 countries surveyed) prevalence of entrepreneurship is combined with low (second only to Serbia) share of opportunity-driven (as opposed to necessity-motivated) entrepreneurship.  In other words, few people are involved in entrepreneurial activities, and of those who are, the majority does it simply because they see no other way to make a living…

Dani Rodrik on shortcomings of financial globalization

Dani Rodrik writes:

Why Did Financial Globalization not Deliver the Goods?

‘Cause let’s face it, it didn’t. It didn’t boost investment and growth in emerging market economies; it led to increased volatility; and it played an important supporting role in the current subprime mortgage mess.

I have a new paper with Arvind Subramanian which scrutinizes the reasons.

[Long quote omitted]

The paper does two things. First, it evaluates and critiques the latest generation of work in favor of financial globalization–mainly the writings of Rick Mishkin, Peter Henry, and Kose, Prasad. Rogoff, and Wei. Second, it argues that we need to understand the difference between saving- and investment-constrained economies in order to make sense of financial globalization. In investment-constrained economies–where investment is low not because of poor access to credit but because of low perceived return–capital inflows are at best ineffective, at worst harmful.

The distinction between saving- and investment-constrained economies is indeed important.  The question I have is, how do you become an investment-constrained economy in the first place?  Is it pure and simple financial repression, or are there any other factors at work?

Brad DeLong on trade, inequality, and China

Brad DeLong makes some very interesting points:

One of them, however, looks debatable:

There is a good chance that China is now on the same path to world preeminence that America walked 130 years ago. Come 2047 and again in 2071 and in the years after 2075, America is going to need China.

Personally, I have serious doubts about the first part. Judging by what little is visible to an outside (and linguistically impaired to boot) observer, China expends more resources on keeping itself a single country than it does on any sort of outward expansion, and has been doing so at least since late 1970s, when its forays into Vietnam were abruptly halted. Perhaps a better way to say it would be that China is now on the same path to world preeminence that Europe walked around 1500? But China is not fragmented enough for that; it is entirely possible that Britain became the superpower only because in many places its rule was considered a lesser evil than that of France or Spain. Who would play France and Spain to China’s Britain? But then, who says there will be a China in 2047 and again in 2071?

Historically, China consolidated either in response to external threats or after losing to external threats (in which case it was the foreign invaders that did the consolidating). Let’s take a quick look on the last 1,000 years of the Chinese history:

  • Most of the 10th century was a period of what today is called Five Dynasties and Ten Kingdoms; the imperial (northern) China rapidly cycled through five dynasties, while the rest of China was divided into ten independent kingdoms.
  • By 1000, the Song Dynasty gained control over a large part of China, while the Liao Dynasty ruled in Manchuria and eastern Mongolia, to be supplanted by the Jin Dynasty around 1115. Around 1030, the Western Xia dynasty emerged and eventually took away much of Song Dynasty’s possessions, including their capital city of Kaifeng, so the Song (from then on referred to as Southern Song) Dynasty capital was moved to Hangzhou.
  • By 1271, after a lengthy Mongolian invasion, most of China was under the rule of the Yuan Dynasty founded by Kublai Khan.
  • By 1368, the Mongols, resented by much of Chinese population, were replaced by the Ming Dynasty, which proceeded to repair and expand the Great Wall to protect China from the northern invaders.
  • In 1616, the Manchus invaded and by 1644 completely defeated the Ming Dynasty, banned Chinese style in clothing and hair requiring Manchu styles instead, and ruled China as the Qing Dynasty until the 20th century.

I would guess that before China feels secure enough to pursue world preeminence, there will be people in China feeling secure enough to challenge Beijing’s preeminence. And when that happens, one of China’s successor states may indeed end up being preeminent through competition with the rest, just as Britain became preeminent through competition with France and Spain…

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Later same day:  In today’s issue, The New York Times reported large-scale violent protests in Tibet.



According to the report, Chinese security forces initially withdrew, letting the protesters (and looters of Chinese-owned stores) run free, but returned 24 hours later for a massive crackdown.  The Chinese news media, which initially had not been allowed to cover the Lhasa violence, began to show footage of Tibetan uprising, but, predictably, not of the subsequent crackdown…

Subprime debacle FAQ

A series of questions asked privately:

– what is sub prime lending and the issues surrounding this.

Generally speaking, subprime lending is lending to borrowers whose creditworthiness is doubtful. In the specific context of the recent subprime debacle, subprime lending that experienced problems was mortgage lending to individuals with low credit scores and poorly (if at all) documented income.

– how did the crisis begin? what happened?

To understand what happened, you need to start with understanding the normal rules of asset-based lending. Let’s say you’re a banker. You give someone a loan to buy a house. If the borrower can’t make payments, you repossess the house and sell it. For a very long time, bankers kept in mind that it is entirely possible for the house to lose value between the time a loan was given and the time the borrower defaulted. So to protect themselves against large losses in a declining market, banks never lent more than 80% of the house value.

Now let’s fast forward to 1998. Home prices begin to increase very rapidly. After a few years of record-breaking price growth, the bankers suddenly realize that they don’t lose anything on foreclosures, even if they lend 90% or even 100% of the house value. (Some non-bank mortgage companies eventually went as far as 120% loan-to-value.) So all of a sudden lenders found themselves in a situation where they can make easy money by lending to anyone. If the borrowers pay, good for them; if they default, the hungry market will snap up any number of foreclosures at very attractive prices. Or so it was thought at the moment…

Now recall that a lot of these new borrowers are subprime; they got themselves talked into adjustable rate mortgages, which have a low interest rate, but this interest rate is not fixed; it is tied to an interest rate benchmark (such as the prime rate) and changes with it. Interest rates, meanwhile, bottomed out in 2002 and rose almost two percentage points by mid-2006. It doesn’t sound like a big deal, but on a $200,000 adjustable rate mortgage it could easily add $200 to the monthly payment. Throw in the grim job outlook, and you can see why defaults began to happen increasingly often among subprime borrowers. Defaults rise, but prices begin to decline, as anyone who wanted a house seemed to have one. Lenders get stuck with foreclosure properties, which they can’t sell unless they drop the price and lock in a loss.

– how could the crisis be stopped from happening? (better credit scoring? credit risk management?)

I honestly don’t know. A lot of what was going on seemed to be bordering fraud anyway (from dubious appraisals to fuzzy credit ratings of mortgage-based securities), so another regulation may or may not have changed anything, especially since a lot of subprime lenders (Countrywide being the prime example) were not banks and were thus out of regulatory purview of the Federal Reserve.

– what happened after the crisis? (recent events)

Too soon to say: the crisis isn’t over yet.

– who was affected and why?

A lot of people… Subprime borrowers (primarily working-class people who saw a chance at home ownership and seized it without thinking through the consequences), subprime lenders, homebuilders, buyers of bonds into which subprime mortgages were repackaged (which included insurance companies, mutual funds, and foreign banks), you name it…

– WHAT ARE THE LESSONS to be learned for the subprime lending?

Any lesson you can draw from the subprime lending debacle today you could learn by reading Hyman Minsky in 1980s… To borrow a description of Minsky’s views from Nassim Taleb, “stability and absence of crisis encourage risk-taking, complacency, and lowered awareness of the possibility of problems” (The Black Swan, p.78). This is exactly what has befallen both subprime borrowers and subprime lenders.

i would be deeply grateful for a DETAILED explanation on this. also with sources/references to it would be helpful.

Minsky’s Financial Instability Hypothesis is a great starting point…

Of alien life

A question from FunAdvice:

Are we not advanced enough to perceive alien life?

Do you think the reason we can’t find life on the moon, the sun, the 70 sextillion stars, and the decillions of moons and planets that revolve around them is because we are not advanced enough to be able to perceive alien life, just like bacteria is not advanced enough to percieve human life. Maybe all alien life is so advanced that us primitive humans who evolved from monkey’s and have only been advancing for 100 years can’t comprehend civilizations of the moon and Mars, and Venus that are billions of years old and more advanced than us. Maybe they project their world as lifeless on to our eyes so that we won’t invade their planet. Maybe they are holographic images. Bacteria can’t percieve human life, but human life exists. Maybe humans just can’t perceive alein life even though it exists throughout the universe. Any comments or suggestions?

There are all kinds of possibilities…

Maybe space travel is a phase that advanced civilizations outgrow, choosing instead to focus on something more important, such as teaching their children to appreciate the beauty of the world they live in.

Maybe advanced civilizations are impossible in principle, because producing enough energy for interstellar travel would irreparably damage the environment on a planetary scale.

Maybe advanced civilizations can only be built by learning (and evolving) machines floating in outer space close to a star (to draw energy from it), as living beings on planets don’t have enough lifespan to learn what needs to be learned to build an advanced civilization and don’t have enough energy to power their spacecraft.

Maybe there is a Pan-Galactic Pact Against First Contact; all intelligent races agreed to leave the emerging intelligent life alone to evolve as it would (we set up wildlife sanctuaries, why can’t we be in one as well?)

That’s why good science fiction is so much fun; it makes you wonder about these things…

Hedge funds: bigger vs. better

From Institutional Investor‘s Hedge Fund Daily:

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Why Bigger HFs Not Always Better

While investors flock to bigger and better established hedge funds because of the imagined sense of security, they may be taking risks of which they are unaware. In an interview with Thomson Investment Management News, Max Ferri, a senior analyst at Laven Partners, points out that because the big funds tend to attract more money, they are also more tempted to find lucrative ways of spending their cash load that may not be in line with their business plan.  “Some funds set themselves reasonable targets when they start off,” Ferri says.  “However, with growth also comes greed and when people start knocking at the door like crazy, funds can start to overexpand.”  He says funds that experience exponential growth may find their capacity point is 100 times more than when they started and at that new level, “the strategy can no longer be run without carrying some sort of major risk, or is simply too big to be profitable.”  That’s when such funds may suffer from style drift, and suddenly the fund becomes more correlated to the markets and less of a hedge fund.  Ferri, who is also in charge of hedge fund selection at Laven, says his firm sticks to early-stage managers, since “best returns are found within the first three years of a manager’s strategies,” while the assets are still manageable.  And he says the “sweet spot” in terms of HF size is between $50-$100 million and $300-$400 million.

Upgrading (or not) to Vista

A question from Askville:

Do you think upgrading from XP to Vista is a bad idea?

I have an upgrade disc and I wonder if its worth it. I want to get Vista on my computer but with all the bugs. It doesnt seem like a good idea right now. Makes me wonder how long I should wait.

First, ask yourself a question: Why do you want to upgrade?  What would you get with Vista that you miss so badly in XP?  Then, read this guide and see whether you have to do a “clean install” (a computer geek term for the new OS wiping out all data on your hard drive during installation, so that you have to back up your data before the OS upgrade and install all your applications again after the upgrade) or there is an in-place upgrade (which, mercifully, won’t destroy your data and will let you keep your applications) available.  If you have to do a clean install, contemplate the perceived benefits of having Vista against the hassles of recovering from a clean install.  Finally, see if your applications will work under Vista; it’s possible you will have to upgrade them as well.

Assuming you do have a reason to upgrade (most people don’t), download and run the Windows Vista Upgrade Advisor utility from Microsoft before trying to upgrade; it will analyze your computer and tell you if it’s Vista-ready (many computers aren’t).  Note that with Vista, there are two sets of system requirements; your computer may fully qualify for Vista itself, but fail to qualify for its new user interface called Aero (Aero has higher requirements for the video card and graphics memory).

So the real question is really not “how long should I wait?”.  The real questions are: (1) “do I have a compelling reason for this upgrade?”, (2) “do I have to perform a clean install?”, and (3) “does my computer meet the system requirements for Vista and Aero?”