Twofish's Blog

December 16, 2007

Notes on banking

Filed under: china, finance — twofish @ 9:52 am

http://piaohaoreport.sampasite.com/blog/Foreign-companies-can-raise-mone.htm

I doubt that anyone is thinking about letting PRC entities buy stakes in US banks. What people have in mind for the immediate future are more like a minority interest (similar to what US banks have with Chinese banks). Long term (i.e. in 10 to 15 years), I’m pretty sure that the big Chinese banks are thinking about doing what ABN-Amro did with LaSalle Bank.

It’s important to distinguish the Chinese government as “owner” with the Chinese government as “regulator.” When the Chinese government has used the banks to achieve policy goals it’s been with the “regulator” hat and not the “owner” hat. The regulations that force sterilization come through the PBC and not from the Ministry of Finance through CIC. Hypothetically, if there were a major private Chinese bank, it would have to abide by the PBC’s regulations in this area. Conversely, CIC doesn’t have the legal authority to directly force a bank to buy sterilization bonds, and there are some layers of insulation that make this difficult to do practically.

Also what the PRC is doing with its banks doesn’t seem that different from what the United States was doing with Regulation Q between 1933 and 1980 (i.e. capping interest rates for policy reasons, namely to provide cheap financing to encourage home ownership) or other things that the US has done historically (i.e. prohibiting interstate banking to promote local community investment or prohibiting bank ownership of corporations). For that matter what the PRC is doing now doesn’t seem that different from what the Fed does in enforcing reserve requirements and risk management to insure macroeconomic stability.

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December 5, 2007

Plato’s disease

Filed under: economics — twofish @ 4:25 am

http://organizationsandmarkets.com/2007/11/19/relevance-and-practice/

I have on order “How Economics Forgot History” by Hodgson.

It seems that social science disciplines suffer from “Plato’s disease.” There is the belief that behind all of the noise there are same basic abstract principles that unify the discipline, and the goal of research is to discover those grand principles.

The trouble is that by looking at more and more abstract principles, one becomes more and more detached from messing and complex reality, which may be a problem if unifying abstract principles do not exist and all that is “real” is messy reality.

Financial innovation

Filed under: finance — twofish @ 4:06 am

We need to distinguish financial innovation from the subprime mortgage situation, and the more I think about it, the more I think that “financial innovation” has gotten a bad rap.

Selling mortgages to people with bad credit on the assumption that house prices would have increased indefinitely was a stupid idea, but I think that one could make a case, that given low interest rates, that people would have done it anyway even if there were no financial innovation.

The argument that I’d like for people to think about is that without these complex instruments, the crash would have looked more like the S&L crash of the 1980’s. As it is, the direct costs of the damage has been borne mainly by investment banks and hedge funds with large amounts of capital. Without financial instruments which effectively focused the risk in those entities I think it could be argued that the cost would have been more widespread.

Something to think about.

http://organizationsandmarkets.com/2007/12/03/financial-innovation/

Comments on David Brooks

Filed under: academia, china — twofish @ 3:11 am

http://www.nytimes.com/2007/12/04/opinion/04brooks.html?_r=1&hp&oref=slogin

Some notes:

You are truly a golden child, because you succeed in university as well. You have a number of opportunities. You could get a job at an American multinational, learn capitalist skills and then come back and become an entrepreneur. But you decide to enter government service, which is less risky and gives you chances to get rich (under the table) and serve the nation.

The part that Brooks misses is the trip to the United States in which the Chinese kids gets exposed to forms of education that don’t involve rote learning.  Getting into Chinese undergraduate school involves a lot of rote memorization and passing a test.  However, it’s important to recognize that the reason the system is set up this way is to avoid corruption and to have some objective means of getting people into the social elite.

In one sense, your choice doesn’t matter. Whether you are in business or government, you will be members of the same corpocracy. In the West, there are tensions between government and business elites. In China, these elites are part of the same social web, cooperating for mutual enrichment.

In the United States government and business elites are part of the same social web also.  Yes government and business elites will end up arguing with each other in the United States, but the same happens in China.  There are a lot of good things about the United States, and I think that the US has a much better form of government than China.  But the business, academic, and political elites work largely the same in both the United States and China.

You feel pride in what the corpocracy has achieved and now expect it to lead China’s next stage of modernization — the transition from a manufacturing economy to a service economy. But in the back of your mind you wonder: Perhaps it’s simply impossible for a top-down memorization-based elite to organize a flexible, innovative information economy, no matter how brilliant its members are.

It’s not impossible.  Singapore has done it.  Whether it can be done on a continent wide scale and whether the Communist Party of China can do that is another question.

I’m not sure what point David Brooks is trying to make.  If it is that a system of memorization limits flexibility of thought, well, yes.  That’s why Chinese end up in American graduate schools.

That’s a thought you don’t like to dwell on in the middle of the night.

I don’t see why.  It may turn out that China is just not very good at this innovation and creativity thing in which case the obvious thing to do is to outsource that sort of stuff to the United States.  But I don’t think this is going to be a problem.  China is experiencing a massive “brain gain” in which people with American experience and ideas are coming back and changing the ways things are done there.

The United States has one big advantage over China that will help it with the “innovation thing” and that is that you just have a larger diversity of people in the United States.  The United States is an immigrant nation whereas China just has too many people living there already to be as throughly diverse as the United States.  You come up with new ideas when you meet different people doing different things and while I can imagine some “international centers” in China, it’s unlikely that the entire country is going to be the meeting place for the world.

I don’t think that people have come to grips with this globalization thing.  People still think in terms of the United States versus China, but that is going to grow as silly as thinking in terms of New Jersey versus Connecticut.  OK, the US might be better at coming up with innovations than China, but Silicon Valley is better at coming up with technological innovations than Sioux City, Iowa.  So what?

December 3, 2007

Where did we go wrong?

Filed under: academia — twofish @ 6:41 am

A discussion about the sorry state of academic activism….

I do think that Ph.D. programs should prepare students with the expectation that they will not be full time academics, and despite my dislike over some aspects of my education, by and large, I think my education was very good at doing that, and in talking about the world of adjuncts, we need to have that discussion.  This is part of a larger social discussion about what we need to do to prepare students in general for an uncertain world, since adjuncts make up only one part of the “new proletariat.”  If we can’t figure out how to get decent wages to English Ph.D.’s then we are totally cooked when it comes to high school dropouts.

I’m fascinated by the development of late 19th century history.  In most developed nations, the social revolution that Marx predicted did not come to pass, but that only happened because people with power got scared and passed a series of social reforms that prevented revolution.  One thing that I find interesting is that people in the business elites really do have a social conscience because they know better than anyone, that if they don’t make people wealthy, that the poor are going to take their wealth.  I don’t seem people in academia doing this in any way that is effective.  I think the main problem is that people in academia are in their own little world that is disconnected with the lives of most people.

I’m curious that academics at least on the Chronicle of Higher Education forums don’t seem to take a wider more active role at social activism.  It’s interesting to go back to the late-19th and early-20th centuries, when it seemed that American intellectuals did self-consciously realize the power that they had, and it is sad to see that this no longer seems to be the case.  Who are the Charles W. Eliot’s and William Barton Rogers of our time?

My guess is that people with tenure don’t see a reason to change the system in any fundamental way, and are frightened of any change that will reduce their status and job security.  People without tenure are so busy just trying to survive that they can’t do anything,

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