The global crisis debate

Apparently, the UK government that will be hosting the next G20 summit wants to know what to do to fix the world economy. Don't know if listening to economists is a good idea or not, but that's what they decided to do. They asked Vox to moderate the debate between economists from all around the world! The global crisis debate is here!

The praise and fertilization of folly

In this column I want to talk about one of the best presentations I attended at the Latin American Economist Association Meeting in Rio de Janeiro.

Better than the presentations of some of the 5 Nobel prize winners who were there, was Harvard's Michael Kremer. Even though the title of the paper is not the boldest, "Nudging Farmers to Use Fertilizer: Evidence from Kenya", the topic and the approach are very innovative and challenge traditional mainstream economics (Even if you are in Harvard, you are the mainstream). More importantly, there are clear policy recommendations that can greatly assist poor economies.

Should the government give subsidies for the use of fertilizers? The "Chicago Tradition" of Development (a categorisation not well accepted among the participants) starts from the presumption that farmers are rational profit maximisers, so subsidies will distort fertilizer use away from optimal levels (for those that were there, the kind of models we analyzed in Arcand's Development class last semester). On the other hand, many agricultural experts see the use of modern inputs, in particular fertilizer, as key to agricultural productivity. Pointing to the strong relationship between fertilizer use and yields in test plots, they argue that fertilizer generates high returns and that dramatic growth in agricultural yields in Asia and the stagnation of yields in Africa can largely be explained by the use of fertilizer in the former.

The answer of Kremer and friends is different. In previous studies they have observed that African farmers know that fertilizers are good and productive, but still they usually don't use them, even when expected returns can be as high as 70%. Why? Because people can be irrational!! The authors build a model where farmers are allowed to be naive about their future preferences and biased towards present pleasure, resulting in the procrastination of investment decisions (in line with the studies on hyperbolic discout rates). The on-field tests of the model seem to corroborate the predictions.

So, which policy to follow? Consistent with the model, the efficient allocation under subsidies is more a matter of when, rather than how much. A small time-limited reduction in the cost of purchasing fertilizer at the time of harvest induces substantial increases in fertilizer use, as much as considerably larger price cuts later in the season. Such small early discounts could help present-biased farmers commit to fertilizer use without substantially distorting decisions of non-procrastinating farmers and incurring other costs of heavy subsidies. In joint work with a Kenya based NGO, they evaluate the impact of this kind of policy, and find strong supportive evidence.

So the problem is not being irrational, but how to give the right incentives for productive craziness. A modern Praise to the Folly!

Why leaders matter - macroeconomic policy

Is the crisis Bush's fault? The NYT has an article quoting Robert Barbera, the chief economist ofITG saying that "no matter who took office in 2001, they were destined to oversee dashed expectations regarding the economy, the markets and the geopolitical outlook”...well, maybe.

But W did mess up badly. While Clinton managed the biggest employment growth at the cost of no inlfation (in your face Philipps!) nor treasury debt, W managed the lowest employment growth and biggest debt/GDP ratio of all US presidents. 

Click on the graph below to see macro performance under various US presidents!

Karl Marx - 1867

Owners of capital will stimulate the working class to buy more and more expensive goods, houses and technology, pushing them to take more and more expensive credits, until debt becomes unbearable.

The unpaid debt will lead to the bankruptcy of banks, which will have to be nationalized, and the State will have to take the road which will eventually lead to Communism.

ht (Maria at UBS)

Distrust and regulation

Trust and regulation are substitutes. A society can work well with one or the other. Hence, a society with a high level of mutual trust should have a low demand for regulation, and vice versa. This is what a new NBER paper models and documents. In their words, it explains why it is that people in countries with bad governments want more government intervention.

But causality is circular, as always, as culture shapes institutions, and institutions shape culture.“Compared to the English colonies, the more heavily regulated French colonies over the decades have developed lower levels of trust (because of a more controlling role of the state) and that this lower trust has generated continued demand for government regulation.”

The most interesting point they make is that “distrust generates demand for regulation even when people realize that the government is corrupt and ineffective; they prefer state control to unbridled activity by uncivic entrepreneurs.” Indeed, in developing countries, voters dislike capitalism because it is associated with high levels of corruption and, also, demand for regulation results from perceived unfairness of the existing social order.

Between rich and poor countries this seems quite obvious, but what about across rich countries? Well, they suggest that regulation, here minimum wage policies, undermine the ability of firms and workers to learn about each others’ cooperative attitudes, and that low cooperation in turns creates a demand for wage policies, as shown below!

Banks' market caps

Postdoctoral research fellowship at PSE

The Paris School of Economics offers a full-time fellowship research post-doctoral appointment, starting date of September 1st 2009, for a fixed-term period of 12 months.

The fellow will participate in a research project on “FDI in services” writing one paper fitting within the global project, and targeted for publication in leading journals of the field. Farid Toubal and Lionel Fontagné are the researchers in charge of the supervision of the post-doctoral fellow.

Applicants should send their application packages, preferably via email as .pdf attachments, to toubal@univ-paris1.fr.

The application package consists of (1) CV, (2) a short description of current and future research , (3) at least two research papers, and (4) a letter of application, and (5) three letters of reference.

The deadline is Mai 31st, 2009.

Corruption at the World Bank

It just emerged that Wipro and Megasoft had been banned by the World Bank from its procurement programme because the firms had provided improper benefits to bank staff.

The Economist talks about discomfort for India's outsourcing industry. The Wall Street journal talks about another blow to India's already-reeling technology industry.

Why is the press only focusing on the stock market and reputation consequences for the Indian companies, and says nothing about the Bank's practices? The improper benefits were provided, not just offered! This is because of corrupt World Bank employees for crying out loud!

The $3,000,000,000,000 War

US$3 Trillion Bucks is by anyone's reckoning a lot of money - it will certainly buy you a lot of Ipods, even in expensive Swiss supermarkets. Yet that is the price tag that Stiglitz and Bilmes have put on the Iraq War, in their book which I finished reading over the holiday season (shown above, the short precis of the book can be found here). It's an excellent read, not only because of the eye popping figures that the authors put on various aspects of the war, and the interesting facts contained in it (I for example learned that the shadow value of human life is actually US$7.2 million), but also because the forensic methodology they use to arrive at this figure is extremely rigorous and transparent.

In fact, apart from its huge size, the scary thing about the figure of US$3 trillion is that the authors arrive at it using quite conservative assumptions concerning the evolution of future government liabilities related to the war (like veteran's healthcare, replacement of army equipment, etc.). Realistically speaking, the actual cost may be even higher.

Given the myriad of better alternative uses for such a huge pile of cash, hopefully this book will give policymakers some pause the next time they think about letting slip the dogs of war......

How tariffs affect the Ipod price

The ipod price index is available here (ht Salvatore)

Some more competition for the swiss supermarkets

We all agree that Switzerland is a fascinating country. Beautiful countryside, a well functioning and established represantative democracy, excellent institution for education...on the other side, there also some clear market distortions which make it very hard for people (especially economists) to understand how this country can function so well. An established fact is the lack of competition among supermarkets.

Here I provide some statistics about number of retail stores per capita. While Switzerland is close to the median value with 6.51 stores per million inhabitants, as shown in the table below, the problem is that there's only Coop and Migros.

	p25	p50	p75	mean	sd	N
Numb.of stores	4.86	6.81	10.69	7.75	3.82	51

Source Euromonitor

Just to give you an idea of how to interprete the numbers,the value for the USA is 3.14 (think about Walmart). The value for Germany is 3.32, and Aldi is very much like Walmart. The value for France is 6.62, and if you go to Champion in Ferney Voltaire it looks also very much like Walmart (ok, now I'll stop mentioning Walmart). Italy has a value of 15.8, and is instead dominated by small-sized retailers, with a very limited range of products, but easily accessible evervwhere (drogherie, salumerie, etc.).

As reported in this article, Migros and Coop represent one third of the entire market, but 70% for the food market. In Geneva is pretty common to cross the border for a little shopping, making sure you don't exceed the custom limits. It is a patent fact that there is an important price differential across the borders. In the article is said that quality matters more for the Swiss consumers. I don't often find a striking difference of quality across the border, but instead a lower variety of products. I believe that the price differential across the border, whose said to be 10% on average, is mainly reflected by different rental costs, since Coop and Migros seem consolidated strategically within the cities, but I am open to listen to other opinions.

Finally, the news is that german retailer Lidl will soon enter the Swiss market. Lidl is a giant in retail distribution and should provide a beneficial boost to competition. Coop has already announced a reduction in prices as a response to this threat from a competitor (and in response to falling food prices). Good news for Rigot (and Sebastian).

Landlockness trade policies

One widely agreed on fact in economics is that being landlocked negatively affects trade, as the landlocked dummy is always significant in gravity equations. The explanation given most of the time is that transportation costs are higher. 

One would expect trade policy to be accommodative to compensate for this geographic curse. However, we observe the opposite. Wei (2000) suggested this may be because “a country that is naturally more open, as determined by its size, geography and other factors – would find it optimal to devote more resources to building good institutions. Such economies may display less corruption and a higher quality of government than naturally less open economies.”

To see how landlocked countries managed their trade policy, I regressed some indicators of trade policy (average 2004-2009) from the Doing Business database (IFC) on being landlocked, and on being a landlocked developing country, controlling for GDP per capita in 2005. The results are striking, and in the table below. To export to a landlocked country, one needs about two more documents, 22 more procedural days, and $1300 more per container. These numbers are even bigger when we focus only on poor landlocked countries.

	Landlocked	Developing landlocked
Number of all documents required	1.73	2.21
	1.06	1.42
Days necessary to comply with all procedures	21.81	28.44
	19.40	24.91
Cost associated with all the procedures (US$ per container)	1282.40	1626.116
	953.84	1174.22

OLS coefficients 100% significant, controlling for GDP per capita, R squares vary between 35% and 60%, 162 countries. First line is for importing, second for exporting.

Landlocked countries are an easy place to extract rents as trade routes are easily controlled by corrupt officials or business groups. As explained by Arvis et. al. (2007), “facilitation” payments at roadblocks and weighbridges are ubiquitous. In West Africa, they add 10% to overhead costs and can occur every 30 km. These are even worse at border crossings, inevitable for landlocked countries, where transit operators, customs staff, local police, and the military altogether,  all want their share of the transit rents. For a Kyrgyz truck to enter Uzbekistan, the official cost is 450$. Speeding up the process costs 200$ more.

Geographical barriers to trade could indeed provide more opportunities and hence incentives for less liberal trade policies. This is what the landlocked dummy captures.

Good news about the crisis...or is it ?

Finally, good news about the current economic crisis. According to a vox column from these two professors, the crisis might be over sooner than the common predictions. The reason is that some important measures of business and political uncertainty has been falling lately, indicating more stability and confidence to conduct business. It means businesses are no longer hesitated to invest and hire people which would lead to economic growth in the near future.

I wish this prediction comes into reality. But as the famous joke say that if there are 10 economists there would be 11 predictions, you can see some evidences to say the opposite.

While it might be true those uncertainty indexes have been improving, both researchers focus only on the measures affecting the supply side. Economy is not only about businesses doing the investment and hiring, but also about consumers spending their money. Businesses do not invest and hiring people because consumers cut spending and postpone unnecessary shopping. The list of unnecessary items is getting longer nowadays.

How do you expect consumers to spend money if people are still uncertain whether to have their jobs and income next month? Or if they are still uncertain whether their saving and pension accounts are safe and readily available during worse situation? The recent US consumer index shows that the index has reached new all-time low and consumers are reluctant to spend their money (Swiss index has also been falling for more than a year, and not reached the bottom yet).

The column certainly gives a kind of summer breeze into this freezing winter; but don’t expect too much on the prediction.

Mr Keynes, Econometrics and the Economic Method

Does your statistical model have the correct specification? Are you sure your dependent variables do not suffer from collinearity? Do you think the linear specification is appropriate? How did you choose the number of lags in your equation? Did you check the structural stability of your estimated equation? How do you know your variables are not measured with errors? How do you account for non-measurable variables which may be crucial to your specification?

These set of questions is today in the mindset of any empirical economists (and it's also an easy set of questions to pose if you ever have to attend a conference in which an empirical paper is presented..). Anyway, these are the problems Keynes identified in a famous comment named "Professor Tinbergen' s method" appeared on "Economic Journal" in 1939. This comment provides an unusually harsh critique (unusual for academic standard) to Professor Tinbergen 's 1939 report to the League of Nations, "Statistical testing of the Business Cycle Theory", and in particular, to the chapter named "A method and its application to Investment Activity".

Econometrics has advanced a lot since then, and it is quite striking to see how Keynes' critiques have represented a sort of research agenda for future generation of econometricians. Keynes in his Comment, was also more fundamentally skeptical about statistical testing of economic theory, especially when it comes to the business cycle. How can one make sure that the model is all-encompassing? What type of induction can we make if different econometric specification can be derived from theory? How can you avoid the "slippery problem" of passing from an estimated model to casual inference?

Subsequent work has reduced the problem of casual inference by expanding the role of proabilistic models, in either classical or Bayesian setting, as Haavelmo pointed out in a 1943 reply, leading to the final take off of the discipline. What made Keynes so harsh toward his fellows? As explained by Garrone and Marchionatti in this paper, Keynes was harsh because he was skeptic about the path Economics was taking in the 1930s: it was seen as a tool to formalize mathematically and quantify statistically a complex sytem. This skepticism is still part of the discussion about the correct method of economic research. In his view, the economist's method should entail the use of statistics as a tool to provide a preliminary evidence to our logical thinking, to make less "impressionist" judgements. He did not discard Econometrics, but he thought of it as a way to test a certain theory derived which was to be derived from a small set of assumptions. He thought economic thinking should not be too formal, if this entails assumptions which are non plausible. So better to be ad-hoc and right than to be formally wrong. In conclusion, while econometricians took Keynes' critique at full value, economists have been less benign with him. It should not come as a surprise then, that still today, Le Figaro voted Keynes man of the year.

Corn and Turkey

Were 16th century Europeans confusing Turkey and India when refering to the Americas? In Québec, we call corn blé d'Inde (Indian wheat), in Italy it's granoturco (Turkish wheat). We call turkeys dinde (chicken from India) while in english it's turkey (chicken from Turkey).

Back to 1694..

On thursday the Bank of England reduced the Bank rate to 1.5%, as an effort to achieve its mainained target for CPI inflation of 2%. In spite of being an inflation targeter, the decision seems especially driven by the necessity to restore confidence in the market and provide a further stimulus to economic activity.

One historical curiosity that comes together with this decision is the following: today's Bank Rate is at its lowest level since 1694, which is the time the Bank of England was founded. The motivation behind the creation of a national bank, was to sustain the troubled financial position of the british government after the "Glorious Revolution". A scottish banker, William Patterson, envisaged a loan of £1,200,000 being made to the Government, in return for which the subscribers would be incorporated as the "Governor and Company of the Bank of England", with banking privileges including the issue of notes. The story is also here.

By the way,the Bank of England is not the first National Bank created. The very first one is this.

Skipping the line at supermarkets

Salvatore had the best idea ever for a new business: A supermarket with no queues. How would that work? Well, a little device on your shopping basket or on your wrist with which you can scan the products you buy and swipe in your credit card! Honesty should be as high as 90%, as suggested by this experiment, or even higher with security cameras. The possible sales money lost would not be as high as cashier salary I guess.

Anyway, coop has already started to implement something like this, though not as radical.

In other news, when you’re being impatient for your favourite sushi which is not appearing on the traditional sushi train, you can order it and it arrives by shinkansen, as seen below. Afraid of the rise of the machines anyone?

Homer Economicus

While I have known for a while that Homer’s favourite magazine was The Economist, I was happy to find out that two of my major interests, economics and The Simpsons, were combined once again, in the paper, Homer Economicus: The Simpsons in the Economics Classroom, which I found by luck while looking at the AEA programme for sexy topics.

As the authors explain, “many students have a hard time applying basic microeconomics when it comes to real-world situations. A classroom discussion about the effects of a ban on organ sales, for example, can often be derailed by student opinions on the ethics of allowing individuals to sell their organs. Using a fictional, animated television show to discuss issues like organ donation makes it easier for students to set aside their normative concerns and focus instead on the positive effects of policy changes”.

They give many examples from specific episodes. One of them is “King-Size Homer,” where “after learning of a coworker’s absence from work because of a disability, Homer tries to find a way to purposely injure himself so that he too can go on disability and work from home. After walking around a construction site with no hardhat on and trying to trip and hurt himself on an oil spill, Homer almost loses hope of becoming disabled, remarking, “I’m never going to be disabled! I’m sick of being so healthy.” Homer then discovers the disease “hyper-obesity,” realizing that if he gains enough weight, he can qualify as disabled. Homer proceeds to eat as much as he can in order to become disabled. This episode provides a straight-forward example of how individuals respond to incentives and correspondingly how public policies, even when designed with the best of intentions, can lead to unintended consequences, such as individuals trying to go on disability. Homer’s coworker Lenny perhaps clarifies this when he refers to disability as a “lottery that rewards stupidity.”

In “Homer vs. the Eighteenth Amendment,” alcohol is prohibited in Springfield after Bart gets drunk during the St. Patrick’s Day parade. This episode illustrates the differences and similarities between regular and black markets. […] Falling alcohol supply due to prohibition causes the price of a pitcher of beer to rise to $45. The episode also shows prohibition leading to a host of secondary effects such as increased corruption. The local organized crime boss, Fat Tony, bribes the Springfield police in order to smuggle large quantities of illegal alcohol into the city. Another secondary effect of prohibition is seen as bar patrons begin substituting from beer (the standard at Moe’s Tavern when alcohol was legal) to much stronger drinks. After becoming the underground provider of alcohol to Moe’s, Homer, aka the beer baron, is seen making gin, cognac, and “12 year old scotch” in bathtubs in his basement. The similarities between the secondary effects of alcohol prohibition seen in Springfield and the narcotics market in the US are clear.”

And here’s one of their discussion question: “Economists typically believe that increased regulations (such as prohibition) are costly for suppliers. However, Homer indicates that "people were drinking more" as the result of prohibition. Analyze what this implies about supply and demand as a result of prohibition in Springfield?”

What Rigotnomics is all about

from wordle.net

Young bright economists

Here's the list of eight young economists who are making a big splash in their discipline and beyond, according to The Economist. 

• Jesse Shapiro of the University of Chicago
  
• Roland Fryer of Harvard
  
• Esther Duflo of MIT
  
• Amy Finkelstein of MIT
  
• Raj Chetty recently hired by Harvard from Berkeley
  
• Iván Werning of MIT
  
• Xavier Gabaix of New York University
  
• Marc Melitz of Princeton University
  

"Economics is now defined neither by its subject matter nor by its method" That's why I never understood what it was I was studying.

The myth of free trade

I’ve been reading The Economist for quite a while now. I feel equipped to defend my ideas when IUED types start with their anti-globalization speeches. But I just finished reading a book. It’s called Bad Samaritans, The myth of free trade and the secret history of capitalism, and I have to say I’m not sure yet how I would debate with this guy called Ha-Joon Chang, apparently a heterodox economist. He is definitely convincing. It is not easy to read him and find quick counter arguments to his claims. He is an economist that makes you think.

He believes in a development ladder, as explained in his previous book, that developing countries need to climb in order to get rich but that the West, the World Bank and the IMF are kicking away by advocating free trade. He argues that infant industries need protection to grow and become value creating machines in the same way his 6 year old son needs to go to school before getting a job.

But what make it convincing are his historical examples. Nokia’s electronics division lost money for 17 years before becoming the technological giant it is today; Toyota was bailed out in 1949 and Ford and GM were kicked out by the Japanese government, and is now the biggest carmaker in the world. And almost no country has become rich without industries… What is development anyway? It’s the creation of value...you need businesses, industries that create value as explained here. His development economics are far from the hip “lab” development economics as if life’s just a big commercial. For him, it’s about facts and history, and industrialization. Not small randomized experiments.

This led me to ask myself what if all industries in one country were foreign as in mucho mucho FDI? Wouldn’t this count as industrialization? Only if the value added stays in the country and is invested, I thought.

He insists on long run economic development as opposed to short run optimization, brought about by free trade. In an equal and industrialized world, free trade will be optimal, but it cannot rise poor countries out of poverty. If they specialize in agriculture, everybody gains in the short run, but developing countries will not be able to develop without activities that create value added, like industries.

He argues against too much patents by saying that “the fuel of interest to the fire of genius” has been mostly scientific curiosity and the desire to benefit humanity throughout history, quoting the Royal Society, and that we don’t always need to “bribe” scientists to invent things. He is less convincing on corruption which he deems not that bad, but I guess he is just being consistent with his government promoted industrialization model. In his last chapter he explains how economics shape culture more than culture being responsible for economic underdevelopment. The Japanese were perceived as lazy and the Germans as thieves. Culture changes, but it takes time.

Sometimes he is a bit too ideological, but in the same way free traders are too ideological when they promote free trade without listening. So, is reducing industrial tariffs good for the long run economic development of poor countries?

Risk taking and financial reward: a Q&A session with a banker

Many observers believe that "excessive risk taking" is the main culprit behind the genesis of the current crisis. In this nice column Mark Thoma neatly summarizes the models proposed to explain why "excessive" risk taking may emerge in financial decisions. Let me briefly re-summarize them in light of the current crisis.

Under the first model of "Risk Misperception", a whole set of players, rating agencies, risk analyst, investors, all committed the same mistake: they all thought that as house prices were going up, they would have continued to do so.

Under the second model of "Risk Misrepresentation", some players may have acted with fraud: they sold an atomic bomb by labelling it a nice firework. This may have to do with the sophistication and opacity of the financial instruments involved: difficult to handcraft them, but easy to sell them to some hungry investors as "safe".

Under the third model of "Risk misallocation", moral hazard comes into play, in two possible ways. Either government intervention has allocated risk from the private to the public sector, or some agents have had high incentive to take excessive risks since they could easily passed them to a "principal". Here, the example of the mortgage broker selling risky loans is paramount.

There are good reasons to believe that all of the above happened. There is academic evidence about excessive risk taking induced by the first model (Gerardi et al. 2008), and mainly anecdotal evidence about the second and the third. It is important to assess what is the right view to inform the policy making process. I like to stress that, risk is an intrinsic component of a capitalist system, and crisis just a consequence of it. Policy reforms should not be then about how to avoid crisis, but maybe on how to reduce their impact and their consequences.

In this Q&A session I ask a banker, who prefers to remain anonymous, to offer a perspective on the topic.

Q. It's not entirely clear to me why risk taking may be excessive. A risk should be without metric: something is risky or not. An investment strategy is risky or safe. Do you share the same view? Do you think risk can be properly assessed?

A. I do not share this view. VaR is considered as the classic way to asses riskiness of an investments and it's very commonly used within a bank and between investors.
Regulatory agencies very often require stricter Stress Tests to be applied to investments.
Obviously the obscure side of this approach stays with the assumptions: I think very few investors analyze in details the multiple assumptions underlying a risk assessing model.

Q. Do you, within a bank, hold some risk benchmark, or is it entirely up to you to set them up?

A.The benchmark is at the basis of every investment. The bank considers various alternatives benchmark for every financial positions it assumes as "principal" and proposes them to its own clients.

Q. Loosely speaking, is risk sensitivity determined by a bank's culture?

A.I do not have experience with different banks but I guess that each bank's culture can affect the risk sensitivity.More pressure on short term budget targets can encourage an easier risk taking approach if the bank is lacking of a well integrated system of risk management

Q. How many times did u perceive risk was excessive in your business?

A. Almost never until March 2007, when the financial world started to look too perfect (growing global markets together with implied volatilities at historical lows across asset classes). I can remember at that date a few experts starting to propose the crucial question: where is the risk being hidden?
The question was taken seriously, but I think nobody (either academic or practitioners) have been able to propose an exhaustive answer yet.

Q. And people around you, did they ever look worried about the riskiness of the investment products they were selling?

A. I can easily remember more than one occasion, when a product was re-engineered with more conservative features or not sold after some analysis had shown an excessive risky profile or exposure to risky markets. Investment banks are very cautious in terms of reputational risk: selling a defaulting product or being involved in a financial scandal can be lethal for the ability to run on going business for each well known bank.

Q. Do you or any of your colleague "saw the crisis coming?"

A. A financial crises stays with a successful banker as a cancer stays with an healthy person. Every successful banker would like to avoid seeing a coming crises. When the crisis was clear, the natural reaction was to minimize it. At the beginning of each quarter I heard many managers saying: this will be over in 3 months. Whoever disagreed with this view could have been considered as a looser black bird.

Q. What in your view contributed to this financial collapse? Do you think there is something missing in the picture delineated above?

A. I would like to mention one more element contributing to the diffusion of the current crisis: the mental framework in accordance with which we can look at the past to well forecast the future and that -at its most trivial level- can be summarized in the sentence "but this never happened".

This framework is at the basis of the back testing methodology, which is very spread between investors.
A distortion of this framework is realized when back testing and investment engineering invert their logical role: the investment features are defined to best fit the back test. This can actually produce a leveraged effect on any unpredicted event.

Q. Do you think monetary policy played a role in triggering the crisis?

A. This is what a lot of experts seem to agree with. if this is true I just wander what can actually happen in the next few years consequently to the evidence that US rates have been moved to zero...I think new distortions will come out very soon. There are still ppl having money out there, in the Street.

Q. Do you think more transparency in the banking sector will make a difference, or the financial markets are too clever for that?

A. Financial practitioners spend most of their time thinking about the best way to the "cheat" the regulatory framework. Everybody agrees that the ratings system finally ended up producing a leverage to the crises. But this simply means that the regulatory agencies and policy makers need an extra effort to gain more transparency in the banking system, which should be considered as a fundamental condition for efficient financial markets.

Q. Do you think "squeeze banks profits" and bankers salaries is the right approach for reforms?

A. The fact that a very competitive sector as the financial one is able to make such big profits and pay such big bonus is just a clear sign that either strong inefficiency or massive risks are in place. But big profits are just a symptom of the unhealthy situation and the regulatory system should take care of the causes and not of the symptoms.

Thanks!!