Review of The Big Short

No economists saw the crisis coming. Well, maybe some did, such as Dr Doom Roubini or Bob Shiller, who had been talking about a housing bubble for a while. But economists didn’t put money where their mouths were. A few people actually did by betting on the collapse of Wall Street. The Big Short recounts their story brilliantly. How did they know it was gonna happen? Well, they weren’t working in huge banks, they were outsiders. One of them was an autistic with only one eye who in 2005 decided to create a fund and invest it all in credit default swaps. He was making a huge bet on the collapse of supbrime loans, like buying a share on a prediction market such as Intrade. These few gamblers were right, and arrogant bankers were ignorant, and some were even more ignorant than others.
All in all, this is a well-written, easy-to-understand, story of the crisis. Michael Lewis, famous for Liar’s Poker but also sports books such as Moneyball and the Blind Side (which became a movie starring Sandra Bullock), makes you understand what happened better than any economist. Bankers and analysts in big banks and rating agencies had no idea what was going on with all those toxic bonds. Because of a lack of market information, mortgage-backed securities were rated way too high and credit-default swaps were priced way too low, failing to reflect the high probability of default and allowing a huge house of cards to build-up. Obvious in retrospect…

The Robert Mugabe School of Intelligence

The Zimbabwean reports (via Blattman):

[Zimbabwean] Defence minister Emerson Mnangagwa has told Parliament that the Chinese would channel the money through Treasury for the completion of the Robert Mugabe School of Intelligence. He told the Senate this week that the "$98 million loan" was "for the construction of the college which is ideal for addressing the current global challenges”.

Who's to head the IMF now?

Now that Strauss-Kahn has fallen, the race to replace him as head of the IMF has started. As Rodrik explains, "The Germans insist the new managing director should be from Europe [this is the tradition]. Europe's weak periphery wants someone who will be sympathetic to their cause and hit the ground running. Emerging market and developing economies ask for a leader that departs from the usual mold and will reflect their outlook and preferences for a change." He thus suggests Kemal Dervis would be the best candidate. On the other side of the blogosphere, though still in Cambridge, MA, Mankiw thinks Stanley Fisher would do a great job. Other news suggest Trevor Manuel, ex finance minster of South Africa, is also a potential candidate. Only Dervis is European. He's from Istanbul. Will this matter, once again?

Brazil to tackle triangulation of goods

Reuters reports (via China Post):

Brazil will take new steps to protect local industries from a strong exchange rate, including an investigation of Chinese imports that come in improperly through other countries, its trade minister told Reuters on Friday. Fernando Pimentel said the probe into the so-called “triangulation” of goods would be the first of its kind in Brazil. The first case will involve blankets from China that were routed to Brazil through Paraguay and Uruguay, with further investigations expected in coming months, he said. The measures come as Brazilian President Dilma Rousseff faces enormous pressure from manufacturers, a key constituency, to slow an avalanche of imports from abroad, especially China. Brazil's currency is trading near decade-long highs, thanks to its booming economy and a flood of capital from the developed world.

ht: the bunk

Is Samsumg kicking off the rise of Factory Africa?

"Samsung aims to develop the local industry further by establishing further knock-down plants - where currently there are such plants in Sudan, South Africa, Nigeria, Ethiopia and Senegal," the company said in a statement.

Could this be the beginning of "Factory Africa"? This is pretty much how it started in Asia where Japanese foriegn investment led to a development competition acorss countries and raised millions out of poverty (check this paper on the rise of Factory Asia).

Source: News 24. ht: afro-ip via bv.

Can Superman get a UN passport?

This is from the latest Superman comic. Story here.

No more double-blind refereeing process

From the American Economic Review's website:

Upon a joint recommendation of the editors of the American Economic Review and the four American Economic Journals, the Executive Committee has voted to drop the "double-blind" refereeing process for all journals of the American Economic Association. The change to "single-blind" refereeing will become effective on July 1, 2011. Easy access to search engines increasingly limits the effectiveness of the double-blind process in maintaining anonymity. Further, it increases the administrative cost of the journals and makes it harder for referees to identify an author's potential conflicts of interest arising, for example, from consulting. 

Moral of the story: when you can't apply a rule, drop it. 

The world is lumpy: Interesting statistics

Do we truly live in a globalised world?

• only 2% of students are at universities outside their home countries
• only 3% of people live outside their country of birth
• only 7% of rice is traded across borders
• only 7% of directors of S&P 500 companies are foreigners
• less than 1% of all American companies have any foreign operations
• exports are equivalent to only 20% of global GDP
• FDI accounts for only 9% of all fixed investment
• less than 20% of venture capital is deployed outside the fund’s home country
• only 20% of shares traded on stockmarkets are owned by foreign investors
• less than 20% of internet traffic crosses national borders

These interesting stats are from Pankaj Ghemawat “World 3.0”, cited in The Economist.

Learning about human behavior using data from the Titanic disaster

In a super sweet piece in the Journal of Economic Perspectives Bruno Frey and co-authors study how people behave under extreme conditions of life and death using archive data from the Titanic disaster.

They collected individual-level data on the passengers and crew on the Titanic and identified those who survived by a dummy. Regressing that dummy on a bunch of individual characteristics they found that while people in their prime were more likely to be saved, it was women—rather than men—who had a better chance of being saved. Children also had a higher chance of surviving. At the time of the disaster, the unwritten social norm of “saving women and children first” seems to have been enforced. However, they do find evidence suggesting that effects predicted using the standard homo economicus model are also important. People in their prime age drowned less often than older people. Passengers with high financial means, traveling in first class, were better able to save themselves. Crew members who had access to better informational and relational resources managed to survive more often than others aboard.

They conclude that the behavior of human beings is not random or inexplicable, but can be explored and, at least in part, explained by economic analysis. What a great use of data!