Econtobe

A Professional Accountant turned Journalist in India has written the below article about the crisis. From The Hindu Business Line : Will the US remain US? Or become a neo-USSR? Will the US remain US? Or become a neo-USSR? The population of derivative products has grown to gigantic levels that is beyond the competence of any system, mind, or force to deal with. S. Gurumurthy The title is not to tease the reader. If the ongoing debate initiated by Martin Wolf, associate editor and chief economic commentator in Financial Times and Prof. Nouriel Roubini, professor of economics at New York University, is to be given a title, that could be this. Wolf, whose Wednesday columns in FT are discussed by fifty most influential economists of the world, is a mainline economic thinker. Roubini, who has held different positions in US government, now occupies important seats in academia and runs Roubini Global Economics [RGE] Monitor, an influential Web site. In July 2006 itself, Roubini had predicted that US was in recession. But, like others had, Wolf had ignored Roubini for nearly 20 long months. But, as the unfolding events were proving Roubini right, Wolf wrote [FT, February 18, 2008] that Roubini deserved to be taken seriously. March towards disaster Wolf also held Alan Greenspan, who had dismissed the housing issue “as not a bubble but a froth”, wrong. Wolf pointed out how Roubini has [on February 5, 2008] predicted a 12-step march towards a ‘catastrophic’ financial and economic outcome as a “rising possibility”. In his column, Wolf recalled Roubini’s 12-step recipe for disaster, including: Housing recession that wipes out family wealth of $4-6 trillion, forces a million to surrender house keys to lenders, and turns home builders bankrupt; Home loan losses that exceed the estimated $250-300 billion and, together with consumer loan losses, spread credit crunch across; Top-rated credit insurers get downgraded, causing a further $150 billion loss; Commercial property market melts; A large bank goes bankrupt; Big losses in leveraged buyouts, with hundreds of billions of dollars of bank funds stuck; Corporate bond defaults force losses of $250 billions on credit default swap insurers and bankrupt many; With meltdown of hedge funds delinked from central banks, further collapse of the stocks force huge fall in security prices; Acute illiquidity dogs financial markets with jump in concern about solvency; and “A vicious circle” of deep recession makes financial losses “more severe” and “financial losses and meltdown” make the recession “even more severe.” Roubini estimates $1 trillion loss in the meltdown. “Is this scenario at least plausible?” asks Martin Wolf, and answers, stunningly, “It is”. [This was on February 18. But the loss meter in March projects $3 trillions loss!] If this “nightmarish scenario” lasts for six quarters, Roubini warned on February 5, it would be too late for other nations to devise ‘policies’ to ‘de-couple’ from US. But can the US Fed head off this danger? Roubini says ‘no’ for many reasons. Two of them are important. One, the Fed can deal with liquidity, but, not solvency, which is the real issue. Two, the transactions-oriented financial system itself is in deep crisis. This second one is critical and needs some explanation. Derivatives in control The world of finance which Roubini calls as transaction-oriented system looks a bizarre, dollar jungle now. A peep into this mind-boggling labyrinth will unnerve even the most diehard among optimists. The world of finance today is controlled by derivatives. What is a derivative? ’Derivatives are financial Weapons of Mass Destruction [WMD]’, ‘now latent’ but ‘are potentially lethal’. This is not socialist Fidel Castro, but, capitalist Warren Buffet speaking recently (on March 10, 2008). Yet, the most among those who count in the world seem unaware of this WMD. ‘Politicians, senior executives, regulators, even portfolio managers have limited knowledge’ about it, says an expert Web on derivatives. Derivative is a financial instrument whose value is not its own, but derived from something else, on some underlying asset or transaction, such as commodities, equities (stocks) bonds, interest rates, exchange rates, stock market indexes, why, even inflation indexes, index of weather! The CDOs (collateralised debt obligations), by which the underlying US local subprime loans were palmed off to other continents, was, till the fraud was not out, a reputable credit derivative. So derivative is not only a WMD but also an ICBM, an Inter Continental Ballistic Missile, that hits across continents! Also, the virtual derivative economy is gradually decoupling itself from the actual in quality as well as size. Hundreds of exotic derivative products have been innovated and innovations by the best minds are continuing. Mind-boggling size The population of these beastly financial products has grown to gigantic levels that is beyond the competence of any system, mind, or force to deal with. The sheer collective size of these modern financial beasts is terrifying. According to the Bank of International Settlements [bIS], the aggregate derivative positions of banks grew from $100 trillion in 2002 to — believe it — $516 trillions in 2007, that is over 500 per cent in five years! Yet they do not appear in bank or corporate balance sheets. Some of the vital actuals seem pygmies in comparison to these virtuals. The total derivatives are more than ten times the global GDP [$50 trillion]; some seven times the world’s estimated real estate value [$75 trillions]; more than five times the world’s stock values [$100 trillions]; more than 33 times the US GDP [$15 trillions] or the US money supply [$15 trillion]; 172 times the US federal budget [$3 trillion] — it can go on. The size of the virtual economy is indeed petrifying. Worse, it unpredictably targets, yet accurately eliminates, the distant and the unwary as the CDOs did. A decade earlier, Long Term Capital Management [LTCM] a hedge fund co-promoted by two Nobel laureates, collapsed. Its loss of $5 billion was peanuts compared to the trillion dollar-plus loss that is forecast now. Yet the LTCM fall nearly snuffed out the global monetary system. The derivative economy was much smaller then. When billions could devastate the world market then, what could trillions not do now? It is so huge now that, no one, not even all governments and central banks in the world put together, can control this huge and growing population of derivatives. This is what Akio Morita, the former Sony Corporation chairman, told the Group-7 leaders as far back as 1993, when the size of the derivative population was far less. With the derivatives growing so malignant, it is not the actual finance which controls its derivative, but, the other way round – the virtual controls the actual. What, if this off-balance-sheet virtual architecture collapses? It is so fragile that it can. Martin Wolf warns “the connection between housing bubble and the fragility of the financial system has created huge dangers, for the US and for the rest of the world.” If a collapse starts, it is beyond any known power’s power to stop or repair it. The balance sheet of the whole world is too small for it and the actual will too meet the fate of the virtual. Roubini’s caveat regarding transaction-oriented financial system being in crisis and Warren Buffet’s warning about derivatives as financial WMDs, expose how fragile is today’s virtual financial architecture, which is several times the actual. A way out? What is the way out? And is there a way out at all? There are ‘ways out’, claims Martin Wolf, but, warns, ‘they are poisonous ones’. Wolf says, “In the last resort governments resolve financial crisis. This is the iron law.” And adds, “The US public sector is coming to the rescue.” Public sector? To the rescue of world’s most efficient financial market? In the freest economy in the world? Yes. And Wolf hopes, “In the end, they will succeed.” This was Wolf on February 20, 2008. The state in US as the answer to the mess created by the free market? Confession indeed from a diehard capitalist! Some 18 years back, market was touted as the answer to the mess created by the state in USSR. A 360-degree turn now. Read on, it is more interesting. Nationalisation of losses? In his later article on March 11, 2008, Wolf says, “The government would have to mount a rescue. The most plausible means of doing so would be via nationalisation of all losses.” Nationalisation? And of losses? In free market US, which pontificates on privatisation of public sector and government works the world-over? But how to nationalise only losses? To keep the ownership with those who lost others’ money? Roubini also says that some market observers are already talking about nationalisation of the US banking system — first covert and then explicit — as the next step to the financial meltdown. Obviously the US Government is seen as the saviour for the faltering — or better, collapsing? — financial market of the US. So, massive state penetration of Wall Street seems inevitable. And it is already happening. And that will be a topic by itself. QED: What then is its consequence? If the banking system in US, which holds the Capital of capitalism, is nationalised, what will be left of capitalism in US? Capitalism without Capital ’C’? If US nationalises capital, will US capitalism remain market capitalism or become State Capitalism? Will the US be US then? Or will it become a neo-USSR? No seer is needed to give the answer. It’s obvious. (The author is a corporate advisor. His e-mail is guru@gurumurthy.net)

Hi Bat Bat, Here is wishing you the best for your pursuits. Firstly, Is your primary aim teaching? If so, you can try becoming a faculty with your profile as-is. Business schools normally encourage practising professionals to become 'adjunct' or visiting faculty and to teach. So you can attain your aims without a phd. And you can even try for a full-time position if people in the university are happy with your performance. The reason why I say the above is, as follows. 1. A PhD prepares one for a research career and not mainly for a teaching one. Teaching more often is a secondary activity for a PhD holder. Are you intent on researching in accounting 'science', publish papers and attend conferences? If so, you should go for a phd. 2. That said, your age - although not an insurmountable hindrance, is a problem nevertheless. If you start your Phd say in 45, you'll finish when you are 50. And starting an academic career as an assistant professor at 50 in not something universities will encourage. I think you should personally speak to a professor in a school that you know about what he thinks about all this.. So, maybe you are better off being a visiting faculty first and try for a professorship directly.

Wow, I'm amazed and impressed by the reasoning behind using so much math. Continuing musings.. Math is indeed a fantastic language for this purpose.. If its a medium then I would imagine other social sciences having difficulty in communicating complicated logic should use it as well. For instance philosophy, does anyone know if math has penetrated mainstream philosophy too? I've read works of Bertrand Russell but not sure of contemporary research there.. Moreover, so much math really makes it difficult for a layman like me to understand econ research. I remember I started reading Welfare Economics by Amartya Sen and was amazed to see it completely math oriented and inscrutable.. unfortunately had to put it down. :(

I couldn't resist posting what I know although the thread exists for a different reason, especially since there is a reference to Indian students. In my (Indian) university, every year there were atleast 5 people who used to get 2400/2400 in the (yesteryears) GRE. And a lot (really a lot) will have scores over 2250.. I would imagine scores in excess of 1500 is just normal even now. Reason - students here don't have anything else to do except study. They are made to think if they don't emigrate they aren't fit to live. I ain't exaggerating.

Hmm.. The basic premise seems to be that adcoms are very risk averse. For some reason this leads me to believe that the next path-breaking super-star economist is going to come from a mid-range school.. :) Although I understand the risk present in picking someone who might not pass prelims, I find it tough to digest the fact that we've to take so much math just to make adcoms decision easier. Life doesn't seem to be easy. :rolleyes: I was talking about using math/statistics RAs from 'other' respective departments not econ PhD/MA students. Of course I have zero-knowledge about how this entire RA system works, hence pardon all the ignorance.

I've been reading the criteria for admissions for quite sometime now and I can't help but wonder (rather, muse!) on these lines.. I view mathematics and statistics as just tools to crunch economic data.. If top PhD programs only admit people who are expected to be math/stats specialists it means they are only intent on creating economics craftsmen.. ones who are experts in using the tools; not necessarily the ones who have the potential to become thought-leaders in economics content, isn't it? Please pardon my naivete in thinking this way. Or, is there an implicit assumption that everybody who are intent on pursuing an economics PhD should already have the 'aptitude' and 'potential' for econ thought leadership and their math/stat prowess only increases the probability of making an Adam Smith or Ricardo out of them? Also, can't an economics researcher hire a lot of quantitative RAs from math and statistics departments to get his tooling done, while he focuses on analysis? Historically, political scientists like Chanakya or economists like Smith may not have been as much mathematical jocks as contemporary PhDs in these fields.. Maybe the adcoms think that all thought-leadership required in economics has already been done.. but this is hard to believe when so much disparities exist in the world. I am sure there is a big hole in my logic & thoughts.. and the forum would quickly point it out.. :)

YoungEconomist: For a private sector career, where you do your phd may not matter for a 'great career' because the market will pay for your work. In other words, private sector research will only work in areas that has an immediate market. Moreover, an MA probably is enough academic training for someone who wants to get into the industry. But for academic research, having a 'great career' from a low ranked school might be very difficult. For one, research departments aren't financially independent but depend on grants/funds. I don't know how many US universities are well-funded and given enough independence to focus long on an area of research. There may not be more than 50-100.. Maybe someone from a lower ranked place would shift to a big and better university after years of 90 hour work-weeks teaching and researching , if he wants a great career.. I think it makes sense to put in those hours right now and get admitted to a better program.. And on 'love of work': If its using the research methodology (tools, analysis, math) that one loves, then doing any research is sufficient. But if it is the subject matter that one loves (development economics, international trade etc) then being funded and having the independence to choose the subject is very important.. and these may not be available outside of top-50/100..

Yes. It is more likely that someone from US/Europe who attends such programs will graduate at the bottom-20 or 40% in a developing country. See this forum link where someone has suggested places like Russia, Turkey and Israel apart from Latin America for an MA! It is indeed a *huge risk* to even consider going to these places for a masters. Especially for someone who has an average Undergrad GPA, because maybe thats the reason why he is considering a masters degree first of all.

I've seen the list before. All of those 15 are latin-american students, aren't they? For an Argentinian wanna-be, it is definitely not a risk at all. Similar is the case for Indian going to ISI, Kolkata or DSE, Delhi. But, considering that only a few (maybe 5?) good colleges for higher education exist in a developing country like Brazil, Argentina or India the native students coming to these institutes are no lesser than geniuses. I say this from my experience. After all, Sir C.V.Raman went to a Bangalore college and got a nobel prize subsequently. So isn't it a risk to graduate at the bottom-20% of the class having deliberately chosen to attend a developing country program considering the competition? And well, I'm actually happy hearing the news about funding at a 230 ranked school. I really wish it was true in other schools around this rank.

Read the article here. This is from the Times newspaper today (Dec 9), Bangalore India edition. This gives a good perspective on the MA Program in economics in India. To be sure, the article talks only about the colleges ranked in Top-10 in India. Here is an article on top 10 arts colleges in India. And even in colleges that offer a Phd, the MA programs remain unfilled. IMHO, there is really no point studying or researching in an institute which is outside of Top-150 in the world. I saw some threads talking about MA programs in Latin America and Asia. It might be a *huge risk* going to these places. I'm worried what kind of an academic job will someone who goes to a 'outside of top-100' ph.d program will get. Outside of Top-150 or Top-200 institutes, funding and research might be non-existent. Even if they offer phd programs, it might be a huge compromise.

Upon reading the article, I get a feeling that the author just wants to say that 1988 crash and the resulting decline in jobs made people from elite universities join outside of this elite group/elsewhere and this contributed to building up of a more widespread network. Maybe this is just a onetime event and not a trend. I, for one, would think that being close to Einstein and other elite physicists of the time would obviously improve my productivity because of obvious reasons.

Olm's advice is not for 'everybody' but its for the OP. I think he qualifies for a Statistics MA assuming there would have been a basic probability/statistics course in his economics UG. I think since he's already taken a 'lot of eco courses' a statistics MA will better complement his UG and let him take math courses as well. MA Math may not be a good advice because it requires taking GRE subject test in mathematics and I guess is a competitive program to get good grades.

Hi Terd, I think these are really valid questions on the utility of an economist from an ordinary (outside of top-50) school. Going to an ordinary school for a ph.d need not preclude one from getting his research published in top journals. Why do you assume that an ordinary ph.d will only produce ordinary research? I would like to believe this is not true, if it is, then all the motivation I had to pursue a ph.d is gone! :-) On a more practical level, I think if someone finds that he isn't capable of top quality research and still wants to be useful, he should get into industry (not think-tanks, but companies). I think those jobs are available much more in Finance (equity research, financial engineering etc) than in economics. I however do not know how difficult or easy it is for an economics ph.d to break into finance jobs.. all the math that we took should help, but not sure about it. Can anyone answer? How easy it is for an economist to work in Finance corporate jobs if he feels that he is not producing quality research capable of making any 'impact'?

Hi Vardhan: You can get into a Masters program. But how good a program and how helpful would it be to you, are questions that are more important and requires more information from you to answer. UBC says this in their site: Applicants for admission to the M.A. program are normally expected to have a strong undergraduate academic record especially in economic theory, statistics, and econometrics, with at least one year of calculus. Additional study of calculus and linear algebra is strongly advised. Your application may not be very competitive in a good MA program if the adcoms don't see such courses in your transcript AND your engineering degree grades aren't great. Also, you are required to give 2 recommendations from professors who taught you and preferably are economists, math or statistic professors.. I am concerned if you'll be able to get these. I've a similar background as you, but have an MBA(IIM) after my engineering, but still worried about prospects. But no need to lose heart, we can still fight it out! :)

Is there anyone in the forum that has gone through this path.. of using an MA Math as a stepping stone? From what I read in univ sites, most of good programs require a subject GRE in Math for admit. To get a decent score in this subject GRE the test-taker should know good amount of pure math. So this is kinda catch-22 situation. Moreover, considering that a lot of math ph.d aspirants use a MA Math program as an intermediate I would assume it would be very competitive for a econ aspirant. I for one would be very skeptical before embarking on this path. I completely understand the theoritical utility of the math program, but practically it does appear to be too much of a hardship, considering UG level math is sufficient for econ phd (only hearsay, but from a lot of current phd students). An Econ masters with Math minor sounds a lot better.