L'Information est d'Or

I just finished reading the fascinating book "SOCCERNOMICS: why England loses, why Spain, Germany and Brazil win, and why the US, Japan, Australia, Turkey - and even Iraq - are destined to become the kings of the World's most popular sport" . It is the first time I ever read anything interesting about football! The authors, Simon Kuper and Stefan Szymanski, are two economists interested in sports and they enjoy to apply - in sometimes an unconventional and surprising way - their economist's tools and reasoning to sports. Using plenty of data, they try to answer the following questions: Why do clubs have so much debt? Is a club a business? How efficient is the transfer market? Should we regulate more the sports markets? aka limit debt, share the revenues more equally among clubs Is it worth hosting a major sports event like the World Cup or the Olympics? How to shoot a penalty? What does the rise and decrease of some clubs tell us? Rather t...

In a paper presented at the National Bureau of Economic Research (NBER) Macro Annual Conference (April 20-21, 2012), Adrian, Colla and Song Shin (2012) present four stylized facts about financial frictions: In a contraction, bank loans are reduced but bond financing increases to make up for most of the gap. For example, during the 2007-2009 crisis, the number of bank loans issued in the USA declined by 75% whereas the number of bonds increased by two fold. Credit spreads (= risk premium) increase in a contraction Bank lending changes dollar for dollar with a change in debt, with equity being "sticky". So, credit supply by banks is the consequence of their choice of leverage. (cf. figure 1 and 2) Bank leverage is procyclical figure 1: Investment Banks: change in equity and debt in relation to the change in assets figure 2: Commercial Banks: change in Equity and Debt in relation to a change in assets They then develop a model of financial intermediation that...

In March, the Chairman of the Federal Reserve (ie the US Central Bank) gave a series of four lectures about the Federal Reserve system and the Financial Crisis to students of Georges Washington University. I have enclosed the videos of these classes. Dr. Bernanke, who is also a prominent academic researcher, is very skilled at explaining very complex problems with easy words. So, even non economists will find these lectures accessible and useful to understand the sequence of events that led to a global financial crisis and how the Federal Reserve responded to it. Let me give you a few extracts and comments that I found particularly worth highlighting: The three pillars of central bank action are: Monetary policy (setting interest rates) Provision of liquidity (lender of last resort) Financial regulation and supervision (shared with other agencies) "We did not foresee that declining house prices would trigger a financial crisis." This is an honest but clear ...

Since their top in 2007-2008, leading stock markets indices around the World have significantly declined, making this five year period one of the worst performance ever. As the chart below shows, we can distinguish three groups: The worst performers are the South European indices: Greek (ATHEX), Italian (MIB) and Spanish (IBEX) indices are down over 59%, badly hit by the Euro crisis and subsequent double-dip recession. For those countries, their membership in the Eurozone is put in question, their financial systems are strained by a loss of confidence and large outflows of money. This financial sector stress is having a depressing effect on the real economy, through reduced loans to companies and dampened business confidence. The particularity of this group is that they are now trading at their lowest level since the 2007-2008 crisis because the second crisis (Euro crisis) is hitting them much more than the first crisis (sub-prime then global financial crisis). The second group ...

I have just completed reading the 2007 seminal article by Barry Eichengreen about "The Breakup of the Euro Area". The author describes the barriers that a nation would face should it decide to exit the Eurozone. The barriers are of different natures: legal, technical, political and economic. However, as we will see, the financial crisis, which originated in the USA with the subprime crisis before triggering a Euro crisis, has lowered these barriers significantly to a point where a break-up of the Eurozone has become a realistic scenario. The technical and legal barriers are about creating a new currency, redenominating debt in the new currency and enforcing it while preventing a probable bank run because citizens that expect a devaluation will try to send their money abroad. While undoubtedly large, those barriers are not insurmountable because it has already been done (example Argentina 2001) and this barrier may be effectively lowered when people, anticipating the poss...

Being part of the Eurozone - and therefore in direct competition with other European nations -means that France has no choice but to enact urgently the following economic reforms: Reduce the weight of public spending in GDP (currently at 57%) Reduce debt before the market forces us to Reform labour market to make it more flexible and reduce unemployment. (cf Unemployment and market frictions Otherwise, they will end up in a Cul de Sac   Which of the 2012 presidential candidates offers such a programme? Not too sure...

Back in August 2008, I advised my readers in a post ( Buy USD vs EUR ) of a likely decline of the Euro against the US Dollar because of worsening situation of Europe compared to the United States. And indeed, three years and a half later, the Euro has declined from 1.5 dollars to 1.35 (-10%). What about now? As Euro area is just entering the second leg of a double-dip recession - IMF forecasts -0.5% GDP growth in 2012 compared to +1.8% for the USA. (didn't we also warn you about it? see the post of July 2010 -   Double Dip  ), a further decline of the Euro wouldn't be surprising... EURUSD exchange rate (Google Finance)