The usefulness of academic economics

When Kepler figured out the orbit of the planets, nothing changed in the solar system (though it did pave the way for cool things like spacecraft). But academic research in economics can change the laws of motion of the economy.

There are many other war stories of this nature, particularly from financial economics. One that comes to my mind is the story of the 1986 Eytan/Harpaz paper on pricing a geometric mean of prices index, that is told in this paper by Sam Thomas.

Conversations with economists

Video files from NDTV's Policy with Patnaik.

Crisis watch, 17 November

TED spread	2.10
S&P 500 returns	-4.17%
VIX	66.3
Nikkei 225 (9:20 AM IST)	+1.17%
US Financials index	-5.75%
ICICI Bank ADR	-6.56%
Call rate on 15th	6.58%
Currency futures (9:19 AM IST)	48.99

• RBI moves once again.
• Seven elements of the policy response by Ila Patnaik.
• Editorial in Financial Express on NREG as automatic stabiliser
• Meghnad Desai worries about the fiscal situation of the G-7 in Financial Express.
• Editorial in Financial Express on FMPs.
• Declaration of the G-20.
• Jayanth Varma on financial sector soundness in Financial Express. I also closely watch stock market valuations of banks.
• Some improvements on rules about commodity derivatives transactions by Indian firms on overseas markets.
• Banks seem to have started raising deposit rates in an attempt to hoard liquidity. Also see this story in Hindustan Times.
• M. Govinda Rao in Business Standard on the fiscal position.
• Sugata Ghosh in Economic Times describes how RBI is inching closer to the joys of exchange traded derivatives, away from their traditional bias in favour of OTC derivatives.
• Business Standard gets it on short selling.
• An editorial in Indian Express.
• An editorial on dollar liquidity in Financial Express.
• The House of Tata is making progress on raising some cash. Of the $2.7 billion transaction, roughly a fourth goes into Tata Sons.
• Read and participate in a good discussion on credit rating agencies that was none of my doing.
• John Cochrane on whether this is a good time to buy US equities.
• Article by Richard Milne in Financial Times about how large firms are overcoming the infirmities of banking on the subject of their supply chain.
• Understanding the problem of liquidity by Lasse Heje Pedersen, on voxEU.

Consequences of AML/CFT

I have been a skeptic about anti money laundering and the attack on the `financing of terror'. My logic is that it only cost $100,000 to implement the 9/11 attacks, and this small sum of money can slip around the world in myriad and undetectable ways. As an example, gold is worth $23,661 per kg, and has a density of 19.3 g/cc. So gold worth $100,000 has a volume of just 220 cc! It's impossible to stop movements of these small sums.

While the benefits in terms of stopping terrorism are miniscule, the AML/CFT work has enormous costs. You might like to see Considering the Consequences: The Development Implications of Initiatives on Taxation, Anti-money Laundering and Combating the Financing of Terrorism by Percy Mistry and J. C. Sharman.

I read a fascinating article titled Stuart Levey's War by Robin Wright in New York Times which gave me a new angle on AML/CFT: it might not block Osama Bin Laden, but it could be used to go after State sponsors of terrorism. As an aside, it also gives you insights about what happens when trade finance gets scarce.

What are good resources on India and AML/CFT? I found this interesting blog.

Entry barriers in higher education

India's Colleges Battle a Thicket of Red Tape by Geeta Anand in Wall Street Journal.

Mastercard's measurement of 65 cities in emerging markets

On 9 November, I had blogged about the measurement of cities as international financial centres (IFCs) that's being done by the City of London. By this measure, in absolute terms, Bombay's score rose by 37 points between 3/2007 and 9/2008, but Bombay's rank was abysmal.

Mastercard has released a MasterCard Worldwide Centres of Commerce: Emerging Markets Index document dated October 2008. Unlike the City of London, which looks at IFCs worldwide, the Mastercard study focuses on 65 cities in emerging markets and looks at a larger perspective on the city as an engine of commerce rather than as an IFC.

In the overall ranking (page 5), Bombay appears at rank 19 with a score of 52.7 while Shanghai is ranked first with a score of 66.01. This ranking is useful in giving a sense of how badly India is faring on urban governance. I found this list to be quite interesting in what it told us about the relative ranks of cities within India: it's Bombay (52.7), Delhi (49.73), Bangalore (47.17), Chennai (47), Hyderabad (45.29), Calcutta (44.65), Poona (43.68), Coimbatore (43.25).

On page 19, they show a ranking focusing on the financial services environment. Here, Bombay comes out at rank 1 with a score of 8.46 while Shanghai appears second with a score of 7.67.

Discussion on credit rating agencies

What was a blog post titled `Interesting internships' has morphed into an `Interesting discussion on credit rating agencies'.