29 September 2008

A glooming bright future for the non-financial sector

Which is likely to be true?

The Paulson Plan, whatever its final form, will not bring this upheaval to an early end. The consequences are clearly spreading from Wall Street to Main Street. The recent performance of nonfinancial stocks indicates that investors are well aware of the fact.

So comparisons with the Great Depression, which have been of academic interest but little practical relevance, take on new salience. [...]

It is hard to avoid concluding that the Fed erred disastrously when deciding that Lehman Bros.


The non-financial sector today looks nothing like it did in 1930. The weak correlation between asset prices and non-financial sector performance and the strong profitability of today’s non-financial capital are two good reasons to scoff at the idea that the non-financial sector will collapse because of the recent events on Wall Street, and even better reasons to scoff at the Bernanke-Paulson-Bush idea that a massive bailout of financial firms is the key to avoiding a non-financial collapse.


The Treasury and the Fed should let Wall Street drown alone, to be replaced by new financial service providers who can swim as robustly as are non-financial American businesses.

Before pointing to the authors, take a look at the graphs below. That's the Brazilian stock market main index (IBOVESPA) and the tipping point is just after US House of Representatives' rejecting the edited version of the Paulson plan. This is relevant not only because of the time frame, but because the Brazilian stock market has evolved a lot in the past years and - unlike its Russian counterpart, for instance - had not faced severe swings in a long time. Oh, and the fact that I'm Brazilian may have something to do with it...!

It would be great if the markets were always efficient and we could let havoc take place, relying confidently in creative destruction. This, however, is not the case and professor Barry Eichengreen's warning - that US unemployment rate may reach 2 digits - should be taken very seriously. He's the author of the first quote, taken from And now the Great Depression, at Vox Eu. Professor Barry Eichengreen, from University of California, Berkeley, has been frequently quoted these past days thanks to his Anatomy of a Crisis. He seems to be inspired and we'll be keeping an eye out for more insights.

The second quote is from Casey Mulligan's Wall Street Will Drown Alone. His core argument can be found in Greg Mankiw's A Note of Optimism. Oh, yes, professor Mulligan is from (surprise, surprise!!) University of Chicago.

PS: After writing this, the Bovespa reopened... Let's see where it goes now.

25 September 2008

Economics International is back

Dear Readers!

Economics International is back after the vacations break and ready to bring you new insight on international finance, trade and business.

In the coming academic year, we aim at enlarging the number of authors, obtaining more academic articles written by PhD students and touching upon topics not covered anywhere else.

As to the latter, the article on the interactions between Eastern philosophies and economic life of Chinese diaspora by Lea Tan will be ready soon.

We hope that you will find the visit on our website interesting, entartaining and inspirating!

Best wishes,
Economics International