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1651. Privatized Returns and Socialized Risks: CEO Incentives, Securitization Accounting and the Financial Crisis

Author:
Michele Fabrizi and Antonio Parbonetti
Publication Date:
01-2013
Content Type:
Working Paper
Institution:
City Political Economy Research Centre (CITYPERC), University of London
Abstract:
The paper investigates the role of CEO¶s equit\ and risk incentives in boosting securitization in the financial industry and in motivating executives to reduce the perceived risk while betting on it. Using a sample of US financial institutions over the period 2003-2009 we document that CEOs with high equity incentives have systematically engaged in securitization transactions to a larger extent than CEOs with low incentives. We also show that CEOs with high equity and risk-related incentives have engaged in the securitization of risky loans and have used securitization for transferring risks to outside investors. Finally, we show that executives incentivized on risk have provided outside investors with low quality disclosure about losses recorded on securitized loans thus contributing to increase the opacity of securitization transactions undertaken. Overall, we interpret our results as evidence that CEOs have foreseen in securitizations under US GAAP an opportunity for hiding risks while bearing them and generating profits and cash flows because of the risks. Our results are robust to several model specifications as well as to endogeneity concerns.
Topic:
Financial Crisis, Securitization, CEOS, and Compensation
Political Geography:
Global Focus

1652. Financial Fragility in the Current European Crisis

Author:
Domenica Tropeano
Publication Date:
01-2013
Content Type:
Working Paper
Institution:
City Political Economy Research Centre (CITYPERC), University of London
Abstract:
The paper argues that the European financial system in the years following the great financial crisis started in 2007 has become increasingly fragile. Minsky’s notion of fragility, on which it is based, is related to history, policy and institutions. In the current European environment, fragility depends on the rise of shadow banks’ assets, the expansion of derivatives and the changes in financial regulation. All these elements have jointly triggered several feedback loops. In Minsky’s opinion, policies should have the scope of thwarting self-enforcing feedback loops. Yet the policies that have been implemented so far seem to have produced the opposite effects. They have created new feedback loops that nurture fragility again. This outcome, however, is not surprising for policies may change initial conditions and have unintended consequences, as Minsky has taught us since a long time.
Topic:
Financial Crisis, Regulation, Finance, and Financial Systems
Political Geography:
Global Focus

1653. (Re-) Conceptualising the Space of Markets: The Case of the 2007-9 Global Financial Crisis

Author:
Andrew Jones
Publication Date:
01-2013
Content Type:
Working Paper
Institution:
City Political Economy Research Centre (CITYPERC), University of London
Abstract:
The 2007-9 period saw an unprecedented crisis emerge in global financial markets with the collapse of several large western financial institutions, and the nearest moment of systemic crisis yet witnessed in the globalized financial system. The crisis has thus provoked a significant questioning of market theories, and in particular understandings of market within orthodox neoclassical economics. Within the social sciences, a significant element of this response has built on a growing heterodox socioeconomic literature which is heavily critical of hegemonic conceptions of the market within economics. However, whilst a small body of work in economic geography has begun to engage with this literature, geographical thinking has not directly sought to conceptualise the nature and significance of market spatiality. Utilizing a cultural economy approach, this paper therefore argues that economic geographical theories need to foreground the concept of market rather than treat markets as a ‘component’ of wider processes. It further contends that the concept of the ‘market’ needs to be reconceptualised in a way that captures the spatialities of markets and the difference that space makes to market behaviours and outcomes. Drawing on the growing heterodox socioeconomic literature on markets, it thus proposes a practice-oriented ‘socio-spatial approach’ for framing conceptions of market spatiality, arguing that such a spatial epistemology opens up a range of theoretical possibilities for further contesting hegemonic neoclassical theories of the market beyond current socioeconomic critiques. It seeks to illustrate the utility of such a framework through a case study analysis of the limitations inherent in existing policy practices surrounding the early phase of the recent global financial crisis.
Topic:
Economics, Markets, Financial Crisis, and Culture
Political Geography:
Global Focus

1654. A Paradigm Shift thatNever Will Be?:Justin Lin’s New Structural Economics (pdf)

Author:
Ben Fine and Elisa Van Waeyenberge
Publication Date:
01-2013
Content Type:
Working Paper
Institution:
School of Oriental and African Studies - University of London
Abstract:
This paper assesses the attempt by Justin Lin, former Chief Economist of the World Bank, to posit a new development paradigm through his New Structural Economics, NSE. Lin’s attempt to redefine development economics deserves scrutiny for at least two reasons. He launched his new framework from the platform that his position as Chief Economist at the Bank. Critical scrutiny of his propositions then allows for continued insights into the complex relationship between scholarship and policy at the Bank and further illuminates, more broadly, the role of the Bank across the spectrum of development economics, development studies and development policy. Second, Lin’s framework claims a return to a “structural” understanding of development, with a strong industrial policy rhetoric emanating from it. This has been greeted with considerable enthusiasm by erstwhile critics of the Bank. Closer scrutiny of the NSE, however, both reveals the flawed nature of its core theoretical notion of comparative advantage and exposes its strong, if unfortunately conservative, commitment to a flawed and incoherently applied neoclassical economics. These issues are explored across Lin’s propositions regarding structural change, the role of the state and finance and are further examined in the context of specific policy interventions that Lin attaches to the NSE.
Topic:
Development, Economics, Industrial Policy, World Bank, and Economic structure
Political Geography:
Global Focus

1655. A Note on Credit Allocation, Income Distribution, and the Circuit of Capital (pdf)

Author:
Paulo dos Santos
Publication Date:
08-2013
Content Type:
Working Paper
Institution:
School of Oriental and African Studies - University of London
Abstract:
This note considers the relationship between credit allocation and the aggregate, class distribution of income in the Circuit of Capital. Production and consumption credit inject means of purchase in different locations in the monetary circuits of capitalist reproduction. On the basis of comparative-dynamic analysis of the properties of steady-state evolutions, the note shows that production credit increases the wage share in total income, while consumption credit increases profit shares. These findings hold in general for any evolution in which sectoral revenue- elasticities of outlays measure less than unity. The note also motivates a new endogenous approach to the aggregate distribution of income, and offers new analytical tools facilitating work based on demand-constrained models of the Circuit of Capital.
Topic:
Inequality, Income Inequality, Economic Theory, Credit, and Capital
Political Geography:
Global Focus

1656. A History of Polyvalent Structural Parameters: the Case of Instrument Variable Estimato

Author:
Duo Qin and Yanqun Zhang
Publication Date:
09-2013
Content Type:
Working Paper
Institution:
School of Oriental and African Studies - University of London
Abstract:
This paper investigates the rise and fall of the IV method in macro-econometric models and its subsequent revival in micro-econometric models. The key findings are: (i) the IV method implicitly breaks the contemporaneously circular causality postulated in a simultaneous- equation model (SEM) by redefining the conditional variable concerned as a suboptimal conditional expectation of it; (ii) the IV method falls out of favour in macro-econometrics mainly because of lack of empirical validations for such redefinitions; (iii) the IV method wins its popularity in micro-econometrics by its capacity to produce multiple suboptimal conditional expectations of the latent conditional variables of interest under the disguise of an SEM consistent estimator; nevertheless, (iv) such suboptimal conditional expectations give rise to the insurmountable difficulty of credibly interpreting the IV-based parameter estimates, especially in the case of prognosticated omitted variable bias. The findings highlight the methodological drawback of the estimator-centric strategy of textbook econometrics.
Topic:
Economic Theory, Macroeconomics, and Microeconomics
Political Geography:
Global Focus

1657. Modelling Scale Effect in Crosssection Data:The Case of Hedonic Price Regression

Author:
Duo Qin and Yimeng Liu
Publication Date:
09-2013
Content Type:
Working Paper
Institution:
School of Oriental and African Studies - University of London
Abstract:
An innovative and simple experiment with cross-section data ordering is carried out to exploit a basic and common feature between many economic variables – nonlinear scale dependence. The experiment is tried on hedonic price regression models using two data sets, one for automobiles and the other computers. The key findings are: (a) Hedonic price indices can be significantly biased if they are constructed using models which disregard possible nonlinear scale effects latent in random data samples; (b) Scale-based data ordering offers considerable potential to filter such scale-dependent information from cross-section samples; (c) The filtering can be easily carried out by systematic adoption of dynamic modelling methods.
Topic:
Science and Technology, Economic Theory, Models, and Price Regression
Political Geography:
Global Focus

1658. Price Non-Convergence in Commodities: A Case Study of the Wheat Conundrum

Author:
Sophie van Huellen
Publication Date:
10-2013
Content Type:
Working Paper
Institution:
School of Oriental and African Studies - University of London
Abstract:
The close relationship between commodity future and cash prices is critical for the effectiveness of risk management and the functioning of price discovery. However, in recent years, commodity futures prices, across the board, have appeared increasingly detached from prices on physical markets. This paper argues that while various factors, identified in previous literature, which introduced limits to arbitrage have facilitated non-convergence, the actual extent of non-convergence in these markets is caused by essential differences in the mechanisms of price formation on physical and derivative markets. With reference to the particular case of the CBOT wheat market, the paper shows that the size of the spread between futures and cash prices can be theoretically and empirically linked to the increasing inflow of financial investment into commodity futures markets.
Topic:
Agriculture, Markets, Commodities, and Financialisation
Political Geography:
Global Focus

1659. Capital Flows to Emerging Markets: An alternative Theoretical Framework

Author:
Bruno Bonizzi
Publication Date:
11-2013
Content Type:
Working Paper
Institution:
School of Oriental and African Studies - University of London
Abstract:
This paper represents a theoretical contribution to the analysis of international capital flows. It outlines an alternative theoretical framework based on Post-Keynesian monetary theory, and in particular on Hyman Minsky’s Wall Street paradigm and concept of Money-manager capitalism and Jan Toporowski’s theory of capital market inflation. The key aspects of such an approach are, firstly, that in a monetary analysis capital flows need to be understood as “flows of funds”, as opposed to the traditional understanding of capital flows based on “real” decision, such as saving and investment. A consequence of this is the need of focusing on gross rather than net capital flows. Secondly, when considering emerging markets, the asymmetric nature of the international monetary system must be stressed. Thirdly, it is important to understand the specific forms that capital flows take: in today’s world, pension funds and other institutional investors — alongside banks — are key players in the financial markets, and their role in shaping capital flows to emerging markets must be explicitly recognised. This paper synthesises these elements by understanding capital flows as the result of institutional investors portfolio choice. Along the lines of Minsky and Toporowski, portfolio choice by institutional investors need to be assessed in relation to their balance sheet structure, beside risk/return trade-offs and general state of risk aversion
Topic:
Emerging Markets, Capital Flows, Investment, and Economic Theory
Political Geography:
Global Focus

1660. Green Transformation towards Sustainable Development?

Author:
Lisa-Marie Althaus
Publication Date:
05-2013
Content Type:
Working Paper
Institution:
Institute for Development and Peace
Abstract:
Both the concept of sustainable development (SD) and the new green transformation concepts (GTC) aim for the integration of environmental protection and development. Previous comparative research on these GTC is not based on theoretically founded crite- ria that are related to the established development paradigm of SD. The study closes this research gap by providing a conceptual comparison of different GTC versions as pub- lished by UNEP, the OECD, and the German Advisory Council on Global Change (WBGU). The analysis reveals that GTC concepts are indeed based on central goals and principles of SD. Unlike the concept of SD, the GTC acknowledges planetary boundaries as limits to growth. However, the more economy-focused concepts of UNEP and the OECD do not only disregard important social goals but also concerns of intergenerational equity and the globality principle of SD. In contrast, the WBGU focuses on civil society participation and both intra- and intergenerational equity by aiming for decisive institu- tional changes. It is shown that this GTC partly extends beyond the scope of SD and thus could mark an important step with regard to the further development of the concept.
Topic:
Civil Society, Climate Change, Development, Economics, Green Technology, and Sustainability
Political Geography:
Global Focus