The current financial and economic crisis: empirical and methodological issues

In this paper we describe the main causes of the recent financial crisis as a result of many theoretical, methodological, and practical shortcomings mostly according to heterodox, but also including some important orthodox economists. At theoretical level, there are problems concerning teaching and using economic models with overly unrealistic assumptions. In the methodological front, we find the unsuspected shadow of Milton Friedman’s ‘unrealisticism of assumptions’ thesis lurking behind the construction of this kind of models and the widespread neglect of methodological issues. Of course, the most evident shortcomings are at the practical level: (i) huge interests of the participants in the financial markets (banks, central bankers, regulators, rating agencies mortgage brokers, politicians, governments, executives, economists, etc. mainly in the US, Canada and Europe, but also in Japan and the rest of the world), (ii) in an almost completely free financial and economic market, that is, one (almost) without any regulation or supervision, (iii) decision-taking upon some not well regarded qualities, like irresponsibility, ignorance, and inertia; and (iv) difficulties to understand the current crisis as well as some biases directing economic rescues by governments. Following many others, we propose that we take this episode as an opportunity to reflect on, and hopefully redirect, economic theory and practice.

Proposal for redesigning the financial system: lessons learned from the crisis

this paper analyzes the singularities inherent to the financial industry, in relation to other businesses, and its implications to financial crises throughout history. The efficient markets hypothesis is questioned, and its impact on the deregulation of the financial system is analyzed. Finally, the causes of the current crisis are investigated, and the general lines to be addressed for the redesign of a financial system to achieve an efficient and equitable capitalism are suggested.

Le contrôle européen des concentrations et les leçons à tirer de la crise financière et économique = European merger control and the lessons of the financial and economic crisis. Research Papers in Law, 06/2013

No abstract.

Válság és hitelderivatívák. A szintetikus fedezett adósságkötelezettségek (CDO-k) árazása és kockázataik (Crisis and loan derivatives. The pricing and risks of synthetic collateralized debt obligations)

A dolgozat első részében röviden áttekintjük a 2007-ben kezdődött pénzügyi válság lefolyását és a válsághoz vezető okokat. A bemutatás során igyekszünk végig a mögöttes folyamatokra és azok mozgatórugóira koncentrálni, ezzel megragadva a válság egyfajta "elméletét". A bemutatásból láthatóvá válik a hitelderivatívák kiemelt szerepe a válság során. A dolgozat második részében az egyik legnépszerűbb hitelderivatív termék, a szintetikus fedezett adósságkötelezettségek (CDO-k) matematikai modellezését és annak problémáit mutatjuk be. Sokak szerint ezek a matematikai modellek okozták - vagy legalábbis felerősítették - a válságot. Az elemzés során megmutatjuk, hogy nemcsak a modellezési eszközök nem voltak megfelelők, hanem az árazás elve sem állta meg a helyét a kockázatsemleges árazási keretben. Ez az eredmény élesen rámutat a mögöttes elméletek válságára. / === / The first part of the paper examines briefly the financial crisis of 2007 and its causes, focusing on its driving processes and key motifs. This shows clearly the importance and centrality of credit derivatives in the crisis. The second part presents a mathematical modelling of one of the most popular credit derivative products: synthetic collateralized debt obligations, along with the drawbacks and problems of the modelling process. It is widely claimed that these products caused or at least precipitated the crises. The authors show not only that the modelling tools were inappropriate, but that the principle for pricing did not match adequately the risk-neutral valuation framework.

Effects of the current financial and economic crisis on the rural landscape as well as the agri-food sector in Europe and Central Asia

This paper reviews the expected effects of the current financial crisis and subsequent recession on the rural landscape, in particular the agri-food sector in Europe and Central Asia (ECA) on the basis of the structure of the rural economy and of different organisations and institutions. Empirical evidence suggests that the crisis has hit the ECA region the hardest. Agriculture contributes about 9% to gross domestic product (GDP) for the ECA region as a whole with 16% of the population being employed in the agricultural sector. As far as the impact of the financial crisis on the agri-food sector is concerned, there are a few interconnected issues: (1) reduction in income elastic food demand and commodity price decline, (2) loss of employment and earnings of rural people working in urban centres, implying also costly labour reallocation, (3) rising rural poverty originating mainly from lack of opportunities in the non-farm sector and a sizable decline of international remittances, (4) tightening of agricultural credit markets, and the (5) collapse of sectoral government support programs and social safety-net measures in many countries. The paper reveals how the crisis hit farming and broader agri-business differently in general and in the ECA sub-regions.

Social Services in Times of Economic and Social Crisis: The case of Spain

The financial and economic crisis which originated in 2008 has had a severe impact on the population of the Southern European countries. The economic policies of austerity and public deficit control, as well as the neo-liberal and conservative social policies are redefining the public social protection systems, in particular the Social Services. In order to get to understand the current situation, we shall explain how the Social Services were developed in Spain and analyse the causes and consequences of the economic crisis. The working hypothesis is that the greater the increase on the population’s needs, the more developed the Social Services should be. We carried out a descriptive analysis of the situation as far as the social impacts of the crisis per region are concerned. We tested the hypothesis through a parametric model of analysis of variance (one-way ANOVA) triangulating with the non-parametric Kruscal-Wallis test. The working hypothesis failed. The regions with better developed Social Services show a lower level of poverty and social exclusion. The challenges that the public Social Services system faces in times of crisis is three-fold: 1) re-modelling of local administration and transferring of the municipal Social Services responsibilities to the regional administration; 2) an increase of the population at risk of poverty and social exclusion 3) impact on social policies.

Cortisol shifts financial risk preferences

Risk taking is central to human activity. Consequently, it lies at the focal point of behavioral sciences such as neuroscience, economics, and finance. Many influential models from these sciences assume that financial risk preferences form a stable trait. Is this assumption justified and, if not, what causes the appetite for risk to fluctuate? We have previously found that traders experience a sustained increase in the stress hormone cortisol when the amount of uncertainty, in the form of market volatility, increases. Here we ask whether these elevated cortisol levels shift risk preferences. Using a double-blind, placebo-controlled, cross-over protocol we raised cortisol levels in volunteers over eight days to the same extent previously observed in traders. We then tested for the utility and probability weighting functions underlying their risk taking, and found that participants became more risk averse. We also observed that the weighting of probabilities became more distorted among men relative to women. These results suggest that risk preferences are highly dynamic. Specifically, the stress response calibrates risk taking to our circumstances, reducing it in times of prolonged uncertainty, such as a financial crisis. Physiology-induced shifts in risk preferences may thus be an under-appreciated cause of market instability.

Submission to the Queensland Government inquiry into "The adequacy of existing financial protections for Queensland's seniors"

This submission covers the following terms of reference: • the current levels of financial literacy of seniors and how that can be improved, for example by education programs; • what support and advice is available to assist seniors with their independent financial decision-making; • online and internet based vulnerabilities and the prevalence and vulnerability of seniors to scams; • agencies and organisations that provide advice and support to seniors requiring financial protection; and • the role of the financial sector in ensuring adequate safeguards for seniors in relation to financial decision-making.

The role of transformative thinking and practice in a property entrepreneur's response to the funding crisis since 2008

This portfolio of exploration explores the role of transformative thinking and practice in a property entrepreneur’s response to the financial crisis which swept over Ireland from 2008. The complexity of this challenge and the mental capacity to meet its demands is at the core of the exploration. This inquiry emerged from the challenges the financial crisis presented to my values, beliefs, assumptions, and theories, i.e. the interpretive lens through which I make meaning of my experiences. Given the issue identified, this inquiry is grounded in aspects of theories of constructive developmental psychology, applied developmental science, and philosophy. Integrating and linking these elements to business practice is the applied element of the Portfolio. As the 2008 crisis unfolded I realised I was at the limits of my way of knowing. I came to understand that the underlying structure of a way of knowing is the ‘subject-object relationship’ i.e. what a way of knowing can reflect upon, look at, have perspective on, in other words, make object, as against what is it embedded in, attached to, identified within, or subject to. My goal became enhancing my awareness of how I made meaning and how new insights, which would transform a way of knowing, are created. The focus was on enhancing my practice. This Portfolio is structured into three essays. Essay One reported on my self-reflection and external evaluation out of which emerged my developmental goals. In Essay Two I undertake a reading for change programme in which different meaning making systems were confronted in order to challenge me as a meaning maker. Essay Three reported on my experiment which concerned the question whether it was possible for me as a property entrepreneur, and for others alike, to retain bank finance in the face of the overwhelming objective of the bank to deleverage their balance sheet of property loans. The output of my research can be grouped into General Developmental and Specific Business Implications. Firstly I address those who are interested in a transformational-based response to the challenges of operating in the property sector in Ireland during a crisis. I outline the apparatus of thought that I used to create insight, and thus transform how I thought, these are Awareness, Subject-object separation, Exploring other’s perspectives from the position of incompleteness, Dialectical thinking and Collingwood’s Questioning activity. Secondly I set out my learnings from the crisis and their impact on entrepreneurial behaviour and the business of property development. I identify ten key insights that have emerged from leading a property company through the crisis. Many of these are grounded in common sense, however, in my experience these were, to borrow Shakespeare’s words, “More honor'd in the breach than the observance” in pre Crisis Ireland. Finally I set out a four-step approach for forging a strategy. This requires my peer practitioners to identify (i) what they are subject to, (ii) Assess the Opportunity or challenge in a Systemic Context, (iii) Explore Multiple Perspectives on the opportunity or Challenge with an Orientation to change how you know and (iv) Using the Questioning Activity to create Knowledge. Based on my experience I conclude that transformative thinking and practice is a key enabler for a property entrepreneur, in responding to a major collapse of traditional (bank debt) funding.

Managing state-owned enterprises in an age of crisis:An analysis of irish experience

As with all aspects of public management, the control, financing, and regulation of state-owned enterprises (SOEs) are matters subject to changing international trends and domestic political imperatives. The effects of the global financial crisis (GFC) on the ownership, financing, and role of SOEs are still unfolding, but undoubtedly will be heavily influenced by a new era of public sector reforms principally designed to reassert central political controls, as well as by fiscal pressures to balance state budgets. In this regard, the Irish experience is instructive, with the findings from two datasets being used here to examine various modes of state enterprise control and their corresponding autonomy. Significantly, there has been considerable variety within and across the SOE sector, demonstrating the need for more detailed understanding of how SOEs are managed. © 2011 Taylor & Francis.

Protecting the most vulnerable in an economic crisis: a participatory study of civil society organisations in the Republic of Ireland

This paper advances knowledge of how civil society organisations (CSOs) negotiate the shift from boom-time public expenditure to governmental austerity. The study focuses on the Republic of Ireland, where CSOs occupied an important role in providing a voice for ‘vulnerable’citizens in corporatism for over a decade. The global financial crisis and subsequent austerity measures caused the country’s model of corporatist-style ‘social partnership’ to collapse. The article connects CSOs’ adaptation to austerity measures when protecting the ‘people behind the cuts’ to broader questions about co-optation of civil society through state-led policymaking
institutions.

Italy's got talent. How Italian leading companies in confectionery industry overcame the crisis

The crisis that spread worldwide since 2007 started from the financial sector and ended to affect also real economy. This process has attracted the attention of many scholars seeking to study its causes and impacts. Notwithstanding many works on this topic, the impact of the crisis on specific industries is still rather unexplored. The present work seeks to address this issue by analyzing the confectionery industry, with particular emphasis for Italian market leaders, Ferrero S.p.A. and Perfetti Van Melle S.r.l.. The aim of the study is to assess if they have been successful in tackling the crisis, keeping a satisfactory level of profitability associated to a good financial health notwithstanding ongoing difficulties. Moreover, we seek to analyze the strategies the companies employed to survive the crisis. The concern of the paper is both quantitative and qualitative. Thus, we calculated a complete set of indicators using a specific methodology for financial statement analysis which has been conceived especially for studying Italian firms; these data have been integrated with other information retrieved from the annual reports of the companies (especially the notes to the accounts and the directors’ report). The analysis highlights that both the firms benefit from a good financial health, with Perfetti Van Melle presenting a large amount of liquidity. On the contrary, liquidity should be the main concern of Ferrero because of an excessive reliance on current liabilities. Both the firms have a good level of profitability, even if Perfetti Van Melle’s one is decreasing. The key-strategies for the success of these firms are ongoing investments in state-of-the-art plant and machinery, an increasing use of equity as the main source of funding, along with huge investments in research and advertising.

UK Public Private Partnerships and the Credit Crunch: A Case of Risk Contagion?

During the past twenty years, the UK has relied heavily on Public Private Partnerships (PPP) and especially the Private Finance Initiative in the procurement of infrastructure and services. Discussing the causes of the credit crunch and its effects on PPP, this paper notes that the provision of new public sector infrastructure and related services has been adversely affected by the impact of the credit crunch on Private Finance Initiatives (PFIs). These problems have arisen primarily from the unwillingness of commercial banks to replace collapsed PFI bond financing unless new PFI contracts reduce financial risks; which, in turn, is likely to increase the cost of these projects to the public sector. Additional financial strains have arisen for the UK government from the need to bail out collapsed PFI projects. Overall we find evidence that the UK commitment to PFI has not only increased immediate fiscal pressures on the UK when these have become least palatable, but has also created fiscal vulnerabilities at local and national levels which are likely to hamper the country’s ability to launch counter-cyclical responses to the ongoing crisis.

Reforming the Westminster Model of Agency Governance: Britain and Ireland after the Crisis

Conventional understandings of what the Westminster model implies anticipate reliance on a top-down, hierarchical approach to budgetary accountability, reinforced by a post–New Public Management emphasis on recentralizing administrative capacity. This article, based on a comparative analysis of the experiences of Britain and Ireland, argues that the Westminster model of bureaucratic control and oversight itself has been evolving, hastened in large part due to the global financial crisis. Governments have gained stronger controls over the structures and practices of agencies, but agencies are also key players in securing better governance outcomes. The implication is that the crisis has not seen a return to the archetypal command-and-control model, nor a wholly new implementation of negotiated European-type practices, but rather a new accountability balance between elements of the Westminster system itself that have not previously been well understood.

Eurozone Network Connectedness During Calm and Crisis: Evidence from the MTS Platform for Interdealer Trading of European Sovereign Debt

This paper examines the connectedness of the Eurozone sovereign debt market over the period 2005–2011. By employing measures built from the variance decompositions of approximating models we are able to define weighted, directed networks that enable a deeper understanding of the relationships between the Eurozone countries. We find that connectedness in the Eurozone was very high during the calm market conditions preceding the global financial crisis but decreased dramatically when the crisis took hold, and worsened as the Eurozone sovereign debt crisis emerged. The drop in connectedness was especially prevalent in the case of the peripheral countries with some of the most peripheral countries deteriorating into isolation. Our results have implications for both market participants and regulators.