Keeping at It, by Paul A. Volcker

Paul Volcker, who died this last December at the age of 92, is some sort of almost demi-god among people interested in central banking, monetary policy, and banking regulation; in other words, people like me. I was hence extremely interested to read his memoir. In Keeping at It: The Quest for Sound Money and Good Government, Volcker explains how he lived episodes such as the fall of Bretton Woods, the fight against inflation in the late 70s and early 80s, the Latin America crisis in the 80s, the 2007-08 financial crisis and the subsequent regulatory reform—including the so-called Volcker Rule.

It is not that Volcker lived throughout these moments; he was actually the main character in many of them. But apparently he did more, much more. For instance, he chaired one of the investigations to determine the number Jewish dormant accounts in Swiss banks. Jews fleeing due to the Holocaust deposited money in the Swiss banking sector taking advantage of its position as a neutral country; however, after the war, they faced a lot of obstacles—mostly bureaucratic imposed by banks—to get the money back. He also chaired an investigation into the United Nations’ Oil-for-Food program in Iraq. He chaired the foundation of the IFRS, the body that sets accounting standards worldwide. And he went to become economic adviser of Obama. Not too bad.

The memoir is focused mainly on the professional side of Volcker, and while it is not a brilliant literary piece, it is sufficiently well written, and his professional life was incredible, so this turns out to be a wonderful—and relatively fast—read.

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My books: A tour

I am running out of activities to do with my (almost) three-year-old daughter, so I decided to sort my books by topic and alphabetical order. It looks so nice that I decided to record a brief tour around them. Here it is:

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The Fifth Risk, by Michael Lewis

When I was at the Bank of England, I remember discussing with someone over a coffee about the need to screen new candidates for a willingness to work as public servants. The idea—as argued by my counterpart—was that people who work for the public sector should have some sort of trait(s) that makes them suitable for that sector. I thought that made no sense. Why would you purposely limit the pool of potential candidates? It is not as if it was easy to attract new PhDs; on the contrary, the low pay—compared to other finance departments and central banks—and the reputation of the institution regarding the little importance placed on research—a reputation that has improved substantially since Mark Carney became the Governor—made it challenging to hire.

But that was the whole point. If you do not screen for such candidates, the ones that come to the public sector might leave shortly afterwards. And hence the recruitment process needs to start again. Without entering into a discussion of how to screen them, it now appears clear to me that this should be one of the most important selling points of the Bank of England when recruiting: come to develop your research, not only to satisfy intellectual curiosity, but importantly to improve policies and help maintain financial stability and prosperity.

The subjects that serve the public are the main focus of the latest Michael Lewis’ book, The Fifth Risk. The author highlights the career and work of (many former) employees of the Federal Government and their crucial contribution in different areas such as nuclear power, weather forecasting, or sea rescues. And, importantly, details the new Trump Administration’s approach—or lack thereof, to be more precise.

As seen with the Coronavirus pandemic, Trump is completely unprepared for his job. While he might not be the first President to be unfit for office, a crucial difference with Trump is that he is not even able to recruit people that will do a good job. His ego and insecurities are so big that he needs people around telling him how good he is. He has the opposite of a civil servant mentality; it’s all about him. And one of the consequences is that he cannot understand how vital certain parts of the government are. Not only is he unfit for office, but also he thinks he is the most fit for it. The danger that this produces is huge.

I have tended towards more libertarian positions for many years now. I do not consider myself a libertarian—I might have, in the past—but my “default” position in most cases is no government intervention. There are many reasons for this, and I think this is not only a defensible position, but actually the most rational one. Of course government intervention is necessary; unfortunately, ex-post rationalisation of moral urges provide cover for interventions that are misplaced and can create dangerous precedents. My favourite example is the banning of the Niqab or the Burqa.

And yet I have felt extremely sympathetic with the main characters in The Fifth Risk. Maybe it is because they remind me of my mother. She was a primary school teacher for several decades—she has retired now. She used to bring work at home; exams to mark, activities to prepare, etc. Don’t get me wrong: she managed to do everything—this is not a story of absent mothers. But early on what I thought was: Why are you doing this? Your salary does not depend on this additional effort. I think this is what I find so compelling about some of the examples: they just do their job as best as they can, saving lives as a result, without any apparent private benefit. Many of them could clearly be making a lot more money… but they choose not to.

Anyway, as usual, these posts are less about the book and more about my thoughts. It is an interesting book, recommended, although nothing close to Liar’s Poker, Flash Boys, or The Big Short. Those are masterpieces!

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National Populism, by Eatwell and Goodwin

National populists prioritize the culture and interests of the nation, and promise to give voice to a people who feel that they have been neglected, even held in contempt, by distant and often corrupt elites.

The result of the Brexit referendum and the election of Donald Trump as the 45th President of the United States took many people, particularly from the economic and political elites, by surprise. But I predicted it! No, of course not. I was as surprised—shocked might be a better word—as everyone else around me. But the movements towards more populist positions have been increasing for some time. And the book by Roger Eatwell and Matthew Goodwin, National Populism, is an excellent source to understand why.

One thing that I particularly enjoyed of this book is that the authors analyse the issues without any judgement or moral outrage. To say that this is refreshing is an understatement; it has almost become a meme to say that the Leave voter was an older uneducated racist white living in the countryside. And, for sure, all these variables correlate positively with a vote for Leave. But the model still leaves a lot of unexplained variation. Getting a deeper understanding of this variation is key; if not for pure intellectual curiosity, at least to “win back” part of these voters.

The book claims that the increase of national populism revolves around four Ds: Distrust, Destruction, Deprivation, and De-alignment. Distrust refers to the lack of trust that citizens feel towards the elites–as Michael Gove put it during the referendum campaign, Britain has had enough of experts. (Although they seem to be back with the Coronavirus!). Destruction is related to the perceived elimination of the nation’s historical identity. There are many examples of this, such as John Cleese saying that London is no longer an English city. Deprivation describes the belief that one collective is losing out relative to another. Finally, de-alignment refers to the lost bonds between voters and parties, citizens and mainstream media.

I would add, as the book points out, that the reaction to these concerns by a part of the media elite reinforces the position of national populists. Take the case of John Cleese’s claim. I like London a lot, and one of the main reasons is the fact that it is extremely cosmopolitan, with plenty of people coming from other parts of the world, a great mix of cultures and traditions. This fact, by definition, means that it is less English. In the 2011 census, the percentage of foreign-born population living in Inner London was 42.2%. Of course, someone could argue that Cleese is trying to create an us-vs-them mentality, de facto implying than non-English is worse, and hence the comments are clearly racist. Maybe that was his intention; maybe not. But the reaction is to attribute this intention to anyone that makes this type of claim. And when this is the reaction to self-evident truth (more and more non-English people have come to live in London, and hence the English tradition and identity of the city is diminishing) we end up with populist leaders gaining more trust from the voters.

There is much more in the book that I am not going to try to cover here. But an important point is that national populism appears to be here to stay. This is not just a temporary shock that will go away as people realise their “mistakes.” The underlying concerns will continue and most likely exacerbate in the next years, with raising inequalities, automation, and public spending restrain. Therefore, it is key to start thinking about how to address them so that national populist leaders do not get to decide the fate of the nations.

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Sapiens, by Yuval Noah Harari

… we are on the threshold of both heaven and hell, moving nervously between the gateway of the one and the anteroom of the other. History has still not decided where we will end up, and a string of coincidences might yet send us rolling in either direction.

Better late than never, I just finished reading Sapiens. The book is an account of our history, the history of Homo Sapiens, from the beginning—when other species of humans shared the Earth—until now. I’ll start by saying the obvious: this book should be completely mandatory in school; if not the book itself, the content for sure. When I look back at my education, I wonder why we had to spend time studying the history of Catalonia and Spain while so much about our human history was left out. Admittedly, Harari would say that this is necessary for the fiction that we call “nation” to persist, but it is not clear to me why we should not push for a bigger tribe.

Anyway, this is a discussion for another time. The book is extremely interesting and enjoyable; I thought I would quickly summarise three ideas / facts that I found remarkable:

  • There are several species of humans that became extinct in the past. While I knew that to be the case for the Neanderthals, there are a few more that were scatter across the globe, such as Denisovans or Soloensis. While some of their DNA is now mixed with ours—meaning there was at least some inbreeding between species—it still seems to be the case that Homo Sapiens drove them to extinction—although maybe not on purpose.
  • The idea of hunter-gathering tribes being somehow “on-balance” with nature is, to put it mildly, laughable. The amount of animal species that we destroyed or permanently changed during that period is immense. True, these Sapiens did not have the knowledge to understand the consequences of their actions, so I am not judging them—I’m judging those who, nowadays, with all the current knowledge in their hands, idealise that period.
  • The agricultural revolution can be seen as plants—wheat, rice, etc—domesticating Homo sapiens. The fate of the family or the village depended on whether the crops were abundant. The rise in welfare did  not come until centuries later.

I highly recommend it for anyone interested in our history… so, basically, everyone. A final note: maybe it is because I read about the Coronavirus every hour of every day, but I keep relating the books I read to the current situation. The quotation at the beginning of this post marks the times that we are living in. The world in the recent decades has improved dramatically. Among other things, international conflicts have decreased to a minimum. The strong links among countries—in terms of trade, finance, even culture—make it more difficult to have conflicts like in the past. Yet this new pandemic is threatening to separate us from each other, at least temporarily; we are starting to see countries blaming other countries for the virus—even suggesting that it was developed on purpose. As the links among countries are momentarily reduced, let’s try not to revert back to a past where clashes against other countries were incessantly used to strengthen the concept of the nation.

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Top three books I read in 2019

I managed to reach my goal of reading 24 books in 2019. Ideally it should have been a simple linear process–you know, one book after the other, at more or less a pace of two a month–but it was not. And it was not due to my difficulties in focusing. Anyhow, in September it seemed like a done deal, then I went to Japan for holidays–I still have to write about it, I so love that country–and did not read as much as I thought I would, then the teaching term started, and I almost did not reach it. But at the end I succeeded.

Just to clarify, I read the equivalent of way more than 24 books, once you add all the journal articles, working papers, etc. This was a goal to expand my knowledge beyond my area of interest (economics / financial intermediation). Reading about justice, ethics, physics, productivity, and interesting lives.

So these are the three books that I think I enjoyed the most. In part just by reading them, but also because they increased my curiosity of the topics. This is my top three:

  1. Hitch-22.
  2. Reality is not what it seems.
  3. The scientific attitude.

I have written about the first two (here and here). It comes as no surprise that Hitch-22 is the favourite one, especially when I combined the book version with the audiobook narrated by Hitch himself. A month ago, by the way, Michael Moynihan shared a great footnote in the book, what he called the “greatest footnote of all times.” Hitch is really missed.

For 2020, the goal is to do the same, but with a twist: without buying any new book. I have I would say around 100 to read to even at this pace it should be 4 years before I need to buy any new one. I’ll report in a year. Happy 2020!

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Defending economics (again)

From time to time I read one of those articles that attack economics and economists. The latest article of this type has appeared in the Australian edition of the Guardian: if economics is a science, why isn’t it being more helpful? It is frustrating to reply to them but it this one was too bad to pass the opportunity.

The article argues that economists do not agree on anything–they do not agree on what efficiency means, what allocation means, what scarcity means. You get the idea. Take the following claim: “And some people refuse to believe that renewable electricity is a substitute for coal-fired electricity. Like everything else in economics, there is no right answer.

Well, there is a right answer. We might not know it at the moment–or the consensus might not be there–but there is. There is a right answer to whether we can use electricity only from renewable energy, and if possible at which price, and also if not possible how much it would cost to augment the capacity.  There are right answers to all of these questions. People sometimes refuse to believe science, even when they practice it themselves. “God does not play dice with the universe” is a famous quote by Albert Einstein that shows his difficulties in accepting quantum mechanics. Should we say that there are no right answers in physics because some people refuse(d) to believe quantum mechanics?

This brings us to the author’s comparison of economics to other sciences: “If physicists can agree on how to make an object move and physiologists can agree on how to resuscitate a heart that’s stopped beating, why can’t economists agree on how to boost Australia’s flagging wage and GDP growth?” Why didn’t he asked about whether physicists agree with the interpretation of quantum theory? Or the multiverse? Again, we do not define science with respect to how certain we are about our predictions. Weather forecasting is a science that gets it wrong many times. Because there is a high degree of uncertainty associated to it: the outcome depends on many factors, and small deviations can lead to big impacts. Exactly like economics–and especially macroeconomics.

The author admits that sometimes “There is no doubt that economists can sometimes use scientific methods to develop some conclusions to some questions, based on replicable and repeatable methods” But then he says that “Similarly, when it comes to decisions about increasing unemployment benefits or reducing greenhouse gas emissions, it is absurd and unhelpful to suggest that an economist – or any economic model – can determine what we “should” do.” He seems to suggest that economics is a positive science rather than a normative one. But then it is a science. In order to decide what we should do, we need to understand the consequences of our actions. The fact that there is disagreement about these consequences, again, does not mean economics is not a science. There are right and wrong answers to these questions.

What a lazy article. It closes with this claim: “Economists know the price of everything and the value of nothing. Values are entirely up to us.” But what are the values that he is referring to? Does he mean, for instance, values such as a desire to increase unemployment benefits? But are these values orthogonal to the consequences that they might create? To the extent that they are not, economics is necessary. To the extent that we need to understand the mechanisms at play in the economy when we raise unemployment benefits, we need economics.

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