China’s International Growth Agenda by Prof. Michael Spence

The following is an excerpt from a recent Project Syndicate article by NYU Stern Professor and Nobel laureate Michael Spence:

mspenceFor most of the past 35 years, China’s policymakers have set their focus on the domestic economy, with reforms designed to allow the market to provide efficiency and accurate price signals. Though they had to be increasingly aware of their country’s growing impact on the global economy, they had no strategy to ensure that China’s neighbors gained from its economic transformation.

But now China does have such a strategy, or at least is rapidly developing one. Moreover, it extends well beyond Asia, embracing Eastern Europe and the east coast of Africa.

A key element of China’s strategy is the recently established Asian Infrastructure Investment Bank (AIIB), and to some extent the BRICS’ New Development Bank, established last year by Brazil, Russia, India, China, and South Africa. Both banks are obvious alternatives – and so rivals – to the Western-dominated World Bank and International Monetary Fund.

Read the full article published in Project Syndicate.

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Banks’ Financial Reporting and Financial System Stability by Prof. Viral Acharya

Viral Acharya, NYU SternThe use of accounting measures and disclosures in bank contracts and in regulation suggests that the quality of banks’ financial reporting is central to the efficacy of market discipline and non-market mechanisms in limiting bank debt and risk overhang in good economic times, as well as mitigating the consequences of risk overhang that could compromise the stability of the financial system in downturns. Professors Viral Acharya and Stephen Ryan examine how research on banks’ financial reporting, informed by the financial economics literature on banking, can generate insights about how to enhance the stability of the financial system. The researchers begin with a foundational discussion on how aspects of banks’ accounting for financial instruments, opacity and disclosures may affect stability. They then develop a simple model of fair value and amortized cost accounting with regulatory forbearance that illustrates the complex interactions that can result among banks’ accounting treatments, investors’ willingness to fund banks’ assets, the incentives of banks and investors to gamble, and regulators’ policy of bailing out banks. Next, the researchers evaluate representative papers in the existing empirical literature on banks’ financial reporting and stability, pointing out the research design issues that empirical accounting researchers need to confront to develop well-specified tests capable of generating reliably interpretable findings. The paper concludes with considerations for accounting standard setters and financial system policymakers. Professors Acharya and Ryan presented this paper at the 50th annual Journal of Accounting Research conference at Chicago Booth on May 8.

Read the full paper here.

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The Liquidity Time Bomb by Prof. Nouriel Roubini

The following is an excerpt from Project Syndicate:

nroubiniA paradox has emerged in the financial markets of the advanced economies since the 2008 global financial crisis. Unconventional monetary policies have created a massive overhang of liquidity. But a series of recent shocks suggests that macro liquidity has become linked with severe market illiquidity.

Policy interest rates are near zero (and sometimes below it) in most advanced economies, and the monetary base (money created by central banks in the form of cash and liquid commercial-bank reserves) has soared – doubling, tripling, and, in the United States, quadrupling relative to the pre-crisis period. This has kept short- and long-term interest rates low (and even negative in some cases, such as Europe and Japan), reduced the volatility of bond markets, and lifted many asset prices (including equities, real estate, and fixed-income private- and public-sector bonds).

And yet investors have reason to be concerned. Their fears started with the “flash crash” of May 2010, when, in a matter of 30 minutes, major US stock indices fell by almost 10%, before recovering rapidly. Then came the “taper tantrum” in the spring of 2013, when US long-term interest rates shot up by 100 basis points after then-Fed Chairman Ben Bernanke hinted at an end to the Fed’s monthly purchases of long-term securities.

Likewise, in October 2014, US Treasury yields plummeted by almost 40 basis points in minutes, which statisticians argue should occur only once in three billion years. The latest episode came just last month, when, in the space of a few days, ten-year German bond yields went from five basis points to almost 80.

Read the full article on Project Syndicate here.

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3 Questions for NYU Stern Prof. David Yermack on Digital Currencies

dyermackDavid Yermack is the Albert Fingerhut Professor of Finance and Business Transformation at the NYU Stern School of Business and is the Director of the NYU Pollack Center for Law and Business. He is co-instructor for the NYU course on Bitcoin and Electronic Currencies. His essay “Is Bitcoin a Real Currency?” was published in The Handbook of Digital Currencies (Elsevier, 2015).

Prof. Yermack will be teaching a 2 day intro to digital currency course at NYU Stern on Nov 9-10, 2015. Learn more and apply today!

1.  How do you think digital currency is disrupting monetary payment systems?

“Companies in the payment processing industry are worth more than $500 billion, led by the big credit card companies such as Visa, MasterCard, and American Express.  The large commercial banks also have significant businesses in international money transfers, and there is a further industry of hardware and software companies such as ATM manufacturers.  All of these firms are vulnerable to the new technology underlying digital currency, which brings major innovations to the way that money is tracked, transferred, and secured.  You are starting to see the major players try to co-opt this technology before it undermines their business models.”

2.  What do you predict is the future of Bitcoin?

“There are about 100,000 Bitcoin transactions every day, and the growth rate is fast.  However, the Bitcoin network has too many bottlenecks and delays to handle worldwide commerce on a large scale, and there is no one who has the authority or responsibility to upgrade it.  So I think Bitcoin is likely to be displaced by successor digital currencies that build on its more clever aspects.  However, it’s not clear that money on a large scale will ever move beyond the control of national governments and be issued by autonomous computer networks, which is what Bitcoin’s creator envisioned.  There are too many macroeconomic problems that could occur if a government could not control its own money supply.”

3.  What should business leaders to be thinking about in terms of Bitcoin?

“Bitcoin relies on a radical change in information technology known as the “blockchain,” and this can be adapted to handle many business transactions involving property registration, self-executing contracts, derivative securities, and so forth.  A lot of organizations are doing research on blockchain applications, and that seems to be where the opportunities lie.”

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Prof. Nouriel Roubini: The Dollar Joins the Currency Wars

nroubiniIn a recent opinion editorial on Project Syndicate, Professor Nouriel Roubini argued that governments shouldn’t use currency wars to boost economic growth. While many central banks around the world have eased monetary policies to jumpstart growth, the US dollar has simultaneously strengthened against both advanced-country commodity exporters and fragile emerging markets.

However, in his op-ed, Professor Roubini warns of the dangers of the US joining the “currency war” to prevent the dollar’s appreciation:

…the US has effectively joined the “currency war” to prevent further dollar appreciation. Fed officials have started to speak explicitly about the dollar as a factor that affects net exports, inflation, and growth.‎ And the US authorities have become increasingly critical of Germany and the eurozone for adopting policies that weaken the euro while avoiding those – for example, temporary fiscal stimulus and faster wage growth – that boost domestic demand.

…Currency frictions can lead eventually to trade frictions, and currency wars can lead to trade wars. And that could spell trouble for the US as it tries to conclude the mega-regional Trans-Pacific Partnership. Uncertainty about whether the Obama administration can marshal enough votes in Congress to ratify the TPP has now been compounded by proposed legislation that would impose tariff duties on countries that engage in “currency manipulation.” If such a link between trade and currency policy were forced into the TPP, the Asian participants would refuse to join.

To read the entire opinion article on Project Syndicate, please click here.

Professor Roubini’s op ed was also covered by The GuardianLivemintMarketWatch and The Wall Street Journal.

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