Interesting Picks

Everything You Wanted to Know about Credit Default Swaps--but Were Never Told

Nice summary of a paper that shows why it is difficult to figure out how big the multipliers are.

More Cochrane bashing (and one of the best ones).

Short paper by Gary Gorton on the liquidity aspect of the crisis.

The Economist's Free Exchange summarizes some recent writings on the fiscal debate.

Tim Duy's Fedwatch (compliments of Mark Tahoma).

Marc Auboin looks at the challenges lying ahead for trade financing.

Some more oil analysis from Goldman- this one concentrates on flows to oil ETFs.

The TARP relief index is not doing well.

Excellent post by Menzie Chinn on why fiscal policy may be ineffective.

Is it a shortfall in Chinese demand for the world’s goods, not Chinese demand for the world’s bonds?

TURKSTAT is following the latest trends

Turkish Statistical Institute (TUIK/TURKSTAT) revised its CPI basket. By taking off film development fees and VCD rental fees, TURKSTAT has proven once again that it is following the latest trends in technology and consumer attitudes. But I am not sure what to make of their taking off velvet as well as lady coats and child jackets. BTW, dry apricots, a favorite snack of mine, are in...

Here are the old and new weights of the 12 main categories:

2008 2009
Food, Beverages 28,63 28,03
Tobacco & Liquor 5,00 4,58
Clothing and Shoes 8,07 7,22
Housing 16,6 18,63
Houseware 7,42 7,53
Health 2,54 2,5
Transportation 12,59 12,64
Communication 12,59 12,64
Entertainment and Culture 2,81 2,54
Education 2,24 2,47
Restaurant, Cafe and Hotels 5,64 5,47
Miscellaneous 4,16 3,79

Out of curiosity, I asked a couple of market economist friends how much the new weights changed their January inflation forecasts: Both said their forecast went up, one by 1bp and the other by 2bp. Not a big difference in absolute terms, but quite significant in percentage terms (I won't give their numbers not to reveal their identity, but to give you some perspective, the mean of the CNBC survey of inflation expectations is 0.13%).

Where should the IMF money go to?

Typical a la Turca, we have started debating on where the IMF money should go to although we are still in the show me the money stage.

Over the weekend, CBT President Durmus Yilmaz said that although they could definitely make use of it at the Bank, it would be better if the IMF money went to the Treasury for use in improving debt-rollover ratios.

The more traditional argument is that the money should go to the CBT and than on to the private sector for FX liquidity needs and/or easing credit conditions in a some kind of credit insurance scheme.

Joking aside, I am really glad Yilmaz made the alternative case. While I have highlighted both crowding out from debt-rollover and real sector liquidity woes as clear and present dangers a number of times in my Hurriyet columns, I am not sure which one of these would be a more binding constraint.

But I do not have to utter an opinion, as I am not in the decision maker's seat and writing these lines from the comfort of my own warm and cozy home. But the mere fact that different opinions are being expressed in an important issue makes me happy, especially after having followed the excellent debate on the merits of a fiscal stimulus in the US with envy and wondered why we do not get that in Turkey.

BTW, speaking of that, Cochrane has written one of the best pieces written on fiscal stimulus so far: I believe it should be required reading for any macro course.

Weekly Hurriyet Column: Deconstructing three myths

Below is the unedited version of my column for this week. You can read the final version at Hurriyet's authors archive. A few additional points are in order: For those of you verse in Turkish, Salih Neftci had an interesting article on CDSs today. While he briefly defines the animal, which I was not able to do due to space constraints, if you want to know everything about CDSs, I can refer you to a set of excellent posts at Charles Davi's blog. Also, I recently came across a great short piece in the Economist that illustrates why econometrics should be handled with care. Finally, the IMF paper I am referring to is here.


As JFK once said, the great enemy of truth is often the myth. Therefore, for the noble quest for lux et veritas, I would like to devote this week’s column to deconstructing three myths of the Turkish economy.

First, the December budget figures leave no doubt that there is significant fiscal slippage. However, just as fiscal-hopefuls are well off the mark, so are those attributing the figures to expansionary policy. In fact, while the December turnout reflects the rise in primary expenditures, which have never been a strong point in Turkey’s fiscal report card, even more noteworthy is the slowdown in tax revenues. The tax system’s sensitivity to domestic demand is proving to be useful for once, as the December revenues, along with other recent leading indicators such as November industrial production and December capacity utilization, have already prepared me for the shock when the fourth quarter growth figures will be announced on the last day of March.

Monetary policy has similarly been of use in an unexpected way. While we have yet to see how much the Bank’s recent aggressive easing will make its way into the economy, it has at least hopefully dispelled the ultimate myth of Sisyphus: The high interest low exchange rate myth, i.e. the urban legend that the Bank has been targeting the level of the exchange rate. In addition, the lower policy rates and the easing bias that has come with them have earmarked the continuation of the bond rally that has been going on since the fall of last year, a rally that has happened despite the weakness in the lira in the same period.

While the noted decoupling between the lira and Treasuries partly reflects the global environment and is in no way exceptional to Turkey, it is curiously expected to continue, as most market economists are noting that there may still be some value left in Treasuries, while at the same time shifting their USDTRY trajectories for 2009 upwards. Maybe, a first step towards understanding this interesting enigma is noting that both the lira and interest rates are influenced by many factors, only some of which are common to both.

To illustrate, a recent IMF paper has found disinflation credibility and the risk premium as the main determinants of real rates in Turkey. While such empirical analysis should always be handled with care, I had reached a similar conclusion around the same time (see the October 8 entry in my blog). The downward trend in inflation expectations and the sharp fall in credit default swaps (CDSs) from December to early January fit in well in this respect.

While CDSs are all-encompassing market-based measures of risk that tend to move together, there are certainly important Turkey-specific factors that could easily cause a jump in the perception of the country’s risk premium- for a case in point, just have a look at the Turkey and Ukraine CDSs for the past year. I had already discussed in previous columns the possibility of a fiscal binge, crowding out from the Treasury’s borrowing program and external financing woes in the absence or delay of an IMF program. Just add in mounting real sector troubles and rising political tensions to fully appreciate the richness of Turkey’s risks.

JFK noted that belief in myths allows the comfort of opinion without the discomfort of thought- at least before the house of cards comes tumbling down, when it is too late to think anyway. So do some thinking and worrying in advance, and Turkish Treasuries may suddenly stop being the great value they are marketed to be.

Interesting Picks

Brad Setser notes that China was not the biggest demander of Treasuries in 2008.

Defending the TALF (via Greg Mankiw)

Worthwhile Canadian Initiative reviews the case for and against automatic stabilizers.

The air smells of crowding out.

If you do not have the time to read her widely-acclaimed papers with Rogoff, Carmen Reinhart summarizes their findings.

Ricardo Cabellero on causes, consequences and solutions to the crisis.

Summary of a good case for fiscal policy from a not-so-recent paper.

Cassandra returns to the well-covered inflation-deflation debate with a well-written post.

Was it the saving glut or loose monetary policy?

Blinder lists six errors that led to the financial crisis.

For real-time forecasting

The surprise November industrial production, current account and December capacity utilization figures, all released in a span of four days, led many market economists to sharply revise their growth and current account forecasts. In fact, in the week starting with January 12, when capacity utilization and current account were released, I was getting on average two to three "we revise our forecasts" emails per day.

I am not saying that forecasters should stick to forecasts forever; in fact, updating as new information becomes available is the logical way to go. But what makes the story interesting from my perspective is that I, having lived with a more gloomy scenario that I had repeatedly mentioned in my Hurriyet Daily News columns since mid-December, saw this as the economists suddenly waking up from Wonderland and facing the grim realities of Turkey.

In fact, if one digs deeper, the huge revisions beg one to question the models used in these forecasts. The IP and utilization figures were really dismal, but were they really dismal enough to lead forecasters to revise their 2009 growth forecasts from 1.5% to -1.0%? Whatever model/framework you use, two monthly figures can not justify such large revisions.

Having been there done that, I can personally testify that more often than not, there is not much beef behind such forecasting models. The issue is usually one of resources, as market economists do not have the luxury of academics to spend days or even weeks on a forecasting exercise. And even if they did and came up with the perfect model, past performance does not guarantee future performance, and the model is likely to be useless soon.

Of course, there are other factors at play as well. For one thing, in the world of forecasting, there is definitely incentive for herding, as I explained in a previous blog. Besides, it really does not make sense to continuously revise forecasts with every new data available. But I still feel that market economists would definitely benefit from having a real-time forecasting framework (like the one in a recent ECB paper) sit around for sporadic use at least.

Interesting Picks

The week in pictures from Econompicdata.

Economists in the movies and supply curves in one of this year's Oscar contenders.

Best 25 finance blogs

A roundup of some recent books on the crisis- I have read the first two and hope to review them here soon-, and some econ. book recommendations from Tim Hartford as well as up and coming from the Enlightened Economist.

Tyler Cowen summarizes his alternative (to stimulus) recommendations. His coblogger Alex Tabarrok does the same.

FT Alphaville on how contango affects oil ETFs.

I am not into this technical stuff, but for the interested: 6 ways to identify a trend day in the stock market.

EM outflows, again.

Looking at sovereign ratings as type I and type II errors.

A big Mac...

...finally costs less in Turkey than in the US- sorry for the short post, but I am rushing to the nearest McDonald's...

Interesting Picks

Research of the day: Who survived the Titanic and why (via Tyler Cowen).

Picture of the day: The shrinking banks (here's a slightly different version).

Chart of the day: A flow chart on which chart to choose.

Suggestions and questions for the new Treasury secretary.

Worthwhile Canadian Initiative looks at the big picture for monetary and fiscal policy.

The decaying Fed balance sheet.

More on the Fama stimulus issue.

Brad Setser asks whether the US should worry about the drop in foreign demand for US long-term assets.

Alea summarizes a very interesting recent paper with two charts.

Just as everyone is worried about deflation, David Beckworth has a Cato piece on benign deflation.

The Goldman oil bull is back.

A primer on different quantitative models.

FT Alphaville takes on why the yen is going strong.

Monthly guest blog in Turkish: Living 1929 again (1929'i yeniden yasamak)

It is time for hedge fund manager Afsin Alp's monthly guest blog, published in the December issue of BORYAD. Even though it was written in more than a month ago, it is still a good read, and everything Afsin is saying is true, except the part where he says I am a valuable economist:)


George Soros’un Amerikan Kongresi’ndeki panelde söylediği gibi, içinde bulunduğumuz finansal kriz bir dış etken tarafından değil, tamamen finansal sistemin kendisi tarafından yaratılan bir durumdur. Bu ayki yazımda, ABD’nin bugün içinde bulunduğu durumun 1929’da yaşanan büyük depresyonla ne gibi benzerlikler gösterdiğini kalitatif anlamda kanıtlamaya çalışacağım. ABD 1929’daki gibi bir depresyon mu yaşayacak, yoksa tüm bu gelişmeler tarihe “keskin bir resesyon” olarak mı geçecek?..

1929 depresyonuna şöyle bir mercek tutarsak, o zamanki krizin mimarının FED’in kendisi olduğunu görürüz. 1925’te ıskonto oranını 4’ten 3.5’e indirdiğinde, aslında son 75 yılın belki de en büyük hatasına imza atmış oldu. Devlet kağıtları bankalardan ve yatırımcılardan satın alındı, böylece insanların ellerinde nakit birikti. John Kenneth Galbraith’in 1954’te yazdığı “The Great Crash 1929”da da belirttiği gibi, insanlar kendilerine finanse edecek para verildiği takdirde istisnasız her zaman spekülasyon yapacaklardır. 1929 yılında yaşanan gelişmeler, bunun en iyi örneğidir. 1927-29 dönemindeki kredinin ucuzluğunu, 2001-2006 ile karşılaştırmak mümkün. Her iki dönemde de ev fiyatları ve hisse senedi fiyatları astronomik düzeyde yükselmiştir. Hatta insanlar marjin hesaplarında yüksek miktarlarda hisse senedi almışlardır. Öyle bir duruma gelinmiştir ki, bankalar %5’ten borçlanıp yatırımcılara %12’den kredi kullandırmışlardır. Bu herhalde tüm zamanların en iyi arbitraj fırsatıdır. Üretici şirketler bile üretimlerini azaltıp hisselerini %12’den borç vermeye başlamışlardır; çünkü bu, şirketin sermaye kazanç oranında bile yüksek bir rakam olup ayrıca risksiz bir yatırımdır.

İçinde bulunduğumuz ucuz kredi dönemi FED eski Başkanı Alan Greenspan (nam-I diğer Mr. Balon) döneminde başlamış ve bu faiz oranları uzun süre olması gereken seviyeden düşük tutulduğu için emlak piyasalarında bir balon oluşmuştur. 1929’daki kredilerin teminatı hisse senedi değerleri, içinde bulunduğumuz dönemin kredilerinin teminatı ise emlak değerleri olmuştur. Her iki piyasada da teminata olan talep azaldığında verilen krediler geri istenmiş ve bunun karşılığında riskli krediler geriye ödenememiştir.

Sevgili dostum Needham&Company’nin kurucu ortağı Ray Godfried ve Acacia Technologies CEO’su Paul Ryan ile bir konferans sonrası yediğim akşam yemeğinde Paul’un anlattığı basit bir hikaye, aslında emlak piyasasındaki balonu ve sistemin çarpıklığını çok iyi anlatıyordu. Paul, kızını her gün okula götüren servis şoförünün (bu kişinin tahmini yıllık geliri 50 bin dolar civarıdır) California’nın güzel bir şehrinde 650 bin dolarlık bir evi almak için bankadan mortgage almaya hak kazandığını anlatıyor ve böyle bir riski bankanın nasıl aldığını almakta zorluk çektiğini söylüyordu. Paul’e verdiğim cevap şuydu: Eğer bir aktifin değerinin hiçbir zaman azalmayacağını ve sonsuza kadar belli bir oranda artacağını varsayıyorsan, bu krediyi vermeyi düşünebilirsin. Ama bu aktifler -ki bu durumda ev fiyatlarıdır- keskin bir şekilde düşmüş ve teminat değerleri azaldığı için bankaların sermayeleri erimiştir.

Piyasa sorunlarını kendi çözmeli

Amerikan devleti kriz döneminde 7 milyar dolar harcamayı gözden çıkarmıştır. Kabaca bir hesapla kişi başına 25 bin dolara denk gelmekte ki bu, Amerikan yıllık gayri safi milli hasılasının yarısı demek. Peki, vergi mükelleflerini böyle bir yükün altına sokmak doğru mu? Benim şahsi fikrim de, ünlü yatırımcı Jim Rogers gibi piyasanın sorunlarının kendi dinamikleri içerisinde çözülmesinden yana. Buna bir nevi doğal seleksiyon da diyebiliriz. Yani batan şirketler kadar, bu durumdan faydalanıp yeşerecek ve güçlenecek birçok şirket de olacaktır. Yapılan müdahaleler kısa vadede olumlu bir etki yapsa da, uzun vadede sıkıntı yaratacaktır. Bütün bu müdahalelerin pozitif noktası ise, devletin şirketlere direct yatırım yapması ve faiz toplamasıdır. Bu yatırımların ileride bir geri dönüşü olması mümkündür. Ancak yine de harcanan bu paraların çoğu kayıptır.

Son zamanlarda atılan adımlar, bana ülkenin bir nevi monarşist bir düzende yürütüldüğü izlenimini verdi. Bu düzenin başında da Hazine’den sorumlu Mr. Paulson vardı. Devletten 700 milyar dolar almasının nedeni, piyasadaki toksik kağıtları toplamak ve bir market oluşturmaktı. Ancak Kasım ayında bundan vazgeçtiğini açıkladı. Kongre üyeleri buna ateş püskürdü ve borsa o günlerde yine tarihi düşüşlere sahne oldu. Aynı açıklamaların sonunda, bu tür kağıtları bilançosunda fazlasıyla taşıyan Citibank hisseleri çökmeye başladı ve sonunda yine devlet 45 milyar dolar direkt nakit enjekte ederek ve ayrıca bilançosunda bulunan 300 milyar dolarlık problemli kağıtları da garanti ettiğini söyleyerek, şirketin batmasını önledi. Kısaca buradan çıkacak sonuç; ne pahasına olursa olsun devletin büyük bankaların (JP Morgan Chase, Bank of America, Wells Fargo ve Citi Bank) batmalarına izin vermeyeceğidir.

Para istemeye özel jetlerle gidenler…

Peki ya devletten para istemek için özel jetlerle Washington’a uçan General Motors, Ford ve Crysler CEO’larına ne demeli?.. Tabii onlar da kurtarılma potasına girdiler ve 25 milyar dolarlık düşük faizli ilk etap kredilerini aldılar. Verilen söz ise, tökezleyen otomotiv endüstrisini daha çok akaryakıt tüketim oranı düşük ve randımanlı araçlar üretmeye yöneltmekti. Bu üç şirket yeniden yapılanmak için planlarını açıklayacak ve ikinci bir kredi talep edecekler. Eğer bu talep Kongre’den geçmezse bu şirketler -öncelikli olarak General Motors- iflasını açıklayacak. Aslında otomotiv sektörünün yeniden yapılanması için bu şirketlerin önce iflasa gitmeleri şart. Sebebi ise, normal sektörde çalışan işçi saat başına 40 dolar alırken, sendikalardan dolayı bu rakamın General Motors’ta 70 dolar olması. Yani sendikalardan kurtulmaları gerek ve ayrıca sağlık giderlerine de ciddi kısıtlamalar getirmeliler. Tahminim, herhangi bir yeni yapılanmada 29 adet olan fabrikalardan 14’u kapanacak ve 60 bin çalışanının yarısı işsiz kalacaktır.

Bundan sonrası için piyasaların yönünü söylemek zor. Özellikle Kasım ayının son beş gününde yaşanan çıkış, 1929’dan beri kriz sonunda yasanmış en büyük 5 günlük çıkıştır. Aralık ayının ilk haftası piyasalarda bir düzeltme yaşanma ihtimali olsa bile, bir Santa Clause rallisi* göreceğimizi tahmin ediyorum. Makro ekonomik olarak ise, şu andaki en büyük problemin deflasyon olduğu konuşuluyor, ama bana göre deflasyon değil problem dez-enflasyondur. Konuyla ilgili ekonomik değerleri ve özellikle Türkiye’de olan etkilerini değerli ekonomist Emre Deliveli kendi blog’unda ve Daily News’deki köşesinde son derece derin irdelemekte. Ben bu kısa vadeli trend yerine uzun vadeli sonuçlara bakmak istiyorum. İçinde bulunduğumuz aşırı para arzından dolayı ilerde enflasyonist etkiler görmemiz kaçınılmazdır. Bu arada komik bir not: FED artik para arzını rapor etmeyi durdurdu. Neden acaba?.. Ancak bazı özel şirketlerden bulduğum verileri sizlere aktarmak istiyorum.

Ağustos ayında 13.5 trilyon dolar olan arz, Kasım’da %17 artarak yaklaşık 14.5 trilyon dolara ulaşmıştır. Bu trendi İngiltere, diğer Avrupa Birliği ülkeleri, Avustralya ve Hindistan’da da görmek mümkün.

Böyle bir durumda yatırım yapılacak yerler, dolar bazında trade eden emtia piyasalarıdır. Emtiaların değer kazanmasını görmek için önce ekonomik verilerdeki düşüşün durulmasını beklemek faydalı olacaktır. Özellikle kriz dönemlerinde insanların yatırım aracı olarak tercih ettiği altını, uzun vadeli öneririm. Ancak dolardaki bu fiktif yükselişte altın kısa vadede cazip görünmüyor. Geçen yazımda aktardığımı tekrarlamak istiyorum: Sermaye piyasalarına yatırım yapmayı şu anda çok anlamsız buluyorum. Bonoların bu kadar ıskontolu işlem gördüğü yerde sermaye piyasaları cazip görünmüyor.

Weekly Hurriyet column: Ask not what your country can do for you...

Below is the unedited version of my column for this week. You can read the final version at Hurriyet's authors archive. In the second paragraph, I was essentially trying to say that even the CBT's optimistic scenario may not be enough to justify such aggressive easing by an inflation targeter. But Atilla Yesilada, at his column at Bilge Yatirimci, offers an alternative explanation in his usual slightly wonkish tone: Maybe, the CBT is not an inflation targeter anymore...BTW, I highly recommend Atilla's columns at either Bilge Yatirimci or Global Source/Istanbul Analytics- one of the few columns I try to read regularly.


It seems I was too hasty when I declared that the Central Bank had engineered the perfect surprise rate cut last month. Last week’s cut was not only more than twice expectations, but has also brought Turkish real rates in line with peers such as investment grade Brazil.

The Bank has stated explicitly that it expects oil prices will stay low and exchange rate pass-through will be limited. However, these factors may not be enough to justify so strong an easing- unless the Bank believes the recession will be so deep that even the sticky service inflation will fall rapidly- the implicit scenario that is giving me the shivers for some time.

Countering the crisis

“Fortunately”, the government has finally announced that it will disclose its “package” at the end of the month. In the meantime, it has asked for suggestions, and the Izmir Chamber of Commerce put together a diverse group from the academia, the business world and NGOs for a brainstorming session on Saturday to form its recommendations. The session and an accompanying panel discussion on Friday organized by the Izmir Economics University have urged me, at the expense of oversimplifying, to condense the crisis propositions into two broad categories.

First, it is clear that the financing channel has been seriously disrupted, and various credit guarantee fund formulations aim to ease firms’ access to finance, differing on where the funds will come from, who they will be intended for and who will bear the risk. My own view is for a setup that will provide the least budget burden, is geared towards SMEs (as they are more credit constrained, and targeting SMEs is likely to have a bigger employment impact), ensures the money will flow to the real sector rather than to Treasury bills and mitigates moral hazard by sharing the risk between the banks and the government.

The next set of policies revolves around using Keynesian tools to counter the crisis. Here, the suggestions as are colorful as they come, ranging from tax breaks and tax delays to outright cash handouts, such as Finance Minister Unakitan’s recent cash for employment announcement. I am ambivalent on the use of fiscal policy, not only because its impact is highly uncertain, but also for fear of a binge that would bring the nightmare before 2001 back. Policies that will enhance long-run growth and productivity such as infrastructure investment and human capital seem like the safest bet, even though that’s not the way to go if the government is trying to get not the best, but the quickest bang for the buck.

If you build it, will they come?

Commendable as they are, the proposals outlined above adopt the producer’s perspective. A question as key as “how will they produce” is “how will they buy”, especially since global demand is so weak. It was after all the crisis in confidence and sharp consumer pullback that pushed Turkey into a premature slowdown. But unless the consumer feels her job secure, she will not consume, so unless the crisis in the consumer is solved, all the other measures are likely to hit a wall at some point. The optimist could hope that the crisis package will bring back consumer confidence, but I prefer to err on the side of caution.

The government has eroded confidence by claiming the crisis would pass tangent (it turned out to be the diameter) and doing nothing. Luckily, while it seems to have totally misinterpreted JFK’s famous quote, the academia, NGOs and the business world have done more than their share, with the Izmir efforts being the latest example. Now, we will see whether the government will be able to follow.

The mood in markets

The poll below, from the yahoo group Research Turkey (compiles research reports on the Turkish economy) reflects the mood in Turkish markets after the CBT's surprise rate cut. As you can see from the poll, bond yields and USDTRY, which used to move in tandem, have recently decoupled, with the former taking its cues from policy rates and the latter still following global developments, but I am not sure the decoupling will last...

POLL QUESTION: After unexpected 200 basis rate cut of CBT which one is still the best way of protecting your savings in 2009 ?

CHOICES AND RESULTS
- CASH USD, 4 votes, 20.00%
- CASH EUR, 1 votes, 5.00%
- CASH TL, 1 votes, 5.00%
- TR GOV. BOND, 6 votes, 30.00%
- GOLDEN, 3 votes, 15.00%
- OIL, 1 votes, 5.00%
- US STOCKS, 0 votes, 0.00%
- TR STOCKS, 4 votes, 20.00%
- OTHER , 0 votes, 0.00%

Live blogging from IEU crisis conference

Mehmet Buyukesi TEA president:
Crisis-fighting tools:
- very happy with the CBT (I wonder if he'll be happy 3 months from now)
- credit guarantee fund
- unemployment insurance amnesty for a year on condition of no layoffs
Emphasized diversification in exports: small export markets increased most.
Said they are not losing morale (but I am, given how fast exports are plunging)

Varol Ciliv (CEO of TEB)
Started with his view of the world.
- started with global imbalances
- claims prices will not increase again unless USA starts consuming again.
- notes that this time we are not faced with our crisis, so our past experience with crises will not work
- he believes Turkey did not decouple from other EM, whereas it should have, i.e. Turkey did not deserve the turbulence of October November.
- banking system is sound, has the capacity to lend.
After that, he went over a concise summary of world conditions, nothing radical, but good for beginners:
- believes world is for more credit constraints
- world stock markets have much further to go.
- Fed, the world's largest hedge fund.
- more corporate bankruptcies
What about Turkey?
- we got outflows because our capital markets are deep and liquid (ED: interesting idea to test)
- we hit on the brakes because of uncertainty, syndication risks, etc.
- CBT policy helped as well
- Believes banks will start lending soon (I don't agree, more later)
Why banking sound?
- crisis experience
- BRSA doing its job well.
Current account was Achilles heel, but
- will shrink as oil prices fall
- need to have CA deficit for growth as well.
Talked about high interest, low FX.
How to get out of crisis?
Opportunities:
- oil prices falling
- as developed country firms go bankrupt, opportunity for Turkish firms.
What do firms need to do?
- specialize and focus
- FX risk! Do not do currency mismatch
- interest and liquidity risk
- hh debt/ debt only 15 pcent but we don't know hoe to manage
- cost management
- financing management
- diversify markets
Ad: we did a lot of SME financing, e.g. to KOSGEB.
- credit guarantee fund small, needs to be expanded.
Critique:
- need to understand the world and follow up.
- emphasized banking-customer relationship.

Mahmut Kaplan- KOSGEB
- we got hit by the crisis rather soon (ED: I don't think so, quite the opposite).
- believes Turkey will emerge from the crisis in a higher position than the 17th largest GDP (ED: it won't, but what if it does?- growth versus levels)
- the crisis has told us the king is naked (i.e. the weaknesses of the Turkish economy).
Message to firms:
- analyzing yourself and the environment you deal with: they found this is the largest determinant of competitiveness (ED: how did they measure?).
- next step is deciding what to do?- doing what others do will not work in the new environment (ED: this looks awfully like a heterogeneous goods trade model)
- innovation + cooperation should be the name of the game--> clustering e.g. Joint marketing, supply management (ED: how does this work in a game theory setting?).
- value chains
- trotting fox better than lying lion (ED: trotting fox gets hunted, trotting lion finds food!)
- we have TRY 1.6bn credit pool.

Oguz Esen- IEU Econ Professor
started with UN, OECD, WB projections
Emphasized the changing projections since 2007
Then talked about the developed country responses to the crisis. Emphasized multilateral, coordinated fiscal and monetary response.
One benefit of the crisis has been the breakdown of the washington consensus of cyclical response to the crisis (fiscal and monetary). (ED: this is because the crisis is global, broad-based and developed country origin)
Likes what CBT is doing, but claims real interest rates still high (ED: I don't agree, 6 pcent not to high)
Believes fiscal stimulus necessary as well. But borrowing will be moe difficult for Treasury this year (ED: this, I agree with, for a change)
Referred to OECD report that says primary surplus of 2.5 pcent would keep debt gdp constant.
Where to use the money?:
- do not delay ongoing projects
- do not cut government purchases
- use it for infrastructure, because infrastructure really bad (ED: examples he is giving are on high prices, that doesn't tell quality is bad- also infrastructure will have slow effects
- education (ED: this is for the very long run)
- health
- credit based on no cut in employment and innovation (ED: good in theory, but in practice).
- deposit insurance (ED: will create moral hazard) but I like his two-tier deposit idea (different rates for insured and uninsured, but really because the difference will be an interesting risk tracker)
- employment tax decreases (ED: totally agree).

Halit Soydan (IEU professor)
Emphasized fiscal discipline, but CBT has failed on inflation targeting.
Real market is coughing up blood in Izmir.
Where will be spend TRY 10bn? Should be injected to the private sector.
Ex-central bankers are against money to banks because it won't go to private sector, besides it will increase money supply and cause inflation.
He believes CBT should give rediscount limits to banks. If they don't lend, will stay as it is.
Likes what KOSGEB is doing, but it is way too small.
Credit guarantee fund: needs to be done as well, mentions the discussions in UK (ED: I am really worried about moral hazard here, need to check the UK discussions. Should we do this to everyone? Exporters and agriculture... He believes export-led growth is the way to go. Agriculture was hurt during the crisis. He believes agriculture should be supported (ED: I really do not like subsidy and supports, too much welfare loss). Also SMEs and industry (ED: I wonder if anyone is left behind, how about Besiktas fans as well?- they are suffering as much as any of these groups). Also fx-debted industrialists as well (ED: only if they agree to give half of the profits they made during the appreciation years to the government- who he trips should not cry).
Sent by BlackBerry Internet Service from Turkcell

Interesting Picks

Chart of the day: Stimulus pie chart.

Macroblog tackles two important questions: What is the Fed doing and is it inflationary?

The big boys are tough on the new kid on the blog.

Just how much are the Fed's swaps with other central banks? Just look at the latest Treasury data, suggests WSJ.

An oil puzzle.

Charles Davi explains why credit default swaps exist.

Bernanke on the Fed balance sheet (by James Hamilton).

Rebecca Wilder highlights the surge in Fed non-borrowed reserves.

Correlation is not causation, and past may not translate into the future, but this is still interesting.

The CBT has done it again

I think I was too hasty when I likened the rate ploy in Ankara to Casino Royale last month. Or maybe I was just being preemptive, as the Bank widely exceeded market expectations of a cut of 50-100bp (I saw one guy predicting 125bp, but that was the highest) with the 200bp cut today.

The Bank is definitely in a better position to judge the economy and particularly inflation than I am (or anyone else is for that matter). So I would like to think that they know what they are doing, and they probably are with a high probability. But given the current turbulent markets, I would even be worried even if that probability is well over 1/2 or even very close to unity. If you are wondering why I am concerned, have a look at my Hurriyet Daily News column right after last month's cut or more recently this past Monday.

More on this later, but all this makes me wonder whether the Bank is about to change its operational structure and take the one-week repo rate as the policy rate soon, as it said it would in case of a tightening or permanently higher liquidity squeeze...

Interesting Picks

Some more really scary Fed charts.

FRB San Francisco President Janet Yellen on Fed's balance sheet, quantitative easing and Fed communications. A complement is a piece by FRBSF Research Director.

Mark Tahoma summarizes the latest fiscal fight.

Speaking of fiscal policy, here's Economix list of economists against a big fiscal surplus.

Tim Duy's Fed watch (via Mark Tahoma) on a variety of issues this time around.

Menzie Chinn summarizes the papers of the The Capital Flows behind Financial Globalization session at the AEA meetings.

Binder and Rudd go over different explanations of why the rise in oil price rises did not have such a dramatic effect as in the 1970s. Or maybe they did?

Some good news: Two Stanford economists believe, based on their VAR model, that the recession will be over sooner than most people think.

Daron Acemoglu on Structural lessons for and from economics (from and to the crisis).

FRB Minneapolis looks at the recession in perspective.

Paul Krugman and Andy Harless on bang for the buck measure of fiscal policy (not equivalent to multiplier effects).

Bernanke on quantitaive easing and exit strategy (via FT Alphaville).

Weekly HDN column: Hopeless but not serious, or...

Below is the unedited version of my column for this week. You can read the final version at Hurriyet's authors archive. BTW, I am too lazy to try to prove it econometrically (and I doubt I would be able to anyway given data limitations), but the record-low December capacity utilization (much more than the drop in sales, although I would want to wait for the CNBC figures to ascertain that) seems to provide some support to the inventory depletion story of inflation I outlined in the last paragraph.


It is said the Irish President once asked Winston Churchill how the British war effort was faring, to which Churchill replied: "Serious but not hopeless." When Churchill threw the same question back, the President answered: "Hopeless but not serious”.

While the early-year global rally, which came to a premature end, will not be the last rally of the year, it is increasingly becoming obvious that the health of the world economy is turning from grim to serious, but is still not hopeless, thanks to the huge stimulus packages most countries are throwing in. In fact, the only major country that has stayed relatively unresponsive to the dismal economic landscape is Turkey, which makes me wonder whether Turkish policymakers have adopted the Irish state of mind.

If you feel like you would like to question my skepticism, you have every right to: After all, the December inflation justified the Central Bank’s easing. The IMF is in Turkey, and an agreement is likely to be reached soon, filling the external financing gap. Moreover, didn’t government spending and investment contribute significantly to the third quarter growth figures? All these statements are right and would normally be commendable in ordinary circumstances. But the fact is that we are not living in ordinary times, and such times require extraordinary solutions: Solutions of the type we have not seen yet.

For one thing, no efforts in mitigating the emerging financing constraints in the private sector have been announced so far, other than rumors of a credit package geared towards exporters. The high debt rollover ratio is likely to darken this bleak picture further, as public borrowing crowds out the private kind. Some early signs of this crowding out were seen in the Eurobond auction of the past week, where the two-third local subscription was curiously interpreted as a sign of liquidity of the banking system. While channeling some of the IMF funds to the Treasury could mitigate the crowding out effect, I am crossing my fingers that the high-borrowing month of February will pass without a calamity of the German kind. Otherwise, the Central Bank could find the effectiveness of the monetary transmission mechanism fading real fast.

Another concern is the nature and scope of fiscal policy. While the IMF agreement will probably not be as fiscally-restraining as before, I would like to know where the money will go to. To get the best bang for the buck, policies stimulating private investment should be preferred, but with the goal of protecting the Turkish golden ratio of debt to gross domestic product. A spiraling of debt could lead to worsening expectations and higher interest rates, not the exact place you would want to find yourself in the midst of a global recession. Maybe the government is waiting for the IMF agreement, but I find it hard to believe that policymakers have been so tight-lipped on how they will stimulate the economy.

If Turkish policymakers have an Irish frame of mind, they at least, unlike the Irish, are not impervious to psychoanalysis. How else could you explain the illusion that exchange rate pass-through has disappeared, a conclusion reached on just a couple of months of data? Maybe it is just me, but every time I look at the December inflation figures, I see signs of pass-though covered up by the strong inventory depletions in textiles and autos as well as the drop in energy prices.

I do not want to be a harbinger of doom, but Turkish policymaking is looking more and more to be hopelessly unserious.

Interesting Picks

The week in pictures from Econompicdata

Chart of the day: Consumer deleveraging has just begun.

Great piece by Willem Buiter on central bank balance sheets in quantitative/qualitative easing.

Some more scary Fed charts from the Financial Ninja.

Brad Setser looks at the role of the global savings glut in the current crisis. BTW, Martin Wolf has an excellent book (which I plan to review soon) on the same topic.

Charles Davi continues with his macroeconomic theory of CDSs.

Calculated Risk and Econbrowser go over the latest employment figures. David Beckworth on the other hand, explains that looking at absolute nonfarm payrolls and comparing to WWII does not make sense because the labor market is growing. Justin Fox takes the same issue as well as adding some more pointers to geared towards interpreting the unemployment figures correctly.

Another economist mea culpa.

Fama, who has started blogging with his LT coauthor French, explains the issues arising on government equity capital for financial firms.

Simon Johnson on the economic crisis and the crisis in economics.

A complement to the recently much-talked-about Reinhart Rogoff paper.

Serious but not hopeless or hopeless but not serious

The following joke is not intended to light up the mood at all, so be warned:

During the dark days of World War II, two Irishmen were consoling themselves with a pint or two in a Dublin pub. Over the radio came the crackling strain of Winston Churchill, saying, "The situation is serious, but not hopeless." Said one Irishman, "That's the difference between us and the English. In Ireland, the situation is always hopeless, but never serious."

I don't know if it is just me and if it is just me, maybe it is because of I am too fixated on the Irish within so that I am making imaginary connections, but Turkish economic policy response to the crisis is starting to look increasingly like the Irishman's view of life. Or maybe it is just me and I am impervious to psychoanalysis just like the Irish.

Anyway, I'll have more to say on this on Monday, but in the meantime, fee free to have a look at what other countries are doing (HT to Eray Yucel).

PS. There are different versions of the joke above. The version is I used is from here, but see here for a different (and probably better known version).

Interesting Picks

Chart of the day I: I think this is the best answer to the so-called lending mystery.

Chart of the day II: The slow rising of the commercial paper market.

Calculate your financial comeback, compliments of NYT.

Is the impossible trinity impossible after all?

As Simon Johnson summarizes, to Acemoglu, the financial crisis has manifested the breakdown of some of the most traditional economic modeling assumptions. A similar view is expressed in the financial modelers' manifesto.

Is China losing its taste for US debt?- asks the NYT. Nope, is Brad Setser's answer.

FT Alphaville summarizes Goldman's oil predictions.

538 looks at various sources, including prediction markets (on which I have written), to assess the probability of a depression.

IS there a US Treasury bubble?

I knew they were running a hedge fund, but I had no idea it was this profitable. BTW, it is very easy to track the government's model portfolio.

Interesting Picks

Rebecca Wilder and FT Alphaville summarize the latest FOMC minutes.

The Economist reports on a discussion of the Spence report at the AEA meetings.

A funny economist

While Macroman lists out his predictions for 2009 (in two parts), Brad Setser lays out the big themes.

A new paper looks at why US and other developed countries stopped saving in the first place.

A new way to regulate banks.

While Hal Varian notes of the need to boost private investment to stimulate the economy, David Altig ponders whether tax cuts will do the trick.

Interesting Picks

Britain's Buffett on how to spot a market turning point.

Tim Duy's Fed Watch (via Mark Tahoma)

Top 10 reasons why economists got humbled and missed the crisis.

Brad Setser on why central banks aren't always a stabilizing presence in the market.

The article in the NYT on the role of Value at Risk (VaR) in the crisis has got a lot of attention, but as Yves Smith explains, the article never explains what's wring with such models in the first place. James Kwak, on the other hand, focuses on another deficiency of VaR: The real world changes. For an argument that VaR itself is harmless, see here. In a related article, Jon Danielsson argues that measuring risk is really a myth- on which Yves Smith comments.

I recently stumbled upon an Aleph Blog from 2007 on a bunch of indicators he is using- I liked the comprehensive list.

Rebecca Wilder questions using infrastructure projects to boost the economy. Her arguments certainly make sense to anyone familiar with economic theory, and there is some evidence that the infrastructure multiplier is not that high. I suspect one reason may be quickness. Anyway, thinking of an alternative, while a tax cut makes sense in some respects, Krugman offers a balanced view.

Speaking of a fiscal stimulus, Willem Buiter questions whether the US economy can afford a fiscal stimulus in the first place. Yves Smith goes over his main arguments, while Paul Krugman contends that it is not clear the alternative is better.

FT Alphaville returns to the yield curve debate I had featured just before the New Year.

Calculated Risk on the increasing correlation between new home sales and unemployment during recessions.

10 craziest days on Wall Street last year.

Price-level targeting to get the US off the liquidity trap- also a worthwhile take on the Krugman liquidity trap model.

A not-so-nice side product of zero rates: Incentives to fail in the repo market.

Trying to make sense of what the heck the Fed is doing- I sympathize with the guy, given I am as confused as he is on some of these issues.

Weekly Hurriyet Daily News Column: Behind Titanic in uncharted waters

Below is the unedited version of my column for this week. You can read the final version at Hurriyet's authors archive. You can read more of my thoughts on trade and specifically on exports in recent posts. Two issues I mention in the article and plan to look in more detail in future blogs are the exchange rate pass-through mechanism and degree of crowding out (from Treasury borrowing to private lending). There has been some work on the former, but just anecdotal evidence (to the best of my knowledge) on the latter. My gut feeling is that crowding out has been limited so far (unlike what are claiming), but is quite possible this year.

I start the year by painting the Turkish economic outlook, using the global backdrop as the canvas, in the Impressionist style- with short, thick strokes to quickly capture the essence of the subject rather than gory details.

The Turkish economy in 2009

To avoid Cassandra’s fate, I have chosen to support my outlook with last week’s data, which illustrate some of the main economic themes of 2009 as well as offer hints on what is to come.

First, the Central Bank of Turkey (CBT) had taken what I deemed excessive risk when it cut its policy rate a surprising 1.25%. December inflation has proved the Bank right for now, and the CBT has won the first round at the poker table. However, further volatility in the lira could pass on to inflation, and despite the downward trend in core indices, prices still exhibit a considerable amount of inertia. While the December inflation outturn has almost secured another large rate cut from the CBT in January, it will be interesting to see the Bank play its hand down the road.

Second, November trade data showed that trade is plunging. While falling oil prices and indicators of a sharp slowdown in the last quarter make the contraction in imports hardly a surprise, the fall in exports is more than what economic models can account for and is in line with the rest of the world. In fact, there is increasing evidence that financing constraints account for a considerable part of the decline in trade across the globe. If this is indeed the case for Turkey as well, the recently reported export credit package would be a welcome development. In any case, if exports fall sharply, the contribution to growth from external demand is likely to be smaller than the 0.5-1.0% expected by most economists, pulling down growth further. In this respect, trade volume indices, devoid of price effects, will be important for tracking the impact of trade on growth.

Finally, Treasury’s 2009 borrowing program was largely overlooked, but the fiscal/debt outlook is likely to be increasingly important for the dynamics of the economy. While the recent fiscal adjustments have led some to fear that fiscal tightening is on the agenda with the IMF, the budget has just gained more realistic footing, as it was based on unrealistic assumptions such as a 4% 2009 growth rate. In fact, while limited fiscal easing is likely to be the case this year, more important will be the other side of the fiscal coin, i.e. debt. For one thing, the deficit is likely to have a limited negative impact as long as public debt ratios do not deteriorate. In a similar vein, with a high debt-rollover ratio, credit crowding out, one of the ghosts of Christmas past, looms ahead.

Sailing in uncharted waters

The global backdrop will nevertheless have important implications on how these three main themes and the rest of the economy will play out: The trajectory of oil prices would affect both inflation and the external balance. There is serious uncertainty regarding the effectiveness of Fed’s monetary policy and the fiscal stimuli many countries are undertaking. It is up for grabs whether emerging market (EM) outflows will continue, when the US will start showing signs of recovery, or how the expected sovereign bond glut will impact EM borrowing.

These questions, and many more, are left unanswered because we have never been here before. Truth be told, the world is sailing in uncharted waters, with Turkey towed behind. Just cross your fingers that we are not headed for an iceberg.

What is going on with Turkish exports?

I had written last week that in November, preliminary export figures from Turkish Exporters Association (TEA) had deviated from the official TURKSTAT figures.

When you look at the relationship between the two series from a longer time horizon, we see that the relationship has been, if not broken, severed recently. The graph below is from regressions TURKSTAT figures on a constant and TEA preliminary exports.

Casual observation reveals that the residuals have become much volatile in 2008. Also, the large positive residuals suggest that TEA data have been turning out to be lower than TURKSTAT figures for roughly a year. This can be better seen by looking at the TEA/TURKSTAT ratio:


The above figure is compliments of Murat Ucer of Turkey Data Monitor (TDM), a comprehensive database program for the Turkish economy.

At this point, I do not have an explanation for this puzzle, but it definitely does not have much to do with the recent developments. According to my friend Ozlem Derici from TDM and Istanbul Analytics, the difference between the two figures could be due to the fact that trade to and from free trade areas (FTAs), which were excluded from TURKSTAT statistics, began to included along with the new GDP series at the beginning of 2008. Ozlem is not sure how TEA compiles their statistics, but it is likely that they too were using the TURKSTAT methodology. If this is the case, while the switch has made forecasting exports more challenging, it has also provided us with a useful side product: An easy way to look at the size of exports from FTAs:)....

Incidentally, using the once-reliable TEA data, official December exports are forecasted at USD 7.2bn, which would correspond to a 26.1% yoy decline. But if the recent trend continues, the decline will be a bit less, as the official figures will turn out to be more than implied by TEA data.

Trade Financing

Turkish business daily Dunya reported on Friday that the government was putting the finishing touches on a USD 900mn export credit plan:

İhracatçılar yeni yıla müjdeli bir haberle giriyor. Hükümet, küresel krizin ihracatçılar üzerindeki etkisini azaltmak için yeni bir kredi paketi hazırladı. 900 milyon dolarlık Merkez Bankası ihracat reeskont kredisini içeren paketin, önümüzdeki günlerde dış ticaretten sorumlu Devlet Bakanı Kürşad Tüzmen tarafından açıklanması bekleniyor. Yeni paketle, firmalara 10 milyon dolar limitli kredi verilecek. Kredinin faizi libor artı 0.75, vadesi ise 4 ay olacak.

Krediden yararlanacak firma kredi ödemesini ister 4 ay sonra peşin, isterse taksitle yapacak. Krediden daha önce ihracat yapmış, imalatçıihracatçı, ihracatçı veya ihracata yönelik mal üreten imalatçı vasfını haiz firmalar, ihracat belgesi veya ruhsatname sahibi işletmeler yararlanacak. Kredi kullananlar her türlü vergi, resim ve harçtan muaf olacak. Firmalar kredi başvurularını Eximbank’a yapacak. Krediden yaklaşık bin ihracatçının yararlanması düşünülüyor.

This is in line with the common thinking that the large fall in exports and imports seen recently in many countries is mainly attributable to the collapse of trade financing. For example, Menzie Chinn has recently looked at the US and China. The graph below, from his piece on the US, shows that it can't be exchange rate effects because such effects would work in opposite directions for exports and imports and also with a lag.

Figure 4: Log USD nominal exchange rate, broad basket (blue), goods exports, millions USD (red), and non-oil goods imports (blue), both seasonally adjusted. December USD figure is for statistics through Dec. 26. Gray shaded area denotes NBER defined trough and thereafter. Source: BEA/Census, October release, Federal Reserve, and NBER.


While the collapse of trade finance is definitely a valid candidate for explaining the plunge in trade, there are other potential explanations as well such as the general pullback in global demand and rise in protectionism. But I doubt either of the two (especially the latter) would be accountable for the global plunge in exports and imports by itself.

I am all for ingenuous ways to help the Turkish real sector combat the crisis, but at this moment, we do not have conclusive evidence on the role of financing constraints. I wonder if anyone has put the traditional export/import demand/supply equations to use: A decrease in the explanatory power of such models would provide further evidence that exporters are constrained by trade finance.

Interesting Picks

The week in pictures from Econompicdata.

If you have New Year Resolutions, here's how Economics can help.

Charts from Council on Foreign Relations comparing the current downturn to previous recessions in terms of key macro variables.

In a similar vein, according to a recent Reinhart Rogoff paper, as summarized by Yves Smith, past financial crises suggest we have not seen the bottom yet.

2008 has been the year of the humbling of the economist, but as WSJ points out, some got it right; they even have an interactive graphic of the Cassandras.

James Hamilton revisits of a 2007 paper to analyze the role of oil prices on consumption. In a follow-up, he explains how this relationship contributed to the recession.

Some fun with the AEA papers.

We don't know if it will work in the US, but puring money into has definitely not worked in Latin America.

Felix Salmon summarizes the Taleb vs. Merton debate.

Tyler Cowen's famous mistakes in Economics.

More on targeting stock prices.

2008 volatility awards.

Rebecca Wilder argues that it is better to use non-seasonally adjusted numbers in the BLS employment report for now.

Econospeak on earlier episodes of negative interest rates and a couple of words on negative prices in general.

Interesting Picks: Turkey

Baslevent and Kirmanoglu of Bilgi University use European Social Survey data look at the relationship between personal values and political choices.

Board characteristics of Turkish banks.

Demet Canakci, who seems to be affiliated with half of Ankara, uses macro stress testing to assess the fragility of the banking sector.

Orhan Karaca notes that adjusting for working days, 3Q growth turns out to be negative.

Hasan Ersel corrects a commonly-held misconception: As I mentioned before and after the release of the 3Q figures, Turkey has not been affected by the global crisis much as of the end of the third quarter. But don't expect a similar pattern at the final quarter of the year!

The CBT has a new survey: The Investment Survey. The inaugural results for the third quarter were recently published.

Wigley & Wigley evaluate Turkish education policy using Sen's capabilities approach.