Tag Archives: economics

Busy Times, Postgraduate Study & Internships

So it’s been a while since I last found the time to update the blog. Unfortunately, going into the final year of my undergraduate degree has taken up a significant amount of my time. As well as work for university, I’ve also been dealing with various applications for internships in the summer of 2013 and postgraduate programs for 2013/14, which leads me to…

One small request…

In order to help me find summer internship opportunities, I would greatly appreciate it if you take a look at my online Visual Résumé (or my LinkedIn) and then share it, refer it to others or even contact me directly if you know of any interesting internship opportunities.

What am I looking for?

I have 5 months of work experience at two of Scandinavia’s leading banks and have the top grades on my course at a leading UK university. I am open to any opportunities within Management Consulting, Investment Banking, Asset Management, Corporate Banking, Risk, Accounting or any other fields that you think I might be suited to.

Where would I like to work?

Ideally, I’d prefer opportunities based in London since this would save me money on the costs such as accommodation. However, I am also willing to travel elsewhere in the UK or abroad, as long as I am able to find a way to finance my costs. As I said, this is simply to help me in my job search so that I could find work that suits me, at a company that values my skills. Any help with this is greatly appreciated.

Thanks!

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Suggested Articles (09/03/12)

  1. Welcome…to the World of Failed NationsDaron Acemoglu, James Robinson – following the release of their new book Why Nations Fail in the UK, I thought it would be appropriate to also introduce their new blog, covering themes from the book itself. More specifically they talk about various examples of how extractive institutions have been the main cause of failed nations.
  2. Too Big to Jail: Simon Johnson – having only just recently watched the film Inside Job, I came across this interesting article following on from the themes of the film, about corporate fraud and criminality within some of the biggest banks that were involved in the financial crisis. An interesting play on the “too big to fail” argument, whereby banks have an incentive to take on excessive risks. The “too big to jail” view describes how banks can also get away with just about anything if they are big enough.
  3. A Devaluation Option for Southern Europe: Gita Gopinath, Emmanuel Farhi, Oleg Itskhoki – an clever suggestion on how Southern European countries can effectively create the same effects as devaluation, without the need to actually leave the Euro and readopt their old currencies. In my opinion it definitely seems like a viable idea. What the Southern European countries need most now is to increase their competitiveness and show signs of growth, as opposed to imposing austerity measures. Only once their economies begin to grow again, will they be able to fix their balance sheets.
  4. Jeremy Lin and the Political Economy of Superstars: Kenneth Rogoff – an interesting discussion on why we accept high pay for sports superstars, but on the other hand do not tolerate the high bonuses of financial superstars. In my opinion this is a very fair point to make, but the question that remains is, should we accept high pay for both or not tolerate either? I’ll leave that for you to decide.
  5. Where to Wait for an Elevator: John Cook – finally, just a fun bit of optimisation theory for when you are next waiting for an elevator. Enjoy!
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Celebrating The Greek Credit Event

Finally, the ISDA (International Swaps & Derivatives Association) has decided today that a restructuring credit event has occurred in Greece.

Has there not already been restructuring of Greek debt?

It is true that there have already been write-offs by holders of Greek debt, however, a restructuring credit event occurs when restructuring is involuntary. Surprisingly the debt write-offs were previously considered to be “voluntary”, even though this required a lot of convincing of private creditors. Today though, the Greek government announced that it will activate its Collective Action Clause on Greek bonds.

What does the Collective Action Clause (CAC) mean?

The CAC is an agreement that if a certain percentage of Greek debt holders agree to a write-off, the remaining debt holders can also be forced into writing off their part of the debt. Since this clause has now been activated, the restructuring is no longer voluntary, and so a credit event has occurred.

So why should we be happy about a credit event having occurred?

The good thing about the restructuring finally being considered a credit event, is that any insurance that was purchased by private sector creditors and governments would now be triggered. Many holders of Greek debt had purchased Credit Default Swaps (CDS) in case Greece were to experience a credit event, and now that one has occurred, the CDS have finally been triggered and creditors receive their payments.

What if the restructuring had not been considered a credit event?

If a credit event had not occurred and CDS payments had not been triggered, many private creditors would have possibly begun to wonder as to whether there was any use for CDS at all. After all, if Greece’s debt restructuring isn’t considered a credit event, then what is? As a result, CDS agreements would have been deemed worthless, causing both private creditors and governments who hold CDS, to write off their value and possibly land in even greater financial trouble.

So there you go, there’s a part of Greece’s failure that we can finally be happy about.

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Hayek vs. Keynes

Hayek vs. Keynes (Round 1): Fear The Boom & Bust

Hayek vs. Keynes (Round 2): Fight Of The Century

Hayek vs. Keynes: Hayek’s Gift

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Capital Gains vs. Ordinary Income – Is it as easy as we think to distinguish between the two?

Is distinguishing between capital gains and ordinary income really as easy as we think?

Apparently not, as is shown by the following example from Gregory Mankiw’s recent New York Times article.

What is a capital gain, and how can we distinguish it from ordinary income?

The answer seems simple. If you have a job, the money you are paid for your work is ordinary income. If you buy an asset at one time and sell it later for a higher price, the profit you made from holding it is a capital gain.

But is it really that easy? Consider five examples, and see if you can identify what is ordinary income and what is a capital gain:

• Abe buys a vacation home for his family for $800,000. Some years later, when his children have grown and left home, he sells it for $1 million. He makes $200,000.

• Bob is a real estate investor. After scouring the market for the best investment opportunities, he buys a house for $800,000 that he believes is undervalued. A few years later, he sells it at $1 million, for a profit of $200,000.

• Carl is a real estate investor and a carpenter. He buys a dilapidated house for $800,000. After spending his weekends fixing it up, he sells it a couple of years later for $1 million. Once again, the profit is $200,000.

• Dan is a real estate investor and a carpenter, but he is short of capital. He approaches his friend, Ms. Moneybags, and they become partners. Together, they buy a dilapidated house for $800,000 and sell it later for $1 million. She puts up the money, and he spends his weekends fixing up the house. They divide the $200,000 profit equally.

• Earl is a carpenter. Ms. Moneybags buys a dilapidated house for $800,000 and hires Earl to fix it up. After paying Earl $100,000 for his services, Ms. Moneybags sells the home for $1 million, for a profit of $100,000.

How much capital gains and ordinary income do we attribute to Abe, Bob, Carl, Dan and Earl? (To keep things simple, assume that Ms. Moneybags is untaxed. Think of her as running a pension fund or university endowment.)

Let’s take the easy cases first. It seems clear that Abe has a capital gain. His profit of $200,000 comes from simply holding an asset over time. And it seems equally clear that Earl’s $100,000 is ordinary income. He is being paid for providing his services.

But between these cases, the situation gets murky. Bob and Carl are being rewarded in part for the time they spend, but the tax law treats both as having earned entirely capital gains. The tax code does not count the time that Bob spent looking for investments as employment and his gain as taxable labor compensation, even though some of it arguably is. Nor does it try to tax Carl’s sweat equity as labor compensation.

This brings us to Dan and his partnership with Ms. Moneybags. The tax law treats this partnership as exactly equivalent to Carl’s situation. In this case, however, the $200,000 capital gain is divided into halves: some of it goes to Ms. Moneybags, who provided the cash, and some goes to Dan, who provided the sweat equity. Once again, nothing is treated as ordinary income.

In some ways, this treatment makes sense. After all, Dan is doing half of what Carl did, so why should he have to pay a higher tax rate than Carl did on that half of his income? On the other hand, it seems that Dan is getting off easy. Dan does not seem very different from Earl, because both are getting $100,000 for fixing up the house.

If these examples leave your head spinning, you are not alone. Economists and tax lawyers who study these issues are unsure about the best way to handle these situations in practice.

Here is where carried interest enters the picture. Carried interest from a private equity partnership is like the income that Dan earns from his real estate partnership. In this case, however, Dan is not a carpenter but a specialist in business turnarounds. The partnership does not buy dilapidated houses to fix up and sell; it buys troubled businesses to fix up and sell. And just as Dan the carpenter can treat his share of the partnership income as a capital gain, Dan the business specialist can do the same.

Critics of current law think it is unfair that these private equity partners are taxed at capital gains rates, whereas other high-income individuals like doctors and lawyers pay the much higher tax rates for ordinary income. It is a reasonable point, and some reform may well be appropriate. But as the tax situations of Abe through Earl illustrate, it is not obvious what the best approach would be. Not all problems have easy answers.

via Capital Gains vs. Ordinary Income – Economic View – NYTimes.com.

So should we even attempt to distinguish between capital gains and ordinary income?

Even this simplified example shows how difficult it can be to determine what should be taxed as capital gains and what should be taxed as ordinary income. Perhaps this is why some countries, such as my home country, Estonia (which incidentally is renowned for having a very simple tax system), do not distinguish between the two. Capital gains and ordinary income are both taxed at a flat rate of 21%. What are your thoughts on this issue? Should we distinguish between capital gains and ordinary income, or not?

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#Finance100 – A Couple Of Suggested Twitter Feeds

With Economia having released their Twitter #Finance100 list a couple of days ago, I thought it would be an appropriate way to start off this blog, with a couple of suggested feeds to keep up to date with the latest economics news.

What is #Finance100?

The list essentially ranks individuals and organisations involved in economics and related areas, based on their PeerIndex score, a score between 0-100 indicating how influential they are on Twitter.

Who to follow?

Currently the top 5 Twitter feeds are as follows:

1) Nouriel Roubini – Economist, renowned for anticipating the 2008 housing crash and financial crisis.

2) Robert Peston – Journalist, business editor for the BBC.

3) Paul Mason – Journalist, economics editor for BBC’s Newsnight.

4) The Economist – Weekly News Publication, specialising in economics, politics and international affairs.

5) Tim Harford –  Economist/journalist, author of various books including The Undercover Economist, and more recently Adapt.

Of course this ranking is likely to change over time so be sure to check the full list for an updated ranking.

+ A Couple of Extras – My BlogRoll

As well as feeds on the #Finance100 list, I will be adding some of my favourite economics blogs to the BlogRoll at the bottom of the page. Some of these are only recently becoming popular and so did not make the #Finance100, but they are definitely worth a read. Be sure to check them out!

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Welcome!

Who am I?

I am a BSc Economics student, interested in the world of economics, banking and finance.

Why did I start this blog?

I started this blog so that I could collect and share various interesting articles that I come across in newspapers, magazines, blogs, etc.

What will be posted?

I will try to make a couple of posts each month (more frequently if I manage to find the time), highlighting articles by leading economists which would be of interest to other economics students and enthusiasts.

Anything else?

I would just like to mention that any opinions that you might have on any of the articles that I post are more than welcome and I would be very keen to discuss/debate any issues…

Enjoy!

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