Future is Islamic Finance

Turns out Atif Mian and Amir Sufi are closet Islamic bankers.

“Both student debt and mortgages illustrate a broader principle. If we’re going to fix the financial system—if we are to avoid the painful boom-and-bust episodes that are becoming all too frequent—we must address the key problem: the inflexibility of debt contracts. When someone finances the purchase of a home or a college education, the contract they sign must allow for some sharing of the downside risk. The contract must be made contingent on economic outcomes so that the financial system helps us. It must resemble equity more than debt.8
This principle can be seen easily in the context of education. Student loans should be made contingent on measures of the job market at the time the student graduates. For example, in both Australia and the United Kingdom, students pay only a fixed percentage of their income to pay down student loans. If the student cannot find a job, she pays nothing on her student loan.

For reasons we will discuss, we believe a better system would make the loan payment contingent on a broader measure of the labor market rather than the individual’s income. But the principle is clear: recent graduates should be protected“if they face a dismal job market upon completing their degrees.9 In return, they should compensate the lender more if they do well.

The disadvantage of debt in the context of student loans is not a radical leftist idea. Even Milton Friedman recognized problems with student debt. As he put it, “A further complication is introduced by the inappropriateness of fixed money loans to finance investment in training. Such investment necessarily involves much risk. The average expected return may be high, but there is wide variation about the average. Death and physical incapacity is one obvious source of variation but probably much less important than differences in ability, energy, and good fortune.”10 Friedman’s proposal was similar to ours: he believed that student-loan financing should be more “equity-like,” where payments were automatically reduced if the student graduates into a weak job environment.

Making financial contracts in general more equity-like means better risk sharing for the entire economy. When house prices rise, both the lender and borrower would benefit. Likewise, when house prices crash, both would share the burden. This is not about forcing lenders to unfairly bear only downside risk. This is about promoting contracts in which the financial system gets both the benefit of the upside and bears some cost on the downside.

Financial contracts that share more of the risk would help avoid bubbles and make their crashes less severe. Recall from chapter 8 how debt facilitates bubbles by convincing lenders that their money is safe, and how this leads them to lend to optimists who bid prices higher and higher. If lenders were forced to take losses when the bubble pops, they would be less likely to lend into the bubble in the first place. They would be less likely to be lulled into the false sense of security that debt dangerously offers. Charles Kindleberger saw time and time again that bubbles were driven by investors’ believing that the securities they held were as safe as money. We must break this cycle.”

“We have also shown that when borrowers are forced to bear the entire brunt of the crash in asset prices, the levered-losses cycle kicks in and a very severe recession ensues. If financial contracts more equally imposed losses on both borrowers and lenders, then the economy would avoid the levered-losses trap in the first place. This would force wealthy lenders with deep pockets to bear more of the pain if a crash materializes. But their spending would be less affected, and the initial demand shock to the economy would be much smaller. In the context of housing, a more equal sharing of losses would also help avoid the painful cycle of foreclosures. If financial contracts were structured appropriately, we could avoid foreclosure crises entirely.”

“In chapter 10, we advocated policies that would help restructure household debt when a crash materializes. But intervening after the fact requires political will and popular support, both of which are absent during a severe recession. The contingent contracts we propose here would automatically accomplish many of these goals. And they would preserve incentives because all parties would understand what they were signing up for. In the next section, we propose a specific mortgage contract that includes these features, which we call the shared-responsibility mortgage. As we will demonstrate, had such mortgages been in place when house prices collapsed, the Great Recession in the United States would not have been “Great” at all. It would have been a garden-variety downturn with many fewer jobs lost.”

Excerpt From: Sufi, Amir. “House of Debt: How They (and You) Caused the Great Recession, and How We Can Prevent It from Happening Again.”


Save the banks to save the economy – Spanish Edition

“Spanish housing in the 2000s was the U.S. experience on steroids. During the early part of the decade, house prices soared 150 percent as the household debt-to-income ratio doubled. When house prices collapsed, the home equity of many Spanish home owners was completely wiped out, setting in motion a levered-losses cycle even worse than the one in the United States. The Spanish economy foundered, with unemployment topping 25 percent by 2012. Spanish home owners had even worse problems than their American counterparts. As in the United States, house-price declines destroyed home equity, and many home owners were evicted from their homes. But in Spain a law from 1909 stipulated that most Spanish home owners remain responsible for mortgage payments—even after handing over the keys to the bank. If a Spaniard was evicted from his home because he missed his mortgage payments, he could not discharge his mortgage debt in bankruptcy. He was still liable for the entire principal.1 Further, accrued penalties and the liabilities followed him the rest of his life. And bankruptcy registers made it difficult for him to lease an apartment or even get a cell phone contract.

“As a result of these laws, mortgage-debt burdens continued to squeeze Spanish households even after they were forced out of their homes. Suzanne Daley of the New York Times reported on the story of Manolo Marban, who in 2010 was delinquent on his mortgage and awaiting eviction. He expected no relief from his $140,000 mortgage even after getting kicked out: “‘I will be working for the bank the rest of my life,’ Mr. Marban said recently, tears welling in his eyes. ‘I will never own anything—not even a car.’”3 Hard-handed Spanish mortgage laws spurred widespread condemnation and social unrest. Locksmiths and police began refusing to help bankers evict delinquent home owners.4 In 2013 Spanish firefighters in Catalonia also announced that they would no longer assist in evictions, holding up a sign reading: “Rescatamos personas, no bancos”—we rescue people, not banks.

“Even outsiders recognized the harshness of Spanish mortgage laws: the European Union Court of Justice handed down a ruling in 2013 demanding that Spain make it easier for mortgage holders to escape foreclosure by challenging onerous mortgage terms in court.5 The Wall Street Journal Editorial Board—not known as a left-leaning advocate for indebted home owners—urged Spain to reform mortgage laws to “prevent evicted homeowners from being saddled eternally with debt.”6 A number of opposition parties in the Spanish parliament attempted to reform the laws governing mortgage contracts. But in the end, nothing was done. As we write, harsh Spanish mortgage laws remain on the books, and Spain has endured a horribly severe recession, comparable to the Great Depression in the United States.

So why wasn’t more done to help Spanish home owners? Lawmakers in Spain made an explicit choice: any mortgage relief for indebted households would hurt Spanish banks, and the banking sector must be shielded as much as possible. For example, if lawmakers made it easier for home owners to discharge their debt by walking away from the home, more Spaniards would choose to stop paying and walk away. This would leave banks with bad homes instead of interest-earning mortgages, which would then lead to larger overall economic costs. The head of the mortgage division at Spain’s largest property website put it bluntly: “If the government were to take excessive measures regarding mortgage law, that would affect banks. It would endanger all of the hard work that has been done so far to restore the Spanish banking system to health.

“The New York Times story by Suzanne Daley reported that “the government of Jose Luis Rodriguez Zapatero has opposed . . . letting mortgage defaulters settle their debts with the bank by turning over the property. . . . Government officials say Spain’s system of personal guarantees saved its banks from the turmoil seen in the United States.” The article quoted the undersecretary of the Housing Ministry: “It is true that we are living a hangover of a huge real estate binge. And it is true that far too many Spaniards have excessive debt. But we have not seen the [banking] problems of the U.S. because the guarantees [requiring Spaniards to pay their mortgage debt] here are so much better.

“Still, the extreme preferential treatment given to banks under Spanish bankruptcy law was not enough to protect the banking sector. Spanish banks steadily weakened as the economy contracted. In July 2012 the Spanish banking system was given a $125 billion bailout package by Eurozone countries. And it was actually backed by Spanish taxpayers.9
So did the policy of protecting banks at all costs succeed? Not at all. Five years after the onset of the financial crisis, the recession in Spain is one of the worst in the entire world. If protecting banks at all costs could save the economy, then Spain would have been a major success story.” “Still, the extreme preferential treatment given to banks under Spanish bankruptcy law was not enough to protect the banking sector. Spanish banks steadily weakened as the economy contracted. In July 2012 the Spanish banking system was given a $125 billion bailout package by Eurozone countries. And it was actually backed by Spanish taxpayers.9

So did the policy of protecting banks at all costs succeed? Not at all. Five years after the onset of the financial crisis, the recession in Spain is one of the worst in the entire world. If protecting banks at all costs could save the economy, then Spain would have been a major success story.”

Excerpt From: Sufi, Amir. “House of Debt: How They (and You) Caused the Great Recession, and How We Can Prevent It from Happening Again.”

Modeling Structured Finance in VBA

Landed our first securitization deal. Was asked if I am interested in doing the securitization modeling or should we outsource to the big four auditing firms or someone in India for doing it on the cheap or saving us time. I volunteered that I will do it (it will be good for my CV and allow me to play around with my hobby of coding).

Brought out William Preinitz “A Fast Track to Structured Finance Modeling” and read almost 300 pages into it in a few hourse. After having used python for some time, verbosity of VBA was like a culture shock. Secondly, I tried to follow the coding examples of Preinitz in my own data file. Late into night coding by copying and I realize that I am not learning much. So I start a new file and start coding in VBA from start without referring to the book example yet following the same methodology. I of using a 2D array to load the whole raw data into memory, I follow Preinitz’s methodology loading each column of data in its own single array. This being VBA and “Option Explicit” feature switched on to prevent unintentionally creating variables (by typo), it required firstly declaring a global array variable, secondly ReDim that array to length of column and finally loading the column data in to that array. I have to do this for each column I have to load. Similarly, to do collateral screening, I have to refer to each data column by name.

I had presumed that may be its faster to load data into 1D array and test it by going array by array rather than loading all of it up in a single 2D array because that is why Preinitz goes about doing it. I googled around a bit and whoa.. was I surprised. With the current computer speeds, its faster to load the whole dataset as a single 2D array. Moreover, I do not have to create complicated variable names to refer to data. I can go to them by just using column numbers. Fucking hell. This makes my life so much easier. Fewer variables to create

I will plan to test this today or tomorrow night but God, Preinitz couldn’t have made it harder. Who knows, when the program increases in complexity, I might regret this but common sense tells me I won’t.

چائے کی پیالی – پلانے کی اور، دکھانے کی اور

بیگم کچھ عرصہ کے لئے میکے گئیں تو راقم الحروف کو پہلی بار احساس ہوا کہ چاۓ کی پیالی خودبخود نہیں دھُل جاتی- لیکن  ولی عہد اکثر و بیشتر باورچی خانے میں بقول اپنی والدہ کے “ہاتھ بٹانے کی بجاۓ کام بڑھاتا رہتا ہے ، برتن توڑ توڑ کے” تو حفظ ماتقدم کے تحت گھر میں ضرورت سے زیادہ چاۓ کی پیالیاں ہیں- راقم الحروف عادتاً سست واقع ہوئے ہیں- جیسے جیسے بیگم کا قیام طول پکڑتا گیا، ویسے ویسے بے دھلی چاۓ کی پیالیوں کا مینار جو کہ راقم الحروف “کچن سِنک” میں تعمیر کر رہے تھے اونچا ہوتا گیا – ایک وقت ایسا آیا کہ” پینے” کے ساری پیالیاں مستعمل ہو گئیں – ابھی بیگم کی واپسی میں کچھ دن باقی تھے- راقم الحروف کو خیال آیا کہ کیوں نہ “دِکھانے” والی پیالیاں بھی زیرِ استعمال لائی جائیں

 یہ دِکھانے والی پیالیاں کیا ہوتی ہیں؟

یہ برصغیر کی ثقافت کا اہم جزو ہیں – ہر دلہن اپنے جہیز میں ایک “ڈنر سیٹ” لاتی ہے جو اس کی والدہ کی طرف سے ہوتا ہے – متوسط طبقہ کی مائیں اکثر جاپانی برانڈ “نوری ٹاکے” کے ڈنرسیٹ دیتی ہیں- یہ برتن شاز و نادر ہی استعمال ہوتے ہیں ۔ نئی دلہنیں بلکہ وہ پرانی دلہنیں بھی جن کی بیٹیاں بھی اب دلہن بن کے جا چکی ہوں ان برتنوں کو صرف اپنی ماں کی آمد پر نکالتی ہیں-  اگر مہمان خانے کی الماری شیشے کی ہو اور اس میں جگہ بھی  ہو تو یہ اس میں سالوں زیرِ نمائش رہتے ہیں –  اسی لئے یہ  “دِکھانے” کے برتن کہلاۓ جاتے ہیں- یا پھر دوسری صورت میں جیسے کہ جس چھوٹے کرائے کے مکان میں ہمارا بچپن  اور لڑکپن گزرا کہ مہمان خانے میں صوفے ہی بڑی مشکل سے سمائے  تو جس ڈبہ پیک میں اسے ہماری والدہ  اپنے جہیز میں لائیں تھیں، کئی دہائیاں اسٹور میں اسی ڈبے میں پڑے رہے

ہمارے ایک دوست کے بقول  ان کی مرحوم والدہ اللہ انھیں جنت نصیب کرے عید کی عید اس ڈنرسیٹ  کو نکالتی ہیں ، صاف کرتی ہیں اور پھر واپس ڈبے میں ڈال دیتی ہیں ۔ ہمارے اس دوست کی شادی عید کے چند روز بعد ہونی تھی- چاند رات کو جب ان کی والدہ سالانہ جہیز ڈنر سیٹ صفائی میں مصروف تھیں تو ہمارے دوست سے رہا نہ گیا اور انھوں نے اپنی والدہ ماجدہ سے کہہ دیا کہ ” اب نیا سامان آنے والا ہے آپ یہ پرانے زمانے کے برتن کو پھینک کیوں نہیں دیتیں یا پھر کسی کو دیدیں”- اللہ مبالغہ آرِائی سے بچائے لیکن بقول ہمارے دوست کے ان کی والدہ نے گال پیٹے، سینہ کوبی کی اور رونا شروع کردیا کہ “ابھی بیوی آئی نہیں تو میری ماں کے دئیے ہوئے برتن پھنکوا رہا ہے کہ پرانے ہوگئے ہیں، جب بیوی آجائے گی تو ماں باپ کو بھی گھر سے باہر نکال پھینکے گا کہ آثارِقدیمہ کی شخصیات ہیں ” – دوست کے والد صاحب جو ساتھ والے کمرے میں خبریں دیکھ رہے تھے کہ” ہر سال کی طرح اس سال بھی کمر توڑ مہنگائی نے عوام کی خوشیوں کو ماند کردیا ہے کہ چاند رات میں جوق در جوق بازاروں کا رخ کر رہے ہیں”  بھاگے بھاگے آئے اور دوست کی والدہ کو سنبھالا-

اس قصہ کو یاد کرتے ہی راقم الحروف کافی دیر مخمصے کا شکار رہے کہ آیا دکھانے والی چائے کی پیالیوں کو ان کی آرامگاہ یعنی مہمان خانہ کی نمائشگاہ میں سے ہلایا جائے یا نہیں-  سابق صدر زرداری نے ایک دفعہ فرمایا تھا کہ “ہر شریف آدمی کی طرح میں بھی اپنی بیوی سے ڈرتا ہوں” – راقم الحروف توٹھرے ہی شریف- سر پہ کفن باندھا ، کمر کس لی ایپرن سے ، جھاواں پکڑا ہاتھ میں ، میکس صابن کی ڈبیہ کھولی اور پھر اس فلک بوس مینارِ پیالیاں کو ایک ایک پیالی کرکے زمیں بوس کرد یا

Murkier beginnings of League of Nations – White Man’s Burden

From William Easterly’s masterly “Tyranny of Experts”

The negotiations in Versailles for a treaty to end World War I occupied the first half of 1919, until the participating nations signed the treaty of Versailles on June 28, 1919. Although twenty-seven nations participated in the Versailles talks, the dominant powers were the United States, the United Kingdom, and France.

The first decision was to transform former German colonies into “mandates.” The mandates were places, not commands. They were regions whose trustees answered to the League of Nations (the precursor international organization to the United Nations) that was also created at the Versailles conference. This was the context for Woodrow Wilson’s inaugural address quoted above about how “the first time in history the counsels of mankind are . . . concerted” to improve “the conditions of working people . . . all over the world.” Wilson spelled out the idea of the mandates further “with regard to the helpless parts of the world”: “All of those regions are put under the trust of the league of nations, to be administered for the benefit of their inhabitants—the greatest humane arrangement that has ever been attempted—and the rules are laid down in the covenant itself which forbid any form of selfish exploitation of these helpless people by the agents of the league who will exercise authority over them during the period of their development.”

The mandates were not directly relevant to China, which was not a colony. However, the idea of development as a neutral enterprise in some territories “for the benefit of their inhabitants” would indeed be relevant in China. It was one of the first statements of technocratic development, in which the focus is on the development of the “helpless” and not on who is doing the developing. It displays either naïveté or indifference to who actually holds the power.

In practice, the mandates were hard to distinguish from colonies. The League of Nations awarded the former German colonies to other colonial powers, notably Britain (e.g., Tanzania) and France (e.g., Togo). The League had no enforcement power to prevent “exploitation” by those colonial powers who “will exercise authority over them during the period of their development.” So the mandates just became British or French colonies in all but name. Cynics could dismiss the whole exercise as a power grab by the British and French.

Murky beginnings of United Nations – White Man’s Burden

From William Easterly’s excellent “Tyranny of Experts”

The triumph of the technocratic idea of development was written into the charter of the new United Nations. On June 26, 1945, in San Francisco at the United Nations Conference on International Organization, representatives of the world’s countries signed the United Nations Charter, which reads in part: “We the peoples of the United Nations,” in order “to reaf-firm faith in fundamental human rights, in the dignity and worth of the human person, in the equal rights of men and women and of nations large and small, and . . . to promote social progress and better standards of life in larger freedom,” have determined “to employ international machinery for the promotion of the economic and social advancement of all peoples.”53 This sounds admirable, of course, but there is a fundamental omission. The UN Charter paid at least lip-service to rights and freedom, but it made no mention of independence for colonial peoples. Perhaps it helps to understand this contradiction to learn that the main author of the soaring language of the charter was Jan Smuts, the long-time South African leader and long-time advocate of white rule in Africa. At the conference in San Francisco, Smuts praised the United Kingdom as the “greatest colonial power” in the world. Smuts saw the United Nations as serving “men and women everywhere, including dependent peoples, still unable to look after themselves.”54 The “international machinery” to promote “advancement” of “dependent peoples” included the British Empire. At the time of the UN’s founding, the United Nations and the British Empire were mutually supportive international organizations.

W.E.B. DuBois accused Smuts and the other UN founders of “lying about democracy when we mean imperial control of 750 millions of human beings in colonies.”55

Friedrich Hayek had questioned the moral value of any real power given to an international organization in The Road to Serfdom in 1944. Hayek, with his realism about the Allies wielding such power and his suspicion of unchecked power at any level, reacted a lot like the left-wing anti-imperialist DuBois. He asked, “can there be much doubt that this would mean a more or less conscious endeavor to secure the dominance of the white man, and would rightly be so regarded by all other races?”56

Article 73 of the UN Charter said that some unspecified UN members have “responsibilities for the administration of territories whose peoples have not yet attained a full measure of self-government.” As Lord Hailey pointed out in the 1956 revision of the Africa Survey, this provision did not give “the organization of the United Nations any authority to intervene in the control of these territories.” The article requires such members to ensure for these peoples “protection against abuses.” This article thereby firmly required colonial powers to protect their colonial subjects against—themselves.57

When the United Nations published its first report on development in 1947,Economic Development in Selected Countries: Plans, Programmes and Agencies, it included plans for “British African Non-Self-Governing and Non-Metropolitan Territories” and “French African Overseas Territories.” The introduction to the report lumps together all “governments of the less developed countries,” including the European colonial rulers of these territories next to local rulers like those in Argentina, Brazil, Chile, Poland, and Yugoslavia. The report declared that all members of this diverse group of autocrats, democrats, Stalinists, and colonizers shared the “ultimate aim in economic development” which “is to raise the national welfare of the entire population.