Category Archives: Economics in Brief

The Making of The Greek Fiscal Crisis

Dr. Periklis Gogas is an invited contributor to The Business Thinker magazine. He is a faculty member at Democritus University of Thrace, Greece, teaching Macroeconomics, Banking and Finance

The public debate over Greek debt is in the headlines for months now ever since the first issues with regard to Greece’s fiscal problems were raised. Political and ideological confrontations on the subject are inevitable. Accusations over culpability are an everyday occurrence between members of the two major political parties PASOK and ND that ruled Greece by turns since democracy was restored in 1974. Academic economists in Greece follow these developments closely and they are often at the epicenter of heated discussions in the media with journalists and tax payers indirectly or directly accusing them for the current situation. People are wondering why all the economists that now stress the shortcomings of Greece’s fiscal policy remained silent or at least they did not criticize that strong the same policies in the past. The truth of course is that no politician ever asked them and no one ever listened to their warnings. Politicians were busy accusing each other for creating the debt. Thankfully, numbers can tell the truth impartially without subjective political judgments and deception: a simple graph like the one in Figure 1 depicts the truth. Continue reading The Making of The Greek Fiscal Crisis

Desperate investors

Alexis Papachelas is a guest editorial writer to The Business Thinker. He is currently the Executive Editor of the long standing and highly respected daily Greek newspaper “Kathimerini”.

Many entrepreneurs who for years have waited patiently for their proposals to be examined in order to get to work on their investment projects are wondering when the government will finally decide to get around to looking at them. This has come to the fore after two major projects were pushed through under specially streamlined procedures, so it is only natural for the others to be awaiting answers about whether and when they will receive similar preferential treatment. Their hope is that they will not have to go through the pack of ambitious intermediaries full of promises of being able to push through investments.

The government and the Maximou Mansion have a clear role in the promotion of large investments. Nothing important can happen unless the prime minister or someone close to him with great influence puts his or her weight behind it. But this also means that the door should be open to every serious investor who is stuck in a rut and not just those with connections.

Continue reading Desperate investors

Remedy for Future Market Meltdowns: Require Margins for Over-the-Counter Trades

H. Nejat Seyhun, the Jerome B. & Eilene M. York Professor of Business Administration and professor of finance. Ross School of Business, University of Michigan. With his permission we publish this article that is also at U of M News and Media

In the year and a half since Lehman Brothers failed, we have heard a chorus of urgent calls for new regulations to prevent a repeat of the financial meltdown of 2008. Despite many proposals, however, no new regulations have gained traction toward enactment into law.

These proposed reforms have included requiring additional fees for banks, restricting the size and scope of banks, separating banks’ depository functions and trading activities, and stripping the Federal Reserve of its authority over banks and creating new regulatory institutions to oversee them. Yet, the Fed complains that it needs additional policy tools to manage the economy.

There is a simple, time-tested solution that would prevent a repeat of the recent financial crisis — a margin requirement for over-the-counter transactions (private transactions between banks or other parties).

In the aftermath of the 1929 stock market crash, the margin requirement for stock ownership (the amount that an investor must deposit in a margin account before buying on margin or selling short) was raised from 10 percent to 50 percent. This simple requirement has served us well for the past 80 years and has controlled excessive risk-taking in the stock market by individuals. Unfortunately, the margin requirement applies only to the stock market and exchange-traded products. There have been no margin requirements for over-the-counter transactions, where the bulk of trading takes place.

I propose that we immediately implement a margin requirement for all financial transactions, including over-the-counter transactions. The initial margin would be set small, even as low as one or two percent, and adjusted over time as needed, similar to exchange-based transactions. In addition to initial margins, maintenance margins would be required to take into account gains and losses on a day-to-day basis. To facilitate posting of the margins, a clearinghouse would be required to act as a counterparty to all transactions. In the United States, the Federal Reserve is well suited for this purpose. If it chooses, the Fed can pay interest on the margins, thus acquiring an additional policy tool.

Will margin requirements for over-the-counter transactions prevent a repeat of the financial meltdown of 2008? The answer is surely yes.

  • Margin requirements would apply to all firms, financial as well as nonfinancial.
  • Margin requirements would be flexible and subject to change by the Federal Reserve. If systemic risks increased, the Fed can simply increase the margin requirements, thereby stepping on the brakes and requiring de-leveraging. If the economy cools or goes into a recession, the Fed can reduce the margin requirement or temporarily set it close to zero, thereby encouraging greater risk-taking.
  • Margins would automatically control both the size and risk of all institutions and eliminate moral hazard problems. Firms experiencing losses would have to post bigger margins to cover their losses. To do so, they might need to liquidate their risky money-losing positions before they become too large, thus automatically reducing their size and risk levels.
  • Margin requirements would provide continuous updated information flow to the Federal Reserve, allowing it to monitor all financial institutions.

We already have a margin requirement in the stock market — the initial margin is 50 percent while the maintenance margin is 25 percent. We have margin requirements for all exchange-traded products. We have an informal margin requirement in the housing market, although this has not always been observed and should be made into a regulatory mandate as well. A simple way to achieve this objective is to require that all home buyers put down 20-25 percent of the purchase price as a down payment. Having a required margin in the housing market would prevent both housing bubbles as well as control the system-wide risk levels.

A saying goes that necessity is the mother of all invention. One benefit of the crises of the past is that they taught us expensive lessons on how to control risk. Let’s use our hard-earned knowledge and implement a margin requirement for all financial transactions.


H. Nejat Seyhun is Professor of Finance and Jerome B. and Eilene M. York Professor of Business Administration at the Ross School of Business, University of Michigan, where he has twice served as the chairman of the finance department.  He holds a Ph.D. in finance (1984) from University of Rochester, Rochester NY. Professor Seyhun’s research has been quoted frequently in the financial press including the Wall Street Journal, New York Times, Washington Post, Newsweek, Business Week, Bloomberg Business News, and Los Angeles Times.   Among his past consulting clients are Citigroup, Towneley Capital, Tweedy, Browne, and Vanguard.