finance & economics
“The dogmas of the quiet past are inadequate to the stormy present.” - Abraham Lincoln
At a time of great uncertainty there is comfort in ceremony. Election night put a merciful end to the presidential campaign supercycle, and many Americans will be glad to return to prime time TV and ads about how chairs are like Facebook. But ominous headwinds remain, and neither candidate seemed willing or able to create the blueprints for sustainable, responsible, inclusive growth, regardless of who was picked as Chief Executive on November 6th.
finance & economics, science & tech »
“A man who has committed a mistake and doesn’t correct it,
is committing another mistake.” ~ Confucius
Another quarterly earnings release has come and gone, and once again Canada’s former mobile tech heavyweight has stunned even those who have grown used to disappointment. It might seem unfair to criticize a company that services roughly 75 million BlackBerry subscribers worldwide – that is, when its service hasn’t failed – and sold over 14 million new phones and 150,000 tablets in the last three months alone.
As evidence continues to mount that established models of rational decision-making are dangerously out of date, behavioral science has embraced human irrationality in all of its deceptively predictable forms. At the forefront of the field is Duke University professor Dan Ariely, whose simple experiments into human bias have shed light on everything from the fallacy of supply and demand to the problem of procrastination.
As ideological battles are waged over the benefits of free markets, the challenges of financial regulation, the inefficiency of policymaking, and the design of a sustainable path forward, pundits often attack one another without a fundamental understanding of the mechanics of our modern financial system. This primer helps to explain the unique roles that banks and capital markets play in the efficient (and sometimes painfully inefficient) functioning of of modern society. While it won’t settle any debates, it certainly reminds us how little we may know about the way the economy works…
It isn’t surprising that so-called “ambulance economics” has gained mass policy appeal as the global economy descends into madness. The battlefield, after all, is no place for quiet research and careful study. But even the most pressing humanitarian disasters could use a little “clinical economics” to help decision-makers better chart out the way forward. Recent poverty relief efforts in Haiti, for instance, should certainly focus first on the bare essentials of sustenance, sanitation, and security. Once politicians and development professionals are able to stop the bleeding, however, the really critical work actually begins in terms of supporting the long-term prosperity of the country. In that spirit, any path forward should take into consideration the unique historical, geographic, cultural, and …
Humanity is rarely more receptive to change than during the depths of a crisis. At various times, war, famine, and financial paralysis have offered societies around the world an opportunity to revisit their fundamental character. But just as political, economic, and social systems are descending toward chaos, a current of optimism emerges – if only for a moment. The second derivative inflects, like the speed of a car just before a crash. Avoiding Armageddon — or at least pushing it back — releases a shockwave of positive sentiment. Green shoots emerge and reformists are branded as meddling fools who almost ruined a good thing. Stability returns, trust is restored, and the economy springs back to life — with a few important exceptions.
As capital markets continue to increase in scale and scope, there is a natural tendency to believe that they have also become more accurate at valuation. Scores of “rational” investors acting in their own self-interest, based on their own proprietary information along with anything publicly available, make their best guess about the value of a particular security – from a simple common share of IBM to a bet on the amount of rainfall next April. Those who believe the future looks bright will buy, and those who think better days are behind will sell.
Armchair financial quarterbacks would do well to tune out the mass media every so often and tune into the real global dialogue on the nature of the recent crisis and our prospects for a sustainable recovery. It is no coincidence that those whose perspective is truly global consider the fundamental nature of our modern political economy in terms of decades not days, systems not statistics, and welfare not wealth.
In this speech, given just weeks before the March 2008 arranged marriage of Bear Stearns and JPMorgan, this banker to central bankers dissects the credit crisis of 2007 and calls attention to dangerous fault-lines that presaged the apocalyptic deleveraging of the next 18 months…
“Bob Farrell was a legend at Merrill Lynch & Co. for several decades. Farrell had a front-row seat to the go-go markets of the late 1960s, mid-1980s and late 1990s, the brutal bear market of 1973-74, and October 1987′s crash. He retired as chief stock market analyst at the end of 1992, but continued to occasionally publish. Rumor has it for a humongous donation to Farrell’s favorite charity, you can get on his very exclusive email list. Marketwatch gathered some of Farrell’s more famous observations, and republished them as 10 Market Rules to Remember.” – via The Big Picture
finance & economics, financial crisis »
The frightening this about this table isn’t lavish CEO pay after record bank losses, nor the 9-figure scale of the payouts, but just how closely the bailout money matches the total bonus pool in almost every case. Granted, base compensation in investment banking is nearly equivalent to the minimum wage, but there are a lot of people – roughly 3.6 million in America alone – that would jump at the chance to make $150,000 for 90 hour work-weeks, if only they could…
This TED talk by mathematician Steven Strogatz “shows how flocks of creatures (like birds, fireflies and fish) manage to synchronize and act as a unit when no one’s giving orders”. The parallels to market behavior and financial panic are implicit but obvious. We often perceive of our decisions during a crisis as unique and self-preservational, but the tendency toward spontaneous order is a powerful impulse. Coordinated reaction to natural threats, be it a hungry seal or predator hawk, can often increase a group’s biological fitness and probility of survival, while a coordinated reaction to financial crises can actually amplify individual risk – like Strogatz’s example of London’s Millenium Bridge – and only make matters worse…
For nearly a quarter century, Milton Friedman’s monetarists and their acolytes at the Federal Reserve have pursued American prosperity on the assumption that the sheer quantity of money in the economy, along with the degree to which it turns over annually, are the principal levers shaping macroeconomic fundamentals. For the better part of the 20th century that assumption held true as money supply was carefully managed, rising when the economy needed a boost and contracting when it was overheating.
The theory draws its roots from a colossal failure by the Federal Reserve during the Great Depression.
Scientists and market commentators have long been aware of the susceptibility of the markets to any single investment philosophy. The rise of early program trading contributed to the historic one-day loss of nearly 23% on Black Monday in 1987. Recent experiments with risk securitization may cost trillions of borrowed dollars to unwind and decades to fully digest.
The existence of black markets in virtually every economy on the planet is a testament to human resourcefulness and natural entrepreneurship. For those that are building tunnels under Gaza’s border with Egypt, $100,000 and a few months work can generate up to $10,000 a day in fees, and help to provide critical supplies and less critical desires into the struggling Gaza strip. One economist has estimated that roughly 90% of the annexed economy is driven by these covert smuggling operations. Unfortunately, along with tea, cows, washing machines, and gas flow AK-47s, drugs, and anti-aircraft missiles as soaring Gazan demand meets profitable Egyptian supply…
Assuming that our lot in life is simply a function of hard work, acquired skills, and a bit of good luck, the only real difference between liberals and conservatives is the degree to which we believe that those who fall on hard times – for whatever reason beyond their control – deserve a helping hand. How we publicly spend on that assistance is not only a question of socio-political philosophy, but also a matter of practical statecraft. Whether “leveling the playing field” or simply “setting the rules of the game”, pharohs, kings, and presidents have all made use of their regulatory oversight with varying degrees of success. This piece in the Boston Review by noted macroeconomist Dean Baker explores the …
A eulogy for 20th century finance by one of its greatest poets…
The End of the Financial World as We Know It
By MICHAEL LEWIS and DAVID EINHORN
Americans enter the New Year in a strange new role: financial lunatics. We’ve been viewed by the wider world with mistrust and suspicion on other matters, but on the subject of money even our harshest critics have been inclined to believe that we knew what we were doing. They watched our investment bankers and emulated them: for a long time now half the planet’s college graduates seemed to want nothing more out of life than a job on Wall Street.
For those still convinced that the Federal Reserve is the lynchpin in some grander economic conspiracy, this brief history of central banking in America should put some of your doubts to rest…
Myth #1: The Federal Reserve Act of 1913 was crafted by Wall Street bankers and a few senators in a secret meeting.
On the Georgian resort hideaway of Jekyll Island (which has some excellent golf courses, by the way), there once met a coalition of Wall Street bankers and U.S. senators.