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Showing posts from January, 2013

New Greek Currency?

Local communities in Greece are setting up their own currencies, with the most notable being the Tem. You can read the full story here (hat tip - Chris Colvin). Why are they doing this? Is it anti-Euro sentiment? Is Greece about to exit the Euro and go back to the drachma (see below)? Is it just Greeks asserting and projecting their local identity? My guess is that it has to do with tax evasion.

Repatriation of Bundesbank's Gold

The Bundesbank is to repatriate a large chunk of its substantial gold reserves held in New York and Paris (click here for story). Two questions immediately spring to mind. Why do central banks still hold large amounts of gold even though currencies are no longer tied to gold? Why is the Bundesbank pulling its gold reserves back to Germany? Some analysts see the Bundesbank's move as a sign of an impending currency war. Others see it as the world moving towards a de facto gold standard!

Underpants as an Economic Barometer

Economists are always looking for data which reveal something about the underlying health of the economy. Alan Greenspan, former chairman of the Federal Reserve, believed that sales of men's underpants (the Men's Underwear Index) reveal something about an economy's health. The basic idea is that during difficult economic times, men delay purchase of replacement underpants and make their existing undepants last longer! Click here and here to read more.

The Never-Ending Recession?

The Office for National Statistics in the UK has just released its estimates for GDP in the last quarter of 2012 (click here). GDP fell by 0.3%, which means that if GDP growth in the first quarter of 2013 is negative that the UK is officially back in recession for the third time since the 2008 financial crisis.  GDP in the UK is still below its 2007 level, and the big question for many economists is when will GDP get back to its 2007 level? Many commentators are talking about a decade or more of lost growth. Maybe it would have been better to let the banks fail in 2008 rather than endure a sickly economy for a decade or more!

The Democratic Accountability of Central Banks

There is an interesting article in today's Daily Telegraph which argues that central banks around the world need to be less independent and more accountable to politicians (click here). The inflation targeting regime, which was popular over the past two decades, is no longer acceptable to governments who wish to monetise huge amounts of their debt (aka quantitative easing) as such regimes keep inflation too low.  Mervyn King, in a speech in Belfast last night, conceded that after 21 years, inflation targeting needs to be reassessed, but he thinks that to abandon it would be irresponsible.  I have great concerns about placing monetary policy in the hands of non-accountable central banks or in the hands of politicians who will be tempted to use the monetary system for their own short-term ends. What is the solution? One possibility would be to return to a commodity-based monetary regime such as the Gold Standard. However, full-franchise democracies and commodity-based monetary reg…

Financial Repression

In the course of writing my book on British banking stability, I've been thinking a lot about financial repression. Financial repression is where governments repress the financial system in order to generate low nominal rates and negative real rates of interest. After World War II, most combatants had really high levels of debt. Consequently, governments used financial repression to reduce their debt servicing costs as well as the real value of their debt. After the 2007-8 financial crisis, many economies have very high levels of government debt. How can they reduce the real value of this debt and keep their debt-servicing costs low? The answer is financial repression - low nominal rates, negative real rates, and a small dose of inflation. You can read more about financial repression here and here.

William Lazonick and Stock Buybacks

A recent post at NEP-HIS Blog reviews William Lazonick's working paper on the Financialization of the U.S. Corporation. Lazonick is concerned with why, following the disappearance of large numbers of middle-class jobs in the U.S. during the past three decades, U.S. corporations have not invested in new technology and created high-value jobs to replace those lost to rationalisation and globalisation. His answer is the financialization of the U.S. corporation, with stock buybacks being the most obvious manifestation of this process. According to Lazonick, corporations use stock repurchases to manipulate their share prices, with the result that corporate executives holding stock options are enriched. He ultimately blames this on the erroneous 'ideology' that corporations should be run in such a way so as to maximise shareholder value.
I think that Lazonick is correct to highlight the problems with stock buybacks. As a student of financial history who has worked on dividend p…

Are Chimps Capitalists?

When my brother sent me this article from News Thump and suggested that it might be a good piece for my blog, I pointed out that some readers may actually believe it, and not realise that it was a piece of satire. His somewhat prejudiced retort was that those readers would be Queen's University students! 

The End of Growth?

We have all become accustomed to economic growth. We expect our GDP / national income to grow year after year (leaving aside the odd blip).  However, the stagnation of Western economies since the 2008 crisis has resulted in some economists suggesting that long-run economic growth has ground to a halt.  In particular, Robert Gordon has argued that in the grand scale of human history economic growth has been a temporary phenomenon lasting nearly two centuries. His explanation for this temporary growth is simply that technology revolutions (steam, railways, electricity, chemical engineering, combustion engine, household sanitation) raised productivity. He is less sanguine about the ability of computer technology to raise productivity. For one, the IT revolution isn't reflected in the productivity figures. Why? It could be that it eventually will - technology can be slow to raise productivity. On the other hand, maybe the IT revolution isn't such a big deal and doesn't make u…

Why Do Firms Pay Dividends?

Economists have puzzled for a long time as to why firms pay dividends in a world where taxes penalise dividend payments. In a paper with Qing Ye and Wenwen Zhan, I look at dividend policy in an early and unregulated capital market. In this market, we can ex ante rule out some traditional explanations for dividend policy as there are no taxes, no institutional investors, and no impediments to stock repurchases. In this early capital market, it turns out that firms paid dividends in order to communicate the company's health to investors.  The Review of Finance has recently accepted this paper and it is now available to view on its advance access page. Here is the paper's abstract: Why do firms pay dividends? To answer this question, we use a hand-collected dataset of companies traded on the London stock market between 1825 and 1870. As tax rates were effectively zero, the capital market was unregulated, and there were no institutional stockholders, we can rule out these potential …

MSc Finance Reunion

The MSc Finance at Queen's University will be 20 years old in September 2013. A reunion and networking event, organised by the Queen's University Management School and Queen's Alumni Office, is being held on Friday 13th September in Riddel Hall. You can sign up for the event here, or send me a tweet, or email me.

James Buchanan

James Buchanan, the Nobel-prize winning economist, died yesterday at the age of 93. Buchanan is most famous for pioneering public choice theory, which advocates the application of economic analysis to public policy and political science. You can read obits here and here. A free primer on public choice theory is available here and a very good encyclopedia entry is here. One of the key insights of public choice is that we should be concerned more about the institutional framework of our political systems rather than the personalities of our politicians.