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Showing posts from 2011

Financing Christmas

Tim Harford has an interesting post on the financing of Christmas.  In the past, families saved up for Christmas, but today Christmas is largely financed by credit cards.  In Harford's words - "Christmas is now financed in arrears, not in advance".  Credit is readily available, and, as a result, people can end up spending more than they can really afford.  Does this mean that credit card companies are exploiting people's weaknesses?  How much have credit cards contributed to the growth in consumer spending?  Christmas, however, is not about money or finance!  I will be taking a break from blogging for a couple of weeks unless the EuroZone collapses in the interim.  On that pessimistic note, may I wish you a Merry Christmas and a prosperous 2012. 

Wealth Inequality in the Roman Empire

Walter Schiedel and Steven Friesen, two historians of the Roman Empire, have recently attempted to estimate wealth inequality in the Roman Empire when it was at its zenith using papyri ledgers, previous scholarly estimates, imperial edicts, and Biblical passages.  Schiedel and Friesen estimate that in 150 AD, the top 1% of Roman society controlled 16% of the wealth, less than half of what America’s top 1% control today!  It is also much lower than wealth concentration in N. Ireland - according to the estimate in my recent OEP article , the top 1% of population back in 2001 controlled 22% of the wealth.  I have no doubt that that figure is much higher for 2011.  You can read more about Schiedel and Friesen's work here .

Equity Withdrawal in 2007

A Financial Times report published today reveals the high level of equity withdrawal in the run up to the credit crunch in the summer of 2007.  It is particularly worrying that equity withdrawal was highest in some of the poorest regions of the UK.   Northern Ireland comes out top of the bunch - 74% of those re-mortgaging their properties in the province in 2007 withdrew equity.  As a result, those who extracted large amounts of equity may owe more on their mortgage than the actual value of their property even though they bought their home well before the bubble began.

Marriage Tax Breaks

Nick Clegg has criticised Conservative plans to give tax breaks to married couples ( click here ).  The Conservative plan is to allow tax allowances of up to £150 per year to be transferred between spouses.  For example, an unemployed husband could transfer £150 of his tax allowance to his wife.  Are there good economic reasons why a government would do this?  Well-raised and socialised children provide a positive externality (i.e., benefit) to society.  Mother or fathers who take career breaks to raise children typically do so at their own expense.  In other words, society gets the benefit, but a family bears the cost.  There is therefore an argument for subsiding parents through the tax system by allowing transferable allowances (although £150 is a paltry amount). The next question is whether this should be provided to both unmarried and married parents.  The statistics and majority of evidence clearly show that the latter provides a more stable environment in which

Paul Krugman on China

Paul Krugman has added to the choruses of warnings regarding the Chinese economy ( click here ).  According to Krugman:’s impossible not to be worried: China’s story just sounds too much like the crack-ups we’ve already seen elsewhere. And a world economy already suffering from the mess in Europe really, really doesn’t need a new epicenter of crisis.

Taxing the 1%

In a recent paper, Piketty et al. suggest that "The top 1% of US earners now command a far higher share of the country's income than they did 40 years ago. This column looks at 18 OECD countries and disputes the claim that low taxes on the rich raise productivity and economic growth. It says the optimal top tax rate could be over 80% and no one but the mega rich would lose out." You can read Piketty et al.'s VOX piece on the taxation of the mega rich  here .

Game Theory and Toilet Seats

I love Game Theory - it can be a very powerful tool for examining social interactions and human behaviour.  Game Theorists apply their logic to everything from military strategy to the position of toilet seats!  Click here to read a post on "Why women should put the toilet seat up!".

China's Credit and Property Bubble

Property prices in Beijing fell 35% between October and November and the Shanghai stock index has fallen 30% since May.  As much investment in China has been financed by credit, does this mean that the Chinese economy is in trouble?  Is it about to experience its 2008 crisis in 2012?  What will be the effects for Western economies should China experience a financial crisis and massive deleveraging?  Click here to read more.

Financial Illusions?

This post follows on from my previous ones on behavioural economics and neuroeconomics .  I have always been fascinated by optical illusions - you can find Shepard's two tables (see figure below) and other famous examples here .   © 1990 Roger N. Shepard The question, of course, is whether we can be fooled / duped whenever it comes to making economic decisions.  Are there such things as financial illusions?  With regards to the recent housing bubble, were those who bought in the boom years duped by a financial illusion?  Did they really believe that houses would keep appreciating? Why did they pay such a high price for their house whenever the long-run link between house prices, income, and rental yields suggested that house were overpriced? One possible alternative to the financial-illusion hypothesis is that they were purchasing houses with borrowed money and therefore didn't care.  In the US, for example, mortgagees can walk away from their houses and are


Continuing on the theme of yesterday’s post: could future economic research be conducted in Medical schools rather than Economics departments?   A growing branch of economics is neuroeconomics ( click here for its learned society), which is where neural scientists and economists study the human brain in attempt to get a handle on economic behaviour.   Robert Shiller, a leading behavioural economist, believes that the future of economics lies in a better understanding of how Keynes’s idea of animal spirits (our emotions and our less-than-rational psychological make-up) affects our behaviour.   You can read an op-ed piece by Shiller here and his co-authored book with George Akerlof is here .


I have recently read Thaler and Sunstein's Nudge .  Thaler is a founding father of behavioural economics and Sunstein is a Harvard law professor, who currently works for the Obama administration. Nudge is a manifesto for what its authors call Libertarian Paternalism, the idea that governments should design choice architecture to nudge people in the direction that the State (or its expert advisers) thinks is best for individuals and society.  In this world, people are 'free to choose' (to quote the title of the Friedmans' famous book), but government determines the choices people face and may even nudge them in the direction of one particular choice. The problem with this, of course, is that governments and their advisers as well as their lobbyists have incentives to nudge us in directions which are not optimal for us or society, but which benefit the government and its supporters or financial backers.  See here for more on this critique. The behavioural economics in

Royal Bank of Scotland Failure

The Financial Services Authority report into the failure of RBS has just been released - the report can be read here . According to the FSA report, the collapse of RBS was due to a combination of the following factors: significant weaknesses in RBS’s capital position, as a result of management decisions and permitted by an inadequate global regulatory capital framework; over-reliance on risky short-term wholesale funding, which was permitted by an inadequate approach to the regulation of liquidity; concerns and uncertainties about RBS’s underlying asset quality, which in turn was subject to little fundamental analysis by the FSA; substantial losses in credit trading activities, which eroded market confidence. Both RBS’s strategy and the FSA’s supervisory approach underestimated how bad losses associated with structured credit might be; the ABN AMRO acquisition, on which RBS proceeded without appropriate heed to the risks involved and with inadequate due diligence; and an ov

Entente Cordiale Est Mort

In sidelining Britain, France has completely thrown its lot in with Germany.  Ambrose Evans-Pritchard at the Daily Telegraph (you can read his blog here ) suggests that the Merkozy alliance will not last: "Does France, for that matter, really want to be locked into a clammy embrace with an ever stronger Germany? The whole purpose of monetary union for Paris was to tie down a reunited Germany with silken cords. France now finds its own hands tied because of EMU, reduced to a humiliating side-kick.  But the vain and hysterical little man now in the Elysée will soon be gone. A leader will emerge once more with a "certaine idée de la France". There is also a good article over at the Daily Telegraph on Cameron's adroit handling of Merkozy, his rabid Eurosceptic backbenchers, and members of his Europhile LibDem cabinet.

Britain and the EU: In or Out?

David Cameron's withdrawal from an EU-wide treaty to deal with the debt crisis was the right thing to do as the treaty on the table won't fix the crisis and threatened the position of the City as the world's premier financial market.  However, it not leaves Britain as potentially the only member of the EU not to sign up to the deal.  Consequently, Britain may be marginalised and full withdrawal (or ejection) from the EU may be just around the corner unless the Euro collapses first, which is becoming more likely every day.  The treaty needed two things to save the euro - (a) the ability to have fiscal transfers to economies hit by demand shocks (e.g., the PIIGS) and (b) a change in the ECB's mandate, which would enable it to monetise the debt of EU sovereign states.


Robert H. Frank, author of the Darwin Economy , has a series of interesting articles on income inequality over at Slate.   Click here to access them. He examines why inequality matters (expenditure cascades), the reasons for growing inequality (technology and "winner-take-all markets"), and ways to remedy inequality (progressive consumption taxes).

Payday Loans and Usury

A report out today from R3 finds that millions of Britons take out high-interest payday loans.  These loans, if paid back on pay day, usually charge a low interest rate, but if they are not paid back, the interest rate can go as high as 4,000%!   In the past, usury laws existed to prevent lenders charging high interest rates.  This was largely based on the Old Testament, where the justification for usury laws was the protection of the poor and vulnerable.   Do we need to revisit such laws?  Or maybe we need to rethink our whole attitude as a society to material things, consumer goods, and debt.  After all, easy access to credit was at the root of the housing bubble and subsequent financial crisis. 

RBS and Inside Job

Last night, BBC2 broadcast RBS: The Bank That Ran Out of Money .  It is well worth watching - you can catch it over at BBC iPlayer by clicking here . Tomorrow night at 9pm, BBC2 will broadcast the Oscar-winning documentary Inside Job .  This is a must-see film.

OECD Report on Wage Inequality

The OECD have released a report today, showing that wage inequality has increased over the past 30 years across most advanced economies - click here for details.  The graph below shows that the Gini coefficient of income inequality increased across most OECD countries between 1985 and 2008.

More Austerity for Ireland

The text and footage of Enda Kenny's pre-budget address to the nation can be found here .  Can the Irish people take more austerity?  My fear is that austerity for years to come will only result in the empowerment of political parties who will take Ireland in a backwards and inwards-looking direction.  European (German) leaders need to wake up and realise that harsh austerity measures can only result in long-term political instability in the PIIGS. 

Nick Clegg on Executive Pay

Nick Clegg the Deputy Prime Minister, in a televised interview, outlined some proposals regarding restraints on exorbitantly high executive pay - click here  for the interview and details.  Why does the government have the right to interfere in the internal workings of a company?  My perspective on this is a straightforward one - corporations can only exist in the first place because the State permits them to have the fiction of a separate legal personality, which enables companies to enter contracts etc. as if they were individuals.  In other words, the corporation is a creation of the State and, as such, surely the State has the right to interfere in its internal workings?  Whether such interference will be effective or efficient is an entirely different question.  You can read my article with Charlie Hickson on the history of the corporation here . 

Making the Market

I have recently finished reading Paul Johnson's Making the Market: Victorian Origins of Corporate Capitalism .  It is an extremely well written, enlightening and perceptive book.  Johnson makes excellent use of pivotal anecdotes to get his point across.  The basic point of the book is that to understand corporate capitalism (i.e., an economic system dominated by companies), we need to go back to the origin - the era in which the modern corporation was developed.  Johnson argues that the judicial and political development of both corporate personality and limited liability ultimately resulted in an abdication of directorial responsibility.  This resulted in a moral ambiguity which was ultimately accepted by Victorian society. Johnson (p.233) concludes his book by reminding us that the 'market' is a 'human construct of intriguing complexity and constant change' and that the 'reluctance of economists..... to recognise and embrace this messy complexity has done lit

Is the Fed the International Lender of Last Resort?

Stock markets around the globe reacted positively to yesterday's announcement by the Fed that it was reducing the rate at which its lends dollars to other central banks and hence the international banking system.  Does this mean that the Fed has become the international lender of last resort?  It is certainly a major step in that direction.  However, it also signals that the Fed (and other central banks) believe that the Eurozone is going to implode.  If that happens, major European banks will face massive liquidity problems as depositors and lenders run banks before the euro is devalued.  The Eurozone endgame began yesterday. 

Four Decades and Counting

I am 40 today!  This milestone has got me thinking and reminiscing about events which have occurred during my lifetime.  Below are the 10 most significant economic/financial events that occurred during my lifetime and which had an impact on my thinking at the time.  The collapse of Bretton Woods would be in here if I could remember back that far.  In retrospect, I would probably have a different 10, but these 10 events all made an impression on me at the time.   1. Winter of Discontent (1978-79) – an economic meltdown that scarred a seven-year-old boy from Co. Tyrone. 2. Irish Punt breaks link with Sterling (1979) – all of a sudden my classmate from south of the border had to pay more for his 1/3 pint of milk! 3. Flotation of TSB (1985) – this resulted in my first share ownership. 4. October Stock Market Crash (1987) – this taught me that shares can go down as well as up! 5. German Reunification (1990) – the economic powerhouse of Europe became even more powerful.

Public Sector Strike

The public sector across the UK is on strike today over plans to change their pensions.  The mood amongst public-sector workers will have been soured even more by the Chancellor's announcement yesterday that the cap on public-sector pay increases will be 1% per annum until 2015.  If inflation stays close to its current level of 5%, that means a real pay cut of 4% per annum over the next three years! I am tired of hearing the argument that the private sector has endured pain  so now the public sector must follow suit.  I have three issues with this argument.  First, the private sector enjoyed most of the upside whenever things were rosy, whereas the public sector got the crumbs.  Second, there is a risk-return trade-off that people who make this argument are ignoring.  Private-sector workers earn a higher expected wage, but face a greater probability of pay cuts or redundancy. On the other hand, public-sector workers earn a lower expected wage, but face a lower probabilit

Child Prefers Hayek to Keynes!

A number of weeks ago, I posted clips to the Hayek vs Keynes rap.  The artists behind the rap have received a letter from a nine-year-old girl in which she states her preference for Hayek over Keynes - great discernment in one so young!  The letter is reproduced below (hat tip to Dr Graeme Acheson).

Wedding Inflation

There are two notable economic facts about weddings in the West.  First, brides spend an exorbitant amount on a dress which is worn only once.  Second, the costs of weddings have been rising faster than inflation for at least two decades.   Click here for an interesting article which provides economic / behavioural explanations for these two phenomena.  

IMF Credit for Italy and Spain

Reports in Italy yesterday suggest that the IMF is preparing plans to grant IMF credit to both Italy and Spain -  click here .  It is somewhat ironic for me that a Bretton Woods institution is going to rescue two of the largest economies in the Eurozone.  According to UBS's head of foreign exchange strategy: “Fixed income investors are betting that either Germany moves towards a fiscal union with its eurozone partners or that, without the ECB willing to buy unlimited amounts of sovereign bonds in the secondary markets, the eurozone will break apart.” (quote from  Daily Telegraph - full text here ). As markets move faster than politicians (especially EU ones), a break up is much more likely than closer fiscal union.  

Death of a Currency?

Following yesterday's rise of German bond yields above those of the basket-case economy which is the UK, Jeremy Warner, Associate Editor at the Daily Telegraph , has written a pessimistic piece on the future of the Euro - click here .

Less Mathematics and More Economics

I love hearing from past students.  This time last year I met up with David Symington (BSc Finance '07 class) for breakfast at Harvard Business School.  David has recently completed an MA in International Economics, Emerging Markets & International Development at John Hopkins and is now on an ODI Fellowship in Zanzibar. After reading some of my posts, David sent me this article on the dismal state of the dismal science - click here .  Coincidentally, David sent me this article the very day I heard of Mark Blaug's passing - obit here .  Blaug was a great historian of economic thought - he was horrified that modern courses in economics were obsessed with mathemathical training rather than reading the works of great economists such as Adam Smith or David Ricardo.  His Economic Theory in Retrospect  should be read by all economists. 


As a student of corporate history, I gain an interesting perspective on the longevity of firms.  Very few firms in existence today were in existence 100 years ago.  One exception is IBM .  Warren Buffett has recently taken a large stake in IBM, which is testament to the fact that this firm is still very successful.  Why has IBM been so successful?   There are at least three reasons. 1. It has innovated and responded to the needs of its customers – small, medium and large business enterprises.  It started out with punch card readers and counting machines, moved on to mainframes and PCs, and today it provides firms with business solutions, consulting and software. IBM was once the market leader and main innovator in the PC and laptop market, setting industry standards along the way. But it quickly realised that this was not going to be a profitable business in the long-run and that its customers (businesses) were going to need integrated software and consulting solutions to compet

Don't Just Book It, Thomas Cook It!

Thomas Cook has been around for 170 years, but it is going through a very uncertain time as it attempts to renegotiate its debt with its bankers.  Its share price fell 75% in trading yesterday. My Corporate Finance class will soon learn that some of the major costs associated with debt are the costs of financial distress.  The publicity surrounding its debt difficulties will not be good for Thomas Cook.  Its managers will have their attention diverted from managing the business to dealing with creditors.  Its best employees may try and jump ship (excuse the pun!).  It will be unable to finance new profitable holiday packages.  But most of all, who will want to book their honeymoon or summer holiday with a company that may not be around in a few months?      

High Pay Commission

The report of the High Pay Commission (HPC) was released yesterday - click here .  In previous posts, I have lamented about high pay – see here and here . The HPC’s report finds evidence that “Excessive high pay damages companies, is bad for our economy and has negative impacts on society as a whole. At its worst, excessive high pay bears little relation to company success and is rewarding failure.....Our findings also show that the argument used by many senior figures in British business, that pay must escalate in order to attract the best talent from abroad to UK companies, is a myth. Our own evidence shows that global mobility is limited, with only one successful FTSE 100 chief executive officer poached in five years – and even this person was poached by a British company.” The scale of the relative rise in high pay uncovered by the HPC is staggering. “Previously unpublished figures show that pay at the top has spiralled alarmingly to stratospheric levels in some

Banks: Small is Beautiful (and Safer)

It looks like Simon Johnson (former chief economist at IMF) has it in for big banks - click here and here . He is right, of course, to be worried about big banks.  I have always had a problem with big banks because they are perceived to be 'too big to fail' or 'too important to fail'.  The great irony for me is that the 2008 crisis actually resulted in some banks becoming even larger behemoths than before.   In 1900, there were nearly 100 banks in the UK, and the top five banks only had circa 25% of the market.  Today, retail banking in the UK is dominated by the 'Big Four'.  As these institutions are believed to be 'too big to fail', taxpayers have to bail them out whenever they get into trouble.  The implicit policy of 'too big to fail' prior to 2008 resulted in many of these banks taking too much risk in the first instance as they knew taxpayers would bear some of the downside of their risk-taking, whilst owners and managers bear all

Student Protests in USA

The ongoing campus protests in the US are being clamped down by heavy-handed police tactics - see article in HuffPost here (thanks to Barry Quinn for the hat tip).  This is a worrying sign as freedom of speech and the right to protest are fundamental rights in any democracy.

United States of Europe

Niall Ferguson, the master of counterfactual history, has an interesting article in the WSJ on what Europe will look like in 2021 - click here .  He foresees a United States of Europe, with its capital in Vienna and the Germans very much in the driving seat. His crystal ball gazing takes an interesting twist as follows: "And in 2013, in a historical twist only a few die-hard Ulster Unionists had dreamt possible, the Republic of Ireland's voters opted to exchange the austerity of the U.S.E. for the prosperity of the U.K. Postsectarian Irishmen celebrated their citizenship in a Reunited Kingdom of Great Britain and Ireland with the slogan: 'Better Brits Than Brussels'." Ferguson is always provocative, but he has a better handle than most on the rise and fall of Empires and how finance is right at the centre of these movements.

Northern Rock

Northern Rock (or at least part of it) was sold yesterday to Virgin Money.  At the time of its nationalisation, we were told that this could be a "good" investment for the British taxpayer.  It hasn't been, and it never was going to be.  Ed Balls believes that the Tory government got a poor price for it - click here .  The irony, of course, is that Balls was at the heart of the New Labour government which allowed and encouraged  banks to take imprudent risks in the first place.  What a nerve! The taxpayer loss on the Northern Rock (estimated at circa £400m) is small change compared to the eventual loss to taxpayers associated with the bailouts of RBS and Lloyds-TSB.  In 2009, RBS posted a loss of £24.1 billion (£24,100,000,000) and Lloyd's TSB a loss of £10.8 billion.  The RBS loss in 2009 holds the world record for the single largest corporate loss posted by a failed bank. Hyun Song Shin at Princeton has an interesting paper on the Northern Rock coll

The Internet

My blog has been going for just over a month, and it has had close to 2,000 hits, several of which have been from exotic locations such as Sierra Leone and Iraq - thanks to all my readers.   What an amazing thing the Internet is!  I am old enough to remember the pre-Internet era.  I remember my first introduction to the Internet in 1995, when I was a PhD student at Queen's University.  Sunny Teoh, a good friend from Malaysia, showed me how to browse in the Elmwood Computer Centre.  The first thing I searched for was <economist jokes> ( click here  for a taster).  I remember it like it was yesterday.  Today I use the Internet on a daily basis, and I can't imagine my working life without it.  But has it made me a more productive academic?   On the plus side, I can now easily obtain papers and working papers at the click of a mouse.   I can also communicate with scholars around the world via email or Skype, and I can also book travel to conferences etc..   On the ne

Economic Development and the Authorised Version

Today the Queen attended a service at Westminster Abbey to mark the 400th anniversary of the Authorised Version (or King James Version) of the Bible.    Although scholars have highlighted the impact of this version of the Bible on society ( click here ), the development of literature and the English language ( click here ), what has been its impact on economic development? We can maybe get an answer to this question, if we look at the work of Sascha Becker and Ludger Woessmann, who have recently published a paper in the Quarterly Journal of Economics , which suggests that Bible reading had a powerful impact on economic development in Germany.  Below is the abstract of their paper:  Max Weber attributed the higher economic prosperity of Protestant regions to a Protestant work ethic. We provide an alternative theory: Protestant economies prospered because instruction in reading the Bible generated the human capital crucial to economic prosperity. We test the theory using county

The Great Crash and Future Decision Making

Will being born or living through the present financial and economic crisis affect your future decision making?  Recent work by Ulrike Malmendier and her co-authors suggests that experiences of macroeconomic instability and depression make individuals less willing to take financial risks in the future - click here .  In addition, they find that corporations managed by executives who grew up during the Great Depression were less likely to rely on debt finance and more likely to use internal finance – click here for the paper.  The big question for me is why the experience of macroeconomic instability and depression is forgotten by subsequent generations.   As the recent crisis has demonstrated, we are all too quick to forget the lessons of the past.   One possible reason is that economic history has been removed from the curriculum in economics departments and been replaced by classes in analysis, stochastic calculus, econometrics etc..   We need more economic and financial h

American Hegemony

Although we are all currently focused on the short-term upheavals associated with the European debt crisis, there is a more interesting long-run issue which we would do well to understand.  This issue is the decline of American hegemony.  Over the past 20 years, China has emerged as an economic superpower.  In 1991, its share of world GDP was under 5%, whilst the US share was circa 25%.  By 2013 China's share will be 15% and the US share will be 19%!  It is reckoned that China's share of world GDP will equal that of the US by the end of this decade! Globalisation has been cheered on by successive US administrations, and the costs to date have mainly been for US workers, whose jobs have been off-shored or who face downward pressures on their wages due to competition from overseas.  But maybe the largest cost to the US, however, will be the decline of its hegemony and the concurrent rise of China. Michael Moran has a series of articles on the decline of the US over at Sla

Dutch Cooperative Banking

On Friday of last week I had the privilege of examining Chris Colvin's PhD at the London School of Economics.  His dissertation is a study of the Dutch cooperative banking system in the 1920s, a period when the Dutch banking system experienced a severe crisis.  The main findings of his PhD are as follows: 1. Religion played an important role in the stability of cooperative banks during the crisis. 2. Cooperative banks which faced greater competitive pressures took more risk. 3. The ability of banks to limit their liability resulted in them taking greater risks. Although one needs to be circumspect about drawing policy lessons from an historical episode like this, there are two things from this episode which should, at the very least, get us thinking.  First, competition in banking may not always be a good thing.  Second, to use modern parlance, owners need to have 'more skin in the game' in the form of some form of extended liability.  See my previous post on this issue.

Greg Mankiw's Econ Class: An Update

Click here to read an open letter from students in Greg Mankiw's Econ class.  It appears that they are dissatisfied with the focus and underlying worldview of the module.  Economics has long been regarded as the dismal science, but given the inability of economists to forecast the Great Crash of 2008, it is in danger of being viewed as an irrelevant science.  There is, however, a more sinister view regarding economists.   Charles Hickson, my mentor and former colleague, lambasts the economics profession in the introduction to his 2001 book with the late Earl Thompson.  He suggests that economists simply serve the elite of society by devising theories and models that justify the elite's laws and policies.  In other words, economists have sold out, and have, in the process, lost their integrity. Which is it?  Dismal, irrelevant or corrupted science?  Unfortunately, it is probably all three.  In my humble opinion any resuscitation will involve a revival of interest in institut

Reforming the EU

Professor Charles Goodhart , the Norman Sosnow Professor of Banking and Finance at the London School of Economics, has suggested some deep structural reforms, which are designed to prevent future crises emerging in the EuroZone.  His two main proposals are as follows. 1. Political reform Goodhart argues that “the single most important political reform for the EU is to have the President of the European Commission elected by the voters… The purpose of the exercise is to construct a European polity, and power centre, that answers directly to the people of Europe, and is not simply an apparatus managed by national political leaders.” 2. Fiscal reform in the form of tax-raising powers According to Goodhart, “as has been exemplified in the recent crisis, it is problematical to try to issue money without the power to support that via taxation.  Equally without access to money (notably via taxes), the power to undertake counter-cyclical, or cross-country, stabilisation is limited.  So, t

The 99%

In a letter to this week's Economist , one of the leaders of the Occupy Movement stated that they are not anti-capitalist - they are just opposed to an unjust society where the 99% bail out the financiers and banks who have created a huge economic mess.  We were all told the lie that the bailout was necessary to prevent economic meltdown.  Despite all the bailouts, we still have economic mess and ordinary people are feeling the economic pain of having bailed out the financial system through falling real pay (if they are still in a job!) and reduced provision of public services.  This is why we have the Occupy movement. You can read an interesting and short op-ed by Joseph Stiglitz on the Occupy movement here .

Are Economists Like Dentists?

     Roger Backhouse has an interesting piece in the NY Times on how the economics profession has ignored "capitalism" for too long - it no longer even discusses economic systems.  According to Keynes "economists should become more like dentists: modest people who look at a small part of the body but remove a lot of pain".  However, Backhouse argues that we need more general practitioners!  Click here to read more.

The Economics of Lying

One of the lead articles in last week’s Economist argued that “lying is at the heart of civilisation” and “lying is one of the things that makes the world go round”.   Think about it for one minute.   If lying was socially acceptable and prevalent, would contracting and economic exchange be even possible?   Would the very fabric of society not crumble?   We could trust no one – the government, doctors, business, our parents, our professors, our friends, and even our nearest and dearest.   Sadly, the prevailing postmodern and relativistic culture in which we live believes that there is no such thing as truth.   You can watch Os Guinness argue for why we need “truth” by clicking here . In the City of London, there was once a phrase “my word is my bond”.   People in the City could be trusted – social opprobrium (and even jail) would be the result of someone caught lying and cheating.   Maybe the tolerance of lying and dishonesty has been at the root of recent financial chicanery in

Ulster Bank's Loan Losses

Ulster Bank, founded in 1836, has been one of Ireland's most successful banks over the past 175 years.  However, yesterday it announced that it had written off more than £1 billion of bad loans (mainly in the property sector) in the first nine months of 2011.  Click here for further details.  Along with Charles Hickson, I have examined the corporate governance of Irish banks (including the Ulster Bank) in the nineteenth century ( click here ).  Bank directors back then had incentives to ensure that their banks did not take excessive risk, which could potentially result in large loan losses.  First, directors were usually shareholders, holding about circa 1% of shares each, which meant that they stood to lose wealth if their bank performed poorly.  Second, they did not receive stock options or remuneration tied to performance.  Third, as with all bank shareholders at the time, they had unlimited liability, which meant they stood to lose everything (right down to their