Finance: Past, Present and Future

This will be my last post until 2013.  I wish all my readers a prosperous 2013. My first posts on this blog looked at the Hayek-Keynes rap by EconStories (see here and here ). EconStories have followed this up with an hilarious festive album of macro-follies - see video below (hat tip - Graeme Acheson). 

As someone who has supervised nearly 10 PhD students over the past decade, I am always delighted to hear that my former students are doing well in their academic careers. Graeme Acheson , who was my first PhD student, has just been appointed to a full professorship at the University of Stirling . He starts his new post at the end of January. Well done to Graeme!

Click here to read Graham Brownlow's post at the Extremis Project . In his post he discusses the economics of anti-terrorism policies in Northern Ireland during the Troubles. Interestingly, he views the state funding provided to DeLorean in the context of the British government's anti-terrorism policy.    

Politicians like to pretend that central banks are independent of the government in that they are not subject to political interference when it comes to making monetary policy. Governments may have incentives to use monetary policy for their own ends rather than the good of the economy, which results in a  political business cycle . In order to commit to not interfering in this way, governments grant central banks operational independence and require them to hit a target. For about two decades many central banks around the world have had an inflation target. But the flatlining of economic growth in many economies is causing governments and central bankers to rethink this target -  click here for Stephanie Flanders' post on this.   

Is the continued sluggishness of the world's advanced economies a result of the financial crisis or is it a crisis in innovation?  Has the financial crisis exposed a deeper malaise in advanced economies in that they are no longer making technological breakthroughs?  Since the Industrial Revolution, economic growth has been spurred on by large technological breakthroughs - think steam, railways, the telegraph, electricity, the combustion engine, flight, chemical engineering, the computer, and the Internet. But have we run out of innovation with the result that economic growth will stagnate?  Click here to read an op-ed piece by Kenneth Rogoff on this issue (hat tip: Graham Brownlow). Rogoff argues that the malaise is due to the financial crisis not an innovation crisis.    

As I write this post, I'm sitting in a coffee shop waiting to speak to a group of senior bankers at Ulster Bank about what we can learn from the history of financial crises. The four lessons I will be sharing with them are: (1) the 2008 crisis is totally different from anything that has come before in terms of its scale and scope; (2) if bankers aren't properly incentivised, they will take on too much risk; (3) asset markets can reverse, but this is only a concern if the assets are financed via debt; and (4) politics matters - crises ultimately have a political root.     

The folks at learnstuff.com have sent me an infographic on the gender wage gap in the United States ( click here ). The puzzle is this: although women achieve higher scores in college than their male peers, women earn less than men. This holds true across all levels of education. Why? Discrimination may be part of the story, but child-rearing may explain a large chunk of the gap. A neat study would be to look at the effect of child-rearing on the wage gap. In other words, does the wage gap exist for childless women? If so, the puzzle deepens.    

Are central banks independent of political influence? Do we want them to be independent of the government? Can central banks really be independent? Do democratic polities and central banking mix? Do we need central banks?  Click here to listen to a short and fascinating podcast by Gerald P. O'Driscoll Jr.  on the myth of central bank independence.  Hat tip to Graham Brownlow.    

The Chancellor made his autumn statement today - five days into December! You can read the entire speech here   and the BBC's synopsis  here . Two things stand out for me. First, the projections for future economic growth are pure guesses - it is hard to see the UK economy growing at 2% plus after 2014. Second, Bradford & Bingley and Northern Rock Asset Management have been brought unto the nation's balance sheet, adding £70bn to national debt! The Labour government had conveniently kept most of the financial interventions from 2008 off the nation's balance sheet. Including these interventions increases UK national debt dramatically - click here . 

As human beings we have a deep-seated desire to explain natural and social phenomena. We have an in-built search mechanism which looks for causation in order to explain the world around us. For example, the US stock market declined on the day after Obama's election. Why? Most people connected the two events, but the two may have been totally unrelated.  Another example can be found in today's Metro where it is claimed that crime falls and birth rates go up in Mexico City whenever Javier Hernandez is playing for Manchester United. These may simply be crude correlations and there may be no causation whatsoever. It requires rigorous statistical testing to demonstrate correlation never mind causation!     

The majority of the readers of this blog were born or were young children in 1992.  As a result, you have grow up in a world with mobile phones and SMS. On this day in 1992, the first text message was sent by an engineer working for Vodafone ( click here to read more). Some 8,000,000,000,000 texts are sent every year.   Has texting benefited society? Some have expressed fears that texting damages children's language and literacy development. However, some recent studies have found the opposite! Has it made us more productive? Constant bleeps or vibrations break our concentration, possibly making us less productive. Niall Ferguson has recently argued that texting is making kids stupid. He has suggested that parents remove mobile devices from their kids and send them to book camp , where they spend two weeks reading and discussing classic literature. Texting may also result in underdeveloped social skills - we text rather than talk. I am also concer...

Yoram Bauman is the Stand-Up Economist.  In the video clip below, Bauman sends up Greg Mankiw's 10 principles of economics.    

Click here  to read a brief and inciteful history of the pound sterling (the British currency), which is about 1,200 years old.

Over this past week, I have been reading lots about the Bank of England's history. Up until World War I, bank governors typically held office for only two years ( click here ). However, during the tumultuous years from 1920 to 1944, Montgau Norman held the position of Governor. Since then, Governors have typically served for a decade. In the past, Governors were a mixture of City merchants and Bank insiders.  Notably, the Bank's current Governor ( Mervyn King ) and its future Governor ( Mark Carney ) both have PhDs in economics. However, unlike King, Carney has 13 years experience working in the financial sector. What is the ideal background for the Bank's Governor?  Some fear that academics are too far removed from commerce to be good Governors.  Others fear that individuals who have never previously worked for the Bank of England make poor Governors. Robert Peston fears that Carney is another Goldman Sachs alumnus i...

XKCD have produced a fantastic infographic of the US Congress, which looks at ideological slants and the events which seem to have affected the make-up of the Congress. It is notable how economics and finance  have affected US politics. For example the Panic of 1873, the Bimetallic issue of the 1890s, and the Great Depression are highlighted in the infographic.     

China has experienced an unprecedented period of economic growth.  Never before has an economy grown so quickly over a sustained period of time. Admittedly, China was starting from a very low base after the policy disasters of Chairman Mao. But what about China's future economic growth? If the gowth in China or any of the BRIC economies slows then that spells trouble for the economies of the West. Many commentators are turning bearish about China and the BRICs. The US Conference Board's prognosis for the BRICS is very bleak ( click here ). Matthew Yglesias sees political corruption as a reason to be bearish, but the great unexploited inland possibilities in China as a reason to be bullish. Niall Ferguson sees economic inequality and the demographic timebomb as reasons to be bearish about China. Daron Acemoglu and James Robinson are also bearish because China has not built inclusive and democratic institutions which will enable it to sus...

Mergers are notorious for producing bad returns for investors. Another example of this has emerged today with Hewlett-Packard writing off $5bn in its latest accounts from its 2011 merger with  Autonomy , a British technology and software company. HP are claiming accounting irregularities (fraud), which meant that it overvalued the company.  Autonomy's founder, however, is claiming that HP simply destroyed value after the merger! You can read BBC and Guardian coverage here and here .  

Walter Mischel ran a series of famous experiments in the late 1960s where he tested the ability of children to control their impulse for immediate gratification.  He simply put them in a boring office with a marshmallow or Oreo sitting on a plate. The kids were told that if they did not eat it that they would get another marshmallow / cookie in 15 minutes.  Below is a short video of the experiment.    At the time, Mischel surmised that the kids who ate the marshmallow immediately or soon after the clock started running were unhappy at home and had behavioural difficulties. However, he also tracked his 653 subjects over time and found that the kids who were unable to control their need for gratification performed very poorly in school relative to those who delayed their need for gratification. They also underperformed in later life. You can read more here .  Why did Mischel find what he did? One possibility is that kids who ate t...

Richard Thaler in his book with Cass Sunstein discusses small interventions that policy-makers or firms can make to 'nudge' citizens / customers. Thaler discusses his key insights into human behaviour and public policy in the 18-minute video below. One example he discusses is the  Urinal Fly  firm which came up with the idea of painting a fly unto urinals in order to keep public bathrooms cleaner by reducing spillage by 85%!    

How can Western governments reduce their debts without implementing austerity programmes? One obvious way is to run a mild inflationary policy (3 to 4%) for a decade  This would substantially reduce the real value of the principal which has to be repaid. Another way to reduce the government's debt burden would be to monetise it i.e., have the central bank buy government bonds with newly-created money. At present, the Bank of England holds £375bn of UK government debt. The accumulated interest on this debt (approx. £30bn) has been reclaimed by the Treasury, which ultimately reduces the amount the government has to borrow. In other words, the government is effectively paying no interest on its debt! However, there is an even more radical way for the government debt burden to be reduced - the Bank of England could simply forgive the £375bn debt which it holds! What would stop it from doing so?     

Over the next number of weeks, I plan to have several posts on behavioural economics. Behavioural economics has a different view of what constitutes economic man than neoclassical economics and it attempts to apply insights from psychology as well as neuroscience to economics.   Kathleen Vohs has done some interesting work on the psychological consequences of money. She and her co-authors have conducted a series of experiments where they find that money changes people's motivation for the better and their behaviour towards others for the worse. You can read their short paper, which was published in Science , here .  Below is a video where Vohs talks about this study. The implications of this study for employers and wider society are potentially very huge.

Below is a somewhat far-fetched (but hilarious) animation, which helps illustrate the standard theory of the evolution of money as well as the role of banks and financiers in Western society. It is well worth watching, but it should not be viewed uncritically. For those interested in the movies, there are several references to well-known films.    

How quickly do economies recovery after recessions? The answer depends on the nature of the recession i.e., whether the recession was caused by a financial crisis or not. Schularick and Taylor , using data for advanced economies over 140 years, find that financial-crisis recessions are more painful than normal recessions and that the intensity of credit creation in the boom phase of the cycle is related to the severity of the subsequent crisis. You can read their VOX piece here  and paper here .   Reinhart and Rogoff have also addressed this issue on VOX - click here .  John Taylor challenges their finding here .  

Thomas K. McCraw, the Pulitzer Prize-winning business historian and former HBS professor, died at the end of last week (hat tip - Graham Brownlow). You can read obits here and here . He had just recently published a book on the Founding Fathers and Finance.

Unsurprisingly, from my perspective, President Obama was re-elected in the US election. How did Wall St react? The Dow Jones fell by 2.36% and the Nasdaq fell by 2.48%. Why? One possibility is that Obama's re-election means that the fiscal cliff crisis will occur again within a matter of weeks. Another possibility is that Wall St wanted Romney as his policies were pro-business.

The ONS has just released its study on real wages since 1986. The headline finding is that wage inequality has grown since 1986.  You can watch the ONS podcast below.  

Peter Hitchens , the journalist and younger brother of the late Christopher Hitchens, is always controversial, but not always for the sake of it. In his new book on the war on drugs, he argues that rather than fight this war, governments have chosen instead to decriminalise drug taking or have chosen not to enforce the law. There is a fascinating interview with Hitchens about his new book in the Guardian - click here .   Is the taking of drugs not a private issue? No! The externalities that are imposed on wider society by the taking of drugs (legal and illegal) are potentially huge. It is estimated that the abuse of class A drugs alone costs the UK economy £15.3bn per annum. You can read a paper on the economics of drug taking here .      

Following on from last week's post, I have been reading a paper in the Journal of Finance by Lyndon Moore and Steve Juh. In this paper, they look at derivative pricing on the Johannesburg Stock Exchange 60 years before the Black-Scholes (1973) formula. They find that long before the development of formal theory, investors had a very good intuitive grasp of option pricing.  The implication of their paper is that the innovation of the Black-Scholes-Merton formula does explain the huge growth of the options markets since the 1970s.     

The Chicago Plan, which was the idea of a group of University of Chicago economists in the 1930s, was that  bank deposits be 100% backed by reserves i.e., government-issued money. This 'narrow banking' proposal  would separate the money and credit functions of banking, and mean that all money in an economy would be government-issued money. A recent IMF working paper has argued that such a system would eliminate bank runs, give governments better control of the business cycle, and dramatically reduce public and private debt.   Click here for Daily Telegraph comment on this working paper. There is a group in the UK called Positive Money who are campaigning for narrow banking. From my perspective, the Chicago Plan would mean that banks are risking investor and not depositor money whenever they make a loan. However, the main problem with the Chicago Plan is that near-bank institutions issuing near-money would spring up and circumvent the 100% ...

Neuroscientists have recently been looking at how childhood socioeconomic status and maltreatment during childhood affects the development of the brain ( click here ).  Amongst other things, low socioeconomic status and childhood maltreatment  can result in deficits in working memory, impaired cognition, a smaller hippocampus , and a larger amygdala .  The question for social scientists is whether early intervention or government policy can somehow improve things for those from disadvantaged backgrounds.    

I have just read an interesting article by Epsen Haug and Nicholas Taleb in the Journal of Economic Behaviour and Organization . The working paper can be found here . They make the following somewhat controversial arguments in their paper:   1. Black, Scholes and Merton did not invent any formula - they just took an existing formula and made it compatible with neoclassical economics. 2. Option trading was a lot more developed and sophisticated prior to the development of the Black-Scholes-Merton model than we previously realised. 3. Option traders did not use the Black-Scholes-Merton formula after 1973. Instead, they continued to use their bottom-up heuristics which are more robust to high impact rare events. 4. The growth of the options market is not due to the Black-Scholes-Merton formula, but the development of computers with powerful processors. 5. Option traders use heuristics which are close to the Bachelier and Thorp ...

John A. Allison is the president of the Cato Institute, a libertarian think tank based in Washington D.C.. Until 2008, he was also the CEO of one of America's leading banks ( BB&T ). Allison lays much of the blame for the financial crisis at the feet of the Federal Reserve and the government.  Ultimately, however, he suggest that the reasons behind the financial crisis are philosophical.   Below is a video of Allison talking about the reasons for the financial crisis, which is interesting because he was an insider. Please note that this should not be viewed uncritically as Allison's ideological bent colours his analysis.     

Apple has just warned investors of a pre-Christmas profits fall. Competition in the tablet market is putting pressure on Apple's gross margins. Notably, Noah Smith has an interesting post which compares Sony and Apple. I like this comparison as I can remember Sony as the Apple of its day. Like Apple, Sony's rise to prominence was with a portable music device - the Sony Walkman (for my younger readers, the Sony Walkman played these things known as cassettes). Like Apple, Sony had an iconic and visionary founder in Akio Morita. Noah Smith suggests that Sony's decline was partially due to the death of Morita in 1999. Will post-Jobs Apple go the same way?     

Nicholas Crafts has just posted a piece on Vox, which examines policy lessons from past severe recessions ( click here ). In particular, he looks at the recessions of 1930-32 and 1979-81. Among other things, he advocates stimulating private house-building as the stock of houses is estimated to be three million below the long-run equilibrium.  Tim Besley and Tim Leunig have some radical suggestions as to how this can be achieved - click here .  Of course, the impact of this policy will be to drive down house prices, and, in the process, raise defaults on mortgages, further damaging bank balance sheets.

After 38 years, the Ceefax service is coming to an end. In the era before the internet and 24-hour news channels, this was how many people stayed abreast of current news.  For many investors in the pre-internet era, it was the only source of relatively up-to-date security prices and market news. Farewell Ceefax!    

The EU Commission is about to debate proposals that would force corporate boards to reserve 40% of their seats for women ( click here for the story).  Earlier this month, I posted about a new study which found that gender diversity is good for corporate performance.  This study implies that it is in a company's interest to have women on boards and that quotas are unnecessary.  Nevertheless, quotas are becoming increasingly common in the EU. 

When I was a kid, the first computer game console which I ever saw was Grandstand.  The game consisted of two white vertical bars and a 'square' ball! The object of the game was to get the square ball past your opponent.  Needless to say, computer games have come a long way since then. Today, computer games can involve countless players from around the world. For example,  Eve Online has some 400,000 players.  In this game, players engage in trading, form coalitions, create banks, and make spaceships. Eve Online mirrors the real economy as banks fail, economies enter recessions, and the price level can fluctuate wildly.   Economists have taken to testing their theories using data from Eve Online - click here to read more (hat tip Chris Colvin). Famously, the Second Life game suffered bank collapses at the end of 2007 - an early warning of what was to come in the real economy!      

Andrew Haldane, Executive Director for Financial Stability at the Bank of England, gave an interesting speech at Queen's University today.  The speech can be accessed here and the press release is here . In his speech, Haldane attempted to draw lessons from the Bank's history of reacting to crises and how the Bank can do a better job of fostering financial stability in the future. However, one has to seriously has to consider whether or not the Bank is part of the problem rather than the solution.  Did banks and those who gave money to them take too much risk prior to 2007 because they knew that the Bank and the government were going to bail them out? Apparently, there will be more banks allowed to fail in the future, but this promise suffers from a time inconsistency problem i.e., when it comes to the crunch, banks will be bailed out.  The Bank of England is partially culpable for the collapse of the UK banking system as they ha...

Matthew Yglesias has an article over at Slate which looks at some of the concepts developed by Lloyd Shapley and Alvin Roth, the recipients of the 2012 Nobel prize in economics. Click here to read his article. 

This week's Economist has a really nice section on the growth of inequality ( click here ).   Many parts of the developed (and emergent) world have experienced growing wealth and income inequality over the past three decades. My own work on Ireland shows that wealth in the 19th century was concentrated in the hands of the top 1% of the population, but from 1900 onwards wealth became less concentrated.  However, since the 1980s, wealth has become much more concentrated. The big questions arising from this for economists and other social scientists are why has this happened and what can we do about it? 

The Nobel Prize in Economics has been awarded to Alvin Roth and Lloyd Shapley   for their work on game theory and market design.  The press release is here . Once again the Nobel committee's selection was not one predicted by the pundits.  Roth's blog can be accessed here . 

The EU has just won the Nobel Peace Prize for its contribution to peace on Continental Europe.  There is no doubt that the EU has helped to bring some sort of stability to Europe after the ravages of World War II, fascist regimes, and totalitarianism. However, there is also a possible contradiction in awarding the prize to the EU at this time in that monetary union has created massive political and social tensions both within countries (e.g., Spain and Greece) and within Europe. My prediction for the Nobel Economics Prize - it won't be the EU!         

As an undergraduate, I took several monetary theory courses where I was introduced to the ideas of the influential Milton Friedman. Friedman was a major influence in the 1970s and 1980s as economies around the world tried to get inflation under control. He was also a leading advocate of personal freedom, particularly in the economic sphere of life - you can get his Free to Choose book or watch his entire PBS Free to Choose documentary here . The Centre for Policy Studies held an event in July 2012 to mark the 100th anniversary of Friedman's birthday - click here .  Niall Ferguson's speech at this event is well worth watching.        

Boris Johnson's speech at the Tory conference yesterday poked fun at David Cameron not knowing what Magna Carta literally meant (see clip below where David Letterman exposes Cameron's lack of knowledge of British history). I found Cameron's lack of knowledge astounding for two reasons. First, as an Etonian, he would have studied the classical languages. Second, the signing of Magna Carta was one of the most important and defining events in England's history - we can trace our legal rights (such as the right to a trial by our peers) and checks on autocratic rule all the way back to the signing of Magna Carta.   Cameron's lack of knowledge is maybe not that surprising. I've been to Runnymede (where Magna Carta was signed) and the only memorial to the event was erected by the American Bar Association (see photo below)! Magna Carta is much more important to Americans than to the British. However, our lack of knowledge of the past endangers the freedoms we ...

Tyler Cowen ( Marginal Revolution blog ), along with Alex Tabarrok, has just launched  Marginal Revolution University (hat tip: Graham Brownlow). The first course they are offering is Development Economics.  This is probably the most important course any finance or economics students could take as it is all about why some economies have become wealthy whilst others have become poor.  The course is a series of short videos, which are well worth watching. The first lecture is below; all other lectures can be accessed at Marginal Revolution University .

This blog started one year ago today.  Thanks to all my subscribers and colleagues who have encouraged  me with this venture - your support is very much appreciated.  For those interested in statistics and facts, here are this blog's statistics: 234 posts or 0.89 per working day 350 subscribers / followers An average of 100 page views per day Most viewed post   Pageviews by country - Sierra Leone at bottom and UK at top Pageviews by browser - Explorer (26%), Firefox (22%), Chrome (19%), Apple (13%), Safari (11%) Pageviews by operating system - Windows (67%), Macintosh (17%), iPhone (4%), Linux (3%), Android (3%), iPad (2%) My favourite post

Click here to read a paper by Noel Johnson and Mark Koyama , two economists at George Mason University, which attempts to explain the secularization of Western state institutions.  You can read Chris Colvin’s review of their paper here .  My main critique of the paper is that Johnson and Koyama greatly underplay the persecution of the Huguenots before and after the Revocation of the Edict of Nantes.  Fewer Huguenots were killed than Cathars because the former were able to emigrate all around the world, and c.400,000 did so.    Here is the paper’s abstract: This paper investigates the relationship between the historical process of legal centralization and increased religious toleration by the state. We develop a model in which legal centralization leads to the criminalization of the religious beliefs of a large proportion of the population. This process initially leads to increased persecution, but, because these persecutions are costly, it eventually...

The final episode of Masters of Money was broadcast this week. Karl Marx was the subject of this week's episode, and the perspective which Stephanie Flanders took was on saving capitalism from the capitalists. This was, in my estimation, the best of the three episodes. You can watch it on iPlayer .   The three volumes of Marx's capital are difficult reading, but his Communist Manifesto, written with Friedrich Engels, is short and very readable. The Kindle version is free on Amazon.

Does the gender diversity of boards of directors matter? A recent research report from Credit Suisse ( click here ) suggests that the presence of women on boards is correlated with better firm performance. This raises an interesting economic question: why should the presence of women on boards matter?   Are women more empathetic with employees and therefore better managers?   Are women better at selecting successful firms?   Are successful firms able to have the luxury of having more women on their boards?   Are women better at multi-tasking (a key skill for modern corporate managers)?   Are women on boards so good at their job because they have been toughened up by constant male chauvinism on their rise up the corporate ladder? This subject would be a great PhD topic for someone! Click here to read an older post on this issue.

Eric Hobsbawm, the great intellectual and historian, died today, aged 95. You can read obits here and here and tributes here .  His three books, Age of Revolution , Age of Empire , and Age of Capital should be read by all who want an insight into how the world developed from 1789 to 1914.  His work has amazing breadth and is very readable. Below is a Newsnight interview (January 2012) with Hobsbawm.   

Economics spreads it tentacles everywhere - the Ryder Cup is no exception.   Click here to read a great post  which suggest that the Ryder Cup captains need to know game theory!

Today is the centenary of the Ulster Covenant , the document signed by nearly 0.5 million people which opposed the plans for Home Rule in Ireland. The economics of Home Rule should be of interest to all students of Irish history. Notably, the opening sentence of the Ulster Covenant states that "Home Rule would be disastrous to the material well-being of Ulster as well as the whole of Ireland". This would make a great PhD topic: Would Home Rule have been disastrous for the economy?  Did the partition of Ireland affect the economic well-being of all of its citizens right up to the present day?  Was opposition to Home Rule motivated by money rather than politics or religion?  There are at least two papers written by academics at Queen's which look at the economics of Home Rule. 1. A number of years ago, Charlie Hickson and I in an article published in the European Review of Economic History suggested that the fall of the Irish stock market in the ye...

Stephanie Flanders, the BBC economics editor, has a great series on BBC2 entitled the Masters of Money .   The first episode was on Keynes and the second on Hayek. The final episode will be on Karl Marx. UK readers can view the series on iPlayer . I cannot recommend this series highly enough.  However, I was a bit disappointed that she did not interview Larry White of GMU in the Hayek episode.  BTW, the photo of me at the top right-hand side of this blog is taken at the boulder (6,000 feet above sea level) where F. A. Hayek wrote his Constitution of Liberty. F. A. Hayek Plaque at Obergurgl, Austria 

In a previous post, I discussed how the Bristol pound deals with the last period problem associated with fiat money ( click here ). The Bristol pound seems to be doing well – over 300 retailers plus service providers such as solicitors, buskers, and private tutors accept it. In fact, the Bristol pound has been so successful that several big businesses want a part of the action. You can read more by clicking here and  here .  (Hat tip to Chris Colvin, a former Bristolian).

Many of the readers of this blog will be studying economics for the very first time. Economics is a very exciting subject, which, if used properly, can be a very powerful instrument which aids our understanding of the economy and society. The Open University has a series of 60 second videos which explain six basic economic concepts in a novel and concise manner. You can watch them here .   

Many people don’t fully grasp how the stock market works and what its economic function actually is.  Behind all the complicated maths and (deliberate and unhelpful) mystique is a very simple economic function.  Entrepreneurs need capital to operate their businesses and individuals need outlets for savings.  Individuals can give entrepreneurs money in return for a SHARE of the company’s future profits or a STOCK of the company’s capital.  An individual can, at any time, sell this right to a share in the company’s future profits to another individual – this market, which can be organised or informal, is known as the share market or stock market.  Below is a great cartoon from the 1950s, unearthed by Graeme Acheson, which provides a helpful (if dated) explanation of how the stock market works.    

The ongoing euro crisis threatens not only the break up of the EU, but also the unity of some nation states, particularly Spain.   Click here to read more about Catalonia's secession plans.

Even though Facebook has lots of its shares traded on the stock market, Mark Zuckerberg basically controls the majority of voting rights in the corporation. In other words, he can do pretty much what he wants, and he doesn't need to care about Facebook's falling stock price. According to Matthew Yglesias over at Slate, this may turn out to be a strength and stock-holders may actually see share prices rise back to their IPO price. Zuckerberg doesn't have to worry about the short-term demands of the market, freeing him up to think of the long term.  Maybe there is something in this. Last week, for example, the markets responded positively to Zuckerberg's first major speech about the company's future since Facebook's flotation back in May.  However, this may only be a temporary bounce. Facebook may have problems keeping its key employees as many of them now have stock options well out of the money and stock which has halved in value ( click here ). ...

Here is a great comedy skit on the euro crisis (hat tip - Greg Mankiw).

Click here  for the Economist 's take on Keynes the investor.  

When will society become cashless? When will we no longer use notes and coins? Cheques are set to disappear by the end of this decade, but talk about the demise of cash is premature. In the Darwinian process which shapes our monetary economy, why is cash going to survive? What are the survivable traits of cash? First, it anonymous, whereas electronic payments are not. Second, it is convenient. Third, it is secure from online con-men and hackers. Fourth, electronic payment is too costly for low value items and services. Fifth, a large proportion of modern society is unbanked i.e., they don't have a bank account. Sixth, cash is deeply embedded in our culture and society. Prof. Bernardo Batiz-Lazo of Bangor University, and formerly of Queen's, has a really nice blog which examines historical and cross-country experiences with cashless payments. He has also just written a review over at the  NEP-HIS blog  of a paper which looks a...

David Chambers and Elroy Dimson have done a lot of nice work looking at how Keynes invested the endowment of King's College, Cambridge - click here for their working paper. David was interviewed for the BBC2 programme on Keynes which aired yesterday evening ( click here ). You can also listen to him talk about Keynes the investor in the video clip below.   

Richard Grossman has an interesting op-ed piece in the Los Angeles Times on why the US should not return to the gold standard - click here .  The Free Exchange blog at the Economist also has a post on the gold standard. I have recently been examining the financial crises which occurred in the UK in 1837, 1857, 1857 and 1866 for my new book. On each occasion, whenever one of these financial crises occurred, the Bank of England had to increase its interest rate (known as the bank rate), sometimes as high as 10%.  Why did they do this in the middle of a crisis?  Shouldn't interest rates be cut in a crisis?  The answer is simple: the gold standard meant that the Bank had to increase its interest rate to prevent gold draining from it and the country.

The bond-buying proposal announced by the ECB this week has been well received by financial markets. Under the plan, the ECB will buy unlimited amounts of European sovereign bonds. To keep Germany happy, the bond purchases will be sterilized by offering banks low-interest term deposits of about one week. However, the bond purchase scheme is conditional on countries introducing severe austerity measures. Matthew Yglesias in an article in Slate has labelled this power grab by the ECB immoral, and he argues that Spain, Italy, and Portugal should exit the euro.    

Congratulations to Emma Wang, my PhD student, on passing her viva yesterday.   Dr Wang's thesis consists of three essays on different aspects of cross-border mergers. She has done some really nice work looking at the effect of takeover law on cross-border mergers, which will hopefully find a wider audience.  Emma is a former graduate of the MSc Finance at Queen's. She has just started an academic position at the University of Northampton.

According to a Guardian report , the Bank of England's quantitative easing experiment has been a failure.  Since 2008, the Bank has created £325,000,000,000 of funds to buy UK government bonds, and today it owns about one third of all traded government debt. Supporters point to the fact that QE has prevented steep falls in equity  and asset prices. However, most of the gains from this go to the top 10% of society.  In the initial period after the crisis, borrowers, and mortgagees benefited at the expense of savers (mainly the over 50s). However, borrowing rates have since crept up and inflation has affected all sectors of society, particularly  pensioners. Has QE resulted in economic growth? Doubtful. Has QE redistributed wealth within society.  Most definitely! Banks, the wealthy and borrowers have benefited at the expense of the prudent, savers, the elderly, and the poor....