Finance: Past, Present and Future

Robert Shiller has written an op-ed piece in City A.M., where he talks about the importance and beauty of finance (hat tip - Graham Brownlow).  Shiller has a unique vision for the future of finance as you will see from the quotes below taken from his op-ed. There is still work to do in making finance into a more effective tool for advancing our fundamental goals. Finance needs to be democratised, to serve all the people more effectively than it has been. It needs to be humanised, so that it respects human values, and human foibles, in a grander design for society. Financial innovations, from practitioners, self regulatory organisations and government regulators, are still needed. Young people who feel a moral obligation to exert leadership for positive good in society should well consider finance as a field to enter now. It puts them on the cutting edge where human activities are moulded and directed, it gets them involved in the minutiae of activities that are pri...

My postgraduate Money and Banking class had to set up a blog on a topic of their choosing.  There were many interesting blogs created by my students, but the top Blogger in the class was Berta Kruminaite, who blogged about the Dutch tulip mania.  The Dutch tulip mania, which occurred in Amsterdam in 1536-7, saw a dramatic reversal in the price of tulip bulbs.  This mania episode is traditionally regarded as the first famous 'bubble'.  However, over the years, economists have taken different positions as to whether the Dutch tulip mania really was a ‘bubble’.  Berta does a great job of presenting these different views.  She even manages to include a video clip of Newt Gingrich discussing the tulip mania!  You can access Berta’s blog here .

Slate has an interesting article on the high remuneration of US university presidents and vice-chancellors, whose pay in real terms has increased substantially over the past two decades. Is this a further manifestation of the higher education bubble (see earlier post ) in the US? Have increased tuition fees resulted in higher university CEO pay?  According to the study carried out for Slate, it seems that the upward movement in pay comes from the fact that a couple of decades ago, the pay of university presidents was benchmarked against the private sector instead of the public sector. Consequently, as executive pay has gone up in the private sector over the last few decades so has the pay of university CEOs.  Could there be another reason? One possibility is that the expansion of the university sector over the past few decades has resulted in universities becoming large, diverse and complex organizations, and in order to attract the best managerial talent, universi...

In the US, a bank cheque is spelt 'check'.  Is this just another case of the debasement (please excuse the monetary pun) of the English language by our colonial cousins?    Following on from an earlier post , check comes from the French word for chess - eschec .  In chess, when your opponent puts you in check, your options are limited.  Thus check began to mean a person who prevented things going wrong or a person who prevented dishonesty. According to Forsyth in The Etymologicon ,   “Bank checks were originally introduced as a replacement for promissory notes and got their name because they checked fraud........Bank checks started out being spelled with a -ck on both sides of the Atlantic.  But British people, perhaps under the influence of the Chancellor of the Exchequer, decided to start calling them cheques.  This has a peculiar etymological result.  A blank cheque is a cheque with no check on it.”    ...

Since 24th November 2011, the FTSE 100 has increased by 14.6%, the S&P 500 by 21.1%, the DAX by 30.2% and the CAC 40 by 25.1%.  Why has there been a rally in equity markets over the past four months?   There are several possibilities ranging from an improved outlook for the US economy (the equity market is usually an economic bellwether), further  quantitative  easing by central banks, the ECB's huge liquidity injection into the European banking system, and an easing of the severity of the European debt crisis.   David Glasner has posted an interesting explanation for the rally over at his Blog - click here .  He basically suggests that the market rally is due to an increase in inflationary expectations, which has resulted in a fall in real interest rates and a rise in stock prices.  As a UCLA graduate, Glasner was no doubt influenced by Alchian and Kessel's famous paper entitled "The Effects of Inflation" .  In this paper, Alch...

George Osborne is delivering the UK Budget speech in Westminster this afternoon.  Why is the minister in charge of the UK Treasury called the Chancellor of the Exchequer?    An interesting book which I have just read, Mark Forsyth's The Etymologicon , provides the answer.  Persia was ruled by shahs .  This word came into Vulgar Latin as scaccus and then into French as eschec , and then into English as chess - after all chess is a game of kings.   Henry II did his accounts on a board that looked like a chessboard - an Escheker in French (most of the English ruling elite spoke French at this time).  Thus the finances of Britain are controlled by the Chancellor of the Exchequer.  According to Forsyth, the "S changed to X through confusion and foolishness".  

Following on from my post last week, Apple announced yesterday that it will pay its first dividend in 17 years and repurchase $10 billion of its stock. How did investors respond? They seemed to like the news as Apple stock went up by 2.65%. Why? One possible reason is that Apple could be signalling that it is confident that future cash flows are going to be high. Another possibility is that by paying out some of its $98.6b in cash, it is assuring investors in a post-Jobs world that managers will not dissipate cash flows.

This month, Ben Bernanke, Federal Reserve Chairman, will deliver a four-part lecture series about central banking, the Federal Reserve System, and the financial crisis. According to the Federal Reserve Board website: The series begins with a lecture on the origins and missions of central banks, followed by a lecture that will discuss the role and actions of the Federal Reserve in the period after World War II. In the final two lectures, the Chairman will review some of the causes of, and policy responses to, the recent financial crisis, focusing specifically on the actions of the Federal Reserve.  The lectures are being offered as part of a course at the George Washington University School of Business - the syllabus is available here .  All the subsequent lectures in the course are being made available via video as well. To access the lectures, click here .

It is St. Patrick's Day and the sun is shining!  This week I decided to learn more about St. Patrick by reading Newport White's  St.. Patrick: His Writings and Life , which was published in 1920.  It was a fascinating read!  You can get a free pdf copy or copy for your Kindle  here .  Being old fashioned, I bought an ex-library copy from the University of Glasgow! I hope you enjoy St. Patrick's Day.  Below is one of my favourite clips from The Muppet Show  - it is particularly apt for St. Patrick's Day!

This week my Corporate Finance class were looking at corporate dividend policy.   Two recent news items highlight the centrality and importance of the dividend decision.   First, last week’s Economist argued that Apple should return to investors the $100b of cash it has on its balance sheet (click here ).   One theory is that Apple seems to fear that the act of returning cash to shareholders may signal to the market that its best days are behind it.   Another theory is that the near-bankruptcy experience of Apple in the 1990s meant that Steve Jobs had a strong preference for hoarding cash.  This may be an example of where managerial traits and experiences affect corporate policy.   Second, a report by a Research Fellow at the American Enterprise Institute suggests that the Obama administration plans to increase dividend taxes from 15% to 45%, the highest in 27 years.   A study by Chetty and Saez shows that the Bush divide...

I have recently finished reading the interim report of the Kay Review. The terms of reference for the review are: "to examine the mechanisms of corporate control and accountability provide by UK equity markets and their impact on the long term competitive performance of UK businesses". All finance students should read this interim report as well as anyone interested in equity markets - click here . Here are some of my highlights: 1. There has been a decline in collective action by institutional investors. 2. The mode of appointing non-executives (by a board committee with substantial input from the Chairman) raises questions about their independence. 3. Some non-executive directors may hold too many non-executive roles to perform effectively. 4. The increase in nominee holdings due to the introduction of electronic trading and settlement means that the majority of holdings of UK equities are nominee holdings, which means that beneficial shareho...

It seems that economists at Queen's have a lot to say about the origins of the Mafia.  After Chris Colvin's review was picked up by Monday's FT, I learned that Arcangelo Dimico and co-authors have just finished a working paper on the origins of the Mafia.  Their paper is entitled "Origins of the Sicilian Mafia: The Market for Lemons" - you can access it here .

A recent working paper investigating the historical and geographical origins of the Mafia has been reviewed by Chris Colvin at the NEP-HIS Blog.  His review was picked up by the Financial Times (click here ).  You can read Chris's Blog post here and access Buonanno et al's paper here . Paper abstract: This research attempts to explain the large differences in the early diffusion of the mafia across different areas of Sicily. We advance the hypothesis that, after the demise of Sicilian feudalism, the lack of publicly provided property-right protection from widespread banditry favored the development of a florid market for private protection and the emergence of a cartel of protection providers: the mafia. This would especially be the case in those areas (prevalently concentrated in the Western part of the island) characterized by the production and commercialization of sulphur and citrus fruits, Sicily’s most valuable export goods whose international demand was soaring at...

Does the age of a CEO affect corporate performance and corporate policy?  Are older CEOs less acquisitive?  Does the wisdom of years make them better managers?  Have their greater experiences of boom and bust made older CEOs more risk averse?  Is there a last-period problem with older CEOs?  Have older CEOs got the energy to manage complex organisations?  Two recent papers examine how CEO age affects acquisition behaviour.  Soojin Yim in a recent working paper finds that older CEOs are less acquisitive - she finds that a firm with a CEO who is 20 years older is 30% less likely to announce an acquisition. Yim interprets this finding as evidence to support the agency problem.  Jenter and Lewellen in their NBER working paper document the effect of CEO age on merger behaviour.  Here is the abstract of their paper: This paper explores the impact of target CEOs’ retirement preferences on the incidence, the prici...

What caused the Great Crash of 2008?  The proximate cause was the collapse of house prices.  Why did house prices collapse? There is an interesting post over at Freakonomics which suggests that the collapse in US house prices was triggered by the large increase in gas (petrol) prices in 2006-7, which dramatically increased the cost of commuting from the suburbs.  The full paper is available  here .  However, the increase in gas prices was only a trigger, and  it cannot explain the extent of the fall in house prices in the USA, Ireland, UK, and other economies.   

This week Northern Ireland's Rory McIlroy became the number one golfer in the world.  This reminded me of Armen Alchian's  1977 editorial in the Wall Street Journal ,  where he posed the question why is golf solely found in capitalist societies?  He argued that "Golf's ethic, principles, rules and procedures of play are totally capitalistic.  There are antithetical to socialism.  Golf requires self-reliance, independence, responsibility, integrity and trust.  No extenuation is granted misfortune, mistake or incompetence.  No second chance.  Like life, it is often unfair and unjust, with uninsurable risks.  More than any other sport, golf exploits the whole capitalist spirit."   You can read Alchian's entire WSJ oped piece here .  Notably, a recent empirical study in the Atlantic Economic Journal  provides support for Alchian's thesis.   

I have been in a lot of major cities in my lifetime, and several of them have a thriving diamond district. Click here to read an interesting take on why diamond shops in most major cities tend to locate close to each other.   The basic argument is that it lowers search and information costs for diamond customers.   I am not sure if this is totally correct.   Another possible reason why diamond shops may locate close to one another is that by being close together, they lower their joint security costs.   Given the density of diamond shops in one area, one would expect more cctv, police patrols etc..   Notably, all of the major diamond shops near Hatton Gardens in London are two minutes away from the nearest police station!  

Some of the authors at Education News sent me a neat infographic after reading one of my previous posts on the higher education bubble.   Click here to see it. The accumulation of debt by US students to pay for their education is such that the sum of total student debt exceeds the sum of total credit card debt in the US!   My fear is that the UK will eventually head in the same direction, with ever-increasing tuition fees being paid for by an ever-increasing student debt.

My Money and Banking class this week looked at the Great Depression.   You can read a recent interview given by Christina Romer , former chair of Obama’s Council of Economic Advisers, where she reviews five books/articles on the Great Depression – click here .   This interview gives a good overview regarding the causes and cures of the Great Depression.   One thing which emerges from Romer’s interview is that many economists have been drawing close parallels between the Great Depression and the ongoing Great Recession.   These parallels have been used to justify the extreme policy interventions used by central banks and governments.   As much as I like to see governments and economists drawing lessons from economic history, one has to wonder whether we have been hasty in drawing comparisons between the two episodes.   Have our political leaders simply used the Great Depression (and our fears of a repeat) as a justification to bail out large finan...