Equity Market Rally

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, Alchian and Kessel discuss how inflation affects real interest rates, bond prices, and the price of real assets as well as how inflation redistributes wealth from net monetary creditors to net monetary debtors.

The Economics of Global Warming

The Berkeley Earth Project , an independent study of global warming, has found that the earth has become a degree warmer over the past half century. However, the statistical uncertainty surrounding pre-1920 estimates makes it very hard to say much about long-term trends - click here for graph . This is one of my concerns with the global warming debate - we simply don't have trustworthy long-run data which looks at temperature changes over the last millennium (or two). My second concern with the global warming debate is that it is very hard to prove any sort of casual link between global warming and human activity. The scientists may be able to show correlation between global warming and our production of carbon dioxides etc., but correlation is not causation. My third concern with the debate is that those who are sceptical or agnostic are stereotyped as flat-earthers or intellectually-challenged crackpots. This only stifles debate and the progress of science itself.

Boom and Bust: A Global History of Financial Bubbles

Boom and Bust: A Global History of Financial Bubbles, co-authored with my colleague Will Quinn , is forthcoming in August. It is published by Cambridge University Press and is available for pre-order at Amazon , Barnes and Noble , Waterstones and Cambridge University Press .

The Failure of Herstatt Bank

As an undergraduate, I was taught about the failure of Herstatt Bank in 1974 and Herstatt risk. This bank was only the 35th largest bank in Germany at the time so why would anyone be interested in studying its failure? Herstatt failed because of its involvement in risky foreign exchange business. When it closed its doors on 26 June 1974, counterparty banks (mainly in New York) had not received dollars due to them because of time-zone differences - this is known as settlement risk. The cross-jurisdictional implications of its failure resulted in the Bank for International Settlements setting up the Basel Committee on Banking Supervision and Herstatt's failure was a key reason for the establishment of real-time gross settlements systems, which ensures that payments between two banks are executed in real time. The Bank of England's Ben Norman has an interesting post on Herstatt over at the Bank's new blog ( Bank Underground ). As well as giving an excellent overview of

Finance: Past, Present and Future

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