Finance: Past, Present and Future

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....

The Free Exchange column in a recent issue of the Economist examined the role of government in the evolution of money – click here .   Karl Menger famously argued in his 1892 Economic Journal article that money evolves organically without anyone inventing it and without government intervention.  In a lesser known paper , Charles Goodhart argues for a cartalist view of the origin of money i.e., government plays a significant role in the rise of a monetary economy.  The main implication of the Mengerian view is that government should get out of money.  The main implication of the Goodhartian view is that  fiscal  and monetary matters are the concern of governments and the two should not be divorced as is the case with the euro.

Congratulations to Chris Colvin , lecturer in economics at Queen's, who has just won the biennial PhD dissertation prize at the European Business History Association conference. Chris completed his PhD at LSE, and I had the privilege of being one of his examiners. Queen's has been well represented in this competition in recent years, with Gareth Campbell being a finalist on the previous occasion.  

Click here to read Stephen Broadberry's critique of Acemoglu and Robinson's Why Nations Fail  (hat tip - Graham Brownlow).