Finance: Past, Present and Future

Each year my Money and Banking class create blogs as part of their coursework. The top blogger this year is Stuart Henderson who looks at the relationship between capitalism and financial crises. You can read Stuart's blog here . Honourable mentions go to Will Quinn who blogged about bubble identification and Tong Chen who blogged about the Mississippi bubble.  I am taking a break from blogging for a few weeks to allow me to concentrate on getting my book finished.

In his budget yesterday (FT's coverage is below), the Chancellor of the Exchequer ( click here for the etymology of this title) announced a £12 billion mortgage guarantee scheme. Why is the UK government so keen to stimulate the UK housing market? After all, it was the exuberance in housing markets which was largely to blame for the financial crisis. The mortgage guarantee scheme is aimed at helping borrowers who don't have enough money to put down a deposit on a house. Are these not going to be subprime borrowers of various shade?  Click here to read Robert Peston's view on this scheme.    

Click here to read an insightful commentary on the new super-rich and how wealth inequality has widened over the past few decades.     A recent Credit Suisse report on global wealth is available here . According to this report, the richest 1% of the world's population controls 46% of the world's wealth. There are 26 million dollar millionaires (with 1.6 million of those living in the UK), and 29,000 people across the world have wealth in excess of $100 million.    Below is a short interview with Sir Anthony Atkinson, a leading expert on inequality.    

It has become accepted policy that when banks collapse, depositors should not bear any losses. However, in the case of Cyprus, it appears that, as part of the country's bailout by the EU and IMF, depositors are being asked to take a haircut in the form of a levy on savings. This levy has just been rejected by the Cypriot parliament - story here .  The wider fear in the EU is that once the principle of depositor levies has been accepted, it makes banks in other weak economies susceptible to runs because depositors no longer believe that their deposits are 100% secure. One reason why the levy has been proposed is that the EU is reluctant to bail out the foreign depositors of Cypriot banks.  It is reckoned that up to one half of deposits in Cypriot bank accounts are from Russia. According to a report in Der Speigel , a euro-zone bailout of Cypriot banks would mainly benefit Russian oligarchs, business-people, and gangsters ( click here ). Bailing out banks is a bad idea and simpl

Cormac Ó Gráda is one of the greatest economic historians in the world never mind Ireland. In a new paper entitled Eating People is Wrong: Famine's Darkest Secret , he tackles one of the greatest taboos - cannibalism. The paper's abstract is below.   Cannibalism is one of our darkest secrets and taboos. It is the ultimate measure of the resilience or otherwise of civilizational processes to extreme conditions. How common was cannibalism in times of famine in the past? Both the nature of the evidence for famine cannibalism and the silences about it challenge the empirical historian to the limit. After a review of the global historiography, this talk will attempt to assess the evidence for cannibalism during Ireland’s many famines, culminating in the Great Irish Famine of the 1840s. 

The most important mode of instruction in university is the lecture. This is where a professor gives their unique perspective on the subject. Miss the lecture and you miss the message. PowerPoint lecture outlines give students a partial and sometimes distorted view of the lecture. However, in most UK universities lecture attendance is not compulsory whereas tutorial attendance is. Click here to read an interesting student post at the Guardian  which argues that lectures should be made compulsory.    

The Office for National Statistics has just published a review of how UK households have changed over the past 40 years - click here for graphics and here for ONS report.   In terms of changes in household composition between 1971 and 2011, the headline figures are: Average household size has fallen from 2.91 to 2.35 Proportion of one-parent families has increased from 8% to 22% A huge decline in marriage - the proportion of women aged 18-49 cohabiting increased from 11% to 34%. The review also shows a very sharp fall in smoking and heavy drinking over the past four decades.  In 1974, 45% of adults smoked, but today only 20% smoke!   In terms of consumer goods and comfort, there have also been huge changes over the past four decades. Only 42% of households had a phone in 1972; this figure is 100% today. 37% of households had central heating in 1972; this figure is 98% today.  66% of households had a washing machine in 1972; the figure is 96% today. In 1984, 9%

Do banks cause economic growth or are they a result of economic growth? The multitude of banking experiments in U.S. banking history make it a suitable laboratory to test conjectures about the relationship between growth and banking development. Matthew Jaremski and Peter Rousseau in "Banks, Free Banks, and U.S. Economic Growth" look at this relationship in the era prior to the Civil War, and they find that the free banking system had little effect on economic growth.  Click here  to read Chris Colvin's NEP-HIS review of this paper.        

The Schumpeter column in the Economist has a really nice article on restoring our faith in the company ( click here ). The column is based on a new book by Colin Mayer .    

My Corporate Finance class and I will begin looking at dividend policy tomorrow. Today, Aviva , the insurance giant, announced that it was cutting its dividend by more than a quarter. Subsequent to this announcement its shares fell 12.5% ( story here ). Why did Aviva shares fall so much? After all, the classic Miller and Modigliani irrelevance theorem suggests that a firm's dividend policy has no effect on the value of the firm. One explanation is that Aviva's managers were signalling to its shareholders that the future prospects of the company are not as good as was once thought. In a paper with Qing Ye and Wenwen Zhan, I find that dividends also played a very important information communication role is early capital markets.         

Owen Sims sent me this interesting article which looks at whether Twitter can predict the stock market. Johan Bollen , a computational social scientist, used algorithms to measure the mood and sentiment of tweets in order to to gauge the public mood. The measure he developed was correlated with subsequent movements in the stock market. This correlation may be spurious, but behavioural economists have increasingly been interested in how public sentiment affects asset markets and they have used the news media to get a handle on sentiment.  See, for example, Paul Tetlock's work in this area - click here .        

My 5-year-old son's new topic at school is 'People who help us'. His teacher asked the children to name occupations of people who help us. My son's answer was 'bankers'!! Bankers do help us - they provide very useful means of payment and payment systems as well as channeling funds from those who have capital but no productive opportunities to those who have productive opportunities but lack the necessary funds. One of the results of the banking crisis is that banks contracted their lending to businesses and it appears that UK banks are still doing it ( click here for story). One of Ben Bernanke's key insights into the Great Depression is that banking crises push up the cost of intermediating funds, and that this has a devastating effect on the macro-economy (paper available here ). What, if anything, can the UK government do about this state of affairs?

A new website, World of CEOs , has recently been launched. This website contains details, data, and bios for thousands of CEOs around the world. It is a fantastic resource for anyone interested in doing empirical studies on CEO attributes and behaviour.  It is also a great resource for those interested in finding out about particular CEOs.