Finance: Past, Present and Future

The keynote address in Antwerp was given by Yale's Will Goetzmann . Professor Goetzmann runs Yale's International Center for Finance . He was instrumental in developing the ICF's Historical Financial Research Data , which is made freely available to researchers. Along with Rik Frehen and R. Geert Rouwenhorst, Goetzmann has just published a paper in the Journal of Financial Economics entitled New evidence on the first financial bubble . The working paper is available here and the abstract is below. The Mississippi Bubble, South Sea Bubble and the Dutch Windhandel of 1720 together represent the world's first global financial bubble. We hand-collect cross-sectional price data and investor account data from 1720 to test theories about market bubbles. Our tests suggest that innovation was a key driver of bubble expectations. We present evidence against the currently prevailing debt-for-equity conversion hypothesis and relate stock returns to innovations in Atlantic...

Why do firms list their shares on more than one stock exchange?  Why do some firms list their shares on stock exchanges outside the economy in which they are located? These questions were addressed by David Chambers in a paper presented at the Antwerp workshop. He and his co-authors look at foreign listings of U.S. railroads during the first era of financial globalisation.   Click here for their paper.  The abstract is below. We study motivations for the globalization of capital markets by examining the role of geography in the financing of U.S. railroad investment from 1866 to 1913. The selected industry and period provide a natural experiment to study the first globalization wave due to the relative underdevelopment of contemporary U.S. financial markets, the dramatic change in global communication technology, the enormity of capital investment needs, and the unique geography-specific nature of railroad assets. We observe an intense level of foreign listing ...

One of the most intriguing papers at the recent financial history workshop in Antwerp was by Christophe Spaenjers . Christophe's research focuses on returns on alternative investments and emotional assets e.g., art, jewels, stamps, collectibles etc.. Click here for further information on emotional assets. In his new paper, Christophe looks at the returns on wine over the past century. He finds that wine performs on a par with stamps and art and just below equity. Click here to learn more about wine as an alternative investment.

Last week I was speaking in Antwerp at the 5th Eurhistock Workshop (programme here ). My posts this week will briefly survey some papers which were presented at this conference. However, in this post I want to discuss the purpose and usefulness of financial history. Why should we be interested in financial history?   Reason 1: Financial history provides long run data for tests of asset pricing theories (see Dimson, Marsh and Staunton's Investment Returns Yearbook ). Reason 2: Financial history provides out-of-sample tests and natural experiments of asset pricing (see Koudijs, 'The boats that did not sail' ). Reason 3: Financial history allows us to test economic theories of bubble formation (see Garber's 'Famous first bubbles' ). Reason 4: Financial history enables us to test corporate finance theories in an era when tax and regulatory distortions did not exist (see my paper with Ye and Zhan on dividend policy in C19th) Reason 5: Financial ...

Ever since Bill Clinton's campaign strategist coined the phrase in 1992, " it's the economy, stupid ", politicians and commentators have believed that the economy is the most important issue for voters when it comes to general elections. Click here to read a wonderful piece by Roger Scruton in  The Guardian  which argues that true conservatives are driven by more than economics, and that the current divisions in the Tory party need to be looked at through this prism.

At the recent Berkshire Hathaway AGM, Warren Buffett spoke about the damage quantitative easing had inflicted upon ordinary savers and bondholders ( click here ). Quantitative easing has forced bond yields and deposit rates to very low levels - bondholders and savers have been earning negative real returns for over four years. Meanwhile, investors are poring money into the stock-market in search of yield, which has lifted the FTSE 100 to its highest level since September 2000. Here is a short video from the 2013 Berkshire Hathaway AGM, where Buffett talks about quantitative easing, bank regulation, and high-frequency trading.

Click here to read a piece by Barry Eichengreen , where he highlights the dangers of analogical reasoning in the area of monetary policy. He suggests that past experiences shape modern central banking practice - the Fed's policy is motivated by a desire to avoid its inaction in the early 1930s and the ECB's policy is motivated by Germany's desire to avoid the hyperinflation of the 1920s. However, these analogies may be the wrong ones for today's problems. To avoid faulty analogical reasoning, Eichengreen suggests having a portfolio of analogies from the past.  The bottom line is that economists need to know and understand the past.

Click here to read about the Las Vegas housing market which has been hotting up once again. Robert Shiller has described it as 'bubbly'.

Three former Chancellors of the Exchequer have been calling for the UK to exit the EU - Lord Lawson (story here ), Lord Lamont (story here ), and Lord Healey (story here ). Add these calls to the electoral pressure from UKIP , and one can foresee the Conservatives being forced to offer an in-out referendum to the UK electorate. The ongoing euro crisis is also fueling anti-EU sentiment across Europe, with political tensions between member states mounting and the Franco-German relationship under severe strain. Surprisingly, Oskar Lafontaine , the German finance minister who launched the euro and was described by The Sun in 1998 as the most dangerous man in Europe ( click here ), has recently called for its break up before tensions and economies within Europe deteriorate even more (story here ). The euro could be the undoing of the EU project.    

A number of weeks ago, I had a post on the data errors in Reinhart and Rogoff's famous 'austerity' paper. So what are the lessons for the economics profession of ReinhartRogoffgate? Lesson 1 : Diversity is good. The errors in Reinhart and Rogoff's paper were discovered by economists working at UM Amherst. Amherst's economics department is not typical as it is heterodox i.e., open to economists who are not from the mainstream neoclassical school. You can read a Washington Post article about this department here .  Lesson 2 : Economics is not a 'hard' science. Economics is not physics and quantification in economics is of  limited use when it comes to measuring relationships between variables. Quantification is useful in physics as there are laws of nature which do not change (i.e., g - the acceleration of gravity on earth = 9.8 m/s^2). You can read Samuel Brittan's opinion piece on this issue here   (hat tip - Graham Brownlow).

I am currently working my way through 72 final-year research papers. I have been somewhat shocked by the low level of preciseness when it comes to English grammar: mixing up tenses, there being used instead of their, its being mixed up with it's, and renegade commas and apostrophes appearing at random! Split infinitives and the non-use of the Oxford comma are also commonplace, but only a pedant worries about such grammatical niceties!   Thankfully moves are afoot to improve the grammar of school kids.  You can read more on this as well as test your grammar by clicking  here .    

China is a fascinating country. Its rapid economic growth and transformation over the last few decades has been unprecedented in history. The big question for the world economy is can this growth continue? Daron Acemoglu and James Robinson argue that China must develop inclusive political institutions if it is to continue on this high-growth path. Others suggest that China's demographic time-bomb may operate to slow its growth. China's one-child policy, which has been operating for three decades, has resulted in an unbalanced population in terms of age and gender. However, this policy has also resulted in invasive state interference in the lives of women and families - click here to read a horrific account of the out-workings of the one-child policy. Can China's growth continue with such endemic oppression? Has such oppression been helpful to China's economic growth?

Manchester United have just announced that Sir Alex Ferguson will retire at the end of the season. Click here to read an earlier post which featured a Harvard Business School case study on Ferguson as a manager.

Following on from my post last week on Apple's bond issue, click here to read Mark Roe's piece at Project Syndicate where he discusses why it might be a good long-term strategy for Apple to return a large chuck of its $137bn cash pile to shareholders. Roe believes that Apple may be at a point in its corporate and innovation life-cycle where the cash could be wasted by its management in pursuit of the next big thing - the iThingamajig. Consequently, he argues that the cash is better in the hands of investors.

The public debate about same-sex marriage has raised some really interesting questions about the nature and rationale of marriage. Marriage is an institution which we observe across space and time, but why do we have marriage and why has it been so prevalent across societies? Marriage in the West has been eroded over the past number of decades and many see the extension of the marriage franchise to same-sex couples as a further weakening of the institution. Unfortunately, much of the debate on this issue is being stifled and sometimes there is more heat than light. However, I recently came across a really good debate on Piers Morgan's CNN show, which featured Ryan Anderson of the Heritage Foundation , a conservative think tank based in the United States.