Finance: Past, Present and Future

Anat Admati , Stanford academic and author of The Bankers' New Clothes , has consistently called for banks to face high capital requirements. She has also been very critical of bank regulation. Below is a short 15-minute clip, where she explains the problems with bank regulation. 

What happens when capital flows all of a sudden stop and begin to reverse? From 2000 to 2008, one half of Europe (the PIIGS) received huge capital inflows from the other half as well as from overseas. In 2009, there was a sudden stop and a capital-account reversal, followed by an economic crisis. But, we've been here before.  In a post at VOX, Oliver Accominotti and Barry Eichengreen compare this recent sudden stop to a similar episode which occurred in Europe in the late 1920s. The working paper on which this post is based can be found here . Hat tip - Chris Colvin.

Should millionaire footballers play in the searing heat of a Qatari summer? No. FIFA, football's world governing body, has said that the 2022 World Cup will be played in winter. But should the World Cup be played in a country which uses migrant workers as slaves, forcing them to work in searing heat without providing adequate fluids? Click here to read a wonderful Guardian expose of modern-day slavery in Qatar.

PNAS has recently published a paper entitled Money and Trust Among Strangers , which argues that token money may play an important behavioural role which facilitates cooperation in society. You can read a BBC report on the paper  here .  Maria Bigoni and her co-authors conduct an experiment where they examine the role of token money in facilitating cooperation among strangers. They argue that lack of trust among strangers makes money behaviourally essential. Could this possibly explain why we accept money which has no intrinsic value? 

The Institute for New Economic Thinking is offering a free course on Money and Banking, which is taught by Perry Mehrling of Columbia University. Mehrling revives and updates some forgotten theories in monetary economics in this course.You can access the course here .

What is the relationship, if any, between democracy and finance? There is a school of thought which argues that a limited electoral franchise benefits stock market development, whereas a broad electoral franchise benefits banking sector development. Hans Degryse , Thomas Lambert and Armin Schwienbacher have just published a CEPR working paper entitled The Political Economy of Financial Systems: Evidence from Suffrage Reforms in the Last Two Centuries , which looks at this very issue.  Here is the abstract: Initially, voting rights were limited to wealthy elites providing political support  for stock markets. The franchise expansion induces the median voter to  provide political support for banking development as this new electorate has  lower financial holdings and benefits less from the uncertainty and financial  returns from stock markets. Our panel data evidence covering 1830-1999  shows that tighter restrictions on the voting franchise induce a g...

I have just read a novel paper which attempts to combine experimental economics with economic history. Giovanni Giusti , Charles Noussair and Hans-Joachim Voth have written a paper which attempts to recreate some of the conditions present during the South Sea Bubble in a laboratory setting.  Their paper "Recreating the South Sea Bubble: Lessons from an Experiment in Financial History" is available here , and the paper's abstract is: Major bubble episodes are rare events. In this paper, we examine what factors might cause some asset price bubbles to become very large. We recreate, in a laboratory setting, some of the specific institutional features investors in the South Sea Company faced in 1720. Several factors have been proposed as potentially contributing to one of the greatest periods of asset overvaluation in history: an intricate debt-for-equity swap, deferred payment for these shares, and the possibility of default on the deferred payments. We consider which ...

I have just been asked to join the editorial board of Financial History Review , which is published by Cambridge University Press on behalf of the European Association for Banking and Financial History . This is a great honour and I look forward to serving as one of the journal's ambassadors.

Click here for a tongue-in-cheek post at Project Syndicate which argues that Protestants don't understand monetary policy.  Hat tip to Christopher Coyle.

Is political union a prerequisite for a successful monetary union? Peter Rousseau tackles this question by looking at how monetary union arose in the United States. He argues that is was not until well after the Civil War that the US achieved a stable monetary union. In other words, it look a long time for the US to achieve monetary union. Maybe there is hope for the EU. However, the EU is not a political union in the same sense that the US was or is. You can read a review of the paper at NEP-HIS Blog and the full article is available here . 

It is five years since the collapse of Lehman Brothers. To mark this wooden anniversary,  Chris Colvin and I have a written an op-ed piece for The Conversation , which contrasts the radical response of the political system to the 1825-6 banking crash with the tepid response of politicians to the 2008 financial crisis. You can read the article in full here .  University of Glasgow Library

One of the contributors to my book workshop this week was Richard Grossman , who spoke about this forthcoming book entitled " WRONG: Nine Economic Policy Disasters and What We Can Learn from Them ". In this book, Richard looks at policy mistakes made by governments because they were blinded by ideology rather than clearly seeing the economic problem at hand. For example, he looks at how the British government's policy during the Great Famine was wrong and how Britain's return to the gold standard in 1925 was wrong. He also looks at wrong economic policy in the run-up to the subprime and Euro crises. His book is due out soon and can be pre-ordered at Amazon by clicking here .

On Tuesday, QUCEH hosted a book manuscript workshop where colleagues and experts discussed and critiqued my book manuscript on British banking stability over the long run. Richard Grossman , Lucy Newton and Cormac Ó Gráda and a bunch of my colleagues at Queen's gave me great feedback which will undoubtedly improve the book. I'm hoping that it will be on the shelves this time next year!  

As a tribute to Ronald Coase, the Institute for New Economic Thinking has a blog post today which reproduces a piece written by Coase, which argues for the need to reconnect the study of economics with the actual economy! In other words, Coase wanted economists to stop building their elegant mathematical models and study how the economy actually works. Armen Alchian , another great economist who passed away this year, was also an advocate of economists trying to understand the economy and how economic forces work. In the short video clip below, the 101-year-old Coase shares some of his ideas about the subject of economics.

Ronald Coase, the Nobel-prize-winning economist, died yesterday. Coase was 102 and still writing and giving talks, particularly on the subject of China . Coase is best known for two of the most cited and influential papers in economics -   The Problem of Social Cost  published in 1960 and The Nature of the Firm  published in 1937. I remember reading and re-reading these when I first stumbled upon them two decades ago. Coase was critical of the way contemporary economics had developed. In 1999 he wrote that   Economics, over the years, has become more and more abstract and divorced from events in the real world. Economists, by and large, do not study the workings of the actual economic system. They theorize about it. As Ely Devons, an English economist, once said at a meeting, "If economists wished to study the horse, they wouldn’t go and look at horses. They’d sit in their studies and say to themselves, ‘What would I do if I were a horse?’" And they would soon...

Two of the highlights of my job are teaching MSc students and the supervision of PhD students ( click here ), who have typically come from an MSc course. One of the problems facing British universities is that there is inadequate funding for students to undertake taught postgraduate courses as well as PhDs. There is no systematic funding of postgraduate study as there is with undergraduate degrees, with the result that many bright but poor students are unable to take taught postgraduate courses or do a PhD. In addition, there is a real fear that those who are now paying up to £9,000 fees per annum will not have the appetite or ability to fund postgraduate study whenever they graduate in 2014/15, which deprives the UK of highly-trained specialists and future academics. You can read more about this impending crisis and funding gap here .