Finance: Past, Present and Future

Russell Napier, the author of Anatomy of the Bear , gave a fascinating talk to our MSc students a few months back. Today, I'm heading to Edinburgh for the opening of the Library of Mistakes , which is Russell's brainchild. The aim of this public library is to collect books and documents pertaining to past financial, business and corporate mistakes. Maybe we can learn from mistakes made in the past! Incidentally, in the recent video below, Russell talks to the FT's John Auther about the outlook for Emerging Markets and the global economy.  Fascinating as always.

Pets At Home is joining in what seems like an IPO (Initial Public Offering) rush on the London stock-market, with other UK-based retailers also considering the possibility of floating. Pets At Home is owned by KKR , a private equity firm. The aim of the flotation is not to raise funds for growth. It is simply about KKR cashing out. So here's the question: should you invest in this IPO? KKR know more about the future prospects of this firm than anyone else. The fact that they are bringing Pets At Home to market is therefore not necessarily a good signal - why would they sell a good prospect? Furthermore, Pets At Home has a business which has nothing unique and can easily be replicated by other firms.

If we want to understand finance or economics, then we need to understand human behaviour. The BBC's Horizon has a really interesting programme (hat tip: Graham Brownlow) on human behaviour, which explains how it affects our decisions about money and finance. It is available here on BBC iPlayer until 6th March.

Here is a short CATO Institute video, where Larry White makes the case for returning to a classical gold standard.

Click here to read an op-ed piece in the Economist on activist shareholders. Carl Icahn , a prominent activist shareholder, argues that it is up to investors not governments to demand change at companies. You can read his Ichan Report here .

In my Money and Banking class, I spend two lectures explaining why banks exist and how banks reduce the costs of getting money from savers to borrowers. The two principal costs which I stress are those associated with reducing adverse selection and moral hazard. However, since the 2008 financial crisis, there has been a surge of interest in crowd-funding or peer-to-peer lending. This is where borrowers pitch for loans on a designated website and savers decide whether or not to lend to them.  One example of this is Funding Circle , which has already lent £223m to businesses and has over 60,000 savers lending funds. To date, the average saver is earning an attractive 5.8% per annum. However, Funding Circle stresses that by joining it, you will be helping the economy by lending to British businesses. So is finance going to regress back to direct finance by bypassing the banks? Are banks going to disappear? I foresee several problems with peer-to-peer lending. First, there is a li...

Which is the more glamorous occupation: fire fighter or fire prevention officer? Which is the more important? Let's think of the financial analogy. Which is the more glamorous: dealing with financial crises or designing policies to prevent future crises? Once the crisis is over and fixed, politicians and the public have little interest in designing policies to prevent future collapses as such things do not capture the public imagination. In addition, bankers have every incentive to resist policies designed to prevent future crises because they are costly to implement.   Click here to read Robert Shiller's take on this. The existence of a fire service which quickly and efficiently reacts to fires means that, unless compelled by the government, people and firms under-invest in fire prevention. Indeed, there is even the possibility that the existence of such a fire service increases the probability and severity of fires. The same holds true in finance. The existence of bailout...

Click here to read a paper by Michele Belot and Marco Francesconi which uses speed dating to understand how we select partners. The paper's abstract is: Much empirical evidence shows that female and male partners look alike along a variety of attributes. It is however unclear how this positive sorting comes about, because marriage is an equilibrium outcome arising from a process that entails searching, meeting and choosing one another, a process that is usually a black box to social researchers. This study exploits unique field data from a large speed dating agency to shed light on the forces driving choices at the earliest stage of a relationship after a first meeting. We find that both women and men value physical attributes, such as age and weight, and that choices are assortative along  age, height, and education. However, we find that meeting opportunities play a dominant  role in determining dating proposals. These results have importan...

In an interview broadcast yesterday, Mark Carney stated that the UK's housing market is experiencing a widespread recovery. At the two ends of the spectrum, prices in the London housing market are increasing at 10% per annum, whilst the N. Irish housing market is still in the doldrums, with prices half of what they were in 2007 and 9% below 2005 prices. However, cheerleaders for the N. Irish housing market disagree - click here . The data for N. Ireland is  here  . Why is the housing market recovering? According to Carney, it is not due to low interest rates and cheap credit (but he would say that, of course); rather it is due to foreign capital coming into the country and into the London market in particular.  Is this recovery good news for the economy? The Bank of England and UK Government want house prices to recover because it helps banks, property developers and households strengthen their balance sheets. However, it was a frothy and over-priced housin...

If Scotland leaves the Union, what will be its currency? Both the Bank of England and the UK Treasury have said that it won't be the pound ( story here ). The UK Treasury's analysis of the issue is here . If Scotland votes for independence, they will need to come up with an alternative currency. The threat to Scotland's large financial services industry of leaving the pound is huge. It seems that the Scottish nationalists wants the best of both worlds - independence whilst maintaining the link with sterling. The members of the UK Parliament have categorically stated that this cannot happen. This is a major blow to the independence movement. In effect, the UK Parliament are saying to Scottish people, if you want to leave the Union, you leave it entirely - you can't cherry pick which bits you want to keep. What are the other options available to Scotland? Joining the euro would be a disaster. They could form their own central bank and peg their currency to sterli...

Click here for details of the European Association for Banking and Financial History New Scholar Workshop which QUCEH is hosting in April. Will Quinn, one of my PhD students, will be presenting a paper at it. 

I have created a video playlist on YouTube. The complete playlist is below or you can access it here .

What should companies do? What is the main objective for companies? For many observers, companies should focus on maximising shareholder value or shareholder wealth. This ideology of maximising shareholder value is prevalent in most Western economies. In the video below, Bill Lazonick  critiques this ideology and suggests that it is bad for economic prosperity in the long run. Click here for a paper by Lazonick on this topic.

American politics appears to be broken. Polarisation, excessive reliance on the judiciary to make laws, and gridlock in Washington, resulting in episodic fiscal cliffs, suggest a malaise. I've just read a piece in the American Interest by the ever-insightful Francis Fukuyama on what is wrong with American political institutions. He delves into the historical development of American politics and finds that the current problems are deep-seated. He highlights two particular problems - (a) the rise of lobbyists and special interest groups and (b) the usurpation by the judiciary of law making. Fukuyama is pessimistic about the future of American politics. According to him, the last time the US found itself with such a malaise, it took the Civil War to change the political trajectory of the country.  

Banks and financial institutions hate regulation. It is cumbersome, costly to adhere to, and costly to circumvent. In this HuffPost blog post , Denis Kelleher outlines the five fronts on which Wall Street has been fighting government attempts to regulate banks. Big banks have largely been successful in fighting off costly regulation. In my forthcoming book published by Cambridge University Press, I advocate either total regulatory lock-down of the banking system or no regulation. In the case of the latter, governments would also have to credibly commit to not bailing out banks when they get into trouble. The mishmash of complex rules we have today isn't fit for purpose. After all, this system didn't prevent the 2008 crisis!   

The British government's Nudge Unit , which uses insights from behavioural psychology and economics (see Nudge website for further details) to improve public policy, has been partially privatised ( story here ). Employees now own one third, the government owns one third, and Nesta , a charity set up to stimulate innovation, owns the other third. It seems that demand for the Nudge Unit's services from foreign governments and non-government institutions has been one of the reasons for this move. Another reason could be that this new ownership structure is applying some of the insights of behavioural economics in terms of incentivising employees of the unit. The Nudge Unit has been nudged!

Below is the FT's John Auther on Bernanke's legacy for asset markets.

Ben Bernanke stepped down as Chairman of the Federal Reserve on Friday. So what will be his legacy? Bernanke, although he didn't anticipate the financial crisis, steered the Fed through the most turbulent of financial environments since the Great Depression. Notably, as an academic, Bernanke was probably best known for his work on the Great Depression. His key insight was that the collapse of banks during the Great Depression resulted in credit channels not working properly. How well did he steer the Fed over the past eight years? You can read articles where Bernanke's performance is assessed at the WSJ , Project Syndicate and PBS .