Finance: Past, Present and Future

New work by  Jord à, Schularick and Taylor highlights the  role  of mortgage finance in the financialisation of advanced economies. It also reveals that real-estate lending booms are mainly responsible for financial crises and weak recoveries. I'm broadly  sympathetic  to their findings. In my new book  Banking in Crisis , the role of mortgage finance in the demise of UK banking stability is highlighted. But I also highlight why banks have become addicted to high-risk mortgage finance. First, there is an absence of proper incentives which keep bankers honest. Second, it is in the interest of the political elite to let banks engage in risky mortgage financing. For 17 advanced economies Source: http://www.voxeu.org/article/great-mortgaging

Here is a nice post by Simon Johnson on what bank capital is and what it is not. Johnson is an advocate of higher capital requirements for banks. In my new book Banking in Crisis , bank capital plays a very important role in contributing to pre-1940 British banking stability and its absence played a major role in the 2008 financial crisis. 

Paul Mason has a nice article on how the on-going crisis has imbued many with a feeling of powerlessness. Crisis is the new state of economic being and there is absolutely nothing we can do about it. We therefore become resigned to crises and increasing inequality. Mason raises interesting questions about the long-term consequences of powerlessness and he also alerts us to the dangers of powerlessness by pointing out how the rise of fascism, nationalism and Hitler quickly followed the crisis of the 1930s.

We all know about the effect of the Great Recession on wages and wealth. But what about its impact on psychological well-being? Jan-Emmaneul De Neve  of UCL has worked on this area and in the video below he explains how recessions affects our mental well-being. His basic message is that because we weight economic losses more than economic gains, recessions can have a large effect on our well-being.  

Global stock markets and commodity prices have been on a downward trajectory over the past month. Why? Markets have been spooked by mixed economic signals coming from the US and more hawkish sentiment from central banks (interestingly central bankers have rowed back on this following the turbulence - click here ). They have also been concerned by the state of the Eurozone, with even Germany entering the economic doldrums. The Ebola scare has even been blamed for the turbulence of the past few weeks. However, the greatest fear in financial markets is of a slowdown in China. A slowdown in China means a fall in demand for commodities (hence the fall in commodity prices) and a fall in demand for other goods and services (even university education!). Could China's debt-fuelled construction and economic boom be coming to an end?

My colleague Chris Colvin , along with Abe de Jong and Philip Fliers (both of the Rotterdam School of Management), has recently published a paper in Explorations in Economic History looking at what determined bank distress during the financial crisis which occurred in the Netherlands in the 1920s. Their working paper is available here and the published version is here . Below is a video where Philip Fliers outlines the main findings of their paper.

Carl Icahn , the famous activist investor, has written an open letter to Apple's Tim Cook encouraging him to increase share buybacks and return cash to shareholders. The full text of the letter is available here .  Icahn believes that the market is undervaluing Apple's future growth potential - he seems very excited by the iPhone 6. Given Apple's huge cash pile, it makes sense for it to repurchase shares which are significantly undervalued. An FT Lex video on the Icahn letter is below.

This year's winner of the Nobel Prize in Economics is Jean Tirole . Tirole is best known as someone who has formalised (in a mathematical sense) key concepts in microeconomics and industrial organisation. Click here to read Tyler Cowen's comprehensive post on Tirole's contribution to economics. Tirole played a large role in my education. I read / studied two of his books during my graduate studies - The Theory of Industrial Organization (1988) and The Prudential Regulation of Banks (1994) . Notably, both of these books have stood the test of time - as will his book The Theory of Corporate Finance (2006) .

Hester Pierce of the Mercatus Centre at George Mason University has published a really interesting piece in the American Banker on the need for bank regulators to have humility - click here to read it (hat tip  - Graham Brownlow). This is a lesson that F. A. Hayek tried to teach the economics profession several decades ago. Academics can go one of  two ways when it comes to humility. One way is for them to have an exaggerated view of themselves and their abilities - the ego takes over and they think that they know best. The second way is that the more they learn about the world around them, the more they realise that they do not understand it and the more humble they become.

One of my pet hates is corporate jargon or management-guru speak. I'm the Head of a Management School and I don't understand what people mean when they use corporate jargon. After sharing my pet hate with my colleague Alan de Bromhead, Alan kindly send me the video below where 'Weird Al' Yankovic lampoons corporate doublespeak and meaningless buzzwords in song - click here to learn more. 

Over the next number of weeks, I will be posting several Bank of England videos explaining what inflation is, why it matters, and why it happens.

Congratulations to Tyler Goodspeed who won the Gerschenkron Prize for his PhD (from Harvard University) at the annual Economic History Association conference. His thesis, which examines free banking and the 1772 financial crisis, is available to read here . Tyler presented a paper at one of our economic history seminars last year.

My new book Banking in Crisis had its first customer review on Amazon (see below). It got five stars! I actually know who the reviewer is - YuXiang Long - a very enthusiastic student from my 2013 Money and Banking class. Thanks Long!  If you want to write a customer review on Banking in Crisis , please feel free to do so. But can we trust Amazon  (or TripAdvisor) reviews? Could I not manipulate Amazon reviews of my book by bribing family, friends and students to post overly positive reviews? Are Amazon customers savvy enough to catch on and do they simply ignore them?  What type of Amazon reviews do I pay attention to? If I'm buying a book or DVD, I usually ignore customer reviews. However, if I'm buying a piece of gadgetry, I usually read a cross-section of the reviews, particularly those which comment on the functioning etc of the gadget.  When it comes to hotels, I usually ignore hotels with under 200 reviewers and I start by reading the terrible (one-star) ...