Posts Tagged ‘finance’

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Special mention

www.usnews David Simonds Grexit cartoon 14.06.15

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Seven years after the global financial crash, we’re still in the midst of a full-scale war of finance.

On one side of the Atlantic, U.S. Court of Claims Judge Thomas Wheeler found that former AIG head Hank Greenberg was indeed correct in claiming the government overstepped its legal boundaries in its “unduly harsh treatment of AIG in comparison to other institutions” that was “misguided and had no legitimate purpose.” The ruling basically confirmed the Fed’s right to create a gigantic bailout of Wall Street but denied its ability to actually determine the use of the funds by the “taking of equity” in essentially worthless financial institutions like AIG.

Finance thus continues to win the war in the United States.

And, as Ambrose Evans-­Pritchard [ht: sw] explains, finance is engaged in all-out war in Europe.

Rarely in modern times have we witnessed such a display of petulance and bad judgment by those supposed to be in charge of global financial stability, and by those who set the tone for the Western world.

The spectacle is astonishing. The European Central Bank, the EMU bail­out fund, and the International Monetary Fund, among others, are lashing out in fury against an elected government that refuses to do what it is told. They entirely duck their own responsibility for five years of policy blunders that have led to this impasse.

They want to see these rebel Klephts hanged from the columns of the Parthenon – or impaled as Ottoman forces preferred, deeming them bandits ­ even if they degrade their own institutions in the process.

The European Central Bank is actively inciting a bank run in Greece and threatening to throw that country out of the euro zone if it resists the demands of the creditors, represented by the troika, without ever seriously considering the proposals put forward by the democratically elected Syriza government.

The truth is that the creditor power structure never even looked at the Greek proposals. They never entertained the possibility of tearing up their own stale, discredited, legalistic, fatuous Troika script.

The decision was made from the outset to demand strict enforcement of the terms agreed in the original Memorandum, which even the last conservative pro­Troika government was unable to implement ­ regardless of whether it makes any sense, or actually increases the chance that Germany and other lenders will recoup their money.

At best, it is bureaucratic inertia, a prime exhibit of why the EU has become unworkable, almost genetically incapable of recognising and correcting its own errors.

At worst, it is nasty, bullying, insistence on ritual capitulation for the sake of it.

The troika, in other words, is acting like a unified debt collector, and is willing to go so far as to threaten to topple a democratically elected government to set an example that, in Greece and elsewhere in Europe, finance is willing to do anything and everything to win the war.

Chart of the day

Posted: 11 April 2015 in Uncategorized
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Much of the sloppy coverage of General Electric’s decision spinoff GE Capital, it’s financial division, blithely asserts that “it has become harder for financial services businesses to make big profits in the postfinancial crisis environment of tighter regulation and lower risk.”

As readers can see from the charts above, while GE’s move may represent the end of an era for one corporation, the financial sector itself has rebounded remarkably well from the crash of 2008.

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Harvard economics professor Sendhil Mullainathan is worried that too many of his students are taking jobs in finance. He should be worried for other reasons, too.

Mullainathan’s concern stems from the idea that much of the activity in the financial sector involves “rent-seeking”:

Instead of creating wealth, rent seekers simply transfer it — from others to themselves. . .

The economists Eric Budish at the Booth School of Business and Peter Cramton at the University of Maryland, and John J. Shim, a Ph.D. candidate at Booth, have shown in a study how extreme this financial gold rush has become in at least one corner of the financial world. From 2005 to 2011, they found that the duration of arbitrage opportunities in the Chicago Mercantile Exchange and the New York Stock Exchange declined from a median of 97 milliseconds to seven milliseconds. No doubt that’s an achievement, but correcting mispricing at this speed is unlikely to have any real social benefit: What serious investment is being guided by prices at the millisecond level? Short-term arbitrage, while lucrative, seems to be mainly rent-seeking.

This kind of rent-seeking behavior is widespread in other parts of finance. Banks sometimes make money by using hidden fees rather than adding true value. Debt collection agencies may use unscrupulous practices. Lenders to poor people buying used cars can make profits with business models that encourage high rates of default — making money by taking advantage of people’s overconfidence about what cars they can afford and by repossessing vehicles. These kinds of practices may be both lucrative — and socially pernicious.

Mullainathan makes clear that that kind of rent-seeking behavior is ubiquitous in the world of finance. But, it seems to me, he has an even bigger problem: it’s not clear there’s an area in finance that doesn’t involve some kind of rent-seeking (or, as I prefer, surplus-seeking) behavior. The best Mullainathan can come up with is a general summary of the effects of the division of labor in Adam Smith and a movie, It’s a Wonderful Life.

Mainstream economists and Wall Street bankers have tried mightily to come up with concepts and measures of how the financial sector creates value and thus has an economic or social benefit. But, in the end (to judge by Mullainathan’s column), they’ve failed.

Finance may be very lucrative, for banking institutions and Harvard students alike, but all it does is capture some of the value created elsewhere in the economy. And in an attempt to capture more and more of that value, by taking advantage of arbitrage opportunities and developing new financial instruments, it created the worst crisis since the first Great Depression.

Not even George Bailey would have been able to prevent that from happening.

 

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Special mention

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One story that can be told about today’s announcement is the Royal Swedish Academy of Sciences’ own explanation: that French economist Jean Tirole has been awarded the The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel for 2014 because he “has clarified how to understand and regulate industries with a few powerful firms.”

The other story is: Tirole has shown how much the real world of capitalism—industries that are dominated by a few firms that have extensive market power, which can charge prices much higher than costs and block the entry of other firms—differs from the fantasy taught in countless introductory courses in economics: a world of perfectly competitive firms, which have no negative effects on society and which therefore don’t need to be regulated.

In addition, Tirole (in “Intrinsic and Extrinsic Motivation,” an article with Roland Bénabou, published in the Review of Economic Studies) has challenged a central tenet of neoclassical economics, that individuals always respond positively to managerial supervision and incentives. He has demonstrated, instead, that both close supervision and monetary rewards can often times backfire, especially in the long run: they can undermine intrinsic motivations, thus explaining why workers find behavioral punishments and rewards both alienating and dehumanizing.

Last year, the Academy tried to have it both ways, offering the Prize to both Eugene Fama and Robert Schiller. This year, the message is both clearer and yet unspoken: the neoclassical model of perfect competition and individual incentives bears no relation to the kinds of capitalism that exist anywhere in the world.

And the policy implication: we’ll all be better off if we take over the large firms and let workers run them for society’s benefit.

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According to the new census by Wealth-X and UBS, almost half (45 percent) of the world’s billionaires partially or fully inherited their wealth. In fact, over the past year, the number of billionaires with partly inherited wealth experienced the largest growth in both relative and absolute terms.

But, clearly, the largest number of billionaires (some 80 percent) acquired their wealth at least partly through their participation in either privately held or publicly held businesses. According to the report, 63 percent of billionaires’ primary businesses are private companies, compared to only 31 percent that are public companies and 6 percent that are other types of institutions (education, government, non-profit, and social organizations).

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Opportunities for significant wealth gains can be found across most, if not all, industries. But certain industries have been particularly important sources of billionaires’ wealth generation. The largest share of the world’s billionaires have made their fortunes through finance, banking, and investment. But, outside of Europe and the United States—for Latin America and the Caribbean, Asia, Africa, and the Middle East—the largest proportion of new billionaires made their fortunes in industrial conglomerates.

In other words, most billionaires acquired their fortunes—either now or in the past—by helping themselves to the surplus created by their employees.