banking crisis

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pages: 249 words: 66,383

House of Debt: How They (And You) Caused the Great Recession, and How We Can Prevent It From Happening Again by Atif Mian, Amir Sufi

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Andrei Shleifer, balance sheet recession, bank run, banking crisis, Ben Bernanke: helicopter money, Carmen Reinhart, debt deflation, Edward Glaeser, en.wikipedia.org, financial innovation, full employment, high net worth, Home mortgage interest deduction, housing crisis, Joseph Schumpeter, Kenneth Rogoff, liquidity trap, Long Term Capital Management, market bubble, Martin Wolf, moral hazard, mortgage debt, paradox of thrift, quantitative easing, Robert Shiller, Robert Shiller, school choice, shareholder value, the payments system, the scientific method, tulip mania, young professional

Which aspect of a financial crisis is more important in determining the severity of a recession: the run-up in private-debt burdens or the banking crisis? Research by Oscar Jorda, Moritz Schularick, and Alan Taylor helps answer this question.19 They looked at over two hundred recessions in fourteen advanced countries between 1870 and 2008. They begin by confirming the basic Reinhart and Rogoff pattern: Banking-crisis recessions are much more severe than normal recessions. But Jorda, Schularick, and Taylor also find that banking-crisis recessions are preceded by a much larger increase in private debt than other recessions. In fact, the expansion in debt is five times as large before a banking-crisis recession. Also, banking-crisis recessions with low levels of private debt are similar to normal recessions. So, without elevated levels of debt, banking-crisis recessions are unexceptional. They also demonstrate that normal recessions with high private debt are more severe than other normal recessions.

While spending on other durable goods did not fall quite as early as residential investment, it still fell before the heart of the banking crisis. Compared to 2006, furniture purchases in 2007 were down 1.4 percent, and expenditures at home-improvement stores were down 4 percent. Spending on appliances was still up 2 percent in 2007, but the growth was significantly lower than the 7 percent growth in 2005 and 2006. Looking within the year of 2008, however, provides important insights. The heart of the banking crisis began in September 2008, when both Lehman Brothers and AIG collapsed. So by focusing on January through August, we can estimate the pre-banking-crisis spending decline in 2008. As a benchmark, we want to compare spending in January through August 2008 to that in January through August 2007, because retail sales are seasonal.

They also demonstrate that normal recessions with high private debt are more severe than other normal recessions. Even if there is no banking crisis, elevated levels of private debt make recessions worse. However, they show that the worst recessions include both high private debt and a banking crisis.20 The conclusion drawn by Jorda, Schularick, and Taylor from their analysis of a huge sample of recessions is direct: We document, to our knowledge for the first time, that throughout a century or more of modern economic history in advanced countries a close relationship has existed between the build-up of credit during an expansion and the severity of the subsequent recession. . . . [W]e show that the economic costs of financial crises can vary considerably depending on the leverage incurred during the previous expansion phase [our emphasis].21 Taken together, both the international and U.S. evidence reveals a strong pattern: Economic disasters are almost always preceded by a large increase in household debt.

 

Global Financial Crisis by Noah Berlatsky

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accounting loophole / creative accounting, banking crisis, Bretton Woods, capital controls, Celtic Tiger, collateralized debt obligation, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, deindustrialization, Doha Development Round, energy security, eurozone crisis, financial innovation, Food sovereignty, George Akerlof, Gordon Gekko, housing crisis, illegal immigration, income inequality, market bubble, market fundamentalism, moral hazard, new economy, Northern Rock, purchasing power parity, quantitative easing, race to the bottom, regulatory arbitrage, reserve currency, Robert Shiller, Robert Shiller, Ronald Reagan, shareholder value, South China Sea, too big to fail, trade liberalization, transfer pricing, working poor

Michael Mandel, “A Simple Guide to the Banking Crisis,” Business Week, March 12, 2009. Copyright © 2009 by McGraw-Hill, Inc. Reproduced by permission. 172 Solutions to the Global Financial Crisis I don’t know why I called this a “a simple guide to the banking crisis.” Really, it’s the longest post I’ve written here. But here it is: Why is the banking crisis so hard to solve? We stood and watched while Hank Paulson and Ben Bernanke fumbled with their response in the fall. Now we are being treated to the distressing spectacle of Tim Geithner struggling as well to articulate a clear policy for dealing with zombie banks. How come these smart and powerful men can’t get a handle on the problem? I want to lay out 5 simple propositions which will help you understand why the banking crisis is so intractable. Then I will explain what happens next.

The healthy part of Gota Bank was sold cheaply to Nordbanken; the rest was put in Retriva, another “bad bank” created by the government. Banks Can Survive the Crisis Without Nationalization But this is as far [as] Sweden’s experience of bank nationalization goes. And it is hardly a bed-time story for friends of bank nationalization today in the US or the UK [United Kingdom]. So—what are the lessons from the Swedish banking crisis for crisis responses today? One key element of the response to the banking crisis was to avoid nationalization. First, all the big banks had big credit losses, but they survived without being taken over by the government. Nor did they become zombie banks [banks which are bust, but which continue to operate solely because of government guarantees or support], the profitability of these banks returned to high levels only a few years after the crisis started.

On September 7, 2008, Fannie Mae (Federal National Mortgage Association) and Freddie Mac (Federal Home Loan Mortgage Corporation), the two largest mortgage lenders in the United States, had to be bailed out by the U.S. government. On September 15, 2008, Lehman Brothers, another large bank, declared bankruptcy. In the following weeks, Washington Mutual also collapsed. The U.S. government also stepped in to save the nation’s largest insurance company, AIG. The rescue package was $85 billion. The banking crisis was not confined to the United States. In the first place, other nations had their own housing bubbles. Even more important, banks and investors around the world had placed money in U.S. mortgages. As Jim Haughey wrote on the blog Market Insights, “Foreign investors were net buyers of about $20 billion a month of agency bonds throughout the 2004–05 housing boom and through mid-2008.” Thus, foreign banks faced many of the same problems U.S. banks did when the U.S. housing bubble burst.

 

pages: 576 words: 105,655

Austerity: The History of a Dangerous Idea by Mark Blyth

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accounting loophole / creative accounting, balance sheet recession, bank run, banking crisis, Black Swan, Bretton Woods, capital controls, Carmen Reinhart, Celtic Tiger, central bank independence, collateralized debt obligation, correlation does not imply causation, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, currency peg, debt deflation, deindustrialization, disintermediation, diversification, en.wikipedia.org, Eugene Fama: efficient market hypothesis, eurozone crisis, financial repression, floating exchange rates, Fractional reserve banking, full employment, German hyperinflation, Gini coefficient, global reserve currency, Growth in a Time of Debt, Hyman Minsky, income inequality, interest rate swap, invisible hand, Irish property bubble, Joseph Schumpeter, Kenneth Rogoff, liquidationism / Banker’s doctrine / the Treasury view, Long Term Capital Management, market bubble, market clearing, Martin Wolf, moral hazard, mortgage debt, mortgage tax deduction, Occupy movement, offshore financial centre, paradox of thrift, price stability, quantitative easing, reserve currency, road to serfdom, savings glut, short selling, The Great Moderation, The Wealth of Nations by Adam Smith, too big to fail, unorthodox policies, value at risk, Washington Consensus

How this occurred is the subject of the next two chapters, but that it occurred is worth reminding ourselves now. This is a banking crisis first and a sovereign debt crisis second. That there is a crisis in sovereign debt markets, especially in Europe, is not in doubt. But that is an effect, not a cause. There was no orgy of government spending to get us there. There never was any general risk of the whole world turning into Greece. There is no risk of the United States ever going bust anytime soon. There is no crisis of sovereign debt caused by sovereigns’ spending unless you take account of actual spending and continuing liabilities caused by the rupture of national banking systems. What begins as a banking crisis ends with a banking crisis, even if it goes through the states’ accounts. But there is a politics of making it appear to be the states’ fault such that those who made the bust don’t have to pay for it.

Yet they remain the governing ideas of the moment. By the time the book is published this may no longer be the case, but in the meantime, these ideas will have wrought tremendous damage. Part of the reason for this is, as we shall see, ideological. But part of the reason these ideas are so powerful is very material. It has to do with how a “too big too fail” banking crisis in the United States became a “too big to bail” banking crisis in Europe, and how this drives us all down the road to austerity. We are, at best, still saving the banks that we started saving in 2008, especially in Europe. This book allowed me to work out why such bad ideas remain the governing ideas, for both ideological and material reasons. But going back to the book after doing the video made me remember another much more personal reason why I should write this book that has to do with the unfairness of austerity as a policy.

The cost of bailing, recapitalizing, and otherwise saving the global banking system has been, depending on, as we shall see later, how you count it, between 3 and 13 trillion dollars.9 Most of that has ended up on the balance sheets of governments as they absorb the costs of the bust, which is why we mistakenly call this a sovereign debt crisis when in fact it is a transmuted and well-camouflaged banking crisis. As we shall see in chapter 2, the US banking system, the origin of the global banking crisis, was deemed by the US government to be “too big to fail” and therefore wasn’t allowed to fail when it got into trouble in 2007–2008. The price of not allowing it to fail was to turn the Federal Reserve into a “bad bank” (chock-full of bad assets that were swapped for cash to keep lending going) while the federal government blew a hole in its finances as it plugged the gaps caused by lost revenues from the crash with deficit spending and debt issuance.

 

Crisis and Dollarization in Ecuador: Stability, Growth, and Social Equity by Paul Ely Beckerman, Andrés Solimano

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banking crisis, banks create money, barriers to entry, capital controls, Carmen Reinhart, carried interest, central bank independence, clean water, currency peg, disintermediation, financial intermediation, floating exchange rates, Gini coefficient, income inequality, income per capita, land reform, London Interbank Offered Rate, Mexican peso crisis / tequila crisis, microcredit, money: store of value / unit of account / medium of exchange, offshore financial centre, open economy, pension reform, price stability, school vouchers, seigniorage, trade liberalization, women in the workforce

However, as the commercial banking system was in such a fragile condition in Ecuador at the time of dollarization, a special contingency fund for banks in distress was created following official dollarization. From this perspective, this fund can be viewed something like a lender of last resort in the event of a banking crisis. Moreover, as has been the case in history, for example in the United States during episodes of banking crisis before 1913, the year the Federal Reserve System was created, the resolution of banking crisis or liquidity shocks was arranged by private financiers such as J. P. Morgan. In other cases, the resources for performing the functions of lender of last resort can come from the fiscal budget or from foreign borrowing. The Adjustment Mechanism of the Dollarized Economy An economy operating with a foreign currency as the legal tender works in several respects like the economies under the gold standard of the pre1913 world.

Most of the ingredients of high inflation and acute monetary instability were present: (a) a flight from national money and de-facto dollarization2 as nationals and foreigners in Ecuador lost all confidence in the capacity of the sucre to serve its store-of-value function, (b) large fiscal deficits, (c) a sharp contraction in real economic activity, and (d) a severe banking crisis.3 The increasingly cornered government, led by President Jamil Mahuad, a highly educated and intellectually sophisticated socialdemocrat, could not gather congressional support for passing crucial tax legislation and other measures to stabilize the economy. This situation, combined with the near paralysis of the international financial institutions based in Washington, helped bring about an economic meltdown manifested in very high inflation, a banking crisis, economic depression, and social disarray during most of 1999. It is important to recognize that the Ecuadoran crisis took place in a delicate situation of security within the Andean region.

Dollars at 1998 Prices), 1990–2000 ..............................39 2.9 Ecuador: Nonfinancial Public-Sector Overall and Primary Surplus (US$ Million at 1998 Prices and Exchange Rate), 1990–2000. ...............................................................................................42 2.10 Ecuador: Onshore Commercial-Bank Deposits (US$ Million) .......48 2.11 Ecuador: Onshore Commercial-Bank Loans Performing Normally and in Arrears ......................................................................49 2.12 Ecuador: Indicators of Macroeconomic Imbalance, 1988–2000 ......52 2.13 Ecuador: Consumer Prices, 1995–2000 ..............................................55 3.1 Ecuador: Monthly Trade-weighted Exchange-rate Competitiveness, December 1994–December 2001...............................................103 3.2 Ecuador: Monthly Increases in Consumer Prices, January 1999–December 2001............................................................................103 3.3 Ecuador: Consumer Prices and Weighted Trading-partner Prices at the Current Exchange Rate, December 1997–December 2001 ......................................................104 3.4 Ecuador: Quarterly Real GDP (1998 average =100), 1997.4–2001.4.........................................................................................109 CONTENTS 3.5 vii Ecuador: Quarterly Nonfinancial Public-sector Revenue (US$ million), 1998.2–2001.4 ..............................................................110 3.6 Ecuador: Quarterly Nonfinancial Public-sector Expenditure (US$ million), 1998.2–2001.4 ...............................................................111 3.7 Ecuador: Quarterly Performance of the Main Components of the Current Account of the Balance of Payments (US$ million), 1998.1–2001.4 .........................................................................................113 3.8 Ecuador: Monthly Merchandise Trade and Real-effective Exchange Rate (December 1996–October 2001)...............................117 4.1 Ecuador: Real Wage and Urban Poverty Trends (index, 1990 = 100) ..............................................................................134 4.2 Malnutrition Rates in Latin America ...............................................139 4.3 Malnutrition in Ecuador: Stunting (%) by Consumption Quintiles, 1998 and 1999 ....................................................................139 4.4 Malnutrition in Ecuador: Stunting (%) by Area and Region, 1998–2000 ..............................................................................................140 4.5 Ecuador, Jamaica, Honduras: Years of Educational Attainment by Age Cohort .....................................................................................141 4.6 Ecuador: Educational Attainment by Rural and Urban Areas (persons over 24 years old ) ..............................................................143 4.7 Ecuador: Gender Gap in Education .................................................144 4.8 Ecuador: Percentage of 18-Year-Olds Completing School ............145 4.9 Ecuador: Percent of Children Working, 1999 ..................................146 4.10 Ecuador: Social Spending per Capita, 1995–2001 (in US$) ...........148 5.1 Factors Affecting Vulnerability to Exogenous Shocks....................181 This page intentionally left blank Preface Understanding the nature of deep economic crises and social disarray and formulating adequate exchange rate and other policies for stabilization, growth, and social equity are topics of great importance in developing countries and emerging economies in the turbulent world of the early 21st century. The experience of Ecuador in the late 1990s and the early 21st century showcases a country with structural problems of low growth, regional divides, and social and ethnic fragmentation made more acute by a severe currency and banking crisis in the late 1990s. Ecuador’s response to the crisis centered on the adoption of foreign money—dollarization— as a last-resort measure to cope with total distrust in the national currency and domestic institutions after repeated cycles of failed stabilization and crisis. This book assesses several aspects of the Ecuadoran experience, including a historical analysis of the main features of the country’s economic development and the main political economy features that set the background for the most recent cycle of crisis and stabilization.

 

pages: 280 words: 79,029

Smart Money: How High-Stakes Financial Innovation Is Reshaping Our WorldÑFor the Better by Andrew Palmer

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Affordable Care Act / Obamacare, algorithmic trading, Andrei Shleifer, availability heuristic, bank run, banking crisis, Black-Scholes formula, bonus culture, Bretton Woods, call centre, Carmen Reinhart, cloud computing, collateralized debt obligation, corporate governance, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, Daniel Kahneman / Amos Tversky, David Graeber, diversification, diversified portfolio, Edmond Halley, Edward Glaeser, Eugene Fama: efficient market hypothesis, eurozone crisis, financial deregulation, financial innovation, Flash crash, Google Glasses, Gordon Gekko, high net worth, housing crisis, Hyman Minsky, implied volatility, income inequality, index fund, Innovator's Dilemma, interest rate swap, Kenneth Rogoff, Kickstarter, late fees, London Interbank Offered Rate, Long Term Capital Management, loss aversion, margin call, Mark Zuckerberg, McMansion, mortgage debt, mortgage tax deduction, Network effects, Northern Rock, obamacare, payday loans, peer-to-peer lending, Peter Thiel, principal–agent problem, profit maximization, quantitative trading / quantitative finance, railway mania, randomized controlled trial, Richard Thaler, risk tolerance, risk-adjusted returns, Robert Shiller, Robert Shiller, short selling, Silicon Valley, Silicon Valley startup, Skype, South Sea Bubble, statistical model, transaction costs, Tunguska event, unbanked and underbanked, underbanked, Vanguard fund, web application

Yet turning back the clock, as well as being impractical, is no answer. The greatest danger often lurks in the most familiar parts of the financial system. Deposits are seen as a “good” source of funding, even though they can be taken out in an instant and get a giant subsidy in the form of deposit insurance. Property is regarded as a bread-and-butter banking activity but is the cause of banking crisis after banking crisis. Secured lending is seen as prudent, even though it can mean decisions are often made on the basis of the collateral being offered (a house, say) rather than the creditworthiness of the borrower (a borrower with no income and no job, say). If you look at the write-downs recorded during the crisis, where were they found? In investment banks, yes, but also in the retail and commercial banks.

See Credit-default swap Cecchetti, Stephen, 79 Church-tower principle, 207 Cigarettes, as means of payment, 5 Clark, Geoffrey Wilson, 144 Clearinghouse, 39 ClearStreet, 210 Clinical drug trials, indemnification of, xii–xiii Coates, John, 116 Code, simplification of, 63 Cohen, Ronald, 91–95, 97, 106, 108, 112 Coins, history of, 4 Collateral, xiv, 7, 38, 65, 76, 150, 177, 185, 204–206, 215 Collateralized-debt obligations (CDOs), 43, 234–235 Collective Health, 104 College graduates, earning power of, 170–171 Commenda, 7–8, 19 Commercial paper, 185 Commodity Futures Trading Commission, 54 CommonBond, 182, 184, 197 Confusion de Confusiónes (de la Vega), 24 Congressional Budget Office, 99, 169 Consumer Financial Protection Bureau overdraft fees and prepaid cards, concern about, 203–204 report on reverse mortgages, 141 survey on payday borrowing, 200 CoRI, 132 Corporate debt, in United States, 120 Corporate finance, 237–238 Correlation risk, 165 Cortisol and testosterone, effect of on risk appetite and aversion, 116 Counterparty risk, 22 Credit, industrialization of, 206 Credit Card Accountability, Responsibility, and Disclosure (Credit CARD) Act of 2009, 203 Credit cards, 203 Credit-default swap (CDS), 37, 64–65, 75, 124, 169, 238 Credit ratings, 24, 120–121, 233–236 Credit-reporting firms, 24 Credit risk, 200, 201, 237, 238 Credit scores, 47–49, 201, 216–217 Creditworthiness, xiv, 10, 12, 47, 121, 197, 202, 204, 216 Crowdcube, 152–155, 158–159, 162 Damelin, Errol, 208 Dark Ages, banking in, 11 Dark pools, 60 DCs (defined-contribution schemes), 129, 131 DE Shaw, 163 Debit cards, 204 Debt, 6, 7, 70, 149, 164 Decumulation, 138–139 Defined-benefit schemes, 129, 131 Defined-contribution (DC) schemes, 129, 131 Dependent variable, 201 Deposit insurance, 13, 43–44 Derivatives, 3, 9–10, 29–32, 38, 40 Desai, Samir, 189 Development-impact bonds, 103 Diabetes, cost of in United States, 102 Dimensional Fund Advisors, 129 Direct lending, 184 Discounting, 19 Disposition effect, 25 Diversification, 8, 12, 20, 117–119, 196, 236 Doorways to Dreams (D2D), 213–214 Dot-com boom, 148 Dow Jones Industrial Average, 40 Dow Jones Transportation Average, 40 Drug development, investment in, vii-viii, 114–115 Drug-development megafund adaptive market hypothesis and, 115–117 Alzheimer’s disease, 122 credit rating, importance of, 120–121 diversification and, 117, 119–120, 122 drug research, improvement of economics of, 114–115 financial engineering, need for, 119 guarantors for, 121 orphan diseases and, 118–119, 122 reactions to, 118 securitization and, 117–119, 122 Dumb money, comparison of to smart money, 155–158 Dun and Bradstreet, 24 Durbin Amendment (2010), 204 Dutch East India Company (VOC), 14–15, 38 E-Mini contracts, 54–55 Eaglewood Capital, 183–184 Ebola outbreak (2014), mortality rate of, 230 Ebrahimi, Rod, 210–211 Ecology, finance and, 113 Economist 2013 conference, xv on railways, 25 on worth of residential property, 70 Educational equity adverse selection in, 174, 175, 182 CareerConcept, 166 differences in funding rates, 176 enforceability, 177 in Germany, 166 Gu, Paul, 172, 175–176 income-share legislation, US Senate and, 172 information asymmetry, 174 Lumni, 165, 168, 175 Oregon, interest in income-share agreements, 172, 176 Pave, 166–168, 173, 175, 182 peer-to-peer insurance, 182 problems with, 167–168, 173–174 providers and recipients, contact between, 160, 175 risk-based pricing model, 176 student loans, 169–171 Upstart, 166–168, 173, 175, 182 Yale University and, 165 Efficient-market hypothesis, 115 Endogeneity, 239 Epidemiology, finance and, 113 Eqecat, 222 Equity, 7–8, 149–150, 186–187 Equity-crowdfunding in Britain, 154 Crowdcube, 152–155, 158–159, 162 Friendsurance, 182–183 Equity-crowdfunding in Britain (continued) herding, 159–160 social insurance, 182–183 Equity-derivatives contracts, 29 Equity-sharing, 7–8 Equity-to-assets ratio, 186 Eren, Selcuk, 73 Eroom’s law, 114 Essex County Council, 95 Eurobond market, 32 European Bank for Reconstruction and Development, 169 Exceedance-probability curve, 231–232, 232 figure 3 Exxon, 169 Facebook, 174 Fair, Bill, 47 False substitutes, 44 Fama, Eugene, 115 Fannie Mae, 48, 78, 85, 168 Farmer, Doyne, 60, 63 Farynor, Thomas, 16 FCIC (Financial Crisis Inquiry Commission), 50 Federal Deposit Insurance Corporation (FDIC), 186, 200 Federal Reserve Bank of New York, 170, 204, 205 Feynman, Richard, 115 Fibonacci (Leonardo of Pisa), 19 FICO score, 47–49 Films to rent, study of hyperbolic discounting, 133–134 Finance bailouts, 35–36 banks, purpose of, 11–14 collective-action problem in, 62 computerization of, 31–32 democratization of, 26–28 economic growth and, 33–34 fresh ideas, need for, xviii, 38–39, 80, 85–86 globalization and, 30, 225 heuristics, use of in, 45–50 illiteracy, financial, 134–135 importance of, 10 information, importance of, 10–11 inherent failings in, 241 misconceptions about, xiii–xvi panic, consequences of, 44 regulatory activity, results of, 33 risk assessment, 24, 45, 77–78 risk management, 55, 117–118, 123 as solution to real-world problems, 114 standardization, 39–41, 45, 47, 51 unconfirmed trades, backlog of, 64–65 use of catastrophe risk modeling in, 233–239 See also High-frequency trading (HFT); Internet Finance, history of bank, derivation of word, 12 Book of Calculation (Fibonacci), 19 call options, 10 Code of Hammurabi, 8 coins, 4 commodity forms of exchange, 4–5 credit and debt, 5–7 in Dark Ages, 11 democratization, 26–28 deposits, 6 derivatives, 29–32, 38 Dutch East India Company (VOC), 14–15, 38 early financial contracts, 5 early forms of finance, 3 equity contracts, 7–8 fire insurance, 16–17 first futures market, 29, 39–40 forward contracts, 38 in Greece, 11 industrialization and, 3, 27–28 inflation-protected bonds, 26 insurance, 8–10, 16–17, 20–22 interest, origin of, 5 in Italy, 9, 14 life annuities, 20–22 maritime trade and, 7–8, 14, 17, 23 payment, forms of, 4–5 put options, 9–10 railways, effect of on, 23–25 in Roman Empire, 7, 8, 11, 36 securities markets, 14 stock exchanges, 14, 24–25 Finance, innovation in absence of, xvi–xvii credit and debt, 5–7 derivatives, 9–10, 29–32 diffusion, pattern of, 45 drivers of, 22–26 equity, 7–8 importance of, 66, 242–243 insurance, 8–9, 16–17, 20–22 lessons from, 32–34 mathematical insights, 18–20 payment, forms of, 4–5 risks of, 145 stock exchanges, 14–16 Finance and the Good Society (Shiller), 242 Financial Crisis Inquiry Commission (FCIC), 50 Financial crisis of 2007–2008 causes of, xv, 34, 69 effects of, xx–xi future of finance, effect on, 243 mortgage debt, role of in, 69–70 new regulations since, 185, 187 Financial Times, quote from Chuck Prince in, 62 Fire insurance, early, 16–17 Fitch Ratings, 24 Flash Boys (Lewis), 57 Flash crash, 54–56, 63 Florida, hurricane damage in, 223, 225 Florida, new residents per day in, 225 Foenus nauticum, 8 Forward contracts, 38 Forward transactions, 15 France collapse of Mississippi scheme in, 36 eighteenth century life annuities in, 20–21 government spending in, 99 Freddie Mac, 48, 85 Fresno, California, social-impact bond pilot program in, 103–104 Friedman, Milton, 165 Friendsurance, 182–183 Fundamental sellers, 54–55 Funding Circle, 181–182, 189, 197 Futures, 29, 39–40 Galton Board, 17, 18 figure 1 Gaussian copula, 235 Geithner, Timothy, 64–65 Genentech, xii General Motors, bailout of, xi Geneva, Switzerland, annuity pools in, 21–22 Gennaioli, Nicola, 42, 44 Ginnie Mae, 168 Girouard, Dave, 166 Glaeser, Edward, 74 Globalization, finance and, 30, 225 Goldman Sachs, 61, 98, 156, 235 Google Trends, 218 Gorlin, Marc, 218 Government spending, rise in, 99–100 Governments, support for new financial products by, 168–169 Grameen Bank, 203 Greece, forerunners of banks in, 11 Greenspan, Alan, 236 Greenspan consensus, 236 Grillo, Baliano, 9 Gu, Paul, 162–164, 166, 172, 175–176 Guardian Maritime, 151 Haldane, Andy, 188 Halley, Edmund, 19–20 Hamilton, Alexander, 35–36 Hammurabi, Code of, 5, 8 Health conditions, SIB early detection programs for, 102–104 Health-impact bonds, 103–104 Hedge funds, 123, 158, 183 Hedging, 30–31, 54, 124, 129, 131, 156, 206, 227 Heiland, Frank, 73 Herding, 24, 159–160 Herengracht Canal properties, Amsterdam, real price level for, 74 Heuristics, 45–50 HFRX, 157–158 High-frequency trading (HFT) benefits of, 58 code, simplification of, 63 flash crash, 54–56 latency, attempts to lower, 53 pre-HFT era, 59–61 problems with, 56–58, 62–63 Hinrikus, Taavet, 190–191 HIV infection rates, SIB program for reduction of, 103 Holland, tulipmania in, 33, 36 Home equity, 139–140 Home-ownership rates, in United States, 85, 170 Homeless people, SIB program for, 96–97 Housing boom of mid-2000s, 148–149 Human capital contracts, 165, 167, 173–174, 176, 177 defined, 6 as illiquid asset, 177 Hurricane Andrew, effect of on insurers, 223–224, 225 Hurricane Hugo, 223 Hyperbolic discounting, 133–134, 211 IBM, 169 If You Don’t Let Us Dream, We Won’t Let You Sleep (drama), 111 IMF (International Monetary Fund), 125–126 Impact investing, 92 Implied volatility, 116 Impure altruism, 109–110 Income-share agreements, 167, 172–178 Independent variables, 201 Index funds, 40 India, CDS deals in, 37 India, social-impact bonds (SIBs) in, 103 Industrialization, effect of on finance, 3, 27–28 Inflation-protected Treasury bills, 131 Information asymmetry, 174 Innovator’s dilemma, 189 Instiglio, 103 Insurance, 8–10, 16–17, 142, 223–225 Insurance-linked securities, 222 Interbank markets, x Interest, origin of, 5 Interest-rate swaps, 29 International Maritime Bureau Piracy Reporting Centre, 151 International Monetary Fund (IMF), 125–126 International Swaps and Derivatives Association (ISDA), 40 Internet, role of in finance creditworthiness, determination of, 172–173, 202, 218 direct connection of suppliers and consumers, xviii, 32 equity crowdfunding, 152–155 income-share agreements, 172–173 ROSCAs, 210 small business loans, 216 speed and ease of borrowing, 189 student loans, 166–167 Intertemporal exchange, 6 Intuit, 218 Investment grade securities, 121 Ireland, banking crisis in, xiv–xv, 69 Isaac, Earl, 47 ISDA (International Swaps and Derivatives Association), 40 ISDA master agreement, 40 Israel, SIBs in, 97 Italy discrimination against female borrowers in, 208 financial liberalization and, 34 first securities markets in, 14 maritime trade partnerships in, 7–8 J. C. Flowers, 69, 81 Japan, banking crisis in, 75 Japan, financial innovation in, 27, 29, 39–40 Jha, Saumitra, 27 Jiménez-Martín, Sergi, 73 Job creation, young small firms and, 147–148 Joint-stock firms, 23 JPMorgan, 77, 169 Jump-to-default risk, 238 Käärmann, Kristo, 190 Kabbage, 218 Kahneman, Daniel, 47, 137 Kanjorski, Paul, 145 Kauffman Foundation, 158 Kennedy, John F., 32 Keys, Benjamin, 48 Kharroubi, Enisse, 79 Kickstarter, 172 King, Stephen, 99 Klein, David, 182 Krugman, Paul, xv Lahoud, Sal, 166 Lang, Luke, 153, 161–162 Laplanche, Renaud, 179, 184, 188, 190, 193–194, 196–197 Latency, 53 Law of large numbers, 17 Layering, 57 Left-digit bias, 46 Lehman Brothers, x, 44, 65 Lending direct, 84 marketplace, 184 payday, 200 relationship-based, 11, 151, 206–208 secured, xiv, 76 unsecured, 206 See also Loans; Peer-to-peer lending Lending Club, 172, 179–180, 182–184, 187, 189, 194–195, 197 Leonardo of Pisa (Fibonacci), 19 Lerner, Josh, 59 Lethal pandemic, risk-modeling for demographic profile, 230 exceedance-probability curve, 231–232, 232 figure 3 historical data, 228–229 infectiousness and virulence, 229–230 location of outbreak, 230–231 Leverage, 51, 70–71, 80, 186, 188 Leverage ratio, 76–77 Lewis, Michael, 57 Liber Abaci or Book of Calculation (Fibonacci), 19 LIBOR (London Interbank Offered Rate), 41 Liebman, Jeffrey, 98 Life expectancy government reaction to, 128–129 projections of, 124–127, 126 figure 2 ratio of young to older people, 127–128 Life-insurance policies, 142 Life-settlements industry, 142–143 Life table, 20 Limited liability, 212 Liquidity, 12–14, 39, 185–186 List, John, 109 The Little Book of Behavioral Investing (Montier), 156 Lo, Andrew, 113–115, 117–123 Loans low-documentation, 48–49 secured, 76 small business, 181, 216 student, 164, 166–167, 169–171, 182 syndicated, 41 Victory Loans, 28 See also Lending; Peer-to-Peer lending Logistic regression, 201 London, early fire insurance in, 16–17 London, Great Fire of, 16 London Interbank Offered Rate (LIBOR), 41 Long-Term Capital Management, 123 Longevity, betting on, 143–144 Loss aversion, 136 Lotteries, 212, 213 Low-documentation loans, 48–49 Lumni, 165, 168, 175 Lustgarten, Anders, 111 Lynn, Jeff, 160–161 Mack, John, 180 Mahwah, New Jersey, 52, 53 Marginal borrowers assessment of, 216–217 behavioral finance and, 208–214 industrialization of credit, 206 microfinance and, 203 savings schemes, 209–214 small businesses, 215–219 unsecured lending to, 206 Wonga, 203, 205, 208 Marginal borrowers (continued) ZestFinance, 199, 202, 205–206 Maritime piracy, solutions to, 151–152 Maritime trade, role of in history of finance, 3, 7–8, 14, 17, 23 Market makers, 15–16, 55 MarketInvoice, 195, 207, 217–218 Marketplace lending, 184 Markowitz, Harry, 118 Massachusetts, use of inflation-protected bonds in, 26 Massachusetts, use of social-impact bonds in, 98 Matching engine, 52 Maturity transformation, 12–13, 187–188, 193 McKinsey & Company, ix, 42 Mercator Advisory Group, 203 Merrill, Charles, 28 Merrill, Douglas, 199, 201 Merrill Lynch, 28 Merton, Robert, 31, 113–114, 123–124, 129–132, 142, 145 Mian, Atif, 204 Michigan, University of, financial survey by, 134–135 Microfinance, 203 Micropayment model, 217 Microwave technology, 53 The Million Adventure, 213–214 Minsky, Hyman, 42 Minsky moment, 42 Mississippi scheme, 36 Mitchell, Justin, 166–167 Momentum Ignition, 57 Monaco, modeling risk of earthquake in, 227 Money, history of, 4–5 Money illusion, 73–74 Money laundering, 192 Money-market funds, 43, 44 Monkeys, Yale University study of loss aversion with, 136 Montier, James, 156–157 Moody, John, 24 Moody’s, 24, 235 Moore’s law, 114 Morgan Stanley, 188 Mortgage-backed securities, 49, 233 Mortgage credit by ZIP code, study of, 204 Mortgage debt, role of in 2007–2008 crisis, 69–70 Mortgage products, unsound, 36–37 Mortgage securitization, 47 Multisystemic therapy, 96 Munnell, Alicia, 129 Naked credit-default swaps, 143 Nature Biotechnology, on drug-development megafunds, 118 “Neglected Risks, Financial Innovation and Financial Fragility” (Gennaioli, Shleifer, and Vishny), 42 Network effects, 181 New York, skyscraper craze in, 74–75 New York City, prisoner-rehabilitation program in, 108 New York Stock Exchange (NYSE), 31, 52, 53, 61, 64 New York Times, Merrill Lynch ad in, 28 Noncorrelated assets, 122 Nonprofits, growth of in United States, 105–106 Northern Rock, x NYMEX, 60 NYSE Euronext, 52 NYSE (New York Stock Exchange), 31, 52, 53, 61, 64 OECD (Organization for Economic Co-operation and Development), 128, 147 Oldfield, Sean, 67–68, 80–84 OnDeck, 216–218 One Service, 94–95, 105, 112 Operating expense ratio, 188–189 Options, 15, 124 Order-to-trade ratios, 63 Oregon, interest in income-share agreements, 172, 176 Organization for Economic Co-operation and Development (OECD), 128, 147 Overtrading, 24 Packard, Norman, 60 Pandit, Vikram, 184 Park, Sun Young, 233 Partnership mortgage, 81 Pasion, 11 Pave, 166–168, 173, 175, 182 Payday lending Consumer Financial Protection Bureau, survey on, 200 information on applicants, acquisition of, 202 underwriting of, 201 PayPal, 219 Peak child, 127 Peak risk, 228 Peer-to-peer lending advantages of, 187–189 auction system, 195 big investors in, 183 borrowers, assessment of, 197 in Britain, 181 commercial mortgages, 181 CommonBond, 182, 184, 197 consumer credit, 181 diversification, 196 explained, 180 Funding Circle, 181–182, 189, 197 investors in, 195 Lending Club, 179–180, 182–184, 187, 189, 194–195, 197 network effects, 181 ordinary savers and, 184 Prosper, 181, 187, 195 RateSetter, 181, 187, 196 Relendex, 181 risk management, 195–197 securitization, 183–184, 196 Peer-to-peer lending (continued) small business loans, 181 SoFi, 184 student loans, 182 Zopa, 181, 187, 188, 195 Pensions, cost of, 125–126 Perry, Rick, 142–143 Peterborough, England, social-impact bond pilot in, 90–92, 94–95, 104–105, 112 Petri, Tom, 172 Pharmaceuticals, decline of investment in, 114–115 Piracy Reporting Centre, International Maritime Bureau, 151 Polese, Kim, 210 Poor, Henry Varnum, 24 “Portfolio Selection” (Markowitz), 118 Prediction Company, 60–61 Preferred shares, 25 Prepaid cards, 203 Present value of cash flows, 19 Prime borrowers, 197 Prince, Chuck, 50–51, 62 Principal-agent problem, 8 Prisoner rehabilitation programs, 90–91, 94–95, 98, 108, 112 Private-equity firms, 69, 85, 91, 105, 107 Projection bias, 72–73 Property banking crises and, xiv, 69 banking mistakes involving, 75–80 behavioral biases and, 72–75 dangerous characteristics of, 70–72 fresh thinking, need for, xvii, 80 investors’ systematic errors in, 74–75 perception of as safe investment, 76, 80 Prosper, 181, 187, 195 Provisioning funds, 187 Put options, 9, 82 Quants, 19, 63, 113 QuickBooks, 218 Quote stuffing, 57 Raffray, André-François, 144 Railways, affect of on finance, 23–25 Randomized control trials (RCTs), 101 Raphoen, Christoffel, 15–16 Raphoen, Jan, 15–16 RateSetter, 181, 187, 196 RCTs (randomized control trials), 101 Ready for Zero, 210–211 Rectangularization, 125, 126 figure 2 Regulation NMS, 61 Reinhart, Carmen, 35 Reinsurance, 224 Relendex, 181 Rentes viagères, 20 Repurchase “repo” transactions, 15, 185 Research-backed obligations, 119 Reserve Primary Fund, 44 Retirement, funding for anchoring effect, 137–138 annuities, 139 auto-enrollment in pension schemes, 135 auto-escalation, 135–136 conventional funding, 127–128 decumulation, 138–139 government reaction to increased longevity, 128–129 home equity, 139–140 life expectancy, projections of, 124–127, 126 figure 2 life insurance policies, cash-surrender value of, 142 personal retirement savings, 128–129, 132–133 replacement rate, 125 reverse mortgage, 140–142 savings cues, experiment with, 137 SmartNest, 129–131 Reverse mortgages, 140–142 Risk-adjusted returns, 118 Risk appetite, 116 Risk assessment, 24, 45, 77–78, 208 Risk aversion, 116, 215 Risk-based capital, 77 Risk-based pricing model, 176 Risk management, 55, 117–118, 123, 195–197 Risk Management Solutions, 222 Risk sharing, 8, 82 Risk-transfer instrument, 226 Risk weights, 77–78 Rogoff, Kenneth, 35 “The Role of Government in Education” (Friedman), 165 Roman Empire business corporation in, 7 financial crisis in, 36 forerunners of banks in, 11 maritime insurance in, 8 Rotating Savings and Credit Associations (ROSCAs), 209–210 Roulette wheel, use of in experiment on anchoring, 138 Royal Bank of Scotland, 186 Rubio, Marco, 172 Russia, mortgage market in, 67 S-curve, in diffusion of innovations, 45 Salmon, Felix, 155 Samurai bonds, 27 Satsuma Rebellion (1877), 27 Sauter, George, 58 Save to Win, 214 Savings-and-loan crisis in US (1990s), 30 Savings cues, experiment with, 137 Scared Straight social program, 101 Scholes, Myron, 31, 123–124 Science, Technology, and Industry Scoreboard of OECD, 147 Securities and Exchange Commission (SEC), 54, 56, 57, 58, 64 Securities markets, 14 Securitization, xi, 20, 37–38, 117–122, 183–184, 196, 236 Seedrs, 160–161 Sellaband, 159 Shared equity, 80–84 Shared-equity mortgage, 84 Shepard, Chris, xii–xiii Shiller, Robert, xv–xvi, 242 Shleifer, Andrei, 42, 44 Short termism, 58 SIBs.

But anyone who seeks to defend the industry must also recognize how often, and how badly, it goes wrong. In This Time Is Different, their excellent survey of debt crises across the centuries, Carmen Reinhart and Kenneth Rogoff analyze episodes of banking crises. Such meltdowns are depressingly common in both developed and emerging economies: Britain, America, and France have experienced twelve, thirteen, and fifteen episodes of banking crisis, respectively, since 1800, for example.1 The first bailout in the United States happened way back in 1792, when a bubble and then a slump in the price of the country’s federal debt helped spark widespread panic. Alexander Hamilton, America’s first treasury secretary, was desperate to prevent severe damage to the country’s nascent financial system. He responded by, among other things, buying up government debt in order to prop up its price and protect the banks that owned it and by channeling cash to lenders that needed it.

 

pages: 248 words: 57,419

The New Depression: The Breakdown of the Paper Money Economy by Richard Duncan

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bank run, banking crisis, banks create money, Ben Bernanke: helicopter money, Bretton Woods, currency manipulation / currency intervention, debt deflation, deindustrialization, diversification, diversified portfolio, fiat currency, financial innovation, Flash crash, Fractional reserve banking, income inequality, inflation targeting, Joseph Schumpeter, laissez-faire capitalism, liquidity trap, market bubble, market fundamentalism, Mexican peso crisis / tequila crisis, money: store of value / unit of account / medium of exchange, mortgage debt, private sector deleveraging, quantitative easing, reserve currency, Ronald Reagan, savings glut, special drawing rights, The Great Moderation, too big to fail, trade liberalization

The resulting glut of Chinese goods would cause a collapse in their product prices, lead to a wave of business failures, and put an end to new investment. Corporate distress would result in a systemic banking crisis. Unemployment would soar. China’s economy would quickly collapse into severe depression. China’s imports would contract in line with its exports. The boost that Chinese demand had given to global commodity prices would end. The commodity-producing countries such as Brazil, Australia, Thailand, and Indonesia would be hard hit, as would be countries such as Germany, Japan, and Korea, which had supplied China with higher valued-added products. International finance could not survive the strain of contracting global trade, plunging commodity prices, falling corporate profits, and the bankruptcies those developments would cause. A systemic banking crisis would be the inevitable outcome. Here, then, would be a complete replay of the Great Depression: mass joblessness, extensive credit destruction, and a collapse in international trade.

Global Imbalances: Still Unresolved Vision and Leadership Are Still Lacking Notes Chapter 7: How It Plays Out The Business Cycle Debt: Public and Private 2011: The Starting Point 2012: Expect QE3 Impact on Asset Prices 2013–2014: Three Scenarios Impact on Asset Prices Conclusion Notes Chapter 8: Disaster Scenarios The Last Great Depression And This Time? Banking Crisis Protectionism Geopolitical Consequences Conclusion Note Chapter 9: The Policy Options Capitalism and the Laissez-Faire Method The State of Government Finances The Government’s Options American Solar Conclusion Notes Chapter 10: Fire and Ice, Inflation and Deflation Fire Ice Fisher’s Theory of Debt-Deflation Winners and Losers Ice Storm Fire Storm Wealth Preservation through Diversification Other Observations Concerning Asset Prices in the Age of Paper Money Protectionism and Inflation Consequences of Regulating Derivatives Conclusion Notes Conclusion About the Author Index Copyright © 2012 Richard Duncan.

The economy grew, but it grew in an unhealthy and unsustainable manner. Asset price bubbles formed and reshaped the structure of the economy. The NASDAQ bubble misallocated credit into the telecommunications and Internet sectors. When it popped, the Fed orchestrated the property bubble, which misallocated even more credit into housing. When the subprime loans could not be repaid, the losses produced a systemic banking crisis and forced the effective nationalization of Fannie Mae and Freddie Mac. Next, Bernanke cut interest rates to zero (see Exhibit 5.2), but that was not enough. It was no longer just a matter of ensuring that credit continued to expand. The credit market was imploding under the losses on defaulting and non-performing assets. Credit began to contract and the economy plunged into crisis. At that point the Fed had only one tool left, the printing press.

 

pages: 726 words: 172,988

The Bankers' New Clothes: What's Wrong With Banking and What to Do About It by Anat Admati, Martin Hellwig

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Andrei Shleifer, bank run, banking crisis, Basel III, Bernie Madoff, Big bang: deregulation of the City of London, Black Swan, bonus culture, Carmen Reinhart, central bank independence, centralized clearinghouse, collateralized debt obligation, corporate governance, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, diversified portfolio, en.wikipedia.org, Exxon Valdez, financial deregulation, financial innovation, financial intermediation, George Akerlof, Growth in a Time of Debt, income inequality, invisible hand, Jean Tirole, joint-stock company, joint-stock limited liability company, Kenneth Rogoff, London Interbank Offered Rate, Long Term Capital Management, margin call, Martin Wolf, moral hazard, mortgage debt, mortgage tax deduction, Nick Leeson, Northern Rock, open economy, peer-to-peer lending, regulatory arbitrage, risk tolerance, risk-adjusted returns, risk/return, Robert Shiller, Robert Shiller, shareholder value, technology bubble, The Market for Lemons, the payments system, too big to fail, Upton Sinclair

Ostensibly designed to force banks to invest safely, these rules have often been used to ensure that local borrowers, including the government, would get ample funding at good terms.25 The crises of the 1980s and 1990s, however, showed that investing at home is not the same as investing safely. For example, in Texas the S&L crisis of the late 1980s came sooner, beginning already in 1986, and was stronger than in most other states because Texan real estate and mortgage markets were uniquely affected by the oil price slump of 1985. In Sweden the banking crisis of 1992 was stronger than other countries’ banking crises in the early 1990s because, in trying to protect the exchange rate, the Swedish central bank pushed interest rates for overnight borrowing to a record 500 percent per year, after which there was a dramatic downturn in real estate markets.26 In the United States, such rules were also meant to prevent banks from becoming too large.27 By now, these rules have mostly been lifted.

Because deposits are a form of debt, borrowing is an essential part of banking. Does this mean that banks would provide fewer benefits to the economy if they relied less on borrowing and used more equity? The answer is “No.” Banks have always been fragile and prone to trouble. The very word bankruptcy, common to many languages, alludes to banks.2 The history of banking has been full of crashes and crises. The period between 1940 and 1970, when there was hardly a banking crisis and few bank failures, was a remarkable exception.3 The incidence of crashes and crises since 1970 is not much different from past experience of financial instability, for example, in the nineteenth century.4 Banking experts often start from the observation that, with their reliance on deposits, banks have always been susceptible to runs, and they conclude that fragility in banking is inevitable.

Promoting the competitive success of banks in global markets is not in the public interest if this success is due to banks’ taking excessive risks at the expense of the taxpayers. Many countries have paid dearly for the successes of their banks. Encouraging the banks to fund the government is also not in the public interest if such funding endangers the banks. Such funding may be convenient for politicians who want to hide the costs of their policies, but if a government defaults on its debt and this is accompanied by a banking crisis, the consequences can be disastrous for many people.39 The need for effective regulation is acute. The large scale of bankers’ gambles and the high degree of interconnectedness in the financial system make that system very fragile. If some large and highly connected bank or other financial institution fails, it can destabilize the entire financial system and inflict enormous damage on all of us.

 

pages: 225 words: 11,355

Financial Market Meltdown: Everything You Need to Know to Understand and Survive the Global Credit Crisis by Kevin Mellyn

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bank run, banking crisis, Bernie Madoff, Bernie Madoff, bonus culture, Bretton Woods, collateralized debt obligation, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, cuban missile crisis, disintermediation, diversification, fiat currency, financial deregulation, financial innovation, financial intermediation, Francis Fukuyama: the end of history, global reserve currency, Home mortgage interest deduction, joint-stock company, liquidity trap, London Interbank Offered Rate, margin call, market clearing, moral hazard, mortgage tax deduction, Northern Rock, offshore financial centre, paradox of thrift, pattern recognition, pension reform, pets.com, plutocrats, Plutocrats, Ponzi scheme, profit maximization, pushing on a string, reserve currency, risk tolerance, risk-adjusted returns, road to serfdom, Ronald Reagan, shareholder value, Silicon Valley, South Sea Bubble, statistical model, The Great Moderation, the payments system, too big to fail, value at risk, very high income, War on Poverty, Y2K, yield curve

You could see and touch these investments. Real history shows that real estate lending is in fact about as risky a thing as you can do with other people’s money. It has been the largest single cause of financial crises over the last forty years, from the U.S. banking crisis of 1974, triggered by collapsing real estate investment trusts, the collapse of the U.S. savings and loan industry in the 1980s, the collapse of the Japanese bubble economy in 1990, the Swedish and Finnish banking crises of the same period, and the Asian banking crisis of 1997. The only response to this inconvenient fact that the U.S. Congress seems capable of is to throw money at the collapsing U.S. housing market instead of simply letting the market clear at prices that attract buyers who can actually afford a house. To protect distressed homeowners, our political masters have felt quite free to violate centuries of contract law and property rights essential to a functioning market economy.

Thus far, this is a classic bubble, if a very big one, even for the world’s second largest economy. Japan’s world-beating companies were still selling their products to Europeans and Americans. Japan remained basically a rich country. The problem was there was no Dr. House at the MOF, at least not one to whom anyone would listen. Japan spent the years after the bubble burst in 1990 making a banking crisis into an economic catastrophe. At the time, American bankers, government officials, academics, and other experts told the Japanese they were doing all the wrong things and offered them alternatives. These mainly involved free market solutions for clearing the markets. Today, we appear hell bent on replicating Japan’s mistakes on a vastly larger scale. The obvious need in classic Bagehot terms is to restore confidence in the banking system.

If there was a general collapse of the banking system, something that has happened before in other countries like Mexico and Russia and partially happened here in 1930 to 1933, we the taxpayers would be on the hook for at least $4 trillion to give us back our own deposit money. This wouldn’t happen. Four trillion dollars is larger than the What Should Be Done? federal blow-out budget for 2009 and nearly a third of U.S. national income. The government simply doesn’t have and probably couldn’t get its hands on that kind of money should the current banking crisis go into free fall. The collapse of the payments system based on deposit money would mean no company could pay its bills or its meet payroll. Investors would be wiped out. All our paper wealth and savings would simply evaporate. We would revert to the cash, barter, and private bill of exchange economy that preceded all the real history in Chapter Four. We wouldn’t like it, though we might feel that we had gotten even with the greedy bankers.

 

pages: 700 words: 201,953

The Social Life of Money by Nigel Dodd

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accounting loophole / creative accounting, bank run, banking crisis, banks create money, Bernie Madoff, bitcoin, blockchain, borderless world, Bretton Woods, BRICs, capital controls, cashless society, central bank independence, collateralized debt obligation, computer age, conceptual framework, credit crunch, cross-subsidies, David Graeber, debt deflation, dematerialisation, disintermediation, eurozone crisis, fiat currency, financial innovation, Financial Instability Hypothesis, financial repression, floating exchange rates, Fractional reserve banking, German hyperinflation, Goldman Sachs: Vampire Squid, Hyman Minsky, illegal immigration, informal economy, interest rate swap, John Maynard Keynes: Economic Possibilities for our Grandchildren, joint-stock company, Joseph Schumpeter, laissez-faire capitalism, land reform, late capitalism, liquidity trap, litecoin, London Interbank Offered Rate, M-Pesa, Marshall McLuhan, means of production, microcredit, mobile money, money: store of value / unit of account / medium of exchange, mortgage debt, new economy, Nixon shock, Occupy movement, offshore financial centre, paradox of thrift, payday loans, Peace of Westphalia, peer-to-peer lending, Ponzi scheme, post scarcity, postnationalism / post nation state, predatory finance, price mechanism, price stability, quantitative easing, quantitative trading / quantitative finance, reserve currency, Richard Thaler, Robert Shiller, Robert Shiller, Satoshi Nakamoto, seigniorage, Skype, Slavoj Žižek, South Sea Bubble, special drawing rights, The Wealth of Nations by Adam Smith, too big to fail, trade liberalization, transaction costs, Wave and Pay, WikiLeaks, Wolfgang Streeck, yield curve, zero-coupon bond

Private borrowing is affected too: Krugman envisages a crisis emerging specifically because firms have a high proportion of their debt in foreign currency (Krugman 2002), and Robert Wade’s analysis of the Icelandic crisis suggests that large borrowings by households and firms in foreign currency were crucial (Wade 2009). It is simply less risky for a government to borrow in its own currency. In the aftermath of the 2007–8 banking crisis, many states ran into debt problems, not just because of the costs of bailout but also (and mainly) because of the recession that was triggered by the credit squeeze the banking crisis caused. States fund their debt through taxation (but revenues are in decline) and bonds (which have been downgraded in many cases), and central banks (especially in the United States and the United Kingdom) have been purchasing bonds to sustain the market. For countries borrowing in their own currency (irrespective of whether their creditors are domestic or foreign), there are two options for dealing with rising borrowing costs.

Faced with these realities, it is little wonder that a war has been declared on the banking system through political protests that have embraced as wide a spectrum of society as the original crisis itself. The political rhetoric is not simply about unequal wealth and income distribution. At a more fundamental level, and in a more precise way, it attacks the financial system that is responsible for perpetuating it. Of course, just calling this a banking crisis is too narrow a description. And to speak of banks as if they were all the same—to wit, part of an overarching Wall Street system—glosses over the complexity of financial institutions that do not operate in unison and are fragmented within themselves. Indeed, one could argue that divisions within banks, and their fragmented epistemic cultures, played a significant role in bringing the crisis about (MacKenzie 2011).

Since the early 1990s, however—and especially since the crisis—there has been a genuine surge of interest in the changing nature of money, partly because of the emergence of new forms such as local currencies and digital monies. Whereas the financial crisis appears to have fueled the enthusiasm of wider publics for new forms of money and credit, it has also underlined the argument that the role of states and banks in money’s social production may be undergoing a fundamental transformation. As the Cypriot banking crisis erupted during the early months of 2013, the value of Bitcoins (a currency that severs links with both the state and the banking system) rose sharply against both the euro and the U.S. dollar. There are many possible explanations for this, not least that we were simply witnessing a bubble. But the debates that have sprung up around the Bitcoin phenomenon are revealing because most of them are focused on the possibilities of developing a serious rival to state currency.

 

pages: 488 words: 144,145

Inflated: How Money and Debt Built the American Dream by R. Christopher Whalen

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Albert Einstein, bank run, banking crisis, Black Swan, Bretton Woods, British Empire, California gold rush, Carmen Reinhart, central bank independence, conceptual framework, corporate governance, cuban missile crisis, currency peg, debt deflation, fiat currency, financial deregulation, financial innovation, financial intermediation, floating exchange rates, Fractional reserve banking, full employment, global reserve currency, housing crisis, interchangeable parts, invention of radio, Kenneth Rogoff, laissez-faire capitalism, liquidity trap, means of production, money: store of value / unit of account / medium of exchange, moral hazard, mutually assured destruction, non-tariff barriers, oil shock, payday loans, plutocrats, Plutocrats, price stability, pushing on a string, quantitative easing, reserve currency, Ronald Reagan, special drawing rights, The Chicago School, The Great Moderation, too big to fail, trade liberalization, transcontinental railway, Upton Sinclair, women in the workforce

New York, which held out almost a month after the bank crisis began in Michigan, declared a bank holiday on the morning of Inauguration Day. Terrified citizens were lined up outside New York banks as the new president took his oath of office. Ten days after FDR’s inauguration, he ordered an extended bank holiday. Even as the stronger banks in the nation gradually were allowed to re-open, the banks in Detroit remained closed. Almost a million individuals and businesses in Michigan were cut off from their funds for over a month and the larger depositors of the banks—including Henry Ford—were compelled to wait for the liquidation of the insolvent banks. Jesse Jones, the legendary chairman of the Reconstruction Finance Corporation under FDR, laid the blame for exacerbating the Banking Crisis of 1933 at the feet of Ford and Couzens: Detroit’s banking collapse may have been inevitable, the situation in the sorely stricken automobile industry being what it was, and the laws being what there were at the time; but the circumstances would have been less painful, the personal tragedies fewer, had not insurmountable difficulties been created by personal, industrial, and political hostilities at almost every step of our approach to the problem in February 1933.56 Malcolm Bingay, editor of the Detroit Free Press, interviewed Couzens several times following the crisis of 1933.

The Democrats actually controlled Congress during Hoover’s presidency, so they cannot escape a fair share of responsibility for not foreseeing the catastrophe. FDR and the Democrats clearly worsened the banking crisis in 1932 by refusing to cooperate with the incumbent Hoover during the long transition period from November to March. The handoff of power between Hoover and FDR in March 1933 was painful, culminating with the oath of office as most of the nation’s banks stood closed. The transition in 1933 provided an especially fateful example of why the period of time from the election of a president to inauguration had to be shortened by the Twentieth Amendment to the Constitution that same year. Hoover believed that FDR deliberately chose not to cooperate openly with his government to contain the banking crisis in 1932 and thereby use the larger emergency as a pretext for imposing authoritarian controls over American business and labor.

So pressing was the emergency and so short the time that the Bureau printed dollars with old plates that bore the legend “Series of 1929” and used old signatures from the 12 Federal Reserve Banks. By Saturday, March 11th, planes filled with newly printed dollars began to leave Washington to deliver badly needed funds to banks around the country. While the emergency was far from over, the closure of the banks and the rapid distribution of new cash around the country enabled FDR to slow the deflationary aspect of the banking crisis and buy some time to formulate the next steps to be taken. FDR’s abandonment of the gold standard and confiscation of gold coins in 1933 was among the most memorable actions taken by FDR when it comes to money and debt. FDR’s decision to take the United States off the gold standard and devalue the dollar had a far more profound impact on the country and the world than many of the dozens of other programs that were put in place during the period.

 

pages: 394 words: 85,734

The Global Minotaur by Yanis Varoufakis, Paul Mason

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banking crisis, Berlin Wall, Big bang: deregulation of the City of London, Bretton Woods, capital controls, Carmen Reinhart, central bank independence, collateralized debt obligation, colonial rule, corporate governance, correlation coefficient, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, debt deflation, deindustrialization, eurozone crisis, financial innovation, first-past-the-post, full employment, Hyman Minsky, industrial robot, Joseph Schumpeter, Kenneth Rogoff, labour market flexibility, liquidity trap, London Interbank Offered Rate, Long Term Capital Management, market fundamentalism, Mexican peso crisis / tequila crisis, mortgage debt, new economy, Northern Rock, paper trading, planetary scale, post-oil, price stability, quantitative easing, reserve currency, rising living standards, Ronald Reagan, special economic zone, Steve Jobs, systematic trading, too big to fail, trickle-down economics, urban renewal, War on Poverty, Yom Kippur War

If I am right, and the euro crisis is a systemic failure that began as a banking crisis, then Europe’s medicine is worse than the disease. It is like sending a weak swimmer out to sea to save a drowning bather: all you can expect is the sad sight of the two weak swimmers hanging onto one another for dear life, both sinking fast to the bottom of the sea. The two swimmers are, of course, the eurozone’s deficit states and Europe’s banking system. Overburdened as the banks are with almost worthless paper debts issued by states like Greece and Ireland, they constitute black holes into which the ECB keeps pumping oceans of liquidity, which of course only yields a tiny trickle of extra loans to business. Meanwhile, the ECB, the surplus countries and the IMF steadfastly refuse to discuss the banking crisis, concentrating their energies solely on imposing massive austerity on the deficit states.

When customers suspect this, they try to withdraw their money, at which point the bank collapses, before being brought back to ‘life’ by the Bank of England at a cost in excess of £15 billion. Rocked by this development, Bernanke drops US interest rates by another small amount, to 4.75 per cent, while the Bank of England pumps £10 billion worth of liquidity into the City of London. October – The banking crisis extends to the most esteemed Swiss financial institution, UBS, and the world takes notice. UBS announces the resignation of its chairman and CEO, who takes the blame for a loss of $3.4 billion from CDOs containing US sub-prime mortgages. Meanwhile, in the United States, Citigroup at first reveals a loss of $3.1 billion (again on mortgage-backed CDOs) – a figure that rises by another $5.9 billion within a few days.

The second difference relates to the eurozone’s problematic architecture, and especially the way that, though its member states are bound by a common currency, their public debts are strictly separate, banks are the responsibility of member states alone, and there is no surplus recycling mechanism to prevent structural fault lines from developing. To put it simply, imagine what would have happened in 2008 if, in the ‘dollar-zone’, each state (e.g. California or Nevada) had to bail out the banks registered on its soil and there was no way of financing public deficits from Washington! Within this institutionally problematic framework, the ECB and the European Commission struggled to contain the banking crisis. Between 2008 and 2009, they ‘socialized’ the banks’ losses and turned them into public debt. Meanwhile, the economy of Europe went into recession, as expected. In one year (2008–09) Germany’s GDP fell by 5 per cent, France’s by 2.6 per cent, Holland’s by 4 per cent, Sweden’s by 5.2 per cent, Ireland’s by 7.1 per cent, Finland’s by 7.8 per cent, Denmark’s by 4.9 per cent and Spain’s by 3.5 per cent.

 

pages: 497 words: 150,205

European Spring: Why Our Economies and Politics Are in a Mess - and How to Put Them Right by Philippe Legrain

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3D printing, Airbnb, Asian financial crisis, bank run, banking crisis, barriers to entry, Basel III, battle of ideas, Berlin Wall, Big bang: deregulation of the City of London, Bretton Woods, BRICs, British Empire, business process, capital controls, Capital in the Twenty-First Century by Thomas Piketty, Carmen Reinhart, Celtic Tiger, central bank independence, cleantech, collaborative consumption, collective bargaining, corporate governance, credit crunch, Credit Default Swap, currency manipulation / currency intervention, currency peg, debt deflation, Diane Coyle, Downton Abbey, Edward Glaeser, Elon Musk, en.wikipedia.org, energy transition, eurozone crisis, fear of failure, financial deregulation, first-past-the-post, forward guidance, full employment, Gini coefficient, global supply chain, Growth in a Time of Debt, hiring and firing, hydraulic fracturing, Hyman Minsky, Hyperloop, immigration reform, income inequality, interest rate derivative, Irish property bubble, James Dyson, Jane Jacobs, job satisfaction, Joseph Schumpeter, Kenneth Rogoff, labour market flexibility, labour mobility, liquidity trap, margin call, Martin Wolf, mittelstand, moral hazard, mortgage debt, mortgage tax deduction, North Sea oil, Northern Rock, offshore financial centre, oil shale / tar sands, oil shock, open economy, price stability, private sector deleveraging, pushing on a string, quantitative easing, Richard Florida, rising living standards, risk-adjusted returns, Robert Gordon, savings glut, school vouchers, self-driving car, sharing economy, Silicon Valley, Silicon Valley startup, Skype, smart grid, smart meter, software patent, Steve Jobs, The Death and Life of Great American Cities, The Wealth of Nations by Adam Smith, too big to fail, total factor productivity, Tyler Cowen: Great Stagnation, working-age population, Zipcar

Code: namq_gdp_k Denmark has struggled with its own banking crisis. Iceland remains deeply scarred from its huge financial bubble, which I described at length in Aftershock. 388 One bank let a firm selling yachts grant loans on its behalf. The firm could even grant loans to new customers on weekends when it was impossible to control their creditworthiness. Unsurprisingly, both the firm and bank soon went out of business, the latter by merging with a large commercial bank that was rescued by the government in 1991. See Erling Steigum, "Financial Deregulation with a Fixed Exchange Rate: Lessons from Norway’s Boom-Bust Cycle and Banking Crisis", 2003. http://www.norges-bank.no/Upload/import/publikasjoner/skriftserie/33/chapter2.pdf 389 The banking crisis started in the late 1980s in Norway and in the early 1990s in Finland and Sweden. 390 They extended loans worth 20 per cent of Swedish GDP, pumping up local housing bubbles, with Swedbank and SEB in particular taking big risks. http://www.economonitor.com/analysts/2009/06/24/swedish-banks-could-they-get-burned-by-heavy-baltic-exposure/ 391 Personal calculations from Office for National Statistics, net financial liabilities of households and non-profit institutions serving households (code: AF.L) divided by four-quarter moving sum of their gross disposable income (code: RPHQ).

The lesson from Lehman was not that governments must save all banks, but rather that failed banks should be restructured or killed off in an orderly way rather than a chaotic one. In the absence of legal mechanisms for winding down banks in an orderly fashion, insolvent banks should either have been nationalised, restructured and recapitalised before being sold off again (as Norway did during its banking crisis in the early 1990s) or new “good banks” created and the old “bad banks” wound down, as I argued in Aftershock.68 Either option – nationalisation or the creation of new good banks – would have been infinitely preferable to the current mess. It would have boosted the economy, because the freshly capitalised good banks, unburdened by the old bad loans and securities, could have quickly resumed their proper function of lending to sound companies.

The component parts might muddle along in an imperfect currency union (as in Britain, where little is done to tackle the north-south divide) or there might be efforts to remedy its deficiencies (as there are in the eurozone, as we shall see). In short, the euro itself did not cause the financial excesses in the pre-crisis years, which occurred across the Western financial system. Indeed, in Act One of the crisis, after the bubble burst, it acted as a shock absorber. Nor has the euro prevented its member economies from adjusting. While it might fail, it is not destined to. Last but not least, the vicious interaction between a banking crisis and a bond-market panic that tore the eurozone apart between 2010 and 2012 was largely due to avoidable policy mistakes in Frankfurt, Brussels and Berlin, as we shall see. What really went wrong It was only in Act Two of the crisis after the bailout of Greece’s creditors in 2010 and even more so in Act Three after the summer of 2011 that the euro became an unstable system that amplified shocks rather than damping them.

 

pages: 523 words: 111,615

The Economics of Enough: How to Run the Economy as if the Future Matters by Diane Coyle

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accounting loophole / creative accounting, affirmative action, bank run, banking crisis, Berlin Wall, bonus culture, Branko Milanovic, BRICs, call centre, Cass Sunstein, central bank independence, conceptual framework, corporate governance, correlation does not imply causation, Credit Default Swap, deindustrialization, demographic transition, Diane Coyle, disintermediation, Edward Glaeser, Eugene Fama: efficient market hypothesis, experimental economics, Fall of the Berlin Wall, Financial Instability Hypothesis, Francis Fukuyama: the end of history, George Akerlof, Gini coefficient, global supply chain, Gordon Gekko, greed is good, happiness index / gross national happiness, Hyman Minsky, If something cannot go on forever, it will stop, illegal immigration, income inequality, income per capita, invisible hand, Jane Jacobs, Joseph Schumpeter, Kenneth Rogoff, knowledge economy, labour market flexibility, low skilled workers, market bubble, market design, market fundamentalism, megacity, Network effects, new economy, night-watchman state, Northern Rock, oil shock, principal–agent problem, profit motive, purchasing power parity, railway mania, rising living standards, Ronald Reagan, Silicon Valley, South Sea Bubble, Steven Pinker, The Design of Experiments, The Market for Lemons, The Spirit Level, transaction costs, transfer pricing, tulip mania, ultimatum game, University of East Anglia, web application, web of trust, winner-take-all economy, World Values Survey

THE ECONOMIC CHALLENGES Although, as I write, there are tentative (and perhaps temporary) signs that a recovery is under way, the banking system is still being propped up by massive government help schemes and partial state ownership. Indeed the financial crisis might have further to go, depending for instance on whether European governments such as Greece can repay their debts, or how high unemployment stays and for how long. To say the economy is in a mess is an understatement. Any recession is unwelcome because people lose their jobs, and this has been no ordinary recession. The banking crisis made it the deepest since the Great Depression. The recovery will be a long, slow haul, and there will be a legacy of spending cuts, tax increases, and a huge government debt burden in many countries. The debate about public spending is not whether it will have to be cut, but rather how much and how quickly. It is hard to see where jobs will come from for the next few years. Financial crises have happened frequently throughout the history of capitalism.

The institutions, the rules for governing how we organize the large and complicated societies of the modern world, lag behind people’s behavior as they go about their day-to-day activities—working, spending, investing, saving. The sense of crisis will come to a head due to some trigger—in the mid-1970s it was the OPEC oil price rise, in 2008 the near-collapse of the global financial system. The current structural fragility revealed by the banking crisis has deeper causes. These lie in a dramatic series of technological innovations since the late 1970s, the information and communication technology (ICT) revolution. The financial sector is the most dramatic example of the way ICTs have revolutionized ways of organizing business and relationships in the economy. Technical change has been redrawing long-standing relationships throughout the economy, destroying and creating jobs and businesses.

The assumption underlying this focus has always been that greater wealth is good for people and brings greater contentment, or at least enough contentment to help keep governments in power. But some people have started to challenge this presumption. In the richest countries the relevance of growth as the central aim of policy has increasingly come to be questioned. The consumerism of the boom era has generated something of a sense of revulsion; as the economic and financial dust settles after the banking crisis, a sort of existential introspection questioning the moral basis of the economic order has set in. Don’t Western consumers have enough? And even though growth is agreed to be vital still for poor countries, it is often thought to come at a high cost—for example, in terms of its effects on traditional culture or urban squalor. The challenge to the central importance of growth as a policy goal dates back some years but has been strongly reinforced by the recent financial and economic crisis.

 

pages: 363 words: 107,817

Modernising Money: Why Our Monetary System Is Broken and How It Can Be Fixed by Andrew Jackson (economist), Ben Dyson (economist)

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bank run, banking crisis, banks create money, Basel III, Bretton Woods, call centre, capital controls, cashless society, central bank independence, credit crunch, David Graeber, debt deflation, double entry bookkeeping, eurozone crisis, financial innovation, Financial Instability Hypothesis, financial intermediation, floating exchange rates, Fractional reserve banking, full employment, Hyman Minsky, inflation targeting, informal economy, land reform, London Interbank Offered Rate, market bubble, market clearing, Martin Wolf, means of production, money: store of value / unit of account / medium of exchange, moral hazard, mortgage debt, Northern Rock, price stability, profit motive, quantitative easing, Real Time Gross Settlement, regulatory arbitrage, risk-adjusted returns, seigniorage, shareholder value, short selling, South Sea Bubble, The Great Moderation, the payments system, The Wealth of Nations by Adam Smith, too big to fail, total factor productivity, unorthodox policies

While the increases in asset prices and the money supply may create the impression of a healthy, growing economy, this ‘boom’ is in fact fuelled by an increasing build-up of debt (since all increases in the money supply are a result of increases in borrowing). The current monetary system therefore sows the seeds of its own destruction – households and businesses cannot take on ever-increasing levels of debt, and when either start to default on loans, it can cause a chain reaction that leads to a banking crisis, a wider financial crisis, and an economy-wide recession. Financial crises therefore come about as a result of banks’ lending activities. As Adair Turner, head of the UK’s Financial Services Authority, puts it: “The financial crisis of 2007/08 occurred because we failed to constrain the private financial system’s creation of private credit and money.” (2012) The boom-bust cycle is also caused by banks’ credit creation activities.

In economic terms the permanent loss to the world economy has been estimated at a staggering $60 - $200 trillion, between one and three years of global production. For the UK the figures are between £1.8 and £7.4 trillion (Haldane, 2010). Yet while the 2007/08 crisis was undoubtedly a surprise to many, it would be wrong to think that banking crises are somehow rare events. In the UK there has been a banking crisis on average once every 15 years since 1945 (Reinhart and Rogoff, 2009), whilst worldwide there have been 147 banking crises between 1970 and 2011 (Laeven and Valencia, 2012). It seems clear that our banking system is fundamentally dysfunctional, yet for all the millions of words of analysis in the press and financial papers, very little has been written about the real reasons for why this is the case.

These results point to a serious problem with the current monetary system – the financial sector is perfectly capable of destroying itself and the rest of the economy with it on a periodic basis. Worryingly these crises tend to occur with some regularity – in the UK there has been 12 banking crises since 1800, with 4 of those coming since 1945 (Reinhart & Rogoff, 2009). Globally the situation is similar – Figure 4.4 shows the percentage of countries in a banking crisis between 1800 and 2007 (so excluding the most recent financial crisis) fig. 4.4 - Percentage of Countries affected by Banking Crises Source: Reinhart and Rogoff, 2008 Box 4.F - The house price bubble In the years preceding the most recent financial crisis, bank lending created a bubble in the property market in several countries. For example, Keen (2012) calculates that 78% of the change in American house prices over the past 25 years and 60% of the change in Australian house prices over the past 30 years can be explained by the acceleration in mortgage debt.

 

pages: 393 words: 115,263

Planet Ponzi by Mitch Feierstein

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Affordable Care Act / Obamacare, Albert Einstein, Asian financial crisis, bank run, banking crisis, barriers to entry, Bernie Madoff, Bernie Madoff, collateralized debt obligation, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, Daniel Kahneman / Amos Tversky, disintermediation, diversification, Donald Trump, energy security, eurozone crisis, financial innovation, financial intermediation, Flash crash, floating exchange rates, frictionless, frictionless market, high net worth, High speed trading, illegal immigration, income inequality, interest rate swap, invention of agriculture, Long Term Capital Management, moral hazard, mortgage debt, Northern Rock, obamacare, offshore financial centre, oil shock, pensions crisis, plutocrats, Plutocrats, Ponzi scheme, price anchoring, price stability, purchasing power parity, quantitative easing, risk tolerance, Robert Shiller, Robert Shiller, Ronald Reagan, too big to fail, trickle-down economics, value at risk, yield curve

(It managed to lose £10 billion in a single year.24) There may well, in other words, be a large European bank, or several large European banks, that are even now sliding toward the waterfall, utterly oblivious of what’s about to happen. And if one large bank goes over the edge, there are countless more in danger of following. When and if the banks start to collapse, the fiscal consequences for governments will be horrendous, no matter how prudent they seek to be. A European banking crisis will therefore also be a European sovereign debt crisis‌—‌which in turn will make the banking crisis even worse. * This survey won’t have cheered up too many readers. It’s also raised countless questions. What about Germany? What about the current European bailout fund, the EFSF? What about the euro‌—‌can the European currency even survive? Those are big questions. Too big and too important for this chapter. 17 The aureus and the as For five hundred years around the birth of Christ, Europe had a single currency.

The origins of that scheme go way back‌—‌at least three decades, if you think only of Wall Street, but arguably as much as sixty years if you think of the federal government. Naturally, I’m aware that my claim sounds implausible, but I hope it doesn’t strike readers as entirely implausible. After all, just a few years ago in 2008–9, part of the Ponzi scheme was laid bare for all to see in the shape of the subprime mortgage bust and the consequent banking crisis. That crisis was already the largest Ponzi scheme in history, so the track record is there. As for what’s happening today, this book will attempt a patient accounting of the scheme, its debts, its losses, its strategies of concealment. In particular, we’ll find ourselves, again and again, running across the following ingredients, key to any Ponzi scheme: exponentially increasing liabilities‌—‌or, in plain English, rapidly mounting debt; crappy, nonexistent, or inadequate assets; deceitful or nonexistent accounting; feeble, inert, or toothless regulators; a get-rich-quick culture, for preference salted with a whole array of inappropriate incentives; stupid, ignorant, lazy investors‌—‌the greedier, the better; and an astonishing capacity for self-delusion.

Build in the United States and face a huge healthcare bill? Or build elsewhere and let the government take care of those costs? For many companies, the answer will be obvious. And there’s part of the explanation for the US’s current high levels of joblessness and underemployment. That was the background in 2008 when President Obama swept into power with a mandate for change. He had the inbox from hell already‌—‌Iraq, Afghanistan, banking crisis, recession‌—‌but the pressing need for healthcare reform dumped another huge problem on to the To Do list. Right at the top of the reform agenda should have been the topic of cost. There was no other sane priority. In case you should doubt that, take a look at the projected costs of Medicare and Medicaid over the next seventy years in figure 3.5.28 The data are drawn from a 2011 study conducted by the nonpartisan Congressional Budget Office.

 

Rethinking Money: How New Currencies Turn Scarcity Into Prosperity by Bernard Lietaer, Jacqui Dunne

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3D printing, agricultural Revolution, Albert Einstein, Asian financial crisis, banking crisis, Berlin Wall, BRICs, business process, butterfly effect, carbon footprint, Carmen Reinhart, clockwork universe, complexity theory, conceptual framework, credit crunch, discounted cash flows, en.wikipedia.org, Fall of the Berlin Wall, fear of failure, fiat currency, financial innovation, Fractional reserve banking, full employment, German hyperinflation, happiness index / gross national happiness, job satisfaction, Marshall McLuhan, microcredit, mobile money, money: store of value / unit of account / medium of exchange, more computing power than Apollo, new economy, Occupy movement, price stability, reserve currency, Silicon Valley, the payments system, too big to fail, transaction costs, trickle-down economics, urban decay, War on Poverty, working poor

Nearly half are non-Hispanic white, 18 percent are black, and 26 percent are Latino. Perhaps the most surprising finding is that 28 percent work full-time, year round. These estimates defy the stereotypes of lowincome families.”5 The squeeze for cash has gotten more acute recently. Today, 80 percent of Americans report that they are living paycheck to paycheck. This is nearly double the figure in 2007, just before the banking crisis. One in five individuals earning over $100,000 per year report that they, too, are living from month to month.6 Savings are at an all-time low.7 Consequently, the need for credit is on an upswing while banks are not lending. The Failure of Money 13 The money system really isn’t serving humanity. The world’s population could hit 10 billion by 2050.8 Money is too scarce for many of Earth’s human inhabitants.

“Of those switchers, 610,000 U.S. adults (or 11 percent of the 5.6 million) cited Bank Transfer Day as their reason and actually moved their accounts from a large to a small institution.”2 Community Bankers of America said a poll of its 5,000 members found that nearly 60 percent of community banks are gaining customers who “are sick and tired” of the big financial institutions.3 95 96 PROSPERITY As described in Chapter 4, in functioning systems, nature leans more to resilience than efficiency. Ironically, whenever a banking crisis unfolds, governments invariably help the larger banks absorb the smaller ones, believing that the efficiency of the system is thereby increased. Instead, when a bank has proven to be “too big to fail,” why not consider the option of breaking it up into smaller units that compete with each other? This has been done in the United States before; for instance, the Bell Telephone monopoly was broken into competing “Baby Bells.”

According to Murphy’s research, uncleared checks totaled £5 billion when the banks opened again for business. “The direct use of means-of-payment money (bank deposits) was removed from the transaction process. In the absence of this money, exchange activity remained relatively unaffected because the public was prepared to use undated trade credit as the instrument of exchange.”7 Another variation of the mutual credit system was used to address a different banking crisis in another decade in another country. In this case, the banks threatened to suspend lines of credit, the lifelines of many businesses. The solution that arose is still in existence today. It is actually a major contributor to that country’s ongoing monetary stability and robustness. It is perhaps surprising to learn that the country where this happened is Switzerland, one of the world’s most economically conservative and stable countries.

 

pages: 708 words: 196,859

Lords of Finance: The Bankers Who Broke the World by Liaquat Ahamed

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Albert Einstein, anti-communist, bank run, banking crisis, Bretton Woods, British Empire, capital controls, central bank independence, credit crunch, currency manipulation / currency intervention, Etonian, full employment, German hyperinflation, index card, invisible hand, large denomination, Long Term Capital Management, margin call, market bubble, Mexican peso crisis / tequila crisis, mobile money, moral hazard, new economy, open economy, plutocrats, Plutocrats, price stability, purchasing power parity, pushing on a string, rolodex, the market place

He was in the process of dissolving his partnership and was required briefly in the City. That same afternoon it was reported that Austria had declared war on Serbia and was already bombarding Belgrade. Despite this news, Norman, “feeling far from well” under the strain of the painful negotiations, decided to return to the country. Neither he nor almost anyone else in Britain imagined that over the next few days the country would face the most severe banking crisis in its history; that the international financial system, which had brought so much prosperity to the world, would completely unravel; and that, within less than a week, most of Europe, Britain included, would have stumbled blindly into war. Norman, indeed most of his countrymen, had paid only cursory attention to the brewing European crisis over the previous month. The assassination in Sarajevo of the archduke Franz Ferdinand, heir presumptive to the Austrian Empire, and his wife Sophie by a comic-opera band of bomb-throwing Serbian nationalists on June 28 had seemed at the time to be just another violent chapter in the disturbed history of the Balkans.

Schacht fought back. He blamed Gilbert for having misled him. He even turned on his erstwhile patron Stresemann, whom he accused of having undercut him by caving in to the Allies behind his back even before the conference had started and of now making him the scapegoat for the political fallout at home. While Schacht, even at this stage, would have been willing to go for broke and risk a global banking crisis, his government was not. Fearing that Germany would once again become a pariah nation, the cabinet disavowed his position, forced him to recant, and insisted that he return to Paris and resume negotiations on the basis of the last Allied proposal. He reluctantly agreed, provided the cabinet gave him political cover by publicly accepting final responsibility for any settlement. Schacht had no intention of ending up as the fall guy for what nationalists were bound to see as a sellout.

“I am ready to provide all the reserve funds that may be needed,” he reassured the bankers. Over the next few days, as the Fed did just that, New York City banks took over $1 billion in brokers’ loan portfolios. It was an operation that did not receive the publicity of the Morgan consortium, but there is little doubt that by acting quickly and without hesitation, Harrison prevented not only an even worse stock collapse but most certainly forestalled a banking crisis. Though the crash of October 1929 was by one count the eleventh panic to grip the stock market since the Black Friday of 1869 and was by almost any measure the most severe, it was the first to occur without a major bank or business failure. The market traded up for the last couple of days of October. It then fell back again, revisiting the lows of Black Tuesday on November 13. By the last weeks of November, the Dow had settled at around 240—a 40 percent retreat over the eight weeks since late September.

 

pages: 484 words: 136,735

Capitalism 4.0: The Birth of a New Economy in the Aftermath of Crisis by Anatole Kaletsky

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bank run, banking crisis, Benoit Mandelbrot, Berlin Wall, Black Swan, bonus culture, Bretton Woods, BRICs, Carmen Reinhart, cognitive dissonance, correlation does not imply causation, credit crunch, currency manipulation / currency intervention, David Ricardo: comparative advantage, deglobalization, Deng Xiaoping, Edward Glaeser, Eugene Fama: efficient market hypothesis, eurozone crisis, experimental economics, failed state, Fall of the Berlin Wall, financial deregulation, financial innovation, Financial Instability Hypothesis, floating exchange rates, full employment, George Akerlof, global rebalancing, Hyman Minsky, income inequality, invisible hand, Joseph Schumpeter, Kenneth Rogoff, laissez-faire capitalism, Long Term Capital Management, mandelbrot fractal, market design, market fundamentalism, Martin Wolf, moral hazard, mortgage debt, new economy, Northern Rock, offshore financial centre, oil shock, paradox of thrift, peak oil, pets.com, Ponzi scheme, post-industrial society, price stability, profit maximization, profit motive, quantitative easing, Ralph Waldo Emerson, random walk, reserve currency, rising living standards, Robert Shiller, Robert Shiller, Ronald Reagan, shareholder value, short selling, South Sea Bubble, special drawing rights, statistical model, The Chicago School, The Great Moderation, The Wealth of Nations by Adam Smith, Thomas Kuhn: the structure of scientific revolutions, too big to fail, Washington Consensus

Yet, despite this textbook management by the government, Sweden suffered its worst recession in postwar history during this period. Thus, the first inference usually drawn from this experience is that deep recessions are inevitable after banking crises, even when these crises are vigorously managed. The second inference is that a banking crisis that is managed less skillfully than Sweden’s will surely produce a much worse recession, as it did in Japan. Luckily for the world, neither of these commonly accepted conclusions stands up to scrutiny. In the Swedish case, the recession actually began in 1990, almost two years before the banking crisis, and was caused by an extreme policy of high interest rates, which were raised at one point to above 100 percent in a desperate attempt to defend the Swedish kronor’s exchange rate against the deutsche mark. This misguided monetary policy caused the deep recession and then the collapse of the banking system, not the other way round.

Moreover, examining the causal connections the other way round, several extreme financial crises in recent history were not associated with broader economic downturns at all. The clearest such example is also one that refutes the conventional view that Japanese-style economic and financial paralysis must follow if zombie banks are kept on government life support and their losses hidden or disguised. By far the biggest banking crisis in postwar history prior to 2007-08 occurred from 1982 to 1989, when Mexico, Brazil, Argentina, the Philippines, and many other developing countries defaulted on bank loans worth several times more than the capital of the global banks. As a result, almost every major bank in the United States and Europe was technically insolvent throughout this five-year period. Citibank, J.P. Morgan, Bank of America, Deutsche, Lloyds, and many others suffered what would now be called mark-to-market losses worth between 100 percent and 300 percent of their total shareholders’ funds.13 Yet this horrendous crisis, even bigger in relation to the bank capital of the time than the losses from subprime lending in 2007-09, did not produce a recession.

Capitalism 4 will differ from Capitalism 3 by recognizing that these two desirable objectives are in conflict, but it cannot resolve this tension by sacrificing all financial innovation and creating a static financial system or by resorting to the overweening government intervention of Capitalism 2. Advanced capitalist countries, especially those with large and dynamic financial sectors such as the United States, Britain, and Switzerland, must resist populist demands to strangle nonbank financial institutions with punitive regulations inspired by the banking crisis. These countries have a clear comparative advantage in international finance. In a world of free trade, where prosperity generally progresses when nations specialize in their areas of comparative advantage, it is natural for Anglo-Saxon countries to have larger financial sectors and smaller manufacturing sectors than other countries. The Anglo-Saxon governments are therefore bound to oppose regulations that damage nonbank financial institutions.

 

When the Money Runs Out: The End of Western Affluence by Stephen D. King

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Albert Einstein, Asian financial crisis, banking crisis, Basel III, Berlin Wall, Bernie Madoff, Bernie Madoff, British Empire, capital controls, central bank independence, collateralized debt obligation, congestion charging, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, cross-subsidies, debt deflation, Deng Xiaoping, Diane Coyle, endowment effect, eurozone crisis, Fall of the Berlin Wall, financial innovation, financial repression, floating exchange rates, full employment, George Akerlof, German hyperinflation, Hyman Minsky, income inequality, income per capita, inflation targeting, invisible hand, John Maynard Keynes: Economic Possibilities for our Grandchildren, joint-stock company, liquidationism / Banker’s doctrine / the Treasury view, liquidity trap, London Interbank Offered Rate, loss aversion, market clearing, moral hazard, mortgage debt, new economy, New Urbanism, Nick Leeson, Northern Rock, Occupy movement, oil shale / tar sands, oil shock, price mechanism, price stability, quantitative easing, railway mania, reserve currency, rising living standards, South Sea Bubble, technology bubble, The Market for Lemons, The Spirit Level, The Wealth of Nations by Adam Smith, Thomas Malthus, too big to fail, trade route, trickle-down economics, Washington Consensus, women in the workforce, working-age population

Location decisions are unlikely immediately to change as a consequence of a sudden shift in the exchange rate, particularly now that corporate treasury departments use hedging strategies to insure against unanticipated movements in the currency markets. And there is another big difference. The US may have had a huge banking crisis in the 1930s but the UK did not. Monetary policy therefore could feed through to the broader economy relatively easily. That no longer applies: in the UK, thanks to an enormous banking crisis, the monetary drugs no longer appear to have the power of old. Despite these objections, there are plenty of people who argue that what the world needs now is a bigger dose of 1930s medicine, another New Deal, another period of economic stimulus to match the policies of the Depression era that reversed the earlier attachment to austerity and liquidation.

While the UK’s performance was even more miserable, the early 1980s collapse provided a precedent of sorts (although, on that occasion, the recession was followed by a strong recovery, which is more 33 4099.indd 33 29/03/13 2:23 PM When the Money Runs Out than can be said for the UK’s experience following the financial crisis). Even financially conservative countries succumbed to ongoing disappointment. Although Germany’s decline in 2008 and early 2009 was followed by a strong trade-­led recovery, the momentum didn’t last: by 2012, German exporters were being hit by a collapse in demand in southern Europe as a global banking crisis evolved into a eurozone sovereign crisis. Absent a decent recovery, the process of repaying debt – of deleveraging – has been made all the more difficult. Having thought they could grow their way out of their debt difficulties, Western policy-­makers have been forced to rethink their plans. Worse, persistently low levels of economic activity have made it much more difficult to deliver on the promises made before the onset of the financial crisis.

That, in turn, is likely to lead to even more caution within the private sector, leading to sustained economic weakness and, in time, making the fiscal arithmetic even worse. 218 4099.indd 218 29/03/13 2:23 PM Dystopia MISTRUST OF MONEY The conventional view is that inflation – let alone hyperinflation – is unlikely in a world of ongoing stagnation. The standard cyclical argument is simply that a country faced with deficient demand will have plenty of spare capacity and, hence, is unlikely to be able to generate conditions that might put upward pressure on prices. Even if the economy has entered into an extended period of stagnation, inflation will still be unlikely, particularly if the stagnation partly results from a banking crisis that chokes off the effect of the central bank’s printing press on the broader economy: Japan’s two lost decades provide the perfect example of such conditions. Yet, even in the most extreme recessionary circumstances, it is still possible to generate higher inflation. Roosevelt, after all, managed to do so between 1933 and 1936, fulfilling the pledge made in his May 1933 fireside chat, even though the US economy was, by then, but a shadow of its former self.

 

pages: 524 words: 143,993

The Shifts and the Shocks: What We've Learned--And Have Still to Learn--From the Financial Crisis by Martin Wolf

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air freight, anti-communist, Asian financial crisis, asset allocation, balance sheet recession, bank run, banking crisis, banks create money, Basel III, Ben Bernanke: helicopter money, Berlin Wall, Black Swan, bonus culture, Bretton Woods, call centre, capital asset pricing model, capital controls, Capital in the Twenty-First Century by Thomas Piketty, Carmen Reinhart, central bank independence, collateralized debt obligation, corporate governance, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, currency manipulation / currency intervention, currency peg, debt deflation, deglobalization, Deng Xiaoping, diversification, double entry bookkeeping, en.wikipedia.org, Erik Brynjolfsson, Eugene Fama: efficient market hypothesis, eurozone crisis, Fall of the Berlin Wall, fiat currency, financial deregulation, financial innovation, financial repression, floating exchange rates, forward guidance, Fractional reserve banking, full employment, global rebalancing, global reserve currency, Growth in a Time of Debt, Hyman Minsky, income inequality, inflation targeting, invisible hand, Joseph Schumpeter, Kenneth Rogoff, labour market flexibility, labour mobility, liquidationism / Banker’s doctrine / the Treasury view, liquidity trap, Long Term Capital Management, margin call, market bubble, market clearing, Martin Wolf, Mexican peso crisis / tequila crisis, moral hazard, mortgage debt, new economy, North Sea oil, Northern Rock, open economy, paradox of thrift, price stability, private sector deleveraging, purchasing power parity, pushing on a string, quantitative easing, Real Time Gross Settlement, regulatory arbitrage, reserve currency, risk-adjusted returns, risk/return, road to serfdom, Robert Gordon, Robert Shiller, Robert Shiller, Ronald Reagan, savings glut, Second Machine Age, secular stagnation, shareholder value, short selling, special drawing rights, The Chicago School, The Great Moderation, The Market for Lemons, the market place, the payments system, The Wealth of Nations by Adam Smith, too big to fail, Tyler Cowen: Great Stagnation, very high income, winner-take-all economy

Indeed, in one of the best-informed analyses of the crisis, Perry Mehrling of Columbia University argues that ‘it is not just the shadow banks but, more important, the larger capital-market based credit system that failed, and it is that failure that we must understand if we are to put the system back together again, and on more solid foundations this time. This financial crisis is not merely a subprime mortgage crisis or even a shadow-banking crisis; it is a crisis of the entire market-based credit system that we have constructed since 1970.’40 From the point of view of vulnerability to runs, a vital feature was that a new form of credit-backed money emerged. A working paper from the International Monetary Fund in 2012 summarized what happened: in recent decades, with the advent of securitization and electronic means of trading and settlement, it became possible to expand greatly the scope of assets that could be transformed directly, through their use as collateral, into liquid or money-like assets.

This would mean abandoning the idea that capital-market integration is always desirable or even, for some members, giving up the euro itself. Given the inability to create and sustain a Eurozone-wide financial system with a Eurozone-wide fiscal backstop, a logical alternative would be to segment the financial system and so permit national governments and/or national central banks to impose controls on capital flows. By accident more than design, the exchange controls adopted by Cyprus after its banking crisis would show the way. It is particularly important to curb cross-border funding of banks as part of country-oriented macroprudential regulation. Of course, this would be a violation of the explicit goals of the Eurozone. But attempting to achieve this has not worked too well. It might be more sensible to accept that even inside a currency union, finance should be domestically focused and managed.

Blinder, After the Music Stopped, pp. 229–31, and ‘Fed in $85bn AIG Rescue Deal’, Financial Times, 17 September 2008. 18. Paulson, On the Brink, p. 230. 19. Paul Davies and Michael Mackenzie, ‘Money Fund Sector Shocked as Reserve Breaks the Buck’, Financial Times, 18 September 2012. 20. On the administration in the UK, see http://www.pwc.co.uk/business-recovery/administrations/lehman/lehman-faq.jhtml. 21. House of Commons Treasury Committee, ‘Evidence on 24th June 2009’, Banking Crisis: Regulation and Supervision, 14th Report of Session 2008–09 (London: The Stationery Office, 31 July 2009), Ev32. 22. Ibid., p. 230. 23. Francesco Guerrera, Henny Sender, Michael Mackenzie, Krishna Guha, James Politi and Daniel Dombey, ‘Fears Emerge over $700bn Rescue’, Financial Times, 22 September 2008. 24. Henny Sender, Julie MacIntosh and Francesco Guerrera, ‘WaMu Taken Over by US Regulators’, Financial Times, 26 September 2012. 25.

 

pages: 514 words: 153,092

The Forgotten Man by Amity Shlaes

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anti-communist, bank run, banking crisis, collective bargaining, currency manipulation / currency intervention, invisible hand, Mahatma Gandhi, plutocrats, Plutocrats, short selling, Upton Sinclair, wage slave, Works Progress Administration

But Roosevelt was not so much thinking of religion as allowing that the religious impulse of charity should find expression in the political sphere. Hoover, meanwhile, was still trying to absorb what had happened to him. He paid a surprise visit to the Hoover Dam—“I never in my life saw a man look so worn out,” recalled an observer at Boulder City. Recognizing, better perhaps than any man, that something had to be done over the course of the winter to slow an alarming spread of the bank crisis, he made a point of showing himself to be a good soldier. He wrote memos. He telegraphed Roosevelt to ask for a meeting on the international debt problem—but also, really, in the hopes the two could be partners over the coming months. His moratorium was coming to an end and Britain and France were begging for reconsideration. Hoover, his Treasury Secretary, Ogden Mills, Roosevelt, and Ray Moley met at the White House, all so nervous that they smoked—Hoover had a fat cigar.

The effect of the death was to seal the conviction that the country could not go back to the 1920s, even if it wanted to. Willkie at this time had some news of his own. He became president of Commonwealth and Southern. He was also doubtless concerned about what was going on at home: farmers from Indiana, like those from six other states, were striking at the state capitals to win moratoria on their crushing debt and tax burdens. The uncertainty of the interregnum took its toll. When the banking crisis grew yet worse, Hoover tried contacting Roosevelt, even sending at one point a lengthy personal letter. Historians would later note that Hoover’s sense of urgency even showed up in the way he addressed the letter, misspelling Roosevelt’s name “Roosvelt.” Roosevelt was cruising the coast of Florida; Hoover expected to meet on his return. But Roosevelt was not interested in cooperation. We will never know all his motives, but it was clear that a crisis now could only strengthen his mandate for action come inauguration in March.

Now, in his first year in office, Roosevelt was showing them. He would present it all in what came to be known as the Hundred Days, that first frenzied period of legislative activity. Some of the projects were mere extensions of Hoover’s efforts, no matter what Hoover said. Roosevelt asked for war powers to handle the emergency, just as Hoover had suggested in a note during the interregnum. Hoover had called for a bank holiday to end the banking crisis; Roosevelt’s first act was to declare a bank holiday to sort out the banks and build confidence. Now Roosevelt’s team worked with Republicans to write the first emergency legislation to stop the bank runs. Hoover had had Ogden Mills; Roosevelt had another respectable man as treasury secretary, Will Woodin. Ray Moley would later write of that period, “Mills, Woodin, Ballantine, Awalt, and I had forgotten to be Republicans or Democrats.

 

pages: 223 words: 10,010

The Cost of Inequality: Why Economic Equality Is Essential for Recovery by Stewart Lansley

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banking crisis, Basel III, Big bang: deregulation of the City of London, borderless world, Branko Milanovic, Bretton Woods, British Empire, business process, call centre, capital controls, collective bargaining, corporate governance, correlation does not imply causation, credit crunch, Credit Default Swap, David Ricardo: comparative advantage, deindustrialization, Edward Glaeser, financial deregulation, financial innovation, Financial Instability Hypothesis, floating exchange rates, full employment, Goldman Sachs: Vampire Squid, high net worth, hiring and firing, Hyman Minsky, income inequality, James Dyson, Jeff Bezos, job automation, Joseph Schumpeter, Kenneth Rogoff, knowledge economy, laissez-faire capitalism, Long Term Capital Management, low skilled workers, manufacturing employment, market bubble, Martin Wolf, mittelstand, mobile money, new economy, Nick Leeson, North Sea oil, Northern Rock, offshore financial centre, oil shock, plutocrats, Plutocrats, Plutonomy: Buying Luxury, Explaining Global Imbalances, rising living standards, Robert Shiller, Robert Shiller, Ronald Reagan, savings glut, shareholder value, The Great Moderation, The Spirit Level, The Wealth of Nations by Adam Smith, Thomas Malthus, too big to fail, Tyler Cowen: Great Stagnation, Washington Consensus, Winter of Discontent, working-age population

Up to the First World War, the main financial institutions were much bigger players in the economies of the big industrial nations. In the United States the most powerful businessman of the time was the banker JP Morgan. He was not just one of the world’s richest men at the turn of the nineteenth century, he controlled assets equivalent to some two-thirds of the nation’s output, giving him a stranglehold over American business. The banking crisis of 1907 was solved not by the intervention of government, but by a handful of private bankers led by Morgan. In the UK, the nineteenth century was the golden age of financial imperialism. Although the banks funded, through credit, the building of the nation’s infrastructure— notably the canals and railways—the lion’s share of financial investment went into overseas markets and a mix of speculative activity.

, op. cit. p 12-13. 142 C Toulouse, ‘Thatcherism, Class Politics and Urban Development in London’, Critical Sociology, Volume 18, 1992, p 62. 143 D Kynaston, The City of London, Volume IV, Pimlico, 2001, chapter 22. 144 Z/Yen, The Global Financial Centre Index, City of London Corporation, March 2007. 145 http://www.ifsl.org.uk/media/2333/Eco_con_of_UK_fin_ser_2007.pdf. 146 Centre for Research on Socio-Cultural Change (CRESC), An Alternative report on UK Banking Reform, University of Manchester, 2009, p 41. 147 Robin Blackburn,’ Finance and the Fourth Dimension’, New Left Review, 39, May/June, 2006. 148 Boston Consulting Group, Investment Banking and Capital Markets, Annual Reports. 149 Glyn, Capitalism Unleashed, op. cit. p 52. Elsewhere, the rise of finance proceeded somewhat less smoothly. In the 1990s, the growth slowdown in Germany and the Japanese banking crisis both led to slumps in the valuation of finance companies in those countries. 150 Merrill Lynch and Capgemini, World Wealth Report, 2010, figure 8. 151 José Gabriel Palma, ‘The revenge of the market on the rentiers. Why neo-liberal reports of the end of history turned out to be premature’, Cambridge Journal of economics, vol 33, issue 4, 2009. 152 IMF, Global Financial Stability Report, April 2009, Appendix Tables 3 and 4. 153 CRESC, op. cit. p 42. 154 Anthony Sampson, The Midas Touch, Hodder & Stoughton, 1989, p 13. 155 Quoted in R Roberts and D Kynaston, City State, Profile, 2002, p 116. 156 Bank for International Settlements, Triennial Central Bank Survey, Foreign Exchange and Derivatives Market Activity, September, 2010. 157 Harvey, Neoliberalism, op. cit. p 161; P Dicken, Global Shift, Guilford Press, 2003, ch 13. 158 N Shaxson, Treasure Islands, Bodley Head, 2011, p 74. 159 Ibid. p 78. 160 The Observer, 24 December, 2006. 161 M Hollingsworth and S Lansley, Londongrad, Fourth Estate, 2009, ch 4. 162 Ibid. 163 Michael Freedman, ‘Welcome to Londongrad’, Forbes Global, 23 May 2005; R.

From the beginning of the 1980s, the number of banking failures in the US started rising sharply, a problem exacerbated by the impact of bank deregulation. 231 In 1989, the bursting of a serious property bubble in Japan, triggered by a series of bank liquidity crises, led to a decade-long period of deflation and a sustained collapse in Japanese shares prices. It had been preceded by a decade of rising profits (which rose to 40 per cent of output) and soaring assert prices.232 Between 1990 and 1992, Norway, Sweden and Finland all suffered a banking crisis sparked by a similar property boom, the deregulation of financial services, and excessive lending by the banks. The economies of Sweden and Finland shrank for three years in succession. Finland’s unemployment rate hit 20 per cent in 1994. Again, only decisive action by the national governments prevented a more prolonged fall-out. Five years later, the Asian currency crisis, driven by financial over-reach, caused mayhem across south-east Asia when currency speculators pulled billions out of Asian currency markets.

 

pages: 385 words: 111,807

A Pelican Introduction Economics: A User's Guide by Ha-Joon Chang

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Affordable Care Act / Obamacare, Albert Einstein, Asian financial crisis, bank run, banking crisis, banks create money, Berlin Wall, borderless world, Bretton Woods, British Empire, call centre, capital controls, central bank independence, collateralized debt obligation, colonial rule, corporate governance, Credit Default Swap, credit default swaps / collateralized debt obligations, David Ricardo: comparative advantage, deindustrialization, discovery of the americas, Eugene Fama: efficient market hypothesis, eurozone crisis, experimental economics, Fall of the Berlin Wall, financial deregulation, financial innovation, Francis Fukuyama: the end of history, full employment, George Akerlof, Gini coefficient, global value chain, Goldman Sachs: Vampire Squid, Gordon Gekko, greed is good, Haber-Bosch Process, happiness index / gross national happiness, high net worth, income inequality, income per capita, interchangeable parts, interest rate swap, inventory management, invisible hand, James Watt: steam engine, Johann Wolfgang von Goethe, John Maynard Keynes: Economic Possibilities for our Grandchildren, John Maynard Keynes: technological unemployment, joint-stock company, joint-stock limited liability company, Joseph Schumpeter, knowledge economy, laissez-faire capitalism, land reform, manufacturing employment, Mark Zuckerberg, market clearing, market fundamentalism, Martin Wolf, means of production, Mexican peso crisis / tequila crisis, Northern Rock, obamacare, offshore financial centre, oil shock, open borders, post-industrial society, precariat, principal–agent problem, profit maximization, profit motive, purchasing power parity, quantitative easing, road to serfdom, Robert Shiller, Robert Shiller, Ronald Reagan, savings glut, Scramble for Africa, shareholder value, Silicon Valley, spinning jenny, The Great Moderation, The Market for Lemons, The Spirit Level, The Wealth of Nations by Adam Smith, Thorstein Veblen, trade liberalization, transaction costs, transfer pricing, trickle-down economics, Washington Consensus, working-age population, World Values Survey

Outputs fluctuated much less than in the previous periods, not least thanks to Keynesian fiscal policy, which increased government spending during downturns and reduced it during booms.20 The rate of inflation, that is, the rate at which the general price level rises, was relatively low.21 And there was a very high degree of financial stability. During the Golden Age, virtually no country was in banking crisis. In contrast, since 1975, anything between 5 and 35 per cent of countries in any given year have been in banking crisis, except for a few years in the mid-2000s.22 So in every measure the Golden Age was a remarkable period. When Harold Macmillan, the British prime minister, said, ‘You’ve never had it so good,’ he wasn’t exaggerating. Exactly what lay behind this sterling economic performance, which was unprecedented and has since been unparalleled, is a matter of an ongoing dispute.

The Brazilian crisis followed in 1999 and the Argentinian one in 2002, both in large part the results of financial deregulation. These are only the prominent ones, but the world has seen so many more financial crises since the mid-1970s. According to a widely cited study,17 virtually no country was in banking crisis between the end of the Second World War and the mid-1970s, when the financial sector was heavily regulated. Between the mid-1970s and the late 1980s, the proportion of countries with banking crisis rose to 5–10 per cent, weighted by their share of world income. The proportion then shot up to around 20 per cent in the mid-1990s. The ratio then briefly fell to zero for a few years in the mid-2000s, but went up again to 35 per cent following the 2008 global financial crisis. The ‘unholy alliance’ between short-term-oriented shareholders and professional managers has reduced the ability of corporations to invest The rise of the ‘shareholder value maximization’ model in the era of new finance has dramatically reduced the resources available for long-term investments in non-financial corporations.

REAL-LIFE NUMBERS There has been a vast increase in the frequency of financial crises For most people, the 2008 global financial crisis is probably proof enough that the new financial system has failed to deliver on its promises for greater efficiency and stability. But it is important to note that the 2008 crisis was presaged by many earlier, smaller crises in the last three decades. The list, even counting only the major ones, is impressive. In 1982, Chile got into a major banking crisis, following the radical financial market liberalization in the mid-1970s under the Pinochet dictatorship. In the late 1980s, the Savings and Loan (S&L) companies in the US – also known as ‘thrifts’ – got into massive trouble, having been allowed by the government to move into more risky, but potentially higher-yielding, activities, such as commercial real estate and consumer loans. The US government had to close down nearly one-quarter of S&Ls and inject public money equivalent to 3 per cent of GDP to clean up the mess.

 

pages: 311 words: 99,699

Fool's Gold: How the Bold Dream of a Small Tribe at J.P. Morgan Was Corrupted by Wall Street Greed and Unleashed a Catastrophe by Gillian Tett

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accounting loophole / creative accounting, bank run, banking crisis, Black-Scholes formula, Bretton Woods, collateralized debt obligation, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, diversification, financial innovation, housing crisis, interest rate derivative, interest rate swap, locking in a profit, Long Term Capital Management, McMansion, mortgage debt, North Sea oil, Northern Rock, Renaissance Technologies, risk tolerance, Robert Shiller, Robert Shiller, short selling, statistical model, The Great Moderation, too big to fail, value at risk, yield curve

It was a powerful role, including the oversight of New York commercial banks, and Corrigan, a forceful, burly character with a gravelly voice, was not afraid to express his views bluntly. By 1991, he had already worked at the Fed for a couple of decades, serving as special assistant for a period to the legendary Paul Volcker, and he had seen the financial system suffer through several business cycles and bouts of panic. He had cut his teeth handling the Herstatt Bank crisis of 1974, when the failure of a small German group had rocked the Euromarket, and had confronted the Latin American debt crisis, the collapse of Continental Illinois National Bank, and the failure of Drexel Burnham Lambert. “I have seen it all before,” Corrigan was fond of growling. All that experience had left him uneasy about the tendency of bankers to sow havoc when left to their own devices.

And they were just so proud of what they had done.” [ FOUR ] THE CUFFS COME OFF BISTRO-style CDS trades quickly took off. In early 1998, the J.P. Morgan swaps team conducted a second $10 billion deal, “insuring” another huge chunk of the bank’s loans and bonds. That success led the team to start marketing the service to others. Japanese banks were among the first to bite. By 1998, Japan was in the throes of a full-blown banking crisis that had left the largest banks desperate to find a way to reduce their risk. In the summer, the team cut a series of billion-dollar deals with lending institutions including Fuji, IKB, Daiwa, and Sanwa. Soon after, Masters arranged a BISTRO structure for Pittsburgh-based bank PNC. Demchak already knew that group well, since PNC was his hometown bank, and he had helped to restructure some troubled interest-rate derivatives deals that PNC had made in the early 1990s.

Though he had spent less time studying the repo market, he could also see that if Bear was to default on its repo contracts, that would prompt investors to panic. “If Alan Schwartz [the Bear CEO] is worried, he had better call me,” Geithner told Bear’s lawyers. The next day Schwartz duly called Geithner. “So which institutions are you talking to?” Geithner asked. He badly hoped that Bear might be able to sell itself. A decade earlier, Geithner had worked in Tokyo, as financial attaché to the US Embassy, just as the Japanese banking crisis was getting under way. The Japanese had dealt with failing banks by persuading a stronger institution to step in, and Geithner hoped that such a shotgun marriage could save Bear. Schwartz told Geithner that there were two possible suitors, JPMorgan Chase and Barclays Capital. “Better go back and get talking again!” Geithner said. He then asked his staff to check independently whether the two banks really were serious contenders.

 

pages: 372 words: 109,536

The Panama Papers: Breaking the Story of How the Rich and Powerful Hide Their Money by Frederik Obermaier

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banking crisis, blood diamonds, credit crunch, Deng Xiaoping, Edward Snowden, high net worth, income inequality, liquidationism / Banker’s doctrine / the Treasury view, mortgage debt, offshore financial centre, optical character recognition, race to the bottom, We are the 99%, WikiLeaks

[ ] In Reykjavik we meet our colleague Jóhannes Kristjánsson, arguably Iceland’s best-known investigative journalist, with the most accolades to his name. He used to work in public radio in Iceland, and produced remarkable material on the causes of the banking crisis in his country. He has also conducted undercover research into drug abuse and exposed sex offenders. He is currently working as a freelance journalist, focusing entirely on the Prometheus project. His story is bound to capture the attention of the masses in this country, whose political landscape was shattered by the banking crisis of 2008. Prime Minister Sigmundur Gunnlaugsson, you will recall, cropped up early on in our investigations. If you remember, he and his wife, through the intermediary of the Luxembourg branch of Landsbanki, set up a company with Mossfon in the British Virgin Islands: Wintris Inc.

In his bestseller The Unwinding, US author George Packer describes, precisely and without getting worked up, how the financial elite have dominated the US economy, the absurd repercussions this has for the rest of the country and why citizens who weren’t previously especially politically engaged suddenly got involved in the Occupy Wall Street movement: because they felt betrayed by ‘them up there’. By men like Sanford I. Weill, the founder of what was once the biggest bank in the world, Citibank. The banker, with his aristocratic appearance, is considered to be one of the figures who was jointly responsible for the banking crisis of 2008 that was caused by irresponsible deals. Sanford I. Weill is a hate figure of the Occupy Wall Street movement and was, of course, a Mossack Fonseca client. He held a shell company called April Fool with the Panamanian law firm. He gave the same name to his sixty-metre yacht, because Sandy, as he’s known to his friends, met his wife Joan on 1 April 1954.3 That’s the world of the 1 per cent

Under the accepted rules of politics, as finance minister, no less, it will be hard for him to hold on to his position. This may also be the case for Ólöf Nordal, the serving interior minister, who according to Jóhannes had power of attorney for a company named Dooley Securities S.A.8 [ ] The Panama Papers will place the government under extreme pressure to explain itself. ‘The people of Iceland have gone through so much since the bank crisis that now they will have zero sympathy with an extremely rich prime minister and his extremely rich wife, who used an offshore company to secretly buy bank bonds,’ Jóhannes explains. He is in an absurd situation: he has the material that may force the prime minister of his country to step down, he has the story of the year ready and waiting, and has had since spring 2015 – yet he still has to wait, and keep on waiting, until we are all ready to publish in spring 2016.

 

pages: 322 words: 77,341

I.O.U.: Why Everyone Owes Everyone and No One Can Pay by John Lanchester

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bank run, banking crisis, Berlin Wall, Bernie Madoff, Big bang: deregulation of the City of London, Black-Scholes formula, Celtic Tiger, collateralized debt obligation, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, Daniel Kahneman / Amos Tversky, diversified portfolio, double entry bookkeeping, Exxon Valdez, Fall of the Berlin Wall, financial deregulation, financial innovation, George Akerlof, greed is good, hindsight bias, housing crisis, Hyman Minsky, interest rate swap, invisible hand, Jane Jacobs, John Maynard Keynes: Economic Possibilities for our Grandchildren, laissez-faire capitalism, liquidity trap, Long Term Capital Management, loss aversion, Martin Wolf, mortgage debt, mortgage tax deduction, mutually assured destruction, new economy, Nick Leeson, Northern Rock, Own Your Own Home, Ponzi scheme, quantitative easing, reserve currency, risk-adjusted returns, Robert Shiller, Robert Shiller, Ronald Reagan, shareholder value, South Sea Bubble, statistical model, The Great Moderation, the payments system, too big to fail, tulip mania, value at risk

A long march toward the free market began, and in 2001 the banks were privatized, a policy which was a triumphant success—until it turned into a total disaster. That’s how fast, and how completely, things can go wrong for a society if its banks go bad. This is because banks are central to the operation of a developed economy; in particular, they are central to the creation of credit, and credit is as important to the modern economy as oxygen is to human beings. When the banks go wrong, everything goes wrong: a bank crisis gives you that slamming-the-car-into-reverse feeling. This is how it’s supposed to work. A well-run bank is a machine for making money. The basic principle of banking is to pay a low rate of interest to the people who lend money and charge a higher rate to the people who borrow it. The bank borrows at 3 percent (say), and lends at 6 percent, and as long as it keeps the two amounts in line and makes sure that it lends money only to people who will be able to pay it back, it will reliably make money forever.

Nonetheless, I guarantee that at this very moment, somewhere in the world, somebody at one of the big banks is sitting with his head in his hands, looking at the company’s balance sheet and sweating over this very problem. This might especially be the case in Europe, where banks and governments have delayed the reckoning with bad assets and bank insolvency for as long as they can. If the global economic crisis can be reduced to one single phenomenon, it is this: the fact that nobody knows which banks are solvent. Because banks are crucial to the creation and operation of credit, a bank crisis leads directly to a credit crunch. It’s also why the huge amounts of money being pumped into the banking sector by governments are tending not to do the thing they were supposed to do, that is, restart lending to businesses and consumers. That’s because—and here we can have that very rare thing, a brief moment of sympathy for the banksters—the banks are being given two totally incompatible goals.

There is a sour joke among financial types, referring to the chronic pessimism and down-speak of economics, “the dismal science”: they say that “economists have predicted seven of the last three downturns.” Ho ho. But they sure didn’t predict this one. Just to repeat the basic point: a 20 percent drop in U.S. home prices, not on the face of it an extraordinarily unlikely thing, was enough to cause a global banking crisis that nearly destroyed the entire system, followed by a global recession verging on depression. So why didn’t more economists seem aware of that possibility? Has the profession really drifted that far away from the real world? The short answer is that with some stellar exceptions—Robert Shiller, Nouriel Roubini, Paul Krugman, and John Kay conspicuous among them—yes, it has. The profession’s preference for textbook-perfect academic models of phenomena led to it being AWOL during the biggest economic crisis since the 1930s.

 

pages: 183 words: 17,571

Broken Markets: A User's Guide to the Post-Finance Economy by Kevin Mellyn

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banking crisis, banks create money, Basel III, Bernie Madoff, Bernie Madoff, Big bang: deregulation of the City of London, bonus culture, Bretton Woods, BRICs, British Empire, call centre, Carmen Reinhart, central bank independence, cloud computing, collateralized debt obligation, corporate governance, credit crunch, currency manipulation / currency intervention, disintermediation, eurozone crisis, fiat currency, financial innovation, financial repression, floating exchange rates, Fractional reserve banking, global reserve currency, global supply chain, Home mortgage interest deduction, index fund, joint-stock company, Joseph Schumpeter, labour market flexibility, liquidity trap, London Interbank Offered Rate, lump of labour, market bubble, market clearing, Martin Wolf, means of production, mobile money, moral hazard, mortgage debt, mortgage tax deduction, Ponzi scheme, profit motive, quantitative easing, Real Time Gross Settlement, regulatory arbitrage, reserve currency, rising living standards, seigniorage, shareholder value, Silicon Valley, statistical model, Steve Jobs, The Great Moderation, the payments system, too big to fail, transaction costs, underbanked, Works Progress Administration, yield curve

Second, they became too large to manage effectively—something called “diseconomies of scale”—so bureaucracies and overheads multiplied, with bouts of reorganizations and head-count reductions as a periodic corrective. Innovation, customer service, and the ability to react to new competitors (except to buy them and kill them) all suffered from gigantism. Given where the industry had arrived by 2007, the remarkable thing is not that there was a banking crisis on the scale we experienced, but that one didn’t occur earlier. How Government Policy and Central Banks Shaped the Market Meltdown As mentioned at the beginning of this chapter, the dominant narrative has it that the greedy banks on Wall Street somehow caused the crisis in the financial markets by taking reckless risks in pursuit of outsized bonuses. There is much truth in that allegation. But the reality is actually worse: the top management of the largest banks by and large didn’t understand the risks on their balance sheets and trading desks.

The UK government, at vast expense, ended up owning its two largest domestic bank groups. It is easy with 20/20 hindsight to be critical of men and women scrambling to keep financial Armageddon at bay. What did emerge from all the skin-of-ourteeth crisis management, however, were three key facts. First, the too-big-to-fail institutions ended up even bigger and became almost impossible to manage. The Japanese banking crisis had resulted in something similar. Second, vast amounts of public money spent on the bank bailouts and driving interest rates to record lows left the authorities with little ammunition in case the crisis took a turn for the worse—indeed, countries such as Ireland were driven to the brink by guarantees of banking system deposits. Third, the publics of all the countries affected were alienated and angered by the entire process, greatly limiting the options the national government would have available if the crisis entered a new phase.

Nobody can be certain of the costs for any country of leaving the euro—or, if a major country defaults, the costs staying in. The Maastricht Treaty—the treaty that launched the European Union—left no line of retreat; joining the euro was specifically intended to be an irreversible decision with no escape hatches allowed. That said, major banks and corporations around the world are beginning to think the unthinkable and plan for the collapse of the euro under different scenarios. Why a European Banking Crisis Threatens America The 1990s saw the substantial concentration of deposits in the largest institutions within the US banking system, and the 2008 panic triggered shotgun weddings that put a capstone on the progress. Today, the majority of the US banking and payments system operates within and between seven or eight banks.These same banks provide much of the short-term funding and liquidity needed by an even more concentrated investment-banking industry, as well as the clearing and settlement of trades on the stock exchanges.

 

pages: 246 words: 74,341

Financial Fiasco: How America's Infatuation With Homeownership and Easy Money Created the Economic Crisis by Johan Norberg

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accounting loophole / creative accounting, bank run, banking crisis, Bernie Madoff, Black Swan, capital controls, central bank independence, collateralized debt obligation, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, David Brooks, diversification, financial deregulation, financial innovation, helicopter parent, Home mortgage interest deduction, housing crisis, Howard Zinn, Hyman Minsky, Joseph Schumpeter, Long Term Capital Management, market bubble, Martin Wolf, Mexican peso crisis / tequila crisis, millennium bug, moral hazard, mortgage tax deduction, Naomi Klein, new economy, Northern Rock, Own Your Own Home, price stability, Ronald Reagan, savings glut, short selling, Silicon Valley, South Sea Bubble, The Wealth of Nations by Adam Smith, too big to fail

Bartiromo, "Bill Clinton on the Banking Crisis." 27. Gillespie and Welch, "`I Think the SEC Was Distracted."' 28. Kelly, "Where in the World Is Bear's Jimmy Cayne?" 29. CNBC's Jim Cramer, who had warned of "Armageddon" as far back as August 2007, gave less impressive advice this time. On the March 11, 2008, edition of Mad Money he shouted, "No! No! No! Bear Stearns is fine! ... Don't move your money from Bear! That's just being silly! Don't be silly!" 30. Davis, "Lehman Sought Millions for Execs." 31. Onaran and Helyar, "Fuld Sought Buffett Offer." 32. Dan Duyn, Brewster, and Tett, "The Lehman Legacy"; Onaran Helyar; Ohlsson, "Bushs nej blev starten pa den globala finanskrisen." 33. Poor, "Knock Out." 34. Gullapalli and Anand, "Bailout of Money Funds." 35. Bartiromo, "Bill Clinton on the Banking Crisis." 36.

It also made concerned British savers start to withdraw their money from Landsbanki, which had established itself successfully in the United Kingdom under the name of Icesave. Iceland's government and central bank did all they could to get hold of liquidity and even asked the central banks of other countries where the banks had operations for loans, but to no avail. The Icelanders had nowhere left to go. On October 6, Prime Minister Geir Haarde asked for broad powers to handle the banking crisis, concluding his speech with the words Gud blessi island-"God help Iceland." The next day, the government used its new powers to nationalize Landsbanki. It promised that it would guarantee the money of Icelandic savers while foreign savers would be given compensation, if possible, up to 20,000 euros ($27,000), in line with European guarantee agreements. But it also hinted that there probably was not enough money even for that, at least not right away.

"Tax Break May Have Helped Cause Housing Bubble." New York Times, December 19, 2008. Barr, Alistair. "Moody's Downgrades 691 Mortgage-Backed Securities." Market- Watch.com, August 16, 2007. Barrett, Wayne. "Andrew Cuomo and Fannie and Freddie: How the Youngest Housing and Development Secretary in History Gave Birth to the Mortgage Crisis." Village Voice, August 5, 2008. Bartiromo, Maria. "Bill Clinton on the Banking Crisis, McCain, and Hillary." Business Week, September 24, 2008. Bartlett, Bruce. Impostor: How George W. Bush Bankrupted America and Betrayed the Reagan Legacy. New York: Doubleday, 2006. BBC News online. "Icesave Savers Warned on Accounts," October 7, 2008. Becker, Jo, Sheryl Gay Stolberg, and Stephen Labaton. "White House Philosophy Stoked Mortgage Bonfire." New York Times, December 21, 2008.

 

pages: 353 words: 81,436

Buying Time: The Delayed Crisis of Democratic Capitalism by Wolfgang Streeck

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banking crisis, Bretton Woods, capital controls, Carmen Reinhart, central bank independence, collective bargaining, corporate governance, David Graeber, deindustrialization, Deng Xiaoping, Eugene Fama: efficient market hypothesis, financial deregulation, financial repression, full employment, Gini coefficient, Growth in a Time of Debt, income inequality, Joseph Schumpeter, Kenneth Rogoff, knowledge economy, labour market flexibility, labour mobility, late capitalism, means of production, moral hazard, Occupy movement, open borders, open economy, Plutonomy: Buying Luxury, Explaining Global Imbalances, profit maximization, risk tolerance, shareholder value, too big to fail, union organizing, winner-take-all economy, Wolfgang Streeck

A NEW TYPE OF CRISIS Capitalism in the rich democratic countries has for several years now been in the throes of a threefold crisis, with no end in sight: a banking crisis, a crisis of public finances, and a crisis of the ‘real economy’. No one foresaw this unprecedented coincidence – not in the 1970s, but also not in the 1990s. In Germany, because of special conditions13 that had arisen more or less by chance and seem rather exotic to the outside world, the crisis hardly registered with people for years, and there was a tendency to warn against ‘hysteria’. In most of the other rich democracies, however, including the United States, the crisis cut deep into the lives of whole generations and by 2012 was in the process of turning the conditions of social existence upside down. 1) The banking crisis stems from the fact that, in the financialized capitalism of the Western world, too many banks had extended too much credit, both public and private, and that an unexpectedly large part of this suddenly turned bad.

Here too, though – and this is the core of the problem – no more than guesses are possible. 2) The fiscal crisis is the result of budget deficits and rising levels of government debt, which go back to the 1970s (Fig 1.1),15 as well as the borrowing required since 2008 to save both the finance industry (through the recapitalization of financial institutions and the acquisition of worthless debt securities) and the real economy (through fiscal stimuli). The increased risk of government insolvency in a number of countries is reflected in the higher costs of old and new debt. To regain the ‘confidence’ of ‘the markets’, governments impose harsh austerity measures on themselves and their citizens, with mutual supervision within the European Union, going as far as a general ban on new borrowing. That does not help to alleviate the banking crisis, or a fortiori the recession in the real economy. It is even debatable whether austerity reduces the debt burden, since it not only fails to promote growth but probably has a negative impact on it. And growth is at least as important as balanced budgets in lowering the national debt. FIGURE 1.1 Public debt as percentage of national product: OECD average Countries in unweighted average: Austria, Belgium, Canada, France, Germany, Italy, Netherlands, Norway, Sweden, UK, USA Public debt as percentage of national product: seven countries Source: OECD Economic Outlook: Statistics and Projections 3) Finally, the crisis of the real economy manifest in high unemployment and stagnation (Fig. 1.2)16 partly stems from the fact that firms and consumers have difficulty in obtaining bank loans – because many of them are already deep in debt and the banks are risk-averse and short of capital – while governments have to curb their expenditure or, if it can no longer be avoided, raise taxes.

After 2008 it was therefore able to continue exporting goods such as luxury cars and machinery that no one else could offer at the same quality level, profiting from the high growth-rates in China and the ever more unequal distribution of income in the crisis-torn United States. Moreover, the currency was fixed across the eurozone, with an exchange-rate lower than that of a purely German currency would have been. The European financial and fiscal crisis then put even greater pressure on the euro exchange rate. 14 In the nature of things, there can be no exact statistical data on the scale of a bank crisis. Even the bank that issued certain loans cannot be sure which of them are bad, and if it does know it must try to keep it secret (unless it has the option of shifting worthless securities into a state-supported ‘bad bank’). The same applies to the mutual exposure of national banking systems, about which governments and international organizations can only speculate. The published results of ‘stress tests’ conducted by national or international authorities are inherently unreliable, because the announcement of problems inevitably makes it more likely that they will develop into crises.

 

pages: 823 words: 206,070

The Making of Global Capitalism by Leo Panitch, Sam Gindin

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accounting loophole / creative accounting, airline deregulation, anti-communist, Asian financial crisis, bank run, banking crisis, barriers to entry, Basel III, Big bang: deregulation of the City of London, Branko Milanovic, Bretton Woods, BRICs, British Empire, call centre, capital controls, Capital in the Twenty-First Century by Thomas Piketty, Carmen Reinhart, central bank independence, collective bargaining, continuous integration, corporate governance, Credit Default Swap, currency manipulation / currency intervention, currency peg, dark matter, Deng Xiaoping, disintermediation, eurozone crisis, facts on the ground, financial deregulation, financial innovation, Financial Instability Hypothesis, financial intermediation, floating exchange rates, full employment, Gini coefficient, global value chain, guest worker program, Hyman Minsky, imperial preference, income inequality, inflation targeting, interchangeable parts, interest rate swap, Kenneth Rogoff, land reform, late capitalism, liquidity trap, London Interbank Offered Rate, Long Term Capital Management, manufacturing employment, market bubble, market fundamentalism, Martin Wolf, means of production, money: store of value / unit of account / medium of exchange, Monroe Doctrine, moral hazard, mortgage debt, mortgage tax deduction, new economy, non-tariff barriers, Northern Rock, oil shock, precariat, price stability, quantitative easing, Ralph Nader, RAND corporation, regulatory arbitrage, reserve currency, risk tolerance, Ronald Reagan, seigniorage, shareholder value, short selling, Silicon Valley, special drawing rights, special economic zone, The Chicago School, The Great Moderation, the payments system, The Wealth of Nations by Adam Smith, too big to fail, trade liberalization, transcontinental railway, trickle-down economics, union organizing, very high income, Washington Consensus, Works Progress Administration, zero-coupon bond

Much of the Fed’s intervention involved purchasing foreign currencies on Franklin’s behalf, assuring foreign creditors they would be paid—and even extending its lender-of-last-resort function to Franklin’s London office, on the grounds that “the failure of Franklin to perform on such a volume of international commitments would lead to a crisis of confidence in foreign exchange markets and possibly to an international banking crisis.”85 The grounds for such fears were real enough. The UK’s 1973 “secondary banking” crisis, which was also due to the collapse of a real-estate bubble, “threatened some of the biggest financial institutions with the real risk of collapse.”86 Moreover, a broad range of European banks were revealing major losses amid the volatility in short-term capital flows that were initially triggered by both floating currencies and the recycling of petrodollars.

Chapter 7. 11 As Ryner explained: “The rise of a grey capital market in the wake of sustained inflation, and currency swaps by Swedish multinationals, made it impossible to maintain regulations.” J. Magnus Ryner, Capitalist Restructuring, Globalization and the Third Way: Lessons from the Swedish Model, New York: Routledge, 2002, p. 161. See also Peter Englund, “The Swedish Banking Crisis: Roots and Consequences,” Oxford Review of Economic Policy, 15: 3 (1999), pp. 80–97. This is not to say the Swedish state suddenly became “weak”; in fact, its quick response to Sweden’s massive banking crisis of the early 1990s—including socializing the banks’ bad debts, and then developing a new pension system to provide them with a steady flow of workers’ savings—showed how a “strong state” was able to harness both social benefits and strong unions to the liberalization project in the course of coping with its inherent economic instabilities. 12 Singer, Is Socialism Doomed?

One of his first moves was the suspension of the dollar’s convertibility into gold—thereby breaking with the Federal Reserve’s stubborn clinging to the gold standard under Hoover. So frightened were the bankers themselves by the domestic situation at the time of Roosevelt’s inauguration that they made no objection to the sweeping emergency authority he immediately secured from Congress to deal with the banking crisis, granting the Treasury extensive powers, including the power to buy up all private gold bullion and certificates as well as to provide liquidity to the banks. As Charles and Mary Beard noted, “With an alacrity suggesting spontaneous combustion, excited Representatives and Senators rushed the draft through the two houses and placed it on the President’s desk before the end of the day. Neither Lincoln in 1861 nor Wilson in 1917 had been granted such drastic powers with so little haggling and bickering.”

 

pages: 74 words: 19,580

The 99.998271% by Simon Wood

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banking crisis, clean water, equal pay for equal work, Julian Assange, Occupy movement, offshore financial centre, Steve Jobs

If a true Democrat, someone who is not a Wall Street pawn, someone who is popular and has no skeletons in the closet, were to challenge Obama for the Democratic nomination, and if that person ran on a platform (with cast-iron promises) of ending the wars, cutting military spending, taking money out of politics, closing down the NSA database, ending the drone program, bringing the CIA and the Pentagon under control, restoring all guarantees of human rights (including the abolition of indefinite detention), social justice, transparency of government, reversing deregulation of the financial industries, retroactive justice for everyone responsible for bringing about the Iraq War and the 2008 banking crisis, electoral reform, and all the other things peace-loving people actually want, Obama and any Republican candidate would have a serious problem on their hands. In the next election, as the current Republican candidates are one and all almost unelectable, even such a true 42 Democrat could win. This could never happen, because both parties are controlled by their financial benefactors, but it would be an interesting experiment, as the media and all other instruments of the corporate elites which ensure the status quo is maintained would be forced to fire at such a person with all guns blazing, just as they are doing with the Occupy movement.

Cost The deep reach of the internet into almost every home in developed countries around the world has removed the problem of cost, always the main obstacle to direct democracy in the past. Past Attempts It is true that past experiments with direct democracy have failed, but there could be many reasons for this. The Direct Democracy Party of New Zealand existed from 2005 to 2009, partly as a reaction to the banking crisis and mounting national debt. Thirty-two party members stood as candidates in the 2005 elections but only pulled in 782 votes, 0.03% of the electorate. This failure could be due to a lack of public recognition of (and media 57 disinterest in) the candidates and the party itself, as well as distrust of such a new and radical political entity. At that time, three years before the 2008 financial crisis, fears for the national and global economy among the population were not as widespread as they are now.

 

pages: 566 words: 155,428

After the Music Stopped: The Financial Crisis, the Response, and the Work Ahead by Alan S. Blinder

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Affordable Care Act / Obamacare, bank run, banking crisis, banks create money, Carmen Reinhart, central bank independence, collateralized debt obligation, conceptual framework, corporate governance, Credit Default Swap, credit default swaps / collateralized debt obligations, Detroit bankruptcy, diversification, double entry bookkeeping, eurozone crisis, facts on the ground, financial innovation, friendly fire, full employment, hiring and firing, housing crisis, Hyman Minsky, illegal immigration, inflation targeting, interest rate swap, Kenneth Rogoff, liquidity trap, London Interbank Offered Rate, Long Term Capital Management, market bubble, market clearing, market fundamentalism, McMansion, moral hazard, naked short selling, new economy, Nick Leeson, Northern Rock, Occupy movement, offshore financial centre, price mechanism, quantitative easing, Ralph Waldo Emerson, Robert Shiller, Robert Shiller, Ronald Reagan, shareholder value, short selling, South Sea Bubble, statistical model, the payments system, too big to fail, working-age population, yield curve

Here Bernanke and Paulson disagreed, perhaps reflecting the differing mind-sets of a nonpolitical former economics professor and a Wall Street deal maker thrust into a political world. Their disagreement turned out to be incredibly ironic. The intellectual Federal Reserve chairman favored injecting capital directly into banks. An expert on economic history, Bernanke knew that publicly provided capital almost inevitably follows in the wake of a banking crisis. Besides, providing banks with new capital should leverage the government’s money. At least in theory, each $1 of additional bank capital should support $10 or so of renewed lending. (We’ll come back to that fallacious reasoning shortly.) Many financial market experts such as the famed investor George Soros and noted economists Paul Krugman and Joseph Stiglitz also urged that alternative. But the less cerebral, more action-oriented Treasury secretary overruled Bernanke on both political and market grounds.

By guaranteeing essentially all bank liabilities in September 2008, and subsequently assuming those debts as its own, the Irish government added about 40 points to its debt-to-GDP ratio. In theory, the Irish government was a highly creditworthy borrower that could obtain credit on favorable terms and shoulder the debt burden while Irish banks recovered. In practice, Ireland’s rash actions turned a banking crisis into a sovereign debt crisis. Ireland’s annual government budget deficit in 2010 was a shocking 32 percent of GDP, likely setting a modern-day world record. CRISES HERE AND THERE: DIFFERENCES So much for similarities. There are also numerous differences, most of them stemming from the fact that the seventeen countries of the eurozone share a common currency and a common central bank—but not a common government.

But it did worry about a potential breakup of the euro, which would presumably send a new deutsche mark soaring through the roof, thereby killing German exports. It began to look like the famous old cliché applied to the euro: You can’t live with it, and you can’t live without it. DON’T BANK ON IT So far, I have followed common usage by referring to the mess in Europe as the sovereign debt crisis. Investors are worried about the ability of several European governments to pay their bills. But it is also a European banking crisis: Investors are worried about the solvency of many of Europe’s largest banks. Indeed, the two crises are inextricably linked. Part of the governments’ debt problems derive from the expense of bailing out their banks. Europe’s major banks also own a great deal of government debt, on which they can ill afford to take losses. Furthermore, the line between banks and governments is blurrier in Europe than it is here.

 

pages: 566 words: 163,322

The Rise and Fall of Nations: Forces of Change in the Post-Crisis World by Ruchir Sharma

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3D printing, Asian financial crisis, backtesting, bank run, banking crisis, Berlin Wall, Bernie Sanders, BRICs, business process, call centre, capital controls, Capital in the Twenty-First Century by Thomas Piketty, Carmen Reinhart, central bank independence, colonial rule, Commodity Super-Cycle, corporate governance, currency peg, dark matter, debt deflation, deglobalization, deindustrialization, demographic dividend, demographic transition, Deng Xiaoping, Doha Development Round, Donald Trump, Edward Glaeser, Elon Musk, eurozone crisis, failed state, Fall of the Berlin Wall, Francis Fukuyama: the end of history, Freestyle chess, Gini coefficient, hiring and firing, income inequality, industrial robot, inflation targeting, Internet of things, Jeff Bezos, job automation, Joseph Schumpeter, Kenneth Rogoff, knowledge economy, Malacca Straits, Mark Zuckerberg, market bubble, megacity, Mexican peso crisis / tequila crisis, mittelstand, moral hazard, North Sea oil, oil rush, oil shale / tar sands, oil shock, pattern recognition, Peter Thiel, pets.com, plutocrats, Plutocrats, Ponzi scheme, price stability, Productivity paradox, purchasing power parity, quantitative easing, Ralph Waldo Emerson, random walk, reserve currency, Ronald Reagan, savings glut, secular stagnation, Silicon Valley, Silicon Valley startup, smart cities, Snapchat, South China Sea, special economic zone, spectrum auction, Steve Jobs, The Wisdom of Crowds, Thomas Malthus, total factor productivity, trade liberalization, trade route, tulip mania, Tyler Cowen: Great Stagnation, unorthodox policies, Washington Consensus, WikiLeaks, women in the workforce, working-age population

Between 2011 and 2015 Russia witnessed strong positive net migration due to an influx of hundreds of thousands of job seekers from former Soviet Satellite states, led by Ukraine. But the increasing numbers of talented Russians leaving the country outstripped this influx. More than 180,000 Russians left in 2013, five times more than those who departed in 2009 and close to peaks reached during the banking crisis in 1998. Those leaving were entrepreneurs, writers, scientists, and the sons and daughters of families that could afford to send their children abroad to study, in the hope that they could eventually settle outside Russia. Dinner table conversation among the Russian elite dwelled on how to secure a visa to a desirable foreign country and how to get one’s money out with the family. The Chinese economy was much farther from a crisis situation than Russia’s, but my colleagues there reported similar chatter.

And China’s regular banks, as opposed to the shadow banks, looked reasonably stable—supported by very large stores of deposits, thanks to very strong domestic savings, which amounted to 50 percent of GDP, compared to a global average of about 22 percent. In short, the bulls argued, China was well positioned to pay off or forgive its own debts. The historical record casts doubt on the strength of these defenses, not only for China but for any country. Many other nations on the list of the thirty most extreme credit binges enjoyed some of the same advantages, but this did them no good. Taiwan suffered a banking crisis in 1995 despite having foreign exchange reserves that totaled 45 per cent of GDP, a slightly higher level than China had accumulated by 2014. Taiwan’s banks also appeared to hold more than ample deposits to back their loans, but that did not avert a crunch. Banking crises hit Japan in the 1970s and Malaysia in the 1990s, even though these countries had high domestic savings rates of around 40 percent of GDP, also well above the global average.

† By 2015, I should note, some private financial industry researchers were publishing pieces on the connection between credit binges and slower economic growth, including “Untangling China’s Credit Conundrum” from Goldman Sachs that January and “Keeping a Wary Eye on the EM Credit Cycle” by JP Morgan that November. ‡ In most of these cases, GDP growth was strong during the five-year period when credit was growing dangerously fast, so credit growth was the main reason the credit/GDP ratio was rising § Here I use financial crisis to mean a banking crisis as defined by Carmen Reinhart and Kenneth Rogoff in This Time Is Different (2009), which captures bank runs that force a government to close, merge, bail out, or take over one or more financial institutions. ¶ In twenty-six of the thirty cases, the average annual rate of growth fell over the next five years. The other four—Malaysia, Uruguay, Finland, and Norway—experienced a serious contraction in the economy, but the recovery came soon enough to lift the average rate of growth for the next five years

 

pages: 475 words: 155,554

The Default Line: The Inside Story of People, Banks and Entire Nations on the Edge by Faisal Islam

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Asian financial crisis, balance sheet recession, bank run, banking crisis, Basel III, Ben Bernanke: helicopter money, Berlin Wall, Big bang: deregulation of the City of London, British Empire, capital controls, carbon footprint, Celtic Tiger, central bank independence, credit crunch, Credit Default Swap, dark matter, deindustrialization, Deng Xiaoping, disintermediation, energy security, Eugene Fama: efficient market hypothesis, eurozone crisis, financial deregulation, financial innovation, financial repression, floating exchange rates, forensic accounting, forward guidance, full employment, ghettoisation, global rebalancing, global reserve currency, hiring and firing, inflation targeting, Irish property bubble, Just-in-time delivery, labour market flexibility, London Whale, Long Term Capital Management, margin call, market clearing, megacity, mini-job, mittelstand, moral hazard, mortgage debt, mortgage tax deduction, mutually assured destruction, North Sea oil, Northern Rock, offshore financial centre, open economy, paradox of thrift, pension reform, price mechanism, price stability, profit motive, quantitative easing, quantitative trading / quantitative finance, race to the bottom, regulatory arbitrage, reserve currency, reshoring, rising living standards, Ronald Reagan, savings glut, shareholder value, The Chicago School, the payments system, too big to fail, trade route, transaction costs, two tier labour market, unorthodox policies, urban planning, value at risk, working-age population

Plans were made for flying in money to embassies to distribute to holiday islands, and even for the evacuation of tourists from the Greek islands. German tourists pulled their holiday bookings. In London, the Eurozone Contingency Committee sat at the Treasury, featuring Mervyn King, Adair Turner and cabinet ministers William Hague and Vince Cable, chaired by Chancellor George Osborne. ‘Throughout 2011–12 we were very worried about the Eurozone precipitating a UK financial banking crisis again: we created an emergency committee on Eurozone contingency planning, which for a while was meeting every other week, even every week.’ Strikingly, German politicians and leading members of the ECB popped up in the days after the inconclusive May election to say that a Grexit would be ‘manageable’, as it would ‘do more harm to Greeks than the Eurozone’. But the more Greece’s hard-left parties were attacked from abroad – and by the discredited mainstream parties in Athens – the more popular they became.

But this year, British ministers, including the chancellor, were only to be filmed indoors, with not a flake of snow in view. ‘The fall in GDP according to the Office for National Statistics was caused by the very bad weather,’ Osborne insisted. ‘But David Cameron and I would like the GDP figure to be stronger, even without the snow. The truth is that we always said it would be a challenging recovery. We’ve had the deepest recession of our lifetime, the biggest banking crisis since the 1930s. There is a new government trying to sort out this mess. It was always going to be choppy.’ I asked him whether he would alter his plan if the negative trend continued. ‘I’m not in the business of speculation,’ he replied. ‘I look at the central forecast for the British economy, which is for sustained growth and for rising employment. And to make sure we take advantage of that by not going back into the financial danger zone I found when I came to office.

Hauksson’s biggest scalp was Larus Welding, the ex-chief executive of Glitnir, who, together with one of his colleagues, was sentenced to two months’ jail for a fraud involving a loan to a Glitnir shareholder. (Welding is appealing this.) Another case, still to be heard, questions Kaupthing’s emergency pre-collapse cash call from the Gulf in September 2008. The money for the purchase by a Qatari sheikh of a large stake in Kaupthing ultimately came from a bank in Iceland called… Kaupthing. The charge is that the bank lent the money to instil confidence in itself just ahead of the massive bank crisis. It is certainly documented that the companies connected to Qatari investors were granted large loans by Kaupthing around the same time as buying a 5 per cent stake in the bank. The defendants in the case deny the charges. But whatever happens to Hauksson’s cases, the process has been instructive. The excesses of Icelandic financiers are seared onto the national consciousness, and the special prosecution process is now tattooing it on their foreheads.

 

pages: 350 words: 109,220

In FED We Trust: Ben Bernanke's War on the Great Panic by David Wessel

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Asian financial crisis, bank run, banking crisis, banks create money, Berlin Wall, Black Swan, central bank independence, credit crunch, Credit Default Swap, debt deflation, Fall of the Berlin Wall, financial innovation, financial intermediation, full employment, George Akerlof, housing crisis, inflation targeting, London Interbank Offered Rate, Long Term Capital Management, market bubble, moral hazard, mortgage debt, new economy, Northern Rock, price stability, quantitative easing, Robert Shiller, Robert Shiller, Ronald Reagan, Saturday Night Live, savings glut, Socratic dialogue, too big to fail

“Crowds cheered when he walked down Wall Street, and world political leaders and bankers sent telegrams expressing their awe that one man had been able to do that,” one of his biographers, Jean Strouse, told an interviewer. “But the next minute a democratic nation was really quite horrified at the idea that one man had this much power.” Republican senator Nelson Aldrich of Rhode Island, who was among Wall Street’s best friends in Washington, put the matter more practically: “Something has got to be done. We may not always have Pierpont Morgan with us to meet a banking crisis.” The idea of a centralized monetary authority was hardly novel. The Bank of England had been around since 1694, and as early as the mid-nineteenth century had developed the practice of printing cash and lending it to smaller banks at times of crisis. This “lender of last resort” role for central banks was codified by British journalist and economist Walter Bagehot in his 1873 book, Lombard Street.

Although not nearly as quotable and thus not as prominent as some other presidents, Rosengren emerged as a thoughtful, low-profile Bernanke ally during the Great Panic. He and the Richmond Fed’s Jeff Lacker had gone to the same New Jersey high school, although they didn’t know each other then, and were graduate students in economics at the same time at the University of Wisconsin. Rosengren began his Fed career in the Boston Fed’s research department, focusing for a time on the credit crunch and banking woes of New England in the 1990s as well as Japan’s banking crisis. In 2000, he moved into the nitty-gritty of bank supervision and regulation, an unusual move for a Ph.D. economist but one that gave him highly relevant expertise during the Great Panic and a clear view that some fellow bank presidents lacked. Where others saw signs of hope, Rosengren saw “a deteriorating housing sector, slowing consumer and business spending, high energy prices, and ill-functioning financial markets.”

The Fed could no longer cope with the Great Panic by itself. Based on his years of studying previous financial collapses and telephone conversations with his Swedish and Japanese counterparts who had coped with recent banking crises, Bernanke had suspected for months that he and Paulson would eventually end up asking Congress to spend substantial sums of taxpayer money to rescue the banks. In every major banking crisis he had studied, the government had had to put capital into the banks, take bad loans off the banks’ books, and guarantee the banks’ debts. So far, Bernanke had deferred to Paulson on the timing of going to Congress, while Paulson had been reluctant to propose anything that Congress might, in an election year, reject. Bernanke and Geithner saw this as the inevitable and costly politics of responding to banking crises in a democracy.

 

pages: 124 words: 39,011

Beyond Outrage: Expanded Edition: What Has Gone Wrong With Our Economy and Our Democracy, and How to Fix It by Robert B. Reich

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2013 Report for America's Infrastructure - American Society of Civil Engineers - 19 March 2013, affirmative action, banking crisis, carried interest, collateralized debt obligation, collective bargaining, Credit Default Swap, credit default swaps / collateralized debt obligations, desegregation, full employment, Home mortgage interest deduction, job automation, Mahatma Gandhi, minimum wage unemployment, new economy, Occupy movement, offshore financial centre, plutocrats, Plutocrats, Ponzi scheme, race to the bottom, Ronald Reagan, single-payer health, special drawing rights, The Wealth of Nations by Adam Smith, Tim Cook: Apple, too big to fail, trickle-down economics, women in the workforce, working poor

In May 2012, Jamie Dimon, chairman and CEO of JPMorgan Chase, the nation’s largest bank by assets, announced the bank had lost $2 billion to $3 billion in trades because of excessively risky bets that were “poorly executed” and “poorly monitored,” the result of “many errors,” “sloppiness,” and “bad judgment.” But not to worry, said Dimon. “We will admit it, we will fix it and move on.” Ever since the start of the banking crisis in 2008, Dimon had been arguing that more government regulation of Wall Street was unnecessary. In 2011 he vehemently and loudly opposed the so-called Volcker Rule, itself a watered-down version of the old Glass-Steagall Act—the Depression-era law that had separated investment banking (betting in the financial casino) from commercial banking (taking in deposits and lending them out). Glass-Steagall’s repeal in 1999 had allowed bankers to place large bets with other people’s money—and make huge windfalls for themselves.

By the time of Dimon’s announcement of JPMorgan’s trading losses, the rule had morphed into almost three hundred pages of regulatory mumbo jumbo and still hadn’t been finalized. In light of all this, Dimon’s promise in May 2012, after revealing billions of dollars of losses from risky trades, that JPMorgan would “fix it and move on” was not reassuring. Here we were—less than four years after a banking crisis had forced American taxpayers to bail out the Street, caused home values to plunge by more than 30 percent and pushed millions of homeowners underwater, threatened or diminished the savings of millions more, and sent the entire American economy hurtling into the worst downturn since the Great Depression—and JPMorgan recapitulated the whole debacle with the same kinds of errors, sloppiness, and bad judgment, and the same excessively risky, poorly executed, and poorly monitored trades, that had caused the crisis in the first place.

 

pages: 424 words: 121,425

How the Other Half Banks: Exclusion, Exploitation, and the Threat to Democracy by Mehrsa Baradaran

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access to a mobile phone, affirmative action, bank run, banking crisis, banks create money, barriers to entry, British Empire, call centre, Capital in the Twenty-First Century by Thomas Piketty, cashless society, credit crunch, David Graeber, disintermediation, diversification, failed state, fiat currency, financial innovation, financial intermediation, Goldman Sachs: Vampire Squid, housing crisis, income inequality, Internet Archive, invisible hand, Kickstarter, M-Pesa, McMansion, microcredit, mobile money, moral hazard, mortgage debt, new economy, Own Your Own Home, payday loans, peer-to-peer lending, price discrimination, profit maximization, profit motive, quantitative easing, race to the bottom, Ronald Reagan, Ronald Reagan: Tear down this wall, savings glut, the built environment, the payments system, too big to fail, trade route, transaction costs, unbanked and underbanked, underbanked, union organizing, white flight, working poor

And so it is that federal and state governments have engaged in a frustrating game of whack-a-mole to ban the unscrupulous practices of payday lenders and the like. These lenders skillfully avert new rules by creating new products, crossing state lines, or escaping to do business from Native American reservations. They cannot be regulated away because the payday lending industry is doing what any successful business does: filling a market need. One solution to our present-day banking crisis is to reinvigorate or replicate local banks and cooperatives so that they can again do what they did successfully for many years—overcome the costs of lending to the poor through a tight-knit membership with mutual ownership. Over the past several decades, nearly all of the government and industry initiatives aimed at financial inclusion have focused on community efforts to bank the poor—Jefferson’s localism still runs deep in banking politics.

Unfazed by the largest banks’ opposition to his proposed reforms, Roosevelt used the public’s anger at the banks and the unit bankers’ support to catalyze the legislature to pass these measures.80 In President Roosevelt’s famous inauguration speech, he justified this broad-reaching legislation. When he told the public that “the only thing we have to fear is fear itself,” he was addressing the irrational bank runs that turned the tough economic times into an unprecedented banking crisis. He acknowledged the people’s suffering and placed blame directly at the foot of the bankers: The rulers of the exchange of mankind’s goods have failed, through their own stubbornness and their own incompetence, have admitted their failure, and abdicated. Practices of the unscrupulous money changers stand indicted in the court of public opinion, rejected by the hearts and minds of men.… Stripped of the lure of profit by which to induce our people to follow their false leadership, they have resorted to exhortations, pleading tearfully for restored confidence.

The Glass-Steagall Act, the pillar of the New Deal banking reforms, thus entrenched the doctrine of “separation of banking and commerce” in U.S. banking regulation.82 The act also contained interest rate limits—the amount a bank could offer for deposits—intended to deter competition among banks. Reduced competition, it was believed, would lead to a more dispersed banking sector and more credit availability. These reforms were a response to the recent banking crisis, but they also revealed a Jeffersonian and Brandeisian disdain for concentrated bank power. Although they were intended to make banks safer, they were also meant to limit banks’ market reach and power. A few policymakers were convinced that too much bank power and concentration caused the Great Depression, although the conclusion has since been contested.83 Brandeis, Roosevelt, and Carter Glass—much like their Populist predecessors—saw bank power as one of the great social problems of the day.

 

pages: 193 words: 11,060

Ethics in Investment Banking by John N. Reynolds, Edmund Newell

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accounting loophole / creative accounting, banking crisis, capital controls, corporate governance, corporate social responsibility, credit crunch, Credit Default Swap, discounted cash flows, financial independence, index fund, invisible hand, margin call, moral hazard, Nick Leeson, Northern Rock, quantitative easing, shareholder value, short selling, South Sea Bubble, stem cell, the market place, The Wealth of Nations by Adam Smith, too big to fail

The US Financial Crisis Inquiry Commission blamed failures in regulation; breakdowns in corporate governance, including financial firms acting recklessly; excessive borrowing and risk by households and Wall Street; policymakers ill-prepared for the crisis; and systematic breakdown in accountability and ethics.1 The UK’s Independent Commission on Banking cited factors including “global imbalances, loose monetary policy, light-touch regulation, declining under-writing standards, widespread mis-pricing of risk, a vast expansion of banks’ balance sheets, rapid growth in securitized assets”.2 The UK economist Roger Bootle diagnosed the crisis in a more straightforward way in his 2009 book The Trouble with Markets: “greedy bankers and naive borrowers, mistaken central banks and inept regulators, insatiable Western consumers and over-thrifty Chinese savers”.3 Others have also directly cited bankers’ greed. Gordon Brown, the UK Prime Minister at the time the financial crisis developed, in his book examining the financial crisis, Beyond the Crash, has blamed “excessive remuneration at the expense of adequate capitalisation” for the UK banking crisis.4 It is clear that incentives in the form of the high levels of pay received by investment bankers creating and trading seriously flawed products was a contributing factor to the financial crisis. The asymmetry of risk and reward in investment bankers’ remuneration can incentivise risk-taking: there is an opportunity to be paid very well if a trade is profitable, but the investment banker does not actually lose money (in the form of cash – the value of any equity owned in the investment bank can reduce) if a trade is lossmaking.

These bankruptcies were not alone, as there was a series of failures in both the telecoms/cable and the independent power producer sectors. Governments failed to appropriately increase the effectiveness of oversight of credit rating agencies in the wake of the failures of Enron, WorldCom and so on. • Sovereign debt crises and defaults are nothing new. Looking back to Latin America in the 1980s and early 1990s, and also at the impact of financial crises in major economies, such as the Russian banking crisis in 1997 or the UK in the 1970s, sovereign debt even in relatively stable countries has periodically exhibited relatively high levels of risk. Given the nature of a sovereign country, and its responsibilities (providing services such as health care, defence, education) for and from (e.g., tax raising) its citizens, the ethical position of trading in sovereign debt may have different characteristics than trading in corporate debt. • Strategies involving short-selling are not novel.

The results of this can be that the investment banker concerned is paid in excess of what is merited, but also that other investment bankers are under-remunerated. Is remuneration an ethical issue? Remuneration can be considered an ethical issue from a number of perspectives, notably relating to fairness (i.e., equity and distributive justice), and also relating to the issue discussed on p. 24 of investment banks receiving Ethical Issues – Internal 135 a “free-ride”. There is an argument that the banking crisis was caused by greed. This has been advanced by, among others, former UK Prime Minister Gordon Brown. It can be argued that the cause of the financial crisis (in the UK) was excess bank bonuses resulting in a deficiency in bank capital. This argument contends that the payment of bonuses left the banking sector short of capital, and therefore the financial crisis was (at least in part) the result of greed.

 

pages: 233 words: 66,446

Bitcoin: The Future of Money? by Dominic Frisby

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3D printing, altcoin, bank run, banking crisis, banks create money, barriers to entry, bitcoin, blockchain, capital controls, Chelsea Manning, cloud computing, computer age, cryptocurrency, disintermediation, ethereum blockchain, fiat currency, friendly fire, game design, Julian Assange, litecoin, M-Pesa, mobile money, money: store of value / unit of account / medium of exchange, Occupy movement, Peter Thiel, Ponzi scheme, prediction markets, price stability, quantitative easing, railway mania, Ronald Reagan, Satoshi Nakamoto, Silicon Valley, Skype, slashdot, smart contracts, Snapchat, Stephen Hawking, Steve Jobs, Ted Nelson, too big to fail, transaction costs, Turing complete, War on Poverty, web application, WikiLeaks

China, for example, is the world’s second-largest economy, yet individuals may not withdraw more than $50,000 per annum from the country. The banking crisis in Cyprus in 2013 saw capital controls introduced there. Currently, cash withdrawals are limited to €300 a day, the cashing of cheques is banned and large cash transfers are vetted. Accounts with over €100,000 saw funds confiscated. Capital controls now seem to be being imposed in the Ukraine due to its current instability. Reports suggest nationals are finding it harder and harder to get their money out of Spain and other parts of impoverished Southern Europe, and the insolvency of Spain’s banks makes another banking crisis in the region look probable. The investment bank JP Morgan has declared it is ‘inevitable that capital controls and a capital freeze will be imposed’180 in Southern Europe; senior employees tell me many of their current strategies are based on this inevitability.

Innocent people are made to pay for the profligacies of their banks, their financial system or their governments. Bitcoin has been dubbed ‘money without government’ and ‘money without borders’. You can send money to another country as easily as you can an email, and nearly as instantly. There is no need to smuggle 60 Krugerrands in your pocket if you’re fleeing an oppressive regime. People are already starting to use Bitcoin in this way. When the Cypriot banking crisis hit during the spring of 2013 and fear of capital controls loomed across Southern Europe, the bitcoin price rose from about $15 to north of $200. In the latter part of 2013, the price ballooned again, rising from about $130 to over $1,000 due to Chinese interest. Much of that interest was speculative, but some of it was also money fleeing the country. Shanghai resident Zennon Kapron declared, ‘some people have the equivalent of tens of millions in dollar-equivalent value in China and they want to get it out.

 

pages: 304 words: 80,965

What They Do With Your Money: How the Financial System Fails Us, and How to Fix It by Stephen Davis, Jon Lukomnik, David Pitt-Watson

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Admiral Zheng, banking crisis, Basel III, Bernie Madoff, Black Swan, centralized clearinghouse, clean water, corporate governance, correlation does not imply causation, credit crunch, Credit Default Swap, crowdsourcing, David Brooks, diversification, diversified portfolio, en.wikipedia.org, financial innovation, financial intermediation, Flash crash, income inequality, index fund, invisible hand, London Whale, Long Term Capital Management, moral hazard, Northern Rock, passive investing, performance metric, Ponzi scheme, principal–agent problem, shareholder value, Silicon Valley, South Sea Bubble, statistical model, Steve Jobs, the market place, The Wealth of Nations by Adam Smith, transaction costs, Upton Sinclair, value at risk, WikiLeaks

That is why the day you get married is so memorable. In fact, the elements of that day are not likely to be present in the sample of any of the previous 3,652 days.28 So how could the computer possibly calculate the likelihood of their recurring tomorrow, or next week? Similarly, in the financial world, if you feed a statistical model data that have come from a period where there has been no banking crisis, the model will predict that it is very unlikely you will have a banking crisis. When statisticians worked out that a financial crisis of the sort we witnessed in 2008 would occur once in billions of years, their judgment was based on years of data when there had not been such a crisis.29 It compounds the problem that people tend to simplify the outcome of risk models. For example, many people take comfort in the idea of a 95 percent probability that their maximum loss is predicted to be less than 10 percent in any particular year.

You’ve told me it is important that the finance industry works, but how can you know it works well? Are you comfortable that all these giant buildings are the result of the success of the industry, and not perhaps the result of someone taking some of your money for their own advantage? Are you sure that this very complicated industry is the best way to create those services you say are so important? What about that banking crisis you mentioned, where it looked as though the whole system would collapse? How did that come about?” He’s not done. Walking past one of the many churches in the City of London, our friend reminds us that in his day, churches were deeply respected. But they brought themselves into great disrepute by selling “indulgences,” which allowed those who were wealthy enough to be forgiven their sins.8 The indulgences, he reminds us, paid for a lot of beautiful religious architecture and a comfortable life for those members of the clergy willing to abuse the system.

 

pages: 305 words: 69,216

A Failure of Capitalism: The Crisis of '08 and the Descent Into Depression by Richard A. Posner

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Andrei Shleifer, banking crisis, Bernie Madoff, collateralized debt obligation, collective bargaining, corporate governance, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, debt deflation, diversified portfolio, equity premium, financial deregulation, financial intermediation, Home mortgage interest deduction, illegal immigration, laissez-faire capitalism, Long Term Capital Management, market bubble, moral hazard, mortgage debt, oil shock, Ponzi scheme, price stability, profit maximization, race to the bottom, reserve currency, risk tolerance, risk/return, Robert Shiller, Robert Shiller, savings glut, shareholder value, short selling, statistical model, too big to fail, transaction costs, very high income

Even when interest rates are very low, there may be little demand for loans if people are already overindebted. Since, moreover, the Federal Reserve's efforts to expand or contract the money supply and so lower or raise interest rates are mediated by the banks, a breakdown in the banking system can loosen the Federal Reserve's control over the money supply, opening the way to deflation. That is why the kind of shock to the economy that comes from a banking crisis is potentially more serious than a shock created by a technological change. Increasing the money supply reduces the value of money, and so creates a threat of inflation, because, initially at least, more money is buying the same amount of goods and services. But in a depression the threat of inflation lies in the future. The immediate danger is the opposite. If a bank's equity cushion is too thin for comfort, the bank is unlikely to thin it further by converting its safest assets into risky loans —as an increased fraction of loans are bound to be during a depression —even if invited and enabled to do so by the Federal Reserve's increasing the bank's reserves.

The profession's failure to foresee the depression, and its unpreparedness to suggest timely, effective responses to it, will stimulate fresh thinking in macroeconomics and financial economics. It may even lead to a merger between depression economics, a branch of macroeconomics, and finance viewed as a distinct field of economics (much as statistics is a distinct field of mathematics). Recessions precipitated by a banking crisis are more likely than other recessions to turn into depressions because of the severe negative effect of a breakdown in the credit system on personal consumption expenditures, an effect that sets the stage for deflation. Maeroeconomists are the experts on recessions and depressions, finance theorists on the operation of the financial system. The latter were quicker to spot the storm clouds. The former are chastened not only by their failures of foresight and understanding but also by finding themselves uncertain about how to place the economy on the path to recovery.

They did this by eliminating the limits on federal deposit insurance of bank deposits and by extending that insurance to checkable accounts in money market funds, but more important by bailing out failing firms deemed "too big to fail"—an incentive for corporate giantism and financial irresponsibility (which go hand in hand because the difficulty of controlling subordinates grows with the size of an organization). The government gratuitously disrupted the operations of hedge funds by limiting short selling—at the height of the banking crisis the Securities and Exchange Commission forbade short selling of financial stocks. And by substantially increasing the federal deficit, the government's responses to the crisis are sowing the seeds of a future inflation. But of these criticisms, the main ones — the creation of moral hazard and the planting of the seeds of a future inflation—concern the unavoidable side effects of any effective measures to limit a depression.

 

pages: 460 words: 122,556

The End of Wall Street by Roger Lowenstein

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Asian financial crisis, bank run, banking crisis, Berlin Wall, Bernie Madoff, Bernie Madoff, Black Swan, Brownian motion, Carmen Reinhart, collateralized debt obligation, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, diversified portfolio, eurozone crisis, Fall of the Berlin Wall, fear of failure, financial deregulation, high net worth, Hyman Minsky, interest rate derivative, invisible hand, Kenneth Rogoff, London Interbank Offered Rate, Long Term Capital Management, margin call, market bubble, Martin Wolf, moral hazard, mortgage debt, Northern Rock, Ponzi scheme, profit motive, race to the bottom, risk tolerance, Ronald Reagan, savings glut, short selling, statistical model, the payments system, too big to fail, tulip mania, Y2K

It was also a measure of his political acuity; after Fannie and Freddie, the public had had enough of bailouts, which it regarded as handouts to wealthy bankers.ak ON TUESDAY, the stock market, worried by Lehman, reversed course and tumbled 2 percent. Credit markets fared even worse. Eschewing risk, lenders were pulling funds from private borrowers and parking them with the government for safety. After a day’s reflection, traders were unsettled by the loss of Fannie’s and Freddie’s preferred stock, and by the larger truth that removing the twins from danger had not resolved the banking crisis. In a telltale reminder that the country’s subprime problems were far from over, WaMu’s board sacked its CEO, Kerry Killinger, the banker who once had presumed that mortgages were just like retail. These assorted blows, striking on a single day as if from the fury of an angry god, weighed deeply on other troubled institutions, especially AIG. Its stock dropped under 20, and it was being forced to refinance billions of its debt under difficult conditions.

For them, the dream of home ownership had turned into a nightmare. Fully 20 percent of subprime borrowers were seriously delinquent—an extraordinary credit market bust. Even 5 percent of conventional mortgagors were delinquent, evidence that the disease of overleverage had penetrated the middle class.12 Despite these doleful augurs, the administration was still having trouble persuading the public that it had a stake in the banking crisis. The crisis was still widely seen as a Wall Street problem, and mail on the TARP was running solidly against. Senator Jon Kyl, Republican of Arizona, quipped that his mail was split: 50 percent “No” and 50 percent “Hell, no.”13 Trying to rally votes, President Bush gave a prime-time address on the economy—his first in eight years. He warned that without the legislation the United States could face “a long and painful recession.”

Those downgraded and defaulted bonds were on the books of banks, and others, and there was no painless way to unload them.11 In a perceptive essay published in Time, the British historian Niall Ferguson calculated that bank losses during the crisis amounted to $100 billion more than the total of new capital raised, implying (since each dollar of capital supported $10 or more on the balance sheet) that banks would have to reduce their assets by at least a trillion dollars.12 This guaranteed further price plunges, further bank losses. The devastation of banks implied an ever-stronger case for using the TARP for a capital injection. A group of professors with whom Bernanke periodically consulted were at the Fed that Friday, and strongly recommended capital investment, noting that it had worked in Sweden during its banking crisis in the 1990s. Bernanke surely mentioned this to Paulson, as the secretary told his staff he wanted them to work on a “capital program.”13 Then, Paulson took his family to an island off the coast of Georgia for a weekend of fishing and a respite from stress. The Monday he returned, stock markets around the world crashed. 18 RELUCTANT SOCIALIST The holders of the cash reserve [the central bank] must be ready not only to keep it for their own liabilities, but to advance it most freely for the liabilities of others.

 

pages: 494 words: 132,975

Keynes Hayek: The Clash That Defined Modern Economics by Nicholas Wapshott

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airport security, banking crisis, Bretton Woods, British Empire, collective bargaining, complexity theory, cuban missile crisis, Francis Fukuyama: the end of history, full employment, Gordon Gekko, greed is good, if you build it, they will come, Joseph Schumpeter, liquidationism / Banker’s doctrine / the Treasury view, means of production, mortgage debt, New Journalism, Northern Rock, price mechanism, pushing on a string, road to serfdom, Ronald Reagan, The Chicago School, The Great Moderation, The Wealth of Nations by Adam Smith, Thomas Malthus, trickle-down economics, War on Poverty, Yom Kippur War

Meyer immediately suggested to Hoover that the reparations be cut in half; three days later Hoover went a step further, declaring a moratorium on all debt payments for a year. Keynes declared the decision “a first step of the greatest possible value.”10 Keynes reported back to his friend O. T. Falk11 in London a parlous state of affairs in America that uncannily presaged the symptoms of the banking crisis that would overtake America half a century later, in September 2008. “[The banks] have purchased great quantities of second-grade bonds which have depreciated in value and their advances to farmers and against real estate are inadequately secured,”12 Falk recorded. In a lecture to the New School in New York Keynes rejected the free-market prescriptions “of the so-called ‘economists’ attached to leading New York banks,”13 and advocated a rise in prices and a loosening of credit to put the economy back on track.

Keynes was surprised to discover that in a city that was home to American entrepreneurs and a focal point of American business, the Chicago economists, led by Quincy Wright,16 seemed as keen on increasing public expenditure as he was.17 Keynes arrived home to a Britain suffering a profound crisis in confidence in the government’s ability to pay its debts, combined with a run on sterling, which was still pegged to the gold standard. The German elections of 1930, which left Adolf Hitler’s extreme Nazi Party victorious, prompted visions of a civil war in Germany, leading to a flight of capital from the country and heavy withdrawals of gold and foreign exchange. In early 1931, the German Reichsbank was unable to honor its commitments, setting off a banking crisis that led in turn to an intense round of speculation against the pound sterling, causing the British Treasury to seek an American loan. To meet the terms of the loan, Snowden, the Labour chancellor, proposed a package of severe public-expenditure cuts drawn up by a former official of Prudential Assurance, Sir George May. These included a 20 percent reduction in unemployment pay. Keynes condemned May’s measures as self-defeating and estimated that another 250,000 to 400,000 would be thrown out of work as a result, costing the exchequer far more than it hoped to save from cutting unemployment relief.

It was Sraffa’s reputation as an economist with an original cast of mind that led Keynes to commission him to write an article for the “Reconstruction in Europe” series, a piece that was sharply critical of the three largest Italian banks. The piece was so damning of Italian banking practices that it drew the attention of Mussolini himself, who was, coincidentally, in the midst of trying to solve a banking crisis by using state funds to rescue the ailing Banco di Roma. Sraffa’s piece was perfectly timed to cause the maximum mischief, and Keynes was delighted. Mussolini, however, was not. He decried Sraffa’s article as a “slander against Italy,”14 the unpatriotic act of a radical agent paid by foreigners. In threatening telegrams to Sraffa’s father Angelo, Mussolini demanded that a retraction and apology be published.

 

pages: 357 words: 110,017

Money: The Unauthorized Biography by Felix Martin

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bank run, banking crisis, Basel III, Bernie Madoff, Bernie Madoff, Big bang: deregulation of the City of London, Bretton Woods, British Empire, call centre, capital asset pricing model, Carmen Reinhart, central bank independence, credit crunch, David Graeber, en.wikipedia.org, financial deregulation, financial innovation, Financial Instability Hypothesis, financial intermediation, Fractional reserve banking, full employment, Goldman Sachs: Vampire Squid, Hyman Minsky, inflation targeting, invention of writing, invisible hand, Irish bank strikes, joint-stock company, Joseph Schumpeter, Kenneth Rogoff, mobile money, moral hazard, mortgage debt, new economy, Northern Rock, Occupy movement, plutocrats, Plutocrats, private military company, Republic of Letters, Robert Shiller, Robert Shiller, seigniorage, Silicon Valley, smart transportation, South Sea Bubble, supply-chain management, The Wealth of Nations by Adam Smith, too big to fail

Their ingenious evasions, the historian Tacitus reported, “though continually put down by new regulations, still, through strange artifices, reappeared.”10 Now the emperor decreed the game was up: the letter of the old dictator’s law would be enforced. The consequences were chaotic. As soon as the first ruling was made, it was realised with some embarrassment that most of the Senate was in breach of it. All the familiar features of a modern banking crisis followed. There was a mad scramble to call in loans in order to comply. Seeing the danger, the authorities attempted to soften the edict by relaxing its terms and announcing a generous transitional period. But the measure came too late. The property market collapsed as mortgaged land was fire-sold to fund repayments. Mass bankruptcy threatened to engulf the financial system. With Rome in the grip of a credit crunch, the emperor was forced to implement a massive bailout.

What was in short supply in a crisis was not gold, but trust and confidence—which the central bank had a unique ability to restore by standing ready to swap the discredited bills of private issuers for its own sovereign money. Such was the solution to which the Bank Directors always in the end groped their way reactively in any case. Grasp once that money is not a commodity but credit, and the rationale for making it explicit policy was clear. These diverging views of appropriate policy in a banking crisis were put in the shade, however, by a broader disagreement over the need for government policy, and especially monetary policy, to manage the macroeconomy more generally. The conventional view of money as a commodity medium of exchange was one of the pivotal assumptions behind perhaps the single most famous proposition associated with the classical school—an alleged economic law of nature as practically important as it was counter-intuitive, articulated by Jean-Baptiste Say in his Treatise on Political Economy in 1803.

Magnusson, L., ed. (1995), Mercantilism. London: Routledge. Mandeville, B. (1705), The Grumbling Hive, or, Knaves Turn’d Honest. London. —(1988) [1732], The Fable of the Bees, or, Private Vices, Publick Benefits, 2 Volumes. Indianapolis: Liberty Classics. Markowitz, H. (1952), “Portfolio selection.” Journal of Finance 7(1), 77–91. Martin, F. (2011), “Global High Yield: The Big Winner from the Banking Crisis.” Thames River Capital Monthly Newsletter. London: Thames River Capital. Marx, K. and Engels, F. (1985) [1848], The Communist Manifesto. London: Penguin. Mauss, M. (1954), The Gift: Forms and Functions of Exchange in Archaic Societies (tr. Cunnison, I.). London: Cohen & West. Mayhew, N. (1999), Sterling: The Rise and Fall of a Currency. London: Allen Lane. McCallum, B. (2012), “The Role of Money in New Keynesian Models.”

 

pages: 376 words: 109,092

Paper Promises by Philip Coggan

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accounting loophole / creative accounting, balance sheet recession, bank run, banking crisis, barriers to entry, Berlin Wall, Bernie Madoff, Bernie Madoff, Black Swan, Bretton Woods, British Empire, call centre, capital controls, Carmen Reinhart, carried interest, Celtic Tiger, central bank independence, collateralized debt obligation, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, currency manipulation / currency intervention, currency peg, debt deflation, delayed gratification, diversified portfolio, eurozone crisis, Fall of the Berlin Wall, fear of failure, financial innovation, financial repression, floating exchange rates, full employment, German hyperinflation, global reserve currency, hiring and firing, Hyman Minsky, income inequality, inflation targeting, joint-stock company, Kenneth Rogoff, labour market flexibility, Long Term Capital Management, manufacturing employment, market bubble, market clearing, Martin Wolf, money: store of value / unit of account / medium of exchange, moral hazard, mortgage debt, Nick Leeson, Northern Rock, oil shale / tar sands, paradox of thrift, peak oil, pension reform, plutocrats, Plutocrats, Ponzi scheme, price stability, principal–agent problem, purchasing power parity, quantitative easing, QWERTY keyboard, railway mania, regulatory arbitrage, reserve currency, Robert Gordon, Robert Shiller, Robert Shiller, Ronald Reagan, savings glut, short selling, South Sea Bubble, special drawing rights, The Chicago School, The Great Moderation, The Wealth of Nations by Adam Smith, too big to fail, trade route, tulip mania, value at risk, Washington Consensus, women in the workforce

Just as a bank is vulnerable to a run by depositors, an economy is vulnerable to a loss of confidence in debtors’ ability to repay. The bigger the debt pile, the more earth-shaking these crises of confidence will be. In essence, that is why the debt crisis of 2007 – 08 was so alarming. Pumped up by debt, the banks had become so large relative to the rest of the economy that they simply had to be rescued, at a huge cost. The resulting recession delivered such a blow to government finances that the bank crisis was followed by a sovereign-debt crisis. The finances of banks are highly counter-intuitive. Customer deposits are a liability, not an asset, since they may have to be repaid at any time; the assets of a bank consist largely of the loans made to companies and individuals since they too will eventually be repaid. But those debtors may not (and probably will not) have the cash available to repay the loan immediately, so any run on the bank will create a potential problem for its debtors.

These austerity measures were passed by the Greek parliament in late June in the teeth of strikes and violent protests. For the Greeks, these ‘rescue packages’ simply mean further debt that still has to be paid back, and an abrupt decline in their standard of living. Other EU nations were desperate to avoid a formal Greek default. First, much Greek debt was in the hands of the wider international banking system; a default might thus precipitate a further banking crisis. Secondly, the EU feared that the failure of Greece would simply prompt the markets to switch their attentions to Portugal, Ireland, or (far worse) the much-larger Spain and Italy. Once the principle of default was applied in one nation, why not the others? By delaying any Greek default, the EU hoped to give the banks (and governments in other countries) the chance to repair their finances.

The economy has grown, but asset prices have risen faster, and debts have risen faster still. Debtors, from speculative homebuyers to leading governments, have made promises to pay that they are unlikely to meet in full. Creditors who are counting on those debts to be repaid will be disappointed. Clearing up the mess will be a long, slow process. It will involve many false starts, as occurred during the banking crisis of 2008 and as we have already seen in the European sovereign debt crisis. The debts may be repaid in inflated money, or devalued currency; they may be passed on to other governments with a greater capacity to repay; or they may result in outright default. Breaking those paper promises will result in economic turmoil, as both debtors and creditors suffer. This is a crisis as severe as those that resulted in the end of the gold standard in the 1930s or the end of fixed exchange rates in the 1970s.

 

pages: 368 words: 32,950

How the City Really Works: The Definitive Guide to Money and Investing in London's Square Mile by Alexander Davidson

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accounting loophole / creative accounting, algorithmic trading, asset allocation, bank run, banking crisis, barriers to entry, Big bang: deregulation of the City of London, capital asset pricing model, central bank independence, corporate governance, Credit Default Swap, dematerialisation, discounted cash flows, diversified portfolio, double entry bookkeeping, Edward Lloyd's coffeehouse, Elliott wave, Exxon Valdez, forensic accounting, global reserve currency, high net worth, index fund, inflation targeting, interest rate derivative, interest rate swap, London Interbank Offered Rate, Long Term Capital Management, margin call, market fundamentalism, Nick Leeson, North Sea oil, Northern Rock, pension reform, Piper Alpha, price stability, purchasing power parity, Real Time Gross Settlement, reserve currency, shareholder value, short selling, The Wealth of Nations by Adam Smith, transaction costs, value at risk, yield curve, zero-coupon bond

Since the 18th century, it has also been a bank for other UK banks. As a result of the 1844 Act, the Bank of England gained the right to the sole issue of banknotes in England and Wales. It remained a privately owned bank until nationalisation in 1946. Until 1997, the Bank of England was both the supervisor of banks and adviser to the government on monetary policy, tasks conducted from different departments. The banking crisis of 1973–75 revealed weaknesses in the informal supervisory approach, which led to the Banking Act 1979, and subsequently the Banking Act 1987, under which the Bank would authorise and, in a flexible way, supervise the banking sector. The Bank of England’s continued role as supervisor came under increasing scrutiny, particularly after the July 1991 collapse of Bank of Credit and Commerce International (BCCI).

In 1995, the Bank of England decided not to intervene to save Barings from going bust, taking the view that the event would pose no systemic threat to the UK banking system, and that a wholly market-driven solution was more suitable to address the bank’s insolvency. In other cases, the Bank of England has intervened. In 1890, the Bank, along with various commercial banks, rescued Barings after its bad debts in Argentina were three times its capital and threatened its solvency. In 1975, the Bank arranged a banking consortium to act as a lifeboat in a banking crisis precipitated by large exposures to the property sector. In 1984, the Bank helped Johnson Matthey Bankers Limited, a London market maker in gold bullion, which had got into financial difficulties from its  16 HOW THE CITY REALLY WORKS __________________________________ commercial lending exposures. If the operation had been allowed to fail, other bullion dealers would have joined the creditors, which would have diminished confidence in the London gold market.

 84 HOW THE CITY REALLY WORKS __________________________________ Repos The repo (see also Chapter 2) means a sale and repurchase agreement and is effectively a short-term secured loan in the money markets, sometimes between banks and the Bank of England, and sometimes between financial institutions without involving the Bank directly. The popularity of the repo reflects the overwhelming shift in the money markets from unsecured towards secured lending, where bigger sums may be borrowed. The trend has been driven by the 1990s banking crisis in Japan, and recent banking problems in Germany, according to brokers. Let us look at how the classic repo works in the UK. Sometimes a bank borrows money from the Bank of England for a stated period, perhaps 7, 14 or 28 days, and provides collateral, usually in the form of government bonds. The banks are sitting on large portfolios of mainly government bonds, which they need to hold for reserves, and which have low yields but high collateral value.

 

pages: 370 words: 102,823

Rethinking Capitalism: Economics and Policy for Sustainable and Inclusive Growth by Michael Jacobs, Mariana Mazzucato

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3D printing, balance sheet recession, banking crisis, Bernie Sanders, Bretton Woods, Carmen Reinhart, central bank independence, collaborative economy, complexity theory, conceptual framework, corporate governance, corporate social responsibility, credit crunch, Credit Default Swap, David Ricardo: comparative advantage, decarbonisation, deindustrialization, dematerialisation, Detroit bankruptcy, double entry bookkeeping, Elon Musk, energy security, eurozone crisis, factory automation, facts on the ground, fiat currency, Financial Instability Hypothesis, financial intermediation, forward guidance, full employment, Gini coefficient, Growth in a Time of Debt, Hyman Minsky, income inequality, Internet of things, investor state dispute settlement, invisible hand, Joseph Schumpeter, Kenneth Rogoff, knowledge economy, labour market flexibility, low skilled workers, Martin Wolf, neoliberal agenda, Network effects, new economy, non-tariff barriers, paradox of thrift, price stability, private sector deleveraging, quantitative easing, QWERTY keyboard, railway mania, road to serfdom, savings glut, Second Machine Age, secular stagnation, shareholder value, sharing economy, Silicon Valley, Steve Jobs, the built environment, The Great Moderation, The Spirit Level, Thorstein Veblen, too big to fail, total factor productivity, transaction costs, trickle-down economics, universal basic income, very high income

Investment-led Growth: A Solution to the European Crisis Table 1: Private investment as % of GDP Table 2: Projected average GDP growth (%) Table 3: Unemployed workers (millions of people) Table 4: Debt-to-GDP ratio, south euro zone Table 5: Net government lending as % of GDP List of Illustrations 1. Rethinking Capitalism: An Introduction Figure 1: Percentage of countries experiencing a banking crisis (1945–2008) (weighted by their share of world income) Figure 2: Outstanding private debt (% of GDP) Figure 3: Comparing profiles of UK recessions and recoveries Figure 4: Unemployment rates, selected countries, 2007, 2010 and 2014 Figure 5: Average real wage index for selected developed countries, 2007–2013 Figure 6: Investment (gross non-residential fixed capital formation) as a percentage of GDP Figure 7: Trends in growth in average wages and labour productivity in thirty-six developed economies, 1999–2013 Figure 8: Growth in real after-tax income from 1979 to 2007, US Figure 9: Global greenhouse gas emissions 1990–2050 2.

Rather, it reflected an unprecedented increase in household and corporate debt (see Figure 2). Low interest rates and lax lending practices, particularly for land and property, had fuelled an asset price bubble which would inevitably burst. In this sense the pre-crisis growth of output can be judged only alongside its post-crisis collapse. Figure 1: Percentage of countries experiencing a banking crisis (1945–2008) (weighted by their share of world income) Note: Sample size includes all countries that were independent states in the given year. Source: C. M. Reinhart and K. S. Rogoff, This Time is Different: Eight Centuries of Financial Folly, Princeton, NJ, Princeton University Press, 2009. Figure 2: Outstanding private debt (% of GDP) Source: OECD.stat (http://stats.oecd.org/index.aspx?

Experiences from Transition and Emerging Countries, Brussels, Bruylant, 2014, pp. 33–49. 43 The title of Lou Gerstner’s account of turning the huge IBM bureaucracy into a gigantic, agile organisation can be a mirror for what can be done in governments. See L. Gerstner, Who Says Elephants Can’t Dance? New York, Harper Business, 2002. 44 See Rodrik, Industrial Policy. Index A Acts of Parliament Transparency of Lobbying, Non-Party Campaigning and Trade Union Administration Act 2014 AIG Apple ARPA-E austerity policies Australia top earners B balanced budgets Bank of England banks bailouts banking crisis central emergency loans to investment loans by regulation rents reserves ‘shadow’ state investment banks Barro, Robert BBC Bear Stearns Bernanke, Ben biotechnology venture capitalists BNDES Bretton Woods agreements Brown, Gordon Buffett, Warren Bush, George, Jr C Canada average real wage index top earners unemployment capital, patient Capita Carney, Mark Cave, Tamsin Cheung, Steven N.

 

pages: 172 words: 54,066

The End of Loser Liberalism: Making Markets Progressive by Dean Baker

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Asian financial crisis, banking crisis, Bernie Sanders, collateralized debt obligation, collective bargaining, corporate governance, currency manipulation / currency intervention, Doha Development Round, financial innovation, full employment, Home mortgage interest deduction, income inequality, inflation targeting, invisible hand, manufacturing employment, market clearing, market fundamentalism, medical residency, patent troll, pets.com, pirate software, price stability, quantitative easing, regulatory arbitrage, Robert Shiller, Robert Shiller, Silicon Valley, too big to fail, transaction costs

According to the story, the lending approved by Congress in the Troubled Asset Relief Program (TARP) along with special lending facilities created by the Federal Reserve Board prevented a financial collapse that would have precipitated another Great Depression. While these measures deserve credit for preventing a financial collapse, there is no reason to believe that a financial collapse would have led to a second Great Depression, defined as a decade of double-digit unemployment. The first Great Depression was not just the result of mismanagement of a banking crisis in its early days. The failure of the Fed and the Treasury to take steps to backstop the banking system undoubtedly led to a more severe downturn for the economy and to financial disasters for millions of families who lost their life’s savings in failed banks. However, nothing about this initial failure to act decisively doomed the economy to a decade of double-digit unemployment. Rather, the extended depression was the result of persistent policy failures over the course of a decade.

By January 1980, Volcker had raised interest rates enough to push the economy into recession.[42] After a brief reprieve in the second half of 1980, he began to push up interest rates again. The economy returned to recession in July 1981, with unemployment peaking at just under 11 percent. Volcker was clearly serious about fighting inflation, and he retains a legacy as “a giant of the financial industry” who “restored credibility to the Federal Reserve.”[43] In a similar vein, Ben Bernanke was chairman of the Fed when the housing bubble collapsed and the banking crisis threatened to bring down the financial system. Even though the resulting fallout has given the country the worst downturn since the Great Depression, almost no one in a position of authority has suggested that Bernanke be fired for this policy failure. While it is true that Bernanke only took over as Fed chair in January 2006, after the housing bubble had already expanded to a level where it would have been almost impossible to deflate without causing serious damage, Bernanke had been in top policy positions since the summer of 2002.

 

pages: 278 words: 82,069

Meltdown: How Greed and Corruption Shattered Our Financial System and How We Can Recover by Katrina Vanden Heuvel, William Greider

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Asian financial crisis, banking crisis, Bretton Woods, capital controls, carried interest, central bank independence, collateralized debt obligation, conceptual framework, corporate governance, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, deindustrialization, Exxon Valdez, financial deregulation, financial innovation, Financial Instability Hypothesis, floating exchange rates, full employment, housing crisis, Howard Zinn, Hyman Minsky, income inequality, kremlinology, Long Term Capital Management, margin call, market bubble, market fundamentalism, McMansion, mortgage debt, Naomi Klein, new economy, offshore financial centre, payday loans, pets.com, plutocrats, Plutocrats, Ponzi scheme, price stability, pushing on a string, race to the bottom, Ralph Nader, Robert Shiller, Robert Shiller, Ronald Reagan, savings glut, The Great Moderation, too big to fail, trade liberalization, transcontinental railway, trickle-down economics, union organizing, wage slave, Washington Consensus, women in the workforce, working poor, Y2K

Massive losses piled up at places like Citigroup, Coun-trywide, Merrill Lynch and Morgan Stanley, and cascaded back into the insurance companies. At the end of February, the huge insurer American International Group reported the largest quarterly loss, $5 billion, since the company started in 1919. After some delay, the Federal Reserve Board last summer started lowering interest rates on loans to the banks. But in a phrase from the bank crisis of the 1930s, it was like “pushing on a string.” The bankers’ problem was not that money was too expensive to lend out; it was that they were afraid they wouldn’t get their money back. When they did lend, they jacked up the rates to compensate for the higher perceived risks—even to solid customers. The Port Authority of New York and New Jersey suddenly had to borrow money at 20 percent. The State of Pennsylvania couldn’t finance its college student loan program.

Most important, it drew upon the New Deal’s legacy of government intervention in the marketplace—without any of the New Deal’s fundamental concern for the well-being of ordinary Americans. This year happens to be the 75th anniversary of the New Deal, a revolution in governmental philosophy that began with the Emergency Banking Act of 1933. That first piece of New Deal legislation was a hurried response to the worst banking crisis in U.S. history—until now. President Franklin Delano Roosevelt outlined the problem clearly in his first fireside chat, a week after taking office. “We had a bad banking situation,” Roosevelt said. “Some of our bankers had shown themselves either incompetent or dishonest in the handling of people’s funds. They had used the money entrusted to them in speculations and unwise loans. ... It was the government’s job to straighten out this situation and do it as quickly as possible.”

 

pages: 241 words: 83,523

A Swamp Full of Dollars: Pipelines and Paramilitaries at Nigeria's Oil Frontier by Michael Peel

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banking crisis, British Empire, colonial rule, energy security, informal economy, megacity, offshore financial centre, plutocrats, Plutocrats, race to the bottom, Scramble for Africa, trade route, UNCLOS, wage slave

It’s a spirit that’s less alien than it might first appear to the rich Western states that consume Nigerian oil and thus help finance Lagosian anarchy. As we’ve seen, it only takes a sharp rise in food costs or a crisis in the financial markets to remind even the most complacent Englishman in his castle uncomfortably of the possibility of sudden poverty and social unrest. The anxiety in Britain at the height of the banking crisis in late 2008 hinted at how a stability stemming from seven centuries of parliamentary tradition could disappear 76 A SWAMP FULL OF DOLLARS with surprising speed in the wake of economic catastrophe, extreme violence or environmental disaster. Perhaps a latent recognition of this underpins the popularity among Western audiences of Cormac McCarthy’s The Road, whose post-apocalyptic ambience surpasses that even of Lagos at its most dystopian.

G. 43 Balewa, Sir Tafawa 43, 50 Balogun, Tafa 177 Bari, Daniel Orumiegha- 165 Bayelsa State 8, 23, 31, 106, 108, 110, 183 Alamieyeseigha, DSP, governor 105–13, 132–3, 189, 201 Poverty Eradication Committee 108 Bealer, Jay 141 Benn, Hilary 170 Benue River 5–6 Benue State 8 Biafra, see civil war Bill and Melinda Gates Foundation 81 bin Laden, Osama 9 Black Faces, White Masks 191 Blair, Tony 122 Bonga oilfield 142 Bongo, Omar 150, 151 Bonny Island 27, 145 Bookshop House 68, 70 BP 23, 41 Anglo-Iranian Oil Company 41 Brass 32, 34–5, 38, 39, 44–5, 107 British cemetery 44–5 Charles, Charles 45 Chatteris, Henry Byrne 45 HMS St George 45 Sutton, William 45 Taylor, George John 45 Briggs, Boma 18 Britain Aberdare, Lord 40 banking crisis 75 Blair, Tony 122 British oil 31 Brown, Gordon 122, 143 Chamberlain, Joseph 40 Churchill, Winston 41, 49, 90 civil war, involvement in 47–58 civil war, UK involvement in 48–61 colonial relationship with Nigeria xvi, 24, 31, 32, 35, 38, 40, 41, 42, 76–7, 169 Elizabeth II, Queen 201–202 INDEXAND JUNKIES STARK ILLITERATES Financial Services Authority 122, 131 Goldie, Sir George 36–7, 40 Grey, Sir Ralph 42 Hunt, Sir David 56–7 Kirk, Sir John 38–9 Macmillan, Harold 31 Oil Rivers Protectorate 36 post-independence relationship with Nigeria xvii, 48, 50, 57, 60 Royal Niger Company 32, 33–4, 35, 36–40, 191, 199 Stewart, Michael 54, 55 Straw, Jack 17, 201 Thatcher, Margaret 74, 116 Thomas, George 54 Thomas, Sir Philip 201 Unilever 33 United Africa Company 33, 34, 36 Wilson, Harold 48, 50, 51, 54 Brown, Gordon 122, 143 Buhari, Muhammadu 17 buses, Lagos 71, 96–103 Chiguzor 97–103 Lagos State Traffic Management Authority (‘MOT’) 99, 100 National Union of Road Transport Workers 70–71, 98–100, 101 Obalende terminus 100, 103 Bush, George W. 149 Cape Verde islands 147, 153 Chamberlain, Joseph 40 Chang, Clifton 155 Chelsea Hotel, Abuja 132–3 Chevron xvi, 6, 166, 186–8 Chiguzor 97–103 213 China in Cape Verde 153 expansion in Africa 139, 140, 146, 153–4, 168, 169, 203 exploration contracts xvii–xviii Dangote Group 153, 203 Sinoma International Engineering 154 Churchill, Winston 41, 49, 90 Citibank 124–5 civil war (1967–70) 44, 47–59 death toll in 52 Gowon, General Yakuba 51, 58 Hunt, Sir David 56–7 Ironsi, Major-General Johnson Umunnakwe Aguiyi- 50–51 January Boys 50 Ojukwu, General Chukwuemeka 47–58, 181 Shell 48, 52, 54–5 Stewart, Michael 54 Thomas, George 54 Wilson, Harold 48, 50, 51, 54 Clifford, Reuben Wilson 189–90, 191 Community Primary School One 171–2 Comrade 180–83, 186, 193 Congo 82 corruption xvi, xvii, 18, 59, 90, 103, 105, 114–15, 158, 161, 167, 171, 177, 202–203 ‘area boys’ urban gangs 67–73, 92 Balogun, Tafa 177 banks 106, 109–13, 115–132 Citibank 124–5 UBS 110–12 214 A SWAMP FULL OF DOLLARS Economic and Financial Crimes Commission (EFCC) 109, 112, 113, 114, 177, 202 Ribadu, Nuhu 202–203 electoral 10, 16–17, 50, 107–108, 204 international 145–6 Transparency International 146 transport system 103, 109 Crowder, Michael 40–41 Curtis, Richard 171 Dangote Group 153 Sinoma International Engineering 154 Dariye, Joshua 113 Daukoru, Edmund 203 Daura, Ahmadu 123 debt crisis, see foreign debt, Nigerian Dechaine, Lieutenant-Colonel Rene 140, 152 Delta State 113 Dutch 35 Dada, Timothy 95–6 Dallas, Alexander 152 Dallas 137 Bealer, Jay 141 Chang, Clifton 155 Esono, Pablo 141 Florio, Lieutenant Frank 150 Hendrickson, Commander Bob 141, 148, 149 Hollister, Jay 144 Jones, Ansel 137–8 Kaichi Maru 144 Kurta, Rear Admiral Anthony 140 Montalvo, Lieutenant Frank 151 Nowell, Commodore John 140, 150 Nzang, Lieutenant Placido 141, 155 Tiny, Jimmy 143 UN Convention on the Law of the Sea 144 Wagner, Captain 143, 144, 145, 148, 149, 152 Dangosu, Giedia 24 Dangote, Aliko 203 Economic and Financial Crimes Commission (EFCC) 109, 112, 113, 114, 177, 202 economic collapse see foreign debt, Nigerian Egbesu 5, 13, 183, 191, 192, 198 Ekwueme, Alex 59, 61–4 Elf 151 Elizabeth II, Queen 201–202 Emmanuel, Henry 193–4 Energy Information Administration, US 6, 145 Eni 6, 29, 146 Enron 146 Enugu 47 Equatorial Guinea 141, 142 Mbasago, President Obiang Nguema 141 Ernest 182 Esono, Pablo 141 European Union xviii ExxonMobil xvi, 6, 159 Eze, Kenneth 84–7 Fanon, Franz 191 50 Cent 81 INDEXAND JUNKIES STARK ILLITERATES financial crisis, international 75, 145, 150, 168 Florio, Lieutenant Frank 150 foreign debt, Nigerian 5 8–64, 122, 160, 171 Africa Economic Digest 60, 63 Ekwueme, Alex 59, 61–4 Paris Club 61, 64, 171 Synge, Richard 60, 63, 209 Wolfensohn, James (World Bank) 63 France relationship with Nigeria 36, 59 Freeman, Commander Timi 184–98 Friedman, Thomas 141 G8 summit (2005) 170, 171 Gabon 118, 150 Bongo, Omar 150, 151 Dechaine, Lieutenant-Colonel Rene 140, 152 Gana, Peter 120 Port-Gentil 150, 152 Gazprom xviii Gbomo, Jomo 180 Germans 10 Ghana 43, 51, 60–61, 76, 118 Accra 44 Nkrumah, Kwame 43 Godson 184–98 ‘Golden Arches’ theory 141 Goldie, Sir George 36–7, 40 The Good, the Bad and the Ugly 21 Gowon, General Yakuba 51, 58 Grey, Sir Ralph 42–3 Grimu, Richard 33 Gulf of Guinea xiii, 138, 141, 145, 147, 154 215 Gusau, General Mohammed Aliyu 119 Halliburton 145–6 Stanley, Jack 145–6 Hendrickson, Commander Bob 141, 148, 149 HMS St George 45 Hobbes, Thomas 75, 86 Hollister, Jay 144 ‘Horatius’, poem 53 Hunt, Sir David 56–7 Iblubor, Blessing 16 Ibori, James 113–14, 202 MER Engineering 114 Icelanders 10 Igbo people 41, 47, 49, 50, 51 civil war and Biafra 47–9 Ijaw people 5, 7, 8, 18, 19, 21, 108, 161, 164, 181, 183, 186, 198 Ikebiri I 185–7, 189 Ododo, Francis 185–7 independence, Nigerian 43, 44, 169 Inengite, Chief Osobere 24–7, 29, 170 Inengite, Clifford 29–30 Integrate Production System Surveillance (IPSS) 162 International Maritime Bureau 142 Ironsi, Major-General Johnson Umunnakwe Aguiyi- 50–51 Islam al-Qaeda 9 bin Laden, Osama 9 in Nigeria 9, 41 Itsekiri people 164 Iweala, Ngozi Okonjo- 74, 158 216 A SWAMP FULL OF DOLLARS Izon language 30, 33 Jaja, Tamunosisi Gogo 172–4 January Boys 50 Jones, Ansel 137–8 Joseph, Colin 109 Kaichi Maru 144 Kalabar River 3 Kirk, Sir John 38–9 KKK 10 Korokorose 185, 192–7 Kuluama I 188–92 Clifford, Reuben Wilson 189–90, 191 Community Development Council 189 Orumo, Emmanuel 189 Kunle 179, 182 Kuramo Beach 80–87 Bala 83 Bullet 83 Dreams bar 84 Eze, Kenneth 84–7 Le Meridien Eko hotel 80, 81 Queen 83 Sammy’s Bar 80 Scorpion 81–4 Varieties Bar 81, 82 Kurta, Rear Admiral Anthony 140 Lagos xvi, xviii, xix, xx, 36, 67, 73–80 Balogun market 69 Bookshop House 68, 70 Broad Street 70 buses 71, 96–103 Campos Square 70, 73 Ikeja district 93 Kuramo Beach 80–87 Odunlami Street 68 okadas 89–96, 205 Orile 102 Osodi 99, 100, 103 Somolu 90 Third Mainland Bridge 78, 100 transport system 90–103, 205 Victoria Island 77, 80, 205–206 Lagos State Traffic Management Authority (‘MOT’) 99, 100 Leviathan 75 Liberia 9, 14, 70, 79, 172, 188, 197 life expectancy of Nigerians 73 Live 8 60, 171 Macaulay, Herbert 67 Macaulay, Thomas Babington 53 Macbeth 15 Macmillan, Harold 31 Mann, Simon 142 Marathon 143 Martins 181 Mathews, Michael 124 Mbasago, President Obiang Nguema 141 McCarthy, Cormac 76 McKenzie, Glenn 180–99, 210 MEND, see Movement for the Emancipation of the Niger Delta Middle East 6 concerns about disruption in xviii, 9, 139, 203 elections 17 Saudi Arabia oil exports 6 minibuses 71 Miss World contest (2002) xix Mistry, Rohinton 206 Mobile Police 184 INDEXAND JUNKIES STARK ILLITERATES Molue see buses, Lagos Monfrini, Enrico 115, 117–30 Gusau, General Mohammed Aliyu 119 Swiss Federal Office of Justice 126 Montalvo, Lieutenant Frank 151 Montero, Kaizer xiv–xv, xx Morgan Procurement 124 MOSEND see Movement for the Survival of the Ethnic Nationalities in the Niger Delta Motorcycle Operators Association of Lagos State 90–94 Adio, Innocent 95 Agumba, Leonard 94–5 Dada, Timothy 95–6 Gbagada branch 94 Orimogunje, Olufemi 91–4 Movement for the Emancipation of the Niger Delta (MEND) 21, 22, 163, 179–99 Freeman, Commander Timi 184–98 Gbomo, Jomo 180 Olotu 197–9 Movement for the Survival of the Ethnic Nationalities in the Niger Delta (MOSEND) 181 National Archives 35, 37, 42, 43, 54 National Intelligence Council, US xvii National Oil Spill Detection and Response Agency 27–8 National Petroleum Corporation xviii 217 National Union of Road Transport Workers 70–71, 98–100, 101 Ndibe, Okey 79 Niger Delta xiii, 3–22, 23–45 background and people 5–6 Benue River 5–6 disruption and militancy in 3–22, 7, 8, 10 history of oil discovery in 23–45 housing 25 Niger Delta People’s Volunteer Force 3, 187 Niger River 5–6, 36 village life in xvii, 18, 28–9, 189–92, 195–7 Niger Delta People’s Volunteer Force 3, 187 Niger River 5–6, 36 Nigeria, civil war see civil war Nigeria, creation of as new country 41, 42 Lugard, Flora 41 Nigeria, foreign debt see foreign debt, Nigerian Nigeria, independence see independence, Nigerian Nigeria, religion see religion Nigerian Family Support Programme 124 Nigerian National Petroleum Corporation 125, 183 Nitel 126 Nkrumah, Kwame 43 Nowell, Commodore John 140, 150 Nyingife, Sunday 29, 30 Nzang, Lieutenant Placido 141, 155 218 A SWAMP FULL OF DOLLARS Obasanjo, Olusegun (president of Nigeria 1999–2007) 8, 16, 17, 19, 24, 62, 63, 114, 116, 129, 146, 155, 158, 176, 186 1978 Land Use Act 9, 186 Odi 8 Odili, Peter 10, 172–6 Odioma 165 Bari, Daniel Orumiegha- 165 Ododo, Francis 185–7 Odugbemi, Sina 90–103 Ogoni 7, 161 oil export levels xvii, 6, 7, 27, 52, 58, 145 spills xv, 27–8 stealing of xvi, 13, 15, 17–19, 143, 143, 168, 171 world prices xvi, xvii, 19, 58, 60, 90, 109, 139, 145, 154, 160, 167–8, 203 oil companies Agip 192, 195 BP 23, 41 Anglo-Iranian Oil Company 41 Chevron xvi, 6, 166, 186–8 Elf 151 Eni 6, 29, 146 ExxonMobil xvi, 6, 159 Shell xv, xvi, 6, 7, 15, 18, 23, 28, 41, 42, 146, 157–70, 198 Bonga oilfield 142 in Oloibiri 25–9 interest in civil war 48, 52, 54–5 London office 157–70 Omiyi, Basil 157–70, 198 Total 6, 29, 146 Oil Rivers Protectorate 36 oil spills xv, 27–8 National Oil Spill Detection and Response Agency 27–8 Ojukwu, General Chukwuemeka 47–58, 181 okadas 89–96, 205 Adio, Innocent 95 Agumba, Leonard 94–5 Dada, Timothy 95–6 Orimogunje, Olufemi 91–4 Palm Grove Unit, Motorcycle Operators Association of Lagos State 90–94 riots, Ikeja district 93 Oko 61 Oloibiri 23–7, 170, 181 Inengite, Chief Osobere 24–7, 29, 170 Inengite, Clifford 29–30 Nyingife, Sunday 29, 30 Oloibiri Oil and Gas Research Institute 24 Shell in 25–9 Oloibiri Oil and Gas Research Institute 24 Olotu 197–9 ‘Operation Fire for Fire’ 161 Operation Locust Feast 19 Oputa, Charly Boy 89, 90, 94 Organisation for Economic Co-operation and Development (OECD) 146 Orimogunje, Olufemi 91–4 Orumo, Emmanuel 189 palm oil xvi, 32, 34, 32, 37 1895 Akassa uprising 32–5, 38–9, 107 Paris Club 61, 64, 171 Paul, A.A. 195 INDEXAND JUNKIES STARK ILLITERATES Pax Christi 163 People’s Democratic Party 30, 107, 172, 202 Odili, Peter 172–6 piracy 142–3, 144–5 Sirius Star 142 UN Convention on the Law of the Sea 144 Plateau State 113 police 21, 161–2 Balogun, Tafa 177 Mobile Police 184 ‘Operation Fire for Fire’ 161 Supernumerary (Spy) police 162 Port Harcourt 3, 4, 13, 17, 20, 23, 51, 52, 162, 167, 175, 176, 179, 180, 202 Port-Gentil, Gabon 150, 152 Portuguese 35, 76 Poverty Eradication Committee, Bayelsa State 108 Powell, Colin xix The Prize: The Epic Quest for Oil, Money and Power 151 religion 9, 41, 71, 102 Ribadu, Nuhu 202–203 Rivers State 17, 171–6 budget 174–6 Community Primary School One 171–2 Government House 173, 174–6 Jaja, Tamunosisi Gogo 172–4, 175 Odili, Peter 172–6 State Assembly building 173 The Road 76 Royal Dutch Shell see Shell Royal Niger Company 32, 33–4, 35, 36–40, 191, 199 219 Unilever 33 United Africa Company 33, 34, 36 Wallace, William 38 Russell, Henry 34 Russia Gazprom xviii Georgia conflict 150 oil exports 6 relationship with Nigeria xviii, 139, 146, 168, 203 Sagbama 107 Salisbury, Marquess of 38, 40 Sangama 18 São Tomé and Príncipe xiii–xx, 139–42 agua petróleo xiii–xv, xvi, xx, 139 Saro-Wiwa, Ken 7, 8, 22, 158, 161 Scorpion 81–4 Second World War 42 September 2001 terrorist attacks xviii, 161, 203 Shad-Ro Services 162 Shagari, Shehu 59 Shell xv, xvi, 6, 7, 15, 18, 23, 28, 41, 42, 146, 157–70, 198 in Oloibiri 25–9 interest in civil war 48, 52, 54–5 Bonga oilfield 142 London office 157–70 Omiyi, Basil 157–70, 198 Siemens 126 Simeon 183–99 Sirius Star 142 slavery 32, 35–6, 40, 76, 153 Smith, M.

 

Blindside: How to Anticipate Forcing Events and Wild Cards in Global Politics by Francis Fukuyama

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Asian financial crisis, banking crisis, Berlin Wall, Bretton Woods, British Empire, capital controls, Carmen Reinhart, cognitive bias, cuban missile crisis, energy security, flex fuel, income per capita, informal economy, invisible hand, John von Neumann, Menlo Park, moral hazard, oil rush, oil shale / tar sands, oil shock, packet switching, RAND corporation, Ray Kurzweil, reserve currency, Ronald Reagan, The Wisdom of Crowds, trade route, Vannevar Bush, Vernor Vinge, Yom Kippur War

Suffice it to say that many factors came into play: currency speculators caused a good deal of trouble but were able to do so only because some currencies were deliberately undervalued for the purpose of spurring exports, and some economies were overleveraged in dollar lending amid frailties in newly liberalized financial sectors. The consequences of the crisis were devastating. The East Asian recession during 1998 was the most severe in modern history. Real GDP fell by 13.1 percent in Indonesia, 10.5 percent in Thailand, 7.4 percent in Malaysia, and 0.6 percent in Philippines. Singapore also suffered a contraction of 0.9 percent of GDP even though it did not experience a banking crisis. Investment fell by 44.3 percent in Thailand, 44.0 percent in Malaysia, 33.0 percent in Indonesia, and 11.2 percent in the Philippines. Consumption also declined because of job losses and the collapse in credit availability—by 11.5 percent in Thailand, 10.2 percent in Malaysia, 6.2 percent in Indonesia, and 3.4 percent in Singapore. The large currency declines improved the competitive position of most Asian countries, but export growth did not rebound quickly in most cases.

On the contrary, the IMF 2990-7 ch05 hale 7/23/07 12:09 PM Page 49 econoshocks: the east asian crisis case 49 programs forced countries to pursue microeconomic reforms that opened the door to more engagement with the global economy, including reduced trade protection and expanded opportunities for foreign direct investment. As a result, East Asia enjoyed a sustained recovery after 1999 and was able to restore the health of its domestic financial system. The country that experienced the largest devaluation and the greatest banking crisis, Indonesia, has been able to reduce its government debt from 92 percent of GDP in 2000 to 46 percent currently. The crisis had produced other significant side effects, some, as suggested earlier, with profound consequences for the current balance-of-payments equilibrium of the world economy. After the crisis, the investment ratios of East Asia never fully recovered. Except for China and Vietnam, investment ratios in most East Asian countries are still 5–10 percent below their levels of the early 1990s.

 

pages: 310 words: 82,592

Never Split the Difference: Negotiating as if Your Life Depended on It by Chris Voss, Tahl Raz

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banking crisis, Black Swan, clean water, cognitive bias, Daniel Kahneman / Amos Tversky, Donald Trump, framing effect, friendly fire, iterative process, loss aversion, market fundamentalism, price anchoring, telemarketer, ultimatum game

But then the Dutch explorer Willem de Vlamingh went to western Australia in 1697—and saw a black swan. Suddenly the unthinkable and unthought was real. People had always predicted that the next swan they saw would be white, but the discovery of black swans shattered this worldview. Black Swans are just a metaphor, of course. Think of Pearl Harbor, the rise of the Internet, 9/11, and the recent banking crisis. None of the events above was predicted—yet on reflection, the markers were all there. It’s just that people weren’t paying attention. As Taleb uses the term, the Black Swan symbolizes the uselessness of predictions based on previous experience. Black Swans are events or pieces of knowledge that sit outside our regular expectations and therefore cannot be predicted. This is a crucial concept in negotiation.

Here are some of the best techniques for flushing out the Black Swans—and exploiting them. Remember, your counterpart might not even know how important the information is, or even that they shouldn’t reveal it. So keep pushing, probing, and gathering information. ■Let what you know—your known knowns—guide you but not blind you. Every case is new, so remain flexible and adaptable. Remember the Griffin bank crisis: no hostage-taker had killed a hostage on deadline, until he did. ■Black Swans are leverage multipliers. Remember the three types of leverage: positive (the ability to give someone what they want); negative (the ability to hurt someone); and normative (using your counterpart’s norms to bring them around). ■Work to understand the other side’s “religion.” Digging into worldviews inherently implies moving beyond the negotiating table and into the life, emotional and otherwise, of your counterpart.

 

pages: 379 words: 114,807

The Land Grabbers: The New Fight Over Who Owns the Earth by Fred Pearce

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Asian financial crisis, banking crisis, big-box store, blood diamonds, British Empire, Cape to Cairo, carbon footprint, clean water, credit crunch, Deng Xiaoping, Elliott wave, en.wikipedia.org, energy security, farmers can use mobile phones to check market prices, index fund, Jeff Bezos, land reform, land tenure, Mahatma Gandhi, market fundamentalism, megacity, Mohammed Bouazizi, Nikolai Kondratiev, offshore financial centre, quantitative easing, race to the bottom, Ronald Reagan, smart cities, too big to fail, urban planning, urban sprawl, WikiLeaks

It said that food futures—previously a rather humdrum business that helped fund farmers and keep prices stable—had been taken over by speculators in the finance markets, and in the process it had turned into a dangerous beast that bankrupted farmers and caused worsening price volatility. It said that the same kinds of forces that had overwhelmed the world’s banks in 2008 were disrupting food markets too. And there was an extra wrinkle. It appeared that, as the banking crisis escalated, investors seeking a safe haven were buying into commodities and, by 2010, were driving up food prices once more. The argument, in essence, is this. Until the 1980s, there was a mutually supportive relationship between farmers and market traders—a relationship that had existed since the mid-nineteenth century, thanks to the futures contracts system invented at the Chicago Board of Trade.

But the deregulation of financial institutions in the 1980s undermined that relationship, by creating new forms of financial products that allowed speculators who knew nothing about farming or food trade to muscle in on the food futures business. New kinds of financial derivatives were created, somewhat analogous to those behind the subprime mortgage business, whose collapse triggered the 2008 banking crisis. Traditional futures are themselves a form of derivative, of course. But the new forms began in 1991, when Goldman Sachs packaged up commodities futures of all sorts (from coffee and corn to oil and copper) into the Goldman Sachs Commodity Index. It then sold stakes in index funds. By buying them, investors were betting on the future price of a basket of commodities. The first index funds bumped along for years without attracting too much attention.

See also Illovo; Western family Asuncion, Paraguay, 129, 132, 135, 138 Atama Plantation, 88 Australia, 23, 157–61, 178, 182, 192, 238, 266, 267, 272, 289; land grabbed in, 36, 37, 100, 157–61 Australian Agricultural Company, 157 Awash National Park, Ethiopia, 286 Ayoreo Indians, 131, 134–35 Badia, 283–84, 285, 289 Bahia, Brazil, 97, 115, 118–27, 202 Bahrain, 37, 38, 160 Ballve, Teo, 146–47 Bambara, 272, 281 bananas, 33, 56, 95, 188, 189, 192, 235, 272, 280; banana republics, 141–42, 147 Bangladesh, 21 banking crisis of 2008. See also credit crunch Baro River, Ethiopia, 7, 8, 14, 15 Barreiras, Brazil, 119, 120–21, 123, 125, 127 Batwa “pygmies,” 224–25 Bayliss, Peter, 81–85, 88, 90 Beddington, John, 291, 292–95, 301 Bedford Biofuels, 248–49 Bedouin, 35, 283–84 beef, 27, 116, 118, 138, 141, 157–59, 247 Beidahuang Land Cultivation Group, 202 Beigbeder, Charles, 109 Belarus, 110 Benetton family, 149, 151–52, 154 Benin, 88, 202 Bernhard, Prince, 223, 224, 225, 226–67, 230 Bin Laden Group, 33 biodiesel.

 

pages: 543 words: 147,357

Them And Us: Politics, Greed And Inequality - Why We Need A Fair Society by Will Hutton

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Andrei Shleifer, bank run, banking crisis, Benoit Mandelbrot, Berlin Wall, Bernie Madoff, Bernie Madoff, Big bang: deregulation of the City of London, Bretton Woods, capital controls, carbon footprint, Carmen Reinhart, Cass Sunstein, choice architecture, cloud computing, collective bargaining, conceptual framework, corporate governance, credit crunch, Credit Default Swap, debt deflation, decarbonisation, Deng Xiaoping, discovery of DNA, discovery of the americas, discrete time, diversification, Edward Glaeser, financial deregulation, financial innovation, financial intermediation, first-past-the-post, floating exchange rates, Francis Fukuyama: the end of history, Frank Levy and Richard Murnane: The New Division of Labor, full employment, George Akerlof, Gini coefficient, global supply chain, Growth in a Time of Debt, Hyman Minsky, I think there is a world market for maybe five computers, income inequality, inflation targeting, interest rate swap, invisible hand, James Dyson, James Watt: steam engine, joint-stock company, Joseph Schumpeter, Kenneth Rogoff, knowledge economy, knowledge worker, labour market flexibility, Long Term Capital Management, Louis Pasteur, low-wage service sector, mandelbrot fractal, margin call, market fundamentalism, Martin Wolf, means of production, millennium bug, moral hazard, mortgage debt, new economy, Northern Rock, offshore financial centre, open economy, plutocrats, Plutocrats, price discrimination, private sector deleveraging, purchasing power parity, quantitative easing, race to the bottom, railway mania, random walk, reserve currency, Richard Thaler, rising living standards, Robert Shiller, Robert Shiller, Ronald Reagan, Rory Sutherland, shareholder value, short selling, Silicon Valley, Skype, South Sea Bubble, Steve Jobs, The Market for Lemons, the market place, the payments system, the scientific method, The Wealth of Nations by Adam Smith, too big to fail, unpaid internship, value at risk, Washington Consensus, working poor, éminence grise

The new credit default swap (CDS) was meant to insure the holder of a security against default, but in fact it did little more than provide the means to speculate on the price of bonds, rather as currency options could be used to speculate on currencies. Again, there was no insurable interest: the CDS was not an insurance premium but a gambling chip. Buy a CDS in a bank or country debt, and as soon as there was concern about the credit-worthiness of the loan the price of the CDS would rise. Hedge funds buying CDSs in incredible volume would be key destabilisers during the banking crisis – the trigger for both Bear Stearns’ and Lehman’s demise – and later triggers of the sovereign debt crisis in Europe. It was massive buying of CDSs on Greek government debt in April 2010 that forced the massive EU and IMF bail-out. The evolution of finance into a transaction-driven market place meant there was a new distance between clients and bankers. A banker might originate a loan, but she would aim to distribute it to any number of destinations, aside from her own bank.

This is far higher than the figure for the previous thirty (more regulated) years, and it imposed far higher fiscal costs. A quarter of these crises involved public debt rising by more than 10 per cent of GDP and another half approached 10 per cent of GDP.16 Yet the warnings were disregarded, even as it became obvious that deregulation resulted in a degree of instability that would eventually trigger a systemic Western banking crisis. Bill White, then chief economist at the Bank of International Settlements, warned in a prescient but largely ignored paper in 2004 that deregulated banking systems in the past had shown an alarming capacity to reinforce the economic cycle upwards, buoying up asset prices, reducing credit-worthiness terms and generating extraordinary levels of indebtedness. It was doing so again, and central bankers should not be seduced by low rates of inflation into believing all was well.

In that case, the cumulative loss of output would be more than £5 trillion. Haldane’s upper estimate for lost output is even worse, at £7 trillion. These are epic numbers. Admittedly, they are all based on the assumption that a growth rate of 2.75 per cent, against which they are benchmarked, was sustainable, when it almost certainly was not. Nevertheless, they give an indication of the scale of the costs the banking crisis has imposed on the rest of the economy, and the adjustment and reconstruction challenge that the country now faces. It could be even worse. The economics team at Barclays believe that it is perfectly plausible for growth to average just 1.75 per cent for the first half of the current decade.4 The danger is that business, households, finance and government all make their necessary structural adjustments independently of each other – and within a global environment where similar adjustments are being made, protectionism is rising and competitive devaluations are rife.

 

pages: 934 words: 135,736

The Divided Nation: A History of Germany, 1918-1990 by Mary Fulbrook

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Albert Einstein, banking crisis, Berlin Wall, collective bargaining, deindustrialization, Fall of the Berlin Wall, feminist movement, first-past-the-post, full employment, joint-stock company, land reform, means of production, open borders, Peace of Westphalia, Sinatra Doctrine, union organizing, unorthodox policies

Page 395 INDEX A Ackermann, Anton, 188 Adenauer, Konrad: re-emergence after Third Reich, 359; as leader of CDU and elected Chancellor, 139, 163; the Adenauer period, 17588 passim; declining years, Spiegel affair and retirement 1978; willingness to accept former Nazis in political life, 279; and western integration, 17588 passim, 307, 364 ADGB (Allgemeiner Deutscher Gewerkschaftsbund), see Trade Unions Adorno, Theodor, 38, 281 Africa, 100, 103 Ahlen Programme, 138 Allied war-time planning on Germany, 1301 Alsace-Lorraine, 31 Andersch, Alfred, 297 Anschluss of Austria, 923 Antifas, 1356, 159 anti-Semitism: Hitler's, 51, 86; in Third Reich, 879; in Austria, 92; Holocaust, 10320; in GDR, 276; in FRG, 287; see also Jews, Holocaust APO (Extra-parliamentary Opposition), 282 appeasement, 925, 99 armistice, 26 Army: in Imperial Germany, 20, 23; in Weimar Republic, 26, 27, 31, 32, 489, 58, 64; in Third Reich, 712, 8995; in World War Two, 96125 passim in Federal Republic of Germany, 178, 279; in GDR, 180; in both Germanies after 1949, 25864 passim, 353, 35960 Attlee, Clement, 133 Auschwitz, 1067, 11113, 368; see also Concentration Camps, Holocaust Austria: exclusion from 'small Germany' in 1871, 3; forbidden union with Germany under Treaty of Versailles, 31; and banking crisis of 1931, 57; attempted coup by Austrian Nazis in 1934, 90; Anschluss with Germany in 1938, 923; as separate German-speaking state, 291; concentration camps in, 304; border with Hungary opened in 1990, 3234 Axel Springer Press, 282, 296 Axis powers, 90; see also Tripartite Pact B Baader, Andreas, 211, 2846 Bad Godesberg Programme, 186 Baden, Prince Max von, 24, 25 Bahro, Rudolf, 26970, 320, 365 Baltic States, 936 banking crisis (1931), 57 Barschel, Uwe, 214 Barzel, Rainer, 209 Basic Law (Grundgesetz), 148, 163, 16871 passim, 209, 253, 2611, 307, 338, 341 Basic Treaty (1972), 209 Battle of Britain, 99 Bauer, Gustav, 31 Bauhaus, 39 Bausoldaten, 224, 260, 274 Baylis, T., 251 BDM (Bund Deutscher Mädel), 77 Becher, Johannes, 292 Beck, Ludwig, 91 Becker, Jurek, 294 Page 396 Beer Hall Putsch (1923), 35, 88, 98 Behrens, Fritz, 193, 202 Belgium, 36, 98 Belzec, 110; see also Concentration Camps Benary, Arne, 193, 202 Benjamin, Walter, 38 Berchtesgaden, 70 Bergen-Belsen, 117, 306; see also Concentration Camps Berghahn, Volker, 85 Beria, L.

Brüning's priority nevertheless remained that of showing that Germany was unable to pay reparations, whatever the cost in human misery, misery which could have been alleviated by public expenditure programmes and less deflationary policies. In the summer of 1931, the economic situation was further exacerbated by a financial crisis. A failed attempt at a German Austrian customs union led to a withdrawal of French credits from Austria, precipitating a collapse of the main Austrian bank, a rush of bankruptcies in Austria and Germany, and a banking crisis, which necessitated a 'bank holiday' of three weeks duration in July 1931. In the midst of this mounting economic chaos, politics was increasingly played out not in parliament but on the Page 58 streets. Skirmishes took place between rival political gangs: most frequently, the paramilitary organizations of the KPD joined violent battle with the unruly SA units. Hitler, in an attempt to retain the air of respectability cultivated over the preceding few years, now made concerted efforts to improve his relations with conservative elites: the army, agricultural landowners, leaders of industry.

 

pages: 545 words: 137,789

How Markets Fail: The Logic of Economic Calamities by John Cassidy

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Albert Einstein, Andrei Shleifer, anti-communist, asset allocation, availability heuristic, bank run, banking crisis, Benoit Mandelbrot, Berlin Wall, Bernie Madoff, Bernie Madoff, Black-Scholes formula, Bretton Woods, British Empire, capital asset pricing model, centralized clearinghouse, collateralized debt obligation, conceptual framework, correlation coefficient, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, Daniel Kahneman / Amos Tversky, debt deflation, diversification, Elliott wave, Eugene Fama: efficient market hypothesis, financial deregulation, financial innovation, Financial Instability Hypothesis, financial intermediation, full employment, George Akerlof, global supply chain, Haight Ashbury, hiring and firing, Hyman Minsky, income per capita, incomplete markets, index fund, invisible hand, John Nash: game theory, John von Neumann, Joseph Schumpeter, laissez-faire capitalism, liquidity trap, London Interbank Offered Rate, Long Term Capital Management, Louis Bachelier, mandelbrot fractal, margin call, market bubble, market clearing, moral hazard, mortgage debt, Naomi Klein, Network effects, Nick Leeson, Northern Rock, paradox of thrift, Ponzi scheme, price discrimination, price stability, principal–agent problem, profit maximization, quantitative trading / quantitative finance, race to the bottom, Ralph Nader, RAND corporation, random walk, Renaissance Technologies, Richard Thaler, risk tolerance, risk-adjusted returns, road to serfdom, Robert Shiller, Robert Shiller, Ronald Reagan, shareholder value, short selling, Silicon Valley, South Sea Bubble, statistical model, technology bubble, The Chicago School, The Great Moderation, The Market for Lemons, The Wealth of Nations by Adam Smith, too big to fail, transaction costs, unorthodox policies, value at risk, Vanguard fund

However, in protecting Bear’s creditors from any losses, the authorities had undoubtedly prevented other Wall Street firms, and their shareholders, from incurring big losses. Economically, this government intervention was perfectly justifiable. With the credit markets having been locked up for more than half a year, it was silly to go on pretending that this was simply a liquidity crisis. It had evolved into a full-blown banking crisis. The collapse in the value of subprime securities and other asset-backed securities had permanently wiped out hundreds of billions of dollars of bank capital. There was a growing suspicion that some major financial institutions were insolvent, or close to insolvent. History demonstrates that in such circumstances the only way for policymakers to get ahead of the problem is to acknowledge its scale, excise some of the bad debts, and recapitalize the banks deemed able to survive.

History demonstrates that in such circumstances the only way for policymakers to get ahead of the problem is to acknowledge its scale, excise some of the bad debts, and recapitalize the banks deemed able to survive. In Japan during the 1990s, this didn’t happen, and the country endured a decade of economic stagnation following the bursting of a stock and real estate bubble. At about the same time, in Scandinavia, by contrast, governments took quick and effective action to resolve a large-scale banking crisis. In Finland, the government combined more than forty savings banks into one state-owned savings bank; in Norway, the government nationalized the country’s three biggest banks, wiping out their shareholders; in Sweden, the government seized control of the two largest banks and shunted their toxic assets into a state-owned company. In a March 2008 column, I quoted a speech by Stefan Ingves, a senior official at the International Monetary Fund, who, as an official in the Swedish government, had helped to devise its policies.

If these gambles work out well, their employees and stockholders reap the rewards; if things go wrong, the taxpayers foot some of the bill. To offset these perverse incentives, regulators should impose maximum leverage ratios on banks and other financial firms, and they should also oblige them to hold more than adequate levels of liquidity and capital in reserve. In addition, banks must be prevented from hiding liabilities and risks in SIVs and other shell companies. From the fringe banking crisis of the 1970s to the collapse of the shadow banking system in 2007, recent history demonstrates that opacity is a recipe for trouble. The big financial institutions will squawk about these restrictions, which will reduce their profitability. Let them. In choosing to shelter under the government safety net, they have abrogated their right to behave like hedge funds. On the subject of hedge funds and other nonbanks, we now know that the labels attached to financial institutions are often misleading.

 

pages: 466 words: 127,728

The Death of Money: The Coming Collapse of the International Monetary System by James Rickards

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Affordable Care Act / Obamacare, Asian financial crisis, asset allocation, Ayatollah Khomeini, bank run, banking crisis, Ben Bernanke: helicopter money, bitcoin, Black Swan, Bretton Woods, BRICs, capital controls, Carmen Reinhart, central bank independence, collateralized debt obligation, collective bargaining, complexity theory, computer age, credit crunch, currency peg, David Graeber, debt deflation, Deng Xiaoping, diversification, Edward Snowden, eurozone crisis, fiat currency, financial innovation, financial intermediation, financial repression, Flash crash, floating exchange rates, forward guidance, George Akerlof, global reserve currency, global supply chain, Growth in a Time of Debt, income inequality, inflation targeting, invisible hand, jitney, Kenneth Rogoff, labour mobility, liquidationism / Banker’s doctrine / the Treasury view, liquidity trap, Long Term Capital Management, mandelbrot fractal, margin call, market bubble, market clearing, market design, money: store of value / unit of account / medium of exchange, mutually assured destruction, obamacare, offshore financial centre, oil shale / tar sands, open economy, plutocrats, Plutocrats, Ponzi scheme, price stability, quantitative easing, RAND corporation, reserve currency, risk-adjusted returns, Rod Stewart played at Stephen Schwarzman birthday party, Ronald Reagan, Satoshi Nakamoto, Silicon Valley, Silicon Valley startup, Skype, special drawing rights, The Market for Lemons, Thomas Kuhn: the structure of scientific revolutions, Thomas L Friedman, too big to fail, trade route, Washington Consensus, working-age population, yield curve

Deflation slows nominal GDP growth, while nominal debt rises every year due to budget deficits. This tends to increase the debt-to-GDP ratio, placing the United States on the same path as Greece and making a sovereign debt crisis more likely. Deflation also increases the real value of private debt, creating a wave of defaults and bankruptcies. These losses then fall on the banks, causing a banking crisis. Since the primary mandate of the Federal Reserve is to prop up the banking system, deflation must be avoided because it induces bad debts that threaten bank solvency. Finally, deflation feeds on itself and is nearly impossible for the Fed to reverse. The Federal Reserve is confident about its ability to control inflation, although the lessons of the 1970s show that extreme measures may be required.

After three years of on-again, off-again crises and contagion, the solution was finally found in the troika of the IMF, the ECB, and the EU, backstopped by Germany. The IMF obtained its funds by borrowing from nations with healthy reserve balances, such as China and Canada. The EU raised funds by pooling member resources, largely from Germany. Finally, the ECB created funds by printing money as needed. The troika members operated under the central bankers’ new mantra, “Whatever it takes.” By late 2012, the European sovereign debt and bank crisis was largely contained, although rebuilding bank balance sheets and making the required structural adjustments will take years to complete. Despite this turmoil, the euro held up quite well, to the surprise of many analysts and investors, especially those in the United States. In July 2008 the euro reached a peak of $1.60 and remained in a trading range between $1.20 and $1.60 during the sovereign debt crisis.

Those who believe that bank deposit risk is a thing of the past should consider the case of Cyprus in March 2013, when certain bank deposits were forcibly converted into bank stock after an earlier scheme to confiscate the deposits by taxation was rejected. This conversion of deposits to equity in order to bail out insolvent banks was looked upon favorably in Europe and the United States as a template for future bank crisis management. There are innumerable ways to earn a return by taking risk. Stocks, bonds, real estate, hedge funds, and many other types of pooled vehicles are all investments that include both risk and return. An entire branch of economic science, particularly options pricing theory, was based on the flawed assumption that a short-term Treasury bill is a “risk-free” investment. In fact, recent U.S. credit downgrades below the AAA level, a rising U.S. debt-to-GDP ratio, and continuing congressional dysfunction about debt-ceiling legislation have all shown the “risk-free” label to be a myth.

 

pages: 549 words: 147,112

The Lost Bank: The Story of Washington Mutual-The Biggest Bank Failure in American History by Kirsten Grind

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bank run, banking crisis, big-box store, call centre, collateralized debt obligation, corporate governance, housing crisis, Maui Hawaii, mortgage debt, naked short selling, shareholder value, short selling, Skype, too big to fail, Y2K

By 1986, Pepper faced another problem, though: his succession. In three years, he would turn sixty-five. He had told the board, and promised himself, that he wouldn’t stay on past retirement age. He figured he had two options: sell Washington Mutual, or find someone to take his place. While selling the bank wasn’t ideal, it would have been a good time. Washington Mutual sat in a relatively strong position, even though another banking crisis was unfolding around it. This time banks were failing by the hundreds because of an energy downturn in oil states like Texas and Oklahoma, a commercial real estate bust in California and the Northeast, and an agricultural recession rippling through the midwestern states. In each region, banks had made loans that soured because of their region’s respective downturn. Bank failures would surge to more than 1,000 during the Savings and Loan Crisis, the highest number since Pepper’s sister saw her college funds evaporate.

“I tried to argue as forcefully and intelligently and legitimately as I could that stopping the crisis at WaMu was stopping the Main Street crisis,” Fishman said later about his conversations with various government officials. “All of this other crap was really a financial crisis. We were the Main Street crisis. And I could never get, because of the lack of attention, because of the anger at Kerry and the bank, I could never get enough traction around that argument. They were done with WaMu.” The banking crisis on Main Street continued strongly for the next two years. More than 280 community banks in all corners of the country closed, to be sold by the FDIC, a flood of failures soon overlooked as the normal course of business. The community bank for which Doug Wisdorf had been scheduled to start work the week after he died later failed. When the housing market was growing, the smaller banks made billions of dollars of loans to real estate developers.

See TARP employees, WaMu concerns about JPM purchase of WaMu by, 321–22 Dimon welcoming e-mail to, 304 and five emissaries–Killinger meeting, 203–6 former, 203–6, 203n impact of WaMu failure on, 310–11 JPM conversion of WaMu and, 321–24 layoffs of, 102, 158, 176, 196, 321–24 pension plans of, 310 Pepper’s e-mail to, 310–11 reactions to sale of WaMu by, 302–3, 305 and WaMu as name of bank, 203n See also specific person Enron, 91, 138, 197 Faber, David, 6 Fannie Mae, 64, 120–21, 130, 187, 248, 254, 257, 261, 285 Farkas, Lee, 130 Federal Deposit Insurance Corp. (FDIC) Bair defense of, 243 bank runs and, 214 banking crisis on Main Street and, 319–20 Citigroup case and, 314n Congress and, 249 criticisms of, 319–20 deposit insurance fund of, 219, 227, 228, 237, 243, 245, 275, 292, 304, 317, 333 deposit insurance limit at, 276, 315 founding of, 219 headquarters of, 220 IndyMac closure and, 207, 208, 242, 243, 249 JPM relationship with, 232, 246, 316 mission of, 219, 315 OTS relationship with, 220, 224–28, 233, 242, 244–45, 248–52, 260, 262, 266–67, 270, 274, 275, 281, 287 power of, 219–20 preparation for bank failures by, 216–17, 228 reputation of, 220 Superior Bank case and, 225 “systemic risk” exceptions and, 314 troubled bank list of, 3, 248–49, 262, 273 Wachovia case and, 314 Walmart bank application and, 217 See also Bair, Sheila; Federal Deposit Insurance Corp.

 

pages: 537 words: 144,318

The Invisible Hands: Top Hedge Fund Traders on Bubbles, Crashes, and Real Money by Steven Drobny

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Albert Einstein, Asian financial crisis, asset allocation, backtesting, banking crisis, Bernie Madoff, Bernie Madoff, Black Swan, Bretton Woods, BRICs, British Empire, business process, capital asset pricing model, capital controls, central bank independence, collateralized debt obligation, Commodity Super-Cycle, commodity trading advisor, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, currency peg, debt deflation, diversification, diversified portfolio, equity premium, fiat currency, follow your passion, full employment, Hyman Minsky, implied volatility, index fund, inflation targeting, interest rate swap, inventory management, invisible hand, London Interbank Offered Rate, Long Term Capital Management, market bubble, market fundamentalism, market microstructure, moral hazard, North Sea oil, open economy, peak oil, pension reform, Ponzi scheme, prediction markets, price discovery process, price stability, private sector deleveraging, profit motive, purchasing power parity, quantitative easing, random walk, reserve currency, risk tolerance, risk-adjusted returns, risk/return, savings glut, Sharpe ratio, short selling, special drawing rights, statistical arbitrage, stochastic volatility, The Great Moderation, too big to fail, transaction costs, unbiased observer, value at risk, Vanguard fund, yield curve

So when you say fiscal policy is often underestimated or underappreciated, you are not just speaking about the U.S.? No, it is everywhere. Again, China is a great example. Their stimulus was largely fiscal; monetary policy was relatively passive through all this. China did not cut rates aggressively, nor did they have to bail out the banking system all at once. They never faced a potential domino effect of failing banks. The same is true for much of non-Japan Asia. Countries that did not face a banking crisis did not have the same type of monetary policy response. Aggressive monetary stimulus generally occurred in the debtor countries, such as the U.S. and UK. In the euro region, monetary policy stimulus occurred mainly because Spain, Ireland, and several Eastern European debtor countries were in deep trouble. And while Switzerland is a creditor country, they needed an easier monetary policy mainly because they have a finance-based economy and their banks were in trouble as well.

Nevertheless, I try to stay at least twice as paranoid as the market. There are many trades that others deem great opportunities—but I will not engage in them because they have negative skew risk, meaning they can become illiquid very quickly. For example, the potential for a liquidity crisis in 2008 was well flagged. In August 2007, when LIBOR spiked, it was clear that we were in a systemic banking crisis. It was also obvious that the leverage would have to unwind, which would trigger a liquidity problem causing more unwinding. A full year later, however, people were still in denial that balance sheets were overleveraged and that banks were in trouble. (See Figure 5.4.) Figure 5.4 Three-Month LIBOR—Overnight Indexed Swap (OIS) Spreads, 2006-2008 SOURCE: Bloomberg. When people saw LIBOR spike in the summer of 2007, what should they have done to mitigate their illiquidity risk?

See Risk premia payment Price/earnings (P/E) multiples, exchange rate valuation (relationship) Primary Dealer Credit Facility, placement Prime broker risk Princeton University (endowment) Private equity cash flow production tax shield/operational efficiency arguments Private sector debt, presence Private-to-public sector risk Probability, Bayesian interpretation Professor, The bubble predication capital loss, avoidance capital management cataclysms, analysis crowding factor process diversification efficient markets, disbelief fiat money, cessation global macro fund manager hedge fund space historical events, examination idea generation inflation/deflation debate interview investment process lessons LIBOR futures ownership liquidity conditions, change importance market entry money management, quality opportunities personal background, importance portfolio construction management positioning process real macro success, personality traits/characteristics (usage) returns, generation risk aversion rules risk management process setback stocks, purchase stop losses time horizon Titanic scenario threshold trades attractiveness, measurement process expression, options (usage) personal capital, usage quality unlevered portfolio Property/asset boom Prop shop trading, preference Prop trader, hedge fund manager (contrast) Protectionism danger hedge process Public college football coach salary, public pension manager salary (contrast) Public debt, problems Public pensions average wages to returns endowments impact Q ratio (Tobin) Qualitative screening, importance Quantitative easing (QE) impact usage Quantitative filtering Random walk, investment Real annual return Real assets Commodity Hedger perspective equity-like exposure Real estate, spread trade Real interest rates, increase (1931) Real macro involvement success, personality traits/characteristics (usage) Real money beta-plus domination denotation evolution flaws hedge funds, differentiation impacts, protection importance investors commodity exposure diversification, impact macro principles management, change weaknesses Real money accounts importance long-only investment focus losses (2008) Real money funds Commodity Hedger operation Equity Trader management flexibility frontier, efficiency illiquid asset avoidance importance leverage example usage management managerial reserve optimal portfolio construction failure portfolio management problems size Real money managers Commodity Investor scenario liquidity, importance long-term investor misguidance poor performance, usage (excuse) portfolio construction valuation approach, usage Real money portfolios downside volatility, mitigation leverage, amount management flaws Rear view mirror investment process Redemptions absence problems Reflexivity Rehypothecation Reichsmarks, foreign holders (1922-1923) Relative performance, inadequacy Reminiscences of a Stock Operator (Lefèvre) Renminbi (2005-2009) Repossession property levels Republic of Turkey examination investment rates+equities (1999-2000) Reserve currency, question Resource nationalism Returns forecast generation maximization momentum models targets, replacement Return-to-worst-drawdown, ratios (improvement) Reward-to-variability ratio Riksbank (Sweden) Risk amount, decision aversion rules capital, reduction collars function positive convexity framework, transition function global macro manager approach increase, leverage (usage) measurement techniques, importance parameters Pensioner management pricing reduction system, necessity Risk-adjusted return targets, usage Risk assets, decrease Risk-free arbitrage opportunities Risk management Commodity Hedger process example game importance learning lessons portfolio level process P&L, impact tactic techniques, importance Risk premia annualization earning level, decrease specification Risk/reward trades Risk-versus-return, Pensioner approach Risk-versus-reward characteristics opportunities Roll yield R-squared (correlation) Russia crisis Russia Index (RTSI$) (1995-2002) Russia problems Savings ratio, increase Scholes, Myron Sector risk, limits Securities, legal lists Self-reinforcing cycles (Soros) Sentiment prediction swings Seven Sisters Sharpe ratio increase return/risk Short-dated assets Short selling, ban Siegel’s Paradox example Single point volatility 60-40 equity-bond policy portfolio 60-40 model 60-40 portfolio standardization Smither, Andrew Socialism, Equity Trader concern Society, functioning public funds, impact real money funds, impact Softbank (2006) Soros, George self-reinforcing cycles success Sovereign wealth fund Equity Trader operation operation Soybeans (1970-2009) Special drawing rights (SDR) Spot price, forward price (contrast) Spot shortages/outages, impact Standard deviation (volatility) Standard & Poor’s 500 (S&P500) (2009) decrease Index (1986-1995) Index (2000-2009) Index (2008) shorting U.S. government bonds, performance (contrast) Standard & Poor’s (S&P) shorts, coverage Stanford University (endowment) State pension fund Equity Trader operation operation Stochastic volatility Stock index total returns (1974-2009) Stock market increase, Predator nervousness Stocks hedge funds, contrast holders, understanding pickers, equity index futures usage shorting/ownership, contrast Stops, setting Stress tests, conducting Subprime Index (2007-2009) Sunnies, bidding Super Major Survivorship bias Sweden AP pension funds government bond market Swensen, David equity-centric portfolio Swiss National Bank (SNB) independence Systemic banking crisis Tactical asset allocation function models, usage Tactical expertise Tail hedging, impact Tail risk Take-private LBO Taleb, Nassim Tax cut sunset provisions Taxes, hedge Ten-year U.S. government bonds (2008-2009) Theta, limits Thundering Herd (Merrill Lynch) Time horizons decrease defining determination shortening Titanic funnel, usage Titanic loss number Titanic scenario threshold Topix Index (1969-2000) Top-line inflation Total credit market, GDP percentage Total dependency ratio Trade ideas experience/awareness, impact generation process importance origination Traders ability Bond Trader hiring characteristics success, personality characteristics Trades attractiveness, measurement process hurdle money makers, percentage one-year time horizon selection, Commodity Super Cycle (impact) time horizon, defining Trading decisions, policy makers (impact) floor knowledge noise level ideas, origination Tragedy of the commons Transparency International, Corruption Perceptions Index Treasury Inflation-Protected Securities (TIPS) trade Triangulated conviction Troubled Asset Relief Program (TARP) Turkey economy inflation/equities (1990-2009) investment rates+equities (1999-2000) stock market index (ISE 100) Unconventional Success (Swensen) Underperformance, impact Undervaluation zones, examination United Kingdom (UK), two-year UK swap rates (2008) United States bonds pricing debt (1991-2008) debt (2000-2008) home prices (2000-2009) hyperinflation listed equities, asset investment long bonds, market pricing savings, increase stocks tax policy (1922-1936) trade deficit, narrowing yield curves (2004-2006) University endowments losses impact unlevered portfolio U.S.

 

pages: 422 words: 113,830

Bad Money: Reckless Finance, Failed Politics, and the Global Crisis of American Capitalism by Kevin Phillips

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algorithmic trading, bank run, banking crisis, Bernie Madoff, Black Swan, Bretton Woods, BRICs, British Empire, collateralized debt obligation, computer age, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, currency peg, diversification, Doha Development Round, energy security, financial deregulation, financial innovation, Francis Fukuyama: the end of history, George Gilder, housing crisis, Hyman Minsky, imperial preference, income inequality, index arbitrage, index fund, interest rate derivative, interest rate swap, Joseph Schumpeter, Kenneth Rogoff, large denomination, Long Term Capital Management, market bubble, Martin Wolf, Menlo Park, mobile money, Monroe Doctrine, moral hazard, mortgage debt, new economy, oil shale / tar sands, oil shock, peak oil, plutocrats, Plutocrats, Ponzi scheme, profit maximization, Renaissance Technologies, reserve currency, risk tolerance, risk/return, Robert Shiller, Robert Shiller, Ronald Reagan, shareholder value, short selling, The Chicago School, Thomas Malthus, too big to fail, trade route

Unfortunately, this included Federal Reserve chairman Alan Greenspan, who smiled permissively at hedge funds, asset bubbles, and the new mortgage gambits, while shunning closer attention to the abuses of mortgage lenders.16 This may be why it took a European, Axel Weber, president of the German Bundesbank, to become the first central banker to explain that the August crisis was just like a classic banking crisis or run, save that it was taking place in the nonbank financial system.17 Washington seems to have ignored a profound and trouble-making transformation. In the meantime, the new nonbank financial sector, or shadow banking system, had also taken over some of the prerogatives formerly reserved to banks of creating money. This explained why some market watchers were giving the various leveraged debt and credit merchants catchy new monetary descriptions.

Profits at private equity firms and consumer finance companies were sure to be shrinking. For some of the big banks, potential loan losses would force them to either set aside more capital in reserves or substantially retrench. Having to take huge losses from SIVs and CDOs onto their books was bad enough, but by year’s end, attention was also turning to potential corporate loan defaults. The Financial Times, comparing possible dimensions of the U.S. banking crisis to those of Japanese banks in the 1990s, calculated the earlier losses of the Japanese banks at $700 billion and speculated that if this decade’s losses rose to $600 billion, that “might represent as much as one-third of the core (tier one) banking capital for U.S. and European banks.”35 What could even make things worse would be if defaults on sub-investment-grade corporate debt surged in 2008 because of a recession.

.; “Islamic Bonds to Get Boost”; “Hong Kong Enters the Race for Islamic Capital,” Financial Times, November 21, 2007. 18 “Currency Blocs Fall into Place,” Financial Times, November 22, 2007. 19 “Morgan Stanley Posts Loss,” New York Times, December 20, 2007. 20 “Putin’s Arctic Invasion,” Daily Mail (London), June 28, 2007. 21 Harley Baker, “Vladimir Putin on Russian Energy Policy,” National Interest, November 2005. 22 “ASPO China Is Formed,” Energy Bulletin, ASPO International, October 30, 2007. 23 Siddarth Varadarajan, “India, China, and the Asian Axis of Oil,” Hindu, January 24, 2006. 24 Flynt Leverett and Pierre Noel, “The New Axis of Oil,” National Interest, July 2006, p. 7. 25 “Ghost Road to Boost India-China Trade,” Financial Times, October 9, 2007. 26 “India to Tell West to Shoulder Climate Change Burden,” Reuters, December 2, 2007. 27 “Climate Is a Risky Issue for Democrats,” Washington Post, November 6, 2007. 28 “Global Oil Output Has Already Peaked, Pickens Says,” Bloomberg News, October 19, 2007. 29 David Pauly, “Slow, Steady Liquidation of the World Oil Industry: David Pauly,” Bloomberg News, October 1, 2007. 30 “No Real Alternative to Oil: Rise in Demand Seems Unavoidable,” International Herald-Tribune, October 29, 2007. 31 “Welcome to a World of Runaway Energy Demand,” Financial Times, November 13, 2007. 32 “No Real Alternative to Oil.” A lot of the alternatives deemed plausible may be unrealistic. 33 Karl Polanyi, The Great Transformation: The Political and Economic Origins of Our Time (Boston: Beacon Press, 2001). 34 “Three Ways to Avoid Wall Street,” Money Morning, November 9, 2007. 35 Gillian Tett, “Japan Offers a Salutary Tale in Banking Crisis,” Financial Times, January 1, 2008. 36 Bill Gross, “Pyramids Crumbling,” Pimco Investment Outlook, January 2008. 37 “The Race Is On to Be Asia’s Number One for Finance,” Financial Times, July 5, 2007. 38 Noriel Roubini and Brad Setser, “Will Bretton Woods 2 Regime Unravel Soon?” www.rge.monitor.com, February 2005. 39 Chris P. Dialynas and Marshall Auerbeck, “Renegade Economics: The Bretton Woods II Fiction,” Pimco Viewpoints, September 2007. 40 “America’s Vulnerable Economy,” Economist, November 15, 2007. 41 “Dollar’s Last Lap as the Only Anchor Currency,” Financial Times, November 25, 2007. 42 John Authers, “The Short View: Weak Dollar,” Financial Times, September 10, 2007. 43 “Why Banking Is an Accident Waiting to Happen,” Financial Times, November 27, 2007. 44 Martin Wolf, “Why the Credit Squeeze Is a Turning Point for the World,” Financial Times, December 11, 2007. 45 “Mortgage Crisis Perplexes Even Shrewd Investor Warren Buffett,” San Francisco Chronicle, December 12, 2007. 46 “European Bosses Warming to Foreign Funds,” Financial Times, December 11, 2007. 47 Nassim Nicholas Taleb, The Black Swan (New York: Random House, 2007). 48 “Does Not Compute: How Misfiring Quant Funds Are Distorting the Markets,” Financial Times, December 9, 2007. 49 Richard Bookstaber, A Demon of Our Own Design (New York: John Wiley & Sons, 2007), pp. 5, 259-60. 50 Mike Muehleck, “Exit U.S.,” www.agorafinancial.com//afrude/.

 

pages: 1,335 words: 336,772

The House of Morgan: An American Banking Dynasty and the Rise of Modern Finance by Ron Chernow

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bank run, banking crisis, Big bang: deregulation of the City of London, Bolshevik threat, Bretton Woods, British Empire, California gold rush, capital controls, collective bargaining, Etonian, financial deregulation, German hyperinflation, index arbitrage, interest rate swap, margin call, Monroe Doctrine, North Sea oil, oil shale / tar sands, paper trading, plutocrats, Plutocrats, Robert Gordon, Ronald Reagan, short selling, strikebreaker, the market place, the payments system, too big to fail, transcontinental railway, Yom Kippur War, young professional

As the Richmond convention progressed, emergency telegrams came in thick and fast from 23 Wall Street. Morgan’s friend Bishop William Lawrence noted in his diary how Morgan would study the telegrams, place his palms on the table, then stare fixedly ahead. Though Pierpont was needed on Wall Street, his partners feared a premature return might itself touch off a panic. By Saturday, October 19, he decided to rush back by private railroad car to deal with a spreading bank crisis. “They are in trouble in New York,” he told Bishop Lawrence. “They do not know what to do, and I don’t know what to do, but I am going back.”3 The 1907 panic was Pierpont’s last hurrah. Although semiretired, reporting to work periodically for only an hour or two, he suddenly functioned as America’s central bank. Within two week’s time, he saved several trust companies and a leading brokerage house, bailed out New York City, and rescued the Stock Exchange.

Sharp drops in the money supply then led to severe recessions. The country needed an elastic currency and a permanent lender of last resort. From the ashes of 1907 arose the Federal Reserve System: everybody saw that thrilling rescues by corpulent old tycoons were a tenuous prop for the banking system. Senator Nelson W. Aldrich declared, “Something has got to be done. We may not always have Pierpont Morgan with us to meet a banking crisis.”18 By confirming his storied powers, Pierpont also inadvertently fostered talk of an omnipotent Wall Street money trust. President Roosevelt now recommended federal regulation of the stock exchanges, while New York governor Charles Evans Hughes wanted margin requirements raised from 10 to 20 percent. If these suggestions had been enacted, the country might have been spared some of the lurid excesses of the 1929 crash.

In the end, the pool went ahead and made a tidy profit. The hearings would drag on and eventually assume dimensions unforeseen in early 1932. They would finally take their name from a new subcommittee counsel, Ferdinand Pecora, appointed in January 1933. The Pecora hearings would lead straight to Glass-Steagall and the dismemberment of the House of Morgan. IN the autumn of 1932, Hoover presided over one last humiliation—a nationwide banking crisis. Three years of deflation had eroded the collateral behind many loans. As banks called them in, the business slump worsened and produced more bank runs and failures. Before 1932, the thousands of bank closings were mostly confined to small rural banks. Then, that October, Nevada’s governor shut the state’s banks. There followed a frightening crescendo of state bank closings—euphemistically called holidays—climaxed by an eight-day closing of Michigan banks in February.

 

pages: 348 words: 99,383

The Financial Crisis and the Free Market Cure: Why Pure Capitalism Is the World Economy's Only Hope by John A. Allison

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Affordable Care Act / Obamacare, bank run, banking crisis, Bernie Madoff, Bernie Madoff, clean water, collateralized debt obligation, correlation does not imply causation, Credit Default Swap, credit default swaps / collateralized debt obligations, disintermediation, fiat currency, financial innovation, Fractional reserve banking, full employment, high net worth, housing crisis, invisible hand, life extension, low skilled workers, market bubble, market clearing, minimum wage unemployment, moral hazard, obamacare, price mechanism, price stability, profit maximization, quantitative easing, race to the bottom, reserve currency, risk/return, Robert Shiller, Robert Shiller, too big to fail, transaction costs, yield curve

—Nido Qubein, President, High Point University, Chairman, Great Harvest Bread Company, and author of How to Be a Great Communicator “John Allison lucidly depicts how government and private institutions helped create the biggest financial debacle of our times. This book persuasively debunks the conventional wisdom!” —Tom Stemberg, Managing General Partner, Highland Consumer Fund, Chairman Emeritus, Staples, Inc. “For 20 years, John Allison supplied real leadership, including through the turbulent times of the banking crisis. He understands what caused the collapse and what we need to do going forward to ensure our financial future. His arguments are clear and compelling, and he has a gift for taking complex financial issues and making them understandable. I believe his blueprint is the roadmap for our economic success both now and in the future.” —Fran Tarkenton, NFL Hall of Fame Quarterback, Chairman, OneMoreCustomer.com, and author of Every Day is a Game “John Allison’s book provides real clarity to who and what caused the financial meltdown of 2008 from a person who successfully navigated his bank through the crisis.

., 77, 188, 229 Durbin amendment, 193 Earnings, operating, 103–106 East Germany, 34, 247 Eastern Europe, 34, 252 Economic cycles, 108, 189–193 Economic health, 159–161 Economic recovery, 1, 207–208 Economy, banking industry in, 67–69 Edison, Thomas, 19, 158–159 Education, 230–235, 247 Egypt, ancient, 230 Elitism, 7 Ely, Bert, 48 Employee Retirement Income Security Act (ERISA), 82, 149 Enron, 60, 109, 133, 149 Entitlement programs, reforms for, 199–204 Equal Credit Opportunity Act, 42, 55 ERISA (Employee Retirement Income Security Act), 82, 149 Ethical incentives, lending, 57–58 Euro, 189 European banking crisis, 51–52, 137 Expensing (stock options), 114–117 Experiential learners, 244–245 Fair Housing Act, 55 Fair-value accounting, 103–118 asset valuation in, 106–108 and expensing of stock options, 114–117 and losses on CDSs, 126–127 private accounting systems vs., 177–178 SEC involvement in, 151–152 for selling vs. servicing mortgages, 113–114 Fannie Mae: accounting scandal, 112–113, 149 in current environment, 251 and disintermediation of deposits, 121 failure of, 61–65, 164 and fair-value accounting, 118 in housing policy, 58–61 misallocation of resources by, 14 misleading of rating agencies by, 83 mortgage lending by, 97–101 reforms for, 190–192 selling mortgages to, 113–114 subprime lending by, 58, 99–101 FASB (see Financial Accounting Standards Board) FDIC (see Federal Deposit Insurance Corporation) FDIC insurance, 37–52 and bank liquidity, 171 and failing banks, 140 and fractional reserve banking, 68–69 and pick-a-payment mortgages, 91 reform of, 190 and S&L failures, 97 Federal Deposit Insurance Corporation (FDIC), 37–38 as external auditors, 134 and failing banks, 47–48 misallocation of resources by, 14 and pick-a-payment mortgages, 91 as regulator, 41–48, 143 take over of Washington Mutual, 75–77 Federal Housing Administration (FHA), 15, 190–192, 252 Federal Reserve, 22–23, 102, 189 antitrust policy, 174 bailouts by, 120–121, 190, 192 and banking industry reforms, 187–188 as external auditors, 134 and federal debt, 21–22 and leverage, 72 mathematical modeling by, 136 misallocation of resources by, 14, 208 misleading information from, 46, 83, 101, 125 monetary policy of, 17–20, 31–35, 96 overreaction by, 154 stimulus from, 152, 153, 208 and TARP, 165, 167–168, 171 and unemployment, 213 and Washington Mutual, 75 Federal Reserve Board, 18 Federal Reserve Open Market Committee, 31 Federal Savings and Loan Insurance Corporation (FSLIC), 37–38, 50, 96 FHA (see Federal Housing Administration) Financial Accounting Standards Board (FASB), 105, 106, 114–117 Financial crisis (2007-2009), 1–3, 251–254 banking industry in, 70–72 derivatives in, 122–124 Freddie Mac and Fannie Mae in, 65 free-market response to, 177–186 and Great Depression, 25 lessons from, 251–252 SEC role in, 154–155 Financial reporting requirements, SEC, 150–152 Financial Services Roundtable (FSR), 32, 61–62 First Horizon, 237 Fitch, John Knowles, 150 Fitch Ratings: investor confidence in, 84–87 misratings by, 82–84, 101, 125, 126 and SEC, 81–82, 149–150 Flat tax, 197 Forbes, Steve, 197 Ford, 179 Foreclosure laws, 77–80 Fractional reserve banking, 69–70 Frank, Barney, 7, 61, 63, 64 Fraud, 109–113 Freddie Mac: accounting scandal, 112–113, 149 current environment, 251 and disintermediation of deposits, 121 failure of, 61–65, 164 in housing policy, 58–61 misallocation of resources by, 14 misleading information from, 83 mortgage lending by, 97–101 reforms for, 190–192 selling mortgages to, 113–114 subprime lending by, 58, 99–101 Free markets: experimentation in, 19 justice in, 92, 177 market corrections in, 157–159 and monetary policy, 31–35 risk taking by banks in, 40–41 wage rates in, 210–211 Free trade, 204–205 Friedman, Milton, 20, 189 FSLIC (see Federal Savings and Loan Insurance Corporation) FSR (Financial Services Roundtable), 32, 61–62 GAAP accounting, 116, 117 Gates, Bill, 216 GDP, 183, 197–199 General Electric, 168, 169 General Motors (GM), 169, 178–180 General Theory of Employment, Interest and Money, The (Keynes), 181 Germany, 52 GM (General Motors), 169, 178–180 GMAC, 168, 169, 178–180 Gold standard: and deflation, 25–26 and economic future of U.S., 188–189 Greenspan’s view of, 32 Golden West, 39, 91, 92, 98, 159 Goldman Sachs, 71, 173 as AIG counterparty, 128–129 bailout of, 104, 164, 179 CDSs of, 126 counterparty risk at, 124 crony capitalism at, 6 financial “innovations” of, 101 Government policy: as cause of financial crisis, 1, 5–6, 251 and residential real estate bubble, 6 (See also Housing policy; Policy reforms) Government regulation, 5–8, 41–48, 204 Government spending, 180–183, 197–199 Government-sponsored enterprises (GSEs), 59, 64–65, 98, 137 (See also Fannie Mae; Freddie Mac) Great Depression: and avoidance of stock market, 74 banking industry in, 70–72 economic policies after, 161 and Federal Reserve, 19–20, 24, 188 and gold standard, 188 and government interference, 170 and Smoot-Hawley Tariff Act, 205 Great Recession, 1, 251–254 and Federal Reserve, 188 Freddie Mac and Fannie Mae in, 65 and interest-rate variation, 33 market corrections and depth of, 160 and monetary policy, 17 and residential real estate, 9–15 Great Society, 6, 55, 96 Greece, 51, 52, 137, 228 Greenspan, Alan, 23–30, 32, 33, 160 Gross domestic product, 183, 197–199 Hamilton, Alexander, 19 Harvard University, 43, 131 Hayek, Friedrich, 31 Health insurance, 201–202 High-net-worth shareholders, 93 Home Builders Association, 60 Home foreclosure laws, 77–80 Homeownership, 53–55 Hoover, Herbert, 24, 161, 205 Housing: as consumption, 9–12, 54–55, 73–74 government support of, 12 Housing policy, 53–65 HUD (Department of Housing and Urban Development), 15, 58 Human Action (von Mises), 238 Immigration, 19, 205–206 India, 10, 25, 205 IndyMac, 39, 75, 98 Inflation: CPI as indicator of, 26–27 and fair-value accounting, 103 and Federal Reserve, 21–22 and prices, 24–25 (See also Monetary policy) Initial public offerings, 150 Insurance: bond, 86–87 cross-guarantor, 48–52 FDIC (see FDIC insurance) health, 201–202 private deposit, 48–52 self-insurance at banks, 48–52 unemployment, 212–213 Interest rates, 26–27, 31–35 Inverted yield curves, 27–29 Investment banks: disclosure requirements for, 151 government bailout of, 162 “innovations” of, 101–102 leverage ratios of, 71–72 IPOs, 150 Iran, 198, 199, 227 Iraq, 198 Ireland, 77 Isaac, Bill, 107–108, 161–162 Italy, 51, 52 Japan, 159, 200, 205 Jefferson, Thomas, 19, 220 Johnson, Lyndon Baines, 6, 55, 96, 161, 188 JPMorgan Chase, 75 and Bear Stearns, 162 and shadow banking system, 120 as “too-big-to-fail” firm, 173 and Washington Mutual, 163 Keynes, John Maynard, 181 Labor: allocation of, 10–11, 14 minimum-wage laws, 209–212 Lehman Brothers, 71, 76, 101, 104, 129, 164 and Bear Stearns bailout, 162–163 corporate debt at, 107 counterparty risk at, 124 derivatives from, 123 Limited government, 182–183, 195, 231, 253 Liquidity: of banks, 68–69 and FDIC insurance, 171 and financial crises, 70–72 and housing prices, 74–75 and TARP, 171–172 Loan loss reserves accounting, 152–154 Loans: capital standards for, 51–52 qualified, 98 substandard, 140–141 Madoff, Bernie, 149, 225 March of Dimes, 241 Market corrections, 157–165 Federal Reserve’s prevention of, 23, 32 prevention of, 13 residential real estate, 78 and response to financial crisis, 177–180 Market discipline, 21, 38 Market-based monetary policy, 31–35 Market-clearing price, 209 Mathematical modeling: for loan loss reserves, 152–153 by ratings agencies, 82–83 for risk management, 136–138 MBIA, 86 Medicaid, 6, 55, 201 Medicare, 6, 8, 55, 201, 203 Meltdown (Michaels), 35 Merrill Lynch, 101, 124–125 Michaels, Patrick J., 35 Microsoft, 217 Military spending, 198–199, 227 Minimum-wage laws, 209–212 Mises, Ludwig von, 34, 238 Monetary policy, 17–35 of Bernanke, 27–31, 33, 35, 40, 125, 213 and federal debt, 21–22 and Federal Reserve, 17–23 of Greenspan, 23–27 market-based, 31–35 and unemployment, 208–209 Money market mutual funds, bailout of, 120–121, 192 Money supply, 21–22, 24, 189 Moody, John, 83, 150 Moody’s, 81–87 investor confidence in, 84–87 misratings by, 82–84, 101, 125, 126 and SEC, 81–82, 149–150 Morgan Stanley, 71, 101, 124, 173 Mortgage lending, 95–102 by Fannie Mae and Freddie Mac, 97–101 and investment bank innovations, 101–102 prime, 59, 97–99 by private banks, 97–99 savings and loan industry in, 95–97 subprime, 43, 56–57, 99–101 Mortgages: by BB&T Corporation, 97–98 jumbo, 62 pick-a-payment (see Pick-a-payment mortgages) selling vs. servicing, 113–114 Mozilo, Angelo, 46 Multiplier effect, 181 Naked shorting, 127–128, 151 Nationally recognized statistical rating organizations, 82 Negative real interest rates, 26–27 Neo-Keynesian response to financial crisis, 185–186 Neutral taxes, 197 New Deal, 53, 170, 232 Nixon, Richard, 96, 161, 188 North Korea, 34, 198, 227, 247, 252 NRSROs, 82 Obama administration, 142–144: and Dodd-Frank Act, 64 economic policies of, 15, 161 healthcare bill, 183, 201 and Patriot Act, 45 stimulus plan, 181–182 Office of the Comptroller of the Currency (OCC), 40, 154 Office of Thrift Supervision, 40, 41, 45–46 Operating earnings, 103–106 OTS, 40, 41, 45–46 Panics, 137–138, 161–165 Patriot Act, 45, 46, 48, 133–136, 147 Paulson, Henry: in 2008 panic, 164, 167 and AIG bailout, 128, 129 credibility of, 164 development of TARP, 76, 168–170, 172 Pick-a-payment mortgages, 89–93 borrowers using, 90–91 and FDIC, 91 and rise of Fannie Mae/Freddie Mac, 98 Policy reforms, 195–206 for entitlement programs, 199–204 and free trade, 204–205 and government regulations, 204 for government spending, 197–199 for immigration, 205–206 for political system, 206–207 and tax rate, 196–197 Politics: in banking regulation, 42–46 and crony capitalism, 129 and failure of Fannie Mae/Freddie Mac, 59–62 and Federal Reserve appointments, 18 policy reforms for, 206–207 Poor, Henry Varnum, 150 Portugal, 51 Price fixing, 31, 193 Price setting, 31–32 Prime lending, 59, 97–99 Prince, Charlie, 217 Principles-based accounting, 109 Privacy Act, 133, 135 Private accounting systems, 177–178 Private banks, 97–99, 187–188 Private deposit insurance, 48–52 Public schools, 228, 233–235 Racial discrimination (in lending), 42–45 Raines, Frank, 59 Rand, Ayn, 225, 231 Rating agencies, 81–87 investor confidence in, 84–87 mathematical modeling by, 136 and subprime mortgage bonds, 82–84 and “too-big-to-fail” firms, 173 and SEC, 81–82, 149–150 Real estate: commercial, 11, 97 residential (see Residential real estate market) Recessions, 28, 29, 160 Recovery (see Economic recovery) Reforms: banking industry (see Banking industry reforms) government policy (see Policy reforms) Regions Bank, 237 Regulation: of banking industry (see Banking regulation) by government (see Government regulation) Reporting, financial, 150–152 Reserve currency, U.S. dollar as, 77, 188, 229 Residential real estate market: economics of, 73–74 misinvestment in, 9–15 Residential real estate market bubble, 73–80 and government policy, 6 international impact of, 77 and job creation, 80 and state home foreclosure laws, 77–80 Risk: contagion, 123 counterparty, 123, 124 with derivatives, 122–124 diversification of, 67–69 and economic cycles, 189–193 and FDIC insurance, 38–41 and government regulation, 50–51 liquidity, 68–70 mathematical modeling for, 136–138 and “originate and sell” model, 100 systemic, 50–51 RMBS (residential mortgage-backed securities), 81 Roman empire, fall of, 230 Roosevelt, Franklin D., 24, 37, 103, 161 Rules-based accounting, 109 Russia, 198 Samuelson, Paul, 238 Sarbanes-Oxley Act, 133–134 and fair-value accounting, 106 and Fannie Mae/Freddie Mac, 99 misregulation by, 48, 147 and SEC, 150 violations of, 136 SARs (Suspicious Activity Reports), 136 Satchwell, Jack, 57 Savings and loan (S&L) industry, 95–97, 110, 191 Securities and Exchange Commission (SEC), 149–155 capital ratio guidelines, 71–72 and complexity of accounting rules, 116–117 and expensing of stock options, 114, 115 loan loss reserves accounting for, 152–154 misallocation of resources by, 14 and rating agencies, 81–82, 149–150 requirements for shorting stock, 127–128, 151 and rules-based accounting, 109, 110 and Sarbanes-Oxley Act, 150 Self-insurance, 48–52 Selgin, George, 189 Senate Banking Committee, 46 Shadow banking system, 119–131 and AIG bailout, 128–130 credit default swaps in, 126–128 and derivatives, 122–124 Federal Reserve’s role in, 30 losses from, 131 S&L industry, 95–97, 110, 191 Small businesses, 144–147, 183–184 Smoot-Hawley Tariff Act, 205 Social Security, 8, 199–204 South Financial, 237 South Korea, 247 Soviet Union, 34, 195–196, 252, 254 S&P (see Standard & Poor’s) Spain, 51, 52, 77 Spitzer, Eliot, 71, 134–135, 151 Stagflation, 181, 208 Standard & Poor’s (S&P), 81–87 investor confidence, 84–87 misratings by, 82–84, 101, 125, 126 and SEC, 81–82, 149–150 Standard of living, 6–7, 10, 161, 177 Start-up banks, 38–39 State home foreclosure laws, 77–80 Stimulus plan, 181–182 Stock options, expensing of, 114–117 Stocks, shorting, 127–128, 151 Stress tests, banks, 171 Subprime lending: and CRA, 56–57 by Fannie Mae and Freddie Mac, 99–101 and racial discrimination in lending study, 43 Subprime mortgage bonds, 82–87 Substandard loans, 140–141 SunTrust, 152, 237 Suspicious Activity Reports (SARs), 136 Tails (mathematical models), 137 TARP (see Troubled Asset Relief Program) Tax rate, 196–197 Tea Party Movement, 218, 231 Technology industry, 5 “Too-big-to-fail” firms, 130, 173, 193 Trader principle, 92, 223–224 Troubled Asset Relief Program (TARP), 167–175 and 2008 panic, 165 and FDIC, 37 Underwriters Laboratories, 117, 150 Unemployment, 207–213 in economic recovery, 207–208 and minimum-wage laws, 209–212 and misinvestment in residential real estate, 10–11 and monetary policy, 208–209 Unemployment insurance, 212–213 Unions, 179, 180, 212 United Auto Workers, 179, 180 United States: demographic problem in, 228 economic future of, 8, 227–230, 252–253 educational system of, 230–235 founding concepts of, 219–220 as free trade zone, 204–205 GDP of China vs., 183 mixed economy of, 5–6 public schools of, 233–235 university system of, 230–233 United Way, 224, 241 University system, 230–233 U.S.

 

pages: 430 words: 109,064

13 Bankers: The Wall Street Takeover and the Next Financial Meltdown by Simon Johnson, James Kwak

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Andrei Shleifer, Asian financial crisis, bank run, banking crisis, Bernie Madoff, Bernie Madoff, bonus culture, capital controls, Carmen Reinhart, central bank independence, collateralized debt obligation, corporate governance, Credit Default Swap, credit default swaps / collateralized debt obligations, Edward Glaeser, Eugene Fama: efficient market hypothesis, financial deregulation, financial innovation, financial intermediation, financial repression, George Akerlof, Gordon Gekko, greed is good, Home mortgage interest deduction, Hyman Minsky, income per capita, interest rate derivative, interest rate swap, Kenneth Rogoff, laissez-faire capitalism, late fees, Long Term Capital Management, market bubble, market fundamentalism, Martin Wolf, moral hazard, mortgage tax deduction, Ponzi scheme, price stability, profit maximization, race to the bottom, regulatory arbitrage, Robert Shiller, Robert Shiller, Ronald Reagan, Saturday Night Live, too big to fail, transaction costs, value at risk, yield curve

Schumer was a major proponent of Gramm-Leach-Bliley, and in 2001 he and Gramm passed legislation to cut in half fees paid by financial institutions to the SEC.10 (Gramm left the Senate in 2002 to become a vice chair at UBS Warburg.) Over the past twenty years, the financial services industry became an extremely powerful lobby in Washington, able to win votes in both Republican and Democratic Congresses. In April 2009, Senator Richard Durbin said, “the banks—hard to believe in a time when we’re facing a banking crisis that many of the banks created—are still the most powerful lobby on Capitol Hill. And they frankly own the place.”11 No one thought he was saying anything extraordinary. THE WALL STREET–WASHINGTON CORRIDOR When it came to money, however, Wall Street had no particular advantage over other industries, except that it had more of it. And while campaign contributions gave Wall Street influence on Capitol Hill, important decisions elsewhere in Washington are made by appointed officials who do not depend on campaign money.

In the 1990s, Argentina tried a version of the Russian strategy—capital inflows that supported a budget deficit and allowed a boom in private sector investment. This was the brainchild of Domingo Cavallo, a distinguished economist with a Ph.D. from Harvard, and received strong support from the IMF (and the United States) even as the approach ran into trouble. Failing to deal with underlying political issues, including the inability to effectively tax powerful business elites, ended in a collapse of the currency, a banking crisis, and defaults on Argentina’s public and private debt in 2001–2002. See Paul Blustein, And the Money Kept Rolling In (and Out) (New York: PublicAffairs, 2005); and Michael Mussa, Argentina and the Fund: From Triumph to Tragedy (Washington: Peterson Institute for International Economics, 2002). 49. On the LTCM crisis, see Roger Lowenstein, When Genius Failed: The Rise and Fall of Long-Term Capital Management (New York: Random House, 2000). 50.

 

pages: 397 words: 112,034

What's Next?: Unconventional Wisdom on the Future of the World Economy by David Hale, Lyric Hughes Hale

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affirmative action, Asian financial crisis, bank run, banking crisis, Basel III, Berlin Wall, Black Swan, Bretton Woods, capital controls, Cass Sunstein, central bank independence, cognitive bias, collateralized debt obligation, corporate governance, corporate social responsibility, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, currency manipulation / currency intervention, currency peg, Daniel Kahneman / Amos Tversky, debt deflation, deindustrialization, diversification, energy security, Erik Brynjolfsson, Fall of the Berlin Wall, financial innovation, floating exchange rates, full employment, Gini coefficient, global reserve currency, global village, high net worth, Home mortgage interest deduction, housing crisis, index fund, inflation targeting, invisible hand, Just-in-time delivery, Kenneth Rogoff, labour market flexibility, labour mobility, Long Term Capital Management, Mahatma Gandhi, Martin Wolf, Mexican peso crisis / tequila crisis, money: store of value / unit of account / medium of exchange, mortgage tax deduction, Network effects, new economy, Nicholas Carr, oil shale / tar sands, oil shock, open economy, passive investing, payday loans, peak oil, Ponzi scheme, post-oil, price stability, private sector deleveraging, purchasing power parity, quantitative easing, race to the bottom, regulatory arbitrage, reserve currency, Richard Thaler, risk/return, Robert Shiller, Robert Shiller, Ronald Reagan, special drawing rights, technology bubble, The Great Moderation, Thomas Kuhn: the structure of scientific revolutions, too big to fail, total factor productivity, trade liberalization, Washington Consensus, women in the workforce, yield curve

The upturn in commodity prices since March 2009 has revived optimism about African growth in 2010 and beyond. Jefferis expects robust growth in East Africa. Kenya is still suffering from political divisions, but Uganda has had large oil discoveries. The Democratic Republic of the Congo (DRC) has immense potential to increase its mining output, but the country still suffers from insurgencies in its eastern provinces. West Africa should benefit from the rebound in oil prices, but Nigeria has had a banking crisis because of high levels of margin lending for stock market speculation. Ghana will became an oil producer in 2010, and oil revenues could reach $4 billion per annum. South Africa had a successful FIFA World Cup in mid-2010, which should boost future tourism, but the event put an immense strain on public services. Southern Africa could experience new power supply problems as the regional economy recovers.

Figure 5.2 Industrial Production: United States, Germany, United Kingdom, France, Japan (2007–2008 peak = 100) Source: Thomson Reuters The very weak growth expectations in Europe were illustrated in GaveKal’s third-quarter 2010 Quarterly Strategy Chart Book by comparing the long-term GDP trends in the United States and France (Figures 5.3 and 5.4). Figure 5.3 US Economy Usually Recovers to Trend after Recessions (US GDP with 1973–1980 Trend) Source: Thomson Reuters Figure 5.4 Growth Trends Deteriorated in France after Each Recession Source: Thomson Reuters The Euro Remains Very Expensive The rise of the euro that followed the sovereign bailout in the spring of 2010, although partially reversed during the Irish bank crisis, creates another reason for caution regarding Europe’s prospects in 2011. Although European, and especially German, politicians and industrialists frequently assert that their businesses are unaffected by exchange rates, such claims are implausible in an environment where inflation is almost zero in competitor economies. Additionally, European productivity has been falling as a result of labor-hoarding during the recession.

 

pages: 350 words: 103,270

The Devil's Derivatives: The Untold Story of the Slick Traders and Hapless Regulators Who Almost Blew Up Wall Street . . . And Are Ready to Do It Again by Nicholas Dunbar

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bank run, banking crisis, Basel III, Black Swan, Black-Scholes formula, bonus culture, capital asset pricing model, Carmen Reinhart, Cass Sunstein, collateralized debt obligation, Credit Default Swap, credit default swaps / collateralized debt obligations, delayed gratification, diversification, Edmond Halley, facts on the ground, financial innovation, George Akerlof, implied volatility, index fund, interest rate derivative, interest rate swap, Kenneth Rogoff, Long Term Capital Management, margin call, market bubble, Nick Leeson, Northern Rock, offshore financial centre, price mechanism, regulatory arbitrage, Richard Thaler, risk tolerance, risk/return, Ronald Reagan, shareholder value, short selling, statistical model, The Chicago School, too big to fail, transaction costs, value at risk, Vanguard fund, yield curve

This news put McDonough in an uncomfortable position, since he was urging foreign regulators to embrace the risk models used by the big banks, while his deputy, Peter Fisher, was at that moment sitting in a New York Fed boardroom trying to persuade the CEOs of some of those same firms to help bail out LTCM.11 Basel II, handed down in September, was hailed by most of the industry, but it fostered a dangerous illusion: that mathematical modeling and rule making could replace human judgment in banking. This would become painfully apparent with Basel’s biggest loophole: the treatment of trading positions. The Wet, Sloppy Kiss of Death In the United States, where a multilayered government expressed the wishes of its founders for checks and balances, a multilayered system of financial regulation had grown organically. Each bank regulatory agency had its own creation myth—a bank crisis that was the reason for its existence. The oldest was the Office of the Comptroller of the Currency (OCC), created as an arm of the Treasury Department in the wild monetary years of the 1850s, followed by the archipelago of Federal Reserve Banks set up after a crisis in 1907. The stock market abuses and bank failures of the Great Depression spawned, respectively, the Securities and Exchange Commission (SEC) and the FDIC.

They first got their hands dirty—that is, crossed over from regulator to coconspirator—as they desperately tried to save the stricken financial system, but by 2010 they were seen as part of the problem as well. Everyone knew government shouldn’t be up to its eyeballs in private sector activity; what is even more disturbing now is that it is obvious that governments can’t afford to keep propping up the system. And they can’t afford to stop. After the banking crisis was tamped down, and the markets were swamped by newly printed money, the next challenge came not from the financial sector, but from a spendthrift nation on Europe’s fringe: Greece, a country that for a decade had fiddled the books in plain sight, with the eager assistance of investment banks. In July 2003, my account of Goldman Sachs’s use of swaps to help the Greek government conceal some $3 billion of its debt languished in the pages of an industry trade magazine.4 The head of Greece’s debt management office wrote a huffy letter to the editor who had published my article, insisting that the transaction was “based on prudent debt management rather than accounting concerns,” and concluding, “It is hard to see why this merits cover-story treatment.”

 

pages: 416 words: 106,582

This Will Make You Smarter: 150 New Scientific Concepts to Improve Your Thinking by John Brockman

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23andMe, Albert Einstein, Alfred Russel Wallace, banking crisis, Barry Marshall: ulcers, Benoit Mandelbrot, Berlin Wall, Black Swan, butterfly effect, Cass Sunstein, cloud computing, congestion charging, correlation does not imply causation, Daniel Kahneman / Amos Tversky, dark matter, data acquisition, David Brooks, delayed gratification, Emanuel Derman, epigenetics, Exxon Valdez, Flash crash, Flynn Effect, hive mind, impulse control, information retrieval, Jaron Lanier, John von Neumann, Kevin Kelly, mandelbrot fractal, market design, Marshall McLuhan, Nicholas Carr, open economy, placebo effect, pre–internet, QWERTY keyboard, random walk, randomized controlled trial, Richard Feynman: Challenger O-ring, Richard Thaler, Schrödinger's Cat, security theater, Silicon Valley, stem cell, Steve Jobs, Steven Pinker, Stewart Brand, the scientific method, Thorstein Veblen, Turing complete, Turing machine, Walter Mischel, Whole Earth Catalog

Unlike basic literacy, risk literacy requires emotional rewiring—rejecting comforting paternalism and illusions of certainty and learning to take responsibility and to live with uncertainty. Daring to know. But there is still a long way to go. Studies indicate that most patients want to believe in their doctor’s omniscience and don’t dare to ask for supporting evidence, yet nevertheless feel well-informed after consultations. Similarly, even after the banking crisis, many customers still blindly trust their financial advisors, jeopardizing their fortunes in a consultation that takes less time than they’d spend watching a football game. Many people cling to the belief that others can predict the future and pay fortune-tellers for illusory certainty. Every fall, renowned financial institutions forecast next year’s Dow and dollar exchange rate, even though their track record is hardly better than chance.

., xxvii, 296–98 algebra, 6, 24 Alter, Adam, 150–53 altruism, 194, 196–97 aluminum refining, 110 Amazon, 25 Anasazi, 361 Anderson, Alun, 209–10 Anderson, Ross, 262–63 anecdotalism, 278–80 anomalies, 242–45 Anthropocene thinking, 206–8 anthropologists, 361 anthropophilia, 386–88 anyons, 191 apophenia, 394 Arbesman, Samuel, 11–12 archaeology, 282–84, 361 architecture, 246–49 ARISE (Adaptive Regression In the Service of the Ego), 235–36 Aristotle, 9, 28–29, 35 art: bricolage in, 271–72 parallelism in commerce and, 307–9 recursive structures in, 146–49 Arthur, Brian, 223 Ascent of Man, The, 340 Asimov, Isaac, 324–25 assertions, 267 assumptions, 218–19 atoms, 128 attention, 130, 211 focusing illusion an, 49–50 spotlight of, 46–48 attractiveness, 136, 137 authority and experts, 18, 20, 34 Avery, Oswald, 244 Avicenna, 9 Aztecs, 361 Bacon, Francis, 395 bacteria, 15–16, 89, 97, 166, 290–91, 292–93, 338 transformation of, 243, 244, 245 Baldwin, Mark, 152 Banaji, Mahzarin R., 389–93 banking crisis, 259, 261, 307, 309, 322, 386 Barondes, Samuel, 32 Barton, Robert, 150–51 base rate, 264–65 Bass, Thomas A., 86–87 Bayesian inference, 70 behavior, ignorance of causes of, 349–52 behavioral sciences, 365–66 belief, 336–37 proof, 355–57 Bell, Alexander Graham, 110 bell curve (Gaussian distribution), 199, 200 benchmarks, 186 bias, 18, 43–45 confirmation, 40, 134 self-serving, 37–38, 40 in technologies, 41–42 biochemical cycles, 170–71 bioengineering, 16 biological ecosystems, 312–14 biological teleology, 4 biology, 234, 312 biophilia, 386 Bird, Sheila, 274 birds, 155, 359 chickens, 62–63, 155 herring gulls, 160 songbirds, 154–55 black box, 303 Blackmore, Sue, 215–17 Black Swan, The (Taleb), 315 black-swan technologies, 314–17 Blake, William, 44 blame, 35–36, 106, 386 blindness, 144 Bloch waves, 297 Boccaletti, Giulio, 184–87 body, life-forms in, 13, 290–91, 292 Boeri, Stefano, 78 Bohr, Niels, 28 Bolyai, János, 109 Bony, Jean, 247–48 Bostrom, Nick, 275–77 bottom-up thinking, 157–59 Boyer, Pascal, 182–83 bradykinesia, 63 brain, 48, 129–30, 148, 149, 150, 158, 172, 346, 347, 389, 394 consciousness and, 217 evolution of, 10, 207, 257 mind and, 364, 366 neurons in, see neurons plasticity of, 250–51 predictive coding and, 132–34 self and, 212 size of, 257 of split-brain patients, 349–50 synapses in, 164 temperament traits and, 229–30 white and gray matter in, 162–63 Bramante, Donato, 248–49 Brand, Stewart, 15–16 Bray, Dennis, 171–72 bricolage, 271–72 Brin, Sergey, xxv Bronowski, Jacob, 340, 341–42 Brooks, David, xxv–xxviii Brown, Louise, 165 Bryson, Bill, 387 Buddha, 373 business planning, 186 Buss, David M., 353–54 Byars, James Lee, xxix–xxx Cabot, John, 90 calculus, 34, 109 Calvin, William, 201–2 cancer, 390 body scans and, 69, 259–60, 264, 265 tests for, 264–65 cannibalism, 361–62 carbon, 81, 82 carbon dioxide (CO2) emissions, 202, 207, 217, 262 car insurance, 66–67 Carr, Nicholas, 116–17 Carroll, Sean, 9–10 Cartesian science, 82–83 Caspi, Avshalom, 279 cats, 286 causality, 34–36, 58–61, 396 blame, 35–36, 106, 386 confabulation, 349–52 correlation and, 215–17, 219 of diseases, 59, 303–4 entanglement and, 331 information flow and, 218–20 nexus, 34–35 root-cause analysis, 303–4 in universe, 9–10 web of causation, 59–60, 61 central-limit theorem, 107–8 certainty, 73, 260 proof, 355–57 uselessness of, 51–52 see also uncertainty Challenger, 236 chance, 7, 18 change, 127–28, 290 fixation on, 373 chaos theory, 103, 202 character traits, 229 charitable activities, 194 cheating, 351 chess, 343 chickens, 62–63, 155 children, 148, 155, 252 chocolate, 140 cholera, 338 Chomsky, Noam, xxv Christakis, Nicholas A., xxvii, 81–83, 306 Church, George, 88–89 CINAC (“correlation is not a cause”), 215–17 civil rights movement, 370 Clark, Andy, 132–34 Clarke, Arthur C., 61 climate change, 51, 53, 99, 178, 201–2, 204, 268, 309, 315, 335, 386, 390 CO2 levels and, 202, 207, 217, 262 cultural differences in view of, 387–88 global economy and, 238–39 procrastination in dealing with, 209, 210 clinical trials, 26, 44, 56 cloning, 56, 165 coastlines, xxvi, 246 Cochran, Gregory, 360–62 coffee, 140, 152, 351 cognition, 172 perception and, 133–34 cognitive humility, 39–40 cognitive load, 116–17 cognitive toolkit, 333 Cohen, Daniel, 254 Cohen, Joel, 65 Cohen, Steven, 307–8 cold fusion, 243, 244 Coleman, Ornette, 254, 255 collective intelligence, 257–58 Colombia, 345 color, 150–51 color-blindness, 144 Coltrane, John, 254–55 communication, 250, 358, 372 depth in, 227 temperament and, 231 companionship, 328–29 comparative advantage, law of, 100 comparison, 201 competition, 98 complexity, 184–85, 226–27, 326, 327 emergent, 275 computation, 227, 372 computers, 74, 103–4, 146–47, 172 cloud and, 74 graphical desktops on, 135 memory in, 39–40 open standards and, 86–87 computer software, 80, 246 concept formation, 276 conduction, 297 confabulation, 349–52 confirmation bias, 40, 134 Conner, Alana, 367–70 Conrad, Klaus, 394 conscientiousness, 232 consciousness, 217 conservatism, 347, 351 consistency, 128 conspicuous consumption, 228, 308 constraint satisfaction, 167–69 consumers, keystone, 174–76 context, sensitivity to, 40 continental drift, 244–45 conversation, 268 Conway, John Horton, 275, 277 cooperation, 98–99 Copernicanism, 3 Copernican Principle, 11–12, 25 Copernicus, Nicolaus, 11, 294 correlation, and causation, 215–17, 219 creationism, 268–69 creativity, 152, 395 constraint satisfaction and, 167–69 failure and, 79, 225 negative capability and, 225 serendipity and, 101–2 Crick, Francis, 165, 244 criminal justice, 26, 274 Croak, James, 271–72 crude look at the whole (CLAW), 388 Crutzen, Paul, 208 CT scans, 259–60 cultural anthropologists, 361 cultural attractors, 180–83 culture, 154, 156, 395 change and, 373 globalization and, see globalization culture cycle, 367–70 cumulative error, 177–79 curating, 118–19 currency, central, 41 Cushman, Fiery, 349–52 cycles, 170–73 Dalrymple, David, 218–20 DALYs (disability-adjusted life years), 206 danger, proving, 281 Darwin, Charles, 2, 44, 89, 98, 109, 156, 165, 258, 294, 359 Das, Satyajit, 307–9 data, 303, 394 personal, 303–4, 305–6 security of, 76 signal detection theory and, 389–93 Dawkins, Richard, 17–18, 180, 183 daydreaming, 235–36 DDT, 125 De Bono, Edward, 240 dece(i)bo effect, 381–85 deception, 321–23 decision making, 52, 305, 393 constraint satisfaction and, 167–69 controlled experiments and, 25–27 risk and, 56–57, 68–71 skeptical empiricism and, 85 deduction, 113 defeasibility, 336–37 De Grey, Aubrey, 55–57 delaying gratification, 46 democracy, 157–58, 237 Democritus, 9 Demon-Haunted World, The (Sagan), 273 Dennett, Daniel C., 170–73, 212, 275 depth, 226–28 Derman, Emanuel, 115 Descent of Man, The (Darwin), 156 design: mind and, 250–53 recursive structures in, 246–49 determinism, 103 Devlin, Keith, 264–65 Diagnostic and Statistical Manual of Mental Disorders (DSM-5), 233–34 “Dial F for Frankenstein” (Clarke), 61 Diesel, Rudolf, 170 diseases, 93, 128, 174 causes of, 59, 303–4 distributed systems, 74–77 DNA, 89, 165, 223, 244, 260, 292, 303, 306 Huntington’s disease and, 59 sequencing of, 15 see also genes dopamine, 230 doughnuts, 68–69, 70 drug trade, 345 dualities, 296–98, 299–300 wave-particle, 28, 296–98 dual view of ourselves, 32 dynamics, 276 Eagleman, David, 143–45 Earth, 294, 360 climate change on, see climate change distance between sun and, 53–54 life on, 3–5, 10, 15 earthquakes, 387 ecology, 294–95 economics, 100, 186, 208, 339 economy(ies), 157, 158, 159 global, 163–64, 238–39 Pareto distributions in, 198, 199, 200 and thinking outside of time, 223 ecosystems, 312–14 Edge, xxv, xxvi, xxix–xxx education, 50, 274 applying to real-world situations, 40 as income determinant, 49 policies on, controlled experiments in, 26 scientific lifestyle and, 20–21 efficiency, 182 ego: ARISE and, 235–36 see also self 80/20 rule, 198, 199 Einstein, Albert, 28, 55, 169, 301, 335, 342 on entanglement, 330 general relativity theory of, 25, 64, 72, 234, 297 memory law of, 252 on simplicity, 326–27 Einstellung effect, 343–44 electrons, 296–97 Elliott, Andrew, 150 Eliot, T.

 

pages: 357 words: 95,986

Inventing the Future: Postcapitalism and a World Without Work by Nick Srnicek, Alex Williams

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3D printing, additive manufacturing, air freight, algorithmic trading, anti-work, back-to-the-land, banking crisis, battle of ideas, blockchain, Bretton Woods, call centre, capital controls, carbon footprint, Cass Sunstein, collective bargaining, crowdsourcing, cryptocurrency, David Graeber, decarbonisation, deindustrialization, Doha Development Round, Elon Musk, Erik Brynjolfsson, financial independence, food miles, Francis Fukuyama: the end of history, full employment, future of work, gender pay gap, housing crisis, income inequality, industrial robot, informal economy, intermodal, Internet Archive, job automation, John Maynard Keynes: Economic Possibilities for our Grandchildren, John Maynard Keynes: technological unemployment, late capitalism, low skilled workers, manufacturing employment, market design, Martin Wolf, means of production, minimum wage unemployment, neoliberal agenda, New Urbanism, Occupy movement, oil shale / tar sands, oil shock, patent troll, pattern recognition, post scarcity, postnationalism / post nation state, precariat, price stability, profit motive, quantitative easing, reshoring, Richard Florida, rising living standards, road to serfdom, Robert Gordon, Ronald Reagan, Second Machine Age, secular stagnation, self-driving car, Slavoj Žižek, social web, stakhanovite, Steve Jobs, surplus humans, the built environment, The Chicago School, Tyler Cowen: Great Stagnation, universal basic income, wages for housework, We are the 99%, women in the workforce, working poor, working-age population

Though under the alleged control of boards with community representation, investment decisions were effectively taken with little proper oversight. Localisation here meant the politicisation of allegedly disinterested governance boards, turning some cajas into platforms for local government investment in speculative property schemes, as a culture of cronyism took hold.88 With the worst of Spain’s banking crisis centred on the local banks, restructuring meant the merging of local banks to form larger institutions. Even in Germany, often touted as having the best localised banking system in the world, there were issues with some regional banks. The Landesbanken, for example, were heavily invested in structured credit products that performed particularly poorly during the financial crisis.89 The lesson to draw from this is that there is nothing inherent in smaller institutions that will enable them to resist the worst excesses of contemporary finance – and that the idea of cleanly separating the local from the global is today impossible.

., Validity of Food Miles, p. 3. 82.Doug Henwood, ‘Moving Money (Revisited)’, LBO News, 2010, at lbo-news.com. 83.Stephen Gandel, ‘By Every Measure, the Big Banks Are Bigger’, Fortune, 13 September 2013, at fortune.com. 84.Victoria McGrane and Tan Gillian, ‘Lenders Are Warned on Risk’, Wall Street Journal, 25 June 2014. 85.OTC Derivatives Statistics at End-June 2014, Basel: Bank for International Settlements, 2014, p. 2, at bis.org. 86.David Boyle, A Local Banking System: The Urgent Need to Reinvigorate UK High Street Banking (London: New Economics Foundation, 2011), p. 8. 87.Ibid., pp. 8–9. 88.Giles Tremlett, ‘Spain’s Savings Banks’ Culture of Greed, Cronyism, and Political Meddling’, Guardian, 8 June 2012. 89.Boyle, Local Banking System, p. 10. 90.Andrew Bibby, ‘Co-op Bank Crisis: What Next for the Co-operative Sector?’, Guardian, 21 January 2014. 91.Greg Sharzer, No Local: Why Small-Scale Alternatives Won’t Change the World (Winchester: Zero Books, 2012), p. 3. 92.Philip Mirowski, Never Let a Serious Crisis Go to Waste: How Neoliberalism Survived the Financial Meltdown (London: Verso, 2013), p. 326. 93.Zibechi, ‘Latin America Today’. 94.Christian Marazzi, ‘Exodus Without Promised Land’, in Campagna and Campiglio, eds, What We Are Fighting For, p. viii. 95.Such an approach has also been labelled ‘alternativism’ by communisation theorists.

 

pages: 309 words: 95,495

Foolproof: Why Safety Can Be Dangerous and How Danger Makes Us Safe by Greg Ip

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Affordable Care Act / Obamacare, Air France Flight 447, air freight, airport security, Asian financial crisis, bank run, banking crisis, Bretton Woods, capital controls, central bank independence, cloud computing, collateralized debt obligation, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, currency peg, Daniel Kahneman / Amos Tversky, diversified portfolio, endowment effect, Exxon Valdez, financial deregulation, financial innovation, Financial Instability Hypothesis, floating exchange rates, full employment, global supply chain, hindsight bias, Hyman Minsky, Joseph Schumpeter, Kenneth Rogoff, London Whale, Long Term Capital Management, market bubble, moral hazard, Network effects, new economy, offshore financial centre, paradox of thrift, pets.com, Ponzi scheme, quantitative easing, Ralph Nader, Richard Thaler, risk tolerance, Ronald Reagan, savings glut, technology bubble, The Great Moderation, too big to fail, transaction costs, union organizing, Unsafe at Any Speed, value at risk

The riskiest mortgages were being originated not by banks but by finance companies such as New Century Financial and Ameriquest, then securitized by investment banks and sold to investors all over the world. Other than Fannie and Freddie, there wasn’t much reason to worry that a mortgage crisis would bring down the financial system. It seemed that the response to the various crises of the 1980s had made the financial system genuinely safer. It wasn’t just the banking crisis of the 1980s that taught economic leaders lessons. Each of the subsequent crises left them determined to avoid a repeat. Consider, for example, the stock market crash of 1987. Stock trading was facilitated by specialists and market makers—dealers who would buy and sell for their own accounts. At the market’s nadir many suffered crippling losses on the stocks they had bought that then went down in value.

Financial innovations such as mortgage-backed securities and derivatives allow an individual or a bank or a company to do something risky, then transfer some of the risk to someone else. The belief that they are now safer encourages them to take more risk, and so the level of aggregate risk in the system goes up. Or it might cause the risky activity to migrate elsewhere. In the 1980s, fear of another banking crisis led to rules on banks being tightened. But that didn’t change the demand for credit or the desire by investors and borrowers to buy houses or take on riskier investments. Consequently, lending and risk migrated to less regulated shadow banks. Public concern curtailed construction of new nuclear power plants in the 1970s and 1980s but not the need for electricity. So alternative generating sources had to be found, and many, such as natural gas and coal, are more dangerous for our health.

 

pages: 438 words: 109,306

Tower of Basel: The Shadowy History of the Secret Bank That Runs the World by Adam Lebor

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banking crisis, Basel III, Berlin Wall, Big bang: deregulation of the City of London, Bretton Woods, British Empire, central bank independence, corporate governance, corporate social responsibility, deindustrialization, eurozone crisis, fiat currency, financial independence, financial innovation, forensic accounting, Goldman Sachs: Vampire Squid, haute cuisine, IBM and the Holocaust, Occupy movement, offshore financial centre, Ponzi scheme, price stability, quantitative easing, reserve currency, special drawing rights, V2 rocket

The writer Matt Taibbi once memorably described Goldman Sachs, the giant investment bank, as a “vampire squid.”8 The BIS is now the vampire squid of the regulatory world, hosting a myriad of committees that in turn spawn a raft of subcommittees, many of which are composed of the same central bankers and officials, each producing reams of reports that are passed back and forth from Basel to national central banks and governments in an endless merry-go-round of resolutions and recommendations. Others argue that the answer to the banking crisis is not more insider committees and regulatory bodies hosted at the BIS, or anywhere else, but much less, or none at all. “Banking should become a normal industry, like manufacturing bicycles,” said Andrew Hilton, of the Centre for the Study of Financial Innovation. “Banking should be regulated to protect against fraud, to protect consumers, and to protect the banks’ integrity, but nothing else.

Petersen, Neal H., ed. From Hitler’s Doorstep: The Wartime Intelligence Reports of Allen Dulles 1942–1945. Penn State University Press, 1996. Pol, Heinz. The Hidden Enemy: The German Threat to Post-War Peace. New York: Julian Messner, 1943. Roberts, Richard. Schroders: Bankers and Merchants. London: Macmillan, 1992. Sampson, Anthony. The Money Lenders: The People and Politics of the World Banking Crisis. London: Viking, 1983. Schacht, Hjalmar. Confessions of the Old Wizard. New York: Houghton Mifflin, 1956. Scherman, Rabbi Nosson. The Chumash: The Torah, Haftoras and Five Megillos With a Commentary Anthologised from the Rabbinic Writings, NewYork: Mesorah Publications, 2001. Simpson, Christopher. Blowback: The First Full Account of America’s Recruitment of Nazis and Its Disastrous Effect on Our Domestic and Foreign Policy.

 

pages: 391 words: 97,018

Better, Stronger, Faster: The Myth of American Decline . . . And the Rise of a New Economy by Daniel Gross

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2013 Report for America's Infrastructure - American Society of Civil Engineers - 19 March 2013, Affordable Care Act / Obamacare, Airbnb, American Society of Civil Engineers: Report Card, Bakken shale, banking crisis, BRICs, British Empire, business process, business process outsourcing, call centre, Carmen Reinhart, clean water, collateralized debt obligation, credit crunch, currency manipulation / currency intervention, demand response, Donald Trump, high net worth, housing crisis, hydraulic fracturing, If something cannot go on forever, it will stop, illegal immigration, index fund, intermodal, inventory management, Kenneth Rogoff, LNG terminal, low skilled workers, Mark Zuckerberg, Martin Wolf, Maui Hawaii, McMansion, mortgage debt, Network effects, new economy, obamacare, oil shale / tar sands, oil shock, peak oil, plutocrats, Plutocrats, price stability, quantitative easing, race to the bottom, reserve currency, reshoring, Richard Florida, rising living standards, risk tolerance, risk/return, Silicon Valley, Silicon Valley startup, six sigma, Skype, Steve Jobs, superstar cities, the High Line, transit-oriented development, Zipcar

Things have been going south economically in this country since the cruel winter of 1609, when nearly 90 percent of the settlers in Jamestown, Virginia, died. Even after winning independence, the young nation was perpetually starved for capital, easily bullied by the British, unable to control Atlantic sea lanes, and reluctant to invest in public infrastructure. Lacking a central bank, the U.S. financial system lurched from banking crisis to banking crisis and suffered a series of panics and lengthy recessions. The United States was an economic and cultural backwater for virtually all of the nineteenth century, an immature, uncouth cousin that required huge infusions of European capital to build its railroads. In 1875 U.S. gross domestic product per capita was $2,600, below that of Australia, New Zealand, Belgium, the Netherlands, and the United Kingdom.2 The sense of insecurity lingered even after industrialism supercharged growth between 1880 and 1920 and the United States seized the mantle of economic leadership after World War I.

 

pages: 354 words: 91,875

The Willpower Instinct: How Self-Control Works, Why It Matters, and What You Can Doto Get More of It by Kelly McGonigal

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banking crisis, bioinformatics, Cass Sunstein, choice architecture, cognitive bias, delayed gratification, game design, impulse control, loss aversion, meta-analysis, phenotype, Richard Thaler, Walter Mischel

So assuming you have the resources to walk around the block without collapsing, the absolute demands of self-control couldn’t possibly deplete your entire body’s store of energy. And surely it wouldn’t require refueling with a sugar-laden 100-calorie drink. Why, then, does the brain’s increased energy consumption during self-control seem to deplete willpower so quickly? ENERGY CRISIS To answer this question, it may be helpful to recall the American banking crisis of 2009. After the 2008 financial meltdown, banks received an influx of money from the government. These funds were supposed to help the banks cover their own financial obligations so they could start lending again. But the banks refused to lend money to small businesses and individual borrowers. They weren’t confident in the money supply, so they hoarded the resources they had. Stingy bastards!

INDEX acceptance inner power of Adams, Claire addiction addict loses his cravings candy addict conquers sweet tooth chocoholic takes inspiration from Hershey’s Kisses dopamine’s role in drinking drug e-mail Facebook shopping smoker under social influence smoking Advisor-Teller Money Manager Intervention (ATM) Ainslie, George Air Force Academy, U.S. (Colorado) Amazon.com American Journal of Psychiatry American Psychological Association anhedonia Ansel, Mark anticipation anticipatory shame “Anti-Social” (program) anxiety Archives of Internal Medicine autonomic nervous system Aztecs Baby Boomers banking crisis (2009) Baruch College (NYC) Baumeister, Roy behavior changes religion and Benson, Herbert binge-drinking study binge-eaters Bloomingdale’s (department store) bounded rationality Bowen, Sarah brain on dopamine early energy needs for self-control evolution of mirror neurons modern pleasure center prefrontal cortex remodeling for willpower reward system self-control system self-monitoring system stress and stress center Breman, Anna bride-to-be gains weight Bush, George W.

 

pages: 291 words: 90,200

Networks of Outrage and Hope: Social Movements in the Internet Age by Manuel Castells

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access to a mobile phone, banking crisis, call centre, citizen journalism, cognitive dissonance, collective bargaining, conceptual framework, crowdsourcing, currency manipulation / currency intervention, disintermediation, en.wikipedia.org, housing crisis, income inequality, microcredit, Mohammed Bouazizi, Occupy movement, offshore financial centre, Port of Oakland, social software, statistical model, We are the 99%, web application, WikiLeaks, World Values Survey, young professional

Available at: <http://www. noticiaspositivas.net/2011/03/21/islandia-se-mueve-ante-la-crisis/> [Accessed on January 9, 2012]. Lamant, L. (2011) A gentle cure for the crisis. Presseurop.eu, [Online] April 8. Available at: http://www.presseurop.eu/en/content/article/590821-gentle-cure-crisis [Accessed on January 9, 2012]. Neate, R. (2011) Iceland’s former premier denies criminal negligence over banking crisis. The Guardian, [Online] June 7. Available at: <http://www.guardian.co.uk/business/2011/jun/07/iceland-former-premier-trial-banking-crisis> [Accessed on January 9, 2012]. Roos, J. (2011) Democracy 2.0: Iceland crowdsources new constitution. Roarmag.org, [Online]. Available at: <http://roarmag.org/2011/06/iceland-crowdsources-constitution-investors-spain-greece/> [Accessed on January 9, 2012]. Sibert, A. (2010) Love letters from Iceland: Accountability of the Eurosystem.

 

pages: 471 words: 97,152

Animal Spirits: How Human Psychology Drives the Economy, and Why It Matters for Global Capitalism by George A. Akerlof, Robert J. Shiller

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affirmative action, Andrei Shleifer, bank run, banking crisis, collateralized debt obligation, conceptual framework, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, Daniel Kahneman / Amos Tversky, Deng Xiaoping, Donald Trump, Edward Glaeser, en.wikipedia.org, experimental subject, financial innovation, full employment, George Akerlof, housing crisis, Hyman Minsky, income per capita, inflation targeting, invisible hand, Jane Jacobs, Jean Tirole, job satisfaction, Joseph Schumpeter, Long Term Capital Management, loss aversion, market bubble, market clearing, money: store of value / unit of account / medium of exchange, moral hazard, mortgage debt, new economy, New Urbanism, plutocrats, Plutocrats, price stability, profit maximization, purchasing power parity, random walk, Richard Thaler, Robert Shiller, Robert Shiller, Ronald Reagan, South Sea Bubble, The Chicago School, The Death and Life of Great American Cities, The Wealth of Nations by Adam Smith, too big to fail, transaction costs, tulip mania, working-age population, Y2K, Yom Kippur War

All of these actions by the Fed can be considered use of the discount window, although in nontraditional ways. 11. http://www.federalreserve.gov/newsevents/press/monetary/20081007d.htm and http://www.federalreserve.gov/newsevents/press/monetary/20081021b.htm. 12. See the explanation given by the Federal Reserve at http://www.federalreserve.gov/newsevents/monetary20081125a1.pdf 13. U.S. Department of the Treasury (2008, p. 2). 14. http://en.wikipedia.org/wiki/Fannie_Mae. 15. An excellent survey of Sweden’s resolution of its banking crisis during the 1990s has been given by Englund (1999). After the crisis was over, the banks returned to profitability (Figure 6, p. 90). 16. Morgenson (2008). 17. Benoit et al. (2008). CHAPTER EIGHT WHY ARE THERE PEOPLE WHO CANNOT FIND A JOB? 1. Much of this chapter is based on Akerlof’s joint work with Janet Yellen (Akerlof and Yellen 1990). 2. Early examples of the theory include Solow (1979), McDonald and Solow (1981), and Akerlof (1982).

A Conspiracy of Fools: A True Story. New York: Broadway. “An Elastic Currency and Bankers’ Bank.” 1913. The Independent, December 25, p. 565. “Embezzlements of Last Year.” 1895. Chicago Daily Tribune, January 1, p. 4. Engen, Eric M., William G. Gale, and Cori E. Uccello. 1999. “The Adequacy of Household Saving.” Brookings Papers on Economic Activity 2:65–187. Englund, Peter. 1999. “The Swedish Banking Crisis: Roots and Consequences.” Oxford Review of Economic Policy 15(3):80–97. Fair, Ray C. 1994. Testing Macroeconometric Models. Cambridge, Mass.: Harvard University Press. Fang, Hanming, and Giuseppe Moscarini. 2002. “Overconfidence, Morale, and Wage-Setting Policies.” Paper presented at the National Bureau of Economic Research conference on “Macroeconomics and Individual Decision Making,” November.

 

pages: 103 words: 32,131

Program Or Be Programmed: Ten Commands for a Digital Age by Douglas Rushkoff

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banking crisis, big-box store, citizen journalism, cloud computing, East Village, financial innovation, Firefox, hive mind, Howard Rheingold, invention of the printing press, Kevin Kelly, Marshall McLuhan, Silicon Valley, statistical model, Stewart Brand, Ted Nelson, WikiLeaks

Instead of buying from and selling to one another through highly centralized corporations, we now have the technology required to buy from and sell to one another directly. Beyond using eBay or the less corporate Etsy or Craigslist to make those connections and conduct transactions, however, we also have the means to transcend traditional currency. Local currencies, made illegal to make way for centralized currency during the Renaissance, have already regained widespread acceptance following the banking crisis of 2008. Instead of borrowing this money from a bank, users earn it into existence by making goods and performing services for other people in the same community.[6] Peer-to-peer currencies are based in the abundance of production, rather than the scarcity of lending. This makes them biased, as is the net, toward transaction and exchange rather than hoarding for interest. Now that digital technologies offer us identity confirmation, secure transactions, and distributed networks, we have the ability to operate local-style currencies on a global scale.

 

pages: 124 words: 30,520

Rebooting Democracy: A Citizen's Guide to Reinventing Politics by Manuel Arriaga

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banking crisis, David Graeber, financial innovation, first-past-the-post, Occupy movement, principal–agent problem, Slavoj Žižek

The second, and probably more important, reason why this frustration hasn’t yet fully materialized into a serious threat to our political system is our continued inability to propose clear, convincing alternatives. For example, we—the citizens—have to account for the paradox of the “Indignados” and “Occupy” protest movements that successfully mobilized enormous crowds in the wake of the 2008-2010 banking crisis but seem to have (so far?) left no lasting mark on our political landscape(s). Or consider publishing phenomena such as the late Stéphane Hessel’s “Indignez-vous!” in France and the anthology “Reacciona” in Spain, books that brilliantly speak to the public’s frustration. Like the protest movements, these books garnered huge public attention but did not give rise to sustained social movements working towards reform.

 

pages: 935 words: 267,358

Capital in the Twenty-First Century by Thomas Piketty

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accounting loophole / creative accounting, Asian financial crisis, banking crisis, banks create money, Berlin Wall, Branko Milanovic, British Empire, capital controls, Capital in the Twenty-First Century by Thomas Piketty, carbon footprint, central bank independence, conceptual framework, corporate governance, correlation coefficient, David Ricardo: comparative advantage, demographic transition, distributed generation, diversification, diversified portfolio, European colonialism, eurozone crisis, Fall of the Berlin Wall, financial intermediation, full employment, German hyperinflation, Gini coefficient, high net worth, Honoré de Balzac, immigration reform, income inequality, income per capita, index card, inflation targeting, informal economy, invention of the steam engine, invisible hand, joint-stock company, Joseph Schumpeter, market bubble, means of production, mortgage debt, mortgage tax deduction, new economy, New Urbanism, offshore financial centre, open economy, pension reform, purchasing power parity, race to the bottom, randomized controlled trial, regulatory arbitrage, Robert Gordon, Ronald Reagan, Steve Jobs, The Nature of the Firm, the payments system, The Wealth of Nations by Adam Smith, Thomas Malthus, Thorstein Veblen, trade liberalization, very high income, We are the 99%

The international organizations currently responsible for overseeing and regulating the global financial system, starting with the IMF, have only a very rough idea of the global distribution of financial assets, and in particular of the amount of assets hidden in tax havens. As I have shown, the planet’s financial accounts are not in balance. (Earth seems to be perpetually indebted to Mars.) Navigating our way through a global financial crisis blanketed in such a thick statistical fog is fraught with peril. Take, for example, the Cypriot banking crisis of 2013. Neither the European authorities nor the IMF had much information about who exactly owned the financial assets deposited in Cyprus or what amounts they owned, hence their proposed solutions proved crude and ineffective. As we will see in the next chapter, greater financial transparency would not only lay the groundwork for a permanent annual tax on capital; it would also pave the way to a more just and efficient management of banking crises like the one in Cyprus, possibly by way of carefully calibrated and progressive special levies on capital.

In current discussions concerning the creation of a European banking union, the ECB is supposed to play the central role. In particularly severe banking crises, central banks also work in concert with international organizations such as the IMF. Since 2009–2010, a “Troika” consisting of the European Commission, the ECB, and the IMF has been working to resolve the financial crisis in Europe, which involves both a public debt crisis and a banking crisis, especially in southern Europe. The recession of 2008–2009 caused a sharp rise in the public debt of many countries that were already heavily indebted before the crisis (especially Greece and Italy) and also led to a rapid deterioration of bank balance sheets, especially in countries affected by a collapsing real estate bubble (most notably Spain). In the end, the two crises are inextricably linked.

If a budgetary parliament decides what the Eurozone’s debt ought to be, then there clearly needs to be a European finance minister responsible to that body and charged with proposing a Eurozone budget and annual deficit. What is certain is that the Eurozone cannot do without a genuine parliamentary chamber in which to set its budgetary strategy in a public, democratic, and sovereign manner, and more generally to discuss ways to overcome the financial and banking crisis in which Europe currently finds itself mired. The existing European councils of heads of state and finance ministers cannot do the work of this budgetary body. They meet in secret, do not engage in open public debate, and regularly end their meetings with triumphal midnight communiqués announcing that Europe has been saved, even though the participants themselves do not always seem to be sure about what they have decided.

 

pages: 741 words: 179,454

Extreme Money: Masters of the Universe and the Cult of Risk by Satyajit Das

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affirmative action, Albert Einstein, algorithmic trading, Andy Kessler, Asian financial crisis, asset allocation, bank run, banking crisis, banks create money, Basel III, Benoit Mandelbrot, Berlin Wall, Bernie Madoff, Big bang: deregulation of the City of London, Black Swan, bonus culture, Bretton Woods, BRICs, British Empire, capital asset pricing model, Carmen Reinhart, carried interest, Celtic Tiger, clean water, cognitive dissonance, collateralized debt obligation, corporate governance, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, Daniel Kahneman / Amos Tversky, debt deflation, Deng Xiaoping, discrete time, diversification, diversified portfolio, Doomsday Clock, Emanuel Derman, en.wikipedia.org, Eugene Fama: efficient market hypothesis, eurozone crisis, Fall of the Berlin Wall, financial independence, financial innovation, full employment, global reserve currency, Goldman Sachs: Vampire Squid, Gordon Gekko, greed is good, happiness index / gross national happiness, haute cuisine, high net worth, Hyman Minsky, index fund, interest rate swap, invention of the wheel, invisible hand, job automation, Johann Wolfgang von Goethe, joint-stock company, Joseph Schumpeter, Kenneth Rogoff, Kevin Kelly, labour market flexibility, laissez-faire capitalism, load shedding, locking in a profit, Long Term Capital Management, Louis Bachelier, margin call, market bubble, market fundamentalism, Marshall McLuhan, Martin Wolf, merger arbitrage, Milgram experiment, moral hazard, mortgage debt, mortgage tax deduction, mutually assured destruction, Naomi Klein, Network effects, new economy, Nick Leeson, Nixon shock, Northern Rock, nuclear winter, oil shock, Own Your Own Home, pets.com, plutocrats, Plutocrats, Ponzi scheme, price anchoring, price stability, profit maximization, quantitative easing, quantitative trading / quantitative finance, Ralph Nader, RAND corporation, random walk, Ray Kurzweil, regulatory arbitrage, reserve currency, Richard Thaler, risk-adjusted returns, risk/return, road to serfdom, Robert Shiller, Robert Shiller, Rod Stewart played at Stephen Schwarzman birthday party, rolodex, Ronald Reagan, Ronald Reagan: Tear down this wall, savings glut, shareholder value, Sharpe ratio, short selling, Silicon Valley, six sigma, Slavoj Žižek, South Sea Bubble, special economic zone, statistical model, Stephen Hawking, Steve Jobs, The Chicago School, The Great Moderation, the market place, the medium is the message, The Nature of the Firm, The Wealth of Nations by Adam Smith, Thorstein Veblen, too big to fail, trickle-down economics, Turing test, Upton Sinclair, value at risk, zero-coupon bond

Central Bank Republics Central bankers, led by Alan Greenspan, believed that lightly regulated markets promoted prosperity: “government regulation cannot substitute for individual integrity...the first and most effective line of defense against fraud and insolvency is counterparties’ surveillance.... JP Morgan thoroughly scrutinizes the balance sheet of Merrill Lynch before it lends.”4 In 2008, defending deregulated markets, Greenspan stated: “You can have huge amounts of regulation and I will guarantee nothing will go wrong, but nothing will go right either.”5 In his review of the global banking crisis, Lord Adair Turner noted that: An underlying assumption of financial regulation in the U.S., the UK and across the world has been that financial innovation is by definition beneficial, since market discipline will winnow out any unnecessary or value destructive innovations. As a result, regulators have not considered it their role to judge the value of different financial products, and they have in general avoided direct products regulation, certainly in wholesale markets with sophisticated investors.6 It was a matter of faith: Our soundness standards should be no more or no less stringent than those the market place would impose.

Philip Augar (2009) Chasing Alpha: How Reckless Growth and Unchecked Ambition Ruined the City’s Golden Decade, Bodley Head, London: 47. 4. Alan Greenspan (2008) The Age of Turbulence: Adventures in a New World, Penguin Books, London: 256, 257. 5. Peter S. Goodman “Taking a hard new look: a Greenspan legacy” (8 October 2008) New York Times. 6. “The Turner Review: A regulatory response to the global banking crisis” (March 2009), Financial Services Authority: 49. 7. Alan Greenspan “Banking in the global marketplace” (18 November 1996), Speech to Federation of Bankers Association of Japan, Tokyo. 8. Greenspan, The Age of Turbulence: 360. 9. Alan Greenspan “Do efficient financial markets mitigate financial crises?” (19 October 1999), Financial Markets Conference of the Federal Reserve Bank of Atlanta. 10.

Don Thompson (2008) The $12 Million Stuffed Shark: The Curious Economics of Contemporary Art, Palgrave Macmillan, New York. Pablo Triana (2010) Lecturing Birds on Flying: Can Mathematical Theories Destroy the Financial Markets?, John Wiley, New Jersey. Jerome Tuccille (2002) Alan Shrugged: The Life and Times of Alan Greenspan, the World’s Most Powerful Banker, John Wiley, New Jersey. The Turner Review: A Regulatory Response to the Global Banking Crisis (2009) Financial Services Authority, London. Justyn Walsh (2009) Keynes and the Market, John Wiley & Sons, Chichester. Vicky Ward (2010) The Devil’s Casino: Friendship, Betrayal and the High Stakes Games Played Inside Lehman Brothers, John Wiley, New Jersey. Peter Watson (2001) A Terrible Beauty: The People and Ideas that Shaped the Modern Mind: A History, Phoenix Press, London. David Wessel (2010) In Fed We Trust: Ben Bernanke’s War on the Great Panic, Scribe Publications, Melbourne.

 

pages: 264 words: 115,489

Take the money and run: sovereign wealth funds and the demise of American prosperity by Eric Curt Anderson

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asset allocation, banking crisis, Bretton Woods, business continuity plan, business intelligence, business process, collective bargaining, corporate governance, credit crunch, currency manipulation / currency intervention, currency peg, diversified portfolio, floating exchange rates, housing crisis, index fund, Kenneth Rogoff, open economy, passive investing, profit maximization, profit motive, random walk, reserve currency, risk tolerance, risk-adjusted returns, risk/return, Ronald Reagan, the market place, The Wealth of Nations by Adam Smith, too big to fail, Vanguard fund

In August 2008, the Korea Investment Corporation turned down a reported $5 billion deal with Lehman Brothers.17 In September 2008, the manager of Norway’s Government Pension Fund-Global told reporters that Oslo’s fund was “cool” on taking part in recapitalization of the U.S. financial sector, for fiscal and political reasons. As Yngve Slyngstad put it: We are a long-term investor . . . investing with financial interest. Currently the game in the U.S. financial sector looks more short-term, more political and is more momentum driven. And with our approach in investing, these are not necessarily the circumstances that we feel so comfortable with . . . We have had a credit crisis, a liquidity crisis, and now a banking crisis. You don’t go through this type of situation without having some sort of [new] regulations.18 Similar sentiments—as we noted above—were expressed throughout the Middle East, where sovereign fund managers either were directed to assist ailing domestic markets19 or were seeking regional opportunities.20 This is not to say sovereign wealth funds are completely avoiding investments in Western financial institutions—or that no sovereign wealth fund has profited from these investments.

For instance, rather than establishing branches, foreign banks are required to incorporate each local operation in China as a Chinese-registered company, and each of these entities must have $125 million in registered capital. Second, the minimum balance for individuals in these companies is 214 Notes $125,000. Finally, any foreign bank not locally incorporated can only offer services to businesses in yuan—services to individuals can only be done in foreign currency (“China: Deferring a Banking Crisis,” STRATFOR, Washington DC, 5 September 2006). 52. In December 2006, these “big four” were thought to hold more than 50% of the aggregate assets in China’s financial institutions (Hidetaro Muroi, “Chinese Banking Reform Requires Greater Competition,” Japan Center for Economic Research Staff Report, Tokyo, 26 July 2007). The four institutions were originally internal divisions of the People’s Bank of China but were separated from the central bank in the late 1970s. 53.

 

pages: 586 words: 159,901

Wall Street: How It Works And for Whom by Doug Henwood

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accounting loophole / creative accounting, affirmative action, Andrei Shleifer, asset allocation, bank run, banking crisis, barriers to entry, borderless world, Bretton Woods, British Empire, capital asset pricing model, capital controls, central bank independence, corporate governance, correlation coefficient, correlation does not imply causation, credit crunch, currency manipulation / currency intervention, David Ricardo: comparative advantage, debt deflation, deindustrialization, dematerialisation, diversification, diversified portfolio, Donald Trump, equity premium, Eugene Fama: efficient market hypothesis, experimental subject, facts on the ground, financial deregulation, financial innovation, Financial Instability Hypothesis, floating exchange rates, full employment, George Akerlof, George Gilder, hiring and firing, Hyman Minsky, implied volatility, index arbitrage, index fund, interest rate swap, Internet Archive, invisible hand, joint-stock company, Joseph Schumpeter, kremlinology, late capitalism, law of one price, liquidationism / Banker’s doctrine / the Treasury view, London Interbank Offered Rate, Louis Bachelier, market bubble, Mexican peso crisis / tequila crisis, microcredit, minimum wage unemployment, moral hazard, mortgage debt, mortgage tax deduction, oil shock, payday loans, pension reform, plutocrats, Plutocrats, price mechanism, price stability, prisoner's dilemma, profit maximization, Ralph Nader, random walk, reserve currency, Richard Thaler, risk tolerance, Robert Gordon, Robert Shiller, Robert Shiller, shareholder value, short selling, Slavoj Žižek, South Sea Bubble, The Market for Lemons, The Nature of the Firm, The Wealth of Nations by Adam Smith, transaction costs, transcontinental railway, women in the workforce, yield curve, zero-coupon bond

Simultaneously, frightened bankers called in loans — those, of course, that weren't already in default — and refused to make new ones, preferring instead to stash their money in U.S. Treasury bills. Though big corporations remained largely unscathed, the shutdown of bank credit hurt small businesses, farmers, and households. No doubt the cascade of defaults, insolvencies, and bank failures fed on itself, since credit was denied even to borrowers who could have put it to good use. Though the banking crisis came to an end in March 1933 with Roosevelt's bank holiday — the very month officially recognized as the trough of the 1929-33 contraction — small businesses still found it difficult to borrow money at least through 1935, and possibly 1938, according to a number of surveys cited by Bernanke. The home mortgage market was similarly frozen; what lending took place was the result of New Deal credit programs.

A Fisher deflation was underway. Of course, we don't have Fisher deflations today; we have expensive bailouts, and not just in the U.S. Actually, the recent U.S. bank and S&L bailouts were rather modest in comparison to disasters elsewhere. Estimates are that the combined losses and rescue costs in the U.S. disaster RENEGADES were about 3% of a year's GDP — compared with 4% for Norway's bank crisis, 6% for Sweden's, 8% for Finland's (all from the late 1980s and early 1990s), and, the world champion, 17% for Spain's (which ran from 1977 to 1985). Altogether, about two-thirds of IMF member countries experienced some sort of credit disaster between 1980 and 1996. Such disasters may have been successfully contained, but that doesn't mean they're insignificant or rare. In fact, some analysts argue that the banking disasters of the last quarter-century are historically unprecedented in both frequency and size (Goldstein and Turner 1996).

 

pages: 471 words: 124,585

The Ascent of Money: A Financial History of the World by Niall Ferguson

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Admiral Zheng, Andrei Shleifer, Asian financial crisis, asset allocation, Atahualpa, bank run, banking crisis, banks create money, Black Swan, Black-Scholes formula, Bretton Woods, BRICs, British Empire, capital asset pricing model, capital controls, Carmen Reinhart, Cass Sunstein, central bank independence, collateralized debt obligation, colonial exploitation, corporate governance, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, currency manipulation / currency intervention, currency peg, Daniel Kahneman / Amos Tversky, deglobalization, diversification, diversified portfolio, double entry bookkeeping, Edmond Halley, Edward Glaeser, Edward Lloyd's coffeehouse, financial innovation, financial intermediation, floating exchange rates, Fractional reserve banking, Francisco Pizarro, full employment, German hyperinflation, Hernando de Soto, high net worth, hindsight bias, Home mortgage interest deduction, Hyman Minsky, income inequality, interest rate swap, iterative process, joint-stock company, joint-stock limited liability company, Joseph Schumpeter, Kenneth Rogoff, knowledge economy, labour mobility, London Interbank Offered Rate, Long Term Capital Management, market bubble, market fundamentalism, means of production, money: store of value / unit of account / medium of exchange, moral hazard, mortgage debt, mortgage tax deduction, Naomi Klein, Nick Leeson, Northern Rock, pension reform, price anchoring, price stability, principal–agent problem, probability theory / Blaise Pascal / Pierre de Fermat, profit motive, quantitative hedge fund, RAND corporation, random walk, reserve currency, Richard Thaler, Robert Shiller, Robert Shiller, Ronald Reagan, savings glut, seigniorage, short selling, Silicon Valley, South Sea Bubble, spice trade, technology bubble, The Wealth of Nations by Adam Smith, The Wisdom of Crowds, Thomas Malthus, Thorstein Veblen, too big to fail, transaction costs, value at risk, Washington Consensus, Yom Kippur War

The combined effect of these rules was a surge in the number of national and state-chartered banks during the late nineteenth and early twentieth centuries, from fewer than 12,000 in 1899 to more than 30,000 at the peak in 1922. Large numbers of under-capitalized banks were a recipe for financial instability, and panics were a regular feature of American economic life - most spectacularly in the Great Depression, when a major banking crisis was exacerbated rather than mitigated by a monetary authority that had been operational for little more than fifteen years. The introduction of deposit insurance in 1933 did much to reduce the vulnerability of American banks to runs. However, the banking sector remained highly fragmented until 1976, when Maine became the first state to legalize interstate banking. It was not until 1993, after the Savings and Loans crisis (see Chapter 5), that the number of national banks fell below 3,600 for the first time in nearly a century.

If the acceptance houses went bust, the bill brokers would go down with them, and possibly also the larger joint-stock banks, which lent millions every day short-term to the discount market. The joint-stock banks’ decision to call in loans deepened what we would now call the credit crunch.40 As everyone scrambled to sell assets and increase their liquidity, stock prices fell, compromising brokers and others who had borrowed money using shares as collateral. Domestic customers began to fear a banking crisis. Queues formed as people sought to exchange banknotes for gold coins at the Bank of England.41 The effective suspension of London’s role as the hub of international credit helped spread the crisis from Europe to the rest of the world. Perhaps the most remarkable feature of the crisis of 1914 was the closure of the world’s major stock markets for periods of up to five months. The Vienna market was the first to close (on 27 July).

 

pages: 376 words: 118,542

Free to Choose: A Personal Statement by Milton Friedman, Rose D. Friedman

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affirmative action, agricultural Revolution, air freight, back-to-the-land, bank run, banking crisis, Fractional reserve banking, full employment, German hyperinflation, invisible hand, labour mobility, means of production, minimum wage unemployment, oil shale / tar sands, oil shock, price stability, Ralph Nader, RAND corporation, road to serfdom, school vouchers, The Wealth of Nations by Adam Smith, union organizing, Unsafe at Any Speed, Upton Sinclair, urban renewal, War on Poverty, working poor, Works Progress Administration

That would have ended—or at least sharply reduced—the stream of bank failures and have prevented the public's attempted conversion of deposits into currency from reducing the quantity of money. Unfortunately, the Fed's actions were hesitant and small. In the main, it stood idly by and let the crisis take its course—a pattern of behavior that was to be repeated again and again during the next two years. It was repeated in the spring of 1931, when a second banking crisis developed. An even more perverse policy was followed in September 1931, when Britain abandoned the gold standard. The Fed reacted—after two years of severe depression—by raising the rate of interest (the discount rate) that it charged banks for loans more sharply than ever before in its history. It took this action to avert a drain on its gold reserves by foreign holders of dollars that it feared would be set off by Britain's abandonment of the gold standard.

Mills, then Secretary of the Treasury and an ex officio member of the Board, stated, in explaining his vote for the action, "For a great central banking system to stand by with a 70% gold reserve without taking active steps in such a situation was almost inconceivable and almost unforgivable." Yet that was precisely how the System had behaved for the two prior years and was to resume behaving as soon as Congress adjourned a few months later, as well as during the climactic final banking crisis of March 1933.5 Where the Depression Started The decisive evidence that the depression spread from the United States to the rest of the world, rather than the other way around, comes from the movement of gold. In 1929 the United States was on a gold standard in the sense that there was an official price of gold ($20.67 per fine ounce) at which the U.S. government would buy or sell gold on demand.

 

pages: 457 words: 128,838

The Age of Cryptocurrency: How Bitcoin and Digital Money Are Challenging the Global Economic Order by Paul Vigna, Michael J. Casey

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3D printing, Airbnb, altcoin, bank run, banking crisis, bitcoin, blockchain, Bretton Woods, California gold rush, capital controls, carbon footprint, clean water, collaborative economy, Credit Default Swap, cryptocurrency, David Graeber, disintermediation, Edward Snowden, Elon Musk, ethereum blockchain, fiat currency, financial innovation, Firefox, Flash crash, Fractional reserve banking, hacker house, Hernando de Soto, high net worth, informal economy, Internet of things, inventory management, Julian Assange, Kickstarter, Kuwabatake Sanjuro: assassination market, litecoin, Long Term Capital Management, Lyft, M-Pesa, Mark Zuckerberg, McMansion, means of production, Menlo Park, mobile money, money: store of value / unit of account / medium of exchange, Network effects, new economy, new new economy, Nixon shock, offshore financial centre, payday loans, peer-to-peer lending, pets.com, Ponzi scheme, prediction markets, price stability, profit motive, RAND corporation, regulatory arbitrage, reserve currency, Robert Shiller, Robert Shiller, Satoshi Nakamoto, seigniorage, shareholder value, sharing economy, short selling, Silicon Valley, Silicon Valley startup, Skype, smart contracts, special drawing rights, Spread Networks laid a new fibre optics cable between New York and Chicago, Steve Jobs, supply-chain management, Ted Nelson, The Great Moderation, the market place, the payments system, The Wealth of Nations by Adam Smith, too big to fail, transaction costs, tulip mania, Turing complete, Tyler Cowen: Great Stagnation, Uber and Lyft, underbanked, WikiLeaks, Y Combinator, Y2K, Zimmermann PGP

The entire machinery of the global capital markets seized up, coming to a grinding, smashing, disastrous halt, because nobody trusted anyone anymore. In the months and years that followed, an increasing number of people would decide that perhaps Satoshi Nakamoto’s idea offered a better alternative to all that. * * * While we have no proof that the for-profit-company-led cash initiatives of the 1990s and the 2008 banking crisis shaped Nakamoto’s thinking, both underscored the reasons that cryptocurrency designers were eager for change. The message in each case was that the centralization of money is destructive and that attempts to change that from within would fail. The solution could only be true decentralization, by coming up with a brand-new, rebel monetary system. In the mind of the libertarian-inclined techies who believed in these models, it was not enough to build the kind of anonymity functions that Chaum created.

Well-known loopholes such as this one—others include using a UnionPay card to buy dollar-denominated chips at casinos in Macao—appear to be tolerated by the government. Thousands of Mr. Feis are all over China’s coastal cities. With alternatives like that, bitcoin in China starts to look like a solution in search of a problem. One scenario that could foster Chinese acceptance of the cryptocurrency would be a banking crisis, a threat that economists take seriously and which some see as the greatest risk facing the global economy. Exploiting the controlled interest-rate model that penalizes savers, banks have recklessly built up trillions of renminbi worth of debts to municipalities and developers that are certain to go bad. When that happens, the government will likely bail out the country’s biggest banks as it did when their debts became too unwieldy in 2003, but this time chances are it will let some small- and medium-size banks and trust companies fail.

 

pages: 504 words: 143,303

Why We Can't Afford the Rich by Andrew Sayer

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accounting loophole / creative accounting, Albert Einstein, banking crisis, banks create money, Bretton Woods, British Empire, call centre, capital controls, carbon footprint, collective bargaining, corporate social responsibility, credit crunch, Credit Default Swap, David Graeber, David Ricardo: comparative advantage, debt deflation, decarbonisation, deglobalization, deindustrialization, delayed gratification, demand response, don't be evil, en.wikipedia.org, Etonian, financial innovation, financial intermediation, Fractional reserve banking, full employment, Goldman Sachs: Vampire Squid, high net worth, income inequality, investor state dispute settlement, James Dyson, job automation, Julian Assange, labour market flexibility, laissez-faire capitalism, low skilled workers, Mark Zuckerberg, market fundamentalism, Martin Wolf, means of production, moral hazard, mortgage debt, neoliberal agenda, new economy, New Urbanism, Northern Rock, Occupy movement, offshore financial centre, oil shale / tar sands, patent troll, payday loans, plutocrats, Plutocrats, predatory finance, price stability, pushing on a string, quantitative easing, race to the bottom, Ronald Reagan, shareholder value, short selling, Steve Jobs, The Nature of the Firm, The Spirit Level, The Wealth of Nations by Adam Smith, Thorstein Veblen, too big to fail, transfer pricing, trickle-down economics, universal basic income, unpaid internship, upwardly mobile, Washington Consensus, Winter of Discontent, working poor, Yom Kippur War

In 2011–12 pay and benefits of business executives in the top FTSE 100 companies rose by 27% to an average of £4 million each.101 Commentators from across the political spectrum agree that CEO pay has had little to do with performance and everything to do with economic rent and power.102 Bank bonuses: ‘Heads I win, tails you lose’ If there’s one thing that has inflamed public outrage at the banking crisis more than any other, it’s bankers’ bonuses. Their recipients appeared to inhabit a different world from the rest of society, oblivious to the wider crisis that they helped to produce, making arrogant claims about their alleged star qualities as wealth creators that distinguished them from ordinary mortals. They certainly appear to be good at pursuing their self-interest; there is no reason to doubt their competitiveness and speed of thought, even if they lack wisdom, ethics or understanding of the wider situation.

., Haslam, C. and Williams, K. (2001) ‘Accumulation under conditions of inequality’, Review of International Political Economy, 8(1), pp 66–95. 43 Shutt (2009), pp 128–9. 44 See Chapter Eighteen. 45 Lysandrou, P. (2011) ‘Global inequality as one of the root causes of the financial crisis: a suggested explanation’, Economy and Society, 40(3), pp 323–44. 46 At the time of writing, European Union citizens’ bank deposits were protected up to €100,000 (£85,000) in any one banking group. 47 Turner, A. (2009) The Turner Review: A regulatory response to the global banking crisis, London: Financial Services Authority, p 18. 48 For a definition of debt deflation, see Chapter Four. On how Wall Street engineered asset inflation at the end of the 20th century and enhanced the unearned income of the top 1% in the US who were bondholders, see Canterbery, E.R. (2000) Wall Street capitalism; The theory of the bondholding class, Singapore: World Scientific Publishing Company. 49 Merryman, J. (2012) Occupying money, 17 May, http://source.yeeyan.org/view/430335_f43/Occupying%20Money.%20-%20welcome%20to%20exterminating%20angel%20press.

 

pages: 632 words: 159,454

War and Gold: A Five-Hundred-Year History of Empires, Adventures, and Debt by Kwasi Kwarteng

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accounting loophole / creative accounting, anti-communist, Asian financial crisis, Atahualpa, balance sheet recession, bank run, banking crisis, Big bang: deregulation of the City of London, Bretton Woods, British Empire, California gold rush, capital controls, Carmen Reinhart, central bank independence, collateralized debt obligation, credit crunch, currency manipulation / currency intervention, Deng Xiaoping, discovery of the americas, Etonian, eurozone crisis, fiat currency, financial innovation, floating exchange rates, Francisco Pizarro, full employment, German hyperinflation, hiring and firing, income inequality, invisible hand, John Maynard Keynes: Economic Possibilities for our Grandchildren, joint-stock company, joint-stock limited liability company, Joseph Schumpeter, Kenneth Rogoff, labour market flexibility, market bubble, money: store of value / unit of account / medium of exchange, moral hazard, new economy, oil shock, plutocrats, Plutocrats, Ponzi scheme, price mechanism, quantitative easing, rolodex, Ronald Reagan, South Sea Bubble, the market place, The Wealth of Nations by Adam Smith, too big to fail, War on Poverty, Yom Kippur War

In this respect, ‘the plans of ministers’ were important, yet he believed also in the operation of the truth uttered by merchants to a minister of Louis XIV: ‘let us alone’.30 Again, it was Baring who was among the first writers to refer to the Bank of England as a ‘dernier ressort’, or ‘last resort’ in the lending market. The notion of the lender of ‘last resort’ would occur many times in the future. It essentially means that the central bank would always provide credit to the banking system, even if all other banks were in difficulty. Baring used the term in recounting the banking crisis that had started in England in 1793, which he felt had been caused by the ‘unexpected declaration of war’ against France; as a result of the declaration ‘foreigners withheld remittances’ and the ‘want of money became general . . . alarm in the country continued to increase’, while confidence in the banks ‘vanished’.31 It was to guard against such a situation arising again that Baring argued that the ‘Notes of the Bank of England should be made legal tender during the war.’32 He was arguing for the general acceptance of paper notes, the ‘Notes of the Bank of England’, to provide what we would call ‘liquidity’.

The ‘main difficulty in two words’, as this clever young banker saw it, was ‘to prop up those big houses who have debts owing from Germany which will never be paid, and, if they go under, to prevent the whole City coming down like a pack of cards’.42 The public, once the banks had suspended gold payments for customers, received paper money, notes issued by the British Treasury for everyday purposes, with denominations of £1 and 10 shillings (50p in modern terms). These notes were known as ‘Bradburies’, after Sir John Bradbury, the Joint Permanent Secretary of the Treasury. Gold payments for external trade and debts were preserved. By 8 August, after the suspension of gold payments internally, the bank rate was back to its more traditional level of 5 per cent. The immediate banking crisis had passed. The public may have thought, according to Shaw Stewart, that ‘all is well now’, after receiving the paper notes, but ‘if you saw the length of the faces of those who know, you would realise this is one of the most terrific things London has been up against since finance existed’. Shaw Stewart wisely observed that the remedy would ‘undoubtedly take the form of the Government shouldering the whole thing’.

 

pages: 288 words: 16,556

Finance and the Good Society by Robert J. Shiller

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bank run, banking crisis, barriers to entry, Bernie Madoff, capital asset pricing model, capital controls, Carmen Reinhart, Cass Sunstein, cognitive dissonance, collateralized debt obligation, collective bargaining, computer age, corporate governance, Daniel Kahneman / Amos Tversky, Deng Xiaoping, diversification, diversified portfolio, Donald Trump, Edward Glaeser, eurozone crisis, experimental economics, financial innovation, full employment, fundamental attribution error, George Akerlof, income inequality, invisible hand, joint-stock company, Joseph Schumpeter, Kenneth Rogoff, land reform, loss aversion, Louis Bachelier, Mahatma Gandhi, Mark Zuckerberg, market bubble, market design, means of production, microcredit, moral hazard, mortgage debt, Occupy movement, passive investing, Ponzi scheme, prediction markets, profit maximization, quantitative easing, random walk, regulatory arbitrage, Richard Thaler, road to serfdom, Robert Shiller, Robert Shiller, Ronald Reagan, self-driving car, shareholder value, Sharpe ratio, short selling, Skype, Steven Pinker, telemarketer, The Market for Lemons, The Wealth of Nations by Adam Smith, Thorstein Veblen, too big to fail, Vanguard fund, young professional, Zipcar

The consequence was a drop in real estate prices and the collapse of nancial institutions, not only in the United States but also in Europe and elsewhere. By the spring of 2009 the crisis was so severe that it was described as the biggest nancial calamity since the Great Depression of the 1930s—bigger than the Asian nancial crisis of the 1990s and bigger than the oil-price-induced crises of 1974–75 and 1981–82. Beginning in 2010 it was complicated by a European sovereign debt and banking crisis, which by 2012 resulted in many downgrades of governments’ debt, and even of the Eurozone’s bailout fund, the European Financial Stability Facility. This crisis continues to have repercussions around the world. Despite the problems in the mortgage business and many large nancial institutions —some based simply on overenthusiasm and naïveté, others on outright e orts to manipulate and to defraud—I never felt, as did so many, that these problems were a damning indictment of our entire nancial system.

But perhaps too it is because bankers, in contrast to hedge fund managers and the like, are following a long and time-honored tradition, extending back hundreds of years, which has evolved to solve certain problems—including liquidity, moral hazard and selection bias, and transaction service problems—to the satisfaction of most people most of the time. The anger toward bankers takes a very di erent form. It seems to be anger at their power and presumption, at their single-minded pursuit of money. And the anger ares up whenever there is a banking crisis and the governments of the world come to the rescue of these wealthy interests. But the public also has a sense of the centrality, sobriety, and safety of banks, and they must know that those who manage banks are highly in uential in determining the economic outcomes in our society. The people who run banks indeed nd themselves in a guidance or management role for the whole community. Banking has historically been a pillar-of-the-community line of business, one that provides a degree of extra-monetary reward for those who go into it, at least in normal times when things are going well.

 

pages: 572 words: 134,335

The Making of an Atlantic Ruling Class by Kees Van der Pijl

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anti-communist, banking crisis, Berlin Wall, Bretton Woods, British Empire, capital controls, collective bargaining, colonial rule, cuban missile crisis, deindustrialization, diversified portfolio, European colonialism, floating exchange rates, full employment, imperial preference, Joseph Schumpeter, means of production, North Sea oil, plutocrats, Plutocrats, profit maximization, RAND corporation, strikebreaker, trade liberalization, trade route, union organizing, urban renewal, War on Poverty

In Germany, the subordination of money capital took the form of a temporary majority participation by the state in the banks most deeply involved in the post-war Atlantic circuit of money capital (DANAT and Dresdner Bank), whereas the Deutsche Bank, which through its merger with the Discontogesellschaft even more became the bank of the state-monopolistic heavy industries, was only indirectly supervised. The DANAT bank collapsed and the Dresdner Bank suffered heavy losses in the bank crisis of 1931. The two banks merged in 1932, and the German state took an interest of 75% in the new institution, compared to a 35.6% participation by the central bank in the Deutsche Bank. The latter eventually emerged from the bank crisis reinforced at the expense of its rivals. In the Third Reich, the banks were reprivatized without any separation of functions.77 In Italy, the IRI was founded in 1933 as a holding for the deficitary industrial assets hitherto held by bank capital. In this way, a separation of functions was achieved in practice.

 

pages: 504 words: 139,137

Efficiently Inefficient: How Smart Money Invests and Market Prices Are Determined by Lasse Heje Pedersen

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algorithmic trading, Andrei Shleifer, asset allocation, backtesting, bank run, banking crisis, barriers to entry, Black-Scholes formula, Brownian motion, capital asset pricing model, commodity trading advisor, conceptual framework, corporate governance, credit crunch, Credit Default Swap, currency peg, David Ricardo: comparative advantage, discounted cash flows, diversification, diversified portfolio, Emanuel Derman, equity premium, Eugene Fama: efficient market hypothesis, Flash crash, floating exchange rates, frictionless, frictionless market, Gordon Gekko, implied volatility, index arbitrage, index fund, interest rate swap, late capitalism, law of one price, Long Term Capital Management, margin call, market clearing, market design, market friction, merger arbitrage, mortgage debt, New Journalism, paper trading, passive investing, price discovery process, price stability, purchasing power parity, quantitative easing, quantitative trading / quantitative finance, random walk, Renaissance Technologies, Richard Thaler, risk-adjusted returns, risk/return, Robert Shiller, Robert Shiller, shareholder value, Sharpe ratio, short selling, statistical arbitrage, statistical model, systematic trading, technology bubble, total factor productivity, transaction costs, value at risk, Vanguard fund, yield curve, zero-coupon bond

The various types of supply and demand shocks occur over different time scales as some macro events drive the short-term dynamics (within a year), others affect the medium-term economic environment (1–5 years), and yet others determine the long-run growth (5+ years). The typical short-term demand shocks include changes in the consumer spending rate, changes in monetary policy, and changes in access to consumer credit (credit boom vs. banking crisis). Short-run supply shocks include changes in prices of natural resources, especially energy prices. In the medium run, supply shocks can arise from changes in capital. Capital improvements are due to successful investments, including foreign direct investment (FDI). If a country fails to invest enough, its capital stock decreases as it depreciates and becomes obsolete. One driver of investment is how low the real interest rate is, which depends in part on the inflation risk premium (i.e., stable inflation is best) and the rule of law.

., stable inflation is best) and the rule of law. Also, supply shocks can arise from changes in labor-market frictions (sticky wages, search frictions, and rigid labor laws), product-market frictions (sticky prices and anticompetitive corporate measures), and capital-market frictions (market and funding illiquidity) leading to unemployment and lower capital utilization. For instance, a systemic banking crisis slows growth because the ability to finance projects is a driver of investment. In the long run, output depends on supply factors such as technological progress and population growth. 11.4. COUNTRY SELECTION AND OTHER GLOBAL MACRO TRADES There are no limits to the kinds of trades that global macro hedge funds might consider. Here we consider some of the key trades based on relative-value country selection, momentum, trade flows, and political events.

 

Investment: A History by Norton Reamer, Jesse Downing

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Albert Einstein, algorithmic trading, asset allocation, backtesting, banking crisis, Berlin Wall, Bernie Madoff, Bernie Madoff, Brownian motion, buttonwood tree, California gold rush, capital asset pricing model, Carmen Reinhart, carried interest, colonial rule, credit crunch, Credit Default Swap, Daniel Kahneman / Amos Tversky, debt deflation, discounted cash flows, diversified portfolio, equity premium, estate planning, Eugene Fama: efficient market hypothesis, Fall of the Berlin Wall, Fellow of the Royal Society, financial innovation, Gordon Gekko, Henri Poincaré, high net worth, index fund, interest rate swap, invention of the telegraph, James Hargreaves, James Watt: steam engine, joint-stock company, Kenneth Rogoff, land tenure, London Interbank Offered Rate, Long Term Capital Management, loss aversion, Louis Bachelier, margin call, means of production, Menlo Park, merger arbitrage, moral hazard, mortgage debt, Network effects, new economy, Nick Leeson, Own Your Own Home, pension reform, Ponzi scheme, price mechanism, principal–agent problem, profit maximization, quantitative easing, RAND corporation, random walk, Renaissance Technologies, Richard Thaler, risk tolerance, risk-adjusted returns, risk/return, Robert Shiller, Robert Shiller, Sand Hill Road, Sharpe ratio, short selling, Silicon Valley, South Sea Bubble, spinning jenny, statistical arbitrage, technology bubble, The Wealth of Nations by Adam Smith, too big to fail, transaction costs, underbanked, Vanguard fund, working poor, yield curve

Life insurance and savings accounts are two of the earliest and simplest vehicles. The development of life insurance includes comical legal strategies, actuarial mathematics, and ethical reactions to the very notion of betting on death. Savings accounts have an equally intriguing history—from the savings societies that were crucial for many working poor to the development of commercial banks that facilitate the transactions that propel the economy, and through the 1970s banking crisis, which required governmental intervention. Then there are the more complex, and often more risky, investments in the form of separate investment accounts and mutual funds. These vehicles are not prestructured and often have more ambitious capital appreciation goals and therefore must accept more exposure to losses as well. Life Insurance Life insurance serves the dual roles of allowing families to save money and to mitigate the financial effects of the demise of the family’s provider.

Fortunately, by virtue of their structures, mutual savings banks did not have shareholders to worry about, and thus the central goal was to protect assets.46 The introduction of certificates of deposit with longer maturities and the mergers of banks with other institutions had some positive effects on the industry. In addition, the Garn–St. Germain Depository Institutions Act of 1982 authorized the FDIC to acquire capital instruments from the bank, “net worth certificates,” in order to aid their liquidity positions, which also helped the banks weather this painful inflationary period. With these interventions, the banking crisis of the early 1980s was contained. In total, between late 1981 and 1985, the FDIC aided with seventeen mergers and acquisitions of mutual savings banks involving total assets of nearly $24 billion, which translated into 15 percent of the total assets of FDIC-insured mutual savings banks as of year-end 1980.47 At yearend 1995, the cost of all of the savings bank failures was estimated to be about $2.2 billion.48 Savings and loan associations fared even worse: from 1986 to 1995, over one thousand savings and loan associations with an excess of $500 billion in assets failed.

 

pages: 868 words: 147,152

How Asia Works by Joe Studwell

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affirmative action, anti-communist, Asian financial crisis, bank run, banking crisis, barriers to entry, borderless world, Bretton Woods, British Empire, call centre, capital controls, central bank independence, collective bargaining, cross-subsidies, currency manipulation / currency intervention, David Ricardo: comparative advantage, deindustrialization, demographic dividend, Deng Xiaoping, failed state, financial deregulation, financial repression, Gini coefficient, glass ceiling, income inequality, income per capita, industrial robot, Joseph Schumpeter, land reform, land tenure, large denomination, non-tariff barriers, offshore financial centre, oil shock, open economy, passive investing, purchasing power parity, South China Sea, The Wealth of Nations by Adam Smith, urban sprawl, Washington Consensus, working-age population

They opened up and dominated entire new industries like electrical engineering, chemicals and petrochemicals with vast investments in research and development.35 Japan refined its industrial policy around the export discipline of large manufacturers over a long period between 1925 and 1954. The process spanned the Depression and the fascist, war and early post-war eras.36 It began in 1925, when the Japanese government created the Ministry of Commerce and Industry (MCI) with legal authority to oversee the pricing and quality of important exports.37 Following a devastating banking crisis in 1927, the Commerce and Industry Deliberation Council was set up to lead mergers of industrial firms that were facing bankruptcy. The term sangyō gōrika – ­‘industrial rationalisation’ – came into use to signify the need for the state to cull weaker industrial firms within the context of a protectionist environment that nurtured industrial development.38 In 1930 a senior MCI official, Kishi Nobosuke, spent seven months in Germany studying how cartels operated there.

Nineteenth-century Spain had a large number of investment banks which did nothing to promote industrialisation. This was largely because Spanish company law favoured railroad investment but discriminated against manufacturers. As a result, the Spanish banks financed thousands of kilometres of rail lines, for which all the rolling stock was imported and for which there were no manufactures to transport. After a banking crisis in the 1870s, Spain remained thoroughly un-industrialised.4 Similarly, Austria had plenty of investment banks and weak infant industry policies; its banks financed only mature firms and government securities, and manufacturing development lagged. In sum, throughout history financial systems have catalysed different developmental outcomes depending on the policy environment that has surrounded them.

 

The White Man's Burden: Why the West's Efforts to Aid the Rest Have Done So Much Ill and So Little Good by William Easterly

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airport security, anti-communist, Asian financial crisis, bank run, banking crisis, Bretton Woods, British Empire, call centre, clean water, colonial exploitation, colonial rule, Edward Glaeser, European colonialism, failed state, farmers can use mobile phones to check market prices, George Akerlof, Hernando de Soto, income inequality, income per capita, Indoor air pollution, invisible hand, Kenneth Rogoff, laissez-faire capitalism, land reform, land tenure, microcredit, moral hazard, Naomi Klein, purchasing power parity, randomized controlled trial, Ronald Reagan, Scramble for Africa, the scientific method, The Wealth of Nations by Adam Smith, transaction costs, War on Poverty, Xiaogang Anhui farmers

health care colonial dysfunctional systems for foreign aid successes in modest fees for See also disease heavily indebted poor countries (HIPCs) high-technology exports Hindustan Lever Limited HIV.SeeAIDS HIVSA “hold-up” problem homegrown development aid agencies liberated by examples of as only way to end poverty the poor as helping themselves success and self-reliance Honduras Hong Kong economic growth in formula for success of high-technology exports markets in success of takeoff in ten best per capita growth rates triads in Horton, Lynn humanitarian aid Hungary hunger hungry season in Africa malnutrition in Millennium Development Goals number of people without enough to eat Hun Sen Husain, Ishrat Hussain, Altaf Hussein (king of Jordan) Hussein, Saddam Hussein ibn Ali al-Hashimi Hutus Ickes, Barry Igbo Iliffe, John immunization imperialism as beneficent but incompetent benefits of not being colonized as coming back into fashion decolonization in Middle East native autocrats sponsored by in Pakistan partition of India ratio of Europe’s income to colonies’ in Sudan India advanced degrees in AIDS prevention among prostitutes in British attitude toward caste system colonial rule in economic growth in education projects in ethnic conflict over land in formula for success of GlobalGiving.com project in and hatred of Pakistan legal education in markets in growth of partition of per capita income in police in private firms helping the poor in ten best per capita growth rates Indians (Asian) Indonesia indoor smoke inequality infant mortality inflation Inter-American Development Bank (IDB) International Christian Support Fund (ICS) International Labour Organization (ILO) International Monetary Fund (IMF) accountability lacking for and Argentine default and bad government as bailing itself out in Bolivian free-market reforms creation of debt monitored by and democracy differences among aid bureaucracies ending conditions on loans from evaluation of on financial equilibrium financial programming model of and Haiti as having fewer goals than other agencies and heavily indebted poor countries Independent Evaluation Office in international aid bureaucracy and Mexican banking crisis in Millennium Project Nicaragua aid from as not enforcing its conditions Pakistan aid from on participation postmodern imperialism and Poverty Reduction and Growth Facility loans Poverty Reduction Strategy Paper research department of resources of riots sparked by and selection effect “standby arrangements,” and state collapse “structural adjustment” programs of successful programs of success stories without aid from Sudan aid from in Western interventions in world poverty World Economic Outlook as world’s most powerful creditor Internet Iran (Persia) Iraq American occupation of Saddam Hussein nation-building in in partition of Ottoman Empire Islam, Roumeen Israel Jamaica Jana, Smarajit Japan and benefits of not being colonized intervention in poor countries by per capita income in takeoff in ten best per capita growth rates U.S. nation-building in World War II propaganda in Jereissati, Tasso Jesuits Jews Jinnah, Ali Johannesburg Summit on Sustainable Development Johnson, Simon Jordan Kabila, Joseph Kabila, Laurent Kagame, Paul Kasavubu, Joseph Kashmir Kasper, Sara Kaufmann, Daniel Kazakhstan Keefer, Phil Kennedy, John F.

., Wolfensohn, James women education for girls hunger in in Igbo revolt malnutrition in pregnancy maternal mortality in Millennium Development Goals and polygamy World Bank AIDS programs aid volume emphasized by author as employee of and bad government Big Push thinking influencing in Bolivian free-market reforms China aid from Congolese strategy of creation of and democracy Development Impact Evaluation Task Force differences among aid bureaucracies evaluation of formal rules preferred by Haiti program of and heavily indebted poor countries India aid from in international aid bureaucracy Lesotho agricultural project of on maintenance and Mexican banking crisis in Millennium Project Nicaragua aid from observable efforts shown by Operations Evaluation Department “Our Dream Is a World Free of Poverty,” Pakistan aid from on participation on peacekeeping postmodern imperialism and Poverty Reduction Strategy Paper progress reports on Africa research department of scholarship program of and selection effect SMEs supported by social action program in Pakistan “structural adjustment” programs of successful programs of Sudan aid from in Western interventions in world poverty World Development Report World Economic Forum World Economic Outlook World Health Organization (WHO) and AIDS Chinese tuberculosis project creation of on health spending in poor countries in international aid bureaucracy vaccination campaigns of Xiaogang (China) Yamagata Aritomo Yeltsin, Boris Yugoslavia Yukos Yunus, Mohammad Zaire/Democratic Republic of the Congo (DRC) AIDS in Belgian Congo cellular phone network in government corruption and violence in Luba dominating trade in mineral wealth in Mobuto negative growth in “post-conflict reconstruction” aid to state collapse in ten worst per capita growth rates U.S. military intervention in Zakaria, Fareed Zambia Zimbabwe AIDS in bad government in as failed state white-minority regime in whites and Asians in business in Zinga, Silvia Neyala Page numbers are in Sachs’s book The End of Poverty: Economic ossibilities for Our Time (New York: Penguin Press, 2005).

 

pages: 212 words: 49,544

WikiLeaks and the Age of Transparency by Micah L. Sifry

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1960s counterculture, Amazon Web Services, banking crisis, barriers to entry, Bernie Sanders, Buckminster Fuller, Chelsea Manning, citizen journalism, Climategate, crowdsourcing, Google Earth, Howard Rheingold, Internet Archive, Jacob Appelbaum, Julian Assange, Network effects, RAND corporation, school vouchers, Skype, social web, Stewart Brand, web application, WikiLeaks

“It is common for staffers to get more and better information from blogs, and for hearings to be driven by the conversation online, than from the Congressional liaison group at the Fed.”19 Ultimately activists ranging from followers of libertarian Ron Paul on the right to supporters of Grayson and Senator Bernie Sanders on the left also succeeded in 2010 in forcing Congress to adopt a new law requiring the Federal Reserve to detail all the recipients of bailout funding during the banking crisis. 82 MICAH L. SIFRY That last victory was substantial. The Wall Street Journal editorial page praised the results of the Federal Reserve’s new transparency, writing: Lender of last resort indeed. The Federal Reserve pulled back the curtain yesterday on its emergency lending during the financial panic of 2008 and 2009, and the game to play at home with the kids is: who didn’t get a bailout? If you can find a big financial player who declined the Fed’s cash, you’re doing better than we did yesterday afternoon.

 

pages: 215 words: 55,212

The Mesh: Why the Future of Business Is Sharing by Lisa Gansky

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Airbnb, Amazon Mechanical Turk, Amazon Web Services, banking crisis, barriers to entry, carbon footprint, cloud computing, credit crunch, crowdsourcing, diversification, Firefox, Google Earth, Internet of things, Kickstarter, late fees, Network effects, new economy, peer-to-peer lending, recommendation engine, RFID, Richard Florida, Richard Thaler, ride hailing / ride sharing, sharing economy, Silicon Valley, smart grid, social web, software as a service, TaskRabbit, the built environment, walkable city, yield management, young professional, Zipcar

It starts many, many businesses with the expectation that they don’t all need to work—Virgin Media, Virgin Mobile, Virgin Music. Recently, it created a cab-sharing service in New York and London called taxi2, which is free to passengers of any airline. Virgin execs like to just throw the spaghetti on the wall to see if it sticks. They’re looking for niches that are fertile beds for high-value customers and future juicy markets. Prosper, the peer-to-peer lending firm, discovered a niche opened up by the banking crisis. With people’s confidence waning in the big banks, some turned to Prosper as an alternative. Also, as the market restrained smaller banks from making local loans, Prosper was able to fill part of the gap. Some of the banks themselves turned to the company for help. Niches often occur when customers are restless about current choices, as they were with the banks. Similarly, Etsy is a craft exchange that grew after finding a specialized community of customers on eBay a few years ago.

 

pages: 193 words: 47,808

The Flat White Economy by Douglas McWilliams

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access to a mobile phone, banking crisis, Big bang: deregulation of the City of London, bonus culture, cleantech, cloud computing, computer age, correlation coefficient, Edward Glaeser, en.wikipedia.org, Erik Brynjolfsson, eurozone crisis, George Gilder, hiring and firing, income inequality, informal economy, knowledge economy, low skilled workers, Network effects, new economy, offshore financial centre, Peter Thiel, Productivity paradox, Silicon Valley, smart cities, special economic zone, Steve Jobs, working-age population

By 2014 the average price of a house in London was £330,000 compared to a national average of £182,000.4 By 2007, someone who had bought a house in Central London in 1990 for £600,000 might well have found that it was worth £4 million. Arguably one of the easiest and least meritocratic ways to get rich then; though, in fairness, those benefiting from the property-price inflation would in all likelihood have had to scrimp and save to pay huge mortgages at times of double-digit rates of interest to hang onto their houses. The financial crisis of 2007, followed by the banking crisis of 2008, did no one any favours. But the silver lining in the cloud was the possibility of a rebalancing of the British economy: away from financial services, consumption and an overreliance on the property market towards manufacturing industry, investment and exports; and away from London and the South towards the Midlands and the North. For one year, 2009, it happened. In that year London’s GDP declined by 6% compared with a fall of only 4.3% for the UK as a whole, while London house prices declined by slightly more – 19%, as opposed to 17% for the UK as a whole.

 

pages: 184 words: 53,625

Future Perfect: The Case for Progress in a Networked Age by Steven Johnson

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airport security, algorithmic trading, banking crisis, barriers to entry, Bernie Sanders, call centre, Captain Sullenberger Hudson, Cass Sunstein, cognitive dissonance, credit crunch, crowdsourcing, dark matter, Dava Sobel, David Brooks, future of journalism, hive mind, Howard Rheingold, HyperCard, Jane Jacobs, John Gruber, John Harrison: Longitude, Kevin Kelly, Kickstarter, lone genius, Mark Zuckerberg, meta-analysis, Naomi Klein, Nate Silver, Occupy movement, packet switching, Peter Thiel, planetary scale, pre–internet, RAND corporation, risk tolerance, shareholder value, Silicon Valley, Silicon Valley startup, social graph, Steve Jobs, Steven Pinker, Stewart Brand, The Death and Life of Great American Cities, Tim Cook: Apple, urban planning, WikiLeaks, working poor, X Prize

Daily Kos provided in-depth surveys and field reports on state races that the Times would never have had the ink to cover. Individual bloggers such as Andrew Sullivan responded to each twist in the news cycle; The Huffington Post culled the most provocative opinion pieces from the rest of the blogosphere. The statistician Nate Silver at the website Five Thirty Eight did meta-analysis of polling that exceeded anything Bill Schneider dreamed of doing on CNN in 1992. When the banking crisis erupted in September 2008, I followed economist bloggers such as Brad DeLong to get their expert take on the candidates’ responses to the crisis. I watched the debates with a thousand virtual friends live-tweeting alongside me on the couch. All this was filtered and remixed through the extraordinary political satire of Jon Stewart and Stephen Colbert, whom I watched via viral clips on the Web as much as I watched them on TV.

 

pages: 271 words: 52,814

Blockchain: Blueprint for a New Economy by Melanie Swan

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23andMe, Airbnb, altcoin, Amazon Web Services, asset allocation, banking crisis, bioinformatics, bitcoin, blockchain, capital controls, cellular automata, central bank independence, clean water, cloud computing, collaborative editing, Conway's Game of Life, crowdsourcing, cryptocurrency, disintermediation, Edward Snowden, en.wikipedia.org, ethereum blockchain, fiat currency, financial innovation, Firefox, friendly AI, Hernando de Soto, Internet Archive, Internet of things, Khan Academy, Kickstarter, litecoin, Lyft, M-Pesa, Network effects, new economy, peer-to-peer lending, post scarcity, prediction markets, ride hailing / ride sharing, Satoshi Nakamoto, Search for Extraterrestrial Intelligence, SETI@home, sharing economy, Skype, smart cities, smart contracts, smart grid, software as a service, technological singularity, Turing complete, unbanked and underbanked, underbanked, web application, WikiLeaks

Relation to Fiat Currency Considering Bitcoin as the paradigm and most widely adopted case, the price of Bitcoin is $399.40 as of November 12, 2014. The price has ranged considerably (as you can see in Figure 1-2), from $12 at the beginning of 2013 to a high of $1,242 per coin on November 29, 2013 (trading higher than gold—$1,240 per ounce—that day).20 That peak was the culmination of a few factors: the Cyprus banking crisis (March 2013) drove a great deal of demand, for example. The price was also driven up by heavy trading in China until December 5, 2013, when the Chinese government banned institutions (but not individuals) from handling Bitcoin, after which the price fell.21 In 2014, the price has declined gradually from $800 to its present value of approximately $350 in December 2014. An oft-reported though disputed metric is that 70 percent of Bitcoin trades are made up of Chinese Yuan.22 It is difficult to evaluate how much of that figure indicates meaningful economic activity because the Chinese exchanges do not charge trade fees, and therefore people can trade any amount of currency back and forth for free, creating fake volume.

 

What We Say Goes: Conversations on U.S. Power in a Changing World by Noam Chomsky, David Barsamian

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banking crisis, British Empire, Doomsday Clock, failed state, feminist movement, Howard Zinn, informal economy, microcredit, Monroe Doctrine, oil shale / tar sands, peak oil, RAND corporation, Ronald Reagan, Thomas L Friedman, union organizing, Upton Sinclair, Washington Consensus

Friedman, “Fill ’Er Up with Dictators,” New York Times, 27 September 2006. 16 Adam Thomson, “US Warns Nicaraguans Not to Back Sandinista,” Financial Times (London), 15 September 2006. 17 For details, see The State of Working America, issued biannually by the Economic Policy Institute and published by Cornell University Press. 18 Randeep Ramesh, “A Tale of Two Indias,” Guardian (London). 19 P. Sainath, “Fewer Jobs, More Buses in Wayanad,” Hindu, 27 December 2004; Indo-Asian News Service, “New Economic Policy Hard on Farmers,” Indo-Asian News Service, 29 October 2004. 20 Barbara Harriss-White, India Working (Cambridge: Cambridge University Press, 2003). 21 For analysis, see Chomsky, Year 501, chap. 7; Stephen Fidler, “Aftermath of the Bank Crisis,” Financial Times (London), 14 March 1997. 22 Chris Flood, “Copper Hits High on Codelco Strike,” Financial Times (London), 5 January 2006. 23 Tony Smith, “Argentina Defaults on $3 Billion I.M.F. Debt,” New York Times, 10 September 2003; Benedict Mander, “Latin Allies Forge a Political Bond,” Financial Times (London), 12 July 2006. 24 Chomsky, Hegemony or Survival, p. 139. 25 Chomsky, Failed States, chap. 6. 26 Program on International Policy Attitudes (PIPA), “U.S.

 

pages: 285 words: 81,743

Start-Up Nation: The Story of Israel's Economic Miracle by Dan Senor; Saul Singer

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agricultural Revolution, Albert Einstein, back-to-the-land, banking crisis, call centre, Celtic Tiger, cleantech, friendly fire, immigration reform, new economy, pez dispenser, post scarcity, profit motive, Silicon Valley, smart grid, social graph, Steve Ballmer, web application, women in the workforce, Yom Kippur War

Israel may not, however, fare as well in the current global economic slowdown, which, unlike that of 2000, is not limited to international tech stocks and venture capital funding but is being dramatically felt in the global banking system as well. That said, the breakdown in international finance has infected almost every nation’s banking system, with two notable exceptions: neither Canada nor Israel has faced a single bank failure. Since Israel’s hyperinflation and banking crisis of the early 1980s—which culminated in 1985 with the trilateral intervention of the Israeli and U.S. governments and the IMF—tight restrictions have been in place. Israel’s financial institutions adhere to conservative lending policies, typically leveraged 5 to 1. U.S. banks, on the other hand—precrisis—were leveraged at 26 to 1, and some European banks at a staggering 61 to 1. There were no subprime mortgages in Israel, and a secondary mortgage market never came into existence.

 

The Handbook of Personal Wealth Management by Reuvid, Jonathan.

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asset allocation, banking crisis, BRICs, correlation coefficient, credit crunch, cross-subsidies, diversification, diversified portfolio, estate planning, financial deregulation, high net worth, income per capita, index fund, interest rate swap, laissez-faire capitalism, land tenure, market bubble, merger arbitrage, new economy, Northern Rock, pattern recognition, Ponzi scheme, prediction markets, risk tolerance, risk-adjusted returns, risk/return, short selling, side project, statistical arbitrage, systematic trading, transaction costs, yield curve

203; Regulation 204; Protected rights 205; The future for SIPPs 205; Postscript 206 177 Appendix: Contributors’ contact details Index Index of advertisers 183 191 199 207 212 214 private client services XII Trusts, probate and tax planning Residential property purchases and sales Relationships: formation and breakdown and the consequences Contact Ian Lane, Partner 020 7293 4801 ilane@dac.co.uk www.dac.co.uk/privateclient XIII ឣ Nil Rate Band Will Trusts: Are they still of value? Way back in October 2007 in the time before the banking crisis, ‘the credit crunch’, falling markets, massive job losses and recession (or is it depression!) the UK Government made a surprise announcement of a change to the inheritance tax legislation that was to have a profound effect on tax planning using Wills. This was the announcement of the introduction of the transferable Nil Rate Band. The announcement followed very quickly on a statement by the Conservative Party that, if elected, they were going to introduce a Nil Rate Band of £1m per person.

 

pages: 267 words: 71,123

End This Depression Now! by Paul Krugman

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airline deregulation, Asian financial crisis, bank run, banking crisis, Bretton Woods, capital asset pricing model, Carmen Reinhart, correlation does not imply causation, credit crunch, Credit Default Swap, currency manipulation / currency intervention, debt deflation, Eugene Fama: efficient market hypothesis, financial deregulation, financial innovation, Financial Instability Hypothesis, full employment, German hyperinflation, Gordon Gekko, Hyman Minsky, income inequality, inflation targeting, invisible hand, Joseph Schumpeter, Kenneth Rogoff, labour market flexibility, labour mobility, liquidationism / Banker’s doctrine / the Treasury view, liquidity trap, Long Term Capital Management, low skilled workers, Mark Zuckerberg, moral hazard, mortgage debt, paradox of thrift, price stability, quantitative easing, Robert Gordon, Ronald Reagan, Upton Sinclair, We are the 99%, working poor, Works Progress Administration

An equivalent-sized program today would employ thirteen million workers.) Still, almost $800 billion sounds to most people like a lot of money. How did those of us who took the numbers seriously know that it was grossly inadequate? The answer is twofold: history plus an appreciation of just how big the U.S. economy is. History told us that the slumps that follow a financial crisis are usually nasty, brutish, and long. For example, Sweden had a banking crisis in 1990; even though the government stepped in to bail out the banks, the crisis was followed by an economic slump that drove real (inflation-adjusted) GDP down by 4 percent, and the economy didn’t regain its precrisis level of GDP until 1994. There was every reason to believe that the U.S. experience would be at least as bad, among other things because Sweden could alleviate its slump by exporting to less troubled economies, whereas in 2009 America had to deal with a global crisis.

 

pages: 287 words: 81,970

The Dollar Meltdown: Surviving the Coming Currency Crisis With Gold, Oil, and Other Unconventional Investments by Charles Goyette

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bank run, banking crisis, Ben Bernanke: helicopter money, Berlin Wall, Bernie Madoff, Bernie Madoff, Bretton Woods, British Empire, Buckminster Fuller, California gold rush, currency manipulation / currency intervention, Deng Xiaoping, diversified portfolio, Elliott wave, fiat currency, Fractional reserve banking, housing crisis, If something cannot go on forever, it will stop, index fund, margin call, market bubble, McMansion, money: store of value / unit of account / medium of exchange, mortgage debt, oil shock, peak oil, pushing on a string, reserve currency, rising living standards, road to serfdom, Ronald Reagan, Saturday Night Live, short selling, Silicon Valley, transaction costs

Credit Writedowns Featuring news and opinion on finance, economics, and markets, the site seeks to provide early warning signals for what to expect in the global economy. Especially good at spotting European economic news that is missed elsewhere. The site’s “Credit Crisis Timeline” is a comprehensive collection of accounts of the unfolding credit crisis, while it also provides an overview called “The Dummy’s Guide to the U.S. Banking Crisis.” www.creditwritedown.com. World Gold Council The marketing body of the world’s leading gold mining companies, this site provides interesting news about the use of gold in biomedical, nanotechnology, and other scientific endeavors and industrial applications, as well as key information and research reports on gold fundamentals including price, supply and demand, and other investment statistics. www.gold.org.

 

pages: 192 words: 72,822

Freedom Without Borders by Hoyt L. Barber

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accounting loophole / creative accounting, Affordable Care Act / Obamacare, Albert Einstein, banking crisis, diversification, El Camino Real, estate planning, fiat currency, financial independence, high net worth, illegal immigration, interest rate swap, obamacare, offshore financial centre, passive income, quantitative easing, reserve currency, road to serfdom, too big to fail

We can take a hint from Hungarian billionaire George Soros and other elitists like him, who will have capitalized on you when the real crisis and global changes take place and who will make themselves richer and more powerful than ever. Let’s take a look at some of the financial challenges and threats we face and then have a glance at what financial opportunities may come out of current and future trends that we can possibly exploit ourselves, that is, while we still have the option. The Economics of Sovereign Investing 39 We have a banking crisis in the United States and Europe that just doesn’t want to go away. Many of the financial institutions in these Western countries are bloated with toxic waste that’s listed as “assets” on their books. These outfits engage in creative accounting to disguise their true anemic financial state, including the reality that many are actually insolvent and others are posting multibillion-dollar losses.

 

pages: 202 words: 66,742

The Payoff by Jeff Connaughton

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algorithmic trading, bank run, banking crisis, Bernie Madoff, Bernie Madoff, collateralized debt obligation, corporate governance, Credit Default Swap, credit default swaps / collateralized debt obligations, cuban missile crisis, desegregation, Flash crash, locking in a profit, London Interbank Offered Rate, London Whale, Long Term Capital Management, naked short selling, plutocrats, Plutocrats, Ponzi scheme, risk tolerance, short selling, Silicon Valley, too big to fail, two-sided market, young professional

His concluding paragraphs were prophetic, and explained why a movement of citizen and businesses should insist on meaningful restraints on Wall Street: Many of the opponents of Wall Street reform make the dubious claim that the recovery is being held back by uncertainty about future regulations and taxes. In reality, it is being held back by the financial shock and the fact that we are still in a period of financial instability and undergoing an excruciating process of deleveraging. Even now it is unclear whether a European banking crisis based on their holdings of sovereign debt will continue to impede that recovery. [We must] build a financial system on a firmer foundation. The American economy cannot succeed unless we restore and maintain financial stability. Two years later, the largest European banks—the standard for why the United States needs its own megabanks to compete globally, senators opposed to Brown-Kaufman had said—are still in crisis, causing continued financial instability.

 

pages: 252 words: 80,636

Bureaucracy by David Graeber

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3D printing, Affordable Care Act / Obamacare, airport security, Albert Einstein, banking crisis, barriers to entry, borderless world, Bretton Woods, British Empire, collateralized debt obligation, conceptual framework, David Graeber, George Gilder, High speed trading, hiring and firing, late capitalism, means of production, music of the spheres, new economy, obamacare, Occupy movement, Peter Thiel, planetary scale, price mechanism, Ronald Reagan, self-driving car, Silicon Valley, South Sea Bubble, transcontinental railway, union organizing, urban planning

In today’s political discourse, “deregulation” is—like “reform”—almost invariably treated as a good thing. Deregulation means less bureaucratic meddling, and fewer rules and regulations stifling innovation and commerce. This usage puts those on the left-hand side of the political spectrum in an awkward position, since opposing deregulation—even, pointing out that it was an orgy of this very “deregulation” that led to the banking crisis of 2008—seems to imply a desire for more rules and regulations, and therefore, more gray men in suits standing in the way of freedom and innovation and generally telling people what to do. But this debate is based on false premises. Let’s go back to banks. There’s no such thing as an “unregulated” bank. Nor could there be. Banks are institutions to which the government has granted the power to create money—or, to be slightly more technical about it, the right to issue IOUs that the government will recognize as legal tender, and, therefore, accept in payment of taxes and to discharge other debts within its own national territory.

 

pages: 234 words: 63,149

Every Nation for Itself: Winners and Losers in a G-Zero World by Ian Bremmer

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airport security, banking crisis, barriers to entry, Berlin Wall, blood diamonds, Bretton Woods, BRICs, capital controls, clean water, Deng Xiaoping, Doha Development Round, energy security, European colonialism, failed state, global rebalancing, global supply chain, income inequality, informal economy, Julian Assange, labour mobility, Martin Wolf, mutually assured destruction, Nixon shock, nuclear winter, purchasing power parity, reserve currency, Ronald Reagan, smart grid, South China Sea, special economic zone, trade route, Washington Consensus, WikiLeaks, Yom Kippur War

They will adapt existing international institutions or build new ones. Either way, the G-Zero is not the new world order. It’s a period of transition that will give way to something else. We cannot know whether the G-Zero will last five years or fifteen, but we know that while it exists, it is an incubator of catastrophe. Nor can we know what this catastrophe might look like. A meltdown in European financial markets sparks a banking crisis much larger than the 2008 version, and this time feuding political officials don’t move quickly enough to contain the fallout. Or an influenza epidemic in Asia goes global because leaders of hot-zone countries rely on secrecy to cover their backs rather than the transparency needed to build an effective international response. Or North Korea implodes, setting off a flow of refugees across borders, putting hostile neighbors on high alert, provoking disputes over who will pay to rebuild, and triggering a race to lock down the country’s nuclear material.

 

pages: 330 words: 77,729

Big Three in Economics: Adam Smith, Karl Marx, and John Maynard Keynes by Mark Skousen

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Albert Einstein, banking crisis, Berlin Wall, Bretton Woods, David Ricardo: comparative advantage, delayed gratification, experimental economics, financial independence, Financial Instability Hypothesis, full employment, Hernando de Soto, housing crisis, Hyman Minsky, inflation targeting, invisible hand, John Maynard Keynes: Economic Possibilities for our Grandchildren, John Maynard Keynes: technological unemployment, Joseph Schumpeter, laissez-faire capitalism, liquidity trap, means of production, microcredit, minimum wage unemployment, open economy, paradox of thrift, price stability, pushing on a string, Richard Thaler, rising living standards, road to serfdom, Robert Shiller, Robert Shiller, rolodex, Ronald Reagan, school choice, secular stagnation, The Chicago School, The Wealth of Nations by Adam Smith, Thomas Malthus, Thorstein Veblen, unorthodox policies

economic prosperity between the wars," contends Barry Eichengreen (1992,4). Criti&s of the gold standard have pointed out that in a crucial time, 1931-32, the Federal Reserve raised the discount rate for fear of a run on its gold deposits. If only the United States had not been shackled by a gold standard, they argued, the Federal Reserve could have avoided the reckless credit squeeze that pushed the country into depression and a banking crisis. But Friedman and Schwartz dispute this widely held belief. They point out that the U.S. gold stocks rose during the first two years of the contraction, but the Fed once again acted ineptly. "We did not permit the inflow of gold to expand the U.S. money stock. We not only sterilized it, we went much further. Our money stock moved perversely, going down as the gold stock went up" (Friedman and Schwartz 1963, 360-61).

 

pages: 255 words: 77,849

Is It Just Me? by Miranda Hart

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banking crisis, Donald Trump, ghettoisation, mail merge, wage slave

You know the drill; please tick if you have achieved any of the following: Had an imaginary conversation with a pet Sat on a rugby ball and worried about getting pregnant Discovered or re-discovered Arctic Roll Eaten the contents of someone’s fridge whilst babysitting Let yourself be a child again Carried off a fascinator at a wedding Shouted ‘FLAPS!’ in a marquee Made a David Hasselhoff out of chocolate buttons Confessed to not understanding the bank crisis Galloped in an art gallery Reached a wonderful and almost Zen-like state of self-acceptance, possibly to the point of running up to strangers in the street, grabbing them by the shoulders and shouting, ‘Hey! BE TRUE TO YOU!’ Obviously, MDRC, one of the above is a tad more important than the others. In fact, I’d venture it’s the whole point of this book and it becomes your final task. Can you guess which one it is?

 

pages: 283 words: 81,163

How Capitalism Saved America: The Untold History of Our Country, From the Pilgrims to the Present by Thomas J. Dilorenzo

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banking crisis, British Empire, collective bargaining, corporate governance, corporate social responsibility, financial deregulation, Fractional reserve banking, Hernando de Soto, income inequality, invisible hand, Joseph Schumpeter, laissez-faire capitalism, means of production, medical malpractice, Menlo Park, minimum wage unemployment, plutocrats, Plutocrats, price stability, profit maximization, profit motive, Ralph Nader, Ronald Reagan, Silicon Valley, statistical model, The Wealth of Nations by Adam Smith, transcontinental railway, union organizing, Upton Sinclair, working poor, Works Progress Administration

That was the deepest economic recession prior to the Great Depression, but because President Martin Van Buren’s administration took the appropriate steps (or, more appropriately, didn’t take the wrong steps), the downturn was also short-lived. Van Buren had made clear in his Inaugural Address that he advocated the laissez-faire approach, for the speech was “essentially a charter for inaction,” as Van Buren biographer Major L. Wilson writes.1 And he did not waver from this position when the country experienced a major banking crisis just two months into his term. All but six of the nation’s eight hundred or so banks had ceased redeeming their bank notes in gold or silver, but in his first message to Congress the president proclaimed that his policy would be one of governmental retrenchment. “All communities are apt to look to government for too much,” Van Buren warned, “especially at periods of sudden embarrassment and distress.”2 Moreover, “all former attempts on the part of Government” to “assume the management of domestic or foreign exchange” had “proved injurious.”3 What was needed was “a system founded on private interest, enterprise and competition [i.e., pure capitalism], without the aid of legislative grants or regulations by law.”4 President Van Buren, a strong believer in Jefferson’s dictum that “that government is best which governs least,” refused to suggest to Congress any specific plan for government intervention to attempt to alleviate the effects of the depression.

 

pages: 270 words: 75,803

Wall Street Meat by Andy Kessler

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accounting loophole / creative accounting, Andy Kessler, automated trading system, banking crisis, George Gilder, index fund, Jeff Bezos, market bubble, Menlo Park, pets.com, rolodex, Sand Hill Road, Silicon Valley, Small Order Execution System, Steve Jobs, technology bubble, Y2K

Now that’s the Jack that I remember. Jack paid a $15 million fine and is now barred for life from the securities business. My guess is that is a relief to him. As a boxer, he knows how to get up from a knockout punch. · · · There are plenty of smoking guns to blame for the Internet and Telecom and Technology Bubble. None are very satisfying. Fed Chairman Alan Greenspan pumped the money supply to stave off a banking crisis based on Y2K computer problems and the excess money went into the stock market. Or how about excessive stock options led greedy management to fudge earnings numbers to pump up their stock. Yeah, maybe. It was structural problems on Wall Street that created the bubble, though excess money supply and corrupt management certainly contributed lots of the hot air. Maybe Spitzer could fix all this, so I followed his moves with interest.

 

pages: 283 words: 77,272

With Liberty and Justice for Some: How the Law Is Used to Destroy Equality and Protect the Powerful by Glenn Greenwald

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Ayatollah Khomeini, banking crisis, Bernie Madoff, Bernie Madoff, Clive Stafford Smith, collateralized debt obligation, crack epidemic, Credit Default Swap, credit default swaps / collateralized debt obligations, David Brooks, financial deregulation, full employment, high net worth, income inequality, Julian Assange, nuremberg principles, Ponzi scheme, rolodex, Ronald Reagan, too big to fail, Washington Consensus, WikiLeaks

The ability of financial elites to avoid any legal consequences even for the most egregious acts of wrongdoing is now so self-evident that it has been acknowledged even in the most establishment-sympathetic venues. In April 2009, the second-highest-ranking Democrat in the United States Senate, Dick Durbin of Illinois, blurted out on a local Chicago radio station: “The banks—hard to believe in a time when we’re facing a banking crisis that many of the banks created—are still the most powerful lobby on Capitol Hill. And they frankly own the place.” Paul Blumenthal of the transparency group Sunlight Foundation emphasized the eye-popping dollar amounts behind Durbin’s comment. You would think that this might be an exaggeration, or just a rhetorical bit of anti-bank populism, but if you look at the numbers, Durbin isn’t wrong….

 

pages: 235 words: 62,862

Utopia for Realists: The Case for a Universal Basic Income, Open Borders, and a 15-Hour Workweek by Rutger Bregman

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autonomous vehicles, banking crisis, Bartolomé de las Casas, Berlin Wall, Bertrand Russell: In Praise of Idleness, Branko Milanovic, cognitive dissonance, computer age, conceptual framework, credit crunch, David Graeber, Diane Coyle, Erik Brynjolfsson, everywhere but in the productivity statistics, Fall of the Berlin Wall, Francis Fukuyama: the end of history, Frank Levy and Richard Murnane: The New Division of Labor, full employment, George Gilder, happiness index / gross national happiness, Henry Ford's grandson gave labor union leader Walter Reuther a tour of the company’s new, automated factory…, income inequality, invention of gunpowder, James Watt: steam engine, John Maynard Keynes: Economic Possibilities for our Grandchildren, John Maynard Keynes: technological unemployment, Kevin Kelly, Kickstarter, knowledge economy, knowledge worker, Kodak vs Instagram, labour market flexibility, labour mobility, low skilled workers, means of production, megacity, meta-analysis, microcredit, minimum wage unemployment, Nathan Meyer Rothschild: antibiotics, Occupy movement, offshore financial centre, Peter Thiel, post-industrial society, precariat, RAND corporation, randomized controlled trial, Ray Kurzweil, Ronald Reagan, Second Machine Age, Silicon Valley, Skype, stem cell, Steven Pinker, telemarketer, The Spirit Level, The Wealth of Nations by Adam Smith, Thomas Malthus, Thorstein Veblen, Tyler Cowen: Great Stagnation, universal basic income, wage slave, War on Poverty, We wanted flying cars, instead we got 140 characters, wikimedia commons, women in the workforce, working poor, World Values Survey

Jean-Louis Arcand, Enrico Berkes and Ugo Panizza, “Too Much Finance?” IMF Working Paper (June 2012). 4. Scott L. Cummings (ed.), The Paradox of Professionalism. Lawyers and the Possibility of Justice (Cambridge, 2011), p. 71. 5. Aalt Dijkhuizen, “Hoogproductieve en efficiënte landbouw: een duurzame greep!?” (March, 2013). https://www.wageningenur.nl/upload_mm/a/3/9/351079e2-0a56-41ff-8f9c-ece427a42d97_NVTLmaart2013.pdf 6. Umair Haque, “The Irish Banking Crisis: A Parable,” Harvard Business Review (November 29, 2010). 7. Ann Crotty, “How Irish pubs filled the banks’ role in 1970,” Business Report (September 18, 2013). 8. Antoin Murphy, “Money in an Economy Without Banks – the Case of Ireland,” The Manchester School (March 1978), pp. 44-45. 9. Donal Buckley, “How six-month bank strike rocked the nation,” Independent (December 29, 1999). 10. Umair Haque, op. cit. 11.

 

pages: 257 words: 64,763

The Great American Stickup: How Reagan Republicans and Clinton Democrats Enriched Wall Street While Mugging Main Street by Robert Scheer

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banking crisis, Bernie Madoff, Bernie Madoff, Bernie Sanders, collateralized debt obligation, corporate governance, Credit Default Swap, credit default swaps / collateralized debt obligations, facts on the ground, financial deregulation, housing crisis, invisible hand, Long Term Capital Management, mortgage debt, new economy, Ponzi scheme, profit motive, Ralph Nader, Ronald Reagan, too big to fail, trickle-down economics

Treasury Department he would bring with him the very same “experts” whose financial follies had risked Goldman’s future. Paulson had been selected by Bush to run Treasury on the recommendation of the president’s chief of staff, Joshua B. Bolton, a former director of the Office of Management and Budget and a Goldman executive. Nor was Paulson the first Goldman honcho to be named Treasury secretary, for Robert Rubin had provided exactly that precedent in the Clinton administration. But Paulson used the banking crisis as a justification for quickly putting Goldman employees and alums in charge of key outposts concerning the bailout. Those close connections between the Treasury Department and his old firm—“Government Sachs”—were detailed in a New York Times story October 19, 2008, in which reporters Julie Creswell and Ben White cited in devastating detail examples of just how Goldman alums had come to control the government’s bailout, which among other things benefited Goldman enormously: “It is a widely held view within the bank that no matter how much money you pile up, you are not a true Goldman star until you make your mark in the political sphere.

 

pages: 556 words: 46,885

The World's First Railway System: Enterprise, Competition, and Regulation on the Railway Network in Victorian Britain by Mark Casson

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banking crisis, barriers to entry, Beeching cuts, British Empire, combinatorial explosion, corporate social responsibility, David Ricardo: comparative advantage, intermodal, iterative process, joint-stock company, joint-stock limited liability company, knowledge economy, linear programming, Network effects, New Urbanism, performance metric, railway mania, strikebreaker, the market place, transaction costs

The Llanelli management understood well that connecting up with the Central Wales line would bring additional traYc, and in anticipation of this they had built lines from Llandeilo to Swansea and to Carmarthen, the latter providing connections via the broad gauge for west Wales and the Irish Sea ports. Each of these Joint Lines 203 two new lines was associated with a separate capital account. Although the LNWR was willing to Wnance these lines, the Llanelli company had employed independent contractors who, partly as a consequence of the Overend Gurney banking crisis of 1866, got into Wnancial diYculties. The date of the LNWR’s arrival in Llandovery was also the date that the Llanelli company’s lease of the Vale of Towy line expired. When the lease was renewed the LNWR and Llanelli became partners—an appropriate arrangement since the Llanelli made connection at one end of the line and the LNWR now made connection at the other. The near-bankrupt Llanelli also sold the LNWR running powers over its system, giving the LNWR access to Swansea, Carmarthen, and Llanelli at one go.

G. 41–2 Horncastle 119 Horsham 147, 148, 150, 191–2 Hove 147 ‘hub-spoke-rim’ 315, 316 Fig 3.15 hubs 16, 17, 59–60, 77, 83 Tab 3.4, 86, 105, 127, 142, 267, 268, 327, 449–63 Tab A5.2, 468–70 actual/counterfactual comparison 470–1 Ashford 21 Barking 155 around Birmingham 103 Brentford 155 Bromley 155 Cambridge 107, 109 Carlisle 132 Chester 181, 325 Chester-le-street 127 company-specific 468 composite 439–40 corner 82, 83 Tab 3.4, 85, 86 Crewe 21, 132 cross-country linkages on the symmetrical network 100 Fig 3.19 Croydon 155 cut-off principle in the symmetric system 98 Fig 3.17 Dartford 155 definition 439 Derby 282, 319 Doncaster 122, 213 Durham 127 Epsom 155 Ford 147 four-way 79, 95, 96, 192 and freight congestion 303 hexagonal configurations 96 Hull 83 Tab 3.4 importance in controlling territory 318–19 inefficiency on railway system 96 irregularly-used lines 468–9 Knottingley 213 London 147, 318 London as radial 319 Manchester as major 132 Market Weighton 21 Melmerby mini 124 Melrose 158–9 multiple stations 468 and municipal ownership 275 at natural bridging points 84 Tab 3.5 Newton Aycliffe 127 non-hub intersections 469–70 Index Normanton 213, 282 Peterborough 284 Pilmore mini 124 Ponders End 155 Preston 132 radial on main line system 99 Fig 3.18 regional 19 reversals 470 Rotherham 282 satellite 155, 439 size and distribution on actual system 95 Fig 3.14 Shrewsbury 178, 180, 325 Spennymoor 127 Starbeck mini 124 Steiner hexagonal solution for symmetrical system 97 Fig3.16 Swindon 21, 284 Symington 158–9 symmetric network in collaboration 101 Fig 3.20 symmetric network in competition 102 Fig 3.21 three-way 80, 94, 96, 98, 99 urban 87 Wakefield 122, 213, 262 in Wales 139 Warrington 132 Wells 145 Wembley 155 in the wrong places 21–2 York 122, 124, 282, 325 see also under counterfactual railway network Huddersfield 68, 122, 123, 124, 174 Hudson, George 55, 125, 152, 154, 182, 183, 286, 312 Huish, Mark 179 Hull 15, 55, 68, 119, 122, 125, 214, 271 as port 3 as primary natural hub 83 Tab 3.4 Hull and Barnsley Railway (HBR) and Great Central Joint Line 212–15 and Great Central and Midland Joint Line 212–15 network mileage 59 Hull and Selby Railway 125 Humber Bridge 15 Humber Estuary 214 Humber River 119, 122, 124 Humberside 132 Humberside and Cleveland regional network actual performance 162, 163 Tab 4.2 actual/counterfactual comparison 124–6 Hungerford 111 Hunslet 123 Hunstanton 109, 167 509 Huntingdon 108, 181, 183 as natural hub 83 Tab 3.4 Huntingdonshire 56 Hurst Green 151 Huskisson, William 130, 323 Hyde 169, 176 Hyde Park 16 Hythe 150 Ilkeston 133 Ilkley 122 image promotion and railways 309–11 Immingham Docks 14 Indian railway system 3, 44 Industrial Revolution 35, 39, 50 inefficiencies of the Victorian railway system 16–19 Ingleton 129, 132, 188 Institution of Civil Engineers (ICE) 55, 292 Institution of Mechanical Engineers (IME) 292 inter-modal competition with railways 276 inter-urban cooperation 18 invasion lines 273 by competing companies 268–9 joint venture schemes (large) 166–73 joint venture schemes (small) 173–8 Invergary 160 Invermoriston 161 Inverness 69, 159, 160–1, 162 investment in local infrastructure 369–72 Tab A1.1 Ipswich 69, 107, 108 Ireland 3, 137, 186 Irish famine 18, 33 Irish ferry ports 139 Irish Home Rule 33 Irish Mail 112, 137, 184 contracts 274 Irish parliamentary members 53 Irish Sea 184 iron ore 52 Ironbridge district 139 Irwell River 130 Isle of Man 39, 186 Isle of Portland 204, 205 Isle of Skye 161 Isle of Wight 1, 146 ferry 190 James, William 130, 281 Jarrow 68 Jedburgh 159 joint line ventures 165–220 capital economy 166 defensive strategies 166–7 invasion schemes (large) 166–73 510 joint line ventures (cont.) invasion schemes (small) 173–8 motives 165, 166–7 ‘truce lines’ 167 joint stock company status 42–3, 314 Keighley 123, 188 Keilder Forest 159 Keith 160, 161 Kelso 158, 159 Kemble, Fanny 323 Kendal 15, 70 Kennet and Avon Canal 15, 111 Kennet Valley 148 Kensington 153, 155 Kensington Canal Basin 208 Kent and East Sussex Light Railway 151 Kent and East Sussex regional network actual performance 164 Tab 4.2 actual/counterfactual comparison 150–1 Kentish Town, London 209, 210 Kenyon 186 Keswick 219 Kettering 107 Kidderminster 69, 115, 135, 136, 140 Kilmarnock 14, 69, 157, 158, 159, 194, 195 Kilnhurst 214 Kilsyth and Bonnybridge Joint Line 196 Kilwinning 158 Kings Cross Station, London 153, 319 Kings Lynn 69, 107, 109, 110, 119, 182 as primary natural hub 83 Tab 3.4 Kingsbridge 142 Kingswear 142 Kingswinford 69 Kirk Smeaton 213 Kirkaldy 160 Kirkby Lonsdale 129, 131–2 counterfactual core hub 89 as secondary natural hub 83 Tab 3.4 Kirkby Stephen 129 Kirkcudbright 158 Kirkham 187 Kirkheaton 70 Kirkintilloch 196 Knaresborough 122 Knott Mill 211 Knottingley 119, 126, 173, 183–4, 212 hub 213 Kyle of Lochalsh 161 Labour Party, Independent 37 Ladybank 160 Laing, Samuel 56, 234 laissez faire 36–7, 38 Lake District 129, 131, 177 Lanark 157, 159 Index as secondary natural hub 83 Tab 3.4 Lanarkshire and Dumbartonshire Railway 199–200 Lancashire and Yorkshire Railway (LYR) 123, 182, 183 and Axholme Joint Committee 212–15 and Halifax and Ovenden Railway (Joint) 201–2 and Halifax High Level Station 201, 202 and Lancashire Union Joint Line 196–7 and Methley Joint Line 212 network mileage 59 and North Union Railway 185–7 and Preston and Longridge Joint Line 185–7 and Preston and Wyre Joint Line 185–7 and Preston Joint Line 185–7 and South Yorkshire Joint Line 212–15 and West Riding and Grimsby joint scheme 173 Lancashire coalfield 132, 197 Lancashire textile industry 130 Lancashire Union Joint Line 196–7 Lancaster 68, 116, 128, 129, 131, 157, 177 as primary natural hub 83 Tab 3.4 Lancaster and Carlisle Railway 45 land acquisition and railway promotion schemes 287–8, 290 cost in cities 292 price of 300 Lands End 141 Langport 144, 145 Lansdowne Station, Cheltenham 149 Larbert 196 Largs 158, 195 Larne 158, 185 Larpool Viaduct 126 Laughton 214 Launceston 142, 143 Laxfield 110 Lea Valley 108, 182 Leamington 62, 115, 135, 136, 172, 203 Leatherhead 147, 190, 191, 192, 193 Lechlade 115, 116 Leeds 2, 14, 22, 55, 68, 81, 117, 118, 119, 122, 123, 124, 126, 128, 132, 133, 134, 171, 173, 174, 177, 178, 183, 184, 188, 204, 211, 212, 213, 270 Leeds and Liverpool Canal 130, 197 Leeds and Selby Railway 125, 270 Leicester 14, 68, 107, 115, 116, 117, 118, 133, 134, 135, 136, 167, 170 counterfactual core hub 89 Leicester and Swannington Railway 187 Leicestershire coalfield 187 Leighton Buzzard 116, 118 Leominster 140 Leunig, T. 10 Index Lewes 150 Lewisham 189 Leyburn 132 Leyland 69 Lichfield 115, 134, 135, 136, 148 Lickey incline 135 light railways 284 Lime Street Station, Liverpool 133 Limerick 136 limited liability companies 42–3 Lincoln 14, 56, 69, 117, 119, 121, 122, 133, 181, 182 Lincolnshire 56 Lincolnshire regional network actual performance 162, 163 Tab 4.2 actual/counterfactual comparison 119–21 Littlehampton 146, 147 liveries (and railway companies) 310 Liverpool 68, 87, 122, 123, 125, 130, 131, 132, 133, 134, 138, 140, 168, 169, 174, 175, 178, 181, 186, 201, 210, 211, 271, 273 Central Station, 133, 169 Exchange Station 133 Lime Street Station 133 port 3 as primary natural hub 83 Tab 3.4 Liverpool and Manchester Railway (LMR) 1, 3, 17, 26, 45, 47, 60, 130–1, 152, 186, 203, 210, 232, 260, 262, 270–1, 282, 283, 314, 323 by-passing St Helens 293 by-passing Warrington 293 by-passing Wigan 293 Liverpool Steet Station, London 153, 154, 155 Liversedge 123 Llancaiach 217, 218 Llandeilo 140, 202, 217 Llandovery 140, 202, 203 Llanelli 203 Llanelli Railway 202–3 Llanfynydd 218 Llangollen 138 Llangurig 139, 140 Llangurig Tunnel 15–16 Llyn Peninsula 112, 138 Local and Personal Acts of Parliament see Railway Bills local coalfield joint lines 212–19 Axholme Joint Committee 212–15 Great Central and Hull and Barnsley Joint Line 212–15 Great Central and Midland Joint Committee 212–15 Great Central, Hull and Barnsley and Midland Joint Line 212–15 South Yorkshire Joint Line 212–15 Local Government Acts 48 511 local lines 7, 16–17, 67, 70 local linkages, and municipalization 275 Loch Linnhe 161 Loch Lomond 200 Loch Ness 160 Locke, Joseph 55, 165, 192, 194 Lockerbie 185 ‘Locomotion’ 60 London 2, 55, 56, 57, 61, 64, 68, 77, 81, 89, 174, 178, 183, 184, 186, 204, 205, 213, 216 Addison Road Station 155 Broad Street Station, 209 Cannon Street Station, 153 as centre of hexagonal configuration 96–103, 97 Fig 3.15, Fig 3.16, 98 Fig 3.17, 99 Fig 3.18, 100 Fig 3.19, 101 Fig 3.20, 102 Fig 3.21, Charing Cross Station 153 as corner hub on the counterfactual network 82 and cross-country journeys 94 and Croydon and Oxted Line and Woodside and South Croydon Joint Line 189 docks 152, 154, 209, 210 and early railway schemes 283–4 emergence of London-based system, f 264 and East Anglia regional network 106–9 and East Coast main line 169, 263 and Epson and Leatherhead Joint Line 191–2 Euston Station, 153, 155, 208, 209 to Exeter line 144, 172, 205, 262–3 and Great Central Railway 176 and Great Central Railway access 172 and Great Eastern Railway freight lines 173 and Great Northern Railway 167 and Great Western Railway 179 joint freight lines 208–10 and Kent and East Sussex regional network 150–1 Kings Cross Station 153, 319 London Bridge Station 153, 154, 155, 192, 193 Ludgate Hill Station 153, 193 Marylebone Station 117, 154 Moorgate Station 176 and North Midlands regional network 133 Paddington Station 61, 153, 155, 208, 209 as primary natural hub 83 Tab 3.4, 147, 318 punctuality of express arrivals (1890s) 303, 304 Fig 7.3 as radial hub 319 role of orbital lines on the counterfactual system 155 and Scottish Lowlands regional network 157 512 Index London (cont.) and Shires regional network 116–17, 119 and South Coast regional network 146–7, 149 and South Midlands region 110, 111, 112–13 South Orbital Route 151 and South-West regional network 142 St Pancras Station 117, 128, 154, 201, 209 Stock Exchange 57 suburban railway projects 193 terminals 319, 327 see also individual stations terminals on the counterfactual system 155 Underground system 155, 165 urban freight lines 213 Victoria Station 153, 154, 192, 193, 209 and Wales regional network 136 Waterloo Station 153, 192, 193, 209 and West Midlands regional network 134, 135 and Yorkshire Regional network 122 and Yorkshire traffic 269–70 London and Birmingham Railway (LBR) 14, 17, 20, 22, 24, 45, 112, 116–17, 178, 208, 262, 264, 278, 282 by-passing Aylesbury 293 by-passing Northampton 293 Northampton branch 294 Peterborough branch 294 London and Blackwall Railway 154 London and Greenwich Railway 152 London and Home Counties regional network actual performance 164 Tab 4.2 actual/counterfactual comparison 151–6 London and North Western Railway (LNWR) 21, 24, 46, 102, 107, 114, 116, 117, 118–19, 123, 128–9, 132, 136–9, 156, 157–8, 173, 174, 182, 202–3, 211, 215, 217, 272, 273, 275, 316, 319 and Ashby and Nuneaton Joint Line 187–8 and Birkenhead Joint Line 180–1 and Brecon and Merthyr Joint Line 216–17 and Brynmawr and Western Valleys Line 218 and Chesire Lines Committee 168–9 and Great Northern Railway Joint Lines 170–1 and Great Northern Railway Joint Lines (freight traffic) 170 and Great Northern Railway Joint Lines (Yorkshire coal traffic) 170 and Great Western and Great Central Joint Lines 172 and Lancashire Union Joint Line 196–7 live cattle trade 306 and Macclesfield Committee 175–6 and Manchester South Junction and Altrincham Joint Railway 210–11 and Nantybwch and Rhymney Joint Line 215–16 network mileage 59 and North and South Western Junction Joint Railway 209 and North Union Railway 185–7 and Oldham, Ashton and Guide Bridge Junction Joint Railway 211–12 and Portpatrick and Wigtownshire Joint Committee 184–5 and Preston and Longridge Joint Line 185–7 and Preston and Wyre Joint Line 185–7 and Preston Joint Line 185–7 and Shrewsbury Joint Lines 178–80 and West London Joint Line 208–9 and West London Line Extension Joint Line 208–9 and Whitehaven, Cleator and Egremont Joint Line 219 and Wrexham and Minera Extension Joint Line 218 London and Southampton Railway see London and South Western Railway (LSWR) London and South Western Railway (LSWR) 14, 19, 22, 23, 103, 112, 141–2, 144–5, 146–7, 147–9, 153, 187, 220, 272, 273, 293–4, 316 and Easton and Church Hope Railway 204–6 and Epson and Leatherhead Joint Line 191–2 and Fratton and Southsea Joint Line 190–1 Hounslow loop 209 network mileage 59 and Portsmouth and Ryde Joint Line 190–1 and Somerset and Dorset Joint Railway 171–2 and Tooting, Merton and Wimbledon Joint Line 192–3 and West London Line Joint Extension 208–9 and Weymouth and Portland Joint Railway 204–6 London, Brighton and South Coast Railway (LBSCR) 56, 146–7, 147–9, 153–4, 209, 234, 287 and Croydon and Oxted Line and Woodside and South Croydon Joint Line 189 and Epson and Leatherhead Joint Line 191–2 and Fratton and Southsea Joint Line 190–1 network mileage 59 and Portsmouth and Ryde Joint Line 190–1 and Tooting, Merton and Wimbledon Joint Line 192–3 Index London, Chatham and Dover Railway (LCDR) 150, 151, 153, 189, 273, 287 London Line Extension 210 London Road Station, Manchester 132, 174 London, Tilbury and Southend Railway (LTS) 273 network mileage 59 and Tottenham and Forest Gate Joint Railway 210 London to Exeter line 144, 172, 205, 262–3 Londonderry, Lord 288 Long Eaton 117, 133 Long Stanton 182 long-term interest rates, UK (1830–1914) 35 Fig 2.4 Longbridge motor factory 196 Longridge 186, 187 Looe 142 loop principle 72, 142 Loughborough 70, 133, 187 Louth 119 Low Gill 128, 188 Lowestoft 107, 198 Ludgate Hill Station, London 153, 193 Ludlow 138, 140 Lune River 131 Lune Valley 129 Lutterworth 117 Lybster 161, 162 Lydbrook 198 Lydney 137, 198, 199, 207 Lyme Bay 143, 144 Lyme Regis 144 Lymington 146 Lyndhurst 146 Lynn and Fakenham Railway 109 Lytham 187 M1 motorway 15, 118, 122 M4 suspension bridge 112 M6 motorway 15, 118 M45 motorway 15, 118 Mablethorpe 119 Macclesfield 68, 176 Macclesfield, Bollington and Marple Railway 175 Macclesfield Committee 175–6 Machynlleth 138, 139 Maidenhead 172 Maidstone 69, 150, 151, 155, 189 mail 6, 7 see also Irish mail Maldon 108 Malton 125 Manchester 2, 55, 68, 81, 87, 116, 122, 123, 124, 125, 130, 131, 133, 134, 138, 140, 168, 169, 173, 175, 176, 183, 186, 187, 211, 212, 213, 271, 273, 319 513 Central Station, 132, 169, 174 Exchange Station, 132 joint freight lines 210–12 London Road Station, 132, 174 as major hub 132 textile centre 3 Victoria Station 132 Manchester and Birmingham Railway 174, 210–11, 271 Manchester and Milford Railway (projected) 16, 138 Manchester and Leeds Railway 46, 173, 186, 201, 282 ‘Manchester School’ 37 Manchester, Sheffield and Lincolnshire Railway 211 Manchester ship canal 47 Manchester South Junction and Altringham Railway (MSJAR) 169, 210–11 Mangotsfield 144, 171 Manningtree 107 Mansfield 214 March 108, 181, 182 Margate 70 maritime trade 47 Market Drayton 21, 180 Market Harborough 170 Market Rasen 119 Market Weighton 126 hub 21 Marlborough 148, 149, 166 Marple 176 Marshall, Alfred 35, 322 Marx, Karl 38 Marylebone Station, London 117, 154 Maryport 177 Maryport and Carlisle Railway 177 Matlock 133 ‘me-too’ Parliamentary Bills 20 mechanical engineers 312 Melmerby mini hub 124 Melrose counterfactual core hub 89, 158–9 Melthem 123 Melton Constable 109, 168 junction 11 Melton Mowbray 170 Menai Bridge 311 Menai Strait 136 Mendip Hills 143, 149, 172 Meon Valley 147, 191 Merchants Railway 205 mergers and amalgamations 103, 222, 240, 258, 264–8 consequence 264–8 inter-regional 273 Parliamentary blocking 301 Parliamentary disapproval 262, 264 514 Index mergers and amalgamations (cont.) policy 269–74 rationalizations 297 Mersey and Irwell navigation 130 Mersey River 131 Mersey Valley 186 Merthyr, Tredegar and Abergavenny Railway 216 Merthyr Tydfil 68, 137, 216–17, 217–18 Merton 193 Merton Abbey 193 Methley Joint Line 212 Metropolitan District underground 153 Metropolitan Railway (MetR) 172 and Great Central Joint Committee 176–7 Middlesbrough 122, 126 as primary natural hub 83 Tab 3.4 Middleton 69 Middleton-in-Teasdale 129 Middleton Railway 45 Middlewood 176 Midhurst 148, 190 Midland and Great Northern Railway (MGNR) 109, 110, 167–8 and Great Northern and London and North Western Joint Lines 170 network mileage 59 and Norfolk and Suffolk Railways Joint Committee 197–8 Midland and South West Junction Railway (MSWJR) 23, 166, 148–9 network mileage 59 Midland Counties Railway 133, 269–70 Midland Railway (MR) 22, 23, 46, 55, 102, 107–8, 109, 117, 118, 121, 123, 128, 132, 133, 134, 135, 136, 137, 140, 144–5, 149, 154, 158, 172, 173, 176, 182, 183, 194, 201, 202, 204, 220, 264, 269, 271, 273, 282, 319, 325 and Ashby and Nuneaton Joint Line 187–8 and Bristol Port and Pier Joint Lines 206–7 and Cheltenham and Gloucester Joint Line 203–4 and Chesire Lines Committee 168–70 and Clifton Extension Joint Railway 206–7 and Furness Railway Joint Lines 177–8 and Great Central and Hull and Barnsley Joint Line 212–15 and Great Central Joint Committee 212–15 and Great Northern and London and North Western Joint Lines 170–1 and Halesowen Joint Railway 195–6 and Midland and Great Northern Railway 167–8 network mileage 59 and North and South Western Junction Joint Railway 209 and Otley and Ilkley Joint Line 188–9 Peterborough branch 294 and Portpatrick and Wigtownshire Joint Committee 184–5 second-class travel 310 and Severn and Wye Joint Line 198–9 and Sheffield and Midland Railways Joint Committee 174–5 and Somerset and Dorset Joint Railway (S and DJR) 171–2 and South Yorkshire Joint Line 212–15 and Swinton and Knottingley Joint Line 183–4 and Tottenham and Forest Gate Joint Railway 210 and Tottenham and Hampstead Joint Committee 209–1 third-class travel 310 Midsummer Norton 145 mileage, railway companies network (1911) 59 Tab 3.1 Milford 125 Milford Haven 136, 137 Minehead 141, 142 mineral railways 137, 141 traffic 65, 265 mining as Victorian project-based industry 50–2 in rural areas 306 Mirfield 122 Moat Lane Junction 139 Mold 218 Mole Valley 147, 191 Monmouth 198 monopolies 55, 258–9, 270, 274, 317–18, 321 and regulation of fares 260–2 Montrose 69, 200 Moon, Richard 179 Moor Street Station, Birmingham 136 Moorgate Station, London 176 Moorthorpe 184 Morecambe 177 Moretonhampstead 142 Morpeth 157, 159 Morrison, James 261–2, 322 and low fares policy 271 Moss Chat 130 Motherwell 14, 157 as natural hub 83 Tab 3.4 Mottisfont 148 Mottram 69 Mouldsworth 169 multi-linkage projects, as policy option 275 Mundesley 110, 198 Murdoch, William 61 Index Nantybwch and Rhymney Joint Line 215–16 Nantyglo 218 Napoleonic Wars 3, 26, 33, 35, 37, 146 Narborough 188 narrow gauge see standard gauge national rail network 105, 326 projected 29, 53, 104 nationalization (BR 1948) 26, 28, 273–4 as policy option 274, 275, 276 and social ownership 221 Neasden 172 Neath 139, 140, 199, 215, 216, 217 Neath and Brecon Railway 140 network industries and customer choice 278–9 network inefficiency 320 network optimisation 10–11 Network Rail 286 New Cross Gates 154 New Mills 169, 174, 176 New Romney 150 New Street Station, Birmingham 136 New Zealand 39 Newark 119, 121, 122, 133, 170 as natural hub 83 Tab 3.4 Newbury 111, 115, 118, 148 Newcastle 14, 68, 87, 105, 117, 122, 127–8, 129, 157, 158, 159, 183, 213 coal shipments 50 corner hub on the counterfactual 82 as primary natural hub 83 Tab 3.4 Newcastle and Carlisle Railway (NCR) 3 Newmarket 108, 109 Newport 114, 137, 139, 202, 207, 215, 216, 218 Newport, Abergavenny and Hereford Railway (NAHR) 216 Newquay 142 Newton Aycliffe hub 127 Newton-le-Willows 186 Newton Stewart 184 Newtown 139 Neyland 287 Nine Elms 153 Nithsdale 157 Non-Conformists 54 Norfolk and Suffolk Railways Joint Committee Railway 110, 197–8 Normanton 125, 173, 183, 212 hub 213, 282 North and South Western Junction Joint Railway 209 North British Railway (NBR) 14, 19, 128, 157–9, 160–1, 194, 316 and Dumbarton and Balloch Joint Line 199–200 and Dundee and Arbroath Joint Line 200–1 515 and Kilsyth and Bonnybridge Joint Line 196 network mileage 59 North-East regional network actual performance 163 Tab 4.2 actual/counterfactual comparison 126–8 North Eastern Railway (NER) 117, 124, 125, 126, 127, 128, 129, 152, 157, 159, 173, 194, 286, 316 and Axholme Joint Committee 212–15 and Methley Joint Line 212 network mileage 59 and Otley and Ilkley Joint Line 188–9 and South Yorkshire Joint Line 212–15 and Swinton and Knottingley Joint Line 183–4 North London Railway (NLR) 154, 155 and North and South Western Junction Joint Railway 209 North Midland Railway 133, 170, 183 North Midlands regional network actual performance 163 Tab 4.2 actual/counterfactual comparison 133–4 North Norfolk coast 23, 106, 109, 167, 168, 197