market bubble

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pages: 435 words: 127,403

Panderer to Power by Frederick Sheehan

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Asian financial crisis, asset-backed security, bank run, banking crisis, Bretton Woods, British Empire, call centre, central bank independence, collateralized debt obligation, corporate governance, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, deindustrialization, diversification, financial deregulation, financial innovation, full employment, inflation targeting, interest rate swap, inventory management, Isaac Newton, Long Term Capital Management, margin call, market bubble, McMansion, Menlo Park, mortgage debt, new economy, Northern Rock, oil shock, place-making, Ponzi scheme, price stability, reserve currency, rising living standards, rolodex, Ronald Reagan, Sand Hill Road, savings glut, shareholder value, Silicon Valley, Silicon Valley startup, South Sea Bubble, supply-chain management, supply-chain management software, The Great Moderation, too big to fail, transaction costs, trickle-down economics, VA Linux, Y2K, Yom Kippur War

., p. 37. 12 Ibid. 13 Speech available at http://www.federalreserve.gov/boarddocs/speeches/1996/ 19961205.htm. He was speaking in the midst of a stock market bubble, and almost everyone feared it or knew it, including the Federal Reserve. On November 25, 1996, the Wall Street Journal had reported: “Federal Reserve Board Chairman Greenspan isn’t talking about the stock market these days. In fact, the word among Fed officials is: don’t use the words ‘stock’ and ‘market’ in the same sentence. No one wants the blame for the crash.”14 Two days later, the Bank for International Settlements (the central bankers’ central bank) warned about the “prevailing euphoria” in global credit markets.15 At the September 24, 1996, FOMC meeting, Greenspan said: “I recognize that there is a stock market bubble problem at this point. . . . We do have the possibility of raising major concerns by increasing margin requirements.

The act defined Neighborhood Reinvestment’s mission as “revitalizing older urban neighborhoods by mobilizing public, private and community resources at the neighborhood level.” 23 FOMC meeting transcript, July 2–3, 1996, p. 33. CHAIRMAN GREENSPAN. On that note, we all can go for coffee. Mr. Coffee escaped once again.26 Lindsey had summed up our future. His only error was timing. He did not—but who did?—predict that the stock market bubble would grow for 3½ more years. The stock market bubble forestalled a reckoning. That bubble concealed much that was wrong with a misaligned economy— specifically, the amount of borrowing required to boost the GDP. The gambler’s curse did not strike for another 10 years. First, the stock market cured all that plagued the “real” economy. After that failed, Greenspan seeded a national housing carry trade. “[T]he non-rich, non-old liv[ing] paycheck to paycheck”27 would live off the profits and collateral as the Dow rose from 5,000 to 11,000.

This was his ever-so-muted warning that the stock market might be overpriced: “how do we know when irrational exuberance has unduly escalated asset values?” Yet, he claimed he had popped a bubble in 1994. “I think we partially broke the back of an emerging speculation in equities. We pricked that bubble [in the bond market] as well.”5 He offered to pop the bubble at the September 1996 FOMC meeting: “I recognize that there is a stock market bubble problem at this point. . . . We do have the possibility of raising major concerns by increasing margin requirements. I guarantee that if you want to get rid of the bubble, whatever it is, that will do it.” After his “irrational exuberance” speech, Greenspan gave a couple of warnings in early 1997. Critics told him that he should not make stock market predictions. He never addressed the bubble again—that is, until he decided that he could not identify one before it blew up.


pages: 442 words: 39,064

Why Stock Markets Crash: Critical Events in Complex Financial Systems by Didier Sornette

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Asian financial crisis, asset allocation, Berlin Wall, Bretton Woods, Brownian motion, capital asset pricing model, capital controls, continuous double auction, currency peg, Deng Xiaoping, discrete time, diversified portfolio, Elliott wave, Erdős number, experimental economics, financial innovation, floating exchange rates, frictionless, frictionless market, full employment, global village, implied volatility, index fund, invisible hand, John von Neumann, joint-stock company, law of one price, Louis Bachelier, mandelbrot fractal, margin call, market bubble, market clearing, market design, market fundamentalism, mental accounting, moral hazard, Network effects, new economy, oil shock, open economy, pattern recognition, Paul Erdős, quantitative trading / quantitative finance, random walk, risk/return, Ronald Reagan, Schrödinger's Cat, short selling, Silicon Valley, South Sea Bubble, statistical model, stochastic process, Tacoma Narrows Bridge, technological singularity, The Coming Technological Singularity, The Wealth of Nations by Adam Smith, Tobin tax, total factor productivity, transaction costs, tulip mania, VA Linux, Y2K, yield curve

A plausible interpretation is that these 1.0 ’Argentina II’ Best fit Second best fit Third best fit Best fit antibubble 24000 Index 22000 20000 18000 16000 14000 ’Argentina II: Bubble’ ’Argentina II: Anti-bubble’ 0.8 Spectral Power 26000 0.6 0.4 0.2 12000 10000 92 92.2 92.4 Date 92.6 92.8 0 0 1 2 3 4 5 Frequency 6 7 Fig. 8.8. Left panel: The Argentinian stock market bubble and antibubble of 1992. See Table 8.1. Right panel: Only the best fit is used in the Lomb periodograms. Reproduced from [218]. 8 291 b ubb les and cras h e s i n e m e r g e n t m a r k e t s 1.0 26000 ’Argentina III’ ’Argentina III’ Best fit Second best fit 0.8 Spectral Power 24000 Index 22000 20000 18000 16000 0.4 0.2 14000 12000 0.6 93.6 93.7 93.8 93.9 Date 94 0 94.1 0 1 2 3 4 5 Frequency 6 7 8 Fig. 8.9. Left panel: The Argentinian stock market bubble ending in 1994. See Table 8.1 for the main parameter values of the fit. Right panel: Only the best fit is used in the Lomb periodogram. Reproduced from [218].

In Table 8.1, the main parameters of the fits are given as well as the beginning and ending dates of the bubble and the size of the 24000 1.0 ’Argentina IV’ ’Argentina IV’ Best fit 0.8 Spectral Power 26000 Index 22000 20000 18000 16000 0.4 0.2 14000 12000 0.6 95.5 96 96.5 Date 97 97.5 0 0 1 2 3 4 5 Frequency 6 7 Fig. 8.10. Left panel: The Argentinian stock market bubble ending in 1997. See Table 8.1 for the main parameter values of the fit. Right panel: Only the best fit is used in the Lomb periodogram. Reproduced from [218]. 8 292 chapter 8 1.0 14000 ’Brazil’ ’Brazil’ Best fit 0.8 Spectral Power Index 12000 10000 8000 0.6 0.4 0.2 6000 96.2 96.4 96.6 96.8 97 Date 0 97.2 97.4 0 1 2 3 4 5 Frequency 6 7 8 Fig. 8.11. Left panel: The Brazilian stock market bubble ending in 1997. See Table 8.1 for the main parameter values of the fit. Right panel: Only the best fit is used in the Lomb periodogram. Reproduced from [218]. crash/correction, defined as drop % = Itmax − Itmin Itmax (16) Here, tmin is defined as the date after the crash/correction where the index It achieves its lowest value before a clear novel market regime is observed.

Reproduced from [218]. 300 chapter 8 1.0 6.6 ’Indonesia I’ Best fit ’Indonesia I’ 0.8 Spectral Power Log(Index) 6.4 6.2 6.0 0.4 0.2 5.8 5.6 0.6 93.2 93.4 93.6 93.8 Date 94 0 94.2 0 1 2 3 4 5 Frequency 6 7 8 Fig. 8.26. Left panel: Indonesian stock market bubble ending in January 1994 with log-periodic power law fit with parameters m2 = 044 tc = 199409, and = 156. Right panel: Lomb periodogram of the log-periodic oscillatory component of the price shown in the left panel. The abscissa is the log-frequency f defined as f = /2. Reproduced from [218]. 1.0 7.0 ’Indonesia II’ 0.8 Spectral Power Log(Index) 6.8 6.6 6.4 6.2 0.4 0.2 6.0 5.8 0.6 95.5 96 96.5 97 Date 97.5 98 0 0 1 2 3 4 5 Frequency 6 7 Fig. 8.27. Left panel: Indonesian stock market bubble ending in 1997 with logperiodic power law fit with parameters m2 = 023 tc = 199805, and = 101. Right panel: Lomb periodogram of the log-periodic oscillatory component of the price shown in the left panel.


pages: 326 words: 106,053

The Wisdom of Crowds by James Surowiecki

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AltaVista, Andrei Shleifer, asset allocation, Cass Sunstein, Daniel Kahneman / Amos Tversky, experimental economics, Frederick Winslow Taylor, George Akerlof, Howard Rheingold, I think there is a world market for maybe five computers, interchangeable parts, Jeff Bezos, Joseph Schumpeter, knowledge economy, lone genius, Long Term Capital Management, market bubble, market clearing, market design, moral hazard, new economy, offshore financial centre, Picturephone, prediction markets, profit maximization, Richard Feynman, Richard Feynman, Richard Feynman: Challenger O-ring, Richard Thaler, Robert Shiller, Robert Shiller, Ronald Coase, Ronald Reagan, shareholder value, short selling, Silicon Valley, South Sea Bubble, The Nature of the Firm, The Wealth of Nations by Adam Smith, The Wisdom of Crowds, Toyota Production System, transaction costs, ultimatum game, Yogi Berra

The stock-market bubble of the 1990s coincided with an explosion in financial news. Relative even just to a decade ago, investors now have access to vast troves of information about companies and the markets, thanks to the Internet and cable television. The most influential source of financial news in the late nineties was unquestionably CNBC. Fortune columnist Andy Serwer wrote in 1999, “I think CNBC is the TV network of our time . . . The bull market we’ve been basking in year after year has made investing the national pastime. The more stocks go up, the more of us get into the market, the more we watch CNBC to keep abreast of the action.” (Notice that Serwer’s description—“the more stocks go up, the more of us get into the market”—perfectly captures the logic of a stock-market bubble.) Seven million people a week watched CNBC at the market’s peak, and if you were at all interested in the stock market, it was inescapable.

Each of the chapters is devoted to a different way of organizing people toward a common (or at least loosely common) goal, and each chapter is about the way collective intelligence either flourishes or flounders. In the chapter about corporations, for instance, the tension is between a system in which only a few people exercise power and a system in which many have a voice. The chapter about markets starts with the question of whether markets can be collectively intelligent, and ends with a look at the dynamics of a stock-market bubble. There are many stories in this book of groups making bad decisions, as well as groups making good ones. Why? Well, one reason is that this is the way the world works. The wisdom of crowds has a far more important and beneficial impact on our everyday lives than we recognize, and its implications for the future are immense. But in the present, many groups struggle to make even mediocre decisions, while others wreak havoc with their bad judgment.

Groups benefit from members talking to and learning from each other, but too much communication, paradoxically, can actually make the group as a whole less intelligent. While big groups are often good for solving certain kinds of problems, big groups can also be unmanageable and inefficient. Conversely, small groups have the virtue of being easy to run, but they risk having too little diversity of thought and too much consensus. Finally, Mackay was right about the extremes of collective behavior: there are times—think of a riot, or a stock-market bubble—when aggregating individual decisions produces a collective decision that is utterly irrational. The stories of these kinds of mistakes are negative proofs of this book’s argument, underscoring the importance to good decision making of diversity and independence by demonstrating what happens when they’re missing. Diversity and independence are important because the best collective decisions are the product of disagreement and contest, not consensus or compromise.

Trend Commandments: Trading for Exceptional Returns by Michael W. Covel

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Albert Einstein, Bernie Madoff, Black Swan, commodity trading advisor, correlation coefficient, delayed gratification, diversified portfolio, en.wikipedia.org, Eugene Fama: efficient market hypothesis, family office, full employment, Lao Tzu, Long Term Capital Management, market bubble, market microstructure, Mikhail Gorbachev, moral hazard, Nick Leeson, oil shock, Ponzi scheme, prediction markets, quantitative trading / quantitative finance, random walk, Sharpe ratio, systematic trading, the scientific method, transaction costs, tulip mania, upwardly mobile, Y2K

That said, investors have short and selective memories. If the market advances from a low point to any significant degree upward, buy and hold feels comfortable again. It can feel like market bubbles are a thing of the past—especially when so many talking heads are preaching recovery. Buy and Hope 153 No one knows if there is a current bubble in stocks, but it is amazing that some people think they know. I had a conversation with a friend recently. He mentioned that real estate in Southern California was stabilizing (forget that debate for a moment), and then the conversation of bubbles came up. He quickly announced that we were not in a stock market bubble. I was amazed at his confidence. Has there ever been a time when the majority knew they were in the middle of a bubble? Bubbles are never clear until the dust settles.

Further, look at the Fed Funds rate manipulation over the last 20 years: Fed Funds rate 5.50 percent on November 15, 1994. Stock market takes off. Fed Funds rate 4.75 percent on November 17, 1998. Fed Funds rate 6.50 percent on May 16, 2000. Stock market bubble popped March 2000. The Fed then lowers 13 times. Fed Funds rate 3.00 percent on September 17, 2001. Fed Funds rate 1.25 percent on November 6, 2002. Stock market takes off. Real estate takes back off. Fed Funds rate 1.00 percent on June 25, 2003. P a r l i a m e n t o f W h o re s 183 The Fed then raises 17 times. Fed Funds rate 5.25 percent on August 17, 2007. The Fed then lowers 10 times. Stock market bubble popped October 2008. Fed Funds rate 0 percent on December 16, 2008. Stock market takes off. Those examples are all government intervention and manipulation, plain and simple. In 2010, Brian Sack, a senior official at the New York Fed, admitted the need to keep stock markets artificially high: “Nevertheless, balance sheet policy can still lower longer-term borrowing costs for many households and businesses, If you close your and it adds to household wealth by keeping asset eyes, the monster prices higher than they otherwise would be.” will not go away.

He makes a cogent case for an out of control Fed and Congress, but consider an excerpt from his recent letter: “In hindsight, I frankly underestimated the willingness of investors to believe that the underlying structural difficulties of the economy (which still persist in my view) were so easily solved by disabling fair-market accounting disRide the horse closure and repeatedly violating the provisions of in the direction the Federal Reserve Act. In any event, it is my job to not only defend capital, but to achieve it is going.6 returns despite the recklessness that policy makers choose to pursue.”5 S y s t e m a t i c Tre n d F o l l o w i n g 43 Trend traders use an entirely different type of analysis not based on traditional reasoning. Trend followers do not have Hollywood narratives to explain market bubbles on top of bubbles. A trend follower does not have to know any of the things Hussman laments not knowing. Buy things that have gone up on the theory that they will continue to go up; short things that have gone down on the theory that they will continue to go down.7 Empty your mind. Be formless, shapeless, like water. Now you put water into a cup, it becomes the cup. You put water into a bottle it becomes the bottle.


pages: 467 words: 154,960

Trend Following: How Great Traders Make Millions in Up or Down Markets by Michael W. Covel

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Albert Einstein, asset allocation, Atul Gawande, backtesting, Bernie Madoff, Black Swan, buy low sell high, capital asset pricing model, Clayton Christensen, commodity trading advisor, correlation coefficient, Daniel Kahneman / Amos Tversky, delayed gratification, deliberate practice, diversification, diversified portfolio, Elliott wave, Emanuel Derman, Eugene Fama: efficient market hypothesis, fiat currency, fixed income, game design, hindsight bias, housing crisis, index fund, Isaac Newton, John Nash: game theory, linear programming, Long Term Capital Management, mandelbrot fractal, margin call, market bubble, market fundamentalism, market microstructure, mental accounting, Nash equilibrium, new economy, Nick Leeson, Ponzi scheme, prediction markets, random walk, Renaissance Technologies, Richard Feynman, Richard Feynman, risk tolerance, risk-adjusted returns, risk/return, Robert Shiller, Robert Shiller, shareholder value, Sharpe ratio, short selling, South Sea Bubble, Stephen Hawking, systematic trading, the scientific method, Thomas L Friedman, too big to fail, transaction costs, upwardly mobile, value at risk, Vanguard fund, volatility arbitrage, William of Occam

Part II 74 78 85 90 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 95 3 Performance Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 97 Absolute Returns . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 98 Fear of Volatility and Confusion with Risk . . . . . . . . . . . . . . . . . . . . . . . . . . . . 99 Drawdowns . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 106 Correlation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 111 Zero Sum Nature of the Markets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 114 George Soros and Zero Sum . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 116 4 Big Events, Crashes, and Panics . . . . . . . . . . . . . . . . . . . . . . . . . . . . 123 Event #1: 2008 Stock Market Bubble and Crash . . . . . . . . . . . . . . . . . . . . . . 126 Day-by-Day Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 136 Event #2: 2000–2002 Stock Market Bubble . . . . . . . . . . . . . . . . . . . . . . . . . . 138 Event #3: Long-Term Capital Management Collapse . . . . . . . . . . . . . . . . . . . 151 Event #4: Asian Contagion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 164 Event #5: Barings Bank . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 168 Event #6: Metallgesellschaft . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 172 Final Thoughts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 175 The Always “New” Coming Storm . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 178 5 Baseball: Thinking Outside the Batter’s Box . . . . . . . . . . . . . . . . . . . . 181 The Home Run . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 182 Moneyball and Billy Beane . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 185 John W.

During the dot-com era of the late 1990s, during the 2008 real estate and credit bubbles, so many investors and traders with so little strategy were making so much money that trend followers disappeared from the radar screen, even though they kept right on making money. Since trend following has nothing to do with short-term trading, cutting edge technologies, or Wall Street Holy Grails, its appeal is always negligible during market bubbles. It’s not sexy. If investors can jump on the bandwagon of practically any “long only” mutual or hedge fund manager or turn a profit trading themselves by simply buying Internet, energy, or real estate stocks and holding on to them, what need would there ever be to adopt a strategy such as trend following? However, if we look at how much money trend followers have made since assorted stock market bubbles have popped, trend following becomes far more relevant to the bottom line. The following chart (Chart 1.1) shows a hypothetical index of three longtime trend following firms compared against the S&P stock index.

If you don’t like losing, examine the strategy of the winners. The performance histories of trend followers during the 2008 market crash, 2000–2002 stock market bubble, the 1998 LongTerm Capital Management (LTCM) crisis, the Asian contagion, the Barings Bank bust in 1995, and the German firm Metallgesellschaft’s collapse in 1993, answer that all important question: “Who won?” “Have you heard any rumors?” Killian, perplexed, said no. “I think we’re bust.” “Is this a crank call?” Killian asked. “There’s a really ugly story coming out that perhaps Nick Leeson has taken the company down.”9 126 Trend Following (Updated Edition): Learn to Make Millions in Up or Down Markets Event #1: 2008 Stock Market Bubble and Crash One reason for this paucity of early information is suggested by the following part of the term trend following.


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, centre right, credit crunch, currency manipulation / currency intervention, Etonian, full employment, German hyperinflation, index card, invisible hand, Lao Tzu, 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

At the other end of the political spectrum, the British chancellor of the exchequer, Philip Snowden, a fervent Socialist who had himself frequently predicted the collapse of capitalism, could write gushingly that Norman “might have stepped out of the frame of the portrait of the most handsome courtier who ever graced the court of a queen,” that “his sympathy with the suffering of nations is as tender as that of a woman for her child,” and that he had “in abundant measure the quality of inspiring confidence.” Norman had acquired his reputation for economic and financial perspicacity because he had been so right on so many things. Ever since the end of the war, he had been a fervent opponent of exacting reparations from Germany. Throughout the 1920s, he had raised the alarm that the world was running short of gold reserves. From an early stage, he had warned about the dangers of the stock market bubble in the United States. But a few lonely voices insisted that it was he and the policies he espoused, especially his rigid, almost theological, belief in the benefits of the gold standard, that were to blame for the economic catastrophe that was overtaking the West. One of them was that of John Maynard Keynes. Another was that of Winston Churchill. A few days before Norman left for Canada on his enforced holiday, Churchill, who had lost most of his savings in the Wall Street crash two years earlier, wrote from Biarritz to his friend and former secretary Eddie Marsh, “Everyone I meet seems vaguely alarmed that something terrible is going to happen financially. . . .

Stock market crashes and banking panics had always been closely linked in the pre-Fed world and many of the country’s past financial crises had emerged from Wall Street: 1837, 1857, 1896, and 1907. In his early days as a stockbroker, he himself had been a witness firsthand to the crash of 1896, and had been an active participant in restoring order after the panic of 1907. But as an experienced Wall Street hand, he was quite aware of how difficult it was to identify a market bubble—to distinguish between an advance in stock prices warranted by higher profits and a rise driven purely by market psychology. Almost by definition, there were always people who believed that the market has gone too high—the stock market depended on a diversity of opinion and for every buyer dreaming of riches in 1925, there was a seller who thought the whole thing had gone too far. Strong recognized his own highly fallible judgment about stocks was a very thin reed on which to conduct the country’s monetary policy.

Nobody knows and I will not dare prophesy.” Given so much uncertainty, he was convinced that the Federal Reserve should not try to make itself an arbiter of equity prices. Moreover, even if he was sure that the market had entered a speculative bubble, he was conscious that the Fed had many other objectives to worry about apart from the level of the market. He feared that if he added yet another goal—preventing stock market bubbles—to the list he would overload the system. Drawing a rather stretched analogy between the Federal Reserve and its various and conflicting objectives for the economy and a family burdened by many children, he ruminated, “Must we accept parenthood for every economic development in the country? That is a hard thing for us to do. We would have a large family of children. Every time one of them misbehaved, we might have to spank them all.”


pages: 297 words: 91,141

Market Sense and Nonsense by Jack D. Schwager

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asset allocation, Bernie Madoff, Brownian motion, collateralized debt obligation, commodity trading advisor, conceptual framework, correlation coefficient, Credit Default Swap, credit default swaps / collateralized debt obligations, Daniel Kahneman / Amos Tversky, diversification, diversified portfolio, fixed income, high net worth, implied volatility, index arbitrage, index fund, London Interbank Offered Rate, Long Term Capital Management, margin call, market bubble, market fundamentalism, merger arbitrage, pattern recognition, performance metric, pets.com, Ponzi scheme, quantitative trading / quantitative finance, random walk, risk tolerance, risk-adjusted returns, risk/return, Robert Shiller, Robert Shiller, Sharpe ratio, short selling, statistical arbitrage, statistical model, transaction costs, two-sided market, value at risk, yield curve

Markets do not accurately discount all known fundamentals, but rather they overdiscount or underdiscount this information, depending on the market’s emotional environment, and indeed this is one of the sources of investing or trading opportunities. A much more realistic model of how markets actually work is that prices are determined by a combination of fundamentals and emotions. The same exact set of fundamentals can lead to different prices given different emotional environments. The long history of market bubbles and crashes provides overwhelming empirical evidence that the “madness of crowds”14 can take market prices far beyond any rational level based on value and fundamentals and that market panics can result in precipitous price declines completely removed from any contemporaneous changes in fundamentals. There is a clear line from the Tulipmania of seventeenth-century Holland when “houses and lands were . . . assigned in payment of bargains made at the tulip-mart”15 to the huge demand for mortgage-based securitizations in the early 2000s when investors eagerly bought AAA-rated tranches of securitizations backed entirely by no-verification ARM subprime mortgages for the tiny yield premium they offered.

Right for the Wrong Reason: Why Markets Are Difficult to Beat Advocates of the efficient market hypothesis are absolutely correct in contending that markets are very difficult to beat, but they are right for the wrong reason. The difficulty in gaining an edge in the markets is not because prices instantaneously discount all known information (although they sometimes do), but rather because the impact of emotion on prices varies greatly and is nearly impossible to gauge. Sometimes emotions will cause prices to wildly overshoot any reasonable definition of fair value—we call these periods market bubbles. At other times, emotions will cause prices to plunge far below any reasonable definition of fair value—we call these periods market panics. Finally, in perhaps the majority of the time, emotions will exert a limited distortive impact on prices—market environments in which the efficient market hypothesis provides a reasonable approximation. So either market prices are not significantly out of line with fair valuations (muted influence of emotions on price) or we are faced with the difficult task of determining how far the price deviation may extend.

Markets are traded by people, not robots, and people often react on emotion more than on information.17 The influence of emotion can cause irrational behavior and result in prices being much too high or low vis-à-vis an objective assessment of the fundamentals. 3. The arrival of new information is random. ASSUME TRUE 4. Changes in prices depend on new information. FALSE! Price moves often lag the information. Price moves often occur in the absence of new information (e.g., market bubbles and crashes where momentum feeds on itself). 5. Therefore you can’t beat the market. FALSE! Prices can be significantly out of line with reasonable valuations. Prices don’t move in tandem with information. Some people are more skilled in interpreting information. Why the Efficient Market Hypothesis Is Destined for the Dustbin of Economic Theory Supporters of the efficient market hypothesis are reluctant to give up the theory, despite mounting contradictory evidence, because it provides the foundation for a broad range of critical financial applications, including risk assessment, optimal portfolio allocation, and option pricing.


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, asset-backed security, Atahualpa, bank run, banking crisis, banks create money, Black Swan, Black-Scholes formula, Bonfire of the Vanities, Bretton Woods, BRICs, British Empire, capital asset pricing model, capital controls, Carmen Reinhart, Cass Sunstein, central bank independence, collateralized debt obligation, colonial exploitation, Corn Laws, 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, fixed income, 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, Isaac Newton, 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, Mikhail Gorbachev, 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, rent control, rent-seeking, reserve currency, Richard Thaler, Robert Shiller, Robert Shiller, Ronald Reagan, savings glut, seigniorage, short selling, Silicon Valley, South Sea Bubble, sovereign wealth fund, spice trade, structural adjustment programs, 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

For example, the Renaissance created such a boom in the market for art and architecture because Italian bankers like the Medici made fortunes by applying Oriental mathematics to money. The Dutch Republic prevailed over the Habsburg Empire because having the world’s first modern stock market was financially preferable to having the world’s biggest silver mine. The problems of the French monarchy could not be resolved without a revolution because a convicted Scots murderer had wrecked the French financial system by unleashing the first stock market bubble and bust. It was Nathan Rothschild as much as the Duke of Wellington who defeated Napoleon at Waterloo. It was financial folly, a self-destructive cycle of defaults and devaluations, that turned Argentina from the world’s sixth-richest country in the 1880s into the inflation-ridden basket case of the 1980s. Read this book and you will understand why, paradoxically, the people who live in the world’s safest country are also the world’s most insured.

Chapter 4 tells the story of insurance; Chapter 5 the real estate market; and Chapter 6 the rise, fall and rise of international finance. Each chapter addresses a key historical question. When did money stop being metal and mutate into paper, before vanishing altogether? Is it true that, by setting long-term interest rates, the bond market rules the world? What is the role played by central banks in stock market bubbles and busts? Why is insurance not necessarily the best way to protect yourself from risk? Do people exaggerate the benefits of investing in real estate? And is the economic inter-dependence of China and America the key to global financial stability, or a mere chimera? In trying to cover the history of finance from ancient Mesopotamia to modern microfinance, I have set myself an impossible task, no doubt.

Mania or bubble: The prospect of easy capital gains attracts first-time investors and swindlers eager to mulct them of their money. 4. Distress: The insiders discern that expected profits cannot possibly justify the now exorbitant price of the shares and begin to take profits by selling. 5. Revulsion or discredit: As share prices fall, the outsiders all stampede for the exits, causing the bubble to burst altogether.3 Stock market bubbles have three other recurrent features. The first is the role of what is sometimes referred to as asymmetric information. Insiders - those concerned with the management of bubble companies - know much more than the outsiders, whom the insiders want to part from their money. Such asymmetries always exist in business, of course, but in a bubble the insiders exploit them fraudulently.4 The second theme is the role of cross-border capital flows.


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, centre right, collateralized debt obligation, conceptual framework, corporate governance, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, declining real wages, deindustrialization, Exxon Valdez, falling living standards, financial deregulation, financial innovation, Financial Instability Hypothesis, fixed income, 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, rent control, Robert Shiller, Robert Shiller, Ronald Reagan, savings glut, sovereign wealth fund, structural adjustment programs, 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

The answer appears to be no.” Actually, the answer appears to be yes, and he knew all along what it was. He could have raised the market’s margin requirements, thereby reducing how much stock people could buy with borrowed money. Krugman reminds us that at the September 1996 meeting of the Federal Open Market Committee (F.O.M.C.), Greenspan told his colleagues, “I recognize that there is a stock market bubble problem at this point” and that it could be solved by “increasing margin requirements. I guarantee that if you want to get rid of the bubble, whatever it is, that will do it.” But he didn’t do it. Nor did he lobby behind the scenes against the huge capital gains tax cut of 1997, which fed the market with another torrent of investor money. Not only did he do nothing to tame the market, writes Stiglitz, “he switched to becoming a cheerleader for the market’s boom, almost egging it on, as he repeatedly argued that the New Economy was bringing with it a new era of productivity increases.”

That’s a big number, even by the standards of the U.S. economy; it’s equal to almost 40 percent of the growth in personal spending, and a nice compensation for the failure of the economy to generate new jobs at a vigorous pace. But since we’re saving nothing these days—the personal savings rate went negative in 2005 for the first time since the Great Depression—the cash had to come from abroad. Since 2001 U.S. foreign debt has increased by a stunning $2 trillion. One thing can be said for the housing mania: It’s kept the economy afloat since the bursting of the stock market bubble in 2000. (Wall Street economists estimate that 40 to 50 percent of the growth in GDP and employment over the last several years has been driven by the housing boom.) When the dot-coms went up in smoke, Alan Greenspan’s Federal Reserve drove interest rates down to 1 percent to contain the economic fallout. But that “cure” is what got the housing mania going; low inter est rates made borrowing irresistible, and the nation’s speculative spirits were diverted away from Wall Street and toward home sweet home.

Rubin defends his thesis by blaming the rising trade deficit on inflexible currency exchange with China and other Asian nations. Correct that and everything will be fine, he says. Further, he explains that the capital deficits in the Clinton years were actually a good thing because the high-tech investment boom was drawing in more foreign investors. He neglects to mention that the boom included the high-tech stock-market “bubble” that collapsed a year later on George W. Bush’s watch, with $6 trillion in losses for investors. In any case, Rubin sees nothing in the trading system itself that needs fixing. “Maybe I’m missing something,” he says, “but I don’t think there’s anything in the design of the system we would have done differently.” Another debatable tenet in Rubin’s thinking is the familiar mantra that more education will save us in the long run—that is, improving Americans’ skills and knowledge will offset the low-wage competition.


pages: 289 words: 113,211

A Demon of Our Own Design: Markets, Hedge Funds, and the Perils of Financial Innovation by Richard Bookstaber

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affirmative action, Albert Einstein, asset allocation, backtesting, Black Swan, Black-Scholes formula, Bonfire of the Vanities, butterfly effect, commodity trading advisor, computer age, disintermediation, diversification, double entry bookkeeping, Edward Lorenz: Chaos theory, family office, financial innovation, fixed income, frictionless, frictionless market, George Akerlof, implied volatility, index arbitrage, Jeff Bezos, London Interbank Offered Rate, Long Term Capital Management, loose coupling, margin call, market bubble, market design, merger arbitrage, Mexican peso crisis / tequila crisis, moral hazard, new economy, Nick Leeson, oil shock, quantitative trading / quantitative finance, random walk, Renaissance Technologies, risk tolerance, risk/return, Robert Shiller, Robert Shiller, rolodex, Saturday Night Live, shareholder value, short selling, Silicon Valley, statistical arbitrage, The Market for Lemons, time value of money, too big to fail, transaction costs, tulip mania, uranium enrichment, yield curve, zero-coupon bond

This was a sizable decline, but three weeks later the Dow had retraced its steps to the pre-9/11 level. Or go back to the assassination of President John F. Kennedy in 1963 or the bombing of Pearl Harbor in 1941. Given the scope of the tumult, the market reactions to each event amounted to little more than a hiccup. There is another troublesome facet to our modern market crises: They keep getting worse. Two of the great market bubbles of the past century occurred in the last two decades. First, the Japanese stock market bubble, in which the Nikkei index tripled in value from 1986 through early 1990 and then nearly halved in value during the next nine months. The second was our own Internet bubble that witnessed the NASDAQ rise fourfold in a little more than a year and then decline by a similar amount the following year, ultimately cascading some 75 percent. This same period was peppered with three major currency disasters: the European Monetary System currency crisis in 1992; the Mexican peso crisis that engulfed Latin America in 1994; and the Asia crisis, which spread from Thailand and Indonesia to Korea in 1997, and then broke out of the region to strike Russia and Brazil.

In an age in which people are willing to invest money in virtual stocks, where by definition there are no prospects of earnings and where price appreciation is obtained through nothing short of an unsustainable bubble, it is not too hard to see how a real dot-com, with real prospects, no matter how dim, could attract investors. Market bubbles have been explained by the tendency of investors to follow trends and by the dynamics of crowd psychology—the need for people to be part of a successful herd. But neither trend-following strategies nor irrational crowd behavior is necessary to create market bubbles. Even if we assume as a starting point that the stock market is a random walk and 168 ccc_demon_165-206_ch09.qxd 7/13/07 2:44 PM Page 169 T H E B R AV E N E W W O R L D OF HEDGE FUNDS is governed by rational behavior, and even if we assert at the outset that all trades reflect the full consideration of the most up-to-date information, merely the fact that there are winners and losers will lead to booms and busts that have little to do with the rational application of information.1 The simplest market cycle is based on two psychological characteristics of investors.

If it is Internet stocks in the late 1990s, the pundits point out that the information age is based on a new paradigm of value that is not well captured by traditional methods of accounting and the related modes of fundamental analysis. What has really changed is not the basic information—a P/E ratio is a P/E ratio—but the implications derived from it. Taken in its most extreme form, when there is a story that can afford unbridled optimism and when the optimism is fueled by levered exposures, a market bubble is born. In the case of the Internet bubble, the cycle had an accomplice in the form of a restricted supply of stock, or float. The scarcity of Internet shares was such that the market impact of each buyer contributed more than usual toward inflating the bubble. The float of a stock is the number of shares actually in the market and available for trading. Frequently, when a stock first comes into the market, some of the shares outstanding are restricted from sale, either because they are held by insiders or because they have been issued to major backers with restrictions on their sale.

Stocks for the Long Run, 4th Edition: The Definitive Guide to Financial Market Returns & Long Term Investment Strategies by Jeremy J. Siegel

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asset allocation, backtesting, Black-Scholes formula, Bretton Woods, buy low sell high, California gold rush, capital asset pricing model, cognitive dissonance, compound rate of return, correlation coefficient, Daniel Kahneman / Amos Tversky, diversification, diversified portfolio, dividend-yielding stocks, equity premium, Eugene Fama: efficient market hypothesis, fixed income, German hyperinflation, implied volatility, index arbitrage, index fund, Isaac Newton, joint-stock company, Long Term Capital Management, loss aversion, market bubble, mental accounting, new economy, oil shock, passive investing, prediction markets, price anchoring, price stability, purchasing power parity, random walk, Richard Thaler, risk tolerance, risk/return, Robert Shiller, Robert Shiller, Ronald Reagan, shareholder value, short selling, South Sea Bubble, technology bubble, The Great Moderation, The Wisdom of Crowds, transaction costs, tulip mania, Vanguard fund

Capital 137 Conclusion 138 CONTENTS CONTENTS ix Chapter 9 Outperforming the Market: The Importance of Size, Dividend Yields, and Price-to-Earnings Ratios 139 Stocks That Outperform the Market 139 Small- and Large-Cap Stocks 141 Trends in Small-Cap Stock Returns 142 Valuation 144 Value Stocks Offer Higher Returns Than Growth Stocks 144 Dividend Yields 145 Other Dividend Yield Strategies 147 Price-to-Earnings (P-E) Ratios 149 Price-to-Book Ratios 150 Combining Size and Valuation Criteria 152 Initial Public Offerings: The Disappointing Overall Returns on New Small-Cap Growth Companies 154 The Nature of Growth and Value Stocks 157 Explanations of Size and Valuation Effects 157 The Noisy Market Hypothesis 158 Conclusion 159 Chapter 10 Global Investing and the Rise of China, India, and the Emerging Markets 161 The World’s Population, Production, and Equity Capital 162 Cycles in Foreign Markets 164 The Japanese Market Bubble 165 The Emerging Market Bubble 166 The New Millennium and the Technology Bubble 167 Diversification in World Markets 168 Principles of Diversification 168 “Efficient” Portfolios: Formal Analysis 168 Should You Hedge Foreign Exchange Risk? 173 Sector Diversification 173 Private and Public Capital 177 x The World in 2050 178 Conclusion 182 Appendix: The Largest Non-U.S.-Based Companies 182 PART 3 HOW THE ECONOMIC ENVIRONMENT IMPACTS STOCKS Chapter 11 Gold, Monetary Policy, and Inflation 187 Money and Prices 189 The Gold Standard 191 The Establishment of the Federal Reserve 191 The Fall of the Gold Standard 192 Postdevaluation Monetary Policy 193 Postgold Monetary Policy 194 The Federal Reserve and Money Creation 195 How the Fed’s Actions Affect Interest Rates 196 Stocks as Hedges against Inflation 199 Why Stocks Fail as a Short-Term Inflation Hedge 201 Higher Interest Rates 201 Nonneutral Inflation: Supply-Side Effects 202 Taxes on Corporate Earnings 202 Inflationary Biases in Interest Costs 203 Capital Gains Taxes 204 Conclusion 205 Chapter 12 Stocks and the Business Cycle 207 Who Calls the Business Cycle?

., 295n Gazprom, 177, 182–183 General Electric, 47, 54, 56i, 57, 89, 176i, 177 in DJIA, 38, 39i, 48 General Foods, 60i, 62 General Motors, 40, 56i, 58, 64, 149n, 183 The General Theory (Keynes), 287, 364 Generally accepted accounting principles (GAAP), 103 Genstar, 63 Geometric return, 22 George, Thomas J., 302n Gerard, Harold B., 324n Gervais, Simon, 326n Glassman, James, 88, 147 GlaxoSmithKline, 177 Glickstein, David, 290n Global Crossing, 64 Global Industrial Classification Standard (GICS), 52–53 372 Global investing, 161–184 cycles in foreign markets and, 164–167, 164i diversification in world markets and (see Diversification in world markets) emerging market bubble and, 166–167 future of, 178–182 Japanese market bubble and, 165 largest non-U.S.-based companies and, 182–184 population, production, and equity capital and, 162, 162i, 163i, 164 technology bubble and, 167 Global Marine, 63 Global stocks, 18–20, 19i Global Wealth Allocation, 356 Globex, 258–260 Goethe, Johann Wolfgang, 37q Goetzmann, William, 12n, 18n Gold: as backing for U.S. currency, 193–194 price of, 10 Gold standard: adherence to, 191 end of, 9–10, 10i, 187–189, 192–193 “Good Beta, Bad Beta” (Campbell), 158 Goodyear, 64 Google, 176i, 355 Gordon, William, 295 Government bonds, interest rate on, above dividend yield on common stocks, 95–97 Graham, Benjamin, 77q, 82–83, 95q, 100, 139q, 141, 145n, 150, 152, 289q, 304, 334, 341q Grant, Linda, 359n Grantham, Jeremy, 90 Great Britain, end of gold standard in, 192 Great Crash (see Stock market crash of 1929) Index Great Depression: interest rates during, 8 investors’ reaction to, 16 postcrash view of stock returns and, 83–85 Greenspan, Alan, 87, 113, 246 Grinblatt, Mark, 302n Gross, Bill, 89–90 Gross domestic product (GDP): market value relative to, 119–120, 119i, 120i world, 162, 163i, 164 Gross, Leroy, 329 Growth stocks: nature of, 157 value stocks versus, 144–145 Gruber, Martin J., 348 Gulf of Tonkin incident, 233 Gulf Oil, 55 Gulf War, 85, 233–234 H.

TABLE 10–1 Compound Annual Dollar Returns in World Stock Markets, 1970 through December 2006 (Standard Deviations in Parentheses) Country or Region World* EAFE† USA Europe Japan 19702006 19701979 19801989 19901999 20002006 10.81% 6.96% 19.92% 11.96% 4.65% (17.07) (18.09) (14.59) (13.94) (20.76) 11.57% 10.09% 22.77% 7.33% 7.08% (21.93) (22.77) (23.28) (16.93) (23.85) 10.84% 4.61% 17.13% 19.01% 2.45% (17.10) (19.01) (12.52) (14.39) (18.35) 12.27% 8.57% 18.49% 14.50% 7.34% (20.95) (20.97) (25.89) (12.71) (24.33) 11.47% 17.37% 28.66% -0.69% 4.28% (34.69) (45.41) (28.57) (28.90) (25.71) *World = Morgan Stanley Capital International (MSCI) Value-Weighted World Index. †EAFE is the MSCI index for Europe, Australasia, and the Far East. CHAPTER 10 Global Investing and the Rise of China, India, and the Emerging Markets 165 These differences in returns emphasize the importance of maintaining a well-diversified world portfolio. The Japanese Market Bubble The 1980 bull market in Japan stands as one of the most remarkable bubbles in world stock market history. In the 1970s and 1980s, Japanese stock returns averaged more than 10 percentage points per year above U.S. returns and surpassed those from every other country. The bull market in Japan was so dramatic that by the end of 1989, for the first time since the early 1900s, the market value of the American stock market was no longer the world’s largest.


pages: 461 words: 128,421

The Myth of the Rational Market: A History of Risk, Reward, and Delusion on Wall Street by Justin Fox

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Albert Einstein, Andrei Shleifer, asset allocation, asset-backed security, bank run, Benoit Mandelbrot, Black-Scholes formula, Bretton Woods, Brownian motion, capital asset pricing model, card file, Cass Sunstein, collateralized debt obligation, complexity theory, corporate governance, Credit Default Swap, credit default swaps / collateralized debt obligations, Daniel Kahneman / Amos Tversky, David Ricardo: comparative advantage, discovery of the americas, diversification, diversified portfolio, Edward Glaeser, endowment effect, Eugene Fama: efficient market hypothesis, experimental economics, financial innovation, Financial Instability Hypothesis, floating exchange rates, George Akerlof, Henri Poincaré, Hyman Minsky, implied volatility, impulse control, index arbitrage, index card, index fund, invisible hand, Isaac Newton, John Nash: game theory, John von Neumann, joint-stock company, Joseph Schumpeter, libertarian paternalism, linear programming, Long Term Capital Management, Louis Bachelier, mandelbrot fractal, market bubble, market design, New Journalism, Nikolai Kondratiev, Paul Lévy, pension reform, performance metric, Ponzi scheme, prediction markets, pushing on a string, quantitative trading / quantitative finance, Ralph Nader, RAND corporation, random walk, Richard Thaler, risk/return, road to serfdom, Robert Shiller, Robert Shiller, rolodex, Ronald Reagan, shareholder value, Sharpe ratio, short selling, side project, Silicon Valley, South Sea Bubble, statistical model, The Chicago School, The Myth of the Rational Market, The Predators' Ball, the scientific method, The Wealth of Nations by Adam Smith, The Wisdom of Crowds, Thomas Kuhn: the structure of scientific revolutions, Thomas L Friedman, Thorstein Veblen, Tobin tax, transaction costs, tulip mania, value at risk, Vanguard fund, volatility smile, Yogi Berra

His monetary policy ideas owed much to Irving Fisher. And since a mid-1970s stint as chairman of Gerald Ford’s Council of Economic Advisers, he had become adept at sensing the winds of political Washington. Put all that together, and what emerged in the late 1990s was the world’s most prominent advocate for the idea that financial markets got things right. Greenspan was willing to accept that stock market bubbles could happen, but he also thought deregulation, globalization, and technological innovation were bringing about advances in economic productivity that the stock market might be sniffing out before the government’s economists had. After his brief dalliance with “irrational exuberance,” Greenspan went on to cite this putative productivity boom repeatedly in his speeches and congressional testimony.

It was true, to a point. Economic data later showed that there was a sustained boom in labor productivity (that is, workers produced more per hour worked) beginning in 1995. In the decade following Shiller’s 1996 forecast of stock market returns of “just about nothing,” actual returns were slightly under historical averages but decidedly positive.16 FORECASTING THE MARKET IS HARD, and stock market bubbles tend to have some basis in economic reality. But that doesn’t mean they aren’t bubbles, and can’t cause damage when they burst, which was really all that Shiller was trying to say. Orthodox finance scholars often seemed to bend over backward to miss this point. In 1991, professor and money manager Richard Roll—whose research in the 1980s had backed up Shiller’s claim that markets were excessively volatile—followed up a Shiller presentation on market swings with a response that is still cited by efficient market stalwarts: I really wish Bob were right about markets being inefficient.

(Investors are not simple rational actors/You can’t explain with your fancy three-factors!/Bad news, when the markets are on fire,/Gonna make me some money, can’t call me a liar/Sweet Emotion/Sweet Emotion.) After all the singing was done, the two knocked each other out. “With no clear winner tonight, the debate rages on,” the fight announcer declared.1 Yes, even after the deflating of the 1990s stock market bubble, even in the face of reams of new evidence and theory on the craziness of financial markets, students at Chicago still saw the debate over market rationality as a stalemate. On the other hand, at least they knew there was a debate. And they could take classes with Dick Thaler. BY THE TIME THALER MOVED to Chicago from Cornell in 1995, he was well known among economists. One key reason was the regular column he wrote for the Journal of Economic Perspectives, a publication launched in 1987 by the American Economic Association to keep increasingly specialized economists up to date on developments in the far corners of the discipline.


pages: 364 words: 101,286

The Misbehavior of Markets by Benoit Mandelbrot

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Albert Einstein, asset allocation, Augustin-Louis Cauchy, Benoit Mandelbrot, Big bang: deregulation of the City of London, Black-Scholes formula, British Empire, Brownian motion, buy low sell high, capital asset pricing model, carbon-based life, discounted cash flows, diversification, double helix, Edward Lorenz: Chaos theory, Elliott wave, equity premium, Eugene Fama: efficient market hypothesis, Fellow of the Royal Society, full employment, Georg Cantor, Henri Poincaré, implied volatility, index fund, informal economy, invisible hand, John von Neumann, Long Term Capital Management, Louis Bachelier, mandelbrot fractal, market bubble, market microstructure, new economy, paper trading, passive investing, Paul Lévy, Plutocrats, plutocrats, price mechanism, quantitative trading / quantitative finance, Ralph Nelson Elliott, RAND corporation, random walk, risk tolerance, Robert Shiller, Robert Shiller, short selling, statistical arbitrage, statistical model, Steve Ballmer, stochastic volatility, transfer pricing, value at risk, volatility smile

The Persistence of Error PART TWO - The New Way CHAPTER VI - Turbulent Markets: A Preview Turbulent Trading Looney ’Toons for Brown-Bachelier Preview of More Close-Fitting Cartoons CHAPTER VII - Studies in Roughness: A Fractal Primer The Rules of Roughness A Dimension to Measure Roughness Pictorial Essay: A Fractal Gallery CHAPTER VIII - The Mystery of Cotton Clue No. 1: A Power Law Out of the Blue Clue No. 2: Early Power Laws in Economics Clue No. 3: The Laws of Exceptional Chance The Cotton Case: Basically Closed The Dénouement The Meaning of Cotton Coda: Looney ’Toons, Reprised for Long Tails CHAPTER IX - Long Memory, from the Nile to the Marketplace Abu Nil Father Time A Random Run The Selling of H Coda: Looney ’Toons of Long Dependence CHAPTER X - Noah, Joseph, and Market Bubbles An Alien Plays the Market Two Dual Forms of Wild Variability A Good Reason for “Bubbles” CHAPTER XI - The Multifractal Nature of Trading Time Looney ’Toons for the Last Time Multifractal Time Beyond Cartoons: The Multifractal Model with No Grids Putting the Model to Work PART THREE - The Way Ahead CHAPTER XII - Ten Heresies of Finance 1. Markets Are Turbulent. 2. Markets Are Very, Very Risky—More Risky Than the Standard Theories Imagine. 3.

To me, all the power and wealth of the New York Stock Exchange or a London currency-dealing room are abstract; they are analogous to physical systems of turbulence in a sunspot or eddies in a river. They can be analyzed with the tools science already has, and new tools I keep adding to the old ones as need and ability allow. With these tools, I have analyzed how income gets distributed in a society, how stock-market bubbles form and pop, how company size and industrial concentration vary, and how financial prices move—cotton prices, wheat prices, railroad and Blue Chip stocks, dollar-yen exchange rates. I see a pattern in these price movements—not a pattern, to be sure, that will make anybody rich; I agree with the orthodox economists that stock prices are probably not predictable in any useful sense of the term.

Thinking in terms of the Nile, a record of floods that shows a sequence of mostly wet periods interspersed with brief droughts—or the opposite. Thinking in terms of prices, a long sequence of periods of growth with brief downswings—or the opposite. A value of H smaller than one half, shown on the top panel, has strong “anti-persistence”: Successive changes tend to cancel each other out. Again, the power of fractals shows a strange connection among seemingly unrelated phenomena. CHAPTER X Noah, Joseph, and Market Bubbles I will cause it to rain upon the earth forty days and forty nights; and every living substance that I have made will I destroy from off the face of the earth. Genesis 7: 4. What God is about to do he showeth unto Pharaoh. Behold, there come seven years of great plenty throughout all the land of Egypt: and there shall arise after them seven years of famine; and all the plenty shall be forgotten in the land of Egypt; and the famine shall consume the land.


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 climate, business process, call centre, capital controls, Capital in the Twenty-First Century by Thomas Piketty, Carmen Reinhart, central bank independence, centre right, colonial rule, Commodity Super-Cycle, corporate governance, crony capitalism, 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, falling living standards, Francis Fukuyama: the end of history, Freestyle chess, Gini coefficient, hiring and firing, income inequality, indoor plumbing, industrial robot, inflation targeting, Internet of things, Jeff Bezos, job automation, Joseph Schumpeter, Kenneth Rogoff, knowledge economy, labor-force participation, Malacca Straits, Mark Zuckerberg, market bubble, megacity, Mexican peso crisis / tequila crisis, mittelstand, moral hazard, New Economic Geography, 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, rent-seeking, reserve currency, Ronald Coase, Ronald Reagan, savings glut, secular stagnation, Shenzhen was a fishing village, Silicon Valley, Silicon Valley startup, Simon Kuznets, smart cities, Snapchat, South China Sea, sovereign wealth fund, 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

But—and this is important—that pain will be much more severe if borrowing fueled the bubble. Debt magnifies these recessions. When a recession follows a bubble that is not fueled by debt, five years later the economy will be 1 to 1.5 percent smaller than it would have been, if the bubble had never occurred. However, if the bubble is debt driven, the losses are worse. In the case of a stock market bubble fueled by debt—meaning investors were borrowing heavily to buy stock—the economy five years later will be 4 percent below its previous trend. A debt-fueled housing market bubble will have an even uglier endgame, with the economy shrinking as much as 9 percent compared with where it otherwise would have been, five years on. The need to keep an eye on asset price inflation is particularly important in 2015, when many economists are warning that the world faced the opposite concern: Japan-style deflation.

Often a crash in prices of houses or stocks will depress the economy, because when those asset prices fall sharply, the result is a real decline in wealth. When people feel less wealthy, they spend less, resulting in lower demand and a fall in consumer prices as well. In other words, asset price crashes can trigger bouts of bad consumer price deflation. This is what happened in Japan, where the real estate and stock market bubbles of the 1980s collapsed in 1990 and led to the long fall in both asset and consumer prices. It is also what happened in the United States during the Roaring Twenties, when the runaway optimism of the age drove up stock prices by 250 percent between 1920 and the peak in 1929. Then the market crashed and was followed by consumer price deflation in the early years of the Great Depression. The key question for our purposes: When do rising asset prices reach the bubble stage and start to threaten economic growth?

Taylor, who researched 170 years of data for seventeen countries and demonstrated how the impact of housing bubbles has grown and spread.11 Before World War II, only seven of fifty-two recessions followed the collapse of a bubble in the stock market or the housing market. This link has tightened dramatically since World War II, with forty out of sixty-two recessions—nearly two-thirds—following on the heels of a collapse in the housing or the stock market. The paper offered a number of benchmarks for understanding the likely fallout from these bubbles. In general, housing bubbles took longer to reach a peak than stock market bubbles, largely because stock prices are more volatile than home prices. Housing bubbles were much less common than stock price bubbles, but when they did occur, they were much more likely to be followed by a recession. And once prices for either houses or stocks rise sharply * above their long-term trend, a subsequent drop in prices of 15 percent or more signals that the economy is due to face significant pain.


pages: 519 words: 104,396

Priceless: The Myth of Fair Value (And How to Take Advantage of It) by William Poundstone

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availability heuristic, Cass Sunstein, collective bargaining, Daniel Kahneman / Amos Tversky, delayed gratification, Donald Trump, East Village, en.wikipedia.org, endowment effect, equal pay for equal work, experimental economics, experimental subject, feminist movement, game design, German hyperinflation, Henri Poincaré, high net worth, index card, invisible hand, John von Neumann, laissez-faire capitalism, loss aversion, market bubble, mental accounting, meta analysis, meta-analysis, Nash equilibrium, new economy, payday loans, Potemkin village, price anchoring, price discrimination, psychological pricing, Ralph Waldo Emerson, RAND corporation, random walk, RFID, Richard Thaler, risk tolerance, Robert Shiller, Robert Shiller, rolodex, Steve Jobs, The Chicago School, The Wealth of Nations by Adam Smith, ultimatum game, working poor

Following Graham’s advice is easier said than done. During bull markets, less kindly known as bubbles, Mr. Market shows up every day quoting sky-high prices that only seem to go up. Most investors find it impossible to ignore the siren song. How could Mr. Market be so very wrong, day after day? As early as 1982, Stanford economist Kenneth Arrow identified Tversky and Kahneman’s work as a plausible explanation for stock market bubbles. Lawrence Summers took up this theme in a 1986 paper, “Does the Stock Market Rationally Reflect Fundamental Values?” Summers (now head of the National Economic Council for the Obama administration) was the first to make an extended case for what might now be called the coherent arbitrariness of stock prices. From day to day the market reacts promptly to the latest economic news. The resulting “random walk” of prices has been cited as proof that the market knows true values.

Andrus (1984). “Explorations in Anchoring: The Effects of Prior Range, Anchor Extremity, and Suggestive Hints.” Unpublished manuscript, Stanford University, Stanford, Calif. Cited in Jacowitz and Kahneman 1995. Reinhardt, Uwe E. (2009). “Jack Welch and the Lone Ranger Theory.” The New York Times, Feb. 20, 2009. Reyburn, Scott, and Katya Kazakina (2008). “How Monet, Freud, Hirst Records Led Art-Market Bubble to Burst.” Bloomberg.com, Dec. 29, 2008. Riding, Alan (2007). “Alas, Poor Art Market: A Multimillion-Dollar Head Case.” The New York Times, June 13, 2007. Ritov, Ilana (1996). “Anchoring in Simulated Competitive Market Negotiation.” Organizational Behavior and Human Decision Processes 67, 16–25. Robbennolt, Jennifer K., and Christina A. Studebaker (1999). “Anchoring in the Courtroom: The Effects of Caps on Punitive Damages.”

Crew clothing company, 190, 203, 205 Jensen, Keith, 123–24 Jensen, Marlene, 232 JetBlue Airlines, 182, 183 Jews: Israeli, 81–82; mobsters, 49; Nazi persecution of, 83–84 Jobs, Steve, 184, 257 Johns Hopkins University, 52 Johnson, Eric, 280–82 Johnson & Johnson, 6 Jopling, Jay, 267 Journal of Business, 110 Journal of Consumer Research, 153, 280 Journal of Experimental Psychology, The, 65 juries, 197; damages awarded by, 3–4, 17–21, 276–79 Kahn, Irah, 84 Kahneman, Daniel, 16, 83–87, 105, 133, 146, 147, 188, 196, 236; on altruism, 117; on anchoring, 144, 207; economists’ hostility to, 77; fairness research of, 106–107, 110, 112–14; heuristics of, 88–89, 125–28, 197; on jury awards, 19, 276–77, 279; at Oregon Research Institute, 28, 87–88; on priming, 92, 94, 286; prospect theory of, 97–99, 101–102, 104, 132; and stock market bubbles, 261; on ultimatum game, 113, 115; United Nations experiment of, 10–12, 90 Kalmar, Tepper, 160, 161 Kelley Blue Book, 75 Kelly, Walt, 76 Kennedy, Edward, 257 Kenya, 122 Klein, Calvin, 246 Knetsch, Jack, 105, 107, 110, 113–14, 117 Kohl, Helmut, 271 Koolhaas, Rem, 158 Kouri, Elena, 250 Kozlowski, Dennis, 234–36 Kozlowski, Karen, 234 Krueger, Alan, 165–66 Kucher, Eckhard, 148–49 Lacayo, Richard, 267 Lagavulin whiskey, 219 laissez-faire capitalism, 108 Lamelera people, 123 “Landlord’s Game, The,” 284 La Rue, Diane, 167 Las Vegas Review Journal, 71 Laube, Jim, 160 laundry detergent, 180 Lauren, Ralph, 155 lawsuits, jury awards in, 3–4, 17–21, 276–79 Leaves of Grass (Whitman), 194 Lee, Bob, 144 Leeds, University of, 219 Leeuwenhoek, Anton von, 208 Lehman Brothers, 268 Leipzig, University of, 30 Lichtenstein, Donald, 204–206 Lichtenstein, Sarah, 10, 28, 53, 62–77, 79, 81, 82, 87, 90, 220 Liebeck v.


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, Bretton Woods, British Empire, Buckminster Fuller, California gold rush, currency manipulation / currency intervention, Deng Xiaoping, diversified portfolio, Elliott wave, fiat currency, fixed income, Fractional reserve banking, housing crisis, If something cannot go on forever, it will stop, index fund, Lao Tzu, 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

The explanations the public got were that the authorities’ whir of activity would save the “financial system.” How the extension of more credit would ameliorate a crisis created by excess credit wasn’t explained. Also missing from the authorities’ explanations were examples of financial bubbles, once having popped, being successfully reinflated. No amount of intervention-ism has been able to reinflate the Japanese real estate and stock market bubbles that burst twenty years ago. Nor was there any clarity offered to explain why financial institutions that were incapable of sound operations should be preserved. The benefits to stimulus recipients were clear, but a holistic approach demands examination of not just benefits, but costs as well. The impact of the burgeoning debt on America’s creditworthiness and on the value of the dollar are among those costs.

It was good for the likes of Merrill Lynch, JPMorgan, and Chase Manhattan, which saw their depressed stock prices take off, but it had a costly impact on Americans. Driving rates to 3 percent by the time he was finished, Greenspan fundamentally altered the investment outlook and risk-taking proclivities of retired people and baby boomers alike, as they sought to make up in the stock market for the certificate of deposit and fixed income returns that had disappeared. Ultimately Americans lost $6 trillion in that Greenspan stock market bubble. But while the profits of the banks from market distortions are privatized, banking system losses, as we are wit nessing, are socialized. More alarming is the role of the central bank in funding wars not popular enough to be sustained by direct taxation. This function has been on display since the Federal Reserve Act of 1913 was first passed. Economist Murray Rothbard pointed out that the new act, which took effect in November 1914, coincided with the outbreak of World War I, so its inflationary capacity was put to the test right away:. . . it is generally agreed that it was only the new system that permitted the U.S. to enter the war and to finance both its own war effort, and massive loans to the allies; roughly, the Fed doubled the money supply of the U.S. during the war and prices doubled in consequence.

One need only remember the fabled Goldilocks economy of previous Federal Reserve chairman Alan Greenspan, the Maestro: “It was not too hot and not too cold, but just right!” Of course, Greenspan also admits he didn’t “get it” about the housing bubble until very late, in 2005 and 2006, despite home mortgage debt growing from $1.8 trillion to $8 trillion during his tenure. Nor did he foresee the stock market bubble before it popped in 2000. And he somehow missed the recession of the early 1990s. Greenspan’s successor, Ben Bernanke, didn’t get it either. As chairman of the President’s Council of Economic Advisers in October 2005, he told Congress that he wasn’t concerned about a housing bubble. A year and a half later, in March 2006, deep into the mortgage meltdown, he testified as Fed chairman that problems in the subprime market were “contained.”


pages: 695 words: 194,693

Money Changes Everything: How Finance Made Civilization Possible by William N. Goetzmann

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Albert Einstein, Andrei Shleifer, asset allocation, asset-backed security, banking crisis, Benoit Mandelbrot, Black Swan, Black-Scholes formula, Bretton Woods, Brownian motion, capital asset pricing model, Cass Sunstein, collective bargaining, colonial exploitation, compound rate of return, conceptual framework, corporate governance, Credit Default Swap, David Ricardo: comparative advantage, debt deflation, delayed gratification, Detroit bankruptcy, disintermediation, diversified portfolio, double entry bookkeeping, Edmond Halley, en.wikipedia.org, equity premium, financial independence, financial innovation, financial intermediation, fixed income, frictionless, frictionless market, full employment, high net worth, income inequality, index fund, invention of the steam engine, invention of writing, invisible hand, James Watt: steam engine, joint-stock company, joint-stock limited liability company, laissez-faire capitalism, Louis Bachelier, mandelbrot fractal, market bubble, means of production, money: store of value / unit of account / medium of exchange, moral hazard, new economy, passive investing, Paul Lévy, Ponzi scheme, price stability, principal–agent problem, profit maximization, profit motive, quantitative trading / quantitative finance, random walk, Richard Thaler, Robert Shiller, Robert Shiller, shareholder value, short selling, South Sea Bubble, sovereign wealth fund, spice trade, stochastic process, the scientific method, The Wealth of Nations by Adam Smith, Thomas Malthus, time value of money, too big to fail, trade liberalization, trade route, transatlantic slave trade, transatlantic slave trade, tulip mania, wage slave

In the twentieth century, capital markets democratized investing and stimulated novel solutions to major social problems: social security, sovereign funds, and personal savings accounts are all mechanisms intended to reduce household economic risk. They have deep roots in the history of finance. Along with these important contributions to humankind, finance has also created problems: debt, market bubbles, devastating crises and crashes, exploitative corporations, imperialism, income inequality—to name only a few. The story of finance is the story of a technology: a way of doing things. Like other technologies, it developed through innovations that improved efficiency. It is not intrinsically good or bad. TIME AND MONEY The power of finance to effect such important transitions in world history is that it moves economic value forward and backward through time.

The fragmented political economy of Europe fostered the development of investment markets; the reinvention of the corporation; extra-governmental banking institutions; complex insurance contracts on lives, property, and trading ventures; and a sophisticated tradition of financial mathematics, reasoning, and analysis. These innovations, in turn, changed human behavior. I argue that they altered attitudes toward risk and chance, leading on the one hand to probabilistic thought and calculation and on the other hand to unbridled speculation that fueled the world’s first stock market bubbles. Europeans ultimately turned themselves and the rest of the world into investors. The key stages in Europe’s development are first, the emergence of financial institutions; second, the development of securities markets; third, the emergence of companies; fourth, the sudden explosion of stock markets; fifth, the quantification of risk; and finally, the spillover of this system to the rest of the world.

Bob Shiller dreamed up (and patented) housing futures that could hedge against the decline in home equity. He proposed the creation of GDP-indexed products to hedge against unemployment. These products were met with mild interest in the boom years of the US economy, but, like other projectors before him, Bob Shiller may only have been ahead of his time. One of his ideas instantly caught the public’s imagination, however. He became famous for his study of stock market bubbles and his forecast of the bursting of the Internet craze. A scholar with a gentle, inquiring demeanor, Bob Shiller has always had an interest in the psychology of the stock market. We came to know each other over years of talking about everything from econometrics to the puzzle of investor behavior. At one point in his stellar academic career, Bob took a chance and wrote a trade book, Irrational Exuberance, based on his conviction that the Tech Bubble would burst.

Culture and Prosperity: The Truth About Markets - Why Some Nations Are Rich but Most Remain Poor by John Kay

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Albert Einstein, Asian financial crisis, Barry Marshall: ulcers, Berlin Wall, Big bang: deregulation of the City of London, California gold rush, complexity theory, computer age, constrained optimization, corporate governance, corporate social responsibility, correlation does not imply causation, Daniel Kahneman / Amos Tversky, David Ricardo: comparative advantage, Donald Trump, double entry bookkeeping, double helix, Edward Lloyd's coffeehouse, equity premium, Ernest Rutherford, European colonialism, experimental economics, Exxon Valdez, failed state, financial innovation, Francis Fukuyama: the end of history, George Akerlof, George Gilder, greed is good, haute couture, illegal immigration, income inequality, invention of the telephone, invention of the wheel, invisible hand, John Nash: game theory, John von Neumann, Kevin Kelly, knowledge economy, labour market flexibility, late capitalism, Long Term Capital Management, loss aversion, Mahatma Gandhi, market bubble, market clearing, market fundamentalism, means of production, Menlo Park, Mikhail Gorbachev, money: store of value / unit of account / medium of exchange, moral hazard, Naomi Klein, Nash equilibrium, new economy, oil shale / tar sands, oil shock, pets.com, popular electronics, price discrimination, price mechanism, prisoner's dilemma, profit maximization, purchasing power parity, QWERTY keyboard, Ralph Nader, RAND corporation, random walk, rent-seeking, risk tolerance, road to serfdom, Ronald Coase, Ronald Reagan, second-price auction, shareholder value, Silicon Valley, Simon Kuznets, South Sea Bubble, Steve Jobs, telemarketer, The Chicago School, The Death and Life of Great American Cities, The Market for Lemons, The Nature of the Firm, The Predators' Ball, The Wealth of Nations by Adam Smith, Thorstein Veblen, total factor productivity, transaction costs, tulip mania, urban decay, Washington Consensus, women in the workforce, yield curve, yield management

But at the turn of the century, 70% of companies listed in the United States, including such highly rated companies as Microsoft, had never paid a dividend. 6 Why then would anyone buy Microsoft shares? Even if the company makes no distributions, it has earnings and assets, and this gives value to the shares even if none of that value is in practice passed to shareholders. You may not find that argument entirely persuasive, nor do I; but so long as enough people believe it, you and I can expect to be able to sell our Microsoft shares to them. After the bursting of the stock market bubble in 2000, however, fewer people believed it than before. In 2003, Microsoft announced that it would pay its first dividend. Valuing Securities ••••••••••••••••••••••••••••••••••••• People who claim to predict share-price movements may be fundamental or technical analysts. Fundamental analysis looks at expec- Culture and Prosperity {171} tations of future earnings and dividends. Technical analysis identifies trends in share prices that will help to predict future movements.

Business risks bring problems of asymmetric information and moral hazard. Investors should always have the tale of the wallet auction in their mind. Why are people who know more about this venture and have more influence over its outcome than I do offering a share of its potential profits to me? Why should I buy when they Culture and Prosperity { 243} want to sell? 19 Many people would be better off today if they had asked that question during the stock market bubble. The good reason for relinquishing a share of a potentially profitable investment is that the risk is too large for one individual or institution. Antonio could handle the loss of one ship, but not of three. Marine insurance would have enabled him to diversify the risk of storm at sea, but the risks associated with his own business judgment remained. Christopher Columbus could not finance a venture to find a shorter route to the spice islands of the Indies, but Queen Isabella of Castile, substantially richer, could.

••••••••••••••••••••••••••••••••••••• In The Methodology of Positive Economics) Friedman presents the example of speculative trading to illustrate the thesis that rationality is imposed by competitive market processes. He claims that market speculation is necessarily stabilizing. Speculators make money only if they buy cheap and sell dear; only speculators who make money will stay in the market for long. So prices will fluctuate less in a market with active speculation than without. 21 Yet speculation in the stock market bubble was obviously destabilizing, driving prices to fantastic levels from which they subsequently collapsed. If all traders were perfectly rational (consistent, Culture and Prosperity { 245} self-interested, profit-maximizing, well-informed), there would be no room for speculation, profitable or unprofitable. To give Friedman's argument a chance of being true, there needs to be a little bit of irrationality-noise trading-but not too much.


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, asset-backed security, 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, crony capitalism, currency peg, diversification, Doha Development Round, energy security, financial deregulation, financial innovation, fixed income, 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, sovereign wealth fund, The Chicago School, Thomas Malthus, too big to fail, trade route

Harvard economist Martin Feldstein noted that in 2004 alone, net mortgage borrowing not used for new home purchases, about $600 billion, represented nearly 7 percent of disposable personal income. In a related vein, over five years the housing sector was calculated to have provided nearly 40 percent of the increase in U.S. GDP and employment. The further benefit was that rising home prices offset much of the nationwide loss of wealth—some $7 trillion—occasioned by the 2000- 2002 collapse of the stock market bubble, most notably the implosion of the tech-laden Nasdaq Index (see pp. 11-13, 62). In California, for example, the price of homes essentially tripled between 1995 and 2006, as you can see in Figure 4.4 on p. 114. Wealth-wise, this increase was gangbusters. It was also a powerful tool of financial expansion, mortgage finance being one of the sector’s weightiest pillars. Virtually all the mega-firms were enthusiastic participants.

Obviously, this flood of private credit provided high-octane fuel for the expansion, leverage, and ambition of the financial sector, which seems to have passed manufacturing in the GDP data during the midnineties. Figure 2.5 measures the trot, canter, and gallop of the 1969- 2006 advance of financial debt, which left all other private debt expansion in the dust. The Flow of Funds Review & Analysis, published by the Virginia-based Financial Markets Center, offered one of the few explanatory backdrops as financial debt hit a crescendo in the year before the stock market bubble popped in 2000:FIGURE 2.5 The Triumph of Leverage Source: Federal Reserve System, Flow of Funds Accounts of the United States. These figures are the latest manifestation of a remarkable rise in financial sector indebtedness that dates to the late 1960s, when U.S. banks began borrowing Eurodollars in huge volumes from their offshore branches. . . . In each decade since 1969, the ratio of financial sector debt to GDP has nearly doubled.

Perhaps half of the money pumped into energy and communications debt vanished through bankruptcies and bear market clawings. The partially burst debt and credit bubbles of 2000-2002 had more than a little in common with the burst bubbles of 1969-70 and 1989-92. The floodtides of financial and nonfinancial corporate debt always leave a mess when the waters recede. Indeed, the high-tech and stock market bubble had popped while the Clinton administration was still in office. In its initial months, with a recession already at hand, the administration of George W. Bush was dogged by his family’s and political associates’ closeness to Enron. Thereafter it was plagued well into 2002 by the Texas firm’s failure and apparent criminal culpability. Even so, the attack on Manhattan’s World Trade Center and the Pentagon on September 11 had pushed economic issues into a new, subordinated position.


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, clean water, collateralized debt obligation, correlation does not imply causation, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, 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, The Bell Curve by Richard Herrnstein and Charles Murray, too big to fail, transaction costs, yield curve

This limitation of liability shall apply to any claim or cause whatsoever whether such claim or cause arises in contract, tort or otherwise. Contents Introduction 1 Fundamental Themes 2 What Happened? 3 Government Monetary Policy: The Fed as the Primary Cause 4 FDIC Insurance: The Background Cause 5 Government Housing Policy: The Proximate Cause 6 The Essential Role of Banks in a Complex Economy: The Liquidity Challenge 7 The Residential Real-Estate-Market Bubble and Financial-Market Stress 8 Failure of the Rating Agencies: The Subprime Mortgage Market and Its Impact on Capital Markets 9 Pick-a-Payment Mortgages: A Toxic Product of FDIC Insurance Coverage 10 How Freddie and Fannie Grew to Dominate the Home Mortgage Lending Business 11 Fair-Value Accounting and Wealth Destruction 12 Derivatives and Shadow Banking: A Misunderstanding 13 The Myth that “Deregulation” Caused the Financial Crisis 14 How the SEC Made Matters Worse 15 Market Corrections Are Necessary, but Panics Are Destructive and Avoidable 16 TARP (Troubled Asset Relief Program) 17 What We Could Have—and Should Have—Done 18 The Cure for the Banking Industry: Systematically Move Toward Pure Capitalism 19 Some Political Cures: Government Policy 20 Our Short-Term Path and How to End Unemployment 21 The Deepest Cause Is Philosophical 22 The Cure Is Also Philosophical 23 How the United States Could Go Broke 24 The Need for Principled Action 25 Conclusion Notes Index Acknowledgments Introduction THE PURPOSE OF THIS BOOK IS TO PROVIDE AN INTEGRATED INSID-er’s perspective on the recent financial crisis, the related Great Recession, and why a meaningful economic recovery has not occurred.

Many defenders of the Federal Reserve drop the context; that is, they see the Fed’s ability to provide liquidity as reducing risk. They ignore the fact that the very existence of the Fed creates extremely powerful incentives (human nature) for bank managements to increase risk in good times. Instead of being countercyclical, as its proponents argue, the Fed is pro-cyclical because of its effect on human behavior through the financial and psychological incentives that it creates. 7 The Residential Real-Estate-Market Bubble and Financial-Market Stress AS WE HAVE DISCUSSED, THE “BURSTING” OF THE BUBBLE (MISIN-Vestment) in the residential real estate markets led to the deterioration of the capital markets and to the Great Recession. In reality, it was the actions that led to the misinvestment (bubble) in the first place that were destructive. The bursting of the bubble was both inevitable and healthy for the economy in the long term.

The interesting aspect of this situation is that the negative consequences for the bond market could have been avoided and the risk of retail bank runs controlled. The FDIC could have simply absorbed the extra losses paid to the uninsured depositors. The FDIC’s mission is to protect the safety and soundness of the banking system. If covering uninsured depositors is necessary, it can do so, but it should let the losses fall on the insurance fund, not on innocent bondholders. Violating the rule of law has consequences. The bursting of the real estate–market bubble turned into an international financial crisis for several reasons. First, foreign financial institutions had invested heavily in the U.S. housing market. They suffered capital losses and the resulting reductions in liquidity (lending capacity), as previously described for U.S. institutions, and these reductions were then transmitted to their home economies. Second, there were housing bubbles created by the central banks in a number of other countries (such as Ireland and Spain), and these bubbles also burst.


pages: 337 words: 89,075

Understanding Asset Allocation: An Intuitive Approach to Maximizing Your Portfolio by Victor A. Canto

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accounting loophole / creative accounting, airline deregulation, Andrei Shleifer, asset allocation, Bretton Woods, buy low sell high, capital asset pricing model, commodity trading advisor, corporate governance, discounted cash flows, diversification, diversified portfolio, fixed income, frictionless, high net worth, index fund, inflation targeting, invisible hand, law of one price, liquidity trap, London Interbank Offered Rate, Long Term Capital Management, market bubble, merger arbitrage, new economy, passive investing, price mechanism, purchasing power parity, risk tolerance, risk-adjusted returns, risk/return, Ronald Reagan, shareholder value, Sharpe ratio, short selling, statistical arbitrage, the market place, transaction costs, Y2K, yield curve

That said, looking at data since the late 1980s, it follows that value stocks outperformed as the economy went into a recession and there was uncertainty regarding the tax code. Growth stocks next outperformed during the gridlock period, when moves to higher taxes and regulation were arrested by a divided government. Add to that low and steady inflation and there was little uncertainty during the mid- and late 1990s. When the corporate scandals broke, and the stock market bubble popped, uncertainty crept back in and value stocks reigned once again. The Location Cycles Before I get into location cycles, I need to make some assumptions about exchange rates. In the long run (by this, I mean the economy will approach its equilibrium in the long run), purchasing power parity (PPP) will be restored. PPP is the point at which exchange rates have adjusted based on the purchasing power of currencies.7 If the world we live in were frictionless, all adjustments would be instantaneous.

After that, the tax policies of Presidents Bush and Clinton brought about a cycle in which capital gains’ advantage over dividends steadily increased. Not surprisingly, returns in the 1990s were generated mostly in the form of capital gains as the corporate structure changed to take advantage of the tax laws. Ultimately, corporate behavior also adjusted, with some companies going over the line. All this of course changed when the stock market bubble burst in the late 1990s, subsequently reducing the dividend tax rate. At the present moment, the advantage of capital gains over dividends has been completely eliminated. Now let’s focus again on cycles, beginning with high-yield Treasury bonds (Tbonds). The first round of Reagan tax-rate cuts (The Economic Recovery Tax Act of 1981) represented a major inflection point in the relative rankings of the costs of the return-delivery vehicles.

Clearly, price declines induced by supply shifts are quite bullish for the world economy. On the other hand, price declines induced by demand shifts are quite bearish (see Figure 11.3d). A lack of demand induces a doubly negative effect on profits. Not only do producers collect less money per unit sold, they also sell fewer units. The quintessential example of this is Japan during its deflation years—a stock market bubble that burst in the early 1990s reduced the net worth of individuals and corporations alike. In turn, the credit worthiness of companies was reduced, forcing banks to curtail their loans. The decline in asset prices also reduced the net capital and capital adequacy of the banks, forcing them to further curtail their loan operations. These conditions created what some called a liquidity trap. As the Japan central bank printed money to stimulate the economy, the commercial banks did not lend the extra money.


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, asset-backed security, availability heuristic, bank run, banking crisis, Benoit Mandelbrot, Berlin Wall, Bernie Madoff, Black-Scholes formula, Bretton Woods, British Empire, capital asset pricing model, centralized clearinghouse, collateralized debt obligation, Columbine, conceptual framework, Corn Laws, correlation coefficient, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, 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, mental accounting, Mikhail Gorbachev, Mont Pelerin Society, 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, rent control, Richard Thaler, risk tolerance, risk-adjusted returns, road to serfdom, Robert Shiller, Robert Shiller, Ronald Coase, Ronald Reagan, shareholder value, short selling, Silicon Valley, South Sea Bubble, sovereign wealth fund, 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

The technical phrase for this type of process is negative feedback, and it is found in most stable dynamic systems, such as thermostat-controlled heating systems and the body’s hormonal system. When an initial disturbance occurs, price changes set in force offsetting movements, which restore equilibrium. (The opposite of negative feedback is positive feedback, which amplifies initial disturbances. Positive feedback helps to cause nuclear explosions, rapid population growth, and stock market bubbles.) It should be noted that none of these adjustments is imposed from above: in the language of systems analysis, they are all “emergent” properties, which result from a multiplicity of individual interactions. Each businessman “intends only his own gain,” Smith wrote, “and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention . . .

In the world of Arrow-Debreu, firms are merely shells that react to market prices by transforming inputs into outputs. There is no room for innovation. There are no monopolists, such as Microsoft, and no oligopolists, such as Exxon Mobil and Chevron, Citigroup and Goldman Sachs. Financial markets exist, but only in a very abstract form. People are assumed to plan ahead for every possible state of the world and make contingency plans for each of them. There is no place for stock market bubbles, banking crises, or lending crunches. The typical ups and downs of a modern credit-driven economy are nowhere to be seen. When I interviewed Lucas in 1996, he was engagingly modest about his achievements, perhaps because he could afford to be. (The preceding year, he had visited Stockholm to pick up his Nobel.) “I write down a bunch of equations, and I say this equation has to do with people’s preferences and this equation is a description of the technology,” he said.

“The assumption of ‘rational expectations’ as a modeling device is now entirely orthodox,” Michael Woodford, one of the leading New Keynesians, wrote in 1999. The third-generation rational expectations models can be useful for exploring the old question of how central banks should set interest rates to achieve a low and stable rate of inflation, but they have virtually nothing to say about what policymakers should do to maintain financial stability. As in the original Lucas models, there is no role in them for stock market bubbles, credit crunches, or a drying up of liquidity. Indeed, recognizable financial markets don’t really exist. The illusions of harmony, stability, and predictability are maintained, and Hayek’s information processing machine does its job perfectly: at all times, prices reflect economic fundamentals and send the right signals to economic decision-makers. Even the creators of these models concede that they don’t provide any guidance for policymakers in times of financial turbulence.


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, asset-backed security, 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, market fragmentation, 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, Richard Feynman, Richard Feynman, 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, sovereign wealth fund, special drawing rights, The Chicago School, The Great Moderation, The Market for Lemons, the market place, The Myth of the Rational Market, 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

What made the challenge far more difficult is that the sector of the domestic economy best equipped to spend more than its income or, more precisely, invest more than its savings, is the corporate sector. It did just that at the peak of the stock-market bubble in the late 1990s: indeed its financial deficit, thus defined, reached 4 per cent of GDP. But from 2000 to the crisis of 2008, the business sector was in rough balance, despite the easy monetary policy (see Figure 33).33 This is largely because gross business investment peaked at 13.6 per cent of GDP in the second quarter of 2000, as the stock-market bubble burst. It then fell to 10.1 per cent of GDP in the second quarter of 2003, before rising modestly to 11.8 per cent in the second quarter of 2007, as the economy recovered, just before the global financial crisis. It then collapsed, in response to the crisis and subsequent deep recession, reaching a nadir of 7.5 per cent of GDP in the third quarter of 2009.

That is why Japan has periodically felt obliged to keep the yen down by accumulating foreign-currency reserves.27 The aggressive monetary policies of Abenomics, introduced under Prime Minister Shinzo Abe, may also be an attempt to restore lost growth by improving external competitiveness: between November 2012 (that is, just before he became prime minister for the second time) and July 2013, the JP Morgan broad trade-weighted real exchange rate of the yen fell by 17 per cent. We can only understand the challenges for US policymakers after 1997, particularly for the Federal Reserve, in the light of what was happening elsewhere. Their job, mandated in law, was (and is) to stabilize inflation and keep unemployment low in the US. We may define this combination as internal balance. Between 1997 and 2000, the stock-market bubble did a good job of sustaining demand without any need for heroic monetary policy (see Figure 29). But the bubble then burst. The Fed found itself confronting a much weaker economy. It slashed interest rates. Then came another shock – the terrorist attack of 11 September 2001. The recovery was weak. Worry grew that the US might fall into Japan’s deflationary malaise. Mr Bernanke defined this concern, too, in an influential speech delivered in November 2002, entitled, tellingly, ‘Deflation: Making Sure “It” Doesn’t Happen Here’.28 The Federal Reserve’s intervention rate was reduced to 1 per cent.

But there was no chance that central banks would have got away with such a policy in the absence of general inflationary pressure. It would have violated their explicit mandates. Anybody who argues for such a policy is, in essence, arguing for a different monetary regime. The final question is how far it is possible to live with a financial system capable of imploding in response to what was no more than a modest policy mistake, given the obvious reasons for loose monetary policy after the implosion of the stock-market bubble in 2000 and the terrorist attacks on the US of 11 September 2001. That is perhaps the biggest question of all, to which I will turn in Part III. For all these reasons, the argument that what was needed was a tighter monetary policy does not get us far. The question is how much tighter and with what consequences. In essence, critics of monetary policy in the early 2000s and again today are suggesting that fine-tuning the economy via monetary policy risks dangerous unintended consequence.51 This is correct.


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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, asset-backed security, bank run, banking crisis, banks create money, Carmen Reinhart, central bank independence, collapse of Lehman Brothers, 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, fixed income, friendly fire, full employment, hiring and firing, housing crisis, Hyman Minsky, illegal immigration, inflation targeting, interest rate swap, Isaac Newton, 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, time value of money, too big to fail, working-age population, yield curve, Yogi Berra

I had read in the newspaper that morning that Colombian government bonds were paying only 100 basis points above U.S. Treasuries, which struck me as nutty. Sure, the Colombians were doing much better at managing their economy, and I claimed no special expertise about the country. But a mere 100 basis points over Treasuries, which implied a 1 percent expected loss rate per annum, seemed wildly optimistic. So when I came to the part of my speech about the bond-market bubble and put a picture of Wile E. Coyote on the screen, I had Colombian debt on my mind. When I asked who among the assembled brokers thought that 100 basis points was a reasonable spread over U.S. Treasuries, not a single hand went up. Then I broke the news: The market does, because that’s what Colombian bonds sell for today. By early 2006, I had grown tired of listening to myself speak about the bond bubble to deaf ears.

If a Treasury bond would pay you only 4.5 percent interest, but a mortgage-backed security with (allegedly) negligible default risk would pay you 6 percent interest instead, why not sell the Treasury bond and buy the MBS, picking up an extra 150 basis points in the process? Seems like a no-brainer, right? And if default risk really is negligible, it is. But, of course, the risk wasn’t negligible. Investors should never have extrapolated the amazingly favorable default experience of 2004–2006 into the indefinite future. But they did. It was the kind of thinking that led to the bond-market bubble. As investors shifted out of Treasuries into riskier fixed-income securities—whether Columbian government bonds or MBS backed by subprime mortgages—those riskier securities were bid up in price, and hence down in yield. You had to pay more to buy the same stream of interest payments. So what was once, say, a 150-basis-point reward for bearing more risk became a 100-basis-point reward, or maybe just a 50-basis-point reward.

I’ll explain how that worked shortly, but first let’s pause for a moment to think about remedies—or at least palliatives. Can we prevent asset-price bubbles in the future? Here, unfortunately, the answer is mostly no. Speculative markets have succumbed to occasional bubbles for as long as there have been speculative markets. Indeed, one of the first common stocks ever issued, in the South Sea Company in England, was hyped into the first stock-market bubble—the famed South Sea Bubble of 1720—which devastated, among others, a pretty smart fellow named Isaac Newton. And the Dutch had managed to grow a gigantic bubble in—of all things—tulip bulbs almost a century earlier. No, while we may be lucky enough to nip a few bubbles in the bud, we will never stamp them out. The herding behavior that produces them may well be programmed into our DNA. Our best hope is to minimize the consequences when bubbles go splat—as they inevitably will.


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Age of Greed: The Triumph of Finance and the Decline of America, 1970 to the Present by Jeff Madrick

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accounting loophole / creative accounting, Asian financial crisis, bank run, Bretton Woods, capital controls, collapse of Lehman Brothers, collateralized debt obligation, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, desegregation, disintermediation, diversified portfolio, Donald Trump, financial deregulation, fixed income, floating exchange rates, Frederick Winslow Taylor, full employment, George Akerlof, Hyman Minsky, income inequality, index fund, inflation targeting, inventory management, invisible hand, laissez-faire capitalism, locking in a profit, Long Term Capital Management, market bubble, minimum wage unemployment, Mont Pelerin Society, moral hazard, mortgage debt, new economy, North Sea oil, Northern Rock, oil shock, price stability, quantitative easing, Ralph Nader, rent control, road to serfdom, Robert Shiller, Robert Shiller, Ronald Coase, Ronald Reagan, Ronald Reagan: Tear down this wall, shareholder value, short selling, Silicon Valley, Simon Kuznets, technology bubble, Telecommunications Act of 1996, The Chicago School, The Great Moderation, too big to fail, union organizing, V2 rocket, value at risk, Vanguard fund, War on Poverty, Washington Consensus, Y2K, Yom Kippur War

The Federal Reserve chairman, William McChesney Martin, however, was more determined than the administration economists to stop the rise in inflation, and the Fed sharply raised the interest rate it uses as a target to set monetary policy (the federal funds rate). It is the interest rate on funds banks lend to each other to meet requirements for the reserves against bank loans required by the Fed. The Fed raised it from roughly 6 percent to 9 percent that year. Once the Fed started raising rates, the previously soaring stock market cracked almost immediately. As a consequence of the higher rates and the burst market bubble, GDP contracted toward the end of 1969 after nearly ten years of expansion, and the rate of unemployment began to rise. The stock market continued to plummet in the first half of 1970, and the economy officially slid into recession as the unemployment rate rose above 6 percent. Until this point, economists believed the New Economics had largely solved the problem of serious economic recession.

Raising interest rates to subdue the stock market might diminish the market enthusiasm, but it might also weaken the economy. In a speech in December 1996, Greenspan suggested that the stock market might have reached a stage of “irrational exuberance.” It was a Sunday, but markets then open in Australia and New Zealand immediately fell, leading to a cascade of falling prices around the world. Would the Greenspan Fed now raise interest rates to burst the stock market bubble? The Dow Jones Industrials fell sharply the next day, and Greenspan was chastened by the market response. The Fed did not raise rates and calm quickly returned. Despite rapid economic growth at an annual rate of 4 percent or more, inflation fell below 3 percent in 1997 and below 2 percent in 1998. Greenspan was convinced that computer technologies were at last taking hold across American business, meaning that the nation could get rising output per worker—more productivity—and pay substantial raises without raising prices.

Greenspan was at last also apparently worried about the overpriced stock market. In June, the Fed raised the federal funds rates by .25 percent, the first increase since early 1997, followed by five more increases, the last a major hike of .5 percent. In total the federal funds target was raised from 4.75 percent in early 1999 to 6.5 percent in May 2000. The rate hikes took their toll. The stock market bubble burst in midyear. By the end of 2000, the Nasdaq index had fallen from a high of 5,000 to 3,500 on its way down to nearly 1,000 in 2003. By early 2001, the Dow Jones Industrials lost 1,000 points from its high above 11,000, revived slightly, and then headed to below 8,000 two years later. The long period of growth, overspeculation, and overinvestment in high technology and telecommunications was coming to an end, and lower stock prices and rising interest rates brought on a serious recession as George W.


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Expected Returns: An Investor's Guide to Harvesting Market Rewards by Antti Ilmanen

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Andrei Shleifer, asset allocation, asset-backed security, availability heuristic, backtesting, balance sheet recession, bank run, banking crisis, barriers to entry, Bernie Madoff, Black Swan, Bretton Woods, buy low sell high, capital asset pricing model, capital controls, Carmen Reinhart, central bank independence, collateralized debt obligation, commodity trading advisor, corporate governance, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, debt deflation, deglobalization, delta neutral, demand response, discounted cash flows, disintermediation, diversification, diversified portfolio, dividend-yielding stocks, equity premium, Eugene Fama: efficient market hypothesis, fiat currency, financial deregulation, financial innovation, financial intermediation, fixed income, Flash crash, framing effect, frictionless, frictionless market, George Akerlof, global reserve currency, Google Earth, high net worth, hindsight bias, Hyman Minsky, implied volatility, income inequality, incomplete markets, index fund, inflation targeting, interest rate swap, invisible hand, Kenneth Rogoff, laissez-faire capitalism, law of one price, Long Term Capital Management, loss aversion, margin call, market bubble, market clearing, market friction, market fundamentalism, market microstructure, mental accounting, merger arbitrage, mittelstand, moral hazard, New Journalism, oil shock, p-value, passive investing, performance metric, Ponzi scheme, prediction markets, price anchoring, price stability, principal–agent problem, private sector deleveraging, purchasing power parity, quantitative easing, quantitative trading / quantitative finance, random walk, reserve currency, Richard Thaler, risk tolerance, risk-adjusted returns, risk/return, riskless arbitrage, Robert Shiller, Robert Shiller, savings glut, Sharpe ratio, short selling, sovereign wealth fund, statistical arbitrage, statistical model, stochastic volatility, systematic trading, The Great Moderation, The Myth of the Rational Market, too big to fail, transaction costs, tulip mania, value at risk, volatility arbitrage, volatility smile, working-age population, Y2K, yield curve, zero-coupon bond

Arbitrage is only riskless in the extreme case of perfect substitutability and frictionless markets. Most real-world “arbitrage” opportunities deserve quotation marks because they are only “good deals” that can move against the arbitrageur. With micro-inefficiencies where good substitutes (highly correlated assets) exist, arbitrageurs can put on relative value trades so that some of the risk in arbitrage is hedged. With macro-inefficiencies (say, a market bubble) without good asset substitutes, such hedging is not possible, so the arbitraging of market-level mispricing is risky and unattractive. Arbitrageurs face both the fundamental risk of adverse news and the “noise trader risk” of the possibility that sentiment will make mispricing worse. If arbitrageurs have longer horizons than noise traders, they can be more aggressive and can “ride out” temporary mispricings.

Bubbles and many other observed anomalies can be explained by psychological stories, as well as by alternative, rational, risk-based stories. 6.3.1 Speculative bubbles and other macro-inefficiencies Robert Shiller’s book Irrational Exuberance, which summarizes his work of over 20 years, was published, with some luck, in March 2000 just at the peak of the equity bubble. Shiller’s timing was only slightly off with the second edition which emphasized housing market overvaluation; it came out in 2005, two years before the U.S. real estate bubble burst. Since Shiller’s thinking on this topic is as insightful and influential as anyone’s, I describe his theory on bubbles before discussing some other analyses. Shiller argues that equity market bubbles have four elements:1. Precipitating factors. What gets the bubble started? In the late 1990s, the Internet boom was the most important factor, but other important factors included improving macro-fundamentals (lower inflation and real yields) and the tendency of middle-aged baby-boomers, with high savings rates, to allocate much of their buying to the stock market. 2. Amplification mechanisms.

Other research also confirms that fast credit growth and financial deregulation /innovation are common characteristics of major booms that end in tears. Bubbles have a long, infamous history since the Dutch tulip mania (1637) and the South Sea and Mississippi company bubbles (both about 1720). Wall Street in 1929, Japan in 1989, and global technology stocks in 1999 are the most famous equity market bubbles of the past century. Of course, there are alternative explanations for these high equity prices but the explanations involving purely rational stories, such as time-varying risk premia, are unsatisfactory. Credit and real estate bubbles may be even more detrimental to the real economy than equity bubbles, because the former reside closer to the heart of the financial system and may be harder to detect [4].


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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, asset-backed security, bank run, banking crisis, barriers to entry, Basel III, Big bang: deregulation of the City of London, bilateral investment treaty, 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, crony capitalism, currency manipulation / currency intervention, currency peg, dark matter, Deng Xiaoping, disintermediation, ending welfare as we know it, 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, sovereign wealth fund, special drawing rights, special economic zone, structural adjustment programs, 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

The close linkages between these markets and the American state were thus crucial both to the making of the US housing bubble and to its profound global impact when it burst, as mortgage-backed securities became difficult to value and to sell, thus freezing the world’s financial markets. But crucially important in explaining why the financial crisis turned into such a severe economic crisis was that the collapse of housing prices also undermined workers’ main source of wealth, leading to a dramatic fall in US consumer spending. The bursting of the housing bubble thus had much greater effects than had the earlier bursting of the stock-market bubble at the turn of the century, and much greater implications for global capitalism in terms of the role the US played as “consumer of last resort.” In true imperial fashion, the US fully shared its problems with the rest of the world. Given the role of US financial assets and consumer spending in global capitalism, illusions that other regions might be able avoid the crisis were quickly dispelled.

After 1926 the Federal Reserve kept US interest rates low, in order to support sterling following Britain’s return to the gold standard; yet the main effect of low interest rates was to shift funds from bonds to further speculation in already overheated US stock and real-estate markets. Then, when in 1928 the Fed undertook a relatively modest interest-rate increase to dampen this down, it triggered a massive diversion of funds away from foreign loans, with immediate deflationary effects abroad. Finally the sudden bursting of the stock and real-estate market bubbles in October 1929 more or less completely cut off the flow of US credit that had kept the rickety international financial system going through the 1920s.34 On the eve of the 1929 New York stock market crash, the American economy accounted for no less than 42 percent of global industrial production—far more than Britain’s share even at its peak in 1870.35 That said, the development of the US domestic economy was itself highly uneven.

The Plaza Accord only finally ended what Japan’s own finance minister admitted was the American state’s long-standing toleration of an exchange rate that had amounted to a “subsidy to Japan’s exports to the United States and an import surcharge on US exports to Japan.”71 Japanese banks briefly came to dominate the standard rankings of the world’s largest financial institutions as they provided easy credit for Japan’s historically unprecedented purchase of assets abroad, and became conduits for a real estate and stock-market bubble inside Japan. But their vastly expanded assets concealed highly questionable lending and corporate reporting practices, as well as a technological backwardness that belied their size and prominence (in the late 1980s check-clearing in Tokyo was still done by hand rather than computer, and there were as yet no twenty-four-hour ATMs).72 Even before Plaza, Japanese banks were already implicated in the collapse of Continental Illinois, and after Plaza they were even more implicated in the US stock market crash of 1987.73 At the same time, the Ministry of Finance and the Bank of Japan not only had increasingly less effective control over what was happening in their domestic financial system, but also demonstrated little interest in seeing the yen displace the dollar as the world’s reserve currency—much less in assuming the responsibilities of global financial leadership.


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A Random Walk Down Wall Street: The Time-Tested Strategy for Successful Investing by Burton G. Malkiel

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accounting loophole / creative accounting, Albert Einstein, asset allocation, asset-backed security, backtesting, Bernie Madoff, BRICs, capital asset pricing model, compound rate of return, correlation coefficient, Credit Default Swap, Daniel Kahneman / Amos Tversky, diversification, diversified portfolio, Elliott wave, Eugene Fama: efficient market hypothesis, experimental subject, feminist movement, financial innovation, fixed income, framing effect, hindsight bias, Home mortgage interest deduction, index fund, invisible hand, Isaac Newton, Long Term Capital Management, loss aversion, margin call, market bubble, mortgage tax deduction, new economy, Own Your Own Home, passive investing, pets.com, Ponzi scheme, price stability, profit maximization, publish or perish, purchasing power parity, RAND corporation, random walk, Richard Thaler, risk tolerance, risk-adjusted returns, risk/return, Robert Shiller, Robert Shiller, short selling, Silicon Valley, South Sea Bubble, The Myth of the Rational Market, The Wisdom of Crowds, transaction costs, Vanguard fund, zero-coupon bond

The chart The Japanese Stock-Market Bubble: Japanese Stock Prices Relative to Book Values, 1980–2000 shows quite dramatically that the rise in stock prices during the mid-and late 1980s represented a change in valuation relationships. The fall in stock prices from 1990 on simply reflected a return to the price-to-book-value relationships that were typical in the early 1980s. The air also rushed out of the real estate balloon during the early 1990s. Various measures of land prices and property values indicate a decline roughly as severe as that of the stock market. The bursting of the bubble destroyed the myth that Japan was different and that its asset prices would always rise. The financial laws of gravity know no geographic boundaries. THE JAPANESE STOCK-MARKET BUBBLE JAPANESE STOCK PRICES RELATIVE TO BOOK VALUES, 1980–2000 Source: Morgan Stanley Research and author’s estimates.

Of course, my friend had bought in just at the height of the bubble, and he lost his entire investment when the firm declared bankruptcy. The ability to avoid such horrendous mistakes is probably the most important factor in preserving one’s capital and allowing it to grow. The lesson is so obvious and yet so easy to ignore. THE U.S. HOUSING BUBBLE AND CRASH OF THE EARLY 2000s Although the Internet bubble may have been the biggest stock-market bubble in the United States, the bubble in single-family home prices that inflated during the early years of the new millennium was undoubtedly the biggest U.S. real estate bubble of all time. Moreover, the boom and later collapse in house prices had far greater significance for the average American than any gyrations in the stock market. The single-family home represents the largest asset in the portfolios of most ordinary investors, so falling home prices have an immediate impact on family wealth and sense of well-being.

We know now that real estate prices in the United States were wildly overpriced in 2006 and early 2007. We know now that there would have been enormous opportunities for profit by selling short Internet stocks in early 2000 and selling overpriced homes and commercial real estate in 2007. But neither of those mispricings was nearly as obvious before the crash occurred in both markets. Critics would argue that the technology-Internet stock-market bubble was easy to identify as it was inflating. Robert Shiller published his book Irrational Exuberance in early 2000, just at the peak of the market. True, but the same models that identified a bubble in early 2000 also identified a vastly “overpriced” stock market in 1992, when low dividend yields and high price-earnings multiples suggested that long-run equity returns would be close to zero in the United States.


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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, asset-backed security, 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, centre right, collapse of Lehman Brothers, 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, Isaac Newton, 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

On 14 December, Pole & Co. stopped payment, which put forty of its correspondent county banks out of business.15 Pole & Co. had been put under pressure by an old-fashioned bank run, when depositors simply withdrew their money from the bank. The bank failures were only the last development of what had been a tumultuous year. The South American mining stocks also collapsed in dramatic fashion. One man caught up in the excitement of the stock market bubble was the young Benjamin Disraeli, a twenty-year-old Jewish adventurer, determined to make a name for himself in literature. The young Disraeli was a mere solicitor’s clerk who eagerly and cynically speculated in South American shares. After the South American republics, which were fighting wars of independence from Spain, had been recognized as sovereign states just after Christmas 1824, there was a huge boom in the shares.

In March 1825 there appeared Disraeli’s first published work, an anonymous pamphlet, nearly a hundred pages in length, entitled An Enquiry into the Plans, Progress, and Policy of the American Mining Companies. Disraeli wrote a further two pamphlets, the last of which was entitled The Present State of Mexico. These works were largely fictional accounts of the immense resources which were said to underpin the mining securities. Disraeli fatally borrowed money ‘on margin’ to acquire the stocks, and was £7,000 in debt by June 1825 when the stock-market bubble burst. These debts would hang over his finances for decades.16 Despite the outward show of respectability, it must be remembered that Victorian finance was often a highly speculative affair. The era of the gold standard was also an era when prominent financiers could go bankrupt and, metaphorically at least, lose their shirts. The British government may have ‘virtually balanced’ its budget in every year from 1815 to 1914, but at least four out of eight Governors of the Bank of England between 1833 and 1847 (Governors held the post for two years before handing over to the Deputy Governor) suffered the humiliation of personal bankruptcy.17 One of these six Governors was the unfortunate William Robinson, a corn dealer, who became bankrupt during his governorship.

Blinder, a Princeton professor who had served as Vice Chairman of the Federal Reserve, ‘for the most part [they] meant what Greenspan wanted to do’.4 It became fashionable to blame Greenspan after the financial crisis of 2008 had damaged the US economy. Indeed, in February 2009, Time magazine listed the former central banker at number three in their list of ‘25 People to Blame for the Financial Crisis’.5 Yet, even before the memorable events of 2008, some critics had already begun to blame him for overheating the economy. In its August 2005 article, the New York Times accused him of presiding over ‘a stock market bubble that burst’. His attempts to mitigate the collapse of stock prices had led, in turn, to the ‘housing boom’ and to the ‘potential bust’. The Times also pointed to the accumulation of ‘heavy foreign debt’. This had a simple cause: the Federal Reserve ‘drove interest rates so low that Americans borrowed more and saved less’.6 Greenspan’s belief in the efficacy of free markets had led him to a relaxed view of regulation, and to a scepticism about rigid control of economic variables.


pages: 490 words: 117,629

Unconventional Success: A Fundamental Approach to Personal Investment by David F. Swensen

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asset allocation, asset-backed security, capital controls, cognitive dissonance, corporate governance, diversification, diversified portfolio, fixed income, index fund, law of one price, Long Term Capital Management, market bubble, market clearing, market fundamentalism, passive investing, pez dispenser, price mechanism, profit maximization, profit motive, risk tolerance, risk-adjusted returns, Robert Shiller, Robert Shiller, shareholder value, Silicon Valley, Steve Ballmer, technology bubble, the market place, transaction costs, Vanguard fund, yield curve

The 3.4 percent holding period increment, realized by PCA bondholders over the three and one-half years, represents scant compensation for accepting a high degree of credit risk. U.S. Treasuries produced risk-adjusted returns significantly higher than those realized by holders of the PCA9.625s. Holders of PCA stock faced a tough set of circumstances. In contrast to the strong market enjoyed by bondholders, equity owners faced a dismal market environment. From the date of PCA’s IPO, which took place near the peak of one of the greatest stock market bubbles ever, to the bond-tender offer date, the S&P 500 declined a cumulative 24.3 percent. Bucking a decidedly adverse market trend, PCA’s equity rose from the initial offering price of $12.00 in January 2000 to $18.05 on July 21, 2003, representing a holding-period gain of 50.4 percent. Even in the worst of worlds for equity holders and the best of worlds for bondholders, the equity owners of PCA eked out a victory.

Not until more than four years after the crash did the equity share of mutual-fund assets rise to the pre-crash level. Not until nearly five years later did money-market assets decline to the pre-crash level. Amid one of the greatest bull markets of all time, mutual-fund investors held cash-heavy, equity-light portfolios. INVESTOR REACTION TO THE INTERNET BUBBLE Investors receive similarly poor marks for their asset allocation of mutual funds during the inflation and deflation of the 1990s stock market bubble. Throughout the bull market, mutual-fund investors consistently increased stock holdings at the expense of bond and money-market allocations. Consider the period from 1993 to 2000. Investors registered equity-allocation readings in the 30 percent range in 1993 and 1994, in the 40 percent range from 1995 through 1997, in the 50 percent range in 1998 and 1999, and in excess of 60 percent at the market peak in 2000.

When an asset class performs relatively well, rebalancing requires compensating sales. Under normal market conditions, rebalancers occupy a mildly contrarian space, seen as slightly out of step with conventional wisdom. In times of severe market stress, rebalancing takes on a decidedly dramatic cast. Market collapses require substantial purchases in an environment pervaded by bearish sentiment. Market bubbles require substantial sales in an environment suffused with bullish enthusiasm. Under extraordinary market conditions, rebalancers must demonstrate unusual determination and fortitude. In spite of the central importance of rebalancing to effective portfolio management, investors appear largely indifferent to the process. Evidence indicates that, at best, investors allow portfolios to drift with the ebb and flow of the market, causing strong relative performance to increase allocations and weak relative performance to diminish holdings.


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, asset-backed security, bank run, banking crisis, banks create money, Berlin Wall, Black Swan, central bank independence, credit crunch, Credit Default Swap, crony capitalism, 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

Greenspan cemented his status as a guru with unique foresight in the mid-1990s with an intellectually courageous call that the Internet-based New Economy was so fundamentally changing the U.S. economy that the Fed could permit the economy to grow faster than most inflation-fearing economists thought prudent. The result was lower unemployment without higher inflation — and a technology stock market bubble for which Greenspan got substantial blame. But even after that bubble burst, and a recession ensued, the Greenspan Fed managed to get the economy going again by aggressively cutting interest rates — and the United States avoided the misery that followed the bursting of a real estate and stock market bubble in Japan. Bush was right. Greenspan was a rock star — at least at that moment. He had steered the U.S. economy around the Asian financial crisis in 1998, two wars with Iraq, and the September 11 attacks. To economists, bond traders, and businessmen, he was a hero.

Indeed, this was an assumption on which an entire financial house of cards rested. And it was wrong. Greenspan’s unwillingness to attack the housing bubble wasn’t only about misreading signs. It also reflected a philosophical view about central banks targeting rising asset prices. In an approach Bernanke backed at the time, Greenspan argued that central banks shouldn’t increase interest rates to attack possible market bubbles because they can’t always distinguish a transitory bubble from a sustainable rise in prices. Simply put, the Fed was as likely to aim at a false bubble and kill economic growth as it was to prevent one from inflating. Greenspan also argued that the central bankers’ other tool — talking investors out of their euphoria — was extremely limited. His famous “irrational exuberance” warning came in December 1996 when the Dow Jones Industrial Average was at 6,500.


pages: 383 words: 108,266

Predictably Irrational, Revised and Expanded Edition: The Hidden Forces That Shape Our Decisions by Dan Ariely

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air freight, Al Roth, Bernie Madoff, Burning Man, butterfly effect, Cass Sunstein, collateralized debt obligation, computer vision, corporate governance, credit crunch, Daniel Kahneman / Amos Tversky, David Brooks, delayed gratification, endowment effect, financial innovation, fudge factor, Gordon Gekko, greed is good, housing crisis, invisible hand, lake wobegon effect, late fees, loss aversion, market bubble, Murray Gell-Mann, payday loans, placebo effect, price anchoring, Richard Thaler, second-price auction, Silicon Valley, Skype, The Wealth of Nations by Adam Smith, Upton Sinclair

But in the wake of a number of financial crises, from the dot-com implosion of 2000 to the subprime mortgage crisis of 2008 and the financial meltdown that followed, we were rudely awakened to the reality that psychology and irrational behavior play a much larger role in the economy’s functioning than rational economists (and the rest of us) had been willing to admit. It all started from questionable mortgage practices, augmented by collateralized debt obligations (CDOs are securities based mostly on mortgage payments). In turn, the CDO crisis accelerated the deflation of the housing market bubble, creating a reinforcing cycle of decreasing valuations. It also brought to light some questionable practices of various players in the financial services industry. In March 2008, JP Morgan Chase acquired Bear Stearns at two dollars per share, the low valuation resulting from the fact that Bear Stearns was under investigation for CDO-related fraud. On July 17, major banks and financial institutions that had bet heavily on CDOs and other mortgage-backed securities posted a loss of almost $500 billion.

Who knows? If such calculators had existed during the last 10 years, maybe much of the mortgage fiasco would have been avoided. Despite my belief in the desire of borrowers to make the right decisions (and to avoid the disastrous outcomes of making wrong decisions), I must admit that even if some of the banks had created better mortgage calculators, it is possible that in the delirium of the housing market bubble, zealous bankers and real estate brokers could still have pushed people to borrow more and more. This is where regulators could have stepped in. After all, regulation is a very useful tool to help us fight our own worst tendencies. In the 1970s, regulators placed strict limits on mortgages. They dictated the share of income that could be used to pay a mortgage, the amount of down payment required, and the proof that borrowers had to show to document their income.

procedures and, 62–63 mandatory checkups and, 118 patient compliance and, 260–64 placebo effect and, 173–94, 275–78; see also placebo effect price of medical treatments and, 176, 180–87, 190 public policy and spending on, 190 scientifically controlled trials and, 173–76 self-imposed deadlines and, 118–19 helping, thinking about money and, 74, 75 herding, 36–38 self-herding and, 37–38 Heyman, James, 69–71, 136, 336–37 HIV-AIDS, 90 Holy Roman emperors, placebo effect and, 188 Home Depot, 78 Honda, 120, 121 honesty, 195–230 contemplation of moral benchmarks and, 206–9, 213 dealing with cash and, 217–30 importance of, 214–15 as moral virtue, 203 oaths and, 208–9, 211–13, 215 reward centers in brain and, 203, 208 Smith’s explanation for, 202, 214 superego and, 203–4, 208 see also dishonesty Hong, James, 21 honor codes, 212–13 hormones, expectation and, 179 house sales: anchoring and, 30-31 relativity and, 8–9, 19 value in owner’s eyes and, 129, 135, 265–69 housing market: bubble in, 289–90 decreasing valuations and, 265–66, 279 I ice cream, FREE!, time spent on line for, 61 “Ikea effect,” 135 immediate gratification: e-mail and, 255–59 unpleasant medical treatments and, 261–64 imprinting, 25, 34, 43 see also anchoring indecision, 151–53 individualism, 68 thinking about money and, 74, 75 ingredients, exotic-sounding, 164–65 innovation, increased globalization and, 316–18 insurance fraud, 196, 223 insurance industry, 296 punitive finance practices of, 299-301 spreading cost of, 304 interest-only mortgages, 287–88 interferon, 260–64 internal mammary artery ligation, 173–74, 191 inventiveness, 68 IRA (Irish Republican Army), 156–57 Iran, lack of trust in, 214–15 irrational behaviors, xxix–xxx opportunities for improvement and, 240–44 systematic and predictable nature of, xxx, 239 see also specific topics IRS (Internal Revenue Service), 196 J Japan, savings rate in, 109 jealousy, comparisons and, 15–19 Jerome, Jerome K., 273–74 job performance. 320–24 public scrutiny and, 322 relationship between compensation and, 320–21, 322–24 Jobst suit, 192–94 Johnston, David Cay, 204 JP Morgan Chase, 280 judgment and decision making (JDM), xxviii see also behavioral economics “Just say no” campaign, 100, 101 K Kahneman, Daniel, 19, 129 Keeney, Ralph, 264 knee surgery, arthroscopic, 174–76 Knetsch, Jack, 129 Knight-McDowell, Victoria, 277 Koran, 215 L “Lake Wobegone Effect,” 268–69 Latin America, lack of trust in, 214 Lay, Kenneth, 219 learned helplessness, 312–16 experiments on, 312–14 in financial meltdown, 314–16 recovering from, 315–16 Leaves of Grass (Whitman), 40–41 Lee, Leonard, 21, 157–59, 161, 337 legal profession: attempts at improving ethics of, 213–14 decline of ethics and values in, 209–10 Lehman Brothers, 280, 310 leisure, blurring of partition between work and, 80, 81 Leland, John, 122–23 Leo III, Pope, 188 Leonardo da Vinci, 274 Levav, Jonathan, 231–37, 337 Levitt, Steven, xvi Li, Jian, 166–68 Lincoln, Abraham, 177 Linux, 81 List, John, xvi loans: punitive finance practices and, 300–301, 304 see also mortgages lobbyists, congressional restrictions on, 205 Loewenstein, George, 21, 26, 30–31, 39, 89,, 320–21, 337–38 Logic of Life, The (Harford), 291–92 Lorenz, Konrad, 25, 43 loss: aversion to, 134, 137, 138, 148–49 fear of, 54–55 Lost World, The (Crichton), 317–18 loyalty: in business-customer relations, 78–79 of employees to their companies, 80–84 M Macbeth (Shakespeare), 188 Madoff, Bernard, 291 Maier, Steve, 312-13 major, college students’ choice of, 141–42 manufacturer’s suggested retail price (MSRP), 30, 45 marketing: high price tag and, 24–25 hype of, related to satisfaction derived from product, 186–87, 190–91 relativity and, 1–6, 9–10 “trial” promotions and, 136–37 zero cost and, 49–50 market norms, 67–88 companies’ relations with their customers and, 78–80 companies’ relations with their employees and, 80–84, 252–54 doing away with, 86–88 education and, 85 mere mention of money and, 73–75 mixing signals of social norms and, 69, 73–74, 75–77, 79, 214, 250–52 reducing emphasis on, 88 social norms kept separate from, 67–69, 75–76, 77–78 willingness to risk life and, 84 working for gifts and, 72–74 working under social norms vs., 69–72 Maryland Judicial Task Force, 210 Mazar, Nina, 196–97, 206, 219–20, 224, 320–21, 338 McClure, Sam, 166–68 Mead, Nicole, 74–75 medical benefits, recent cuts in, 82 medical care, see health care medical profession: conflicts of interest and, 293, 295 decline of ethics and values in, 210 salaries of, as practicing physicians vs.


pages: 248 words: 57,419

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

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asset-backed security, 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

But thanks to you, we won’t do it again. —Fed Governor Ben Bernanke1 What a pity that Bernanke did not read Ludwig von Mises instead of Milton Friedman in graduate school! If he had, he would have known that credit creates the boom and that all booms bust. Instead, he was taught that the Great Depression occurred because the Fed made two mistakes: 1. It increased interest rates in late 1928 to slow down the stock market bubble. 2. It did not print money and bail out all the banks when the credit the banks had extended could not be repaid. By putting into practice those mistaken lessons drawn from the Great Depression, Bernanke and his colleagues at the Federal Reserve have brought upon the United States and the world the New Depression. Guided by a flawed interpretation of historic events, the Fed, beginning with Greenspan and continuing under Bernanke, has done absolutely everything in its power to perpetuate the credit boom in the United States.

In other words, there has been no adjustment to the global imbalances that played a leading role in creating this economic disaster. The elimination of those imbalances is inevitable, and it still lies ahead. Looking ahead, the rest of the world won’t buy more from the United States. It will buy less. When the United States buys less from other countries, other countries have fewer dollars and so will buy less from the United States. That was one of the lessons from 2001 when the stock market bubble popped and from 2008 when the housing bubble popped. External factors will exacerbate the depression in the United States during the years ahead, not ameliorate it. Vision and Leadership Are Still Lacking The adoption of fiat money permitted the abuse of Keynesian stimulus on a scale that would have horrified John Maynard Keynes, and it opened up possibilities for credit expansion that earlier generations of economists would not have dreamt possible.

Global Financial Crisis by Noah Berlatsky

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accounting loophole / creative accounting, asset-backed security, banking crisis, Bretton Woods, capital controls, Celtic Tiger, centre right, collapse of Lehman Brothers, 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, structural adjustment programs, too big to fail, trade liberalization, transfer pricing, working poor

Property prices rose at a similar rate to the United States and ever since 2002–03 the Australian household savings rate has been negative. Back in June 2005, the Economist published these prophetic words: “Never before have real house prices risen so fast, for so long, in so many countries. Property markets have been frothing from America, Britain and Australia to France, Spain and China. Rising property prices helped to prop up the world economy after the stock-market bubble burst in 2000. What if the housing boom now turns to bust?” These frothy property prices were fuelled by a combination of low interest rates, loosening lending standards, growing consumer appetite for debt and extensive use of securitisation [pooling and repackaging], which effectively allowed home buyers to access capital from all around the world. 87 The Global Financial Crisis It has been estimated that from 2004 to 2006, more than 20% of new US mortgages were taken out by “subprime” borrowers with poor credit histories and limited capacity to service their loans.

., 65, 66, 70–71, 144, 147 unrest, 19, 25, 108–120, 139– 140 Clearinghouse regulations, 49–50 Climate change policy, 26, 163 Collateralized debt obligations (CDOs), 50, 88 Colombia, 161–162, 180, 182, 183, 184 Common Cause, 205–206 Communist Party, China, 110, 114–116, 139–140 Comparative advantage, 192–193 Competitiveness, financial, 48–49 Congress business subsidies, 202, 203, 204, 205–206 hearings, 175 predatory lending, 206 protectionism and trade agreements, 181, 182, 184 Construction industry, 34, 130, 131, 133 Consumer confidence, 63, 91, 100, 208, 213, 216 Corporate welfare, 201, 202–206 See also Bailouts Cox, Pamela, 158–159 Credit default swaps (CDSs), 17, 28, 29, 50, 175–176, 215 Credit derivatives. See Derivatives Credit markets bubble/freezes, 34–35, 208, 211, 212 securitization’s effects, 56, 82, 89–90 Credit ratings, national, 94, 95, 100 Credit risks, 17, 28 See also Derivatives Currency instability, 59–64, 103, 106, 118 Czech Republic, 99 D Daremblum, Jaime, 180–185 Darling, Alistair, 113, 222 David Rockefeller Center for Latin American Studies, 158 Davos, Switzerland World Economic Forum, 2009, 22–26, 113 Debt relief, 193, 198–199 Defaults, mortgages, 34 Deflation Europe, 97–98, 99 Federal Reserve avoidance measures, 41 Japan, 209, 215 Dembele, Demba Moussa, 186– 200 Denmark, 95 Dennis, Felix, 60 251 The Global Financial Crisis Deposit insurance, 150, 154, 208– 209, 213, 214, 229 Deposit Insurance Corporation of Japan, 208–209, 210, 218 Deposits.


pages: 272 words: 19,172

Hedge Fund Market Wizards by Jack D. Schwager

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asset-backed security, backtesting, banking crisis, barriers to entry, Bernie Madoff, Black-Scholes formula, British Empire, Claude Shannon: information theory, cloud computing, collateralized debt obligation, commodity trading advisor, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, delta neutral, diversification, diversified portfolio, family office, financial independence, fixed income, Flash crash, hindsight bias, implied volatility, index fund, James Dyson, Long Term Capital Management, margin call, market bubble, market fundamentalism, merger arbitrage, oil shock, pattern recognition, pets.com, Ponzi scheme, private sector deleveraging, quantitative easing, quantitative trading / quantitative finance, risk tolerance, risk-adjusted returns, risk/return, riskless arbitrage, Sharpe ratio, short selling, statistical arbitrage, Steve Jobs, systematic trading, technology bubble, transaction costs, value at risk, yield curve

Therefore, whereas Apple seemed adequately priced based on current earnings (a forward prospective P/E of 16 at the time of the interview), it was screamingly cheap based on Taylor’s estimate of earnings three years forward (a P/E under 5). Investors often make the mistake of equating manager performance in a given year with manager skill. In some instances, more skilled managers will underperform because they refuse to participate in market bubbles. In fact, during market bubbles, the best performers are often the most imprudent rather than the most skilled managers. Taylor underperformed in 1999 because he thought it was ridiculous to buy tech stocks at their inflated price levels. This same investment decision, however, was one of the key reasons why he strongly outperformed in subsequent years when these stocks experienced an extended slide. 1The fund documents required Taylor to give investors a 12-month notice before terminating the fund. 2MSCI Emerging Europe index 1995–2002 and MSCI Global Emerging Markets index 2003–2011. 3“The city” is a small historic section in central London that is the heart of the financial district. 4It is an accounting tautology that the sum of the current account balance and the capital account balance is equal to the change in net reserves.

The popular perception of the successful global macro manager is a trader who has an ability to forecast major trends in world markets (FX, interest rates, equities, commodities) through skillful analysis and insight. O’Shea emphasizes that his edge is not forecasting what will happen, but rather recognizing what has happened. O’Shea believes that it is very difficult to pick a major turning point, such as where a market bubble will top, and that trying to do so is a losing strategy. Instead, he waits until events occur that confirm a trading hypothesis. For example, he thought that excessive risk-taking during 2005 to 2007 had inflated various markets beyond reasonable levels and left the financial markets vulnerable to a major selloff. Nevertheless, insofar as he sees his role as trading in response to the prevailing market facts, rather than forecasting turning points, he actually had bullish positions on during this time.

Since his bearish hypothesis was inconsistent with the market price action, he formulated an entirely different hypothesis that seemed to fit what was happening—that is, the markets were seeing the beginning of an Asia-led economic recovery. Staying with his original market expectation would have been disastrous, as both equity and commodity markets embarked on a multiyear rally. The flexibility to recognize that his premise was mistaken and to act on that awareness allowed O’Shea to experience a profitable year, even though his original market outlook was completely wrong. O’Shea believes that the best way to trade a market bubble is to participate on the long side to profit from the excessive euphoria, not to try to pick a top, which is nearly impossible and an approach vulnerable to large losses if one is early. The bubble cycle is easier to trade from the long side because the uptrend in a bubble is often relatively smooth, while the downtrend after the bubble bursts tends to be highly erratic. There are two components necessary to successfully trade the long side of a bubble.


pages: 280 words: 73,420

Crapshoot Investing: How Tech-Savvy Traders and Clueless Regulators Turned the Stock Market Into a Casino by Jim McTague

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algorithmic trading, automated trading system, Bernie Madoff, Bernie Sanders, Bretton Woods, buttonwood tree, credit crunch, Credit Default Swap, financial innovation, Flash crash, High speed trading, housing crisis, index arbitrage, locking in a profit, Long Term Capital Management, margin call, market bubble, market fragmentation, market fundamentalism, naked short selling, pattern recognition, Ponzi scheme, quantitative trading / quantitative finance, Renaissance Technologies, Ronald Reagan, Sergey Aleynikov, short selling, Small Order Execution System, statistical arbitrage, technology bubble, transaction costs, Vanguard fund, Y2K

, resonated as loudly with investors in 2010 as it did when he first published his classic Wall Street book of the same title in 1940.1 The particular thrashing that engendered the sweeping market reforms of 2005 took place in 1969 and 1970 when a stock market bubble burst and the consequent bear market slashed into Wall Street’s brokerage profits, exposing the undercapitalized positions of more than 100 brokerage firms.2 This massive collapse of so-called “white shoe” firms marked the first significant catastrophe for Wall Street since the Great Depression, and it was a wakeup call for Congress that the New York Stock Exchange (NYSE) and its regulator, the Securities and Exchange Commission (SEC), were not on the ball.3 The capital crisis was part of a one-two punch. The first punch was an embarrassing paperwork fiasco in 1968. Brokerage houses were overwhelmed by an unexpected influx of new customers at the zenith of a stock market bubble. The newcomers, expecting to get rich quickly, invested heavily in smaller, highly speculative stocks.


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

But often a bubble is generated by a belief that turns out to be mistaken that fundamentals are changing—that a market, or maybe the entire economy, is entering a new era of growth, for example because of technological advances. Indeed that is probably the main cause of bubbles. A stock market bubble developed in the 1920s, powered by plausible optimism (the years 1924 to 1929 were ones of unprecedented economic growth) and enabled by the willingness of banks to lend on very generous terms to people who wanted to play the stock market. You had to put up only 10 percent of the purchase price of the stock; the bank would lend the rest. That was risky lending, since stock prices could and did decline by more than 10 percent, and explains why the bursting of the stock market bubble in 1929 precipitated widespread bank insolvencies. New profit opportunities and low interest rates had led to overindebtedness, an investment bubble, a freezing of credit when the bubble burst because the sudden and steep fall in asset prices caused a cascade of defaults, a rapid decline in consumption because people could not borrow, and finally deflation.


pages: 268 words: 74,724

Who Needs the Fed?: What Taylor Swift, Uber, and Robots Tell Us About Money, Credit, and Why We Should Abolish America's Central Bank by John Tamny

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Airbnb, bank run, banks create money, Bernie Madoff, bitcoin, Bretton Woods, Carmen Reinhart, correlation does not imply causation, Credit Default Swap, crony capitalism, crowdsourcing, Donald Trump, Downton Abbey, fiat currency, financial innovation, Fractional reserve banking, full employment, George Gilder, Home mortgage interest deduction, Jeff Bezos, job automation, Joseph Schumpeter, Kenneth Rogoff, Kickstarter, liquidity trap, Mark Zuckerberg, market bubble, moral hazard, mortgage tax deduction, NetJets, offshore financial centre, oil shock, peak oil, Peter Thiel, price stability, profit motive, quantitative easing, race to the bottom, Ronald Reagan, self-driving car, sharing economy, Silicon Valley, Silicon Valley startup, Steve Jobs, The Wealth of Nations by Adam Smith, too big to fail, Uber for X, War on Poverty, yield curve

See federal government Corker, Bob, 43 credit and access to real resources, 2, 3, 47 already possessed by individuals, 22, 163 Ben Bernanke and “crony credit,” 41–47 coaching and recruiting of college athletes, 15–21 “credit circles,” 107 credit surges, 58 and division of labor, 66 and Donald Trump, 33–37 and excessive federal government spending, 51, 53–55, 59–63 failures as credit in Silicon Valley, 27–32 and the fracking boom, 66–67, 73–75 housing boom and “easy credit,” 113–22 inability of government to create, 81–82 and Keynesian economics, 78–82 lack of in Soviet Union, 76–78, 80 Lending Club, 107–8 and market “bubbles,” 56–60 oil price declines and rising cost of credit, 146–48 Paulson & Co., 44–45 personal “recessions” and access to credit, 25–26 produced by individuals in the real economy, 3 and supply-side economics, 48–55 See also banking; the Fed A Curious Mind (Grazer), 23 Da Sweet Blood of Jesus (film), 110 Dead Bank Walking (Smith), 164 “death of distance,” 58 Decade of Greed, 33 Dell computers, 109, 125 Dell, Michael, 60 demand as result of production and growth, 140–41, 149 Detroit, Michigan, 99, 140 devaluation, housing booms and value of the dollar, 116–22 Dierdorf, Dan, 16 Dobbs, Lou, 160 the dollar and bank cash reserve requirements, 100 FDR’s devaluation of, 142, 167–69 fluctuating value of, 167–72 gold standard and the price of oil, 68–70 housing booms and value of the dollar, 116–22 inflation and value of the dollar, 43 “money multipliers” and “fractional lending,” 87–90 money supply and value of the dollar, 144 Downey, Robert, Jr., 25–26 Drexel Burnham investment bank, 38–40 Economics in One Lesson (Hazlitt), 22, 64, 74, 113, 163, 176 economy Austrian School of economics, 79, 87, 88–89, 90, 91–95, 113–14, 141 as collection of individuals, 25, 128 economic growth as Cheap Revolution, 160–61 governmental barriers to economic growth and prosperity, 3, 155–56 Keynesian economics, 78–82, 88, 93–96, 140–41 market forces, 1–2, 59–60 production and money supply, 136–37 and quantitative easing (QE) program, 149–54 the real economy and government spending, 4 resource expansion resulting from surprise, 30 robots and job creation, 177–80 supply-side economics, 48–55, 79–80, 92–94, 141, 144 The Economy in Mind (Brookes), 49 Edison, Thomas, 29–30 electricity, Tennessee Valley Authority (TVA), 61 The Elephant and the Dragon (Meredith), 96 Ellison, Larry, 60 entrepreneurs and failure, 28 and innovation, 66 and price cutting, 73 ESPN, 109 Eton Park Capital, 45 Export-Import Bank (Ex-Im), 61 Facebook, 28–29, 143 FailCon, 27 failure as credit in Silicon Valley, 27–32 as feature of capitalism, 58, 89, 100, 125 and innovation, 57–58 Fairchild Semiconductor, 31 Fannie Mae, 119, 120, 173 federal budget deficits, 50 Federal Deposit Insurance Corporation (FDIC), 101–2 federal government excessive spending of, 51, 53–55, 59–63, 173–74 involvement with Wall Street, 129–31 and Keynesian economics, 78–82, 93–96, 147 money supply and value of the dollar, 144 size of, 50–51 the Fed (Federal Reserve Bank) and access to credit, 13–14, 31–32 as barrier to economic growth and prosperity, 5 and Ben Bernanke, 41–47 creation of, 105–6 and easy credit, 2–5, 36–37, 80, 146–48 and excessive power of central banks, 45–46 and high-yield “junk bonds,” 37, 39–40 housing boom and “easy credit,” 113–16, 121–22 inability to create credit, 1–5, 141 on inflation as source of economic growth, 156–61, 165–66 interbank lending rates, 114–16, 156–58 and the money supply myth, 138–45, 158 necessity of, 163–66 quantitative easing (QE) program, 149–54, 172 and the Roaring Twenties, 94–95 Troubled Asset Relief Program (tarp), 172–73 and 2008 financial crisis, 106, 110 Fergusson, Adam, 90–91, 121 film industry and credit extended to filmmakers, 22–26, 27–28 The Financial Crisis and the Free Market Cure (Allison), 119 Flamson, Dick, 35, 101 football players and coaches, 15–21, 78–79 Forbes, Steve, 69, 72 The Forgotten Man (Shlaes), 167–69 The Frackers (Zuckerman), 71 fracking boom, 66–67, 73–75 “fractional lending,” 87–90 Freddie Mac, 119, 120, 173 free markets, 2–3, 11–14 free trade and division of labor, 65–66 Friedman, Milton, 54, 135–36, 137, 138 Frum, David, 117–18 Garrett, Mike, 19 Gates, Bill, 30–31, 59 Geithner, Tim, 171 General Electric, 30 Get on Up (film), 25 Gilder, George, 30, 56, 57, 59, 68, 94, 118, 121, 135–36 Giuliani, Rudolph, 38 Glass-Steagall Act, 102–3, 119–20 Globe.com, 59, 60 gold and devaluation of the dollar, 142, 167–68 and the price of oil, 68–72 Gold (Lewis), 141, 171 Goldman Sachs, 41, 44, 45, 46, 127 Google, 143 Gorman, James, 123, 130 government.

., 34 Keynesian economics, 78–82, 88, 93–96, 140–41 Keynes, John Maynard, 78, 147 Kickstarter, 110 Kiffin, Lane, 20 Kinski, Nastassja, 24 Knowledge and Power (Gilder), 57 Kohli, Shweta, 107 Kohn, Donald, 156 Kornbluth, Walter, 22 labor as credit, 15–21 Laffer, Arthur, 55, 137, 157, 158 Laffer curves, 50, 54–55 Lawrence, Jennifer, 37–38 Lee, Spike, 109, 110 Lending Club, 107–8 Leubsdorf, Ben, 156 Levy, Eugene, 22 Lewis, Nathan, 72, 137, 141–42, 144 LewRockwell.com website, 94 Lisa computer, 30 Lombard Street (Bagehot), 46 Luck, Andrew, 16–17 McAdams, Hall, 89–90, 104 McConnell, Mitch, 51 Mack, John J., 123, 130 Madoff, Bernard, 163 Mann, Windsor, 78 Margolis, Eric, 94, 96 market “bubbles,” 56–63 market forces and government spending, 59–60 price of goods versus price of dollars, 1–2 von Mises on, 20, 152 market intervention and the Fed, 159–61 Mazursky, Paul, 24 Medicare, 53, 78, 174 Merrill Lynch, 120 Metro public transit, 10–11 Meyer, Urban, 17–18 Microsoft, 30–31, 125, 143, 155 Milken, Michael, 38–40, 114, 126 Mill, John Stuart, 76 Mindich, Eric, 45–46 Mission Asset Fund, 107 mobile phones, 53–54 monetarism, 135–36, 138 money and Chinese economy, 135–36, 137 and economic activity, 3, 136–37, 140, 143 and gold standard, 68 and the Great Depression, 141–43, 147, 168 market monetarism, 138–39 as measure of wealth, 67–68 monetarism, 135–36, 138 “money multipliers” and “fractional lending,” 87–90 private money supplies, 144–45 and stable currency, 137, 144 Money and Foreign Exchange After 1914 (Cassel), 119 Moore, Gordon, 31 Moore, Stephen, 50–51 Morgan, J.


pages: 251 words: 76,128

Borrow: The American Way of Debt by Louis Hyman

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asset-backed security, barriers to entry, big-box store, cashless society, collateralized debt obligation, credit crunch, deindustrialization, deskilling, diversified portfolio, financial innovation, Ford paid five dollars a day, Home mortgage interest deduction, housing crisis, income inequality, market bubble, McMansion, mortgage debt, mortgage tax deduction, Network effects, new economy, Plutocrats, plutocrats, price stability, Ronald Reagan, statistical model, technology bubble, transaction costs, women in the workforce

The very centrality of installment credit to the New Era is what made it so susceptible to blame for that era’s demise. Historians today do not believe that overextension of installment credit caused the Great Depression—they don’t even discuss it as a viable possibility—but to those who lived through the Great Depression, installment credit’s role was more certain.36 Installment credit, in this view, was akin to the speculative credit that had fed the stock market bubble. The “artifice” of installment credit attracted much blame. In 1932, for example, a Johns Hopkins economics professor identified credit among the three main causes of the Depression: “perversion of the stock exchanges,” “degradation of banking,” and “reckless installment selling.”37 He argued that by hampering savings, America’s installment credit “retard[ed] the growth of its productive capital” and “morally … it loosened the restraint upon recklessness in optional expenditures.”

By enabling the demand for goods that consumers could not otherwise afford—or worse, for which they could budget installment payments but refused to save—installment credit encouraged overinvestment in productive capacity, which could be made profitable only by what The New York Times called the “continuing and increasing doses of the [installment credit] stimulant.”38 Unearned and not quite real, this “artificial stimulus” smacked of excess. As in the stock market bubble, there was only a symbolic value, not a real one. The shocking experience of the crash emerged from the economy’s very unreality. As the undersecretary of the Treasury wrote in 1932, the “sweeping decline was … inevitable” because “the country was living too much on credit.”39 The director of the Federal Reserve Bank of St. Louis, Max Nahm, argued that “if we could pay the debt of the world today, the depression would be over tomorrow.”40 Saving, not spending, would bring prosperity.


pages: 892 words: 91,000

Valuation: Measuring and Managing the Value of Companies by Tim Koller, McKinsey, Company Inc., Marc Goedhart, David Wessels, Barbara Schwimmer, Franziska Manoury

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air freight, barriers to entry, Basel III, BRICs, business climate, business process, capital asset pricing model, capital controls, cloud computing, compound rate of return, conceptual framework, corporate governance, corporate social responsibility, credit crunch, Credit Default Swap, discounted cash flows, distributed generation, diversified portfolio, energy security, equity premium, index fund, iterative process, Long Term Capital Management, market bubble, market friction, meta analysis, meta-analysis, new economy, p-value, performance metric, Ponzi scheme, price anchoring, purchasing power parity, quantitative easing, risk/return, Robert Shiller, Robert Shiller, shareholder value, six sigma, sovereign wealth fund, speech recognition, technology bubble, time value of money, too big to fail, transaction costs, transfer pricing, value at risk, yield curve, zero-coupon bond

We did, however, find that so-called growth stocks tend to have high ROICs, and value stocks have lower ROICs. The median return on capital for so-called value companies was 15 percent, compared with 35 percent for the growth companies. So the companies classified as growth did not grow faster on average, but they did have higher returns on capital. That’s why a modestly growing company, like the tobacco company Philip Morris International, ends up on the growth-stock list. Similarly, market bubbles and crises have always captured public attention, fueling the belief that the stock market moves in chaotic ways, detached EXHIBIT 5.2 Distribution of Growth Rates for Growth and Value Stocks Growth stocks do not grow materially faster . . . . . . but do have higher ROICs Value median Growth median 8.7% 10.2% Value median Growth median 15% 35% 14 35 Growth 12 30 10 Value 8 6 % of companies % of companies Growth 25 20 15 4 10 2 5 Value 0 0 –3 1 5 9 13 17 21 3-year average sales growth, % 25 –5 5 15 25 35 45 50+ 3-year average ROIC excluding goodwill, % MARKETS AND FUNDAMENTALS: THE EVIDENCE 69 EXHIBIT 5.3 Stock Performance against Bonds in the Long Run, 1801–2013 $ 100,000,000 Stocks 10,000,000 1,000,000 Stocks (inflation-adjusted) 100,000 Bonds 10,000 Bills 1,000 100 10 CPI 1 0 1801 1816 1831 1846 1861 1876 1891 1906 1921 1936 1951 1966 1981 1996 2011 Source: Jeremy J.

Rolling betas should be graphed to search for any patterns or systematic changes in a stock’s risk. r Raw regressions should be based on monthly returns. Using more fre- quent return periods, such as daily and weekly returns, leads to systematic biases.22 r Company stock returns should be regressed against a value-weighted, well-diversified market portfolio, such as the MSCI World Index, bearing in mind that this portfolio’s value may be distorted if measured during a market bubble. In the CAPM, the market portfolio equals the portfolio of all assets, both traded (such as stocks and bonds) and untraded (such as private companies and human capital). Since the true market portfolio is unobservable, a proxy is necessary. For U.S. stocks, the most common proxy is the S&P 500, a valueweighted index of large U.S. companies. Outside the United States, financial analysts rely on either a regional index like the MSCI Europe Index or the MSCI World Index, a value-weighted index comprising large stocks from 23 developed countries (including the United States). 22 Using daily or even weekly returns is especially problematic when the stock is rarely traded.

Metrick, “Corporate Governance and Equity Prices,” Quarterly Journal of Economics 118, no. 1 (2003): 107–155. 22 J. Comprix and K. A. Muller III, “Asymmetric Treatment of Reported Pension Expense and Income Amounts in CEO Cash Compensation Calculations,” Journal of Accounting and Economics 42, no. 3 (December 2006): 385–416. 23 J. Coronado and S. Sharpe, “Did Pension Plan Accounting Contribute to a Stock Market Bubble?” (mimeo, Board of Governors of Federal Reserve System, 2003). CLOSING THOUGHTS 447 CLOSING THOUGHTS Following the financial crisis of 2007–2009, global accounting bodies have worked to close the distortions caused by off-balance-sheet obligations. Although they have made progress, inconsistencies still exist, and careful digging is still required. Thankfully, not every company will have these off-balance-sheet obligations.


pages: 385 words: 128,358

Inside the House of Money: Top Hedge Fund Traders on Profiting in a Global Market by Steven Drobny

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Albert Einstein, asset allocation, Berlin Wall, Bonfire of the Vanities, Bretton Woods, buy low sell high, capital controls, central bank independence, Chance favours the prepared mind, commodity trading advisor, corporate governance, correlation coefficient, Credit Default Swap, diversification, diversified portfolio, family office, fixed income, glass ceiling, high batting average, implied volatility, index fund, inflation targeting, interest rate derivative, inventory management, Long Term Capital Management, margin call, market bubble, Maui Hawaii, Mexican peso crisis / tequila crisis, moral hazard, new economy, Nick Leeson, oil shale / tar sands, oil shock, out of africa, paper trading, Peter Thiel, price anchoring, purchasing power parity, reserve currency, risk tolerance, risk-adjusted returns, risk/return, rolodex, Sharpe ratio, short selling, Silicon Valley, The Wisdom of Crowds, too big to fail, transaction costs, value at risk, yield curve, zero-coupon bond

—George Soros,April 2000 GLOBAL MACRO IS DEAD As 1999 rolled into 2000, many other global macro funds also closed down, prompting the popular press and Wall Street pundits to declare global macro “dead.”While 2000 may have marked the end of the $20 billion-plus global macro mega-funds, it was premature to cite the end of a strategy that profits from global misalignments and macroeconomic trends. When the stock market bubble finally did burst in March 2000, the Greenspan put was written once again as interest rates were reduced from 6.5 percent to 1 percent—levels not seen since the 1950s. It was in this new paradigm that the up-and-coming crop of global macro managers made their names. They caught not only the interest rate move, but also other parts of the classic macro view at the time: long bonds, short stocks, and eventually short the U.S. dollar.

On average, when there 46 INSIDE THE HOUSE OF MONEY is a bad event, volatility goes up because everybody gets nervous and pays up for insurance. One thing the September 11 attacks did for me was reconfirm that tail risk should not be allowed in your portfolio because things happen that you can’t imagine. I’ll give you an example that shows how serious I am about cutting off tail risk. After the stock market bubble burst in 2000 and the Fed started cutting rates, I thought there was a chance the United States could be headed toward a Japan-like deflation situation. I bought butterfly option structures on front-end interest rates whereby I bought one call struck at 2 percent yield and sold two times as many calls struck at 1 percent yield, such that we’d make money if interest rates went anywhere from 2 percent to zero.The option structure was very cheap and our biggest payout came if rates stopped at 1 percent.

We bought a bunch of these gold puts and sold them two 64 INSIDE THE HOUSE OF MONEY 400 Dollars per Ounce 375 350 Puts Purchased Forward Gold at $380 325 Puts Sold 300 275 Strike Price Ja nFe 97 bM 97 ar Ap 97 rM 97 ay Ju 97 nJu 97 lAu 97 gSe 97 pOc 97 tNo 97 vDe 97 cJa 97 nFe 98 bM 98 ar Ap 98 rM 98 ay Ju 98 nJu 98 lAu 98 gSe 98 pOc 98 tNo 98 vDe 98 cJa 98 nFe 99 bM 99 ar Ap 99 rM 99 ay Ju 99 nJu 99 lAu 99 g99 250 FIGURE 4.4 Gold, 1997–1999 Source: Bloomberg. years later at $18—when gold was trading at $258—making six times our money. (See Figure 4.4.) Another great trade over the years was betting on deflation by continuously buying interest rate options, which paid out when rates got low.We bought floors in the United States and Europe that paid off handsomely in 1998, and again after the stock market bubble burst post-2000, paying us multiples on our investment. Another decent-sized investment for us was buying Russian equities in 1999 after the 1998 wipeout. When Russian equity prices got back to 1992 levels, from a risk/reward perspective, we figured it was time to reinvest. (See Figure 4.5.) The absolute return category is there in order to leave us open to making this unsystematic money. The whole idea of being the hedge fund of the future is the ability to combine systematic and unsystematic money making strategies.We start off by acknowledging that we are ignorant, so we need to be systematic, clip some coupons, and earn some 65 THE FAMILY OFFICE MANAGER 800 700 600 RTSI$ Index 500 400 RTSI$ Index Back at 1992 Lows 300 200 100 FIGURE 4.5 3 l-0 n04 Ja Ju 2 l-0 n03 Ja Ju 1 l-0 n02 Ja Ju 0 n01 l-0 Ja Ju 9 l-9 n00 Ja Ju 8 l-9 n99 Ja Ju 7 l-9 n98 Ja Ju 6 n97 l-9 Ja Ju Ja n96 0 Russian Equity Index, 1996–2004 Source: Bloomberg.


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, asset-backed security, bank run, banking crisis, Bernie Madoff, Bonfire of the Vanities, bonus culture, capital controls, Carmen Reinhart, central bank independence, collapse of Lehman Brothers, collateralized debt obligation, corporate governance, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, Edward Glaeser, Eugene Fama: efficient market hypothesis, financial deregulation, financial innovation, financial intermediation, financial repression, fixed income, 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, rent-seeking, Robert Shiller, Robert Shiller, Ronald Reagan, Saturday Night Live, sovereign wealth fund, The Myth of the Rational Market, too big to fail, transaction costs, value at risk, yield curve

Mellon’s message was clear: government should just get out of the way.78 Regulation of private business, as espoused by Brandeis and Wilson, slipped out of fashion.79 The antiregulatory policies of the 1920s helped make possible a period of rampant financial speculation, driven by investment banks and closely related firms that sold and traded securities in an unregulated free-for-all. Investor protection was minimal; small investors could be lured into complex financial vehicles they didn’t understand, and were offered large margin loans to leverage their positions.80 While the market rose, everyone benefited. But the result was a stock market bubble fueled by borrowing and psychological momentum.81 Low interest rates set by the Federal Reserve also fueled an economic boom for much of the decade and encouraged increased borrowing by companies and individuals.82 By 1929, financial assets were at all-time highs, sustained by high levels of leverage throughout the economy. The stock market crash of October 1929 not only destroyed billions of dollars of paper wealth and wiped out many small investors; it also triggered an unprecedented wave of de-leveraging as financial institutions, companies, and investors sold anything they could in an attempt to pay off their debts, sending prices spiraling downward.83 The Federal Reserve could have slowed down the boom and avoided the sharp crash of 1929 if it had been willing early enough to “take away the punch bowl” (in the words of later Fed chair William McChesney Martin)84 by raising interest rates to discourage borrowing and slow down economic growth.

For their pains, the Rubin-Summers-Greenspan trio was featured on the cover of Time magazine as the “Committee to Save the World.”2 The second lesson was that while the U.S. economy was not completely immune to financial panics, any real damage could be contained through a few backroom deals. At the urging of the Federal Reserve, LTCM was essentially bought out and refinanced by a group of private sector banks, preventing a major crisis; a series of interest rate cuts by the Fed even kept the stock market bubble growing for another two years. The mature U.S. financial system, it seemed, could withstand any infection that might spread from the developing world, thanks to its sound financial system and macroeconomic management. Crises were for countries with immature economies, insufficiently developed financial systems, and weak political systems, which had not yet achieved long-term prosperity and stability—countries like Thailand, Indonesia, and South Korea.


pages: 366 words: 109,117

Higher: A Historic Race to the Sky and the Making of a City by Neal Bascomb

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buttonwood tree, California gold rush, hiring and firing, margin call, market bubble, Ralph Waldo Emerson, transcontinental railway, Works Progress Administration

Little did most commuters know that on this day they would reach a market high not to be surmounted again for a quarter of a century. “Wall Street was pandemonium,” said Philip Gibb of the downtown scene that fall. “The outside brokers—the curb men—were bidding against one another for stocks not quoted on the New York Exchange, and their hoarse cries mingled in a raucous chorus. I stood outside a madhouse staring at lunatics.” The stock market bubble—once tethered on a long, thin string to reality far below—had come loose. At the closing bell, the Dow Jones Industrial Average was 381, compared to 104 five years earlier. In the last three months alone, average values had risen twenty-five percent. For all the decade’s marvels and activity—the speed records, dancing contests, political ballyhoo, speakeasy raids, airplane crashes, and talking picture premieres—nothing captured the country’s attention like the market that day.

However, if the issue at stake is large, stay as long as the next man, but go ahead and do things.” Raskob lived his words to the end. Like him, George Ohrstrom and Walter Chrysler went into the Depression facing a tough road ahead, but both managed to sustain themselves through the desperate times, although one had to give up ownership of his skyscraper. In the crash, the boy wonder of Wall Street forfeited most of the water companies he had assembled during the market bubble, leaving him in a precarious financial position, but his voyage to Europe in the wake of Black Tuesday was a success, helping him to maintain the support of his investors. Once again he began acquiring small industrial businesses within a larger holding company. The market implosion taught him not to leverage his companies against one another. They had to stand on their own, or he was not interested in a relationship.


pages: 339 words: 109,331

The Clash of the Cultures by John C. Bogle

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asset allocation, collateralized debt obligation, corporate governance, corporate social responsibility, Credit Default Swap, credit default swaps / collateralized debt obligations, diversification, diversified portfolio, estate planning, Eugene Fama: efficient market hypothesis, financial innovation, financial intermediation, fixed income, Flash crash, Hyman Minsky, income inequality, index fund, interest rate swap, invention of the wheel, market bubble, market clearing, mortgage debt, new economy, Occupy movement, passive investing, Ponzi scheme, principal–agent problem, profit motive, random walk, rent-seeking, risk tolerance, risk-adjusted returns, Robert Shiller, Robert Shiller, shareholder value, short selling, South Sea Bubble, statistical arbitrage, The Wealth of Nations by Adam Smith, transaction costs, Vanguard fund, William of Occam

Votes against management, for example, may make it harder for fund managers to get information from a corporation or to win the right to advise its pension plan. Controversial votes may draw unwanted publicity. By their long forbearance and lassitude on corporate governance issues, mutual funds bear no small share of the responsibility for the failures in corporate governance and accounting oversight that were among the major forces creating the stock market bubble of the late 1990s, and the (50 percent) bear market that followed.6 If the owners of our corporations don’t care about governance, who else is there to assume that responsibility? The first step toward greater accountability is for mutual fund agents to disclose how they vote the shares they own on behalf of their shareholder principals. The time has long since come for funds to cease their passivity as corporate owners and to assume the important responsibilities of corporate citizenship.

For example, in the Go-Go Years of the late 1960s, some 350 new equity funds—largely highly volatile and risky “performance” funds—were formed, more than doubling the number of funds from 240 in 1965 to 535 in 1972. With the ensuing collapse of that bubble and the subsequent 50 percent decline in the overall stock market, only seven or eight new funds were formed during each year in the decade that followed. In the next marketing bubble—the rise of the Information Age, beginning in the late 1990s—funds focusing on Internet and high-tech stocks led the way. The fund industry responded just as one would expect a marketing business to respond. We created an astonishing total of 3,800(!) new equity funds, mostly aggressive growth funds focused on technology and the so-called new economy. Although some 1,200 funds went out of business during this period, the equity fund population still more than doubled, from 2,100 funds at the start of 1996 to 4,700 in 2001.


pages: 346 words: 102,625

Early Retirement Extreme by Jacob Lund Fisker

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8-hour work day, active transport: walking or cycling, barriers to entry, clean water, Community Supported Agriculture, delayed gratification, discounted cash flows, diversification, don't be evil, dumpster diving, financial independence, game design, index fund, invention of the steam engine, inventory management, loose coupling, market bubble, McMansion, passive income, peak oil, place-making, Ponzi scheme, psychological pricing, the scientific method, time value of money, transaction costs, wage slave, working poor

However, they'll often be carried out with an entirely different goal in mind--becoming independently wealthy and financially independent within five years. The methods for doing so will be simple. I won't present any tips that haven't been seen before and which one can't find described in detail in hundreds of other books. Success won't depend on becoming famous on the Internet or getting a book deal, nor will it depend on a timely participation in a market bubble of junk bonds, internet companies, real estate, gold, or tulips. It also won't depend on successfully starting your own business. You won't need to develop a particular specialized skill such as real estate flipping. In fact, if you have a job, keep it. However, using the methods in a way that aligns your goals and side effects persistently and consistently to achieve financial or job-independence is not easy.

This is a genius insight, insofar as it renders the problem mathematically tractable, but it isn't technically true. It's similar to how the insight that gravity is a two-body force and that the gravitational force between the sun and each individual planet is much stronger than the force between the individual planets makes it possible to compute planetary motion. In astrophysics, this always holds true. In economics and investing, it only holds in most cases. When it doesn't, we have market bubbles and crashes. These occur when a substantial number of market participants start behaving according to how the market is behaving--that is, how they themselves are behaving. Their behavior becomes self-referential without them realizing it! In particular the problem is now that the average of all investors is so well tracked that a large fraction of the market responds to the average--and as it very often happens, decisions are strongly influenced by what can be measured, rather than what should be measured.


pages: 355 words: 92,571

Capitalism: Money, Morals and Markets by John Plender

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Andrei Shleifer, asset-backed security, bank run, Berlin Wall, Big bang: deregulation of the City of London, Black Swan, bonus culture, Bretton Woods, business climate, Capital in the Twenty-First Century by Thomas Piketty, central bank independence, collapse of Lehman Brothers, collective bargaining, computer age, Corn Laws, corporate governance, credit crunch, Credit Default Swap, David Ricardo: comparative advantage, deindustrialization, Deng Xiaoping, discovery of the americas, diversification, Eugene Fama: efficient market hypothesis, eurozone crisis, failed state, Fall of the Berlin Wall, fiat currency, financial innovation, financial intermediation, Fractional reserve banking, full employment, Gordon Gekko, greed is good, Hyman Minsky, income inequality, inflation targeting, invention of the wheel, invisible hand, Isaac Newton, James Watt: steam engine, Johann Wolfgang von Goethe, John Maynard Keynes: Economic Possibilities for our Grandchildren, joint-stock company, Joseph Schumpeter, labour market flexibility, London Interbank Offered Rate, London Whale, Long Term Capital Management, manufacturing employment, Mark Zuckerberg, market bubble, market fundamentalism, means of production, Menlo Park, moral hazard, moveable type in China, Nick Leeson, Northern Rock, Occupy movement, offshore financial centre, paradox of thrift, Plutocrats, plutocrats, price stability, principal–agent problem, profit motive, quantitative easing, railway mania, regulatory arbitrage, Richard Thaler, rising living standards, risk-adjusted returns, Robert Gordon, Robert Shiller, Robert Shiller, Ronald Reagan, savings glut, shareholder value, short selling, Silicon Valley, South Sea Bubble, spice trade, Steve Jobs, technology bubble, The Chicago School, The Great Moderation, the map is not the territory, The Wealth of Nations by Adam Smith, Thorstein Veblen, time value of money, too big to fail, tulip mania, Upton Sinclair, We are the 99%, Wolfgang Streeck

These stock promotions were all too often accompanied by fraud, as the temptation to make off with other people’s money became overwhelming. Anyone who wishes to understand this phenomenon should turn not to economic historians but to Dickens and, more specifically, Nicholas Nickleby (of which more in Chapter Five). There, he describes the flotation of a company whose promoters lure outsiders into a stock market bubble and discreetly take their leave before the whole thing pops. While this nineteenth-century corporate party was already going with a swing, it enjoyed a further boost from generalised incorporation, which was introduced in English law along with limited liability under statute, in mid-century. The party was at its most frenetic in the rail industry, where George Hudson, known as ‘the railway king’, was the leading entrepreneur.

And in 1995 he clearly identified that the technology boom was turning into a bubble, telling the Fed’s main policymaking body, the Federal Open Market Committee, in May of that year, ‘The way I put it is that I am more nervous about the asset price bubble than I am about product prices.’ But he also worried that if the Fed pricked the bubble, it could ‘blow the economy out of the water’. At the September 1996 FOMC meeting, he said: ‘I recognise that there is a stock market bubble problem at this point … We do have the possibility of raising major concerns by increasing margin requirements. I guarantee that if you want to get rid of the bubble, whatever it is, that will do it.’ Later that year he made a speech in which he famously referred to ‘irrational exuberance’ in the stock market. Yet from then on he spent much time justifying the ever increasing level of the market by reference to a productivity miracle.

Griftopia: Bubble Machines, Vampire Squids, and the Long Con That Is Breaking America by Matt Taibbi

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affirmative action, Affordable Care Act / Obamacare, Bernie Sanders, Bretton Woods, carried interest, clean water, collateralized debt obligation, collective bargaining, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, David Brooks, desegregation, diversification, diversified portfolio, Donald Trump, financial innovation, Goldman Sachs: Vampire Squid, Gordon Gekko, greed is good, illegal immigration, interest rate swap, laissez-faire capitalism, London Interbank Offered Rate, Long Term Capital Management, margin call, market bubble, medical malpractice, moral hazard, mortgage debt, obamacare, passive investing, Ponzi scheme, prediction markets, quantitative easing, reserve currency, Ronald Reagan, Sergey Aleynikov, short selling, sovereign wealth fund, too big to fail, trickle-down economics, Y2K, Yom Kippur War

Within a few months after that, by July 1995, Greenspan was back to cutting rates, slashing the funds rate from 6 percent to 5.75 percent, flooding the economy with money at a time when the stock market was exploding. With easy credit everywhere and returns on savings and CDs at rock bottom, everyone and his brother rushed ass first into the tech-fueled stock market. “That’s the beginning of the biggest stock market bubble in U.S. history,” says Fleckenstein. But Greenspan’s biggest contribution to the bubble economy was psychological. As Fed chief he had enormous influence over the direction of the economy and could have dramatically altered history simply by stating out loud that the stock market was overvalued. And in fact, Greenspan in somewhat hesitating fashion tried this—with his famous December 1996 warning that perhaps “irrational exuberance” had overinflated asset values.

We can calculate how much money Greenspan dumped into the economy in advance of Y2K; between September 20 and November 10, 1999, the Fed printed about $147 billion extra and pumped it into the economy. “The crucial issue … is to recognize that we have a Y2K problem,” he said at the century’s final FOMC meeting. “It is a problem about which we don’t want to become complacent.” Again, all of these rate cuts and injections—in response to LTCM, the emerging markets crash, and Y2K—were undertaken in the middle of a raging stock market bubble, making his crisis strategy somewhat like trying to put out a forest fire with napalm. By the turn of the century, the effect of Greenspan’s constant money printing was definite and contagious, as it was now widely understood that every fuckup would be bailed out by rivers of cheap cash. This was where the term “Greenspan put” first began to be used widely. Aside: a “put” is a financial contract between two parties that gives the buyer the option to sell a stock at a certain share price.


pages: 489 words: 148,885

Accelerando by Stross, Charles

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call centre, carbon-based life, cellular automata, cognitive dissonance, Conway's Game of Life, dark matter, dumpster diving, Extropian, finite state, Flynn Effect, glass ceiling, gravity well, John von Neumann, knapsack problem, Kuiper Belt, Magellanic Cloud, mandelbrot fractal, market bubble, means of production, packet switching, performance metric, phenotype, planetary scale, Pluto: dwarf planet, reversible computing, Richard Stallman, SETI@home, Silicon Valley, Singularitarianism, slashdot, South China Sea, stem cell, technological singularity, telepresence, The Chicago School, theory of mind, Turing complete, Turing machine, Turing test, upwardly mobile, Vernor Vinge, Von Neumann architecture, web of trust, Y2K

Far away across vast Saturn's curve, a roiling mushroom cloud of methane sucked up from the frigid depths of the gas giant's troposphere heads toward the stars. "– Give him sixty-four doubling times, hmm, add a delay factor for propagation across the system, call it six light-hours across, um, and I'd say … " she looks at Sirhan. "Oh dear." "What?" The orang-utan explains: "Economics 2.0 is more efficient than any human-designed resource allocation schema. Expect a market bubble and crash within twelve hours." "More than that," says Amber, idly kicking at a tussock of grass. She squints at Sirhan. "My mother is dead," she remarks quietly. Louder: "She never really asked what we found beyond the router. Neither did you, did you? The Matrioshka brains – it's a standard part of the stellar life cycle. Life begets intelligence, intelligence begets smart matter and a singularity.

It plants a spun-diamond glass in front of Gianni, then pukes beer into it. Manfred declines a refill, waiting for Gianni to drink. "Ah, the simple pleasures of the flesh! I've been corresponding with your daughter, Manny. She loaned me her experiential digest of the journey to Hyundai +4904/-56. I found it quite alarming. Nobody's casting aspersions on her observations, not after that self-propelled stock market bubble or 419 scam or whatever it was got loose in the Economics 2.0 sphere, but the implications – the Vile Offspring will eat the solar system, Manny. Then they'll slow down. But where does that leave us, I ask you? What is there for orthohumans like us to do?" Manfred nods thoughtfully. "You've heard the argument between the accelerationistas and the time-binder faction, I assume?" he asks. "Of course."


pages: 386 words: 122,595

Naked Economics: Undressing the Dismal Science (Fully Revised and Updated) by Charles Wheelan

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affirmative action, Albert Einstein, Andrei Shleifer, barriers to entry, Berlin Wall, Bernie Madoff, Bretton Woods, capital controls, Cass Sunstein, central bank independence, clean water, collapse of Lehman Brothers, congestion charging, Credit Default Swap, crony capitalism, currency manipulation / currency intervention, Daniel Kahneman / Amos Tversky, David Brooks, demographic transition, diversified portfolio, Doha Development Round, Exxon Valdez, financial innovation, floating exchange rates, George Akerlof, Gini coefficient, Gordon Gekko, greed is good, happiness index / gross national happiness, Hernando de Soto, income inequality, index fund, interest rate swap, invisible hand, job automation, Joseph Schumpeter, Kenneth Rogoff, libertarian paternalism, low skilled workers, lump of labour, Malacca Straits, market bubble, microcredit, money: store of value / unit of account / medium of exchange, Network effects, new economy, open economy, presumed consent, price discrimination, price stability, principal–agent problem, profit maximization, profit motive, purchasing power parity, race to the bottom, RAND corporation, random walk, rent control, Richard Thaler, rising living standards, Robert Gordon, Robert Shiller, Robert Shiller, Ronald Coase, Ronald Reagan, school vouchers, Silicon Valley, Silicon Valley startup, South China Sea, Steve Jobs, The Market for Lemons, The Wealth of Nations by Adam Smith, Thomas L Friedman, Thomas Malthus, transaction costs, transcontinental railway, trickle-down economics, urban sprawl, Washington Consensus, Yogi Berra, young professional

However, if you take the word “responsibly” out of that sentence, it does become a bad thing. Simon Johnson, former chief economist for the International Monetary Fund, wrote an excellent postmortem of the financial crisis for The Atlantic in 2009. He notes, “Major commercial and investment banks—and the hedge funds that ran alongside them—were the big beneficiaries of the twin housing and equity-market bubbles of this decade, their profits fed by an ever-increasing volume of transactions founded on a relatively small base of actual physical assets. Each time a loan was sold, packaged, securitized, and resold, banks took their transaction fees, and the hedge funds buying those securities reaped ever-larger fees as their holdings grew.”12 Each transaction carries some embedded risk. The problem is that the bankers making huge commissions on the buying and selling of what would later become known as “toxic assets” do not bear the full risk of those products; their firms do.

Think of the Fed as always driving in unfamiliar terrain with a map that’s at least ten years out of date. Bob Woodward’s biography of Alan Greenspan was titled Maestro. In the 1990s, as the American economy roared through its longest expansion in economic history, Mr. Greenspan was given credit for his “Goldilocks” approach to monetary policy—doing everything just right. That reputation has since come partially unraveled. Mr. Greenspan is now criticized for abetting the housing and stock market bubbles by keeping interest rates too low for too long. “Cheap money” didn’t cause inflation by sending everyone to buy PT Cruisers and Caribbean cruises. Instead we bought stocks and real estate, and those rising asset prices didn’t show up in the consumer price index. Add one new challenge to monetary policy: We were speeding even though the gauges we’re used to looking at said we weren’t. It’s a hard job.


pages: 515 words: 142,354

The Euro: How a Common Currency Threatens the Future of Europe by Joseph E. Stiglitz, Alex Hyde-White

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bank run, banking crisis, barriers to entry, battle of ideas, Berlin Wall, Bretton Woods, capital controls, Carmen Reinhart, cashless society, central bank independence, centre right, cognitive dissonance, collapse of Lehman Brothers, collective bargaining, corporate governance, correlation does not imply causation, credit crunch, Credit Default Swap, currency peg, dark matter, David Ricardo: comparative advantage, disintermediation, diversified portfolio, eurozone crisis, Fall of the Berlin Wall, fiat currency, financial innovation, full employment, George Akerlof, Gini coefficient, global supply chain, Growth in a Time of Debt, housing crisis, income inequality, incomplete markets, inflation targeting, investor state dispute settlement, invisible hand, Kenneth Rogoff, knowledge economy, labour market flexibility, labour mobility, manufacturing employment, market bubble, market friction, market fundamentalism, Martin Wolf, Mexican peso crisis / tequila crisis, moral hazard, mortgage debt, neoliberal agenda, new economy, open economy, paradox of thrift, pension reform, pensions crisis, price stability, profit maximization, purchasing power parity, quantitative easing, race to the bottom, risk-adjusted returns, Robert Gordon, Robert Shiller, Robert Shiller, Ronald Reagan, savings glut, secular stagnation, Silicon Valley, sovereign wealth fund, the payments system, The Wealth of Nations by Adam Smith, too big to fail, transaction costs, transfer pricing, trickle-down economics, Washington Consensus, working-age population

The three main channels through which quantitative easing helped the economy were all weak: a slight weakening of the value of the dollar helped exports—but these effects were eventually countervailed by America’s trading partners; mortgage rates were reduced as long-term interest rates fell, but the monopolistic banks—and bank concentration after the crisis was greater than before—took much of the lower interest rates and simply enjoyed it as extra profits; and the stock market bubble led the very rich to consume a little more, especially of luxury goods, many of which were made abroad. What the economy really needed was more lending to businesses, but big businesses were already sitting on $2 trillion of cash and were essentially unaffected by QE. And because the Fed and the Obama administration had fixed their attention on the big New York banks and other international banks, the ability of the smaller regional and community banks to make loans remained impaired.43 The result was that years after the crisis such lending remained before its precrisis level.

., 393 in US, 35, 36, 88, 89–92 see also euro single-market principle, 125–26, 231 skilled workers, 134–35 skills, 77 Slovakia, 331 Slovenia, 331 small and medium-sized enterprises (SMEs), 127, 138, 171, 229 small and medium-size lending facility, 246–47, 300, 301, 382 Small Business Administration, 246 small businesses, 153 Smith, Adam, xviii, 24, 39–40, 41 social cohesion, 22 Social Democratic Party, Portugal, 392 social program, 196 Social Security, 90, 91 social solidarity, xix societal capital, 77–78 solar energy, 193, 229 solidarity fund, 373 solidarity fund for stabilization, 244, 254, 264, 301 Soros, George, 390 South Dakota, 90, 346 South Korea, 55 bailout of, 113 sovereign risk, 14, 353 sovereign spreads, 200 sovereign wealth funds, 258 Soviet Union, 10 Spain, 14, 16, 114, 177, 178, 278, 331, 335, 343 austerity opposed by, 59, 207–8, 315 bank bailout of, 179, 199–200, 206 banks in, 23, 186, 199, 200, 242, 270, 354 debt of, 196 debt-to-GDP ratio of, 231 deficits of, 109 economic growth in, 215, 231, 247 gold supply in, 277 independence movement in, xi inequality in, 72, 212, 225–26 inherited debt in, 134 labor reforms proposed for, 155 loans in, 127 low debt in, 87 poverty in, 261 real estate bubble in, 25, 108, 109, 114–15, 126, 198, 301, 302 regional independence demanded in, 307 renewable energy in, 229 sovereign spread of, 200 spread in, 332 structural reform in, 70 surplus in, 17, 88 threat of breakup of, 270 trade deficits in, 81, 119 unemployment in, 63, 161, 231, 235, 332, 338 Spanish bonds, 114, 199, 200 spending, cutting, 196–98 spread, 332 stability, 147, 172, 261, 301, 364 automatic, 244 bubble and, 264 central banks and, 8 as collective action problem, 246 solidarity fund for, 54, 244, 264 Stability and Growth Pact, 245 standard models, 211–13 state development banks, 138 steel companies, 55 stock market, 151 stock market bubble, 200–201 stock market crash (1929), 18, 95 stock options, 259, 359 structural deficit, 245 Structural Funds, 243 structural impediments, 215 structural realignment, 252–56 structural reforms, 9, 18, 19–20, 26–27, 214–36, 239–71, 307 from austerity to growth, 263–65 banking union, 241–44 and climate change, 229–30 common framework for stability, 244–52 counterproductive, 222–23 debt restructuring and, 265–67 of finance, 228–29 full employment and growth, 256–57 in Greece, 20, 70, 188, 191, 214–36 growth and, 232–35 shared prosperity and, 260–61 and structural realignment, 252–56 of trade deficits, 216–17 trauma of, 224 as trivial, 214–15, 217–20, 233 subsidiarity, 8, 41–42, 263 subsidies: agricultural, 45, 197 energy, 197 sudden stops, 111 Suharto, 314 suicide, 82, 344 Supplemental Nutrition Assistance Program (SNAP), 91 supply-side effects: in Greece, 191, 215–16 of investments, 367 surpluses, fiscal, 17, 96, 312, 379 primary, 187–88 surpluses, trade, see trade surpluses “Swabian housewife,” 186, 245 Sweden, 12, 46, 307, 313, 331, 335, 339 euro referendum of, 58 refugees into, 320 Switzerland, 44, 307 Syria, 321, 342 Syriza party, 309, 311, 312–13, 315, 377 Taiwan, 55 tariffs, 40 tax avoiders, 74, 142–43, 227–28, 261 taxes, 142, 290, 315 in Canada, 191 on capital, 356 on carbon, 230, 260, 265, 368 consumption, 193–94 corporate, 189–90, 227, 251 cross-border, 319, 384 and distortions, 191 in EU, 8, 261 and fiat currency, 284 and free mobility of goods and capital, 260–61 in Greece, 16, 142, 192, 193–94, 227, 367–68 ideal system for, 191 IMF’s warning about high, 190 income, 45 increase in, 190–94 inequality and, 191 inheritance, 368 land, 191 on luxury cars, 265 progressive, 248 property, 192–93, 227 Reagan cuts to, 168, 210 shipping, 227, 228 as stimulative, 368 on trade surpluses, 254 value-added, 190, 192 tax evasion, in Greece, 190–91 tax laws, 75 tax revenue, 190–96 Taylor, John, 169 Taylor rule, 169 tech bubble, 250 technology, 137, 138–39, 186, 211, 217, 251, 258, 265, 300 and new financial system, 274–76, 283–84 telecoms, 55 Telmex, 369 terrorism, 319 Thailand, 113 theory of the second best, 27–28, 48 “there is no alternative” (TINA), 306, 311–12 Tocqueville, Alexis de, xiii too-big-to-fail banks, 360 tourism, 192, 286 trade: and contractionary expansion, 209 US push for, 323 trade agreements, xiv–xvi, 357 trade balance, 81, 93, 100, 109 as allegedly self-correcting, 98–99, 101–3 and wage flexibility, 104–5 trade barriers, 40 trade deficits, 89, 139 aggregate demand weakened by, 111 chit solution to, 287–88, 290, 299–300, 387, 388–89 control of, 109–10, 122 with currency pegs, 110 and fixed exchange rates, 107–8, 118 and government spending, 107–8, 108 of Greece, 81, 194, 215–16, 222, 285–86 structural reform of, 216–17 traded goods, 102, 103, 216 trade integration, 393 trade surpluses, 88, 118–21, 139–40, 350–52 discouragement of, 282–84, 299–300 of Germany, 118–19, 120, 139, 253, 293, 299, 350–52, 381–82, 391 tax on, 254, 351, 381–82 Transatlantic Trade and Investment Partnership, xv, 323 transfer price system, 376 Trans-Pacific Partnership, xv, 323 Treasury bills, US, 204 Trichet, Jean-Claude, 100–101, 155, 156, 164–65, 251 trickle-down economics, 362 Troika, 19, 20, 26, 55, 56, 58, 60, 69, 99, 101–3, 117, 119, 135, 140–42, 178, 179, 184, 195, 274, 294, 317, 362, 370–71, 373, 376, 377, 386 banks weakened by, 229 conditions of, 201 discretion of, 262 failure to learn, 312 Greek incomes lowered by, 80 Greek loan set up by, 202 inequality created by, 225–26 poor forecasting of, 307 predictions by, 249 primary surpluses and, 187–88 privatization avoided by, 194 programs of, 17–18, 21, 155–57, 179–80, 181, 182–83, 184–85, 187–93, 196, 197–98, 202, 204, 205, 207, 208, 214–16, 217, 218–23, 225–28, 229, 231, 233–34, 273, 278, 308, 309–11, 312, 313, 314, 315–16, 323–24, 348, 366, 379, 392 social contract torn up by, 78 structural reforms imposed by, 214–16, 217, 218–23, 225–38 tax demand of, 192 and tax evasion, 367 see also European Central Bank (ECB); European Commission; International Monetary Fund (IMF) trust, xix, 280 Tsipras, Alexis, 61–62, 221, 273, 314 Turkey, 321 UBS, 355 Ukraine, 36 unemployment, 3, 64, 68, 71–72, 110, 111, 122, 323, 336, 342 as allegedly self-correcting, 98–101 in Argentina, 267 austerity and, 209 central banks and, 8, 94, 97, 106, 147 ECB and, 163 in eurozone, 71, 135, 163, 177–78, 181, 331 and financing investments, 186 in Finland, 296 and future income, 77 in Greece, xi, 71, 236, 267, 331, 338, 342 increased by capital, 264 interest rates and, 43–44 and internal devaluation, 98–101, 104–6 migration and, 69, 90, 135, 140 natural rate of, 172–73 present-day, in Europe, 210 and rise of Hitler, 338, 358 and single currency, 88 in Spain, 63, 161, 231, 235, 332, 338 and structural reforms, 19 and trade deficits, 108 in US, 3 youth, 3, 64, 71 unemployment insurance, 91, 186, 246, 247–48 UNICEF, 72–73 unions, 101, 254, 335 United Kingdom, 14, 44, 46, 131, 307, 331, 332, 340 colonies of, 36 debt of, 202 inflation target set in, 157 in Iraq War, 37 light regulations in, 131 proposed exit from EU by, 4, 270 United Nations, 337, 350, 384–85 creation of, 38 and lower rates of war, 196 United States: banking system in, 91 budget of, 8, 45 and Canada’s 1990 expansion, 209 Canada’s free trade with, 45–46, 47 central bank governance in, 161 debt-to-GDP of, 202, 210–11 financial crisis originating in, 65, 68, 79–80, 128, 296, 302 financial system in, 228 founding of, 319 GDP of, xiii Germany’s borrowing from, 187 growing working-age population of, 70 growth in, 68 housing bubble in, 108 immigration into, 320 migration in, 90, 136, 346 monetary policy in financial crisis of, 151 in NAFTA, xiv 1980–1981 recessions in, 76 predatory lending in, 310 productivity in, 71 recovery of, xiii, 12 rising inequality in, xvii, 333 shareholder capitalism of, 21 Small Business Administration in, 246 structural reforms needed in, 20 surpluses in, 96, 187 trade agenda of, 323 unemployment in, 3, 178 united currency in, 35, 36, 88, 89–92 United States bonds, 350 unskilled workers, 134–35 value-added tax, 190, 192 values, 57–58 Varoufakis, Yanis, 61, 221, 309 velocity of circulation, 167 Venezuela, 371 Versaille, Treaty of, 187 victim blaming, 9, 15–17, 177–78, 309–11 volatility: and capital market integration, 28 in exchange rates, 48–49 Volcker, Paul, 157, 168 wage adjustments, 100–101, 103, 104–5, 155, 216–17, 220–22, 338, 361 wages, 19, 348 expansionary policies on, 284–85 Germany’s constraining of, 41, 42–43 lowered in Germany, 105, 333 wage stagnation, in Germany, 13 war, change in attitude to, 38, 196 Washington Consensus, xvi Washington Mutual, 91 wealth, divergence in, 139–40 Weil, Jonathan, 360 welfare, 196 West Germany, 6 Whitney, Meredith, 360 wind energy, 193, 229 Wolf, Martin, 385 worker protection, 56 workers’ bargaining rights, 19, 221, 255 World Bank, xv, xvii, 10, 61, 337, 357, 371 World Trade Organization, xiv youth: future of, xx–xxi unemployment of, 3, 64, 71 Zapatero, José Luis Rodríguez, xiv, 155, 362 zero lower bound, 106 ALSO BY JOSEPH E.


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, asset-backed security, backtesting, banking crisis, 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, family office, fiat currency, fixed income, 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, sovereign wealth fund, special drawing rights, statistical arbitrage, stochastic volatility, The Great Moderation, time value of money, too big to fail, transaction costs, unbiased observer, value at risk, Vanguard fund, yield curve

Pensions, other real money investors, and retail investors all made money in this environment. It was a wonderful time to be invested (see Figure 1.5). The Dot-Com Crash As real money was becoming increasingly loaded up on equity risk in their 60-40 portfolios (stocks can be anywhere from 2 to 10 times riskier than bonds depending on what proxies are used), two decades of declining inflation and interest rates culminated in a technology-led stock market bubble that finally popped in March 2000. After the peak, global equity markets declined relentlessly year after year, finally bottoming in early 2003. Stocks generally lost half their value while in-vogue technology stocks dropped 75 percent from peak to trough (see Figure 1.6). Just as they had in the 1970s with bonds, real money managers became painfully aware of the equity concentration risk in their portfolios and began to look for a better, less risky approach.

See U.S. dollar Dollar factor exposure, hedge Dollar notional thinking Dot-com crash rally/bust Double dip, impact Dow Jones Eurostoxx 50 index dividends, trading level Dow Jones Industrial Average (DJIA) (1920-1940) (1922-1937) (1987) (2000-2008) Real Returns (1906-1974) Downside collar Downside protection Downside risk management mitigation Downside tail correlation events, investor preparation Downside volatility examination management Drawdowns, impact Drobny, Andres interview Drobny Conferences Favorite Trade format, Plasticine Macro Trader disapproval Drobny Global Drobny Global Advisors Drobny Global Conference (2009) Dubai crude Duke University (university endowment) ECB. See European Central Bank Economic crash (2008) banks, problems foresight Economic cycle, driver (location) Economic entity, presence Economic leverage, accounting leverage (contrast) Economy, double dip (hypothesis) Efficient frontier leverage, relationship Efficient markets, disbelief Electorate-adjusted El-Erian, Mohamed Emerging markets bearish markets bubble collapse corporate bonds, usage decoupling equities, selection Employee pension scheme, capital allocation End of the Line, The (Lynn) Endowment Model flaws invalidation orientation portfolio resemblance Endowments cash level Commodity Hedger process decrease in-house trading staff, absence problems Energy, usage Equities bubble/overvaluation performance risk, commodity risk (contrast) risk premium, faith risky assets Equity assets, U.S. public/private pension ownership Equity bubble, conditions Equity-centric portfolio, endorsement (Swensen) Equity concentration risk, awareness Equity index futures, usage Equity-like instruments, usage Equity multiples (1980-2000) Equity-oriented portfolios, decrease Equity returns, Harvard/Yale endowments (contrast) Equity Trader, The adaptability call blow-ups, avoidance business entry CalPERS operation core positions trading, indices/options (usage) discipline, lessons environment differentiation focus fundamentals, understanding future adaptability hedge fund operation, worries outlook interview investor meetings lessons manager, investor base (impact) market environment identification momentum trades, options (usage) performance, randomness P&L, trading portfolio construction positioning, understanding private deals, execution profit-taking process real money fund management research team, usage risk framework transition rules, discovery socialism, concern sovereign wealth fund operation stockholder understanding stocks, shorting/ownership (contrast) taxes, hedge traders competition hiring criteria trades ideas, origination quality risk/reward, change trading accounts, problems decisions, policy makers (impact) disaster preplanning sharpness style, implementation worldview Euro, two-year Euro interest rates European Central Bank (ECB) inflation targeting European Currency Unit (ECU) basket European Exchange Rate (ERM) European Monetary Unit (EMU) European Union, breakage (potential) Excess demand, control Excess return, valuation Exchange rate valuation, P/E multiples (relationship) Exchange-traded funds (ETFs) allowance usage Export land model Extreme scenarios, protection (purchase) Faber, Mark Family office manager Fat-tail events Favorite Trade concept format, Plasticine Macro Trader disapproval Federal Reserve Funds, target rate (2008) independence, cessation Feedback, impact Ferguson, Niall Fiat currencies, impact Fiat money, cessation Filipino Diaspora Finance, diversification (impact) Financial bubble, risk Financial instruments, usage Financials, future Financial stocks (2007-2008) Financing problems Firm-level risk management Fiscal policy easing role, impact underestimation Fiscal stimulus China impact Fixed income trading, focus Fixed income volatility trade Flexibility, value (example) Fordham Law School, support Forecast combinations, improvement Forecasting model parameters, estimation Foreign currency diversification, usage Foreign Direct Investment (FDI) Forward fixed income Forward price, spot price (contrast) Forward-starting volatility Friedman, Milton Front contracts, physical commodities Fundamental investing/research, time frames (matching) Fundamentals, understanding Fund management, skill Fund performance, indicator Future benefit obligations, earnings Future correlations, usage FX forwards G3/G7 liquid rate, arbitrage opportunity (absence) G7 demand G7 economies, problems G10 policy General Theory of Employment, Interest, and Money, The (Keynes) German Schatz contracts Global adjustment period Global dollar carry trade Global economy, weakness Global equities decrease markets, decline Global fund management industry Global governments, financial system (backstopping) Globalization, meaning Global macro approach Global macro funds, factors Global macro hedge fund managers Global warming, carbon dioxide (impact) Gold (1979-1980) (1999) (2000-2009) (2004-2009) pension fund base currency safety Good leverage, classification Government bonds bull market (1985-2009) leverage, change LIBOR positions, leverage safety Government debt, funding Government default risk Government stimulus, payment Grantham, Jeremy Great Britain, ERM absence Great Depression spending, decrease taxes, increase Great Macro Experiment.


pages: 432 words: 127,985

The Best Way to Rob a Bank Is to Own One: How Corporate Executives and Politicians Looted the S&L Industry by William K. Black

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accounting loophole / creative accounting, affirmative action, Andrei Shleifer, business climate, cognitive dissonance, corporate governance, Donald Trump, fear of failure, financial deregulation, friendly fire, George Akerlof, hiring and firing, margin call, market bubble, moral hazard, offshore financial centre, Ponzi scheme, race to the bottom, Ronald Reagan, short selling, The Market for Lemons, transaction costs

GPRA required agencies to formally define their mission and to develop strategic plans to achieve those missions. The General Accounting Office (GAO) was assigned the task of identifying high-risk government activities. The SEC, for example, properly defines itself in its recent strategic plans as “a civil law enforcement agency” (SEC Annual Report for 2002, 1). The SEC’s annual reports during the 1990s, however, despite the record-setting, inflating stock market bubble, never defined a wave of control fraud as a central risk to the accomplishment of its mission. The SEC had grossly inadequate resources, did not see the wave of control frauds coming, and was overwhelmed. The GAO’s definition of high-risk functions includes fraud risk as a key factor. The GAO, however, limited its concept of fraud risk to situations in which someone was stealing from a public agency.

Without Gray’s war on the control frauds, their growth would have increased throughout his term. His successor, Danny Wall, would not have taken on the control frauds for reasons made clear later in this book. Indeed, he helped the most notorious control fraud escape regulatory control. Eventually, the expanding wave of control fraud would have caused such a massive bubble in real estate values that it would have collapsed. Since Japan’s real estate and stock market bubbles grew for a full decade during the 1980s without the growth advantages provided by deposit insurance, a U.S. bubble could have lasted for over a decade. Therefore, the wave of control fraud could have extended throughout the Reagan and Bush administrations had it not been for Gray’s desperate war against the control frauds. There were over 300 control frauds. My study found that the 11th District (California, Arizona, and Nevada) had 58 control frauds (Black 1998).


pages: 145 words: 43,599

Hawai'I Becalmed: Economic Lessons of the 1990s by Christopher Grandy

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Bretton Woods, business climate, dark matter, inventory management, Long Term Capital Management, market bubble, Maui Hawaii, minimum wage unemployment, open economy, purchasing power parity, Silicon Valley, Telecommunications Act of 1996

Instead these negative external events combined with the maturing of the economy to push Hawai‘i into stagnation. Being open to the rest of the world means being vulnerable to events outside your control. The Gulf War was one of these events, a conflict on the other side of the world that had real and immediate effects on Hawai‘i’s economic fortunes. The slide of the mainland economy into recession, followed by the bursting of Japan’s stock and property market bubbles brought Hawai‘i’s economic growth to zero. Hawai‘i residents initially reacted to the stagnation with blame and denial. Perhaps that is a natural reaction to events that suggest the necessity to reevaluate long-cherished policies. The disappearance of accumulated balances in the state general fund signaled the severity of the downturn. Cries that government had become too big grew louder and more frequent.


pages: 196 words: 57,974

Company: A Short History of a Revolutionary Idea by John Micklethwait, Adrian Wooldridge

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affirmative action, barriers to entry, Bonfire of the Vanities, borderless world, business process, Corn Laws, corporate governance, corporate social responsibility, credit crunch, crony capitalism, double entry bookkeeping, Etonian, hiring and firing, invisible hand, James Watt: steam engine, joint-stock company, joint-stock limited liability company, Joseph Schumpeter, knowledge economy, knowledge worker, laissez-faire capitalism, manufacturing employment, market bubble, mittelstand, new economy, North Sea oil, race to the bottom, railway mania, Ronald Coase, Silicon Valley, six sigma, South Sea Bubble, Steve Jobs, Steve Wozniak, strikebreaker, The Nature of the Firm, The Wealth of Nations by Adam Smith, Thorstein Veblen, trade route, transaction costs, tulip mania, wage slave, William Shockley: the traitorous eight

The American people were furious: 70 percent of them said that they did not trust what their brokers or corporations told them and 60 percent called corporate wrongdoing “a widespread problem.”32 Even bosses who had not been caught doing anything wrong, such as Hank Paulson of Goldman Sachs and Andy Grove of Intel, felt obliged to apologize to the public for the sorry state of American capitalism.33 Meanwhile, in continental Europe, the two bosses who had most obviously proclaimed themselves disciples of the American way—Thomas Middelhoff of Germany’s Bertelsmann and Jean-Marie Messier of France’s Vivendi—were both sacked. The general catalyst for this revolution was the bursting of America’s stock-market bubble. Between March 2000 and July 2002, this destroyed $7 trillion in wealth—a sum equivalent to a quarter of the financial assets owned by Americans (and an eighth of their total wealth). The spread of mutual funds and the change from defined-benefit to defined-contribution retirement plans meant that this was a truly democratic crash: most of the households in America lost money directly. The specific catalyst was, ironically enough, one of the firms that Bush had turned to to design his energy policy.

The Handbook of Personal Wealth Management by Reuvid, Jonathan.

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asset allocation, banking crisis, BRICs, collapse of Lehman Brothers, correlation coefficient, credit crunch, cross-subsidies, diversification, diversified portfolio, estate planning, financial deregulation, fixed income, 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, sovereign wealth fund, statistical arbitrage, systematic trading, transaction costs, yield curve

Whatever your interest in the subject – as a manager of other people’s wealth or an individual saver seeking to protect and maintain their own assets – this handbook offers vital insights into how to manage wealth better in uncertain times. And uncertainty is the key characteristic the new financial world order. Recent months have seen unprecedented shifts in the economy and in the financial services sector in particular. After a decade or more of growth, came the nasty shock of the most dramatic financial collapse in living memory and nothing will look the same again. Within a few months, both housing and stock market bubbles have burst. In the process the entire global banking system almost came down with them. Those who have worked hard to build wealth and secure their future were left uncertain of where and how to find the right balance of risk and return. The game has changed, but no one is entirely sure of the new rules. Old certainties have gone forever. Previously secure investments have collapsed in value, trusted investors have been exposed as fraudulent and many investors and savers feel let down and many more face an uncertain future.


pages: 223 words: 63,484

Making Ideas Happen: Overcoming the Obstacles Between Vision and Reality by Scott Belsky

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centralized clearinghouse, index card, lone genius, market bubble, Merlin Mann, New Journalism, Results Only Work Environment, rolodex, side project, Silicon Valley, Steve Jobs, Steve Wozniak, supply-chain management, Tim Cook: Apple, Tony Hsieh, young professional

But rather than dwell only on what went wrong, consider what you may have inadvertently discovered. Avoid the Trap of Visionary’s Narcissism During my time at Goldman Sachs, I had the opportunity to be a fly on the wall in a lot of meetings in the executive office during both the dot-com bubble and the dire period that followed it. I always found it interesting how every challenge was presented as an unusual one-off: “Never before have we had a market bubble, followed by such volatility in interest rates, interspersed with terrorist concerns.” The business leaders would nod their heads in affirmation. “This is an extraordinary time,” someone else would say. Based on all the times I have heard “This is the most unusual X, the greatest period of Y, the new era of Z,” you might think that had I not been born in the last thirty years I might have missed the most exciting years of business since the beginning of time!


pages: 300 words: 78,475

Third World America: How Our Politicians Are Abandoning the Middle Class and Betraying the American Dream by Arianna Huffington

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American Society of Civil Engineers: Report Card, Bernie Madoff, Bernie Sanders, call centre, carried interest, citizen journalism, clean water, collateralized debt obligation, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, David Brooks, extreme commuting, Exxon Valdez, full employment, greed is good, housing crisis, immigration reform, invisible hand, knowledge economy, laissez-faire capitalism, late fees, market bubble, market fundamentalism, Martin Wolf, medical bankruptcy, microcredit, new economy, New Journalism, offshore financial centre, Ponzi scheme, Report Card for America’s Infrastructure, Richard Florida, Ronald Reagan, Rosa Parks, single-payer health, smart grid, The Wealth of Nations by Adam Smith, too big to fail, transcontinental railway, trickle-down economics, winner-take-all economy, working poor, Works Progress Administration

Here are a few others: Between 2007 and 2008, more than 800,000 additional American households found themselves trying to make do on under $25,000 a year, bringing the total to nearly 29 million.24 In 2005, households in the bottom 20 percent had an average income of $10,655, while the top 20 percent made $159,583—a disparity of 1,500 percent, the highest gap ever recorded.25 In 2007, the top 10 percent pocketed almost half of all the money earned in America—the highest percentage recorded since 1917 (including, as Business Insider editor Henry Blodget noted, in 1928, the peak of the stock market bubble in the “roaring 1920s”).26 Between 2000 and 2008, the poverty rate in the suburbs of the largest metro areas in the United States grew by 25 percent—making the suburbs home to the country’s biggest and most rapidly expanding segment of the poor.27 Making matters even worse is the fact that while the classes are moving farther apart—with the middle class in real danger of disappearing entirely—mobility across the classes has declined.


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, Big bang: deregulation of the City of London, Bonfire of the Vanities, bonus culture, Bretton Woods, BRICs, British Empire, call centre, Carmen Reinhart, central bank independence, centre right, cloud computing, collapse of Lehman Brothers, collateralized debt obligation, corporate governance, credit crunch, crony capitalism, 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, labor-force participation, 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, Ronald Coase, seigniorage, shareholder value, Silicon Valley, statistical model, Steve Jobs, The Great Moderation, the payments system, Tobin tax, too big to fail, transaction costs, underbanked, Works Progress Administration, yield curve, Yogi Berra

Financial crises of one sort or another, which affected companies ranging from Japanese and Swedish banks to Long Term Capital, an American hedge fund, continued to occur. In fact, they became more frequent. However, the US Federal Reserve and Treasury were always quick to flood the market with money and slash interest rates in order to limit the damage to the financial 17 18 Chapter 1 |  The Rise and Fall of the Finance-Driven Economy economy. Except for the collapse of the dot-com stock market bubble, largescale destruction of financialized wealth was a thing of the past. Another problem, of course, is that markets are reflections of human nature, balanced on a knife’s edge between fear and greed. To remove fear is to open the floodgates of greed. The problem with greed, whatever the Occupy Wall Street gang might think, is not that it is bad. There is bad and greed in all of us. The problem with greed is that it is careless and often delusional.


pages: 283 words: 73,093

Social Democratic America by Lane Kenworthy

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affirmative action, Affordable Care Act / Obamacare, barriers to entry, Celtic Tiger, centre right, clean water, collective bargaining, corporate governance, David Brooks, desegregation, Edward Glaeser, full employment, Gini coefficient, hiring and firing, Home mortgage interest deduction, illegal immigration, income inequality, invisible hand, labor-force participation, manufacturing employment, market bubble, minimum wage unemployment, new economy, postindustrial economy, purchasing power parity, race to the bottom, rent-seeking, rising living standards, Robert Gordon, Robert Shiller, Robert Shiller, Ronald Reagan, school choice, shareholder value, sharing economy, Skype, Steve Jobs, too big to fail, Tyler Cowen: Great Stagnation, union organizing, universal basic income, War on Poverty, working poor, zero day

It would be good to repeat this, but I suspect it won’t happen. The next time our unemployment rate gets near 4 percent, the Federal Reserve is more likely to slam on the brakes by raising interest rates. In the late 1990s, Fed chair Alan Greenspan held interest rates low despite opposition from other Fed board members who worried about potential inflationary consequences of rapid growth, rising wages, and the Internet stock market bubble. Greenspan’s belief in the self-correcting nature of markets led him to worry less than others. Given the painful consequences of the 2000s housing bubble, the Fed is highly unlikely to repeat that approach. So for Americans in middle- and lower-paying jobs, prospects for rising wages going forward are slim. Employment is the other potential source of rising earnings. Indeed, as I noted in chapter 2, it’s the chief reason there has been any increase at all in household incomes since the 1970s.


pages: 209 words: 80,086

The Global Auction: The Broken Promises of Education, Jobs, and Incomes by Phillip Brown, Hugh Lauder, David Ashton

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affirmative action, barriers to entry, Branko Milanovic, BRICs, business process, business process outsourcing, call centre, collective bargaining, corporate governance, credit crunch, David Ricardo: comparative advantage, deindustrialization, deskilling, Frederick Winslow Taylor, full employment, future of work, glass ceiling, global supply chain, immigration reform, income inequality, industrial robot, job automation, Joseph Schumpeter, knowledge economy, knowledge worker, labour market flexibility, low skilled workers, manufacturing employment, market bubble, market design, neoliberal agenda, new economy, pensions crisis, post-industrial society, profit maximization, purchasing power parity, QWERTY keyboard, race to the bottom, Richard Florida, Ronald Reagan, shareholder value, Silicon Valley, sovereign wealth fund, stem cell, The Bell Curve by Richard Herrnstein and Charles Murray, The Wealth of Nations by Adam Smith, Thomas L Friedman, trade liberalization, transaction costs, trickle-down economics, winner-take-all economy, working poor

Top-earning Americans hadn’t had it so good since before the first Wall Street crash in 1929. Based on market income, including wages, bonuses, dividends, and pensions, Berkeley economist Emmanuel Saez calculated the changing fortunes of America’s top earners since 1917. He shows that the top 10 percent received almost half (49.7%) of national individual income in 2006, surpassing 1928, the peak of the stock market bubble in the Roaring ’20s.8 If the top 10 percent have done well over the last 25 years, it is those at the very top who struck gold. Saez’s evidence shows that the top 1 percent captured about half of the overall economic growth in America over the period 1993 to 2006. These were the working rich, including the CEOs of major corporations. In 1965, American CEOs earned 24 times more than the typical worker; the ratio grew to over 100 by in the early 1990s and stood at 1:275 in 2007.


pages: 239 words: 70,206

Data-Ism: The Revolution Transforming Decision Making, Consumer Behavior, and Almost Everything Else by Steve Lohr

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23andMe, Affordable Care Act / Obamacare, Albert Einstein, big data - Walmart - Pop Tarts, bioinformatics, business intelligence, call centre, cloud computing, computer age, conceptual framework, Credit Default Swap, crowdsourcing, Daniel Kahneman / Amos Tversky, Danny Hillis, data is the new oil, David Brooks, East Village, Edward Snowden, Emanuel Derman, Erik Brynjolfsson, everywhere but in the productivity statistics, Frederick Winslow Taylor, Google Glasses, impulse control, income inequality, indoor plumbing, industrial robot, informal economy, Internet of things, invention of writing, John von Neumann, Mark Zuckerberg, market bubble, meta analysis, meta-analysis, natural language processing, obamacare, pattern recognition, payday loans, personalized medicine, precision agriculture, pre–internet, Productivity paradox, RAND corporation, rising living standards, Robert Gordon, Second Machine Age, self-driving car, Silicon Valley, Silicon Valley startup, six sigma, skunkworks, speech recognition, statistical model, Steve Jobs, Steven Levy, The Design of Experiments, the scientific method, Thomas Kuhn: the structure of scientific revolutions, unbanked and underbanked, underbanked, Von Neumann architecture, Watson beat the top human players on Jeopardy!

In technology and business, revolutions tend to play out in evolutionary steps, over time. Technical innovation is only one piece of a puzzle that includes affordability, acceptance in the marketplace, and changes in behavior. Recall that nearly all of the bold predictions made in the late 1990s about the disruptive impact of the Internet across industry really did come true—a decade later, long after the Internet stock-market bubble had burst. All successful technologies raise alarms and involve trade-offs and risks. In ancient times, fire could cook your food and keep you warm, but, out of control, could burn down your hut. Cars pollute the air and cause traffic deaths, but they have also increased personal mobility and freedom, and stimulated the development of regional and national markets for goods. The outlook for the technology we call big data is not fundamentally different.


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

It seems to me that Wall Street management reached into the pockets of their shareholders and paid big fines so they could keep the status quo. I have a bad feeling that Spitzer’s “settlement” will merely perpetuate the old way of doing business much longer than its natural life. The structural changes and return of tough filters will take longer and be more painful to fulfill. Is there some message to all this? Some note to future generations about how to avoid stock market bubbles, how to keep research honest, how to tame the cycles? Nah. They will learn 230 Spitzer Fixer it the hard way. Wall Street is a business. Analysts and salesmen and traders and bankers all make a living providing access to capital to businesses worldwide. For that task, the Street, as a group, gets to keep half of all the revenues they generate. But it’s an information business. When you work on the Street, all you have is your reputation.


pages: 232

Planet of Slums by Mike Davis

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barriers to entry, Branko Milanovic, Bretton Woods, British Empire, Brownian motion, centre right, clean water, conceptual framework, crony capitalism, declining real wages, deindustrialization, Deng Xiaoping, edge city, European colonialism, failed state, Gini coefficient, Hernando de Soto, housing crisis, illegal immigration, income inequality, informal economy, Internet Archive, jitney, Kibera, labor-force participation, land reform, land tenure, low-wage service sector, mandelbrot fractal, market bubble, megacity, microcredit, New Urbanism, Ponzi scheme, RAND corporation, rent control, structural adjustment programs, surplus humans, upwardly mobile, urban planning, urban renewal, War on Poverty, Washington Consensus, working poor

It proposed raising the official figure from 14.7 million to at least 37.1 million, although it acknowledged that this revision still failed to include tens of millions of laid-off employees or the 100 million "floating workers" still counted as farmers.68 Urban poverty in India is more honestly acknowledged and publicly debated than in China, but local social scientists and social-justice activists trying to focus public attention on the underside of the recent economic growth have also had to swim against the current of celebratory official rhetoric As any reader of the business press knows, the drastic neoliberal restructuring of the Indian economy after 1991 produced a high-tech boom and stock-market bubble whose frenzied epicenters were a handful of Cinderella cities: Bangalore, Pune, Hyderabad, and Chennai. GDP grew at 6 percent during the 1990s, while the capitalization of the Bombay Stock Exchange doubled almost every year — and one result was one million new millionaires, many of them Indian engineers and computer scientists returned from Sunnyvale 67 Yatsko, New Shanghai, pp. 120-21. 68 People's Daily (English version), 30 October 2002; Athar Hussain, "Urban Poverty in China: Measurement, Patterns and Policies," ILO working paper, Geneva 2003.


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, asset-backed security, balance sheet recession, bank run, banking crisis, Ben Bernanke: helicopter money, Carmen Reinhart, collapse of Lehman Brothers, 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

Vernon Smith, Gerry Suchanek, and Arlington Williams, “Bubbles, Crashes and Endogenous Expectations in Experimental Spot Asset Markets,” Econometrica 56 (1988): 1119–51. 4. Robert Shiller, “Do Stock Prices Move Too Much to Be Justified by Subsequent Changes in Dividends?” American Economic Review 71 (1981): 421–36. 5. Jeffrey Pontiff, “Excess Volatility and Closed-End Funds,” American Economic Review 87 (1997): 155–69. 6. David Porter and Vernon Smith, “Stock Market Bubbles in the Laboratory,” Journal of Behavioral Finance 4 (2003): 7–20. 7. See the following studies for models describing this logic: Michael Harrison and David Kreps, “Speculative Investor Behavior in a Stock Market with Heterogeneous Expectations,” Quarterly Journal of Economics 92 (1978): 323–36; Jose Scheinkman and Wei Xiong, “Overconfidence and Speculative Bubbles,” Journal of Political Economy 111 (2003): 1183–219; and Dilip Abreu and Markus Brunnermeier, “Bubbles and Crashes,” Econometrica 71 (2003): 173–204. 8.


pages: 300 words: 77,787

Investing Demystified: How to Invest Without Speculation and Sleepless Nights by Lars Kroijer

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Andrei Shleifer, asset allocation, asset-backed security, Bernie Madoff, bitcoin, Black Swan, BRICs, Carmen Reinhart, cleantech, compound rate of return, credit crunch, diversification, diversified portfolio, equity premium, estate planning, fixed income, high net worth, implied volatility, index fund, invisible hand, Kenneth Rogoff, market bubble, passive investing, pattern recognition, prediction markets, risk tolerance, risk/return, Robert Shiller, Robert Shiller, sovereign wealth fund, too big to fail, transaction costs, Vanguard fund, yield curve, zero-coupon bond

The banks do this both in the form of residential property markets, but also by financing and investing in commercial property. Even in the cases where the banks only act as a facilitator and pass on the principal risks to other investors (as opposed to other cases where banks hold on to a property investment), they still have a huge interest in a positive property market. The bursting of the US sub-prime market bubble in 2007–08 and the subsequent default of many geared products connected to it was one of the primary drivers of the financial crisis. So even if the direct representation of property investment companies represents a fairly small portion of the overall stock market, we have indirect exposure to property through many other sectors of the stock markets. In addition to the banks, the listing of many large infrastructure and construction-related companies further adds to our indirect exposure to the property market because corporations in a wide variety of industries already are the largest holders of commercial property.3 Some might disagree that I’m leaving out property investments and I can appreciate why.

Infotopia: How Many Minds Produce Knowledge by Cass R. Sunstein

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affirmative action, Andrei Shleifer, availability heuristic, Build a better mousetrap, c2.com, Cass Sunstein, cognitive bias, cuban missile crisis, Daniel Kahneman / Amos Tversky, Edward Glaeser, en.wikipedia.org, feminist movement, framing effect, hindsight bias, Isaac Newton, Jean Tirole, jimmy wales, market bubble, market design, minimum wage unemployment, prediction markets, profit motive, rent control, Richard Stallman, Richard Thaler, Robert Shiller, Robert Shiller, Ronald Reagan, slashdot, stem cell, The Wisdom of Crowds, winner-take-all economy

. . . When everyone is looking to someone else for an opinion—trying, for example, to pick the Democratic candidate they think everyone else will pick—it’s possible that whatever information other people might have gets lost, and instead we get a cascade of imitation that, like a stampeding herd, can start for no apparent reason and subsequently go in any direction with equal likelihood. Stock market bubbles and cultural fads are the examples that most people associate with cascades . . . but the same dynamics can show up even in the serious business of Democratic primaries. . . . We think of ourselves as autonomous individuals, each driven by [our] own internal abilities and desires and therefore solely responsible for our own behavior, particularly when it comes to voting. No voter ever admits—even to herself—that she chose Kerry because he won New Hampshire.65 Cascades can be found for many contested political questions, including the legitimacy of affirmative action, Four Big Problems / 99 abortion, preemptive war, and capital punishment.


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, Isaac Newton, 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

U.S. home prices had recently increased by another 15 percent in a year, and they had almost doubled since the turn of the millennium. To return to the trends they had followed in the 30 years before that, they would have to fall by around one-fifth. But the builders' associations and the banks' magazines explained soothingly that home prices never fall nationally. This did not impress James Grant, who noted that, since the Great Depression, the United States had experienced 29 market bubbles-strong rises in the prices of securities or other assets. Twentyseven of them had burst. The two exceptions were stock and realestate prices in June 2005. Not understanding why bubbles no. 28 and no. 29 should be exceptions, Grant gave his readers some good advice: Does your brother-in-law, the real estate broker, owe you money? Now is the time to collect.' The Fed Is Our Friend When Alan Greenspan left the Fed in January 2006, The Economist warned that the popularity he had garnered from recurrent rescue efforts such as the aggressive interest-rate cut after 2001 was the most dangerous of his legacies: Investors' exaggerated faith in his ability to protect them has undoubtedly encouraged them to take ever bigger risks and pushed share and house prices higher.


pages: 1,336 words: 415,037

The Snowball: Warren Buffett and the Business of Life by Alice Schroeder

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affirmative action, Albert Einstein, anti-communist, Ayatollah Khomeini, barriers to entry, Bonfire of the Vanities, Brownian motion, capital asset pricing model, card file, centralized clearinghouse, collateralized debt obligation, corporate governance, Credit Default Swap, credit default swaps / collateralized debt obligations, desegregation, Donald Trump, Eugene Fama: efficient market hypothesis, global village, Golden Gate Park, Haight Ashbury, haute cuisine, Honoré de Balzac, If something cannot go on forever, it will stop, In Cold Blood by Truman Capote, index fund, indoor plumbing, interest rate swap, invisible hand, Isaac Newton, Jeff Bezos, joint-stock company, joint-stock limited liability company, Long Term Capital Management, Louis Bachelier, margin call, market bubble, Marshall McLuhan, medical malpractice, merger arbitrage, Mikhail Gorbachev, moral hazard, NetJets, new economy, New Journalism, North Sea oil, paper trading, passive investing, pets.com, Plutocrats, plutocrats, Ponzi scheme, Ralph Nader, random walk, Ronald Reagan, Scientific racism, shareholder value, short selling, side project, Silicon Valley, Steve Ballmer, Steve Jobs, supply-chain management, telemarketer, The Predators' Ball, The Wealth of Nations by Adam Smith, Thomas Malthus, too big to fail, transcontinental railway, Upton Sinclair, War on Poverty, Works Progress Administration, Y2K, zero-coupon bond

But the upheaval was far from over, and the market remained in a nervous mood, partly due to uncertainty over the outcome of the United States and British invasion of Afghanistan a few weeks after 9/11. Then, in November, an energy trading company called Enron stuck a pin in the remains of the late 1990s stock-market bubble, which had shrunk but not burst. As the Justice Department moved in, Enron melted into bankruptcy in the heat of an accounting fraud. Enron was an extreme but not isolated situation. The excesses of the stock-market bubble and the opportunity for executives to pillage their companies led to a whole series of accounting-fraud and securities-violation cases: WorldCom, Adelphia Communications, Tyco, ImClone. As 2002 began, New York Attorney General Eliot Spitzer mounted a blitzkrieg assault against the Wall Street banks for having inflated stock prices by touting new offerings during the Internet bubble using biased stock research.18 Valuations of stocks and bonds began to fall apart as investors lost confidence in the numbers reported to them by managements.

In a sense, the Sun was one of his cigar butts, from which he had been able to enjoy one huge personal puff. In another sense, the temporary boost of fame he had gotten from the Sun was a sidebar compared to something else. Buffett had recently exploded in investors’ minds for a different reason. Under the pen name Adam Smith, a writer named George Goodman had published Supermoney, a fire-and-brimstone critique of the 1960s stock-market bubble, which sold more than a million copies.53 It demonized the fund managers who had ascended to the stratosphere almost overnight and then crashed, in a parabola as dramatic as if their engines had suddenly run out of rocket fuel. They were featured as devil-horned, pitchfork-bearing tempters of the ordinary Joe Investor. But when it came to Ben Graham and his protégé Buffett, Goodman knew he had met a couple of very different characters, and he devoted an entire chapter to the two of them, in which he captured them brilliantly.

Trees don’t grow to the sky, he always said; as Berkshire’s capital grew, the climb would get steeper. But investors in Berkshire had only gratitude for the “lower” returns. Those who bought an index of the market had just suffered through what the Wall Street Journal called a “lost decade” in which the S&P 500 index had gone exactly nowhere, falling below its level of April 1999.2 Buffett’s talk at Sun Valley was unfolding along the lines he had discussed; the period after the 1999 stock market bubble had burst was now the third-longest stretch in the past hundred years when the market made no progress. Buffett still said that stocks are the best long-time investment—as long as they were bought at the right price, and for a low fee. As of early 2008, he was buying stocks, but not with great enthusiasm. Sooner or later the market’s weighing machine would catch up with its voting machine. In the meantime, he continued to mostly buy businesses.


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, collapse of Lehman Brothers, 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, refrigerator car, regulatory arbitrage, rent control, rent-seeking, Robert Gordon, Ronald Reagan, Simon Kuznets, sovereign wealth fund, 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%

During the 1980s, the value of private wealth shot up in Japan from slightly more than four years of national income at the beginning of the decade to nearly seven at the end. Clearly, this enormous and extremely rapid increase was partly artificial: the value of private capital fell sharply in the early 1990s before stabilizing at around six years of national income from the mid-1990s on. I will not rehearse the history of the numerous real estate and stock market bubbles that inflated and burst in the rich countries after 1970, nor will I attempt to predict future bubbles, which I am quite incapable of doing in any case. Note, however, the sharp correction in the Italian real estate market in 1994–1995 and the bursting of the Internet bubble in 2000–2001, which caused a particularly sharp drop in the capital/income ratio in the United States and Britain (though not as sharp as the drop in Japan ten years earlier).

If certain immaterial investments (such as expenditures to increase the value of a brand or for research and development) are not counted on the balance sheet, then it is logical for the market value to be structurally greater than the book value. This may explain the ratios slightly greater than 1 observed in the United States (100–120 percent) and especially Britain (120–140 percent) in the late 1990s and 2000s. But these ratios greater than 1 also reflect stock market bubbles in both countries: Tobin’s Q fell rapidly toward 1 when the Internet bubble burst in 2001–2002 and in the financial crisis of 2008–2009 (see Figure 5.6). Conversely, if the stockholders of a company do not have full control, say, because they have to compromise in a long-term relationship with other “stakeholders” (such as worker representatives, local or national governments, consumer groups, and so on), as we saw earlier is the case in “Rhenish capitalism,” then it is logical that the market value should be structurally less than the book value.

In short, it seems unreasonable to draw such an extreme contrast between Gates and Slim without so much as a glance at the facts.20 As for the Japanese billionaires (Yoshiaka Tsutsumi and Taikichiro Mori) who from 1987 to 1994 preceded Bill Gates at the top of the Forbes ranking, people in the Western world have all but forgotten their names. Perhaps there is a feeling that these men owe their fortunes entirely to the real estate and stock market bubbles that existed at the time in the Land of the Rising Sun, or else to some not very savory Asian wheeling and dealing. Yet Japanese growth from 1950 to 1990 was the greatest history had ever seen to that point, much greater than US growth in 1990–2010, and there is reason to believe that entrepreneurs played some role in this. Rather than indulge in constructing a moral hierarchy of wealth, which in practice often amounts to an exercise in Western ethnocentrism, I think it is more useful to try to understand the general laws that govern the dynamics of wealth—leaving individuals aside and thinking instead about modes of regulation, and in particular taxation, that apply equally to everyone, regardless of nationality.


pages: 580 words: 168,476

The Price of Inequality: How Today's Divided Society Endangers Our Future by Joseph E. Stiglitz

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affirmative action, Affordable Care Act / Obamacare, airline deregulation, Andrei Shleifer, banking crisis, barriers to entry, Basel III, battle of ideas, Berlin Wall, capital controls, Carmen Reinhart, Cass Sunstein, central bank independence, collapse of Lehman Brothers, collective bargaining, colonial rule, corporate governance, Credit Default Swap, Daniel Kahneman / Amos Tversky, Dava Sobel, declining real wages, deskilling, Exxon Valdez, Fall of the Berlin Wall, financial deregulation, financial innovation, Flash crash, framing effect, full employment, George Akerlof, Gini coefficient, income inequality, income per capita, indoor plumbing, inflation targeting, invisible hand, John Harrison: Longitude, John Maynard Keynes: Economic Possibilities for our Grandchildren, Kenneth Rogoff, labour market flexibility, London Interbank Offered Rate, lone genius, low skilled workers, Mark Zuckerberg, market bubble, market fundamentalism, medical bankruptcy, microcredit, moral hazard, mortgage tax deduction, obamacare, offshore financial centre, paper trading, patent troll, payday loans, price stability, profit maximization, profit motive, purchasing power parity, race to the bottom, rent-seeking, reserve currency, Richard Thaler, Robert Shiller, Robert Shiller, Ronald Coase, Ronald Reagan, shareholder value, short selling, Silicon Valley, Simon Kuznets, spectrum auction, Steve Jobs, technology bubble, The Chicago School, The Fortune at the Bottom of the Pyramid, The Myth of the Rational Market, The Spirit Level, The Wealth of Nations by Adam Smith, too big to fail, trade liberalization, transaction costs, trickle-down economics, ultimatum game, uranium enrichment, very high income, We are the 99%, women in the workforce

As in all areas of tax and regulatory policy, circumvention is a problem, and a key challenge for government is to outsmart such attempts by corporations. 14. See U.S. Census Bureau website, “U.S. International Trade in Goods and Services Highlights,” February 10, 2012, http://www.census.gov/indicator/www/ustrade.html (accessed March 6, 2012). 15. In the 1990s, we maintained a trade deficit and full employment, even with a government surplus; but the circumstances were unusual—an investment burst fueled by a stock market bubble (the tech bubble). And it was not sustainable. In chapter 8 we explained how one could stimulate the economy even within the confines of a limited budget deficit, but the politics of what is required (under current circumstances) may make even this unachievable. 16. Part of the reason for the trade imbalances is the role of the United States as a reserve currency. Others want to hold dollars as backing for their country and their currency.

., xxiv Halliburton Corporation, 101, 210, 272 Hammonds, Tim, 338 Harrison, John, 109 health care, 12, 44, 155, 222, 263 cost of, 10, 97, 109, 265, 273, 274, 276, 301, 317, 353, 378, 380 government assistance with, 14, 23, 31, 70, 74, 226, 276; see also Medicare inefficiency in, 176, 183, 228, 380, 395 Obama’s reform of, 14, 163, 276 racial discrimination in, 70, 303 health industry, 95, 97, 176 see also pharmaceutical industry Hemsley, Stephen, 42 Hewlett-Packard (HP), 203, 360 Hispanics: discrimination against, 68, 70, 328, 369 wealth of, 13, 329, 384 Holder, Eric, 199 homeownership, 76, 108, 152, 157, 161, 171, 223, 379 Hoover, Herbert, 231 House of Representatives, U.S., 93, 100, 134, 207 Financial Services Committee of, 136 see also Congress, U.S.; Senate, U.S. housing discrimination, 70–71, 308 housing market: bubble in, 54, 85, 88–89, 183, 191–93, 211, 232, 243, 262, 378, 388 collapse of, 3, 8, 13, 89, 91, 169, 198, 223, 285, 294, 296, 302, 311, 314, 363 recovery in, 284–85 see also foreclosures; mortgage restructuring; predatory lending; subprime crisis housing subsidies, 74 human rights, 59, 155 ideas: democracy and, 185 evolution of, 156–59, 160 immigration, 53, 227, 296 imprisonment, 15, 70, 303, 304–5 incentive pay, 78–79, 87, 107, 108–14, 153–54, 163, 173, 205, 342, 343, 347 income redistribution, 85, 211 criticisms of, xxii, 106 government’s role in, 30–31, 71–76, 155, 238, 279 political limitation of, 32, 77 India, 152–53, 196–97, 249 Industrial Revolution, 30, 105, 345 inequality: alternative models of, 81–82 consequences of, 83–117, 125, 133–35, 147, 148, 186, 187–206, 233 deficit reduction and, 221–24 determinants of, xii, 28, 30–31, 33–39, 79–82, 267, 271, 276 educational, xiv, 19, 20, 30–31, 68, 75, 94, 102, 108, 160, 307–8, 322 efficiency and, 106–16, 117 globalization’s effect on, 60, 63–64, 79, 80, 140, 142, 144, 145 government’s role in, 6, 28, 30–32, 52, 57–58, 74, 75–76, 77, 79, 81, 82, 147, 153, 172–73, 190, 207 historical, 29–30, 332 income, 2, 3, 4, 7–8, 9, 22, 24, 25, 26, 27, 29, 30, 52, 53, 54, 55, 56, 57, 71, 72, 77, 79–80, 81, 85, 86, 127, 153, 178, 183, 202, 233, 240, 241, 267, 294–95, 296, 297, 298, 299, 300, 311, 328, 332, 335; see also income redistribution and instability, 5, 84–92, 117, 240 justifications for, 27, 29, 30, 77–78, 81, 154, 156, 342 lifetime, 26, 106, 310, 311 macroeconomic factors in, 238–64 markets’ effect on, 52–82 perceptions of, 127, 147–48, 152–55, 159, 160, 179, 184 remedies for, 29, 107, 114–17, 213, 237, 268–85, 287 rent seeking and, 32, 38, 40, 77, 107, 173, 213 and social distance, 148, 160 societal effects of, xii, xvi–xvii, xx, xxii, 2, 18, 20, 27, 65, 76, 84, 90, 100, 104–6, 117, 326–27 societal factors in, 53, 64–71, 82, 84, 282 inflation, 219, 239, 240, 241, 242, 248–49, 255, 259–60, 261, 262, 263, 279, 365, 378, 383, 384, 385, 391, 392, 393 Informant, The, 320 infrastructure, 88, 92, 93, 102, 115, 117, 155, 216, 267, 283 innovation: in business, 35, 41, 46, 78, 96, 178–79, 314, 315 direction of, 58, 244, 270, 283–84 patent law and, 43, 202 scientific, 41, 78, 93, 100, 202 insurance industry, 176, 177, 228, 274, 276 intellectual property, 140, 202–3, 316, 323, 354, 375 see also patents interest rates, 3, 7, 49, 71, 80, 86, 88, 110, 177, 208, 209, 217, 234, 242, 243, 244, 245, 251, 259, 260, 261, 262, 283, 380, 382, 385, 386, 392 International Monetary Fund (IMF), 60, 61, 91–92, 138, 141, 181–82, 231, 316, 353 Internet, 41, 45, 87, 115, 174, 349, 358 interns, internships, 76, 332 intrinsic rewards, 111–12 investment: globalization and, 60, 73, 74 private, 6, 73, 74, 86, 87, 88, 92, 222, 225, 226, 230, 235, 243, 244, 283, 335, 382 public, 23, 40, 80, 84, 88, 92–94, 102, 114, 115, 155, 174, 216, 217, 218, 230, 232–33, 263, 267, 273, 279, 281, 282–83, 381 Iran, 22, 23 Iraq War, 101, 143, 176, 209, 210, 211, 340 Ireland, financial crisis in, 182, 210, 219, 220, 255, 256 irrigation, 122, 322 Israel, 14, 262 Italy, 18 financial crisis in, 138–39, 255, 389–90 Japan, 14, 19, 308 Jobs, Steve, 41, 315 JPMorgan Chase, 345, 374, 388 judges, 44, 200, 373 Justice Department, U.S., 199, 318 Kerry, John, 359 Kessler, David, 357 Keynes, John Maynard, 86, 105, 151, 267 King, Mervyn, 248 Korea, 16, 19 Krueger and Mas, 104 Krugman, Paul, 137 labor, 55, 152 bargaining power of, 61, 64, 277, 281; see also labor unions demand for, 38, 53–57, 61, 63 in developing world, 63, 64, 326, 397 discrimination in, 68–70, 71 fairness in, 103–4, 127 free mobility of, 59–60, 61–62 globalization’s effect on, 56, 59–60, 61, 63, 64, 80, 233, 277, 280, 281, 324, 325 Great Recession’s effect on, 29, 57, 65, 67, 91, 124–25, 231, 241–42, 250, 380 macroeconomic policies affecting, 80, 225, 279 motivation of, 102, 103 polarization of, 8–9, 56, 79, 80, 133, 277 public-sector, 57, 322 in recessions, 29, 67, 124 and social capital, 124–25 structural changes in, 53–54, 56, 232–33, 263, 280–81, 285 technology’s effect on, 53, 54–56, 63, 79, 80, 277, 280, 283, 334 women in, 14 work hours and, 9, 14, 26, 327 see also employment; unemployment; wages labor unions, 38, 57, 64–65, 66, 67, 79, 80, 281–82, 327 Latin America, 23, 40, 84, 231 Latvia, austerity in, 231 Lauder, Ronald, 72 lawyers, 42–43, 99–101, 190, 203, 339 Lay, Ken, 178 legal system, U.S., 187–206 alternative frameworks for, 188, 202 banks’ deception in, 198, 199, 200, 201, 373 burden of proof in, 199–200 contracts in, 197 corporate advantages in, 66, 132, 189–90, 191, 203, 272, 327, 374 costs in, 100, 189–90, 202 distributive consequences of, 190, 193, 271, 317, 370 economic bias in, 44 Federal Reserve accountability in, 252 financial crisis prosecution in, xv–xvi, 70, 119, 199, 372, 373 financial sector’s favoring in, 191–202, 203, 204–6 information asymmetries in, 271, 368 political influence in, 44, 190–91, 200 property rights in, 190, 194, 197, 198, 199 purpose of, 100, 188–91 reform of, 273 rent seeking in, 42, 43, 203, 273 and social responsibility, 121 unfairness in, 42, 43, 100, 189–90, 191–202, 203, 206, 368, 373, 375 Lehman Brothers, 253, 313, 390 Leme, Paulo, 353 Lenin, Vladimir, 354 Lessig, Lawrence, xxiv LG, 203 Lincoln, Abraham, 137 List, John, 347 lobbying, 48, 95, 101, 185, 196, 319, 324, 325, 338 Lockheed Martin, 210 London Interbank Offered Rate (Libor), 47 Longitude (Sobel), 109 Lula da Silva, Luiz Inácio, 5, 139, 353 Luxembourg, 183, 286 manufacturing: compensation shifts in, 65, 328 job losses in, 54, 56, 57, 232–33, 285, 321 societal impact of, 156 marginal productivity theory, 30, 33, 77, 267 marketing, 150–51, 160, 162, 357, 359 Marlboro Man, 151, 354 marriage, economic insecurity and, 15, 303 Marshall, Alfred, 102 Marx, Karl, 30, 292 Massachusetts, 200–201 McCarty, Nolan, xxiv McDonald’s, 381 media, 128–29, 134, 135, 136, 160, 163, 252, 272, 286, 335, 348, 349, 358 Medicaid, 14, 228, 277, 378 Medicare, 17, 48, 97, 147, 163, 176, 210, 228–29, 265, 320, 355, 364, 378, 380 Mexico, 16, 42, 64, 138, 176, 365 MF Global Holdings, 313 microcredit, 196–97 Microsoft, 42, 44, 45–46, 74, 203, 317, 318, 319 middle class, 54, 117, 137 assistance to, 29, 274 economic insecurity of, xvii, 12–14, 23, 26, 103, 265–66 globalization’s effect on, 63, 64 Great Recession’s effect on, 10 hollowing out of, 2, 9, 25, 38, 84, 133, 300 income of, 3, 4, 7, 8, 9, 14, 25, 54, 56, 57, 63, 72, 240, 297, 298, 300, 385 recovery of, 29, 225 tax deductions for, 222–24, 379 unfair policies toward, xv, xxii wealth sources of, 3, 8, 13–14, 91, 167 Middle East, 40 see also Arab Spring Mill, John Stuart, 368 monetarism, 257, 258–59 monetary policy, 85, 86, 88, 133, 177, 208, 234, 239–40, 248, 250, 251, 252, 254, 257–58, 259, 261, 262, 263–64, 380, 382, 385, 389, 392 distributive consequences of, 243–45, 264, 279 idea-shaping in, 256–63 monopolies 31, 32, 35, 39–47, 95, 97, 140, 213, 270–71, 274, 316, 318 moral hazard, 171, 229, 256, 362, 363 Mortgage Electronic Registry System (MERS), 198, 201, 374 mortgage fraud, 198, 201, 372, 373 mortgage restructuring, 169–72, 201–2, 284–85, 362, 363 mortgages, tax deductions for, 222, 223, 379 mortgage securities, 205 Mosaic, 318 motivation, 102, 103, 111–12 Motorola, 203 Mozilo, Angelo, 333 Mueller, Edward, 42 Mullainathan, Sendhil, 103 municipal bonds, 212, 378 National Academy of Sciences, 26 National Center for Supercomputing Applications, 318 National Commission on the Causes of the Financial and Economic Crisis in the United States, 357, 358 National Economic Council, 180 Netherlands, 19, 22 Netscape, 45–46, 318 New Deal, xiii, 88, 231 Newfoundland, 138 New York Times, 11, 119, 205 Nokia, 203 North American Free Trade Agreement, 141 Norway, 22, 23, 183, 220 NTP, Inc., 203 Obama, Barack, x, 352 deficit reduction by, 207 and ethanol subsidy, 51 Federal Reserve nominees of, 319 financial crisis response of, xv, 168, 169, 361 health care program of, 14, 163, 276 tax position of, 395 Obama administration, xiv, 67, 170, 171, 200, 250, 284, 362, 396 Occupy Wall Street, ix–xiv, xix–xxi, 102, 116, 118, 127, 134, 345 “Of the 1%, for the 1%, by the 1%” (Stiglitz), xi Olin Foundation, 44, 359 1 percent: definition of, xxii economic framework’s favoring of, xx, xxii, 31, 34, 62, 67, 91, 117, 131, 142, 173, 174, 189, 191, 204, 239, 244, 245–46, 264, 348, 354 economic security of, 18, 19, 25 globalization’s benefits to, 62, 64, 142 idea-shaping by, 129, 134, 137, 146–86, 211, 236, 256, 287 income of, 2, 4, 8, 25, 52, 72, 85, 215, 267, 294, 295, 297, 298, 299, 300, 315, 332, 335 legal framework’s favoring of, 188, 191, 202, 206, 273 media’s control by, 129, 134, 286 political power of, xix, 32, 67, 83, 86, 89, 101, 118, 119, 120–21, 129, 131–33, 134, 137, 138, 146, 191, 267, 285, 348, 351 public perception of, 20–21, 146, 154, 159, 358 reform aimed at, 29, 268–74 rent seeking by, 32, 38, 41–43, 77 saving by, 85, 88, 223, 275 small government preference of, 93 social contract violation by, xvi–xvii social contributions of, 27, 41, 77–78, 96, 266 social norms’ shaping by, 53 taxation of, 5, 38, 42–43, 62, 71–73, 74, 76, 77, 84, 86, 87–88, 114, 115, 116, 138, 142, 159, 167, 208, 209, 211, 212, 214–15, 218, 221, 223, 224, 225, 226, 256, 274, 275, 294, 312, 335, 344, 360, 383, 394 value change in, 288 wealth of, 2, 3, 8, 25, 32, 38, 56, 72, 73, 80, 84, 166–67, 295 see also corporations; financial sector Organization for Economic Cooperation and Development (OECD), 16, 185 Orshansky, Mollie, 305 Ostrom, Elinor, 322 overdrafts, 194, 370 Pager, Devah, 69 Papua New Guinea, 184 patents, 43, 202, 203, 316, 374, 375 see also intellectual property pension funds, 227–28 Personal Responsibility and Work Opportunity Reconciliation Act, 17 Pew Foundation, 20 pharmaceutical industry: government munificence toward, 40, 48, 97, 210, 211, 224, 228, 272, 276 research in, 97 see also health industry Pierson, Paul, xxiv Piketty, Thomas, xxiii, 114 Pinochet, Augusto, 258 polarization, 8–9 Polarized America (McCarty, Poole, and Rosenthal), xxiv police lineups, 149 police states, 125 politics, U.S.: cognitive capture in, 161–62 corporate influence in, 34, 37, 41, 47, 48, 50, 51, 61, 62, 95, 99, 101, 111, 131–32, 135, 136–37, 200, 202, 285, 286, 319, 324, 325, 338, 350 distributive consequences of, 31, 52, 58, 239, 277, 278, 322 economy’s linkage with, xi, xix–xx, xxiv, 34, 38–39, 47, 52–53, 59, 65, 66, 89, 118, 131, 135, 138, 151, 173, 266, 287, 288–89, 348 idea-shaping in, 129, 137, 148, 149, 151–52, 153–55, 159–62, 163, 166–72, 175, 180, 185, 186, 285 legal consequences of, 190–91 media’s role in, 129, 134, 135, 136, 160, 163, 286 reform of, 135–36, 267, 285–86 regulatory capture in, 47–48, 248, 249–50, 253, 264 societal factors in, 64 unfairness in, x, xi, xii, xviii–xx, 31–32, 39, 41, 83, 101, 114–15, 118, 119, 120–21, 127, 129, 131–33, 134, 135, 136–37, 138, 144, 146, 191, 196, 200, 202, 267, 285, 286, 319, 324, 325, 338, 348, 350, 351 voting in, 119–21, 129–31, 133, 134, 135, 137, 286, 288, 325, 345, 349, 350, 351, 355 see also democracy, U.S.; government, U.S.


pages: 829 words: 186,976

The Signal and the Noise: Why So Many Predictions Fail-But Some Don't by Nate Silver

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airport security, availability heuristic, Benoit Mandelbrot, Berlin Wall, Bernie Madoff, big-box store, Black Swan, Broken windows theory, Carmen Reinhart, Claude Shannon: information theory, Climategate, Climatic Research Unit, cognitive dissonance, collapse of Lehman Brothers, collateralized debt obligation, complexity theory, computer age, correlation does not imply causation, Credit Default Swap, credit default swaps / collateralized debt obligations, cuban missile crisis, Daniel Kahneman / Amos Tversky, diversification, Donald Trump, Edmond Halley, Edward Lorenz: Chaos theory, en.wikipedia.org, equity premium, Eugene Fama: efficient market hypothesis, everywhere but in the productivity statistics, fear of failure, Fellow of the Royal Society, Freestyle chess, fudge factor, George Akerlof, haute cuisine, Henri Poincaré, high batting average, housing crisis, income per capita, index fund, Internet Archive, invention of the printing press, invisible hand, Isaac Newton, James Watt: steam engine, John Nash: game theory, John von Neumann, Kenneth Rogoff, knowledge economy, locking in a profit, Loma Prieta earthquake, market bubble, Mikhail Gorbachev, Moneyball by Michael Lewis explains big data, Monroe Doctrine, mortgage debt, Nate Silver, new economy, Norbert Wiener, PageRank, pattern recognition, pets.com, prediction markets, Productivity paradox, random walk, Richard Thaler, Robert Shiller, Robert Shiller, Rodney Brooks, Ronald Reagan, Saturday Night Live, savings glut, security theater, short selling, Skype, statistical model, Steven Pinker, The Great Moderation, The Market for Lemons, the scientific method, The Signal and the Noise by Nate Silver, The Wisdom of Crowds, Thomas Kuhn: the structure of scientific revolutions, too big to fail, transaction costs, transfer pricing, University of East Anglia, Watson beat the top human players on Jeopardy!, wikimedia commons

The second claim of efficient-market hypothesis, what Thaler refers to as the Price Is Right component, is more dubious. Examples like the discrepancy in pricing between Palm and 3Com stock simply could not have arisen if the price were right. You had the same commodity (the value of an interest in Palm) trading at two different and wildly divergent prices: at least one of them must have been wrong. There are asymmetries in the market: bubbles are easier to detect than to burst. What this means is that the ultimatum we face in Bayesland—if you really think the market is going to crash, why aren’t you willing to bet on it?—does not necessarily hold in the real world, where there are constraints on trading and on capital. Noise in Financial Markets There is a kind of symbiosis between the irrational traders and the skilled ones—just as, in a poker game, good players need some fish at the table to make the game profitable to play in.

Google “Insights for Search” beta; “housing bubble” (worldwide). http://www.google.com/insights/search/#q=housing%20bubble&cmpt=q. 19. Google “Insights for Search” beta; “housing bubble” (United States). http://www.google.com/insights/search/#q=housing+bubble&cmpt=q&geo=US. 20. Newslibrary.com search; United States sources only. 21. The volume of discussion in the news media forms a parallel to that of the stock market bubble in the late 1990s, references to which increased tenfold in news accounts between 1994 and 1999, peaking just the year before markets crashed. 22. Janet Morrissey, “A Corporate Sleuth Tries the Credit Rating Field,” New York Times, February 26, 2011. http://www.nytimes.com/2011/02/27/business/27kroll.html?pagewanted=all. 23. Alex Veiga, “U.S. Foreclosure Rates Double,” Associated Press, November 1, 2007. http://www.azcentral.com/realestate/articles/1101biz-foreclosures01-ON.html. 24.

The Age of Turbulence: Adventures in a New World (Hardback) - Common by Alan Greenspan

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air freight, airline deregulation, Albert Einstein, asset-backed security, bank run, Berlin Wall, Bretton Woods, business process, call centre, capital controls, central bank independence, collateralized debt obligation, collective bargaining, conceptual framework, Corn Laws, corporate governance, correlation coefficient, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, cuban missile crisis, currency peg, Deng Xiaoping, Dissolution of the Soviet Union, Doha Development Round, double entry bookkeeping, equity premium, everywhere but in the productivity statistics, Fall of the Berlin Wall, fiat currency, financial innovation, financial intermediation, full employment, Gini coefficient, Hernando de Soto, income inequality, income per capita, invisible hand, Joseph Schumpeter, labor-force participation, labour market flexibility, laissez-faire capitalism, land reform, Long Term Capital Management, Mahatma Gandhi, manufacturing employment, market bubble, means of production, Mikhail Gorbachev, moral hazard, mortgage debt, new economy, North Sea oil, oil shock, open economy, pets.com, Potemkin village, price mechanism, price stability, Productivity paradox, profit maximization, purchasing power parity, random walk, reserve currency, risk tolerance, Ronald Reagan, shareholder value, short selling, Silicon Valley, special economic zone, the payments system, The Wealth of Nations by Adam Smith, Thorstein Veblen, too big to fail, total factor productivity, trade liberalization, trade route, transaction costs, transcontinental railway, urban renewal, working-age population, Y2K

But my concern about a bubble had changed my mind. I told the committee we might need an interest rate increase to try to rein in the bull. "We have to start thinking about some form of preemptive move," I said, "and how to communicate that." I was choosing my words very carefully because we were on the record and we were playing with political dynamite. The Fed has no explicit mandate under the law to try to contain a stock-market bubble. Indirectly we had the authority to do so, if we believed stock prices were creating inflationary pressures. But in this instance, that would have been a very hard case to make because the economy was performing so well. The Fed does not operate in a vacuum. If we raised rates and gave as a reason that we wanted to rein in the stock market, it would have provoked a political firestorm. We'd have been accused of hurting the little investor, sabotaging people's retirements.

The boom rose to a crescendo late in the year, with the NASDAQ stock-market index at the end of December having nearly doubled in 199 More ebooks visit: http://www.ccebook.cn ccebook-orginal english ebooks This file was collected by ccebook.cn form the internet, the author keeps the copyright. T H E AGE OF T U R B U L E N C E twelve months (the Dow rose 20 percent). Most people who'd invested in stocks were feeling flush, and with good reason. This presented the Fed with a fascinating puzzle: How do you draw the line between a healthy exciting economic boom and a wanton, speculative stock-market bubble driven by the less savory aspects of human nature? As I pointed out drily to the House Banking Committee, the question is all the more complicated because the two can coexist: "The interpretation that we are currently enjoying productivity acceleration does not ensure that equity prices are not overextended." An example that intrigued me was the epic, multibillion-dollar competition involving Qwest, Global Crossing, MCI, Level 3, and other telecom companies.


pages: 381 words: 101,559

Currency Wars: The Making of the Next Gobal Crisis by James Rickards

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Asian financial crisis, bank run, Benoit Mandelbrot, Berlin Wall, Big bang: deregulation of the City of London, Black Swan, borderless world, Bretton Woods, BRICs, British Empire, business climate, capital controls, Carmen Reinhart, Cass Sunstein, collateralized debt obligation, complexity theory, corporate governance, Credit Default Swap, credit default swaps / collateralized debt obligations, currency manipulation / currency intervention, currency peg, Daniel Kahneman / Amos Tversky, Deng Xiaoping, diversification, diversified portfolio, Fall of the Berlin Wall, family office, financial innovation, floating exchange rates, full employment, game design, German hyperinflation, Gini coefficient, global rebalancing, global reserve currency, high net worth, income inequality, interest rate derivative, Kenneth Rogoff, labour mobility, laissez-faire capitalism, liquidity trap, Long Term Capital Management, mandelbrot fractal, margin call, market bubble, Mexican peso crisis / tequila crisis, money: store of value / unit of account / medium of exchange, Network effects, New Journalism, Nixon shock, offshore financial centre, oil shock, open economy, paradox of thrift, price mechanism, price stability, private sector deleveraging, quantitative easing, race to the bottom, RAND corporation, rent-seeking, reserve currency, Ronald Reagan, sovereign wealth fund, special drawing rights, special economic zone, The Myth of the Rational Market, The Wealth of Nations by Adam Smith, The Wisdom of Crowds, Thomas Kuhn: the structure of scientific revolutions, time value of money, too big to fail, value at risk, War on Poverty, Washington Consensus

Capital and currency markets exhibit other indicia of complex systems. Emergent properties are seen in the recurring price patterns that technicians are so fond of. The peaks and valleys, “double tops,” “head and shoulders” and other technical chart patterns are examples of emergence from the complexity of the overall system. Phase transitions—rapid extreme changes—are present in the form of market bubbles and crashes. Much of the work on capital markets as complex systems is still theoretical. However, there is strong empirical evidence, first reported by Benoît Mandelbrot, that the magnitude and frequency of certain market prices plot out as a power-law degree distribution. Mandelbrot showed that a time series chart of these price moves exhibited what he called a “fractal dimension.” A fractal dimension is a dimension greater than one and less than two, expressed as a fraction such as 1½; the word “fractal” is just short for “fractional.”


pages: 358 words: 106,729

Fault Lines: How Hidden Fractures Still Threaten the World Economy by Raghuram Rajan

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accounting loophole / creative accounting, Andrei Shleifer, Asian financial crisis, asset-backed security, bank run, barriers to entry, Bernie Madoff, Bretton Woods, business climate, Clayton Christensen, clean water, collapse of Lehman Brothers, collateralized debt obligation, colonial rule, corporate governance, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, currency manipulation / currency intervention, diversification, Edward Glaeser, financial innovation, floating exchange rates, full employment, global supply chain, Goldman Sachs: Vampire Squid, illegal immigration, implied volatility, income inequality, index fund, interest rate swap, Joseph Schumpeter, Kenneth Rogoff, knowledge worker, labor-force participation, Long Term Capital Management, market bubble, Martin Wolf, medical malpractice, microcredit, moral hazard, new economy, Northern Rock, offshore financial centre, open economy, price stability, profit motive, Real Time Gross Settlement, Richard Florida, Richard Thaler, risk tolerance, Robert Shiller, Robert Shiller, Ronald Reagan, school vouchers, short selling, sovereign wealth fund, The Great Moderation, the payments system, The Wealth of Nations by Adam Smith, too big to fail, upwardly mobile, Vanguard fund, women in the workforce, World Values Survey

In order to sterilize without making huge losses, the PBOC fixes the economywide interest rate at a lower level than the dollar interest rate, both by forcing banks to pay households a low rate on their deposits and by paying a low rate on its own borrowing. A direct effect of such a policy is that China mirrors the United States’ monetary policy. If interest rates in the United States are very low, China also has to keep interest rates low. Doing so risks creating credit, housing, and stock market bubbles in China, much as in the United States. With little freedom to use interest rates to counteract such trends, the Chinese authorities have to use blunt tools: for example, when credit starts growing strongly, the word goes out from the Chinese bank regulator that the banks should cut back on issuing credit. Typically, private firms without strong connections bear the brunt of these credit crunches.


pages: 317 words: 84,400

Automate This: How Algorithms Came to Rule Our World by Christopher Steiner

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23andMe, Ada Lovelace, airport security, Al Roth, algorithmic trading, backtesting, big-box store, Black-Scholes formula, call centre, cloud computing, collateralized debt obligation, Credit Default Swap, credit default swaps / collateralized debt obligations, delta neutral, Donald Trump, Douglas Hofstadter, dumpster diving, Flash crash, Gödel, Escher, Bach, High speed trading, Howard Rheingold, index fund, Isaac Newton, John Maynard Keynes: technological unemployment, knowledge economy, late fees, Mark Zuckerberg, market bubble, medical residency, Narrative Science, PageRank, pattern recognition, Paul Graham, prediction markets, quantitative hedge fund, Renaissance Technologies, ride hailing / ride sharing, risk tolerance, Sergey Aleynikov, side project, Silicon Valley, Skype, speech recognition, Spread Networks laid a new fibre optics cable between New York and Chicago, transaction costs, upwardly mobile, Watson beat the top human players on Jeopardy!, Y Combinator

But the CDS market was, as we now well know, egregiously mispriced by the humans who traded the swaps and set the prices. Nevertheless, Wall Street embraced Li’s formula as stone-solid fact. The copula should have been one arrow in the quiver of analysts and rating agencies who examined and stamped their approval on mortgage-backed securities. Instead, it became the only arrow. The resultant boom in collateralized debt obligations and the housing market bubble came straight from bankers’ misuse of what should have been a harmless algorithm. Gaussian copulas are useful tools and are utilized in a number of fields, but the one thing they do not do is model dependence between extreme events, something humans excel at precipitating.33 PASCAL, BERNOULLI, AND THE DICE GAME THAT CHANGED THE WORLD Much of modern finance, from annuities to insurance to algorithmic trading, has roots in probability theory—as do myriad other businesses from casinos to skyscraper construction to airplane manufacturing.


pages: 261 words: 103,244

Economists and the Powerful by Norbert Haring, Norbert H. Ring, Niall Douglas

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accounting loophole / creative accounting, Affordable Care Act / Obamacare, Albert Einstein, asset allocation, bank run, barriers to entry, Basel III, Bernie Madoff, British Empire, central bank independence, collective bargaining, commodity trading advisor, corporate governance, credit crunch, Credit Default Swap, David Ricardo: comparative advantage, diversified portfolio, financial deregulation, George Akerlof, illegal immigration, income inequality, inflation targeting, Jean Tirole, job satisfaction, Joseph Schumpeter, knowledge worker, labour market flexibility, law of one price, Long Term Capital Management, low skilled workers, market bubble, market clearing, market fundamentalism, means of production, minimum wage unemployment, moral hazard, new economy, obamacare, open economy, pension reform, Ponzi scheme, price stability, principal–agent problem, profit maximization, purchasing power parity, Renaissance Technologies, rolodex, Sergey Aleynikov, shareholder value, short selling, Steve Jobs, The Chicago School, the payments system, The Wealth of Nations by Adam Smith, too big to fail, transaction costs, ultimatum game, union organizing, working-age population, World Values Survey

The most important factor for their remuneration and career prospects is their willingness and ability to tell retail customers a story that entices them to do business with their employer. For analysts who cover stocks that have been underwritten by their employer, their career outcome depends even more on that optimism than on the accuracy of earnings forecasts. In a hot stock market, the reward for optimism is highest. This implies that banks systematically amplify stock market bubbles by having their analysts cheer on the retail investor crowds (Kubik and Hong 2003). The incentives of the analysts and their employers are not a secret to the companies covered by their research: if analysts treat them well, these companies return the favor. The gift exchange between analyzed companies and analysts consists mostly of privileged access to information in exchange for favorable reports.


pages: 342 words: 95,013

The Zenith Angle by Bruce Sterling

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airport security, Burning Man, cuban missile crisis, glass ceiling, Grace Hopper, half of the world's population has never made a phone call, Iridium satellite, market bubble, new economy, packet switching, pirate software, profit motive, RFID, Richard Feynman, Richard Feynman, Richard Feynman: Challenger O-ring, Ronald Reagan, Silicon Valley, Steve Jobs, thinkpad, V2 rocket, Y2K

Days that would be full of sunshine for him. And happiness. Future days that would be really cool. The guy was light and magic. Tony silently reached to pour himself more booze. The happy moment passed quickly. There was an anvil on Tony’s back. “What are you up to, Tony? You got plans to turn it around, right?” “Well,” said Tony, who was definitely not okay, “you mustn’t lose sight of the end goal, Van. After a stock market bubble, people are just as irrational as they were before. But now it’s all about the terror, instead of all about the greed. They are more irrational now, because they can’t see any future.” “You’ve got money troubles?” “It’s not that simple. By the way, I’m really sorry about your board of directors gig for DeFanti’s holding company. You were right to resign before you turned fed, but, well, I wanted to make that thing work out a lot better for you.”


pages: 471 words: 109,267

The Verdict: Did Labour Change Britain? by Polly Toynbee, David Walker

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banking crisis, Big bang: deregulation of the City of London, call centre, central bank independence, congestion charging, Corn Laws, Credit Default Swap, decarbonisation, deglobalization, deindustrialization, Etonian, failed state, first-past-the-post, Frank Gehry, gender pay gap, Gini coefficient, high net worth, hiring and firing, illegal immigration, income inequality, knowledge economy, labour market flexibility, market bubble, millennium bug, North Sea oil, Northern Rock, offshore financial centre, pension reform, Plutocrats, plutocrats, Ponzi scheme, profit maximization, purchasing power parity, shareholder value, Skype, smart meter, stem cell, The Spirit Level, too big to fail, University of East Anglia, working-age population, Y2K

It, and programmes like it, were exactly the ‘overspending’ for which Labour was calumnified during and after the May 2010 election. This, however, was not overspending; it was under-taxing. That did not necessarily mean higher income tax. With courage, Labour might have grappled with wider gaps in the British fiscal system, notably our failure fairly to tax property and wealth. Labour missed a cure: taxes on above-average value properties might have prevented the housing market bubbling into excess. Labour turned away from proper taxation of inheritance, even as a device to pay for the growing cost of social care for older people. The Cameron government attacks Labour for spending the nation into deficit, but a fairer charge is that fiscal cowardice disrupted the sustainability of very necessary spending. Under a new leader, however, Labour has the chance to think again. As we write this, the polls, if not unambiguous, give Labour grounds to hope they can return to power.


pages: 334 words: 98,950

Bad Samaritans: The Myth of Free Trade and the Secret History of Capitalism by Ha-Joon Chang

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affirmative action, Albert Einstein, Big bang: deregulation of the City of London, bilateral investment treaty, borderless world, Bretton Woods, British Empire, Brownian motion, call centre, capital controls, central bank independence, colonial rule, Corn Laws, corporate governance, David Ricardo: comparative advantage, Deng Xiaoping, Doha Development Round, en.wikipedia.org, falling living standards, Fellow of the Royal Society, financial deregulation, fixed income, Francis Fukuyama: the end of history, income inequality, income per capita, industrial robot, Isaac Newton, joint-stock company, Joseph Schumpeter, Kenneth Rogoff, labour mobility, land reform, low skilled workers, market bubble, market fundamentalism, Martin Wolf, means of production, moral hazard, offshore financial centre, oil shock, price stability, principal–agent problem, Ronald Reagan, South Sea Bubble, structural adjustment programs, The Wealth of Nations by Adam Smith, trade liberalization, transfer pricing, urban sprawl, World Values Survey

Some urged caution, saying that China was still a relatively poor country, with an income level that was only 20% of that of the US, but most others were confident that China would do as well in finance as in manufacturing, where its ascendancy seemed unstoppable.Wang Xing-Guo, the pro-liberalization governor of the People’s Bank of China, the central bank (granted full independence in 2017), summed up this optimism perfectly: ‘What are we afraid of? The money game is in our genes – after all, paper money is a Chinese invention!’When it joined the organization in 2024, China revalued its currency, the renminbi, by four times and fully opened its capital market. For a while, the Chinese economy boomed as though the sky was the limit. But the resulting real estate and stock market bubbles burst in 2029, requiring the largest IMF rescue package in history. Soaring unemployment and IMF-imposed cuts to government food subsidies led to riots and eventually to the rise of the Yuan-Gongchandang (Real Communist) movement, fuelled by the seething resentment of the ‘losers’ in a society that had moved from the near-absolute equality of Maoist communism to Brazilian-style inequality in the space of less than two generations.


pages: 335 words: 94,657

The Bogleheads' Guide to Investing by Taylor Larimore, Michael Leboeuf, Mel Lindauer

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asset allocation, buy low sell high, corporate governance, correlation coefficient, Daniel Kahneman / Amos Tversky, diversification, diversified portfolio, Donald Trump, endowment effect, estate planning, financial independence, financial innovation, high net worth, index fund, late fees, Long Term Capital Management, loss aversion, Louis Bachelier, margin call, market bubble, mental accounting, passive investing, random walk, risk tolerance, risk/return, Sharpe ratio, statistical model, transaction costs, Vanguard fund, yield curve

On October 12, at the market bottom, the Elves were bearish, when they should have been bullish, and remained bearish through November 1994 as a powerful advance began. It became so embarrassing that Rukeyser actually replaced five bearish Elves with five more bullish Elves. Unfortunately, the newly organized Elves were bullish all through the bear market plunge (21 percent) in July and August of 1998. A year later, as the stock market bubble was approaching its climax at the end of 1999, only one Elf, Gail Dudack, was correctly bearish. Rukeyser must have gotten tired of her bearishness and announced Dudack's dismissal on a November show. He replaced her with Alan Bond, another stock market bull (sentenced in 2003 to 12 years and 7 months in prison for defrauding investors). Two months later, the three-year bear market began with all 10 market-timing Elves bullish.


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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asset-backed security, 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, fixed income, George Akerlof, implied volatility, index fund, interest rate derivative, interest rate swap, Isaac Newton, Kenneth Rogoff, Long Term Capital Management, margin call, market bubble, Nick Leeson, Northern Rock, offshore financial centre, price mechanism, regulatory arbitrage, rent-seeking, Richard Thaler, risk tolerance, risk/return, Ronald Reagan, shareholder value, short selling, statistical model, The Chicago School, time value of money, too big to fail, transaction costs, value at risk, Vanguard fund, yield curve

Usi had essentially built a big red ejector-seat button for Barclays’ trading desk, and while he might have insisted to colleagues that pressing the button was “amoral,” others sitting in his seat later on did not feel the same way. Sue the Asshole In early 2001, Usi’s securitization pipeline was on track to issue $15 billion of CDOs by the end of that year. But there were some troubling headwinds. With the bursting of the dot-com equity market bubble, investors were growing skittish. But Usi was becoming more dependent than ever on Barclays’ weak sales force to sell his Roman androids in order to lock in his profits. Meanwhile, Barclays’ infrastructure had failed to keep up with the rising complexity of Usi’s deals. Agreements by the sales force with shady brokers like A.B. Finn (which subsequently went out of business) to bring in unsophisticated clients raised warning flags.


pages: 411 words: 108,119

The Irrational Economist: Making Decisions in a Dangerous World by Erwann Michel-Kerjan, Paul Slovic

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Andrei Shleifer, availability heuristic, bank run, Black Swan, Cass Sunstein, clean water, cognitive dissonance, collateralized debt obligation, complexity theory, conceptual framework, corporate social responsibility, Credit Default Swap, credit default swaps / collateralized debt obligations, cross-subsidies, Daniel Kahneman / Amos Tversky, endowment effect, experimental economics, financial innovation, Fractional reserve banking, George Akerlof, hindsight bias, incomplete markets, invisible hand, Isaac Newton, iterative process, Loma Prieta earthquake, London Interbank Offered Rate, market bubble, market clearing, moral hazard, mortgage debt, placebo effect, price discrimination, price stability, RAND corporation, Richard Thaler, Robert Shiller, Robert Shiller, Ronald Reagan, statistical model, stochastic process, The Wealth of Nations by Adam Smith, Thomas Kuhn: the structure of scientific revolutions, too big to fail, transaction costs, ultimatum game, University of East Anglia, urban planning

Maybe they are right. One cannot decisively prove that the stock market has been irrational. But in all of this debate no one has offered any real evidence to think that the volatility is rational.6 The price changes appear instead to be correlated with social changes of various kinds. Andrei Shleifer and Sendhil Mullainathan have observed the changes in Merrill Lynch advertisements. Prior to the stock market bubble, in the early 1990s, Merrill Lynch was running advertisements showing a grandfather fishing with his grandson. The ad was captioned: “Maybe you should plan to grow rich slowly.” By the time the market had peaked around 2000, when investors were obviously very pleased with recent results, Merrill’s ads had changed dramatically. In one of these was a picture of a computer chip shaped like a bull.


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, Bonfire of the Vanities, 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, crony capitalism, David Ricardo: comparative advantage, deindustrialization, Edward Glaeser, falling living standards, 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, Mont Pelerin Society, 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

The losses incurred by British and European banks, for example, arose initially largely from reckless investment in securities backed by US subprime mortgages. Despite the bubbles that were building across a number of markets, the regulatory authorities took no action. Yet there had been plenty of earlier examples of their destructive power. In the 1920s, it was the property followed by the stock market bubble that led to the 1929 Crash. In the early 1970s, Heath’s freeing up of the banks had provided a classic warning sign of the impact on property markets as house prices surged out of control. The bursting of the Japanese property bubble in 1989—which sent the nation into a decade-long spiral of deflation—was another. In the US, Alan Greenspan had long argued that the role of the Federal Reserve was to prevent consumer price inflation, and had no role when it came to inflation in the price of assets.


pages: 422 words: 104,457

Dragnet Nation: A Quest for Privacy, Security, and Freedom in a World of Relentless Surveillance by Julia Angwin

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AltaVista, Ayatollah Khomeini, barriers to entry, bitcoin, Chelsea Manning, clean water, crowdsourcing, cuban missile crisis, data is the new oil, David Graeber, Debian, Edward Snowden, Filter Bubble, Firefox, GnuPG, Google Chrome, Google Glasses, informal economy, Jacob Appelbaum, Julian Assange, market bubble, market design, medical residency, meta analysis, meta-analysis, mutually assured destruction, prediction markets, price discrimination, randomized controlled trial, RFID, Robert Shiller, Ronald Reagan, security theater, Silicon Valley, Silicon Valley startup, Skype, smart meter, Steven Levy, Upton Sinclair, WikiLeaks, Y2K, Zimmermann PGP

Engage was part of a conglomerate of Internet companies—ranging from search engines AltaVista and Lycos to websites Shopping.com and Furniture.com—that resulted from a buying spree by the entrepreneur David Wetherell. In the fall of 1999, Wetherell appeared on the cover of BusinessWeek under the headline “Internet Evangelist.” His conglomerate, CMGI, was a poster child for the dot-com boom, with a massive stock market value of $10 billion, despite the fact that it was losing $127 million a year on revenues of just $176 million. By 2001, the dot-com stock market bubble had burst. CMGI’s losses had reached $1 billion a quarter and its stock plummeted to less than $1. Dan quit the company, which eventually folded. But the idea of using cookies to track users survived. Meanwhile, Dan figured that privacy would be the next big thing. In 2001, he launched a privacy software company called Permissus. His idea was to sell technology to businesses that could help them track their customers’ data as it traveled through their computer systems.


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, collapse of Lehman Brothers, 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 Fortune at the Bottom of the Pyramid, The Market for Lemons, The Myth of the Rational Market, 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

This was a self-fulfilling process, as jobs elsewhere were only paying so much because those other businesses had hired the same pay consultants, who told every client company that they should pay their executives enough to attract the best people, and therefore set off an ever-upward ratchet. All sense of due restraint seemed to vanish from the upper reaches of business, as executives came to misinterpret the rise in share prices due to a stock-market bubble as the result of their own talent, and worse, came to feel that extraordinarily high pay was their due because they saw so many other people among their social contacts and peer group making so much. Many bankers are still in this mindset, although executive pay outside the financial markets is gradually deflating. The boom in the financial markets thus came to corrode social norms throughout the economy.


pages: 369 words: 94,588

The Enigma of Capital: And the Crises of Capitalism by David Harvey

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accounting loophole / creative accounting, anti-communist, Asian financial crisis, bank run, banking crisis, Bernie Madoff, Big bang: deregulation of the City of London, Bretton Woods, British Empire, business climate, call centre, capital controls, credit crunch, Credit Default Swap, David Ricardo: comparative advantage, deindustrialization, Deng Xiaoping, deskilling, equal pay for equal work, European colonialism, failed state, financial innovation, Frank Gehry, full employment, global reserve currency, Google Earth, Guggenheim Bilbao, illegal immigration, indoor plumbing, interest rate swap, invention of the steam engine, Jane Jacobs, joint-stock company, Joseph Schumpeter, Just-in-time delivery, land reform, liquidity trap, Long Term Capital Management, market bubble, means of production, megacity, microcredit, moral hazard, mortgage debt, new economy, New Urbanism, Northern Rock, oil shale / tar sands, peak oil, place-making, Ponzi scheme, precariat, reserve currency, Ronald Reagan, sharing economy, Silicon Valley, special drawing rights, special economic zone, statistical arbitrage, structural adjustment programs, the built environment, the market place, The Wealth of Nations by Adam Smith, Thomas L Friedman, Thomas Malthus, Thorstein Veblen, too big to fail, trickle-down economics, urban renewal, urban sprawl, white flight, women in the workforce

To top it all, a financial crisis, centred in the US but global in scope, began to unfold in the state–finance nexus that had powered suburbanisation and underpinned international development throughout the post-war period. This crisis gathered momentum at the end of the 1960s. The solution was becoming the problem. The Bretton Woods Agreement of 1944 came under stress. The US dollar was under mounting international pressure because of excessive borrowing. Then the whole capitalist system fell into a deep recession, led by the bursting of the global property market bubble in 1973. The dark days of the 1970s were upon us with all the consequences earlier outlined. Fitting, though, that it was the New York City fiscal crisis of 1975 that centred the storm. With one of the largest public budgets at that time in the capitalist world, New York City, surrounded by sprawling affluent suburbs, went broke. The local solution, orchestrated by an uneasy alliance between state powers and financial institutions, pioneered the neoliberal ideological and practical political turn that was to be deployed worldwide in the struggle to perpetuate and consolidate capitalist class power.


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, centre right, 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, ending welfare as we know it, Eugene Fama: efficient market hypothesis, eurozone crisis, financial repression, fixed income, 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, rent-seeking, reserve currency, road to serfdom, savings glut, short selling, structural adjustment programs, The Great Moderation, The Myth of the Rational Market, The Wealth of Nations by Adam Smith, Tobin tax, too big to fail, unorthodox policies, value at risk, Washington Consensus

Indeed, given that the federal expenditures in 1929 were only “about 2.5 percent of gross national product” this was hardly surprising.18 Such policies also seemed increasingly redundant by 1929. Because of the stock-market boom, unemployment had fallen to a postwar low. Even though the state had limited its ambitions to balancing the budget and ensuring convertibility, because of the unexpected bursting of the stock market bubble, Hoover spent $1.5 billion on public works when he became president in 1929. By 1931, overall federal spending was up by a third from its 1929 level.19 Given how small state expenditures remained relative to GDP, however, the now-accelerating decline in private spending meant that tax “receipts dwindled by 50 percent and expenditure rose by almost 60 percent.”20 At this juncture Hoover saw austerity as the only way, and the right way, to restore “business confidence” and balance the budget.


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

In addition, any money that is used to repay government debt will be transferred to those institutions that were holding government bonds. Because most of these bonds were initially a form of savings, it is likely that this money will be put back into the financial markets (i.e. people won’t suddenly start spending money they had allocted as saving). Using newly-created money to pay down the national debt will pump this money into the financial markets, where it may stay circulating, fuelling financial market bubbles and doing little or nothing to help the real economy. To avoid this, if it was thought desirable to reduce the nominal value of the debt, bonds should be removed from circulation over a period of time. Fund managers would be well aware that a portion of government bonds were being ‘phased out’, but would have around ten to fifteen years in which they could gradually shift their investments away from the bond market and into corporate bonds and the stock market.


pages: 356 words: 103,944

The Globalization Paradox: Democracy and the Future of the World Economy by Dani Rodrik

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affirmative action, Asian financial crisis, bank run, banking crisis, bilateral investment treaty, borderless world, Bretton Woods, British Empire, capital controls, Carmen Reinhart, central bank independence, collective bargaining, colonial rule, Corn Laws, corporate governance, corporate social responsibility, credit crunch, Credit Default Swap, currency manipulation / currency intervention, David Ricardo: comparative advantage, deindustrialization, Deng Xiaoping, Doha Development Round, en.wikipedia.org, eurozone crisis, financial deregulation, financial innovation, floating exchange rates, frictionless, frictionless market, full employment, George Akerlof, guest worker program, Hernando de Soto, immigration reform, income inequality, income per capita, joint-stock company, Kenneth Rogoff, labour market flexibility, labour mobility, land reform, Long Term Capital Management, low skilled workers, margin call, market bubble, market fundamentalism, Martin Wolf, Mexican peso crisis / tequila crisis, microcredit, Monroe Doctrine, moral hazard, night-watchman state, non-tariff barriers, offshore financial centre, oil shock, open borders, open economy, price stability, profit maximization, race to the bottom, regulatory arbitrage, savings glut, Silicon Valley, special drawing rights, special economic zone, The Wealth of Nations by Adam Smith, Thomas L Friedman, Tobin tax, too big to fail, trade liberalization, trade route, transaction costs, tulip mania, Washington Consensus, World Values Survey

To someone without much knowledge of history, it would appear that the world was shaken by a series of cataclysmic political and military events after 1973. Floating currencies became a source of instability for the international economic system rather than a safety valve. Economists and policy makers would endlessly debate during the eighties and nineties whether currency values reflected fundamental economic conditions or simply distortions in foreign currency markets: bubbles, irrationality, myopic expectations, or short-term trading strategies. What do all these men in their twenties and thirties—they are mostly men—sitting in front of huge computer screens, who move hundreds of millions of dollars across the globe at a keystroke and determine the fate of nations’ currencies, really do? Do they serve to eliminate inefficiencies in the market and bring currency values closer to their true underlying economic worth?


pages: 317 words: 87,566

The Happiness Industry: How the Government and Big Business Sold Us Well-Being by William Davies

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1960s counterculture, Airbnb, business intelligence, Cass Sunstein, corporate governance, dematerialisation, experimental subject, Exxon Valdez, Frederick Winslow Taylor, Gini coefficient, income inequality, invisible hand, joint-stock company, market bubble, mental accounting, nudge unit, profit maximization, randomized controlled trial, Richard Thaler, road to serfdom, Ronald Coase, Ronald Reagan, science of happiness, sentiment analysis, sharing economy, Slavoj Žižek, smart cities, Smart Cities: Big Data, Civic Hackers, and the Quest for a New Utopia, Steve Jobs, The Chicago School, The Spirit Level, theory of mind, urban planning

., ‘Testosterone and Financial Risk Preferences’, Evolution and Human Behavior 29: 6, 2008. 32This argument was put forward by the former UK government chief science advisor, David Nutt. See ‘Did Cocaine Use by Bankers Cause the Global Financial Crisis’, theguardian.com, 15 April 2013. 33Michelle Smith, ‘Joe Huber: Blame Your Lousy Portfolio on Your Brain’, moneynews.com, 17 June 2014. 34Alec Smith, Terry Lohrenz, Justin King, P. Read Montague and Colin Camerer, ‘Irrational Exuberance and Neural Crash Warning Signals During Endogenous Experimental Market Bubbles’, Proceedings of the National Academy of the Sciences 111: 29, 2014. 3 In the Mood to Buy 1Ruth Benschop, ‘What Is a Tachistoscope? Historical Explorations of an Instrument’, Science in Context 11: 1, 1998. 2Jonathan Haidt, The Righteous Mind: Why Good People Are Divided by Politics and Religion, New York: Pantheon Books, 2012. 3See Maren Martell, ‘The Race to Find the Brain’s “Buy-Me Button”’, welt.de, 20 January 2011, transl. worldcrunch.com, 2 July 2011. 4Robert Gehl, ‘A History of Like’, thenewinquiry.com, 27 March 2013. 5Lea Dunn and JoAndrea Hoegg, ‘The Impact of Fear on Emotional Brand Attachment’, Journal of Consumer Research 41: 1, 2014. 6Jeffrey Zaslow, ‘Happiness Inc.’, online.wsj.com, 18 March 2006. 7Keith Coulter, Pilsik Choi and Kent Monroe, ‘Comma N’ Cents in Pricing: The Effects of Auditory Representation Encoding on Price Magnitude Perceptions’, Journal of Consumer Psychology 22: 3, 2012. 8Drazen Prelec and George Loewenstein, ‘The Red and the Black: Mental Accounting of Savings and Debt’, Marketing Science 17: 1, 1998. 9Jonathan Crary, Suspensions of Perception: Attention, Spectacle, and Modern Culture, Cambridge, Mass.: MIT Press, 2001. 10Robert Rieber and David Robinson, eds., Wilhelm Wundt in History: The Making of a Scientific Psychology, Dordrecht: Kluwer Academic Publishers, 2001. 11See James Beniger, The Control Revolution: Technological and Economic Origins of the Information Society, Cambridge, MA: Harvard University Press, 1988. 12Robert Rieber, ed., Wilhelm Wundt and the Making of a Scientific Psychology, New York: Plenum Publishing Company Limited, 1980. 13Ibid. 14The American psychologist Edward Thorndike wrote in 1907: ‘Psychology supplies or should supply the fundamental principles upon which sociology, history, anthropology, linguistics and the other sciences dealing with human thought and action should be based … The facts and laws of psychology … should provide the general basis for the interpretation and explanation of the great events studied by history.’


pages: 323 words: 92,135

Running Money by Andy Kessler

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Andy Kessler, Apple II, bioinformatics, British Empire, business intelligence, buy low sell high, call centre, Corn Laws, family office, full employment, George Gilder, happiness index / gross national happiness, interest rate swap, invisible hand, James Hargreaves, James Watt: steam engine, joint-stock company, joint-stock limited liability company, knowledge worker, Long Term Capital Management, mail merge, margin call, market bubble, Maui Hawaii, Menlo Park, Network effects, packet switching, pattern recognition, pets.com, railway mania, risk tolerance, Sand Hill Road, Silicon Valley, South China Sea, spinning jenny, Steve Jobs, Steve Wozniak, Toyota Production System

But that’s not what anyone pays for anymore. Their economies achieve full employment, sure, but these countries are not economic powerhouses. Not anymore. We were investing in companies with no more than 50–100 workers, most of them highly paid programmers and engineers, whose occupational hazard is coming down off a caffeine buzz and an occasional late night Nerf gun injury. Yet even after the market bubble burst in 2000, these companies would still be worth more than Ssangyong, a company a hundred or a thousand times their size. The stock market values small businesses with high margins over big businesses with low margins. Is that good or bad? Should I even care? Whenever I try to figure out why this is, I keep thinking back and visualizing Mr. Shim, a walking, talking and sweating metaphor for how to invest.


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, Black Swan, Bretton Woods, British Empire, call centre, capital controls, Carmen Reinhart, carried interest, Celtic Tiger, central bank independence, collapse of Lehman Brothers, 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, falling living standards, fear of failure, financial innovation, financial repression, fixed income, floating exchange rates, full employment, German hyperinflation, global reserve currency, hiring and firing, Hyman Minsky, income inequality, inflation targeting, Isaac Newton, 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, sovereign wealth fund, special drawing rights, The Chicago School, The Great Moderation, The Wealth of Nations by Adam Smith, time value of money, too big to fail, trade route, tulip mania, value at risk, Washington Consensus, women in the workforce

After 1971, floating-rate systems appeared to be the answer. But a country that gives into the devaluation option too often under floating rates eventually suffers from higher inflation and interest rates. Creditors extort their revenge over the long term. The Europeans sought to escape this problem by clubbing together in a single currency, but eventually the strains had to show. 7 Blowing Bubbles ‘Stock market bubbles don’t grow out of thin air. They have a solid basis in reality, but reality as distorted by a misconception.’ George Soros, hedge fund manager Where did all the money go? My father-in-law asked that question in the aftermath of the credit crunch of 2007 and 2008, when house prices, share prices and corporate bond prices all tumbled. It seemed a reasonable point. If all the assets in the world were worth, say, $3 trillion one year and $2 trillion the next, what happened to that missing trillion?


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, asset-backed security, 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, double helix, 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

That burden steadily declines as the borrower’s income climbs along with inflation. Low inflation reduces the payment and enables the buyer to afford a much larger mortgage and thus a pricier house. While it was true that high inflation was corrosive to financial stability, so, perversely, was low inflation: inflation was low and economic growth stable in the 1920s in America, and in 1980s-era Japan. In both cases, the result was a stock market bubble. Greenspan himself pointed this out in the aftermath of the dot-com bubble in 2002. As inflation had become tame, recessions had become less frequent, so investors and home buyers were willing to pay higher prices for assets, which exposed them to big losses if anything went wrong. “It seems ironic,” he said, “that a monetary policy that is successful in inducing stability may inadvertently be sowing the seeds of instability associated with asset bubbles.”


pages: 347 words: 99,317

Bad Samaritans: The Guilty Secrets of Rich Nations and the Threat to Global Prosperity by Ha-Joon Chang

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affirmative action, Albert Einstein, banking crisis, Big bang: deregulation of the City of London, bilateral investment treaty, borderless world, Bretton Woods, British Empire, Brownian motion, call centre, capital controls, central bank independence, colonial rule, Corn Laws, corporate governance, David Ricardo: comparative advantage, Deng Xiaoping, Doha Development Round, en.wikipedia.org, falling living standards, Fellow of the Royal Society, financial deregulation, fixed income, Francis Fukuyama: the end of history, income inequality, income per capita, industrial robot, Isaac Newton, joint-stock company, Joseph Schumpeter, Kenneth Rogoff, labour mobility, land reform, low skilled workers, market bubble, market fundamentalism, Martin Wolf, means of production, moral hazard, offshore financial centre, oil shock, price stability, principal–agent problem, Ronald Reagan, South Sea Bubble, structural adjustment programs, The Wealth of Nations by Adam Smith, trade liberalization, transfer pricing, urban sprawl, World Values Survey

Wang Xing-Guo, the pro-liberalization governor of the People’s Bank of China, the central bank (granted full independence in 2017), summed up this optimism perfectly: ‘What are we afraid of? The money game is in our genes – after all, paper money is a Chinese invention!’ When it joined the organization in 2024, China revalued its currency, the renminbi, by four times and fully opened its capital market. For a while, the Chinese economy boomed as though the sky was the limit. But the resulting real estate and stock market bubbles burst in 2029, requiring the largest IMF rescue package in history. Soaring unemployment and IMF-imposed cuts to government food subsidies led to riots and eventually to the rise of the Yuan-Gongchandang (Real Communist) movement, fuelled by the seething resentment of the ‘losers’ in a society that had moved from the near-absolute equality of Maoist communism to Brazilian-style inequality in the space of less than two generations.


pages: 320 words: 86,372

Mythology of Work: How Capitalism Persists Despite Itself by Peter Fleming

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1960s counterculture, anti-work, call centre, clockwatching, corporate social responsibility, David Graeber, Etonian, future of work, Goldman Sachs: Vampire Squid, illegal immigration, late capitalism, Mark Zuckerberg, market bubble, market fundamentalism, means of production, neoliberal agenda, Parkinson's law, post-industrial society, profit maximization, profit motive, quantitative easing, Results Only Work Environment, shareholder value, The Chicago School, transaction costs, working poor

Indeed, the two trends operate in tandem, with some rather bizarre consequences. Financialization and shareholder capitalism perhaps represents the apogee of rationalized capitalism. Here, the numerical monetary logic of pure accumulation truly creates an inversion of ends and means that is shocking. Whatever it takes to increase shareholder value – firing staff, plundering the natural environment, creating extremely volatile property-market bubbles – must be pursued in a single-minded fashion, even if it harms the organization in question. Like all forms of hyper-rationalization, shareholder capitalism fosters a mentality that is generally antisocial and sometimes diabolical when observed from an outside perspective. For example, a large funeral home corporation in the United Kingdom recently had to break some bad news to its shareholders.


pages: 379 words: 113,656

Six Degrees: The Science of a Connected Age by Duncan J. Watts

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Berlin Wall, Bretton Woods, business process, corporate governance, Drosophila, Erdős number, experimental subject, Frank Gehry, Geoffrey West, Santa Fe Institute, invisible hand, Long Term Capital Management, market bubble, Milgram experiment, Murray Gell-Mann, Network effects, new economy, Norbert Wiener, Paul Erdős, rolodex, Ronald Coase, Silicon Valley, supply-chain management, The Nature of the Firm, The Wealth of Nations by Adam Smith, Toyota Production System, transaction costs, transcontinental railway, Y2K

We had done some work, as part of my Ph.D. research, on the evolution of cooperation in small-world networks and on a special case of what is called a voter model (similar to the spiral-of-silence problem studied by Noelle-Neumann). But at the time, we hadn’t thought of either of these problems as related to contagion. Now it seemed clear that contagion in a network was every bit as central to the outbreak of cooperation or the bursting of a market bubble as it was to an epidemic of disease. It just wasn’t the same kind of contagion. This point is particularly important because typically when we talk about social contagion problems, we use the language of disease. Thus, we speak of ideas as infectious, crime waves as epidemics, and market safeguards as building immunity against financial distress. As metaphors, there is nothing wrong with these descriptors—after all, they are part of the lexicon and often convey the general point vividly.


pages: 366 words: 94,209

Throwing Rocks at the Google Bus: How Growth Became the Enemy of Prosperity by Douglas Rushkoff

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3D printing, Airbnb, algorithmic trading, Amazon Mechanical Turk, Andrew Keen, bank run, banking crisis, barriers to entry, bitcoin, blockchain, Burning Man, business process, buy low sell high, California gold rush, Capital in the Twenty-First Century by Thomas Piketty, carbon footprint, centralized clearinghouse, citizen journalism, clean water, cloud computing, collaborative economy, collective bargaining, colonial exploitation, Community Supported Agriculture, corporate personhood, crowdsourcing, cryptocurrency, disintermediation, diversified portfolio, Elon Musk, Erik Brynjolfsson, ethereum blockchain, fiat currency, Firefox, Flash crash, full employment, future of work, gig economy, Gini coefficient, global supply chain, global village, Google bus, Howard Rheingold, IBM and the Holocaust, impulse control, income inequality, index fund, iterative process, Jaron Lanier, Jeff Bezos, jimmy wales, job automation, Joseph Schumpeter, Kickstarter, loss aversion, Lyft, Mark Zuckerberg, market bubble, market fundamentalism, Marshall McLuhan, means of production, medical bankruptcy, minimum viable product, Naomi Klein, Network effects, new economy, Norbert Wiener, Oculus Rift, passive investing, payday loans, peer-to-peer lending, Peter Thiel, post-industrial society, profit motive, quantitative easing, race to the bottom, recommendation engine, reserve currency, RFID, Richard Stallman, ride hailing / ride sharing, Ronald Reagan, Satoshi Nakamoto, Second Machine Age, shareholder value, sharing economy, Silicon Valley, Snapchat, social graph, software patent, Steve Jobs, TaskRabbit, trade route, transportation-network company, Turing test, Uber and Lyft, Uber for X, unpaid internship, Y Combinator, young professional, Zipcar

Next comes frenzy, when we see the formation of speculative bubbles, increasing unemployment, and the beginning of unrest. That’s likely where we are today, with the absurd valuation of every remotely plausible new platform monopoly, as well as the joblessness and upset that the successful ones generate: cabdrivers protesting Uber, hotel workers complaining about Airbnb, and San Francisco residents throwing rocks at Google buses over inflated rent prices. Then the stock market bubble pops. Perez sees that as the turning point, when wealth disparity between the winners and losers reaches an extreme, civil unrest reaches a peak, and government is forced to act through regulation. For instance, the irruption and frenzy phases of automobiles and mass-produced appliances led to the Roaring Twenties and eventually the 1929 crash. So government and even industry begrudgingly supported the New Deal and the welfare state.


pages: 389 words: 109,207

Fortune's Formula: The Untold Story of the Scientific Betting System That Beat the Casinos and Wall Street by William Poundstone

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Albert Einstein, anti-communist, asset allocation, Benoit Mandelbrot, Black-Scholes formula, Brownian motion, buy low sell high, capital asset pricing model, Claude Shannon: information theory, computer age, correlation coefficient, diversified portfolio, en.wikipedia.org, Eugene Fama: efficient market hypothesis, high net worth, index fund, interest rate swap, Isaac Newton, Johann Wolfgang von Goethe, John von Neumann, Long Term Capital Management, Louis Bachelier, margin call, market bubble, market fundamentalism, Marshall McLuhan, New Journalism, Norbert Wiener, offshore financial centre, publish or perish, quantitative trading / quantitative finance, random walk, risk tolerance, risk-adjusted returns, Robert Shiller, Robert Shiller, Ronald Reagan, short selling, speech recognition, statistical arbitrage, The Predators' Ball, The Wealth of Nations by Adam Smith, transaction costs, traveling salesman, value at risk, zero-coupon bond

“I go out only a few nights per month, but on those nights, I tend to come home with two girls, or, usually, more.” Woods takes a perverse pride in saying that he has not watched a horse race in person in the past eighteen years. He does not find horse races that interesting. Results arrive as instant messages from his agents at the track, punctuated by the appropriate smiling or frowning emoticons. Near the top of the late 1990s stock market bubble, Woods sold short the NASDAQ index. It was an outright gamble that the bubble would burst, and the timing was wrong. Woods says he lost $100 million. “When you look at how much money I have consistently made from the horses, from 1987 onward, compared to what I’ve done in the market,” he said, “horses would seem to be a far safer investment than stocks.” The Dark Side of Infinity CLAUDE SHANNON DIED the same year as HAL—2001—on February 24.


pages: 326 words: 103,170

The Seventh Sense: Power, Fortune, and Survival in the Age of Networks by Joshua Cooper Ramo

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Airbnb, Albert Einstein, algorithmic trading, barriers to entry, Berlin Wall, bitcoin, British Empire, cloud computing, crowdsourcing, Danny Hillis, defense in depth, Deng Xiaoping, Edward Snowden, Fall of the Berlin Wall, Firefox, Google Chrome, income inequality, Isaac Newton, Jeff Bezos, job automation, market bubble, Menlo Park, natural language processing, Network effects, Norbert Wiener, Oculus Rift, packet switching, Paul Graham, price stability, quantitative easing, RAND corporation, recommendation engine, Republic of Letters, Richard Feynman, Richard Feynman, road to serfdom, Sand Hill Road, secular stagnation, self-driving car, Silicon Valley, Skype, Snapchat, social web, sovereign wealth fund, Steve Jobs, Steve Wozniak, Stewart Brand, Stuxnet, superintelligent machines, technological singularity, The Coming Technological Singularity, The Wealth of Nations by Adam Smith, too big to fail, Vernor Vinge, zero day

But the network age, because of that chaos that travels with connection, makes the complicated complex. Complicated systems are packed with parts, but they are predictable. It’s the complex ones that really change the rules. And once a mesh of complex connection is really flowing, it produces surprising interaction. Precisely because there is no central plan, the best of these linked systems create, in a sense. From computer crashes to market bubbles. Castells’s social protests emerged in this complex way, appearing like condensate in the jar of the post-2008 economic crisis. Researchers following in his wake studied the Spanish anti-austerity movement of 2011 and found that it was composed largely of new organizations that blossomed from connectivity. Other Spanish protest groups, such as labor, anti-abortion activists, and regional separatists, relied on decades-old organizations.


pages: 345 words: 86,394

Frequently Asked Questions in Quantitative Finance by Paul Wilmott

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Albert Einstein, asset allocation, Black-Scholes formula, Brownian motion, butterfly effect, capital asset pricing model, collateralized debt obligation, Credit Default Swap, credit default swaps / collateralized debt obligations, delta neutral, discrete time, diversified portfolio, Emanuel Derman, Eugene Fama: efficient market hypothesis, fixed income, fudge factor, implied volatility, incomplete markets, interest rate derivative, interest rate swap, iterative process, London Interbank Offered Rate, Long Term Capital Management, Louis Bachelier, mandelbrot fractal, margin call, market bubble, martingale, Norbert Wiener, quantitative trading / quantitative finance, random walk, regulatory arbitrage, risk/return, Sharpe ratio, statistical arbitrage, statistical model, stochastic process, stochastic volatility, transaction costs, urban planning, value at risk, volatility arbitrage, volatility smile, Wiener process, yield curve, zero-coupon bond

This is seen when one calibrates a model to market prices of derivatives, without ever studying the statistics of the underlying process. The validity of the EMH, whichever form, is of great importance because it determines whether anyone can outperform the market, or whether successful investing is all about luck. EMH does not require investors to behave rationally, only that in response to news or data there will be a sufficiently large random reaction that an excess profit cannot be made. Market bubbles, for example, do not invalidate EMH provided they cannot be exploited. There have been many studies of the EMH, and the validity of its different forms. Many early studies concluded in favour of the weak form. Bond markets and large-capitalization stocks are thought to be highly efficient, smaller stocks less so. Because of different quality of information among investors and because of an emotional component, real estate is thought of as being quite inefficient.


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, asset-backed security, 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, Isaac Newton, Jane Jacobs, Jean Tirole, job satisfaction, Joseph Schumpeter, Long Term Capital Management, loss aversion, market bubble, market clearing, mental accounting, Mikhail Gorbachev, 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

Maybe they are right. One cannot decisively prove that the stock market has been irrational. But in all of this debate no one has offered any real evidence to think that the volatility is rational.6 The price changes appear instead to be correlated with social changes of various kinds. Andrei Shleifer and Sendhil Mullainathan have observed the changes in Merrill Lynch advertisements. Prior to the stock market bubble, in the early 1990s, Merrill Lynch was running advertisements showing a grandfather fishing with his grandson. The ad was captioned: “Maybe you should plan to grow rich slowly.” By the time the market had peaked around 2000, when investors were obviously very pleased with recent results, Merrill’s ads had changed dramatically. There was a picture of a computer chip shaped like a bull. The caption read: “Be Wired . . .


pages: 1,152 words: 266,246

Why the West Rules--For Now: The Patterns of History, and What They Reveal About the Future by Ian Morris

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Admiral Zheng, agricultural Revolution, Albert Einstein, anti-communist, Arthur Eddington, Atahualpa, Berlin Wall, British Empire, Columbian Exchange, conceptual framework, cuban missile crisis, defense in depth, demographic transition, Deng Xiaoping, discovery of the americas, Doomsday Clock, en.wikipedia.org, falling living standards, Flynn Effect, Francisco Pizarro, global village, hiring and firing, indoor plumbing, invention of agriculture, Isaac Newton, James Watt: steam engine, knowledge economy, market bubble, Menlo Park, Mikhail Gorbachev, mutually assured destruction, New Journalism, out of africa, Peter Thiel, phenotype, pink-collar, place-making, purchasing power parity, RAND corporation, Ray Kurzweil, Ronald Reagan, Scientific racism, Silicon Valley, Sinatra Doctrine, South China Sea, special economic zone, Steve Jobs, Steve Wozniak, Steven Pinker, strong AI, The Wealth of Nations by Adam Smith, Thomas Kuhn: the structure of scientific revolutions, Thomas L Friedman, Thomas Malthus, trade route, upwardly mobile, wage slave, washing machines reduced drudgery

The paradox of social development—the tendency for development to generate the very forces that undermine it—means that bigger cores create bigger problems for themselves. It is all too familiar in our own age. The rise of international finance in the nineteenth century (CE) tied together capitalist nations in Europe and America and helped push social development upward faster than ever before, but this also made it possible for an American stock market bubble in 1929 to drag all these countries down; and the staggering increase in financial sophistication that helped push social development up in the last fifty years also made it possible for a new American bubble in 2008 to shake virtually the whole world to its foundations. This is an alarming conclusion, but we can also derive a third, more optimistic, point from the troubled history of these early states.

Fleeing Europe’s contagious rivalries and wars, American politicians left the conductor’s podium empty, withdrawing into political isolation worthy of eighteenth-century China or Japan. While times were good the orchestra improvised and muddled through, but when they turned bad its music became cacophony. In October 1929 a little bungling, a lot of bad luck, and the absence of a conductor turned an American stock market bubble into an international financial disaster. Contagion raced through the capitalist world: banks folded, credit evaporated, and currencies collapsed. Few starved, but by Christmas 1932 one American worker in four was jobless. In Germany it was closer to one in two. Lines of the gray-faced unemployed stretched out, “gazing at their destiny with the same sort of dumb amazement as animals in a trap,” the English journalist George Orwell thought.


pages: 407 words: 114,478

The Four Pillars of Investing: Lessons for Building a Winning Portfolio by William J. Bernstein

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asset allocation, Bretton Woods, British Empire, buy low sell high, carried interest, corporate governance, cuban missile crisis, Daniel Kahneman / Amos Tversky, Dava Sobel, diversification, diversified portfolio, Edmond Halley, equity premium, estate planning, Eugene Fama: efficient market hypothesis, financial independence, financial innovation, fixed income, German hyperinflation, high net worth, hindsight bias, Hyman Minsky, index fund, invention of the telegraph, Isaac Newton, John Harrison: Longitude, Long Term Capital Management, loss aversion, market bubble, mental accounting, mortgage debt, new economy, pattern recognition, quantitative easing, railway mania, random walk, Richard Thaler, risk tolerance, risk/return, Robert Shiller, Robert Shiller, South Sea Bubble, transaction costs, Vanguard fund, yield curve

This requires nerves of steel and runs the risk that you may exhaust your cash long before the market finally touches bottom. I don’t recommend this course of action to all but the hardiest and experienced of souls. If you decide to go this route, you should increase your stock allocation only by very small amounts—say by 5% after a fall of 25% in prices—so as to avoid running out of cash and risking complete demoralization in the event of a 1930s-style bear market. Bubbles and Busts: Summing Up In the last two chapters, I hope that I’ve accomplished four things. First, I hope I’ve told a good yarn. An appreciation of manias and crashes should be part of every educated person’s body of historical knowledge. It informs us, as almost no other subject can, about the psychology of peoples and nations. And most importantly, it is yet one more demonstration that there is really nothing new in this world.


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, asset-backed security, 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, declining real wages, 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, Isaac Newton, joint-stock company, Joseph Schumpeter, kremlinology, labor-force participation, 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 Predators' Ball, The Wealth of Nations by Adam Smith, transaction costs, transcontinental railway, women in the workforce, yield curve, zero-coupon bond

Old 1970s and 1980s debts were converted into equity in these de-statified firms, giving foreign investors and domestic political cronies big stakes, often at generous prices, in monopoly or near-monopoly businesses. Pri--vate debt flows, mainly bonds rather than bank loans, grew 337%, and direct investment — taking a position in existing real enterprise or the establishment of a new one — rose 203%. As a result, the official share of long-term finance fell from over half in 1989 to a third in 1994. Mexico was the poster country of the emerging markets bubble. The wave of privatization, deregulation, and capital market opening led to a rush of capital — $68 billion in portfolio capital between 1991 and the first half of 1994, compared to a net outflow of $3.6 billion from 1988 through 1990. Mexican financial markets, a fraction of the size of the U.S. market, boomed. The real Mexican economy, however, was performing poorly, turning in tepid growth rates and low real investment levels, while average Mexicans suffered only the mildest of recoveries from the ravages of the 1980s.


pages: 487 words: 147,891

McMafia: A Journey Through the Global Criminal Underworld by Misha Glenny

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anti-communist, Anton Chekhov, Berlin Wall, blood diamonds, BRICs, colonial rule, crony capitalism, Deng Xiaoping, Doha Development Round, failed state, Fall of the Berlin Wall, financial deregulation, Firefox, forensic accounting, friendly fire, glass ceiling, illegal immigration, joint-stock company, market bubble, Mikhail Gorbachev, Nick Leeson, offshore financial centre, place-making, rising living standards, Ronald Reagan, Skype, special economic zone, Stephen Hawking, trade liberalization, trade route, Transnistria, unemployed young men, upwardly mobile

When American physicists announced that they had achieved cold fusion in the laboratory (a claim later shown to be unproved), eager Japanese investors ran up the share prices of firms that had any sort of relationship with potential cold fusion processes. In retrospect, it appears that by year-end 1988 the Japanese stock market was in the midst of a full-fledged bubble.” It was not long before the extraordinary speculation on the Nikkei stock exchange found its way into the property market. Financial corporations and banks wanted to transfer the notional money of the stock market bubble into hard assets, and property was the best bet. It did not take long for the vortex of speculation to consume the existing housing stock, and so the banks and big corporations started looking for new land to develop. But the postwar construction mania had ensured there were no empty spaces on which to build. To make way for the glistening new bubbly buildings, existing owners or tenants would have to move.


pages: 790 words: 150,875

Civilization: The West and the Rest by Niall Ferguson

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Admiral Zheng, agricultural Revolution, Albert Einstein, Andrei Shleifer, Atahualpa, Ayatollah Khomeini, Berlin Wall, BRICs, British Empire, clean water, collective bargaining, colonial rule, conceptual framework, Copley Medal, corporate governance, credit crunch, David Ricardo: comparative advantage, Dean Kamen, delayed gratification, Deng Xiaoping, discovery of the americas, Dissolution of the Soviet Union, European colonialism, Fall of the Berlin Wall, Francisco Pizarro, full employment, Hans Lippershey, haute couture, Hernando de Soto, income inequality, invention of movable type, invisible hand, Isaac Newton, James Hargreaves, James Watt: steam engine, John Harrison: Longitude, joint-stock company, Joseph Schumpeter, land reform, land tenure, Louis Pasteur, Mahatma Gandhi, market bubble, Martin Wolf, means of production, megacity, Mikhail Gorbachev, new economy, probability theory / Blaise Pascal / Pierre de Fermat, profit maximization, purchasing power parity, quantitative easing, rent-seeking, reserve currency, road to serfdom, Ronald Reagan, savings glut, Scramble for Africa, Silicon Valley, South China Sea, sovereign wealth fund, special economic zone, spice trade, spinning jenny, Steve Jobs, Steven Pinker, The Great Moderation, the market place, the scientific method, The Wealth of Nations by Adam Smith, Thomas Kuhn: the structure of scientific revolutions, Thomas Malthus, Thorstein Veblen, total factor productivity, trade route, transaction costs, transatlantic slave trade, transatlantic slave trade, upwardly mobile, uranium enrichment, wage slave, Washington Consensus, women in the workforce, World Values Survey

There are at least four different hypotheses proposed by those who expect it to stumble. The first is that similar projections of inexorable ascent used to be made for Japan. It too was supposed to overtake the United States and to become the number one global economic superpower. So, the argument goes, China could one day suffer the fate of Japan after 1989. Precisely because the economic and political systems are not truly competitive, a real-estate or stock-market bubble and bust could saddle the country with zombie banks, flat growth and deflation – the plight of Japan for the better part of two decades now. The counter-argument is that an archipelago off the east coast of Eurasia was never likely to match a continental power like the United States. It was credible to predict even a century ago that Japan would catch up with the United Kingdom, its Western analogue – as it duly did – but not that it would overhaul the United States.


pages: 339 words: 57,031

From Counterculture to Cyberculture: Stewart Brand, the Whole Earth Network, and the Rise of Digital Utopianism by Fred Turner

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1960s counterculture, A Declaration of the Independence of Cyberspace, Apple's 1984 Super Bowl advert, back-to-the-land, bioinformatics, Buckminster Fuller, Claude Shannon: information theory, complexity theory, computer age, conceptual framework, Danny Hillis, dematerialisation, distributed generation, Douglas Engelbart, Dynabook, From Mathematics to the Technologies of Life and Death, future of work, game design, George Gilder, global village, Golden Gate Park, Hacker Ethic, Haight Ashbury, hive mind, Howard Rheingold, informal economy, invisible hand, Jaron Lanier, John von Neumann, Kevin Kelly, knowledge economy, knowledge worker, market bubble, Marshall McLuhan, means of production, Menlo Park, Mother of all demos, new economy, Norbert Wiener, post-industrial society, postindustrial economy, Productivity paradox, QWERTY keyboard, Ralph Waldo Emerson, RAND corporation, Richard Stallman, Robert Shiller, Robert Shiller, Ronald Reagan, Silicon Valley, Silicon Valley ideology, South of Market, San Francisco, Steve Jobs, Steve Wozniak, Steven Levy, Stewart Brand, technoutopianism, Ted Nelson, Telecommunications Act of 1996, theory of mind, urban renewal, Vannevar Bush, Whole Earth Catalog, Whole Earth Review, Yom Kippur War

It won two National Magazine Awards, saw its readership grow to more than three hundred thousand a month, developed a book publisher (HardWired) and a variety of online ventures (HotWired, Suck), and helped spawn a clutch of magazines focused on the Internet and the New Economy, including Fast Company, Business 2.0, the Industry Standard, and Red [ 207 ] [ 208 ] Chapter 7 Herring. Thanks in part to a confluence of extraordinary economic, technological, and political currents, its technocentric optimism became a central feature of the biggest stock market bubble in American history. Its faith that the Internet constituted a revolution in human affairs legitimated calls for telecommunications deregulation and the dismantling of government entitlement programs elsewhere as well. And each month, its Technicolor pages of gadgets and gurus cataloged the delights awaiting information professionals in the New Economy. Yet, for all its forward-looking verve, Wired’s vision of the digital future also carried with it a particular version of the countercultural past.


pages: 460 words: 122,556

The End of Wall Street by Roger Lowenstein

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Asian financial crisis, asset-backed security, bank run, banking crisis, Berlin Wall, 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, fixed income, 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, sovereign wealth fund, statistical model, the payments system, too big to fail, tulip mania, Y2K

In 2003, in a letter to investors of the New Income Fund, Rodriguez announced that he was going on a “buyer’s strike.” Specifically, he would not be buying obligations of the federal government of longer than one year, because he did not have faith in what Washington—and in particular Greenspan—was doing. “We have never seen the magnitude of liquidity that is being thrown at the system,” he wrote. “We believe that this is a bond market bubble”—one similar in scale to the dot-com bubble.4 Since announcing his strike, Rodriguez had continued to invest in the obligations of Fannie and Freddie, which had been created by the government but operated (mostly) as private concerns. However, the mortgage market was looking ever more frothy. In October 2005, a few months before his nightmare, Rodriguez told his investors that his staff had been “combing through our high-quality mortgage-backed bond segment and”—lo and behold—“we found two suspicious-looking mortgage-backed CMOs.”


pages: 349 words: 134,041

Traders, Guns & Money: Knowns and Unknowns in the Dazzling World of Derivatives by Satyajit Das

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accounting loophole / creative accounting, Albert Einstein, Asian financial crisis, asset-backed security, Black Swan, Black-Scholes formula, Bretton Woods, BRICs, Brownian motion, business process, buy low sell high, call centre, capital asset pricing model, collateralized debt obligation, complexity theory, corporate governance, Credit Default Swap, credit default swaps / collateralized debt obligations, cuban missile crisis, currency peg, disintermediation, diversification, diversified portfolio, Eugene Fama: efficient market hypothesis, financial innovation, fixed income, Haight Ashbury, high net worth, implied volatility, index arbitrage, index card, index fund, interest rate derivative, interest rate swap, Isaac Newton, job satisfaction, locking in a profit, Long Term Capital Management, mandelbrot fractal, margin call, market bubble, Marshall McLuhan, mass affluent, merger arbitrage, Mexican peso crisis / tequila crisis, moral hazard, mutually assured destruction, new economy, New Journalism, Nick Leeson, offshore financial centre, oil shock, Parkinson's law, placebo effect, Ponzi scheme, purchasing power parity, quantitative trading / quantitative finance, random walk, regulatory arbitrage, risk-adjusted returns, risk/return, shareholder value, short selling, South Sea Bubble, statistical model, technology bubble, the medium is the message, time value of money, too big to fail, transaction costs, value at risk, Vanguard fund, volatility smile, yield curve, Yogi Berra, zero-coupon bond

In his opinion, if you wanted to understand everything in sufficient depth then you keep money under your mattress or perhaps, if you were a little more daring, government securities, preferably short term treasury bills. Otherwise? Did you invest in known unknowns? It wasn’t clear. He seemed keen on an index. A group of known unknowns or unknown unknowns was better than a single one of the same kind. Dealers love sophisticated investors. They are easy pickings. On the platform In the late 1990s, the world caught technology fever. The pandemic was the worst since the last financial market bubble that was only a few years before. New terms were in vogue – TMT (Technology, Media, Internet); TIME (Technology, Internet, Media). Investment banks and dealers cashed in on the infatuation with all things technological. They underwrote IPOs, issued shares, traded securities, arranged mergers and acquisitions, and pro- 05_CH04.QXD 17/2/06 128 4:22 pm Page 128 Tr a d e r s , G u n s & M o n e y vided advice.


pages: 459 words: 118,959

Confidence Game: How a Hedge Fund Manager Called Wall Street's Bluff by Christine S. Richard

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Asian financial crisis, asset-backed security, banking crisis, Bernie Madoff, cognitive dissonance, collateralized debt obligation, corporate governance, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, diversification, Donald Trump, family office, financial innovation, fixed income, forensic accounting, glass ceiling, Long Term Capital Management, market bubble, moral hazard, Ponzi scheme, profit motive, short selling, statistical model, white flight

In fact, the whole bond-insurance industry might be vulnerable to faulty statistical models that rely on the past to predict the future, Ackman argued in the report. These models estimated that MBIA faced just a 1-in-10,000 chance of confronting a scenario that would leave it unable to meet all its claims. Yet historical data-based models considered the 1987 stock market crash an event so improbable that it would be expected to happen only once in a trillion years, Ackman explained. “The recent stock market bubble and its collapse are good reminders that the ‘unthinkable’ and the ‘unpredictable’ occur more often than expected,” Ackman wrote. Ackman also pointed out that MBIA was dangerously reliant on its own triple-A credit rating. Without the top rating, MBIA wouldn’t be able to write new business, Ackman said. MBIA’s investment portfolio would fall in value after a downgrade because it was packed with bonds guaranteed by MBIA itself.


pages: 543 words: 157,991

All the Devils Are Here by Bethany McLean

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Asian financial crisis, asset-backed security, bank run, Black-Scholes formula, call centre, collateralized debt obligation, corporate governance, Credit Default Swap, credit default swaps / collateralized debt obligations, diversification, Exxon Valdez, fear of failure, financial innovation, fixed income, high net worth, Home mortgage interest deduction, interest rate swap, laissez-faire capitalism, Long Term Capital Management, margin call, market bubble, market fundamentalism, Maui Hawaii, moral hazard, mortgage debt, Northern Rock, Own Your Own Home, Ponzi scheme, quantitative trading / quantitative finance, race to the bottom, risk/return, Ronald Reagan, Rosa Parks, shareholder value, short selling, South Sea Bubble, statistical model, telemarketer, too big to fail, value at risk

Bernanke’s comment infuriated an outspoken, deeply skeptical Georgia mutual fund manager named Michael Orkin. Not long after the Fed chairman’s speech, Orkin wrote in his monthly letter to investors, “Since the first shot was fired across the credit bow in February 2007, investors have been force-fed a constant diet of half-truths and whole lies regarding the nature and status of the mammoth mortgage-based derivative machine and the housing market bubble it inflated... The fact that the credit crisis has now turned into a confidence crisis should serve as a wake-up call to Wall Street, the Treasury and the Fed.” In late November 2007, a senior vice president in structured finance at Lehman Brothers, Deepali Advani, who had previously worked at Moody’s, forwarded an e-mail from one of the firm’s traders to a handful of his contacts. “The wheels on the bus are falling off, falling off, falling off...


pages: 497 words: 143,175

Pivotal Decade: How the United States Traded Factories for Finance in the Seventies by Judith Stein

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1960s counterculture, affirmative action, airline deregulation, anti-communist, Ayatollah Khomeini, barriers to entry, Berlin Wall, blue-collar work, Bretton Woods, capital controls, centre right, collective bargaining, Credit Default Swap, crony capitalism, David Ricardo: comparative advantage, deindustrialization, desegregation, energy security, Fall of the Berlin Wall, falling living standards, feminist movement, financial deregulation, floating exchange rates, full employment, income inequality, income per capita, intermodal, invisible hand, knowledge worker, laissez-faire capitalism, Long Term Capital Management, manufacturing employment, market bubble, Martin Wolf, new economy, oil shale / tar sands, oil shock, open economy, payday loans, post-industrial society, post-oil, price mechanism, price stability, Ralph Nader, RAND corporation, reserve currency, Robert Gordon, Ronald Reagan, Simon Kuznets, strikebreaker, trade liberalization, union organizing, urban planning, urban renewal, War on Poverty, Washington Consensus, working poor, Yom Kippur War

There were other conflicting trends. By the end of the Clinton years, unemployment fell to a twenty-year low. Wages rose, poverty rates fell sharply, but CEO earnings skyrocketed. In 1980 CEOs at large companies earned forty-five times as much as ordinary workers. By 1995 the ratio rose to 160 times as much. In 1997 it reached 305, and by 2000 it rose to 458.100 The stock market boom was also a stock market bubble. The ratio of price to earnings had traditionally been 14.5. In 2000, the ratio reached 30, as investors imagined that, despite current earnings, each tech corporation was a future Microsoft. Then the overinvestment in telecommunications led to a collapse, which erased $2 trillion in value and threw half a million people out of work in 2002.101 Global Crossing consumed $12 billion from 1997 until 2002, when it went bankrupt.102 WorldCom lost even more after it went under shortly afterward.


pages: 607 words: 133,452

Against Intellectual Monopoly by Michele Boldrin, David K. Levine

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accounting loophole / creative accounting, agricultural Revolution, barriers to entry, cognitive bias, David Ricardo: comparative advantage, Dean Kamen, Donald Trump, double entry bookkeeping, en.wikipedia.org, Ernest Rutherford, experimental economics, financial innovation, informal economy, interchangeable parts, invention of radio, invention of the printing press, invisible hand, James Watt: steam engine, Jean Tirole, John Harrison: Longitude, Joseph Schumpeter, linear programming, market bubble, market design, mutually assured destruction, Nash equilibrium, new economy, open economy, pirate software, placebo effect, price discrimination, profit maximization, rent-seeking, Richard Stallman, Silicon Valley, Skype, slashdot, software patent, the market place, total factor productivity, trade liberalization, transaction costs, Y2K

Both theoretical and, to a lesser extent, empirical research suggest this possibility.”17 P1: PDX head margin: 1/2 gutter margin: 7/8 CUUS245-08 cuus245 978 0 521 87928 6 April 29, 2008 15:42 194 Against Intellectual Monopoly Several of these studies examine or are influenced by the upswing in patenting that occurred in the United States in the mid-1980s. That upswing followed the establishment of a special patent court in the United States in 1982; it turned into an explosion in the roaring 1990s, paralleling the dot-com stock market bubble, but it did not stop after that bubble burst. In 1983 in the United States, 59,715 patents were issued against 105,704 applications; by 2003, 189,597 patents were issued against 355,418 applications. In twenty years, the flow of patents roughly tripled. Kortum and Lerner focus specifically on the surge in U.S. patents, and make no claim as to whether this means more or less productivity growth.


pages: 412 words: 113,782

Business Lessons From a Radical Industrialist by Ray C. Anderson

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Albert Einstein, banking crisis, carbon footprint, centralized clearinghouse, clean water, cleantech, corporate social responsibility, Credit Default Swap, dematerialisation, distributed generation, energy security, Exxon Valdez, fear of failure, Gordon Gekko, greed is good, Indoor air pollution, intermodal, invisible hand, late fees, Mahatma Gandhi, market bubble, music of the spheres, Negawatt, new economy, oil shale / tar sands, oil shock, peak oil, renewable energy credits, shareholder value, Silicon Valley, six sigma, supply-chain management, urban renewal, Y2K

Yet many of us also had a growing sense that the company I had founded back in 1973, and had reinvented in 1994, needed to be reinvented again to reach our Mission Zero goal. That was another tall order, and the timing was far from perfect. As I write, 2008 is shaping up to be a very challenging year on many, many fronts. We’ve seen a historic storm in energy costs, the bursting of the housing market bubble, a credit crisis, a liquidity freeze, and the federal takeover of financial institutions. Bankruptcies and foreclosures are in every direction you look. And the year has a quarter to go! What will the next months, next year, bring? Setting the stage for the Brasstown Valley meeting, our CEO since 2001, Dan Hendrix, observed, “Many are bracing for an economic slowdown.” Was that an understatement!


pages: 422 words: 131,666

Life Inc.: How the World Became a Corporation and How to Take It Back by Douglas Rushkoff

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affirmative action, Amazon Mechanical Turk, banks create money, big-box store, Bretton Woods, car-free, colonial exploitation, Community Supported Agriculture, complexity theory, computer age, corporate governance, credit crunch, currency manipulation / currency intervention, David Ricardo: comparative advantage, death of newspapers, don't be evil, Donald Trump, double entry bookkeeping, easy for humans, difficult for computers, financial innovation, Firefox, full employment, global village, Google Earth, greed is good, Howard Rheingold, income per capita, invention of the printing press, invisible hand, Jane Jacobs, John Nash: game theory, joint-stock company, Kevin Kelly, laissez-faire capitalism, loss aversion, market bubble, market design, Marshall McLuhan, Milgram experiment, moral hazard, mutually assured destruction, Naomi Klein, new economy, New Urbanism, Norbert Wiener, peak oil, place-making, placebo effect, Ponzi scheme, price mechanism, price stability, principal–agent problem, private military company, profit maximization, profit motive, race to the bottom, RAND corporation, rent-seeking, RFID, road to serfdom, Ronald Reagan, short selling, Silicon Valley, Simon Kuznets, social software, Steve Jobs, Telecommunications Act of 1996, telemarketer, The Wealth of Nations by Adam Smith, Thomas L Friedman, too big to fail, trade route, trickle-down economics, union organizing, urban decay, urban planning, urban renewal, Vannevar Bush, Victor Gruen, white flight, working poor, Works Progress Administration, Y2K, young professional

The last thing they wanted to be involved in was the buying and selling of real property—especially since its value had already been inflated by decades of mythmaking. No, the land would be at the very bottom of the pyramid. Instead, they invested in mortgages other people took out to buy land. As Alan Greenspan eventually explained it to Newsweek magazine, “This particular problem was an accident waiting to happen. The euphoria that existed in the expansion of the housing-market bubble induced investors around the world who’d had a huge buildup in liquidity—largely because of the lower real long-term interest rates that occurred as a consequence of the end of the cold war—to invest in something with a higher rate of return. And, lo and behold, the sub-prime mortgage market provided it.” The housing bubble had little to do with buying pressure, and everything to do with an excess of capital looking for people who might borrow it.


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, Simon Kuznets, 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

See also risk taking speculative bubbles. See bubbles Spielberg, Steven, 188–89 Sprenkle, Case, 79 Squam Lake Group, 22–23, 218 Standard & Poor’s / Case-Shiller national home price index, xv Statman, Myer, 78, 80 status. See inequality; social status; wealth stewardship, 17, 43, 231; and accountants, 101; and educators, 103 Stigler, George A, 95 Stiglitz, Joseph, 30 stockbrokers. See brokers stock markets: bubbles, 47, 185, 186; crashes, 60, 171, 184; excess volatility, 170–72, 185; high-frequency trading, 60–61; history, 46–47; importance, 46; investment banks and, 45–46; regulation of, 46; responses to new information, 59–60; specialists, 57; traders, 57; trading in, 46, 48. See also New York Stock Exchange stock options: as incentives, 21, 22, 23, 24, 48–49; pricing, 132; trading, 78–80 stocks: dilution, 49; dividends, 171, 185; employee ownership, 215–16; history, 46–48, 144; as incentives, 48–49; initial public offerings, 45, 47; inside information, 23, 29–30; issuing, 45, 46, 47, 48–49; prices, 20–21, 133, 171–72, 185–86 Stokey, Nancy, 29–30, 77 storytelling, 180, 181 structured investment vehicles (SIVs), 43 subprime crisis, xv–xvi, 50, 51, 52, 53, 62, 157, 220 sumptuary laws and taxes, 191, 192 swaps, 75 Sweden, mutual fund managers, 28 Swensen, David, 31 Switzerland, homeownership, 213 symmetry, beauty and, 131–32, 133 tail risk, 35 Tarbell, Ida M., 164 tariffs, xvii, 92 Tauzin, Billy, 88 taxes: cheating on, 101; consumption, 192, 253n14 (Chapter 27); estate, 192–93, 253n15 (Chapter 27); fiscal policy, 114–16, 117, 133; gift, 204–5; progressive, 116, 192, 193–94, 217–18, 235; sumptuary, 191, 192.


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, business climate, capital controls, Carmen Reinhart, central bank independence, centre right, 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, labor-force participation, labour mobility, Lao Tzu, 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, sovereign wealth fund, special drawing rights, Stuxnet, The Market for Lemons, Thomas Kuhn: the structure of scientific revolutions, Thomas L Friedman, too big to fail, trade route, uranium enrichment, Washington Consensus, working-age population, yield curve

., 96, 244 Gulf Cooperation Council (GCC), 12, 150, 152–57 monetary integration process and, 153–57 as quasi-currency union, 153 Hague Congress, 116 Hall, Robert, 86–87 Hamilton, Alexander, 120–21 Han Dynasty, 90 Hanke, Steve, 80 Haydn, Michael, 37 Hayek, Friedrich, 70–71, 72, 87 hedge fund covert operations, 47–51 Hemingway, Ernest, 256 Herzegovina, 136 Himes, James, 284 Holocaust, 115 Holy Roman Empire, 114, 115 Hong Ziuquan, 91 Hoover, Herbert, 85 housing market bubbles in, 75, 76–77, 248 collapse of, 2007, 248, 296 rise in, since 2009, 291 wealth effect and, 72, 73 HSBC, 227 Hu Jintao, 151–52, 202 Hunt, Lacy H., 74, 79 Hunt brothers, 217 Hyundai, 82 ImClone Systems, 25 income inequality, in China, 106 India, 12, 139, 151. See also BRICS (Brazil, Russia, India, China, South Africa) IMF commitment of, 202 U.S.


pages: 424 words: 115,035

How Will Capitalism End? by Wolfgang Streeck

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accounting loophole / creative accounting, Airbnb, Ben Bernanke: helicopter money, Bretton Woods, capital controls, Capital in the Twenty-First Century by Thomas Piketty, Carmen Reinhart, central bank independence, centre right, Clayton Christensen, collective bargaining, conceptual framework, corporate governance, credit crunch, David Brooks, David Graeber, debt deflation, deglobalization, deindustrialization, en.wikipedia.org, eurozone crisis, failed state, financial deregulation, financial innovation, first-past-the-post, full employment, Gini coefficient, global reserve currency, Google Glasses, haute cuisine, income inequality, invisible hand, John Maynard Keynes: Economic Possibilities for our Grandchildren, Kenneth Rogoff, labour market flexibility, labour mobility, late capitalism, market bubble, means of production, moral hazard, North Sea oil, offshore financial centre, open borders, pension reform, Plutocrats, plutocrats, Plutonomy: Buying Luxury, Explaining Global Imbalances, post-industrial society, private sector deleveraging, profit maximization, profit motive, quantitative easing, reserve currency, rising living standards, Robert Gordon, savings glut, secular stagnation, shareholder value, sharing economy, sovereign wealth fund, The Wealth of Nations by Adam Smith, Thorstein Veblen, too big to fail, transaction costs, Uber for X, upwardly mobile, winner-take-all economy, Wolfgang Streeck

Despite the repeated revaluations of its currency, due in part to the revaluation of its products, the German economy has thrived since the 1970s, not least by migrating from markets that compete on price to those that compete on quality. Unlike the Mediterranean states, the hard-currency countries are wary of both inflation and debt, even though their interest rates are relatively low. Their ability to survive without a loose monetary policy benefits their numerous savers, whose votes carry significant political weight; it also means they don’t need to take on the risk of market bubbles.23 INEQUALITY FROM DIVERSITY It is important to stress that no one version of the interface between capitalism and society is intrinsically morally superior to the others. Every embedding of capitalism in society, every attempt to fit its logic into that of a social order will be ‘rough and ready’, improvised, compromised and never entirely satisfactory for any party. This does not stop the partisans of the various national models from decrying the alternatives and promoting their own as the most correct and rational.