financial intermediation

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pages: 305 words: 69,216

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

Andrei Shleifer, banking crisis, Bernie Madoff, business cycle, 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, money market fund, moral hazard, mortgage debt, Myron Scholes, 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

There is first the extraordinary diversity and complexity of modern financial intermediation. Commercial banks conduct little more than half the financial intermediation in the American economy. If they are forced to be safe, their competitors will eat them alive. But can hedge funds, private equity funds, investment banks, and all the other nonbank banks be placed under the identical regulatory regime as commercial banks? If not, won't the differences distort competition? It is easier to deregulate an industry than to reregulate it. Deregulation has a built-in momentum: allow an unregulated firm to compete with a regulated one and the regulated firm will have a convincing case that it must be deregulated so that it can compete. One ends with a competitive industry. The competitive financial-intermediation industry that deregulation has created is complex and varied.

A choice under profound uncertainty is not adding a column of numbers but firing a shot in the dark, and so we should consider the character traits (not character flaws) that make some people willing to act on such a basis. They will be people who have a below-average aversion to uncertainty and, since we are speaking of business, an above-average love of making money. They were bound to swarm into financial intermediation in the era created by Alan Greenspan's monetary policy that offered prospects of great wealth to smart people willing to take large risks. Such people are not irrational, but their clustering in financial intermediation when the wraps are taken off risky lending enhances the inherent instability of that business. Similarly, it is not irrational, though often thought to be, to allow oneself to be influenced by what other people are doing. You may doubt that the price of some tradable asset will continue to rise, but the fact that it is rising means that other people disagree with you.

The case against reorganization is the clearer: experience, as with the Department of Homeland Security, teaches that a major federal reorganization (not to mention a reorganization that would encompass both state and foreign regulation of financial intermediation as well) takes years to gel, and during those years of growing pains the efficiency with which the mission entrusted to the reorganized entity will be performed will be lower than it was in the pre-reorganization regime. And this is apart from the fact that in the present instance the same small knot of senior economic officials that would design and supervise the reorganization have their hands full dealing with an economic emergency. The case against trying to reregulate financial intermediation at this time is a bit subtler and requires me to distinguish between two senses of "regulation." In one sense it refers to the regulatory framework — the laws that establish the powers and limits of the regulatory body.


pages: 554 words: 158,687

Profiting Without Producing: How Finance Exploits Us All by Costas Lapavitsas

"Robert Solow", Andrei Shleifer, asset-backed security, bank run, banking crisis, Basel III, borderless world, Branko Milanovic, Bretton Woods, business cycle, capital controls, Carmen Reinhart, central bank independence, collapse of Lehman Brothers, computer age, conceptual framework, corporate governance, credit crunch, Credit Default Swap, David Graeber, David Ricardo: comparative advantage, disintermediation, diversified portfolio, Erik Brynjolfsson, eurozone crisis, everywhere but in the productivity statistics, financial deregulation, financial independence, financial innovation, financial intermediation, financial repression, Flash crash, full employment, global value chain, global village, High speed trading, Hyman Minsky, income inequality, inflation targeting, informal economy, information asymmetry, intangible asset, job satisfaction, joint-stock company, Joseph Schumpeter, Kenneth Rogoff, liberal capitalism, London Interbank Offered Rate, low skilled workers, M-Pesa, market bubble, means of production, money market fund, moral hazard, mortgage debt, Network effects, new economy, oil shock, open economy, pensions crisis, price stability, Productivity paradox, profit maximization, purchasing power parity, quantitative easing, quantitative trading / quantitative finance, race to the bottom, regulatory arbitrage, reserve currency, Robert Shiller, Robert Shiller, savings glut, Scramble for Africa, secular stagnation, shareholder value, Simon Kuznets, special drawing rights, Thales of Miletus, The Chicago School, The Great Moderation, the payments system, The Wealth of Nations by Adam Smith, Tobin tax, too big to fail, total factor productivity, trade liberalization, transaction costs, union organizing, value at risk, Washington Consensus, zero-sum game

In recent years, however, data has been made available which focuses more closely on the financial sector and, above all, on financial intermediation (though the starting point of the change is different for each country). Thus, figure 6 shows employment in financial intermediation as a percentage of total employment. The countries of market-based finance, US and UK, have higher levels of financial employment than the countries of bank-based finance, Japan and Germany. However, the most striking aspect of figure 6 is that employment levels have been low and stable across the four countries: the proportion of the labour force employed in financial intermediation has been flat (or even gently declining) as the financial sector has surged ahead. If employment in financial intermediation (mostly banking) was taken as a proxy for aggregate financial employment, it would appear that financialization has not brought a sustained increase in the proportion of the labour employed in the realm of finance.8 The reasons for stagnant employment in financial intermediation are not immediately clear, and are probably related to the transformation of banking discussed in subsequent sections of this chapter.

For one thing, capital markets also generate further financial intermediation. Thus, investment banks engage in a form of banking that is integrally related to capital markets in terms of fundamental activities and profit extracted. Moreover, mature capitalism is characterized by the rise of ‘institutional investors’ – pension funds, investment funds, and so on – that typically transact with investment banks. Capital markets are not necessarily, and nor even predominantly, places where owners meet eventual users of loanable funds. Both investment banks and institutional investors have been fundamental to financialization, and empirical aspects of their rise are examined in chapters 8 and 9. In the rest of this chapter consider some brief theoretical observations regarding these forms of financial intermediation in contrast to ordinary (commercial) banks.

For informative overviews see Xavier Freixas and Jean-Charles Rochet, Microeconomics of Banking, Cambridge, MA: MIT Press, 2008; and Franklin Allen and Anthony M. Santomero, ‘The Theory of Financial Intermediation’, Journal of Banking and Finance 21, 1998. 8 An elegant exposition of such analysis of financial contracting can be found in Robert M. Townsend, ‘Optimal Contracts and Competitive Markets with Costly State Verification’, Journal of Economic Theory 22, 1979. 9 See, for instance, Joseph Stiglitz and Andrew Weiss, ‘Credit Rationing in Markets with Imperfect Information’, American Economic Review 71:3, 1981, pp. 393–410; Nobuhiro Kiyotaki and John Moore, ‘Credit Cycles’, Journal of Political Economy 105:2, 1997. 10 Once again, the literature is very broad; see, very selectively, Hayne Leland and David H. Pyle, ‘Informational Asymmetries, Financial Structure and Financial Intermediation’, The Journal of Finance 32, 1977; John Bryant, ‘A Model of Reserves, Bank Runs, and Deposit Insurance’, Journal of Banking and Finance 4, 1980; Douglas Diamond and Philip Dybvig, ‘Bank Runs, Deposit Insurance and Liquidity’, Journal of Political Economy 91, 1983; Douglas Diamond, ‘Financial Intermediation and Delegated Monitoring’, Review of Economic Studies 51, 1984; John H.


pages: 478 words: 126,416

Other People's Money: Masters of the Universe or Servants of the People? by John Kay

Affordable Care Act / Obamacare, asset-backed security, bank run, banking crisis, Basel III, Bernie Madoff, Big bang: deregulation of the City of London, bitcoin, Black Swan, Bonfire of the Vanities, bonus culture, Bretton Woods, buy and hold, call centre, capital asset pricing model, Capital in the Twenty-First Century by Thomas Piketty, cognitive dissonance, corporate governance, Credit Default Swap, cross-subsidies, dematerialisation, disruptive innovation, diversification, diversified portfolio, Edward Lloyd's coffeehouse, Elon Musk, Eugene Fama: efficient market hypothesis, eurozone crisis, financial innovation, financial intermediation, financial thriller, fixed income, Flash crash, forward guidance, Fractional reserve banking, full employment, George Akerlof, German hyperinflation, Goldman Sachs: Vampire Squid, Growth in a Time of Debt, income inequality, index fund, inflation targeting, information asymmetry, intangible asset, interest rate derivative, interest rate swap, invention of the wheel, Irish property bubble, Isaac Newton, John Meriwether, light touch regulation, London Whale, Long Term Capital Management, loose coupling, low cost airline, low cost carrier, M-Pesa, market design, millennium bug, mittelstand, money market fund, moral hazard, mortgage debt, Myron Scholes, NetJets, new economy, Nick Leeson, Northern Rock, obamacare, Occupy movement, offshore financial centre, oil shock, passive investing, Paul Samuelson, peer-to-peer lending, performance metric, Peter Thiel, Piper Alpha, Ponzi scheme, price mechanism, purchasing power parity, quantitative easing, quantitative trading / quantitative finance, railway mania, Ralph Waldo Emerson, random walk, regulatory arbitrage, Renaissance Technologies, rent control, risk tolerance, road to serfdom, Robert Shiller, Robert Shiller, Ronald Reagan, Schrödinger's Cat, shareholder value, Silicon Valley, Simon Kuznets, South Sea Bubble, sovereign wealth fund, Spread Networks laid a new fibre optics cable between New York and Chicago, Steve Jobs, Steve Wozniak, 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, The Wisdom of Crowds, Tobin tax, too big to fail, transaction costs, tulip mania, Upton Sinclair, Vanguard fund, Washington Consensus, We are the 99%, Yom Kippur War

Systemic instability in the financial system is the result of the interdependencies inherent in an industry that deals mainly with itself. The growth in the scale of resources devoted to financial intermediation is not to any large degree (or, in most cases, at all) the result of any change in the needs of users of intermediary services. The growth of financial activity has come from a massive expansion in the packaging, repackaging and trading of existing assets. The finance sector today does many things that do not need to be done, and fails to do many things that do need to be done. Financial intermediation that meets the needs of the real economy should not be a game in which professional intermediaries compete to outwit each other. Competition between financial intermediaries is valuable and necessary, but – as with competition in other industries – success in that competition should follow from effectiveness in meeting the demands of customers.

The common sense that suggests that the activity of exchanging bits of paper cannot make profits for everyone may be a clue that much of this profit is illusory: much of the growth of the finance sector represents not the creation of new wealth but the sector’s appropriation of wealth created elsewhere in the economy, mostly for the benefit of some of the people who work in the financial sector. And yet, although the finance industry today displays many examples of egregious excess, the majority of those engaged in it are not guilty or representative of that excess. They are engaged in operating the payments system, facilitating financial intermediation, enabling individuals to control their personal finances and helping them to manage risks. Most people who work in finance are not aspiring Masters of the Universe. They are employed in relatively mundane processing activities in banking and insurance, for which they are rewarded with relatively modest salaries. We need them, and we need what they do. So the third part of this book will be concerned with reform.

Some enthusiasts have claimed that new technologies will eliminate intermediary functions. But connectedness, which the internet delivers so effectively, is only one of the functions of the intermediary. The greater ease of making connections increases the need to monitor these connections. Facebook illustrates how a broader range of relationships diminishes their average quality. Recent financial innovations, such as crowd-funding and peer-to-peer lending, cannot eliminate financial intermediation. If savers are to obtain returns that match the risks they take, they need to be able to judge how their money is used and how the assets purchased with that money are managed. Few have the time, knowledge or experience to do this. Cynicism born of experience is required to find the few viable opportunities among many optimistic business plans. Or to identify those who are likely to repay their debts, among compelling promises and persuasive hard luck stories.


pages: 457 words: 125,329

Value of Everything: An Antidote to Chaos The by Mariana Mazzucato

"Robert Solow", activist fund / activist shareholder / activist investor, Affordable Care Act / Obamacare, Airbnb, bank run, banks create money, Basel III, Berlin Wall, Big bang: deregulation of the City of London, bonus culture, Bretton Woods, business cycle, butterfly effect, buy and hold, Buy land – they’re not making it any more, capital controls, Capital in the Twenty-First Century by Thomas Piketty, Carmen Reinhart, carried interest, cleantech, Corn Laws, corporate governance, corporate social responsibility, creative destruction, Credit Default Swap, David Ricardo: comparative advantage, debt deflation, European colonialism, fear of failure, financial deregulation, financial innovation, Financial Instability Hypothesis, financial intermediation, financial repression, full employment, G4S, George Akerlof, Google Hangouts, Growth in a Time of Debt, high net worth, Hyman Minsky, income inequality, index fund, informal economy, interest rate derivative, Internet of things, invisible hand, Joseph Schumpeter, Kenneth Arrow, Kenneth Rogoff, knowledge economy, labour market flexibility, laissez-faire capitalism, light touch regulation, liquidity trap, London Interbank Offered Rate, margin call, Mark Zuckerberg, market bubble, means of production, money market fund, negative equity, Network effects, new economy, Northern Rock, obamacare, offshore financial centre, Pareto efficiency, patent troll, Paul Samuelson, peer-to-peer lending, Peter Thiel, profit maximization, quantitative easing, quantitative trading / quantitative finance, QWERTY keyboard, rent control, rent-seeking, Sand Hill Road, shareholder value, sharing economy, short selling, Silicon Valley, Simon Kuznets, smart meter, Social Responsibility of Business Is to Increase Its Profits, software patent, stem cell, Steve Jobs, The Great Moderation, The Spirit Level, The Wealth of Nations by Adam Smith, Thomas Malthus, Tobin tax, too big to fail, trade route, transaction costs, two-sided market, very high income, Vilfredo Pareto, wealth creators, Works Progress Administration, zero-sum game

They were struggling to service their public debts, and in order to do so severely cut provision of public goods and services. The same banks that had benefited from the bailout now profited from governments' plight, earning some 20 per cent of their entire derivative revenues from such naked CDSs. Financial intermediation - the cost of financial services - is a form of value extraction, the scale of which lies in the relationship between what finance charges and what risks it actually runs. Charges are called the cost of financial intermediation. But as we have seen, while finance has grown and risks have not appreciably changed, the cost of financial intermediation has barely fallen, apart from some web-based services that remain peripheral to global financial flows. In other words, the financial sector has not become more productive. Another way to grasp this simple fact is to measure the amount of fees charged by institutional investors and compare them with the performance of the funds they manage.

As well as channelling funds from lenders to borrowers, banks run the various payments systems linking buyers to sellers. These activities, especially the transformation of short-term deposits into long-term loans and the guarantee of liquidity to customers with overdrafts, also mean a transfer of risk to banks from other private-sector firms. This bundle of services collectively constitutes ‘financial intermediation'. It is assumed that, instead of directly charging for these services, banks impose an indirect charge by lending at higher interest rates than they borrow at. The cost of ‘financial intermediation services, indirectly measured' (FISIM) is calculated by the extent to which banks can mark up their customers' borrowing rates over the lowest available interest rate. National statisticians assume a ‘reference rate' of interest that borrowers and lenders would be happy to pay and receive (the ‘pure' cost of borrowing).

As far as banks are concerned, their efficiency as useful intermediaries between borrowers and lenders might reasonably be judged by their ability to narrow the ‘wedge', or cost gap, between the two. Maximum efficiency, friction-free capitalism, would in theory be reached when the interest differential disappears. Yet the ‘indirect' measure of financial intermediation services adopted by national accounts (FISIM, explained in Chapter 4) assumes that a rise in added value will be reflected in a wider wedge (or, if the wedge narrows, by increased fees and charges through which intermediaries can obtain payment directly). The point, of course, is not to eliminate interest but - if interest is the price of financial intermediation - to make sure that it reflects increased efficiencies in the system, driven by appropriate investments in technological change, as some fintech (financial technology) developments have done. Banks stand in sharp contrast to supermarkets.


pages: 401 words: 109,892

The Great Reversal: How America Gave Up on Free Markets by Thomas Philippon

airline deregulation, Amazon Mechanical Turk, Amazon Web Services, Andrei Shleifer, barriers to entry, bitcoin, blockchain, business cycle, business process, buy and hold, Carmen Reinhart, carried interest, central bank independence, commoditize, crack epidemic, cross-subsidies, disruptive innovation, Donald Trump, Erik Brynjolfsson, eurozone crisis, financial deregulation, financial innovation, financial intermediation, gig economy, income inequality, income per capita, index fund, intangible asset, inventory management, Jean Tirole, Jeff Bezos, Kenneth Rogoff, labor-force participation, law of one price, liquidity trap, low cost airline, manufacturing employment, Mark Zuckerberg, market bubble, minimum wage unemployment, money market fund, moral hazard, natural language processing, Network effects, new economy, offshore financial centre, Pareto efficiency, patent troll, Paul Samuelson, price discrimination, profit maximization, purchasing power parity, QWERTY keyboard, rent-seeking, ride hailing / ride sharing, risk-adjusted returns, Robert Bork, Robert Gordon, Ronald Reagan, Second Machine Age, self-driving car, Silicon Valley, Snapchat, spinning jenny, statistical model, Steve Jobs, supply-chain management, Telecommunications Act of 1996, The Chicago School, the payments system, The Rise and Fall of American Growth, The Wealth of Nations by Adam Smith, too big to fail, total factor productivity, transaction costs, Travis Kalanick, Vilfredo Pareto, zero-sum game

Figure 11.1b presents a different, yet fundamentally equivalent way of organizing financial intermediation. In traditional banking, intermediation occurs under one roof: the bank makes a loan, keeps it on its books, and earns a net interest income. This income compensates for the costs, including screening and monitoring the borrower, managing the duration and credit risk of the loan, and collecting payments. The originate-and-distribute model, in contrast, involves a daisy chain of intermediation. Many transactions occur inside a black box. There is no simple measure of net interest income as in the traditional model: there are origination fees, asset management fees, trading profits, and the like. Here is the tricky question: how can you measure financial intermediation over time when it is a changing mix of the two models?

FIGURE 11.1  (a, b)  Two equivalent financial systems Finance Still Costs 200 Basis Points As we have just explained, the sum of all profits and wages paid to financial intermediaries represents the cost of financial intermediation. In Philippon (2015), I measure this cost from 1870 to 2010, as a share of GDP. As you can see in Figure 11.2, the total cost of intermediation varies a lot over time. The cost of intermediation grows from 2 percent to 6 percent of GDP from 1880 to 1930. It shrinks to less than 4 percent in 1950, grows slowly to 5 percent in 1980, and then increases rapidly to almost 8 percent in 2010. Why are we spending more on financial intermediation today than 100 years ago? To answer that question, let us construct the amount of intermediation. For the corporate sector, we need to look at stocks and bonds, and for stocks, we want to distinguish between seasoned offerings and IPOs.

Intermediated assets include debt and equity issued by nonfinancial firms, household debt, and various assets providing liquidity services. The data range for intermediated assets is 1886–2012. The solid line with circles in Figure 11.2 is the share of GDP that we spend on financial intermediation in the US. It is literally the equivalent of the $2 paid to intermediaries in Figure 11.1. The shaded-line series is built by adding the series of debt, equity, and liquidity services with the proper theory-based weights. It is the equivalent of the $100 in Figure 11.1. FIGURE 11.3  Raw unit costs of financial intermediation. The raw measure is the ratio of finance income to intermediated assets, as shown in Figure 11.2. The 2012 data are from Philippon (2015), while the new data were accessed May 2016. The data range is 1886–2015. Source: Philippon (2015) with updated data Notice that the underlying data sources for both series are entirely different.


pages: 296 words: 87,299

Portfolios of the poor: how the world's poor live on $2 a day by Daryl Collins, Jonathan Morduch, Stuart Rutherford

Cass Sunstein, clean water, failed state, financial innovation, financial intermediation, income per capita, informal economy, job automation, M-Pesa, mental accounting, microcredit, moral hazard, profit motive, purchasing power parity, RAND corporation, randomized controlled trial, The Fortune at the Bottom of the Pyramid, transaction costs

In addition, Hamid always made sure he had $2 in his pocket to deal with anything that might befall him on the road. 8 THE PORTFOLIOS OF THE PO OR Table 1.2 Hamid and Khadeja’s Closing Balance Sheet, November 2000 Financial assets Microfinance savings account Savings with a moneyguard Home savings Life insurance Remittances to the home villagea Loans out Cash in hand $174.80 Financial liabilities Microfinance loan account Private interest-free loan Wage advance Savings held for others Shopkeeper credit Rent arrears 16.80 8.00 2.00 76.00 $223.34 153.34 14.00 10.00 20.00 16.00 10.00 30.00 40.00 2.00 Financial net worth $48.54 Note: US$ converted from Bangladeshi takas at $1 50 takas, market rate. a In the Bangladesh and Indian diaries remittances to the home village are treated as assets, given that for the most part the remittances entail debt obligations on the part of the recipients or are used to create assets for use by the giving households. In South Africa, remittances are treated as expenses given that they were mostly used to support the daily needs of family members living at a distance. Their active engagement in financial intermediation also shows up clearly on the liabilities side of their balance sheet. They are borrowers, with a debt of $153 to a microfinance institution and interest-free private debts from family, neighbors, and employer totaling $24. They also owed money to the local grocery store and to their landlord. Khadeja was even acting as an informal banker, or “moneyguard,” holding $20 at home that belonged to two neighbors seeking a way to keep their money safe from their more spendthrift husbands and sons.

In South Africa, social welfare pays out monthly grants to the elderly, children, and the disabled.4 The system reaches down to many poor households: in our South African sample of 152 households, 27 percent had grant support as their main source of income. Within our sample, these government grants made up 48 percent of the 35 CHAPTER T WO average household income in the rural areas and 10 percent in the townships. These monthly payments certainly make income more regular, and we later show that this regularity does make it easier to engage in higher levels of financial intermediation. But these incomes are small: in the rural areas, a grant meant to support one person supports, on average, a family of four. As a result, grants are rarely enough to cover costs, and most households supplement them with small business, casual work, and remittances from working relatives. Moreover, having come to rely on regular monthly payments, grantdependent households are left particularly vulnerable when they don’t arrive on time.

A formal sector job, then, doesn’t necessarily translate to more reliable income in South Asia. In South Africa, however, labor laws are much more rigorously enforced, and when households do manage to find a waged job, they tend to have a fairly reliable source of income. Even grant recipient households could depend on regular monthly grant income. In our study, these households were able to “leverage” their more regular sources of income to engage in larger-scale financial intermediation: with a regular income, they were more comfortable taking on higher levels of debt and lenders were more willing to provide loans. As table 2.4 shows, regular wage earners in South Africa are usually better off in terms of both absolute income and income per capita than those earning irregularly (those whose income 44 T H E DA I LY G R I N D Table 2.4 Regular versus Irregular Income Households, South Africa Wage-earning households Share of sample in profile Financial statistics Average monthly income Average monthly income per capita Debt/service ratio Debt/equity ratio Grant-receiving households Irregular income households 49% 27% 21% $635 $188 $235 $219 13% 22% $61 17% 23% $87 7% 19% Note: US$ converted from South African rand at $ = 6.5 rand, market rate.


pages: 356 words: 51,419

The Little Book of Common Sense Investing: The Only Way to Guarantee Your Fair Share of Stock Market Returns by John C. Bogle

asset allocation, backtesting, buy and hold, creative destruction, diversification, diversified portfolio, financial intermediation, fixed income, index fund, invention of the wheel, Isaac Newton, new economy, passive investing, Paul Samuelson, random walk, risk tolerance, risk-adjusted returns, Sharpe ratio, stocks for the long run, survivorship bias, transaction costs, Upton Sinclair, Vanguard fund, William of Occam, yield management, zero-sum game

The moral of the Gotrocks story: Successful investing is about owning businesses and reaping the huge rewards provided by the dividends and earnings growth of our nation’s—and, for that matter, the world’s—corporations. The higher the level of their investment activity, the greater the cost of financial intermediation and taxes, the less the net return that shareholders—as a group, the owners of our businesses—receive. The lower the costs that investors as a group incur, the higher the rewards that they reap. So to enjoy the winning returns generated by businesses over the long term, the intelligent investor will reduce to the bare-bones minimum the costs of financial intermediation. That’s what common sense tells us. That’s what indexing is all about. And that’s the central message of this book. Don’t Take My Word for It Listen to Jack R. Meyer, former president of Harvard Management Company, the remarkably successful wizard who tripled the Harvard University endowment fund from $8 billion to $27 billion.

Indeed, the self-interest of the leaders of our financial system almost compels them to ignore these relentless rules. Paraphrasing Upton Sinclair: It’s amazing how difficult it is for a man to understand something if he’s paid a small fortune not to understand it. Our system of financial intermediation has created enormous fortunes for those who manage other people’s money. Their self-interest will not soon change. But as an investor, you must look after your self-interest. Only by facing the obvious realities of investing can an intelligent investor succeed. How much do the costs of financial intermediation matter? Hugely! In fact, the high costs of equity funds have played a determinative role in explaining why fund managers have lagged the returns of the stock market so consistently, for so long. When you think about it, how could it be otherwise?

Chapter Four How Most Investors Turn a Winner’s Game into a Loser’s Game “The Relentless Rules of Humble Arithmetic” BEFORE WE TURN TO the success of indexing as an investment strategy, let’s explore in a bit more depth just why it is that investors as a group fail to earn the returns that our corporations generate through their dividends and earnings growth, which are ultimately reflected in the prices of their stocks. Why? Because investors as a group must necessarily earn precisely the market return, before the costs of investing are deducted. When we subtract those costs of financial intermediation—all those management fees, all of that portfolio turnover, all of those brokerage commissions, all of those sales loads, all of those advertising costs, all of those operating costs, all of those legal fees—the returns of investors as a group must, and will, and do fall short of the market return by an amount precisely equal to the aggregate amount of those costs. That is the simple, undeniable reality of investing.


pages: 159 words: 45,073

GDP: A Brief but Affectionate History by Diane Coyle

"Robert Solow", Asian financial crisis, Berlin Wall, big-box store, Bretton Woods, BRICs, business cycle, clean water, computer age, conceptual framework, crowdsourcing, Diane Coyle, double entry bookkeeping, en.wikipedia.org, endogenous growth, Erik Brynjolfsson, Fall of the Berlin Wall, falling living standards, financial intermediation, global supply chain, happiness index / gross national happiness, hedonic treadmill, income inequality, income per capita, informal economy, Johannes Kepler, John von Neumann, Kevin Kelly, Long Term Capital Management, mutually assured destruction, Nathan Meyer Rothschild: antibiotics, new economy, Occupy movement, purchasing power parity, Robert Shiller, Robert Shiller, Ronald Reagan, shareholder value, Silicon Valley, Simon Kuznets, The Wealth of Nations by Adam Smith, Thorstein Veblen, University of East Anglia, working-age population

As the OECD GDP statistics manual puts it: “Measurement using the general formula [for constructing GDP] would result in their value added being very small, if not negative; in other words, their intermediate consumption would be greater than their sales!”9 Unable to imagine when this was written that banking could be subtracting value from the economy, statisticians sought to find a way of measuring these earnings from financial intermediation. So for many years the convention was to count financial services as the negative output of an imaginary segment of the economy. It is, to use a phrase from Alice in Wonderland, curiouser and curiouser. As the financial services industry grew throughout the 1980s, the approach changed again, and the 1993 update of the UN System of National Accounts introduced the concept of “financial intermediation services indirectly measured,” or FISIM. This current measure compares banks’ borrowing and lending rates on their loan and deposit portfolios to a risk-free “reference rate” such as the central bank’s policy rate, and multiplies the difference by the stock of outstanding balances in each case.

See United Kingdom environmentalism, 60, 68–71, 115–16, 133–34 European Commission, 2–4 European Union (EU), 1 Eurozone, 101 exchange rates, 48–49. See also purchasing power parity expenditures: categories of, 27–28; as GDP measure, 25, 26t, 27 factor cost, 30 famines, 73 Federal Reserve Bank of Dallas, 121, 123–25 Federal Reserve Board, 83, 88, 94 financial crisis (2008–), 93–97 financial intermediation services indirectly measured (FISIM), 100–104, 136 financial sector, 40, 97–105 fiscal policy, 15, 19, 23, 77 fiscal stimulus, 23 FISIM. See financial intermediation services indirectly measured Fitoussi, Jean-Paul, 118, 139 Fleming, Alexander, 63 Ford, Henry, 45 France, 8–9, 103 Frank, Robert, 112 free market ideology, 93 Friedman, Thomas, 95–96 Gagarin, Yuri, 47 Geary-Khamis dollars, 52 Genuine Progress Indicator (GPI), 116, 137 Georgiou, Andreas, 1–2, 4 Germany, 17, 41–42, 71 Ghana, 32, 53, 94, 107 Gilbert, Milton, 15, 50 globalization, 93–94 global supply chains, 125 Golden Age, 43, 56 Gosplan, 29 government expenditures (G), 27–29 government role in economy, 14–17, 19–21, 23, 63–66, 77–78.

The original SNA (in 1953) had shown the financial services industry as making either a negative or a small positive contribution to GDP. Finance was a more or less “unproductive” activity because the interest flows (now measured by the FISIM construct) were broadly treated as an intermediate input of the finance sector and therefore netted out of the sector’s final value-added contribution to GDP. In the United States from 1947 to 1993, the net interest revenue from financial intermediation (labeled the imputed bank service charge, IBSC) was counted as an input to other sectors of the economy. This approach was formalized worldwide in the revised 1968 SNA, when the IBSC was “considered wholly intermediate consumption and, more pointedly, as the input/expense exclusively of a notional industry sector with no output of its own. That is correct: an imaginary industry supplying no products or services was theorized into being as the ‘buyer’ of banks’ intermediation.


pages: 430 words: 109,064

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

American ideology, Andrei Shleifer, Asian financial crisis, asset-backed security, bank run, banking crisis, Bernie Madoff, Bonfire of the Vanities, bonus culture, break the buck, business cycle, buy and hold, capital controls, Carmen Reinhart, central bank independence, Charles Lindbergh, collapse of Lehman Brothers, collateralized debt obligation, commoditize, corporate governance, corporate raider, 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, information asymmetry, interest rate derivative, interest rate swap, Kenneth Rogoff, laissez-faire capitalism, late fees, light touch regulation, Long Term Capital Management, market bubble, market fundamentalism, Martin Wolf, money market fund, moral hazard, mortgage tax deduction, Myron Scholes, Paul Samuelson, Ponzi scheme, price stability, profit maximization, race to the bottom, regulatory arbitrage, rent-seeking, Robert Bork, Robert Shiller, Robert Shiller, Ronald Reagan, Saturday Night Live, Satyajit Das, sovereign wealth fund, The Myth of the Rational Market, too big to fail, transaction costs, value at risk, yield curve

But there is no law of physics or economics that dictates that all financial innovations are beneficial, simply because someone can be convinced to buy them. The core function of finance is financial intermediation—moving money from a place where it is not currently needed to a place where it is needed. The key questions for any financial innovation are whether it increases financial intermediation and whether that is a good thing. Much recent “innovation” in credit cards, for example, has simply made the pricing of credit more complex. Card issuers have lowered the “headline” price that they advertise to consumers while increasing the hidden prices that consumers are less aware of, such as late fees and penalty rates. These tactics have increased the profits of credit card issuers, but have not increased financial intermediation—except insofar as they helped consumers underestimate the cost of credit and therefore borrow excessive amounts of money.56 Innovation that increases the availability of credit can also be harmful.

This was a key element in Donald Regan’s strategy to provide a full spectrum of financial services; as he said, “I wanted to get into banking, and CMA was the way to do it.”82 Cash management accounts competed directly with traditional savings and checking accounts for deposits, and enabled securities firms to sweep up a larger share of their clients’ assets. Investment banks also benefited from the general shift in financial intermediation (the movement of money from people who have it to people who need it) from banks into the capital markets. Traditionally, households and businesses would put their excess cash in deposit accounts at commercial banks or S&Ls, which would lend the cash out as mortgages and commercial loans. However, the high interest rates of the 1970s convinced investors to move their savings from bank accounts to money market funds, which invested in short-term bonds and commercial paper.

Risks are spread more widely, across a more diverse group of financial intermediaries, within and across countries. These changes have contributed to a substantial improvement in the financial strength of the core financial intermediaries and in the overall flexibility and resilience of the financial system in the United States. And these improvements in the stability of the system and efficiency of the process of financial intermediation have probably contributed to the acceleration in productivity growth in the United States and in the increased stability in growth outcomes experienced over the past two decades.47 Even in April 2009, after the financial crisis, Greenspan’s successor, Ben Bernanke, said, “Financial innovation has improved access to credit, reduced costs, and increased choice. We should not attempt to impose restrictions on credit providers so onerous that they prevent the development of new products and services in the future.”48 The fact that Bernanke, a brilliant and widely respected academic, would sing the praises of financial innovation even after the financial crisis shows the powerful hold this ideology exerted on both economists and policymakers.


pages: 288 words: 64,771

The Captured Economy: How the Powerful Enrich Themselves, Slow Down Growth, and Increase Inequality by Brink Lindsey

"Robert Solow", Airbnb, Asian financial crisis, bank run, barriers to entry, Bernie Sanders, Build a better mousetrap, Capital in the Twenty-First Century by Thomas Piketty, Carmen Reinhart, Cass Sunstein, collective bargaining, creative destruction, Credit Default Swap, crony capitalism, Daniel Kahneman / Amos Tversky, David Brooks, diversified portfolio, Donald Trump, Edward Glaeser, endogenous growth, experimental economics, experimental subject, facts on the ground, financial innovation, financial intermediation, financial repression, hiring and firing, Home mortgage interest deduction, housing crisis, income inequality, informal economy, information asymmetry, intangible asset, inventory management, invisible hand, Jones Act, Joseph Schumpeter, Kenneth Rogoff, Kevin Kelly, knowledge worker, labor-force participation, Long Term Capital Management, low skilled workers, Lyft, Mark Zuckerberg, market fundamentalism, mass immigration, mass incarceration, medical malpractice, Menlo Park, moral hazard, mortgage debt, Network effects, patent troll, plutocrats, Plutocrats, principal–agent problem, regulatory arbitrage, rent control, rent-seeking, ride hailing / ride sharing, Robert Metcalfe, Ronald Reagan, Silicon Valley, Silicon Valley ideology, smart cities, software patent, too big to fail, total factor productivity, trade liberalization, transaction costs, tulip mania, Uber and Lyft, uber lyft, Washington Consensus, white picket fence, winner-take-all economy, women in the workforce

The positive association between financial development and growth turns entirely on growth of credit to the business sector; there is no known connection between expanded household credit and faster growth.36 Indeed, there is evidence that more credit to the household sector reduces savings rates with negative implications for growth.37 Accordingly, to the extent that a larger financial sector focuses more on household credit, it may be diverting resources away from productive activities. Even if we just focus on finance for the enterprise sector, more financial intermediation disproportionately benefits sectors of the economy where collateral is relatively favorable but productivity growth is low, such as in construction.38 By contrast, enterprises with the most growth potential these days are generally built on human and intellectual capital, assets that cannot be pledged as collateral. Here again, more financial intermediation may end up with more resources diverted to relatively unproductive activities. In addition, the financial sector is skilled labor–intensive, meaning its workforce is disproportionately highly educated and highly skilled.

This is frequently a problem, and a severe one at that, for less developed economies. Governments in those countries have often pursued a policy of “financial repression” in which the combination of interest rate controls and high inflation results in negative real interest rates. This is a convenient state of affairs for governments that run chronic budget deficits, but it stunts the development of financial intermediation since savers are stuck with returns below the rate of inflation. Thus, in the world’s lowest-income countries, private bank lending averages a mere 11 percent of GDP, as opposed to 87 percent of GDP in the highest-income countries.30 Meanwhile, corruption and spotty enforcement of contract rights hinder the growth of capital markets. This is why family-owned conglomerates are so common in poorer countries.

When blood ties are more trustworthy than the legal system, the former must serve as the primary nexus for allocating capital. The prevalence of stunted, underdeveloped financial sectors around the world explains why, at the global level, there is a strong positive association between the size of a country’s financial sector and both the size and growth rate of its overall economy.31 Healthy financial development promotes healthy economic development in two basic ways. First, the growth of financial intermediation means more household savings get mobilized for productive use instead of sitting idle under the proverbial mattress. Second, banks and capital markets are generally better able to identify which individuals and businesses should receive financing than are the alternative mechanisms for allocating capital, namely, government, on the one hand, and informal networks of families and friends, on the other.


pages: 209 words: 13,138

Empirical Market Microstructure: The Institutions, Economics and Econometrics of Securities Trading by Joel Hasbrouck

Alvin Roth, barriers to entry, business cycle, conceptual framework, correlation coefficient, discrete time, disintermediation, distributed generation, experimental economics, financial intermediation, index arbitrage, information asymmetry, interest rate swap, inventory management, market clearing, market design, market friction, market microstructure, martingale, price discovery process, price discrimination, quantitative trading / quantitative finance, random walk, Richard Thaler, second-price auction, selection bias, short selling, statistical model, stochastic process, stochastic volatility, transaction costs, two-sided market, ultimatum game, zero-sum game

Allen Spivey, and William J. Wrobleski, 1977, On the structure of moving average prices, Journal of Econometrics 6, 121–34. Arnold, Tom, Philip Hersch, J. Harold Mulherin, and Jeffry Netter, 1999, Merging markets, Journal of Finance 54, 1083–107. Bacidore, Jeffrey M., 1997, The impact of decimalization on market quality: An empirical investigation of the Toronto Stock Exchange, Journal of Financial Intermediation 6, 92–120. Bacidore, Jeffrey M., 2002, Depth improvement and adjusted price improvement on the New York stock exchange, Journal of Financial Markets 5, 169–95. Bacidore, Jeffrey, Katharine Ross, and George Sofianos, 2003, Quantifying market order execution quality at the New York Stock Exchange, Journal of Financial Markets 6, 281. Back, Kerry, 1992, Insider trading in continuous time, Review of Financial Studies 5.

., 1997a, Do competing specialists and preferencing dealers affect market quality?, Review of Financial Studies 10, 969–93. Battalio, Robert H., 1997b, Third market broker-dealers: Cost competitors or cream skimmers?, Journal of Finance 52, 341–52. Battalio, Robert H., 1998, Order flow distribution, bid-ask spreads, and liquidity costs: Merrill Lynch’s decision to cease routinely routing orders to regional stock exchanges, Journal of Financial Intermediation 7, 338–58. Battalio, Robert H., 2003, All else equal?: A multidimensional analysis of retail, market order execution quality, Journal of Financial Markets 6, 143–62. Bertsimas, Dimitris, and Andrew W. Lo, 1998, Optimal control of execution costs, Journal of Financial Markets 1, 1–50. Bessembinder, H., 2004, Does an electronic stock exchange need an upstairs market?, Journal of Financial Economics 73, 3–36.

Grossman, and Jiang Wang, 1993, Trading volume and serial correlation in stock returns, Quarterly Journal of Economics 108, 905–39. CFA Institute, 2002, Trade Management Guidelines, CFA Institute (formerly the American Institute for Management Research), available online at http://www.cfainstitute.org/standards/pdf/trademgmt_ guidelines.pdf. Chakravarty, Sugato, and Craig W. Holden, 1995, An integrated model of market and limit orders, Journal of Financial Intermediation 4, 213–41. Challet, Damien, and Robin Stinchcombe, 2003, Non-constant rates and over-diffusive prices in a simple model of limit order markets, Quantitative Finance 3, 155–62. Chan, Louis K. C., and Josef Lakonishok, 1993, Institutional trades and intraday stock-price behavior, Journal of Financial Economics 33, 173–99. Chan, Louis K. C., and Josef Lakonishok, 1995, The behavior of stock prices around institutional trades, Journal of Finance 50, 1147–74.


pages: 304 words: 80,965

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

activist fund / activist shareholder / activist investor, Admiral Zheng, banking crisis, Basel III, Bernie Madoff, Black Swan, buy and hold, centralized clearinghouse, clean water, computerized trading, corporate governance, correlation does not imply causation, credit crunch, Credit Default Swap, crowdsourcing, David Brooks, Dissolution of the Soviet Union, diversification, diversified portfolio, en.wikipedia.org, financial innovation, financial intermediation, fixed income, Flash crash, income inequality, index fund, information asymmetry, invisible hand, Kenneth Arrow, Kickstarter, light touch regulation, London Whale, Long Term Capital Management, moral hazard, Myron Scholes, Northern Rock, passive investing, performance metric, Ponzi scheme, post-work, principal–agent problem, rent-seeking, Ronald Coase, shareholder value, Silicon Valley, South Sea Bubble, sovereign wealth fund, statistical model, Steve Jobs, the market place, The Wealth of Nations by Adam Smith, transaction costs, Upton Sinclair, value at risk, WikiLeaks

For a fuller discussion of the literature on this topic, see David Pitt-Watson, Christopher Sier, Shyam Moorjani, and Hari Mann, Investment Costs—An Unknown Quantity, Financial Services Consumer Panel (November 2014), https://www.fscp.org.uk/sites/default/files/investment_david_pitt_watson_et_al_final_paper.pdf. 6. Private study obtained by the authors prepared for Her Majesty’s Treasury, November 2011. 7. Thomas Philippon, “Has the US Finance Industry Become Less Efficient? On the Theory and Measurement of Financial Intermediation,” National Bureau of Economic Research Working Paper no. 18077 (May 2012), http://www.nber.org/papers/w18077. 8. Ronald Gilson and Jeffrey Gordon, “Capital Markets, Efficient Risk Bearing and Corporate Governance: The Agency Costs of Agency Capitalism,” Columbia Law School Coursewebs (2012), https://coursewebs.law.columbia.edu/coursewebs/cw_12S_L9519_001.nsf/0f66a77852c3921f852571c100169cb9/C52A6786C57B3B52852579830053479F/$FILE/GilGor+Oxford+Prelim+Draft.Conf+Final.011012.pdf?

For example, Canadian economist Richard Lipsey wrote of perfect competition that “it is a pity it corresponds in so few aspects to reality as we know it.” Richard Lipsey, Positive Economics (Weidenfeld and Nicholson, 1973), 299. 1 What’s the Financial System For? 1. See discussion in Thomas Philippon, “Has the US Finance Industry Become Less Efficient? On the Theory and Measurement of Financial Intermediation,” National Bureau of Economic Research, Working Paper 18077 (May 2012), 6–9, http://www.nber.org/papers/w18077. 2. See World Bank data at data.worldbank.org/indicator/NV.ARG.TOTL.ZS. 3. For current figures see New York Stock Exchange data at www.nyse.com/about/listed/nya_characterstics.shtml (August 21, 2013). 4. Note that it is not just our deposits at the bank, or safe deposit boxes, that involve safe keeping.

The abusive sale of indulgences was such a problem in the thirteenth century, the era of our time traveler, that reform of the system was a subject of the fourth Lateran council of 1215. See text of fourth Lateran council (1215), 63–66, https://www.ewtn.com/library/COUNCILS/LATERAN4.HTM. 2 Incentives Gone Wild 1. Thomas Philippon, “Has the US Finance Industry Become Less Efficient? On the Theory and Measurement of Financial Intermediation,” National Bureau of Economic Research Working Paper no. 18077 (May 2012), http://www.nber.org/papers/w18077 http://www.nber.org/papers/w18077. 2. During the same period, GDP per capita, which is an approximate measure of productivity, increased about tenfold. See http://www.worldeconomics.com/Data/MadisonHistoricalGDP/Madison%20Historical%20GDP%20Data.efp. Of course, different industries have made different contributions to that increase.


pages: 7,371 words: 186,208

The Long Twentieth Century: Money, Power, and the Origins of Our Times by Giovanni Arrighi

anti-communist, Asian financial crisis, barriers to entry, Bretton Woods, British Empire, business climate, business process, colonial rule, commoditize, Corn Laws, creative destruction, cuban missile crisis, David Ricardo: comparative advantage, declining real wages, deindustrialization, double entry bookkeeping, European colonialism, financial independence, financial intermediation, floating exchange rates, income inequality, informal economy, invisible hand, joint-stock company, Joseph Schumpeter, late capitalism, London Interbank Offered Rate, means of production, money: store of value / unit of account / medium of exchange, new economy, offshore financial centre, oil shock, Peace of Westphalia, profit maximization, Project for a New American Century, RAND corporation, reserve currency, spice trade, the market place, The Nature of the Firm, The Wealth of Nations by Adam Smith, Thorstein Veblen, trade liberalization, trade route, transaction costs, transatlantic slave trade, transcontinental railway, upwardly mobile, Yom Kippur War

Flows of commodities and means of payment that were “external” to the declining and rising states were, in fact, “internal” to the non-territorial network of long-distance trade and high finance controlled and managed by the Genoese merchant elite through the system of the Bisenzone fairs (see chapter 2). As in the kin-based systems of rule studied by anthropologists, to paraphrase Ruggie (1993: 149), the network of commercial and financial intermediation controlled by the Genoese merchant elite occupied places, but was not defined by the places it occupied. Marketplaces like Antwerp, Seville, and the mobile Bisenzone fairs were all as critical as Genoa itself to the organization of the space-of-flows through which the Genoese diaspora community of merchant bankers controlled the European system of interstatal payments. But none of these places — Genoa included — in itself defined the Genoese system of accumulation.

But by 1485 the branch in Bruges had been closed and the Medici soon disappeared from the world of European high finance (Ehrenberg 1985: 196-8). As long as the Hundred Years War lasted, however, the equilibrium between the two contending territorialist organizations, and the constant need for financial assistance imposed on both of them by the commercialization of warfare, created unprecedented opportunities for commercial and financial intermediation which the Medici and other Florentine merchant bankers were well placed to turn to their own advantage, both economically and politically. These opportunities presented the Medici with opportunities for business success that Bardi and Peruzzi never had. By seizing these opportunities, the Medici became one of the wealthiest and most powerful families in Europe. “The Medici,” notes Ehrenberg (1985: 52), “hardly ever had more influence over the course of the world’s history than that which they exercised at the time of the struggles between Louis XI of France, Edward IV of England, and Charles the Bold of Burgundy.”

~ in thousand metric tons) 1(1) A Age ot the Rothschild: _ l0 1 1 1 1 1 1 1 1 L 1 1 1 1 1 1 l moms 1826/35 1846/55 1866/75 1886/95 lflb/M Saum: Mitchell (1973: 730). 3.3 The Nineteenth-century Trade Expansion 176 THE LONG TWENTIETH CENTURY accelerating investment of money capital in the expansion of world trade resulted in intensifying inter-capitalist competition in the purchase and sale of commodities. In one instance, the bidding up of purchase prices prevailed; in the other, the bidding down of sale prices prevailed. But whatever the impact on the general price level, intensifying competition resulted in a “precautionary” or “speculative” withdrawal of cash flows from trade. This in turn was both the cause and the consequence of the emergence of profitable opportunities in world financial intermediation — opportunities which select cliques of merchant bankers and financiers (the Genoese nobili vecc/71' in the late sixteenth century, the Rothschilds in the late nineteenth and early twentieth centuries) were particularly well placed to seize and turn to their own advantage. In doing so, the leaders and governors of financial expansions tended to give temporary relief to the competitive pressures that depressed returns to capital, and thereby contributed to the transformation of the end of the material expansion into a “wonderful moment” for a wider circle of capitalist accumulators.


pages: 935 words: 267,358

Capital in the Twenty-First Century by Thomas Piketty

"Robert Solow", accounting loophole / creative accounting, Asian financial crisis, banking crisis, banks create money, Berlin Wall, Branko Milanovic, British Empire, business cycle, capital controls, Capital in the Twenty-First Century by Thomas Piketty, carbon footprint, central bank independence, centre right, circulation of elites, 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, Kenneth Arrow, market bubble, means of production, mortgage debt, mortgage tax deduction, new economy, New Urbanism, offshore financial centre, open economy, Paul Samuelson, 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, twin studies, very high income, Vilfredo Pareto, We are the 99%, zero-sum game

The Notion of the Pure Return on Capital The other important source of uncertainties, which leads me to think that the average rates of return indicated in Figures 6.3 and 6.4 are somewhat overestimated, so that I also indicate what might be called the “pure” rate of return on capital, is the fact that national accounts do not allow for the labor, or at any rate attention, that is required of anyone who wishes to invest. To be sure, the cost of managing capital and of “formal” financial intermediation (that is, the investment advice and portfolio management services provided by a bank or official financial institution or real estate agency or managing partner) is obviously taken into account and deducted from the income on capital in calculating the average rate of return (as presented here). But this is not the case with “informal” financial intermediation: every investor spends time—in some cases a lot of time—managing his own portfolio and affairs and determining which investments are likely to be the most profitable. This effort can in certain cases be compared to genuine entrepreneurial labor or to a form of business activity.

The complex question of government debt and the nature of the wealth associated with it is no less important today than it was in 1800, and by studying the past we can learn a lot about an issue of great contemporary concern. Although today’s public debt is nowhere near the astronomical levels attained at the beginning of the nineteenth century, at least in Britain, it is at or near a historical record in France and many other countries and is probably the source of as much confusion today as in the Napoleonic era. The process of financial intermediation (whereby individuals deposit money in a bank, which then invests it elsewhere) has become so complex that people are often unaware of who owns what. To be sure, we are in debt. How can we possibly forget it, when the media remind us every day? But to whom exactly do we owe money? In the nineteenth century, the rentiers who lived off the public debt were clearly identified. Is that still the case today?

Obviously, there can be situations in which the landlord is in a monopoly position when it comes to renting land and tools or purchasing labor (in the latter case one speaks of “monopsony” rather than monopoly), in which case the owner of capital can impose a rate of return greater than the marginal productivity of his capital. In a more complex economy, where there are many more diverse uses of capital—one can invest 100 euros not only in farming but also in housing or in an industrial or service firm—the marginal productivity of capital may be difficult to determine. In theory, this is the function of the system of financial intermediation (banks and financial markets): to find the best possible uses for capital, such that each available unit of capital is invested where it is most productive (at the opposite ends of the earth, if need be) and pays the highest possible return to the investor. A capital market is said to be “perfect” if it enables each unit of capital to be invested in the most productive way possible and to earn the maximal marginal product the economy allows, if possible as part of a perfectly diversified investment portfolio in order to earn the average return risk-free while at the same time minimizing intermediation costs.


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

Albert Einstein, Andrei Shleifer, asset allocation, asset-backed security, banking crisis, Benoit Mandelbrot, Black Swan, Black-Scholes formula, Bretton Woods, Brownian motion, business cycle, 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 market fund, money: store of value / unit of account / medium of exchange, moral hazard, Myron Scholes, 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, tulip mania, wage slave

Wealth was explicitly a condition for belonging to the ruling class, and the Roman financial system evolved to generate, document, and display this wealth. Laws separating governance from direct economic interests at first created a sophisticated system of credit markets. Senators could lend, but they could not directly engage in business. However, financial intermediation provides an infinite variety of ways to conceal investment or to put it at arm’s length. The legal form of the peculium was one solution to the problem—there were many others. Modern scholarship has recently documented the amazing sophistication of the Roman economy, particularly with respect to financial intermediation. In fact, sometimes the Roman financial system seems shockingly familiar to the modern eye. The degree to which we can actually compare modern institutions like banks to Roman institutions has been regularly debated. However, institutional labels are less important than function.

Deserters from the disaffected Persian regulars soon joined them, and when Ochus rode into the city of Susa, it was not as Sogdianus’s prisoner but as his successor. The usurper was usurped. Ochus took the royal title of Darius II. The overthrow of Sogdianus may be the first war we know of to have been fought on borrowed money, but it certainly was not the last. The Persian rulers following Darius II frequently resorted to tax levies in later years to finance wars. Financial intermediation was a crucial link—some firm or agent that could turn a contractual promise into money in a hurry. In the fifth century BCE, the Murašu firm provided this essential line of credit, and it probably turned the tide of victory. But fate is not always kind. The landholders who supported Ochus remained mired in debt, and many faced foreclosure. The story of the Murašu is important, because it shows how finance could rapidly and powerfully focus economic assets in one time and place for political gain.

Our modern perspective suggests there are a range of financial services Athenians needed: from a basic institution that took deposits and relieved patrons of keeping their money under the mattress in coin, to an entity that could transfer large sums to and from counterparties in transactions, to a source of temporary cash buffer against economic shocks. Bankers also may have served as facilitators of economic investments—either because they profited economically or because this enhanced their reputations and connections. As business opportunities and personal investment needs scaled up with the Athenian economy, the need for financial intermediation inevitably scaled up as well. FINANCIAL LITERACY As a young man, Demosthenes sued his relatives. His uncles were appointed as his guardians after his father’s death, and they stole his inheritance. The financial details in the trial were extremely complex. They involved two businesses, inventories, loans, and other assets. The trial, like all others, took place before a randomly selected jury of Athenian citizens.


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Confessions of a Microfinance Heretic by Hugh Sinclair

accounting loophole / creative accounting, Bernie Madoff, colonial exploitation, en.wikipedia.org, end world poverty, financial innovation, financial intermediation, Gini coefficient, high net worth, illegal immigration, inventory management, microcredit, Northern Rock, peer-to-peer lending, pirate software, Ponzi scheme, principal–agent problem, profit motive

This is not a fear unique to poor African countries: consider the recent collapse of Northern Rock in England during the financial crisis, with queues of people withdrawing their funds from the bank, and the government doing everything it could to persuade the rest that their savings were safe. Or of Argentines queuing up for days outside banks in 2001. I needed to find out if FCC was allowed to take savings, and what it was doing with these deposits. Some MFIs are essentially full-fledged banks. They take savings from some customers and make loans to other customers, just like Deutsche Bank, Bank of America, or Barclays Bank in developed countries. This is so-called “financial intermediation.” Such MFIs make money by charging interest to borrowers at greater rates than the interest they pay to savers. However, in exchange for this margin, the bank has to manage its reserves in such a way that it can return funds to the savers when required. Even if the bank’s borrowers do not repay the funds to the bank, the bank is still legally obliged to return savings to the general public, and thus the bank must assume and manage this risk.

Even if the bank’s borrowers do not repay the funds to the bank, the bank is still legally obliged to return savings to the general public, and thus the bank must assume and manage this risk. And naturally, the banks have to cover their operating costs from this margin. This is a risky business and is regulated. All commercial retail banks across the planet operate on variants of this model: take money from A, lend to B, manage the risk and operating costs efficiently, and hope to make a profit in the meantime. Most MFIs do not engage in such financial intermediation, since most are not allowed to take deposits. Their business model is fairly simple: get money from investors, usually incurring some interest charge, lend money to clients at a higher interest rate, cover all administration costs and costs of defaults of borrowers who do not repay. What is left over is profit for the MFI and its owners. However, there is a third type of MFI that is somewhere between these two extremes, and here occurs much of the abuse: MFIs that make loans and take some savings, known as forced guarantees, or forced savings.

There are two main ways MFIs use to manipulate this system. First, they can quietly use the client savings for other activities. This may involve lending the savings to other clients, who in turn are obliged to make forced deposits in an ever-growing pyramid. Or the MFI may simply use the savings to cover its own operating costs. Both strategies are usually prohibited for MFIs not licensed to engage in full financial intermediation, but local regulators are often not sophisticated enough to detect this or fail to enforce the rules. The second way MFIs can manipulate this system to their advantage is by blurring the difference between forced savings and voluntary savings. The MFI is able to justify capturing forced savings as a guarantee, but then may also discreetly capture voluntary savings, which are deposited into the same account.


pages: 121 words: 34,193

The Hidden Wealth of Nations: The Scourge of Tax Havens by Gabriel Zucman, Teresa Lavender Fagan, Thomas Piketty

Berlin Wall, Bretton Woods, British Empire, Capital in the Twenty-First Century by Thomas Piketty, dematerialisation, Fall of the Berlin Wall, financial innovation, financial intermediation, high net worth, income inequality, means of production, new economy, offshore financial centre, transfer pricing

But not all tax havens are on board; and in the absence of well-defined penalties, history suggests that formal commitments may not translate into real change: threats may be necessary to foster effective cooperation. Although financial sanctions are appealing and simple to implement, they face a potential obstacle: they can be easily circumvented. A bank that does not want to comply with FATCA could use FATCA-compliant intermediaries to continue investing in the United States without facing the 30% US withholding tax. The US law contains provisions to prevent this scenario, but the opacity of financial intermediation chains (largely because of the absence of financial registers) is such that these provisions may well not be enough. An alternative approach to withholding taxes consists of acting on the level of the trade of goods and services, which are currently more traceable than financial transactions. Tax havens cannot, in fact, do without commercial avenues. For the United States and Japan, exports represent a total of only 15% of their GDP.

Fortunately, progress has begun in this area since the 2008–9 financial crisis, under the auspices of a committee of authorities from around the world working to create a global system of legal entity identification.28 Furthermore, by virtue of the international anti-laundering regulations, authorities have the right to demand that the depositories correctly identify the true holders of securities, by going back up the chain of financial intermediation if necessary. This is the fundamental principle in the fight against money laundering and the financing of terrorism: all establishments should know the names and addresses of their actual clients. One concern that some readers will probably have is that a world financial register would threaten individual privacy. Yet countries have property records for land and real estate; these records are public, and there seems to be little misuse.


pages: 354 words: 26,550

High-Frequency Trading: A Practical Guide to Algorithmic Strategies and Trading Systems by Irene Aldridge

algorithmic trading, asset allocation, asset-backed security, automated trading system, backtesting, Black Swan, Brownian motion, business cycle, business process, buy and hold, capital asset pricing model, centralized clearinghouse, collapse of Lehman Brothers, collateralized debt obligation, collective bargaining, computerized trading, diversification, equity premium, fault tolerance, financial intermediation, fixed income, high net worth, implied volatility, index arbitrage, information asymmetry, interest rate swap, inventory management, law of one price, Long Term Capital Management, Louis Bachelier, margin call, market friction, market microstructure, martingale, Myron Scholes, New Journalism, p-value, paper trading, performance metric, profit motive, purchasing power parity, quantitative trading / quantitative finance, random walk, Renaissance Technologies, risk tolerance, risk-adjusted returns, risk/return, Sharpe ratio, short selling, Small Order Execution System, statistical arbitrage, statistical model, stochastic process, stochastic volatility, systematic trading, trade route, transaction costs, value at risk, yield curve, zero-sum game

AI Expert 31, 53–59. Chaboud, Alain P. and Jonathan H. Wright, 2005. “Uncovered Interest Parity: It Works, but Not for Long.” Journal of International Economics 66, 349–362. Chakravarty, Sugato, 2001. “Stealth Trading: Which Traders’ Trades Move Stock Prices?” Journal of Financial Economics 61, 289–307. Chakravarty, Sugato and C. Holden, 1995. “An Integrated Model of Market and Limit Orders.” Journal of Financial Intermediation 4, 213–241. Challe, Edouard, 2003. “Sunspots and Predictable Asset Returns.” Journal of Economic Theory 115, 182–190. Chambers, R.G., 1985. “Credit Constraints, Interest Rates and Agricultural Prices.” American Journal of Agricultural Economics 67, 390–395. Chan, K.S. and H. Tong, 1986. “On estimating Thresholds in Autoregressive Models.” Journal of Time Series Analysis 7, 179–190. Chan, L.K.C., Y.

Working paper, Carnegie Mellon University. Kyle, A., 1985. “Continuous Auctions and Insider Trading,” Econometrica 53, 1315–1335. Le Saout, E., 2002. “Intégration du Risque de Liquidité dans les Modèles de Valeur en Risqué.” Banque et Marchés, No. 61, November–December. Leach, J. Chris and Ananth N. Madhavan, 1992. “Intertemporal Price Discovery by Market Makers: Active versus Passive Learning.” Journal of Financial Intermediation 2, 207–235. References 317 Leach, J. Chris and Ananth N. Madhavan, 1993. “Price Experimentation and Security Market Structure.” Review of Financial Studies 6, 375–404. Lechner, S. and I. Nolte, 2007. “Customer Trading in the Foreign Exchange Market: Empirical Evidence from an Internet Trading Platform.” Working paper, University of Konstanz. Lee, C. and M. Ready, 1991. “Inferring Trade Direction from Intraday Data.”

“The Adjustment of Exchange Rates to Macroeconomic Information: The Role of Order Flow.” Journal of Financial and Quantitative Analysis 43, 467–488. Lyons, Richard K., 1995. “Tests of Microstructural Hypotheses in the Foreign Exchange Market.” Journal of Financial Economics 39, 321–351. 318 REFERENCES Lyons, Richard K., 1996. “Optimal Transparency in a Dealer Market with an Application to Foreign Exchange.” Journal of Financial Intermediation 5, 225–254. Lyons, Richard K., 2001. The Microstructure Approach to Exchange Rates. MIT Press. MacKinlay, A.C., 1997. “Event Studies in Economics and Finance.” Journal of Economic Literature XXXV, 13–39. Mahdavi, M., 2004. “Risk-Adjusted Return When Returns Are Not Normally Distributed: Adjusted Sharpe Ratio.” Journal of Alternative Investments 6 (Spring), 47–57. Maki, A. and T. Sonoda, 2002.


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

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

Money market funds offer almost the same services as deposit institutions, but legally their investors hold shares rather than fixed claims. The trillions of dollars that they raise are invested in short-term debt of nonfinancial companies and banks.30 When money market funds invest in the debt of nonfinancial companies, they are competing with banks that might also lend to these companies. When money market funds make short-term loans to banks, they create an additional layer of financial intermediation between investors who want services like those associated with deposits and banks seeking short-term funding. Borrowing from money market funds increases the risk of liquidity problems and runs. Without deposit insurance, the situation is similar to that of George Bailey in the movie It’s a Wonderful Life, which we discussed in Chapter 4. Managers of money market funds that have loaned to banks may become concerned about the solvency of those banks and attempt to withdraw their money.

Stern School of Business, New York University, New York, and European School of Management and Technology, Berlin. Acharya, Viral V., and Tanju Yorulmazer. 2008. “Information Contagion and Bank Herding.” Journal of Money, Credit, and Banking 40: 215–231. Acharya, Viral V., Demos Gromb, and Tanju Yorulmazer. 2007. “Too Many to Fail—An Analysis of Time-Inconsistency in Bank Closure Policies.” Journal of Financial Intermediation 16 (1): 1–31. Acharya, Viral V., Thomas F. Cooley, Matthew P. Richardson, and Ingo Walter, eds. 2010. Regulating Wall Street: The Dodd-Frank Act and the New Architecture of Global Finance. New York: John Wiley and Sons. Acharya, Viral V., Matthew Richardson, Stijn van Nieuwerburgh, and Lawrence J. White. 2011a. Guaranteed to Fail: Fannie Mae, Freddie Mac, and the Debacle of Mortgage Finance.

“A Market-Based Study of the Cost of Default.” Review of Financial Studies 25 (10): 2599–2999. Dell’Ariccia, Giovanni, Luc Laeven, and Deniz Igan. 2008. “Credit Booms and Lending Standards: Evidence from the Subprime Mortgage Market.” IMF Working Paper 08/106. International Monetary Fund, Washington, DC. Demirgüç-Kunt, Asli, Edward J. Kane, and Luc Laeven. 2008. “Determinants of Deposit-Insurance Adoption and Design.” Journal of Financial Intermediation 17 (3): 407–438. Demirgüç-Kunt, Asli, Enrica Detragiache, and Ouarda Merrouche. 2010. “Bank Capital: Lessons from the Financial Crisis.” Policy Research Working Paper 5473. World Bank, Washington, DC. De Mooij, Ruud A. 2011. “Tax Biases to Debt Finance: Assessing the Problem, Finding Solutions.” IMF staff discussion note. International Monetary Fund, Washington, DC. May 3. Demyanyk, Yuliya, and Otto Van Hemert. 2009.


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

balance sheet recession, banking crisis, basic income, Bernie Sanders, Bretton Woods, business climate, business cycle, Carmen Reinhart, central bank independence, collaborative economy, complexity theory, conceptual framework, corporate governance, corporate social responsibility, creative destruction, credit crunch, Credit Default Swap, crony capitalism, David Ricardo: comparative advantage, decarbonisation, deindustrialization, dematerialisation, Detroit bankruptcy, double entry bookkeeping, Elon Musk, endogenous growth, energy security, eurozone crisis, factory automation, facts on the ground, fiat currency, Financial Instability Hypothesis, financial intermediation, forward guidance, full employment, G4S, Gini coefficient, Growth in a Time of Debt, Hyman Minsky, income inequality, information asymmetry, Intergovernmental Panel on Climate Change (IPCC), Internet of things, investor state dispute settlement, invisible hand, Isaac Newton, Joseph Schumpeter, Kenneth Rogoff, Kickstarter, knowledge economy, labour market flexibility, low skilled workers, Martin Wolf, mass incarceration, Mont Pelerin Society, neoliberal agenda, Network effects, new economy, non-tariff barriers, paradox of thrift, Paul Samuelson, price stability, private sector deleveraging, quantitative easing, QWERTY keyboard, railway mania, rent-seeking, road to serfdom, savings glut, Second Machine Age, secular stagnation, shareholder value, sharing economy, Silicon Valley, Steve Jobs, the built environment, The Great Moderation, The Spirit Level, Thorstein Veblen, too big to fail, total factor productivity, transaction costs, trickle-down economics, universal basic income, very high income

If we restrict our analysis to the five largest sectors (agriculture, manufacturing, wholesale/retail trade, financial intermediation and real estate), which comprise over 92,000 firms and cover more than 90 per cent of total corporate assets in the sample, the result is even more dramatic. Private firms in these five sectors appear to have built even larger stocks of fixed assets relative to their profits than quoted firms—the investment multiplier from being a private firm is 5.2. When we have taken into account additional factors in our analysis, such as the age of companies and the sector in which they operate, the estimated investment multiplier of private firms remained very relevant and statistically significant. Relative to the median sector,33 private firms in the sectors of manufacturing; transport, storage and communication; financial intermediation; real estate; health and social work; and community services exhibit positive multipliers on their investment relative to quoted firms, with multipliers ranging from 4 to 15.

As recent events have shown, the most visible and violent of those costs are experienced at times of financial crisis. These costs, for example in foregone output, have been extensively studied.5 But there is a second potential cost of modern capital markets—the cost of short-termism. Although it has no off-the-shelf definition, short-termism is generally taken to refer to the tendency of agents in the financial intermediation chain to weight too heavily near-term outcomes at the expense of longer-term opportunities.6 This has opportunity costs, for example in foregone investment projects and hence future output. Unlike crises, these opportunity costs are neither violent nor visible. Rather, they are silent and invisible. Perhaps for that reason, there have been very few attempts to capture the potential costs of short-termism in quantitative terms.


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The Clash of the Cultures by John C. Bogle

asset allocation, buy and hold, collateralized debt obligation, commoditize, 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, money market fund, mortgage debt, new economy, Occupy movement, passive investing, Paul Samuelson, Ponzi scheme, post-work, 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, survivorship bias, The Wealth of Nations by Adam Smith, transaction costs, Vanguard fund, William of Occam, zero-sum game

And if not, they can expect to reap what follows. Surely Jack Bogle and others inside the industry have done enough to raise the alarm. Never is this clearer than in his insistence that fees and costs are draining all the promised value out of the pockets of investors. Investors must know that they inevitably earn the gross return of the stock market, but only before the deduction of the costs of financial intermediation are taken into account. If beating the market is a zero sum game before costs, it is a loser’s game after costs are deducted. Which is why costs must be made clear to investors, and, one hopes, minimized. Pointing this out routinely surely cannot earn Jack Bogle many friends among Wall Street, which depends on the mystery surrounding financial innovations—as they are called euphemistically.

It called attention to the even higher levels of speculation that had come to distort our markets and ill-serve our investors. To understand why speculation is a drain on the resources of investors as a group, one need only understand the tautological nature of the markets: Investors, as a group, inevitably earn the gross return of, say, the stock market, but only before the deduction of the costs of financial intermediation are taken into account. If beating the market is a zero-sum game before costs, it is a loser’s game after costs are deducted. How often we forget the power of these “relentless rules of humble arithmetic” (a phrase used in another context by former Supreme Court Justice Louis Brandeis a century ago), when we bet against one another, day after day—inevitably, to no avail—in the stock market.

Owning the entire stock market is the ultimate diversifier for the stock allocation of the portfolio. When you understand how hard it is to find that needle, simply buy the haystack. Rule 6: Minimize the Croupier’s Take The resemblance of the stock market to the casino is hardly far-fetched. Both beating the stock market and gambling in the casino are zero-sum games—but only before the costs of playing the game are deducted. After the heavy costs of financial intermediation (commissions, spreads, management fees, taxes, etc.) are deducted, beating the stock market is inevitably a loser’s game for investors as a group. In the same way, after the croupiers’ wide rakes descend, beating the casino is inevitably a loser’s game for gamblers as a group. (What else is new?) I reiterate what I’ve emphasized often in this book, investors as a group must and do earn the market’s return before costs, and lose to the market by the exact amount of those costs.


pages: 1,164 words: 309,327

Trading and Exchanges: Market Microstructure for Practitioners by Larry Harris

active measures, Andrei Shleifer, asset allocation, automated trading system, barriers to entry, Bernie Madoff, business cycle, buttonwood tree, buy and hold, compound rate of return, computerized trading, corporate governance, correlation coefficient, data acquisition, diversified portfolio, fault tolerance, financial innovation, financial intermediation, fixed income, floating exchange rates, High speed trading, index arbitrage, index fund, information asymmetry, information retrieval, interest rate swap, invention of the telegraph, job automation, law of one price, London Interbank Offered Rate, Long Term Capital Management, margin call, market bubble, market clearing, market design, market fragmentation, market friction, market microstructure, money market fund, Myron Scholes, Nick Leeson, open economy, passive investing, pattern recognition, Ponzi scheme, post-materialism, price discovery process, price discrimination, principal–agent problem, profit motive, race to the bottom, random walk, rent-seeking, risk tolerance, risk-adjusted returns, selection bias, shareholder value, short selling, Small Order Execution System, speech recognition, statistical arbitrage, statistical model, survivorship bias, the market place, transaction costs, two-sided market, winner-take-all economy, yield curve, zero-coupon bond, zero-sum game

Chapter 6: Order-driven Markets Domowitz, Ian. 1990. The mechanics of automated trade execution systems. Journal of Financial Intermediation 1(2), 167–194. Mendelson, Haim. 1982. Market behavior in a clearing house. Econometrica 50(6), 1505–1524. Chapter 7: Brokers Brennan, Michael J., and Tarun Chordia. 1993. Brokerage commission schedules, Journal of Finance 48(4), 1379–1402. Chan, Yuk-Shee, and Mark Weinstein. 1993. Reputation, bid-ask spread and market structure. Financial Analysts Journal 49(4), 57–62. Fishman, Michael J., and Francis A. Longstaff. 1992. Dual trading in futures markets. Journal of Finance 47(2), 643–672. Röell, Ailsa. 1990. Dual capacity trading and the quality of the market. Journal of Financial Intermediation 1(2), 105–124. Sofianos, George, and Ingrid Werner. 2000. The trades of NYSE floor brokers.

Information diversity and market behavior. Journal of Finance 37(1), 87–102. Grossman, Sanford J., and Joseph E. Stiglitz. 1980. On the impossibility of informationally efficient markets. American Economic Review 70(3), 393–408. Hasbrouck, Joel. 1991. Measuring the information content of stock trades. Journal of Finance 46(1), 179–208. Madhavan, Ananth. 1996. Security prices and market transparency. Journal of Financial Intermediation 5(3), 255–283. Malkiel, Burton G. 1973. A Random Walk Down Wall Street (Norton, New York). Pinches, George E. 1970. The random walk and technical analysis. Financial Analysts Journal 26(2), 104–109. Silber, William L. 1994. Technical trading: When it works and when it doesn’t. Journal of Derivatives 1(3), 39–44. Treynor, Jack L. 1981. What does it take to win the trading game? Financial Analysts Journal 37(1), 55–60.

Amihud, Yakov, and Haim Mendelson. 1989. Liquidity and the cost of capital: Implications for corporate management. Journal of Applied Corporate Finance 2(3), 65–73. Chowdhry, Bhagwan, and Vikram Nanda. 1991. Multimarket trading and market liquidity. Review of Financial Studies 4(3), 483–511. Forster, Margaret M., and Thomas J. George. 1992. Anonymity in securities markets. Journal of Financial Intermediation 2(2), 168–206. Garman, Mark B. 1976. Market microstructure. Journal of Financial Economics 3(3), 257–275. Hansch, Oliver, Narayan Y. Naik, and S. Viswanathan. 1998. Do inventories matter in dealership markets? Evidence from the London Stock Exchange. Journal of Finance 53(5), 1623–1656. Lyons, Richard K. 1997. A simultaneous trade model of the foreign exchange hot potato. Journal of International Economics 42(3/4), 275–298.


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The Growth Delusion: Wealth, Poverty, and the Well-Being of Nations by David Pilling

Airbnb, banking crisis, Bernie Sanders, Big bang: deregulation of the City of London, Branko Milanovic, call centre, centre right, clean water, collapse of Lehman Brothers, collateralized debt obligation, commoditize, Credit Default Swap, credit default swaps / collateralized debt obligations, dark matter, Deng Xiaoping, Diane Coyle, Donald Trump, double entry bookkeeping, Erik Brynjolfsson, falling living standards, financial deregulation, financial intermediation, financial repression, Gini coefficient, Goldman Sachs: Vampire Squid, Google Hangouts, Hans Rosling, happiness index / gross national happiness, income inequality, income per capita, informal economy, invisible hand, job satisfaction, Mahatma Gandhi, market fundamentalism, Martin Wolf, means of production, Monkeys Reject Unequal Pay, mortgage debt, off grid, old-boy network, Panopticon Jeremy Bentham, peak oil, performance metric, pez dispenser, profit motive, purchasing power parity, race to the bottom, rent-seeking, Robert Gordon, Ronald Reagan, Rory Sutherland, science of happiness, shareholder value, sharing economy, Simon Kuznets, sovereign wealth fund, The Great Moderation, The Wealth of Nations by Adam Smith, Thomas Malthus, total factor productivity, transaction costs, transfer pricing, trickle-down economics, urban sprawl, women in the workforce, World Values Survey

Not only was it obvious how much money bankers were making—you only had to look at the cars they were driving to see that—but they also spent formidable amounts of money lobbying governments to make life yet easier for them. Banking became a bigger and bigger part of the US and UK economies. The “contribution” of the financial sector to national income grew enormously. In the 1950s, when banks were banks rather than “great vampire squids,” they contributed about 2 percent to the US economy.10 By 2008, that had quadrupled.11 Similar things happened in Britain. Until 1978 financial intermediation accounted for around 1.5 percent of whole economy profits. By 2008, that ratio had risen to about 15 percent. The perceived success of financial deregulation in generating economic dynamism encouraged other countries to do the same. New Zealand, Australia, Ireland, Spain, Russia, and even little Iceland were seduced by the Anglo-Saxon model. The financial industry exploded all over the world.

But the bulk of its revenue comes from what is called the spread—the difference between the interest rate it charges you and the interest rate at which the bank itself can obtain money. To measure the supposed economic value generated by this interest-rate spread, a new accounting concept was introduced in the 1993 update to the UN System of National Accounts, the holy book of GDP. The concept is called financial intermediation services indirectly measured, or FISIM for short. Without going into technical details, the upshot is that the wider the spread the more value is judged to have been created. That is back to front. In banking, spreads increase when risk rises. If a banker judges you quite unlikely to repay a loan, she will raise the interest rate charged to reflect the higher risk of default. So, from an accounting point of view, the riskier the portfolio of loans the greater the contribution to growth.


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Sacred Economics: Money, Gift, and Society in the Age of Transition by Charles Eisenstein

Albert Einstein, back-to-the-land, bank run, Bernie Madoff, big-box store, Bretton Woods, capital controls, clean water, collateralized debt obligation, commoditize, corporate raider, credit crunch, David Ricardo: comparative advantage, debt deflation, deindustrialization, delayed gratification, disintermediation, diversification, fiat currency, financial independence, financial intermediation, fixed income, floating exchange rates, Fractional reserve banking, full employment, global supply chain, God and Mammon, happiness index / gross national happiness, hydraulic fracturing, informal economy, invisible hand, Jane Jacobs, land tenure, land value tax, Lao Tzu, liquidity trap, McMansion, means of production, money: store of value / unit of account / medium of exchange, moral hazard, mortgage debt, new economy, off grid, oil shale / tar sands, Own Your Own Home, Paul Samuelson, peak oil, phenotype, Ponzi scheme, profit motive, quantitative easing, race to the bottom, Scramble for Africa, special drawing rights, spinning jenny, technoutopianism, the built environment, Thomas Malthus, too big to fail

Here, suffice it to say that the proposals of this book can fit into either system. Overall I am more sympathetic to a system that includes private credit, first because it allows organic, endogenous money creation independent of a central authority; second because it more easily incorporates exciting new modes of economic cooperation such as commercial barter rings and mutual-credit systems; third because it allows for much more flexibility in financial intermediation and capital formation; and fourth because it simplifies interbank credit clearing. Moreover, as some of Irving Fisher’s associates began realizing in the mid-1930s, it is nearly impossible to prevent fractional-reserve deposits from appearing in covert forms.6 I draw this point out in the appendix, but consider: even if you issue an IOU to a friend, and your friend gives it to another friend in lieu of cash, you are increasing the money supply.

With fractional-reserve banking, a bank can “borrow short and lend long”; that is, it can hold demand deposits, which could be withdrawn anytime, and lend most of them out as long-term loans. With full-reserve banking this is not allowed. Banks could still lend money, but only if that money has been given to them in the form of time deposits. For example, if a depositor buys a six-month certificate of deposit (CD), those funds could be lent out for a term of six months. One of the main criticisms of full-reserve banking is that it makes financial intermediation—the connection of lenders and borrowers—much more difficult. Instead of issuing loans based purely on creditworthiness, the bank would have to find a depositor willing to commit his money for the term of the loan. However, closer examination reveals this criticism to be for the most part invalid. In fact, banking would be almost the same as it is today. Let’s think about bank deposits first.

Alternatively, given sufficient lead time, it could issue stock or bonds to investors. In general, liquidity would be no more a restraint on lending than it is today. Random fluctuations in the level of deposits happen every day and are no big deal because banks can cover any shortfall in reserves by borrowing from the Fed Funds market or the Fed’s own overdraft facility. Equivalent mechanisms could easily operate in a full-reserve system. Besides financial intermediation, another apparent difference between the two systems is that in a full-reserve system, banks would supposedly have no capacity to alter the money supply, which would be dependent on the monetary authority. However, this difference too is an illusion. In the present system, the money supply increases when banks lend more, such as during an economic expansion when there are lots of safe lending opportunities.


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Makers and Takers: The Rise of Finance and the Fall of American Business by Rana Foroohar

accounting loophole / creative accounting, activist fund / activist shareholder / activist investor, additive manufacturing, Airbnb, algorithmic trading, Alvin Roth, Asian financial crisis, asset allocation, bank run, Basel III, bonus culture, Bretton Woods, British Empire, business cycle, buy and hold, call centre, Capital in the Twenty-First Century by Thomas Piketty, Carmen Reinhart, carried interest, centralized clearinghouse, clean water, collateralized debt obligation, commoditize, computerized trading, corporate governance, corporate raider, corporate social responsibility, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, crowdsourcing, David Graeber, deskilling, Detroit bankruptcy, diversification, Double Irish / Dutch Sandwich, Emanuel Derman, Eugene Fama: efficient market hypothesis, financial deregulation, financial intermediation, Frederick Winslow Taylor, George Akerlof, gig economy, Goldman Sachs: Vampire Squid, Gordon Gekko, greed is good, High speed trading, Home mortgage interest deduction, housing crisis, Howard Rheingold, Hyman Minsky, income inequality, index fund, information asymmetry, interest rate derivative, interest rate swap, Internet of things, invisible hand, John Markoff, joint-stock company, joint-stock limited liability company, Kenneth Rogoff, Kickstarter, knowledge economy, labor-force participation, London Whale, Long Term Capital Management, manufacturing employment, market design, Martin Wolf, money market fund, moral hazard, mortgage debt, mortgage tax deduction, new economy, non-tariff barriers, offshore financial centre, oil shock, passive investing, Paul Samuelson, pensions crisis, Ponzi scheme, principal–agent problem, quantitative easing, quantitative trading / quantitative finance, race to the bottom, Ralph Nader, Rana Plaza, RAND corporation, random walk, rent control, Robert Shiller, Robert Shiller, Ronald Reagan, Satyajit Das, Second Machine Age, shareholder value, sharing economy, Silicon Valley, Silicon Valley startup, Snapchat, Social Responsibility of Business Is to Increase Its Profits, sovereign wealth fund, Steve Jobs, technology bubble, The Chicago School, the new new thing, The Spirit Level, The Wealth of Nations by Adam Smith, Tim Cook: Apple, Tobin tax, too big to fail, trickle-down economics, Tyler Cowen: Great Stagnation, Vanguard fund, zero-sum game

The financial industry is the world’s ultimate power and information hub, the tiny middle portion of an hourglass that represents the larger global economy. All the money in the world, and all the information about who’s making and taking it, passes through that tiny middle. Financiers sit in what is the most privileged position, extracting whatever rent they like for passage. It’s telling that technology, which usually decreases industries’ operating costs, has failed to deflate the costs of financial intermediation. Indeed, finance has become more costly and less efficient as an industry as it deployed new and more advanced tools over time.16 It’s also telling that during the last few decades financiers have earned three times as much as their peers in other industries with similar education and skills.17 As Thomas Piketty put it in Capital in the Twenty-First Century, financiers are, in some ways, like the landowners of old.

The result was that Coke and other product manufacturers, desperate not to run out of supplies, were being forced to pay not only a higher price for the metal but also a premium for delivery.11 “The situation has been organized artificially to drive premiums up,” said Dave Smith, Coke’s head of strategic procurement, at an industry conference in June 2011. “It takes two weeks to put aluminum in, and six months to get it out.”12 Guess who Coke, Coors, and their thirsty consumers were paying that premium to? Goldman Sachs. It’s an amazing tale that provides a window into the complex and costly shenanigans that can result when banks move too far out of their traditional purview of simple lending and financial intermediation and into other types of business. While the Goldman aluminum-hoarding scandal has less human significance than the food and fuel bubbles of 2008 and 2010, it has received significant legal attention and documentation. It thus provides a sharp lens through which to understand the confluence of events that created the dysfunctional system in which financial institutions are allowed to both make the market and be the market.

McKinsey Global Institute, “Debt and (Not Much) Deleveraging,” February 2015, 98–99. 22. Greenwood and Scharfstein, “The Growth of Finance,” 21. 23. Financial efficiency is defined here as the amount of money and engagement that finance provides to Main Street, rather than to the capital markets themselves. 24. Thomas Philippon, “Has the U.S. Finance Industry Become Less Efficient? On the Theory and Measurement of Financial Intermediation,” American Economic Review 105, no. 4 (2015): 1408–38. 25. Robert D. Atkinson and Stephen J. Ezell, Innovation Economics: The Race for Global Advantage (New Haven, CT: Yale University Press, 2012), 21. 26. Victoria Williams, US Small Business Administration, Office of Advocacy, “Small Business Lending in the United States 2013,” December 2014. 27. John Haltiwanger, Ron Jarmin, and Javier Miranda, “Business Dynamics Statistics Briefing: Where Have All the Young Firms Gone?”


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Flash Boys: A Wall Street Revolt by Michael Lewis

automated trading system, bash_history, Berlin Wall, Bernie Madoff, collateralized debt obligation, computerized markets, drone strike, Fall of the Berlin Wall, financial intermediation, Flash crash, High speed trading, latency arbitrage, pattern recognition, risk tolerance, Rubik’s Cube, Sergey Aleynikov, Small Order Execution System, Spread Networks laid a new fibre optics cable between New York and Chicago, the new new thing, too big to fail, trade route, transaction costs, Vanguard fund

The minute you went to buy or sell at the stated market price, the price moved. What Scalpers Inc. did was to hide an entirely new sort of activity behind the mask of an old mental model—in which the guy who “makes markets” is necessarily taking market risk and providing “liquidity.” But Scalpers Inc. took no market risk.§ In spirit Scalpers Inc. was less a market enabler than a weird sort of market burden. Financial intermediation is a tax on capital; it’s the toll paid by both the people who have it and the people who put it to productive use. Reduce the tax and the rest of the economy benefits. Technology should have led to a reduction in this tax; the ability of investors to find each other without the help of some human broker might have eliminated the tax altogether. Instead this new beast rose up in the middle of the market and the tax increased—by billions of dollars.

IEX had built an exchange to eliminate the possibility of predatory trading—to prevent investors from being treated as prey. In the first two months of its existence, IEX had seen no activity from high-frequency traders except this. It was astonishing, when you stopped to think about it, how aggressively capitalism protected its financial middleman, even when he was totally unnecessary. Almost magically, the banks had generated the need for financial intermediation—to compensate for their own unwillingness to do the job honestly. Brad opened the floor for questions. For the first few minutes, the investors vied with each other to see who could best control his anger and exhibit the sort of measured behavior investors are famous for. “Do you think of HFT differently than you did before you opened?” asked one. That question might have been better answered by Ronan, who had just returned from a tour of the big HFT firms, and now leaned against a wall on the side of the room.


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Big Business: A Love Letter to an American Anti-Hero by Tyler Cowen

23andMe, Affordable Care Act / Obamacare, augmented reality, barriers to entry, Bernie Sanders, bitcoin, blockchain, Bretton Woods, cloud computing, cognitive dissonance, corporate governance, corporate social responsibility, correlation coefficient, creative destruction, crony capitalism, cryptocurrency, dark matter, David Brooks, David Graeber, don't be evil, Donald Trump, Elon Musk, employer provided health coverage, experimental economics, Filter Bubble, financial innovation, financial intermediation, global reserve currency, global supply chain, Google Glasses, income inequality, Internet of things, invisible hand, Jeff Bezos, late fees, Mark Zuckerberg, mobile money, money market fund, mortgage debt, Network effects, new economy, Nicholas Carr, obamacare, offshore financial centre, passive investing, payday loans, peer-to-peer lending, Peter Thiel, pre–internet, price discrimination, profit maximization, profit motive, RAND corporation, rent-seeking, reserve currency, ride hailing / ride sharing, risk tolerance, Ronald Coase, shareholder value, Silicon Valley, Silicon Valley startup, Skype, Snapchat, Social Responsibility of Business Is to Increase Its Profits, Steve Jobs, The Nature of the Firm, Tim Cook: Apple, too big to fail, transaction costs, Tyler Cowen: Great Stagnation, ultimatum game, WikiLeaks, women in the workforce, World Values Survey, Y Combinator

So commentators who criticize the financial sector for being a high or rising share of GDP are making the wrong comparison. There may be specific reasons parts of the financial sector are too large, such as the repackaging of subprime mortgages, but a larger financial sector relative to GDP is frequently a sign of previous economic success and stability. It is a possible and indeed plausible response to be disappointed that, in percentage terms, the costs of financial intermediation are not falling but rather sticking at around 2 percent of those forms of intermediable wealth. Why hasn’t the financial sector been more innovative and disruptive? After all, the costs of a phone call to Africa have fallen a great deal, so should we not expect comparable progress from banking and finance? I’ll return to that issue, but for the time being it is important to establish that America’s financial sector is not an out-of-control monster.

Dying for a Paycheck: How Modern Management Harms Employee Health and Company Performance—and What We Can Do About It. New York: HarperCollins. Philippon, Thomas. 2011. “Has the Finance Industry Become Less Efficient? Or Where Is Wal-Mart When We Need It?” VoxEU, Center for Economic Policy Research, December 2, 2011. https://voxeu.org/article/where-wal-mart-when-we-need-it. Philippon, Thomas. 2015. “Has the U.S. Finance Industry Become Less Efficient? On the Theory and Measurement of Financial Intermediation.” American Economic Review 105 (4): 1408–1438. Philippon, Thomas, and Ariell Reshef. 2012. “Wages and Human Capital in the U.S. Finance Industry, 1909–2006.” Quarterly Journal of Economics 127, no. 4 (November): 1551–1609. Phillips, Tim, and Rebecca Clare. 2015. Game of Thrones on Business: Strategy, Morality and Leadership Lessons from the World’s Most Talked-About TV Show. Oxford: Infinite Ideas.


pages: 321

Finding Alphas: A Quantitative Approach to Building Trading Strategies by Igor Tulchinsky

algorithmic trading, asset allocation, automated trading system, backtesting, barriers to entry, business cycle, buy and hold, capital asset pricing model, constrained optimization, corporate governance, correlation coefficient, credit crunch, Credit Default Swap, discounted cash flows, discrete time, diversification, diversified portfolio, Eugene Fama: efficient market hypothesis, financial intermediation, Flash crash, implied volatility, index arbitrage, index fund, intangible asset, iterative process, Long Term Capital Management, loss aversion, market design, market microstructure, merger arbitrage, natural language processing, passive investing, pattern recognition, performance metric, popular capitalism, prediction markets, price discovery process, profit motive, quantitative trading / quantitative finance, random walk, Renaissance Technologies, risk tolerance, risk-adjusted returns, risk/return, selection bias, sentiment analysis, shareholder value, Sharpe ratio, short selling, Silicon Valley, speech recognition, statistical arbitrage, statistical model, stochastic process, survivorship bias, systematic trading, text mining, transaction costs, Vanguard fund, yield curve

ArXiv https://arxiv.org References287 Elsevier. Journal of Banking and Finance. www.journals.elsevier.com/ journal-­­of-­­banking-­­and-­­finance Elsevier. Journal of Corporate Finance. www.journals.elsevier.com/ journal-­­of-­­corporate-­­finance Elsevier. Journal of Empirical Finance. www.journals.elsevier.com/ journal-­­of-­­empirical-­­finance Elsevier. Journal of Financial Intermediation. www.journals.elsevier. com/journal-­­of-­­financial-­­intermediation Elsevier. Journal of Financial Markets. www.journals.elsevier.com/ journal-­­of-­­financial-­­markets Elsevier. Journal of International Money and Finance. www.journals. elsevier.com/journal-­­of-­­international-­­money-­­and-­­finance Elsevier. Pacific-Basin Finance Journal. www.journals.elsevier.com/ pacific-­­basin-­­finance-­­journal Google Finance. www.google.com/finance Google Scholar. https://scholar.google.com Incredible Charts.


pages: 263 words: 80,594

Stolen: How to Save the World From Financialisation by Grace Blakeley

"Robert Solow", activist fund / activist shareholder / activist investor, asset-backed security, balance sheet recession, bank run, banking crisis, banks create money, Basel III, basic income, battle of ideas, Berlin Wall, Big bang: deregulation of the City of London, bitcoin, Bretton Woods, business cycle, call centre, capital controls, Capital in the Twenty-First Century by Thomas Piketty, Carmen Reinhart, central bank independence, collapse of Lehman Brothers, collective bargaining, corporate governance, corporate raider, credit crunch, Credit Default Swap, cryptocurrency, currency peg, David Graeber, debt deflation, decarbonisation, Donald Trump, eurozone crisis, Fall of the Berlin Wall, falling living standards, financial deregulation, financial innovation, Financial Instability Hypothesis, financial intermediation, fixed income, full employment, G4S, gender pay gap, gig economy, Gini coefficient, global reserve currency, global supply chain, housing crisis, Hyman Minsky, income inequality, inflation targeting, Intergovernmental Panel on Climate Change (IPCC), Kenneth Rogoff, Kickstarter, land value tax, light touch regulation, low skilled workers, market clearing, means of production, money market fund, Mont Pelerin Society, moral hazard, mortgage debt, negative equity, neoliberal agenda, new economy, Northern Rock, offshore financial centre, paradox of thrift, payday loans, pensions crisis, Ponzi scheme, price mechanism, principal–agent problem, profit motive, quantitative easing, race to the bottom, regulatory arbitrage, reserve currency, Right to Buy, rising living standards, risk-adjusted returns, road to serfdom, savings glut, secular stagnation, shareholder value, Social Responsibility of Business Is to Increase Its Profits, sovereign wealth fund, the built environment, The Great Moderation, too big to fail, transfer pricing, universal basic income, Winter of Discontent, working-age population, yield curve, zero-sum game

In fact, we can speak of a peculiarly Anglo-American growth model, marked by a growing finance sector, a falling wage share of national income, growing household and corporate debt, and a yawning current account deficit.8 Other economies that pursued this model before 2007 include Iceland and Spain, and today Australia and Canada are perhaps its most enthusiastic adopters. The most obvious indicator of financialisation is the dramatic increase in the size of the finance sector itself. Between 1970 and 2007, the UK’s finance sector grew 1.5% faster than the economy as a whole each year.9 The profits of financial corporations show an even starker trend: between 1948 and 1989, financial intermediation accounted for around 1.5% of total economy profits. This figure had risen to 15% by 2007.10 The share of finance in economic output was, however, dwarfed by the growth in the assets held by the UK banking system: banks’ assets grew fivefold between 1990 and 2007, reaching almost 500% of GDP by 2007.11 The UK also boasted one of the biggest shadow banking systems relative to its GDP before the crisis — a trend that has continued to this day.12 Meanwhile, cottage industries of financial lawyers, consultants, and assorted advisors grew up in the glistening towers in the City of London and Canary Wharf.

But by 2007, mortgages were no longer just mortgages. The debt that had been created by the banks in the boom between the 1980s and 2007 had been transformed into the plumbing of the entire global financial system. Every day, millions of dollars’ worth of mortgages were packaged up into securities, traded on financial markets, insured, bet against, and repackaged into a seemingly endless train of financial intermediation. As the crisis escalated, it was presented as an archetypal financial meltdown, driven by the greed and financial wizardry of the big banks, whose recklessness had brought the global economy to its knees. But whilst the big banks’ relentless desire for returns had escalated the crisis, it’s causes could be traced back to what was taking place in the real economy: mortgage lending.2 And this was driven by financialisation.


pages: 1,202 words: 424,886

Stigum's Money Market, 4E by Marcia Stigum, Anthony Crescenzi

accounting loophole / creative accounting, Asian financial crisis, asset allocation, asset-backed security, bank run, banking crisis, banks create money, Black-Scholes formula, Brownian motion, business climate, buy and hold, capital controls, central bank independence, centralized clearinghouse, corporate governance, credit crunch, Credit Default Swap, currency manipulation / currency intervention, David Ricardo: comparative advantage, disintermediation, distributed generation, diversification, diversified portfolio, financial innovation, financial intermediation, fixed income, full employment, high net worth, implied volatility, income per capita, intangible asset, interest rate derivative, interest rate swap, large denomination, locking in a profit, London Interbank Offered Rate, margin call, market bubble, market clearing, market fundamentalism, money market fund, mortgage debt, Myron Scholes, offshore financial centre, paper trading, pension reform, Ponzi scheme, price mechanism, price stability, profit motive, Real Time Gross Settlement, reserve currency, risk tolerance, risk/return, seigniorage, shareholder value, short selling, technology bubble, the payments system, too big to fail, transaction costs, two-sided market, value at risk, volatility smile, yield curve, zero-coupon bond, zero-sum game

All this sounds a touch harmless, so let’s look at a simple example of financial intermediation. Jones, a consumer, runs a $20,000 funds surplus, which she receives in cash. She promptly deposits her cash in a demand deposit at a bank. Simultaneously, some other spending unit, say, the Alpha Company, runs a temporary funds deficit. Jones’s bank trades the funds Jones has deposited with it for a loan note (IOU) issued by Alpha. In doing this—accepting Jones’s deposit and acquiring the note—the bank is funneling funds from Jones, an ultimate funds-surplus unit, to Alpha, an ultimate funds-deficit unit; in other words, it is acting as a financial intermediary between Jones and this company. Federal Reserve statistics on the assets and liabilities of different sectors in the economy show the importance of financial intermediation. In particular, at the beginning of 2006, households, personal trusts, and nonprofit organizations, who, as a group, have historically been the major suppliers of external financing, held $35.4 trillion of financial assets.

Acting as a Financial Intermediary When dealers moved from using repos simply to finance their positions to using repos to run matched books, they took a giant step: they diversified in a big way into a new-to-them business, financial intermediation. A financial intermediary is an institution that (1) solicits funds from funds-surplus units in exchange for claims against itself and (2) passes on those funds to funds-deficit units in exchange for claims against the deficit units. Banks, S&Ls, credit unions, life insurance companies, mutual funds, and other financial institutions are all financial intermediaries; so too is a dealer to the extent that it does matched book. The matched part of matched book is taking in collateral (any collateral will do), hanging out that collateral on the other side, and “taking the middle.” Borrowing funds at one rate and relending them at a higher rate to earn a spread—that’s what dealers running matched books do—is pure and simple, for-profit financial intermediation. This is illustrated in Figure 13.8.

This book is a comprehensive guide to the money market—U.S. and Eurodollar. It is intended for people working in banks, in dealerships, and in other financial institutions; for people running liquidity portfolios; and for accountants, lawyers, students, and others who have an interest in the markets discussed. The book begins with an introduction to what goes on in fixed-income financial markets—financial intermediation and money creation—plus an introduction to how fixed-income securities work, including various concepts of yield, the meaning and importance of the yield curve and the messages embedded in it, and the concepts and calculation of duration and convexity. Next, the book analyzes the operations (domestic and Eurodollar) of money center banks, of money market dealers and brokers, of the Federal Reserve, and of managers of liquidity portfolios.


pages: 665 words: 146,542

Money: 5,000 Years of Debt and Power by Michel Aglietta

bank run, banking crisis, Basel III, Berlin Wall, bitcoin, blockchain, Bretton Woods, British Empire, business cycle, capital asset pricing model, capital controls, cashless society, central bank independence, collapse of Lehman Brothers, collective bargaining, corporate governance, David Graeber, debt deflation, dematerialisation, Deng Xiaoping, double entry bookkeeping, energy transition, eurozone crisis, Fall of the Berlin Wall, falling living standards, financial deregulation, financial innovation, Financial Instability Hypothesis, financial intermediation, floating exchange rates, forward guidance, Francis Fukuyama: the end of history, full employment, German hyperinflation, income inequality, inflation targeting, information asymmetry, Intergovernmental Panel on Climate Change (IPCC), invention of writing, invisible hand, joint-stock company, Kenneth Arrow, Kickstarter, liquidity trap, margin call, means of production, money market fund, moral hazard, Nash equilibrium, Network effects, Northern Rock, oil shock, planetary scale, plutocrats, Plutocrats, price stability, purchasing power parity, quantitative easing, race to the bottom, reserve currency, secular stagnation, seigniorage, shareholder value, special drawing rights, special economic zone, stochastic process, the payments system, the scientific method, too big to fail, trade route, transaction costs, transcontinental railway, Washington Consensus

The lack of value placed on the transition to low-carbon economies and the lack of finance for this transition represents a double failure of market logic. This transition could restructure our perspectives on the future and revive the incentives to invest. We still need political measures to establish a social value for carbon, thus orienting investment towards the objective of sustainable growth in those countries where political priorities are evolving. What also remains to be done is to redefine financial intermediation, and to do so in connection with the development of the role of money as a principle of value realisation. We should recognise that fighting greenhouse gases through fresh productive investment has a universal social value, whose monetary expression is differentiated across the various sovereign countries. Doing this would open up the opportunity to transform the financial securities and credits issued in order to finance such investment into carbon assets.

We saw in Part I how untenable this hypothesis really is, and the historical analysis of this part has further confirmed this. Low-carbon investment is immersed in a both ecological and technological uncertainty, yet it is itself long term, with income flows staggered across time and with costs concentrated on the initial phase. In the current conditions of secular stagnation, characterised by a mass of idle savings and a low level of productive investment, organising a financial intermediation that could reallocate these savings with the aid of public guarantees for private risk-taking would mean retrieving a form of financial organisation that allowed the historical development of public transport. It is bewildering that we no longer know how to finance public and private investment, when we did a hundred and fifty years ago. If, instead of buying securities on the secondary market, which creates no new income, the central banks bought assets that were the counterparty to new real investment, this acquisition would be directly linked to the income growth produced.

Up until the general crisis in 2008, this market intermediation system operated through opaque risk transfer chains, unknown to market regulators and central banks. Trends in credit drive far-reaching cycles in the prices of financial assets. When these trends are reversed, financial crises are prompted. Figure 6.3 portrays the macroeconomic sequences of this amplification process. At the beginning of the cycle, the low cost of financial intermediation is self-sustaining. Through its interaction with the fall in the price of risk, and the leverage and speculative valorisation of assets, the expansionist boom is nourished. This boom spreads to the real economy through the increased wealth of non-financial agents. Figure 6.3 The chain of the expansive phase of the financial cycle Market actors are financed on credit, against a collateral which is the speculative asset itself.


pages: 524 words: 155,947

More: The 10,000-Year Rise of the World Economy by Philip Coggan

"Robert Solow", accounting loophole / creative accounting, Ada Lovelace, agricultural Revolution, Airbnb, airline deregulation, Andrei Shleifer, anti-communist, assortative mating, autonomous vehicles, bank run, banking crisis, banks create money, basic income, Berlin Wall, Bob Noyce, Branko Milanovic, Bretton Woods, British Empire, business cycle, call centre, capital controls, carbon footprint, Carmen Reinhart, Celtic Tiger, central bank independence, Charles Lindbergh, clean water, collective bargaining, Columbian Exchange, Columbine, Corn Laws, credit crunch, Credit Default Swap, crony capitalism, currency peg, debt deflation, Deng Xiaoping, discovery of the americas, Donald Trump, Erik Brynjolfsson, European colonialism, eurozone crisis, falling living standards, financial innovation, financial intermediation, floating exchange rates, Fractional reserve banking, Frederick Winslow Taylor, full employment, germ theory of disease, German hyperinflation, gig economy, Gini coefficient, global supply chain, global value chain, Gordon Gekko, greed is good, Haber-Bosch Process, Hans Rosling, Hernando de Soto, hydraulic fracturing, Ignaz Semmelweis: hand washing, income inequality, income per capita, indoor plumbing, industrial robot, inflation targeting, Isaac Newton, James Watt: steam engine, job automation, John Snow's cholera map, joint-stock company, joint-stock limited liability company, Kenneth Arrow, Kula ring, labour market flexibility, land reform, land tenure, Lao Tzu, large denomination, liquidity trap, Long Term Capital Management, Louis Blériot, low cost airline, low skilled workers, lump of labour, M-Pesa, Malcom McLean invented shipping containers, manufacturing employment, Marc Andreessen, Mark Zuckerberg, Martin Wolf, McJob, means of production, Mikhail Gorbachev, mittelstand, moral hazard, Murano, Venice glass, Myron Scholes, Nelson Mandela, Network effects, Northern Rock, oil shale / tar sands, oil shock, Paul Samuelson, popular capitalism, popular electronics, price stability, principal–agent problem, profit maximization, purchasing power parity, quantitative easing, railway mania, Ralph Nader, regulatory arbitrage, road to serfdom, Robert Gordon, Robert Shiller, Robert Shiller, Ronald Coase, Ronald Reagan, savings glut, Scramble for Africa, Second Machine Age, secular stagnation, Silicon Valley, Simon Kuznets, South China Sea, South Sea Bubble, special drawing rights, spice trade, spinning jenny, Steven Pinker, TaskRabbit, Thales and the olive presses, Thales of Miletus, The Great Moderation, The inhabitant of London could order by telephone, sipping his morning tea in bed, the various products of the whole earth, The Rise and Fall of American Growth, The Wealth of Nations by Adam Smith, The Wisdom of Crowds, Thomas Malthus, Thorstein Veblen, trade route, transaction costs, transatlantic slave trade, transcontinental railway, Triangle Shirtwaist Factory, universal basic income, Unsafe at Any Speed, Upton Sinclair, V2 rocket, Veblen good, War on Poverty, Washington Consensus, Watson beat the top human players on Jeopardy!, women in the workforce, Yom Kippur War, zero-sum game

It is a long way from the idea that finance’s role is to provide long-term capital to the most promising businesses. Many in the financial sector point to the fall in the cost of trading as a sign of the greater efficiency brought by this approach. But while the cost of individual transactions has dropped, money is changing hands more often. A study by Thomas Philippon of New York University found that the overall costs of financial intermediation (the cut taken by the finance industry) have hovered at around 1.5% to 2% since the 19th century.37 Taking a small percentage out of trillions of dollars of trading volume generates a lot of wealth, and wealth brings influence. In their book 13 Bankers, Simon Johnson and James Kwak recount how Brooksley Born, the chairwoman of the Commodity Futures Trading Commission, wanted to regulate financial derivatives in 1998.

This was well before the 2001 attacks. 34. “Did the Plaza Accord cause Japan’s lost decades?”, IMF World Economic Outlook, April 2011 35. Robert L. Cutts, “Power from the ground up: Japan’s land bubble”, Harvard Business Review, May–June 1990 36. Coggan, Paper Promises, op. cit. 37. Thomas Philippon, “Has the US finance industry become less efficient? On the theory and measurement of financial intermediation”, September 2014, http://pages.stern.nyu.edu/~tphilipp/papers/Finance_Efficiency.pdf 38. Barry Eichengreen and Charles Wyplosz, “The unstable EMS”, https://www.Brookings.Edu/Wp-Content/Uploads/1993/01/1993a_Bpea_Eichengreen_Wyplosz_Branson_Dornbusch.Pdf 39. Source: https://www.nber.org/cycles.html 40. The day was dubbed Black Wednesday although, in fact, it allowed Britain to slash interest rates and let the economy recover.

A People’s History of Modern Europe, Pluto Press, 2016 Pethokoukis, James “What the story of ATMs and bank tellers reveals about the ‘rise of the robots’ and jobs”, American Enterprise Institute, June 6th 2016, http://www.aei.org/publication/what-atms-bank-tellers-rise-robots-and-jobs Petzinger, Thomas Hard Landing: The Epic Contest for Power and Profits That Plunged the Airlines into Chaos, Random House, 1995 Pfeffer, Jeffrey Dying for a Paycheck: How Modern Management Harms Employee Health and Company Performance – And What We Can Do About It, HarperBusiness, 2018 Philippon, Thomas “Has the US finance industry become less efficient? On the theory and measurement of financial intermediation”, September 2014, http://pages.stern.nyu.edu/~tphilipp/papers/Finance_Efficiency.pdf Philipsen, Dirk The Little Big Number: How GDP Came to Rule the World and What to Do about It, Princeton University Press, 2015 Piketty, Thomas Capital in the 21st Century, Harvard University Press, 2014 Pilling, David Bending Adversity: Japan and the Art of Survival, Penguin, 2014 —— The Growth Delusion: The Wealth and Well-Being of Nations, Bloomsbury, 2018 Pinker, Steven The Better Angels of Our Nature: A History of Violence and Humanity, Penguin, 2011 —— Enlightenment Now: The Case for Reason, Science, Humanism and Progress, Viking, 2018 Pollard, Sidney Peaceful Conquest: The Industrialization of Europe, 1760–1970, Oxford University Press, 1981 Pomeranz, Kenneth The Great Divergence: China, Europe, and the Making of the Modern World, Princeton University Press, 2000 Portes, Jonathan “How small is small?


The Making of a World City: London 1991 to 2021 by Greg Clark

Basel III, Berlin Wall, Big bang: deregulation of the City of London, Boris Johnson, British Empire, business climate, business cycle, capital controls, carbon footprint, congestion charging, corporate governance, cross-subsidies, deindustrialization, Dissolution of the Soviet Union, East Village, Fall of the Berlin Wall, financial innovation, financial intermediation, global value chain, haute cuisine, housing crisis, industrial cluster, intangible asset, Kickstarter, knowledge economy, knowledge worker, labour market flexibility, low skilled workers, manufacturing employment, Masdar, mass immigration, megacity, New Urbanism, offshore financial centre, Pearl River Delta, place-making, rent control, Robert Gordon, Silicon Valley, smart cities, sovereign wealth fund, trickle-down economics, urban planning, urban renewal, working poor

The major driver of London’s unusually strong population and economic growth has been its financial and business services sector. These sectors combined grew at a rate of almost 6 per cent a year in the decade up to the financial crisis. The city’s share of financial services among the major economic regions of Europe, the USA and Japan grew from 2.0 per cent in 1998 to 3.7 per cent by 2008 (Oxford Economics, 2011). Business and management consultancy activities, financial intermediation, legal and accounting services are all extremely advanced and concentrated in London. Other sectors which have been critical to London’s economic dynamism are media, telecoms, tourism and software consultancy. In terms of creating the environment for such growth, a number of business-led organisations have been influential in agenda-setting and in aspects of practical implementation. These include London First, the London Chamber of Commerce and Industry, the CBI and the Federation of Small Businesses.

The relationship between London and the rest of the UK is therefore often one of close mutual interdependence and mutual opportunity. Since 2008, London has helped mitigate declining or stagnating public and private sector activity in all of the UK regions (Mayor of London, 2005; Gordon et al., 2009). It will continue to offer the best gateway for international trade and inward investment, because of its responsibility for over half of the UK exports in financial intermediation and legal services, and over two-fifths of UK exports for accounting and other monetary intermediation (Oxford Economics, 2011: 27). It also acts as an essential meeting place for decision-makers and executives who are often responsible for goods and manufacturing industries elsewhere in the country. British firms benefit as customers of the world-class producer services in London such as brokerage, advertising and software consultancy.


pages: 355 words: 92,571

Capitalism: Money, Morals and Markets by John Plender

activist fund / activist shareholder / activist investor, 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, business cycle, Capital in the Twenty-First Century by Thomas Piketty, central bank independence, collapse of Lehman Brothers, collective bargaining, computer age, Corn Laws, corporate governance, creative destruction, 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, God and Mammon, Gordon Gekko, greed is good, Hyman Minsky, income inequality, inflation targeting, information asymmetry, invention of the wheel, invisible hand, Isaac Newton, James Watt: steam engine, Johann Wolfgang von Goethe, John Maynard Keynes: Economic Possibilities for our Grandchildren, John Meriwether, joint-stock company, Joseph Schumpeter, labour market flexibility, liberal capitalism, light touch regulation, London Interbank Offered Rate, London Whale, Long Term Capital Management, manufacturing employment, Mark Zuckerberg, market bubble, market fundamentalism, mass immigration, means of production, Menlo Park, money market fund, moral hazard, moveable type in China, Myron Scholes, Nick Leeson, Northern Rock, Occupy movement, offshore financial centre, paradox of thrift, Paul Samuelson, 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, Veblen good, We are the 99%, Wolfgang Streeck, zero-sum game

A central function of any financial system is to recycle the savings of those with no immediate use for them to those who can put them to good use. As a result, to take an obvious example, young people with a lifetime’s earning power ahead of them, but no significant savings, can borrow for house purchase through the good offices of banks from people in their fifties and sixties who are saving for retirement. The banking system brings the two groups together in the process known as financial intermediation. Yet this is more common in the English-speaking countries than elsewhere. In much of continental Europe, regulations hinder borrowing for house purchase by requiring the borrower to save a significant amount as a pre-condition of the loan or by imposing tough loan-to-value ratios and short repayment periods. This is one of the reasons why over 80 per cent of Italian men between eighteen and thirty live at home with their parents.

S. 1, 2 Elizabeth II 1 Engels, Friedrich 1, 2, 3, 4, 5 Enlightenment 1, 2, 3, 4, 5 Enron 1 entrepreneurs 1 environmental damage 1 Epistle to Allen Lord Bathurst (Alexander Pope) 1 Esterházy, Prince Nikolaus 1 European Monetary Union 1 European Union 1, 2, 3, 4 eurozone 1, 2, 3, 4, 5 Faber, Marc 1 Fable of the Bees, The (Bernard Mandeville) 1, 2, 3, 4, 5, 6 Facebook 1 Faerie Queene, The (Spenser) 1 Fama, Eugene 1, 2, 3, 4, 5 Farmers’ State Alliance (US) 1 fatal embrace 1, 2 Faust (Goethe) 1, 2, 3, 4 Federal Reserve (Fed) 1, 2, 3, 4 Federal Reserve Act (US 1913) 1 Ferguson, Niall 1 feudalism 1, 2, 3 fiat currencies 1 Fidelity Magellan fund 1 financial crisis (2007–08) 1, 2, 3, 4, 5, 6, 7, 8 financial intermediation 1 financial services 1 financial weapons of mass destruction 1 Finley, Moses 1 Fitzgerald, F. Scott 1 Ford, Henry 1, 2 Fors Clavigera (John Ruskin) 1 fractional reserve banking 1 France 1, 2, 3 art market 1 taxation 1, 2, 3, 4 François I of France 1, 2, 3 Frankel, Jeff 1, 2 Franklin, Benjamin 1 Frederick the Great of Prussia 1, 2 Freeland, Chrystia 1 French Revolution 1, 2 Frick, Henry Clay 1, 2 Friedman, Milton 1, 2 Fukushima nuclear spill 1 Fuld, Dick 1 fund managers 1, 2, 3 Fürstenberg, Carl 1 Galbraith, J.


pages: 1,014 words: 237,531

Escape From Rome: The Failure of Empire and the Road to Prosperity by Walter Scheidel

agricultural Revolution, barriers to entry, British Empire, colonial rule, conceptual framework, creative destruction, currency manipulation / currency intervention, dark matter, disruptive innovation, Eratosthenes, European colonialism, financial innovation, financial intermediation, Intergovernmental Panel on Climate Change (IPCC), invisible hand, Isaac Newton, Johann Wolfgang von Goethe, Johannes Kepler, joint-stock company, Joseph Schumpeter, knowledge economy, mandelbrot fractal, means of production, Network effects, out of africa, Peace of Westphalia, peer-to-peer lending, plutocrats, Plutocrats, principal–agent problem, purchasing power parity, rent-seeking, Republic of Letters, secular stagnation, South China Sea, spinning jenny, The Rise and Fall of American Growth, The Wealth of Nations by Adam Smith, trade route, transaction costs, zero-sum game

Thus, even in the absence of a fully fledged state system, the empire for once experienced sufficient competitive pressures to embrace policies and institutions that were conducive to commercial development.157 The Song empire confronted these challenges by shoring up its fiscal system. The share of indirect taxes in government revenue rose from about a third at the end of the tenth century to two-thirds by the 1070s. Excise taxes focused on urban consumption and long-distance trade. Massive urban growth, unfettered marketplaces, a huge expansion of water transport and exchange, and the growing sophistication of financial intermediation led to an economic boom that filled the state’s coffers: the silver value of revenue increased 140 percent between the end of the tenth and the late eleventh centuries.158 This boom also heightened demand for credit. From the late Tang period onward—a time of fading state capacity—merchants had developed novel financial instruments. Learning from these innovations, the Northern Song authorities introduced vouchers to pay suppliers, which then circulated and sustained a speculative securities market.

Mughal rule, by contrast, failed altogether.221 Compared to European polities, large Asian empires faced a disproportionate threat of internal rebellion. They traded off fiscal capacity for appeasement of local ruling groups, a compromise that left them with lower per capita revenue. Not only late imperial China but also the Ottoman and Mughal empires consequently lacked the European system of taxes and public debt that “promoted the development of institutions for financial intermediation and better-regulated supply of money for the economy at large.”222 Likewise, Middle Eastern and South Asian merchants were just as institutionally marginalized as their Chinese counterparts. The Ottoman authorities prioritized the provisioning of the capital and the military, forcing merchants into an unequal relationship to ensure this objective, which overrode any desire to protect their own commercial constituents: “While European states focused on production and protection for local enterprises and workers, Ottoman officialdom was concerned with consumption and the adequacy of supplies of goods at the right price without regard to their place of origin.”

Britain is an outlier: as we have seen, its industrialization was meaningfully linked to mercantilist protections and the economic incentives it created. Overseas trade encouraged the growth of manufacture and urban services. Britain exported perhaps a third of its increase in industrial output that occurred from the mid-seventeenth to the early nineteenth centuries. Profits from servicing global commerce—from transport and financial intermediation—helped London grow, and made merchants wealthier and more influential in politics. Whether empire paid overall is a moot point as long as it benefited the entrepreneurial class.16 Yet even such profits from trade were modest compared to British GDP—a few percent at best in the late eighteenth century—even if they made some monopolists very rich. These gains could surely have supplied enough capital to finance the First Industrial Revolution.


pages: 414 words: 101,285

The Butterfly Defect: How Globalization Creates Systemic Risks, and What to Do About It by Ian Goldin, Mike Mariathasan

"Robert Solow", air freight, Andrei Shleifer, Asian financial crisis, asset-backed security, bank run, barriers to entry, Basel III, Berlin Wall, Bretton Woods, BRICs, business cycle, butterfly effect, clean water, collapse of Lehman Brothers, collateralized debt obligation, complexity theory, connected car, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, David Ricardo: comparative advantage, deglobalization, Deng Xiaoping, discovery of penicillin, diversification, diversified portfolio, Douglas Engelbart, Douglas Engelbart, Edward Lorenz: Chaos theory, energy security, eurozone crisis, failed state, Fellow of the Royal Society, financial deregulation, financial innovation, financial intermediation, fixed income, Gini coefficient, global pandemic, global supply chain, global value chain, global village, income inequality, information asymmetry, Jean Tirole, John Snow's cholera map, Kenneth Rogoff, light touch regulation, Long Term Capital Management, market bubble, mass immigration, megacity, moral hazard, Occupy movement, offshore financial centre, open economy, profit maximization, purchasing power parity, race to the bottom, RAND corporation, regulatory arbitrage, reshoring, Silicon Valley, six sigma, Stuxnet, supply-chain management, The Great Moderation, too big to fail, Toyota Production System, trade liberalization, transaction costs, uranium enrichment

George Kanatas and Jianping Qi, 2003, “Integration of Lending and Underwriting: Implications of Scope Economies,” Journal of Finance 58 (3): 1167–1191; George Kanatas and Jianping Qi, 1998, “Underwriting by Commercial Banks: Incentive Conflicts, Scope Economies, and Project Quality,” Journal of Money, Credit, and Banking 30: 119–133; and Xavier Freixas, Gyöngyi Lórànth, and Alan D. Morrison, 2007, “Regulating Financial Conglomerates,” Journal of Financial Intermediation 16: 479–514. 36. Tom Foreman, 2008, “Culprits of the Collapse—#7 Phil Gramm,” CNN website, 14 October, accessed 22 January 2013, http://ac360.blogs.cnn.com/2008/10/14/culprits-of-the-collapse-7-phil-gramm/; and Goldin and Vogel, 2010, 7. This follows a long-established pattern of a revolving door between Wall Street and the leadership of the U.S. Treasury, with Treasury secretaries often recruited following a period at the helm of one of the major U.S. banks and returning afterward to a chairmanship or other lucrative advisory position in the financial services industry.

The Contribution of Information and Communication Technologies to Development.” Global Governance 15 (1): 37–42. Frankel, Jeffrey A., and Andrew K. Rose. 2005. “Is Trade Good or Bad for the Environment? Sorting Out the Causality.” Review of Economics and Statistics 87 (1): 85–91. Freixas, Xavier, Gyöngyi Lórànth, and Alan D. Morrison. 2007. “Regulating Financial Conglomerates.” Journal of Financial Intermediation 16: 479–514. French, Shaun, Andrew Leyshon, and Nigel Thrift. 2009. “A Very Geographical Crisis: The Making and Breaking of the 2007–2008 Financial Crisis.” Cambridge Journal of Regions, Economy, and Society 2 (2): 287–302. G8 (Group of Eight). 2013. “Lough Erne Declaration.” 18 June. Lough Erne Summit, Northern Ireland. Accessed 23 July. http://www.g8.utoronto.ca/summit/2013lougherne/Lough_Erne_Declaration_130618.pdf.


pages: 274 words: 93,758

Phishing for Phools: The Economics of Manipulation and Deception by George A. Akerlof, Robert J. Shiller, Stanley B Resor Professor Of Economics Robert J Shiller

"Robert Solow", Andrei Shleifer, asset-backed security, Bernie Madoff, business cycle, Capital in the Twenty-First Century by Thomas Piketty, collapse of Lehman Brothers, corporate raider, Credit Default Swap, Daniel Kahneman / Amos Tversky, dark matter, David Brooks, desegregation, en.wikipedia.org, endowment effect, equity premium, financial intermediation, financial thriller, fixed income, full employment, George Akerlof, greed is good, income per capita, invisible hand, John Maynard Keynes: Economic Possibilities for our Grandchildren, Kenneth Arrow, Kenneth Rogoff, late fees, loss aversion, market bubble, Menlo Park, mental accounting, Milgram experiment, money market fund, moral hazard, new economy, Pareto efficiency, Paul Samuelson, payday loans, Ponzi scheme, profit motive, publication bias, Ralph Nader, randomized controlled trial, Richard Thaler, Robert Shiller, Robert Shiller, Ronald Reagan, short selling, Silicon Valley, the new new thing, The Predators' Ball, the scientific method, The Wealth of Nations by Adam Smith, theory of mind, Thorstein Veblen, too big to fail, transaction costs, Unsafe at Any Speed, Upton Sinclair, Vanguard fund, Vilfredo Pareto, wage slave

Especially useful was the remarkably clear and well-documented Financial Crisis Inquiry Report: Final Report of the National Commission on the Causes of the Financial and Economic Crisis in the United States (Washington, DC: Government Printing Office, 2011), http://www.gpo.gov/fdsys/pkg/GPO-FCIC/pdf/GPO-FCIC.pdf. All of these books served as important background for the interpretive story that we are telling in this chapter. 2. Carl Shapiro, “Consumer Information, Product Quality, and Seller Reputation,” Bell Journal of Economics 13, no. 1 (1982): 20–35. 3. Tobias Adrian and Hyun Song Shin, “Liquidity and Leverage,” Journal of Financial Intermediation 19, no. 3 (July 2010): 418–37. Adrian and Shin calculated average balance sheets from sometime in the 1990s (varying by the bank) to the first quarter of 2008 for the five leading investment banks: Bear Stearns, Goldman Sachs, Lehman Brothers, Merrill Lynch, and Morgan Stanley. They held total assets averaging $345 billion; had average liabilities of $331 billion, with average equity of $13.3 billion.

Of course, it is consumers’ monkey-on-the-shoulder tastes that are being “revealed.” BIBLIOGRAPHY “200 West Street.” Wikipedia. Accessed October 22, 2014. http://en.wikipedia.org/wiki/200_West_Street. Abramson, John. Overdosed America: The Broken Promise of American Medicine. 3rd ed. New York: Harper Perennial, 2008. Adrian, Tobias, and Hyun Song Shin. “Liquidity and Leverage.” Journal of Financial Intermediation 19, no. 3 (July 2010): 418–37. Agarwal, Sumit, John C. Driscoll, Xavier Gabaix, and David Laibson. “The Age of Reason: Financial Decisions over the Life Cycle and Implications for Regulation.” Brookings Papers on Economic Activity (Fall 2009): 51–101. Akerlof, George A., and Rachel E. Kranton. “Economics and Identity.” Quarterly Journal of Economics 115, no. 3 (August 2000): 715–53. —.


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

bank run, banking crisis, banks create money, Basel III, Bretton Woods, business cycle, call centre, capital controls, cashless society, central bank independence, credit crunch, David Graeber, debt deflation, double entry bookkeeping, eurozone crisis, financial exclusion, financial innovation, Financial Instability Hypothesis, financial intermediation, floating exchange rates, Fractional reserve banking, full employment, Hyman Minsky, inflation targeting, informal economy, information asymmetry, intangible asset, 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, negative equity, 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

What have banks been lending for? Figure 3.4 shows the total sterling amounts of loans outstanding in the UK since 1997. By far the greatest proportion of bank lending is to the property market: In 2010, 45% of the value of total loans outstanding in the UK was to individuals (and secured on property), with an additional 15% to commercial real estate companies.14 A further 20% of lending was for financial intermediation,15 7% was unsecured personal debt, 1% went to insurance companies and pension funds and 9% was to ‘public and other services’. Meanwhile, the value of loans outstanding to the productive part of the economy (i.e. those sectors which contribute to GDP) accounted for just 8% of total lending. Footnotes 1. Banks operate as the middlemen between the Bank of England and everyone else for cash, so that even to obtain cash at least one person in the economy must have a bank account with a positive bank balance, which means that somebody else must be in debt. 2.

Likewise, the allocation of new lending is not determined by the relative returns on different projects. Rather, it is determined by the likelihood of repayment, and the ability to collateralise loans to ensure that non-repayment does not result in a loss to the bank. In fact, less than 10% of all bank lending today goes to businesses that contribute to GDP – the vast majority goes towards mortgages, real estate companies, and financial intermediation. If these lending decisions had been made by local bank managers who were in touch with the local economy and knew where any investment could be most productive, then banks having greater ‘spending power’ than government may not be such a matter for concern. However, lending decisions are not made by local branch managers, instead they are made by senior managers at the head offices of the banks, based on a statistical analysis of the relative likelihoods of repayment.


pages: 357 words: 110,017

Money: The Unauthorized Biography by Felix Martin

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

Their defences were finally breached, and New Keynesian, dynamic, stochastic, general equilibrium models rapidly came to dominate the policy planning of the world’s leading central banks. But at a fundamental level, all these modifications had been mere mopping-up operations. The real battle fought by Bagehot and Keynes had long ago been lost. The elephant in the room—the fact that the primary analytical workhorse of academics and policy-makers was not a theory of a monetary economy and “lacks an account of financial intermediation, so money, credit, and banking play no meaningful role,” as the Governor of the Bank of England put it in 2012—had, as Lawrence Summers lamented, long since been forgotten.20 Such was the Lazarus-like destiny of the moneyless economics of the classical school. The fate of Bagehot’s original concerns with the central importance of money, banking, and finance was initially less happy. Once their second coming in the hands of Keynes had been rebuffed by the mainstream, they languished in the backwaters of economic thought.

Above all, it is financial stability that is the stated goal of all the new legislation.14 Yet for all the sound and fury, there remains a deafening silence when it comes to the obvious question this raises: what exactly is financial stability? It is a question to which neither of the dominant intellectual frameworks for contemporary economic policy-making are equipped to provide a sensible answer. As the Governor of the Bank of England has pointed out, modern, orthodox macroeconomics “lacks an account of financial intermediation, so money, credit, and banking play no meaningful role.”15 So as one of the founding members of the Bank of England’s Monetary Policy Committee has lamented, it “excludes everything relevant to the pursuit of financial stability.”16 But neither does the modern theory of finance, with its blind spot for money’s macroeconomic role, supply any new and specialised theory of financial stability to slake the thirst of the expectant reformers.


pages: 1,066 words: 273,703

Crashed: How a Decade of Financial Crises Changed the World by Adam Tooze

Affordable Care Act / Obamacare, Apple's 1984 Super Bowl advert, Asian financial crisis, asset-backed security, bank run, banking crisis, Basel III, Berlin Wall, Bernie Sanders, Big bang: deregulation of the City of London, Boris Johnson, break the buck, Bretton Woods, BRICs, British Empire, business cycle, capital controls, Capital in the Twenty-First Century by Thomas Piketty, Carmen Reinhart, Celtic Tiger, central bank independence, centre right, collateralized debt obligation, corporate governance, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, currency manipulation / currency intervention, currency peg, dark matter, deindustrialization, desegregation, Detroit bankruptcy, Dissolution of the Soviet Union, diversification, Doha Development Round, Donald Trump, Edward Glaeser, Edward Snowden, en.wikipedia.org, energy security, eurozone crisis, Fall of the Berlin Wall, family office, financial intermediation, fixed income, Flash crash, forward guidance, friendly fire, full employment, global reserve currency, global supply chain, global value chain, Goldman Sachs: Vampire Squid, Growth in a Time of Debt, housing crisis, Hyman Minsky, illegal immigration, immigration reform, income inequality, interest rate derivative, interest rate swap, Kenneth Rogoff, large denomination, light touch regulation, Long Term Capital Management, margin call, Martin Wolf, McMansion, Mexican peso crisis / tequila crisis, mittelstand, money market fund, moral hazard, mortgage debt, mutually assured destruction, negative equity, new economy, Northern Rock, obamacare, Occupy movement, offshore financial centre, oil shale / tar sands, old-boy network, open economy, paradox of thrift, Peter Thiel, Ponzi scheme, predatory finance, price stability, private sector deleveraging, purchasing power parity, quantitative easing, race to the bottom, reserve currency, risk tolerance, Ronald Reagan, savings glut, secular stagnation, Silicon Valley, South China Sea, sovereign wealth fund, special drawing rights, structural adjustment programs, The Great Moderation, Tim Cook: Apple, too big to fail, trade liberalization, upwardly mobile, Washington Consensus, We are the 99%, white flight, WikiLeaks, women in the workforce, Works Progress Administration, yield curve, éminence grise

Most of the presentations were appropriately upbeat. But one rang an off note. It was given by Raghuram G. Rajan, an Indian by birth but a fully paid-up member of the American economics elite, professor at the Chicago Booth business school and chief economist at the IMF. His paper bore the heretical title “Has Financial Development Made the World Riskier?”57 Rajan worried that the dramatic expansion of modern financial intermediation was building up a dangerous new appetite for risk. At Greenspan’s farewell party, the message was not welcome. Rajan was slapped down by Larry Summers. Wielding his full authority as former Treasury secretary, Summers introduced himself as “someone who has learned a great deal about this subject from Alan Greenspan . . . and . . . who finds the basic, slightly Luddite premise of this paper to be largely misguided.”58 To highlight risks in a complex, modern financial system, as Rajan was tactlessly doing, was to invite “restriction” and other “misguided policy impulses.”

Shin, “Globalisation: Real and Financial,” BIS 87th Annual General Meeting, https://www.bis.org/speeches/sp170625b_slides.pdf. 23. M. Obstfeld and A. M. Taylor, “International Monetary Relations: Taking Finance Seriously” (CEPR Discussion Paper No. DP12079, June 2017), https://ssrn.com/abstract=2980858. 24. Some of the key texts are T. Adrian and H. S. Shin, “Liquidity and Leverage,” Journal of Financial Intermediation 19 (July 2010), 418–437; C. Borio and P. Disyatat, “Global Imbalances and the Financial Crisis: Link or No Link?” (BIS Working Paper 346, 2011); and S. Avdjiev, R. N. McCauly and H. S. Shin, “Breaking Free of the Triple Coincidence in International Finance,” Economic Policy 31 (2016), 409–451. 25. Paradigmatically, D. Yergin and J. Stanislaw, The Commanding Heights: The Battle for the World Economy (New York: Simon & Schuster, 2002). 26.

Krippner, Capitalizing on Crisis: The Political Origins of the Rise of Finance (Cambridge, MA: Harvard University Press, 2011). 30. Z. Pozsar, “Institutional Cash Pools and the Triffin Dilemma of the US Banking System” (IMF Working Paper 11/109, August 2011). 31. P. Gowan, “Crisis in the Heartland,” New Left Review 55 (January/February 2009). 32. Augar, Greed Merchants, 34. 33. Tobias T. Adrian and H. S. Shin, “Liquidity and Lleverage,” Journal of Financial Intermediation 19 (2010), 418–437. 34. D. MacKenzie, An Engine, Not a Camera: How Financial Models Shape Markets (Cambridge, MA: MIT Press, 2006), 211–242. 35. G. F. Davis and M. S. Mizruchi, “The Money Center Cannot Hold: Commercial Banks in the US System of Corporate Governance,” Administrative Science Quarterly 44 (June 1999), 215–239. 36. The following is based on Goldstein and Fligstein, “The Transformation of Mortgage Finance.” 37.


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Seasteading: How Floating Nations Will Restore the Environment, Enrich the Poor, Cure the Sick, and Liberate Humanity From Politicians by Joe Quirk, Patri Friedman

3D printing, access to a mobile phone, addicted to oil, Affordable Care Act / Obamacare, agricultural Revolution, Albert Einstein, barriers to entry, Branko Milanovic, British Empire, Buckminster Fuller, Burning Man, business climate, business cycle, business process, California gold rush, Celtic Tiger, Charles Lindbergh, clean water, Colonization of Mars, Dean Kamen, Deng Xiaoping, drone strike, Elon Musk, en.wikipedia.org, failed state, financial intermediation, Gini coefficient, happiness index / gross national happiness, income inequality, Intergovernmental Panel on Climate Change (IPCC), joint-stock company, joint-stock limited liability company, Kickstarter, low skilled workers, Machinery of Freedom by David Friedman, Mark Zuckerberg, megacity, minimum wage unemployment, Network effects, new economy, obamacare, offshore financial centre, open borders, paypal mafia, peak oil, Peter H. Diamandis: Planetary Resources, Peter Thiel, price stability, profit motive, Ronald Coase, Ronald Reagan, Shenzhen was a fishing village, Silicon Valley, special economic zone, standardized shipping container, stem cell, trade route, UNCLOS, UNCLOS, undersea cable, young professional

Mauritians managed this heady growth magisterially, diversifying their economy rapidly from sugar to textiles to tourism to banking, attracting more than nine thousand offshore companies to the island. Investment in the banking sector alone brought in a cool $1 billion. Looking at the World Bank graphs of percentage of GDP makes Meade’s prognostication downright funny. Between 1976 and 2009, sugar dropped from 40 percent to about 5 percent of GDP, while “financial intermediation” commanded the largest percentage of GDP by 2009. While ethnic diversity would go on to spur genocides in Rwanda and Burundi and civil wars in Nigeria and Guinea, the diverse population of Mauritians behaved like a smart start-up. Ever flexible in their structural reforms, committed to winning investors with sound and transparent legal systems, friendly to entrepreneurs local and foreign, they speedily integrated their island economy into the global marketplace.

Ray, “700 Million Worldwide Desire to Migrate Permanently,” Gallup, November 2, 2009, www.gallup.com/poll/124028/700-million-worldwide-desire-migrate-permanently.aspx. James Meade, later a Nobel Prize recipient in economics, predicted in 1961 that Mauritius was doomed: Meade expressed his doubts in a book first published in 1961 that has since been reissued: James E. Meade, Economic and Social Structure of Mauritius (New York: Routledge, 2011). the island nation’s GDP per person grew tenfold . . . financial intermediation”: Ali Zafar, “Mauritius: An Economic Success Story” (draft), World Bank Group, Africa Success Stories Project, January 2011, http://siteresources.worldbank.org/AFRICAEXT/Resources/Mauritius_success.pdf. per capita income is one of the highest in all Africa: Mauritius: Economy. Global Edge. Accessed February 27, 2016, http://globaledge.msu.edu/countries/mauritius/economy. the diverse population of Mauritians behaved like a smart start-up: Ali Zafar, Yes Africa Can: Success Stories from a Dynamic Continent, ed.


pages: 119 words: 10,356

Topics in Market Microstructure by Ilija I. Zovko

Brownian motion, computerized trading, continuous double auction, correlation coefficient, financial intermediation, Gini coefficient, information asymmetry, market design, market friction, market microstructure, Murray Gell-Mann, p-value, quantitative trading / quantitative finance, random walk, stochastic process, stochastic volatility, transaction costs

Brock and B. LeBaron. A dynamic structural model for stock return volatility and trading volume. The Review of Econoics and Statistics, 78(1):94–110, 1996. J. Carlson and M. Lo. One minute in the life of the dm/usd: Public news in an electronic market. Journal of International Money and Finance, Jan 2006. S. Chakravarty and C. W. Holden. An integrated model of market and limit orders. Journal of Financial Intermediation, 4(3):213– 41, 1995. D. Challet and R. Stinchcombe. Analyzing and modeling 1+1d markets. Physica A, 300(1-2):285–299, 2001. C. Chiarella and G. Iori. A simulation analysis of the microstructure of double auction markets. Quantitative Finance, 2:346–353, 2002. 100 BIBLIOGRAPHY W. S. Choi, S. B. Lee, and P. I. Yu. Estimating the permanent and transitory components of the bid/ask spread.


pages: 492 words: 118,882

The Blockchain Alternative: Rethinking Macroeconomic Policy and Economic Theory by Kariappa Bheemaiah

accounting loophole / creative accounting, Ada Lovelace, Airbnb, algorithmic trading, asset allocation, autonomous vehicles, balance sheet recession, bank run, banks create money, Basel III, basic income, Ben Bernanke: helicopter money, bitcoin, blockchain, Bretton Woods, business cycle, business process, call centre, capital controls, Capital in the Twenty-First Century by Thomas Piketty, cashless society, cellular automata, central bank independence, Claude Shannon: information theory, cloud computing, cognitive dissonance, collateralized debt obligation, commoditize, complexity theory, constrained optimization, corporate governance, creative destruction, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, crowdsourcing, cryptocurrency, David Graeber, deskilling, Diane Coyle, discrete time, disruptive innovation, distributed ledger, diversification, double entry bookkeeping, Ethereum, ethereum blockchain, fiat currency, financial innovation, financial intermediation, Flash crash, floating exchange rates, Fractional reserve banking, full employment, George Akerlof, illegal immigration, income inequality, income per capita, inflation targeting, information asymmetry, interest rate derivative, inventory management, invisible hand, John Maynard Keynes: technological unemployment, John von Neumann, joint-stock company, Joseph Schumpeter, Kenneth Arrow, Kenneth Rogoff, Kevin Kelly, knowledge economy, large denomination, liquidity trap, London Whale, low skilled workers, M-Pesa, Marc Andreessen, market bubble, market fundamentalism, Mexican peso crisis / tequila crisis, MITM: man-in-the-middle, money market fund, money: store of value / unit of account / medium of exchange, mortgage debt, natural language processing, Network effects, new economy, Nikolai Kondratiev, offshore financial centre, packet switching, Pareto efficiency, pattern recognition, peer-to-peer lending, Ponzi scheme, precariat, pre–internet, price mechanism, price stability, private sector deleveraging, profit maximization, QR code, quantitative easing, quantitative trading / quantitative finance, Ray Kurzweil, Real Time Gross Settlement, rent control, rent-seeking, Satoshi Nakamoto, Satyajit Das, savings glut, seigniorage, Silicon Valley, Skype, smart contracts, software as a service, software is eating the world, speech recognition, statistical model, Stephen Hawking, supply-chain management, technology bubble, The Chicago School, The Future of Employment, The Great Moderation, the market place, The Nature of the Firm, the payments system, the scientific method, The Wealth of Nations by Adam Smith, Thomas Kuhn: the structure of scientific revolutions, too big to fail, trade liberalization, transaction costs, Turing machine, Turing test, universal basic income, Von Neumann architecture, Washington Consensus

As these mortgages got added to the assets section of the banks’ balance sheet, they were channelled into speculative activities under the guise of securitization, and used for trades such as arbitrage, market-making, and position -taking, that had nothing to do with client needs and which added little to economic activity. The porosity of the interfinancial system with other banks, hedge funds, and asset managers ultimately resulted in the balance sheets of banks being filled increasingly with these shadow banking assets. Although it is broadly defined as credit intermediation outside the conventional banking system, shadow banking constitutes about one-fourth of total financial intermediation worldwide (IMF, 2014). The shadow banking system also trades in the OTC derivatives market, which had grown rapidly in the decade up to the 2008 financial crisis (BIS, 2008). 20 Chapter 1 ■ Debt-based Economy: The Intricate Dance of Money and Debt As of June 2015, after significant reductions and regulations, the OTC derivatives market was valued at $553 trillion (BIS, 2015). Global GDP amounted to $73.17 trillion20 at the end of 2015.

Retrieved from PYMNTS: http://www.pymnts.com/ in-depth/2015/how-earthport-and-ripple-are-teaming-up-to-make-cross-borderpayments-instant/ Raval, S. (2016). Decentralized Applications - Harnessing Bitcoin’s Blockchain Technology. California: O’Reilly Media, Inc. . Rizzo, P. ( 2015, October 8). Ripple Releases Interledger to Connect Banks and Blockchains. Retrieved from Coindesk: http://www.coindesk.com/rippleinterledger-connect-bank-blockchain/ Santos, V. M. (2012). The Rise of the Originate-to-Distribute Model and the Role of Banks in Financial Intermediation. New York City: Federal Reserve Bank of New York Economic Policy Review. Scannell, K. ( 2016, February 23). London Whale complains of unfair blame for $6.2bn JPMorgan losses. Retrieved from Financial Times: https://next.ft.com/ content/3f558d16-da51-11e5-a72f-1e7744c66818 Smaghi, L. B. (2010). The paradigm shift after the financial crisis. Nomura Seminar. Kyoto: European Central Bank. Stefano Battiston, J.


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Democracy at Work: A Cure for Capitalism by Richard D. Wolff

asset-backed security, Bernie Madoff, business cycle, collective bargaining, Credit Default Swap, declining real wages, feminist movement, financial intermediation, Howard Zinn, income inequality, John Maynard Keynes: technological unemployment, laissez-faire capitalism, means of production, moral hazard, mortgage debt, Occupy movement, Ponzi scheme, profit maximization, quantitative easing, race to the bottom, Ronald Reagan, too big to fail, trickle-down economics, wage slave, women in the workforce, Works Progress Administration

If private financial enterprises purchase insurance (CDS) on outstanding loans, they need to be sure that the private financial insurers can pay legitimate claims in the event of defaults by borrowers. In fact, since 2007, the crisis has repeatedly demonstrated that most of the larger private financial enterprises (and many smaller ones as well) performed their obligations disastrously. Their failures to serve society’s need for safe and effective financial intermediation led to huge social losses and costs. Yet there was an effective taboo against drawing one obvious inference from those failures. Almost no one in politics, the establishment media, or academia dared to say that such failures of a private finance system raised the question of how a public financial system might function better. There were proposals to allow markets to punish failing banks, to allow the government greater regulatory oversight (as formalized in the later Dodd-Frank legislation), and for greater transparency.


pages: 140 words: 91,067

Money, Real Quick: The Story of M-PESA by Tonny K. Omwansa, Nicholas P. Sullivan, The Guardian

BRICs, business process, business process outsourcing, call centre, cashless society, cloud computing, creative destruction, crowdsourcing, delayed gratification, dematerialisation, disruptive innovation, financial exclusion, financial innovation, financial intermediation, income per capita, Kibera, Kickstarter, M-Pesa, microcredit, mobile money, Network effects, new economy, reserve currency, Silicon Valley, software as a service, transaction costs

The bulk of the increase occurred amongst micro accounts. Total assets in the banking sector increased at roughly the same rate. Two metrics show just how positive the development of M-PESA has been for banks. Since 2007, when M-PESA was introduced, the amount of currency outside banks has been declining steadily, as a percentage of overall money supply and reserve currency. Central Bank Governor Ndung’u cites this an a signal of increased financial intermediation, implying that many who had previously been excluded from banking services were now using more appropriate financial instruments. As Ndemo, the permanent secretary of Kenya’s ICT Ministry notes: “Mobile money has brought money that used to be under the pillows into circulation. And I would attribute the increased liquidity in the banks to greater circulation of that resource. When there is liquidity in the banks, it impacts the interest rate, because banks want to lend that money.”


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

"Robert Solow", addicted to oil, air freight, airline deregulation, Albert Einstein, asset-backed security, bank run, Berlin Wall, Bretton Woods, business cycle, business process, buy and hold, call centre, capital controls, central bank independence, collateralized debt obligation, collective bargaining, conceptual framework, Corn Laws, corporate governance, corporate raider, correlation coefficient, creative destruction, 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, laissez-faire capitalism, land reform, Long Term Capital Management, Mahatma Gandhi, manufacturing employment, market bubble, means of production, Mikhail Gorbachev, moral hazard, mortgage debt, Myron Scholes, Nelson Mandela, new economy, North Sea oil, oil shock, open economy, Pearl River Delta, pets.com, Potemkin village, price mechanism, price stability, Productivity paradox, profit maximization, purchasing power parity, random walk, reserve currency, Right to Buy, risk tolerance, Ronald Reagan, shareholder value, short selling, Silicon Valley, special economic zone, stocks for the long run, 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, zero-sum game

They were all products of Soviet schools, I assumed, and deeply indoctrinated with Marxism. What did they know of capitalist institutions or market competition? Whenever I addressed a Western audience, I could judge its interests and level of knowledge and pitch my remarks accordingly. But at Spaso House, I had to guess. The lecture I had prepared was a dry, diffuse presentation on banks in market economies. It delved into such topics as the value of financial intermediation, various types of risk commercial banks face, the pluses and minuses of regulation, and the duties of central banks. The talk was very slow going, especially as I had to pause paragraph by paragraph for the translator to render my words into Russian. Yet the audience was quite attentive—people stayed alert throughout, and several seemed to be taking detailed notes. Hands went up when I finally reached the end and Ambassador Matlock opened the floor for questions.

Similarly in Japan, when the real estate price bubble burst, the refusal of banks to foreclose on borrowers compounded the economic problem. With the real estate market at a virtual standstill, banks could not make realistic estimates of the value of the collateral that supported their assets, and hence could not judge whether they themselves were still solvent. Caution accordingly dictated that bank lending to new customers be constrained, and, since banks dominated Japan's financial system, the financial intermediation so vital to any large developed economy virtually dried up. Deflationary forces took hold. It was not until the long decline in real estate prices bottomed out in 2006 that reasonable judgments of bank solvency were possible. Only then were new loans forthcoming, producing a marked resurgence of economic activity. While I have spent much of this chapter tracing the impact of economic forces on the larger economies, much the same set of forces is at play, for example, in Canada, Scandinavia, and the Benelux countries.

T H E AGE OF T U R B U L E N C E nate an increase in liquidity. These paper claims represent purchasing power that can quite readily be used to buy a car, say, or a company. The market value of stock and the liabilities of nonfinancial corporations and governments is the source of investments and hence the creation of liabilities by banks and other financial institutions. This process of financial intermediation is a major cause of the overwhelming sense of liquidity that has suffused financial markets for a quarter century. If interest rates start to rise and asset prices broadly fall, "excess" liquidity will dry up, possibly fairly quickly. Remember, the market value of an income-earning security is its expected future income leavened by a discount factor that changes according to euphoria and fear as well as more rational assessments of the future.


pages: 182 words: 53,802

The Production of Money: How to Break the Power of Banks by Ann Pettifor

Ben Bernanke: helicopter money, Bernie Madoff, Bernie Sanders, bitcoin, blockchain, borderless world, Bretton Woods, capital controls, Carmen Reinhart, central bank independence, clean water, credit crunch, Credit Default Swap, cryptocurrency, David Graeber, David Ricardo: comparative advantage, debt deflation, decarbonisation, distributed ledger, Donald Trump, eurozone crisis, fiat currency, financial deregulation, financial innovation, financial intermediation, financial repression, fixed income, Fractional reserve banking, full employment, Hyman Minsky, inflation targeting, interest rate derivative, invisible hand, John Maynard Keynes: Economic Possibilities for our Grandchildren, Joseph Schumpeter, Kenneth Rogoff, Kickstarter, light touch regulation, London Interbank Offered Rate, market fundamentalism, Martin Wolf, mobile money, Naomi Klein, neoliberal agenda, offshore financial centre, Paul Samuelson, Ponzi scheme, pushing on a string, quantitative easing, rent-seeking, Satyajit Das, savings glut, secular stagnation, The Chicago School, the market place, Thomas Malthus, Tobin tax, too big to fail

Staggering though it might seem to a non-academic audience, the overwhelming majority of mainstream economists do not understand, nor do economists study, the nature of credit and money, or indeed the wider financial and monetary system. As the governor of the Bank of England at the time, Mervyn King, explained in 2012, ‘The dominant school of modern monetary policy theory – the New Keynesian model as it is called – lacks an account of financial intermediation, so money, credit and banking play no meaningful role.’2 Yet policies based on this vacuum in economic theory still prevail in all western treasuries and in major university economics departments. Unbelievably, they are informed by the economist Paul Samuelson’s barter-based theory of money and credit: ‘Even in the most advanced industrial economies, if we strip exchange down to its barest essentials and peel off the obscuring layer of money, we find that trade between individuals or nations largely boils down to barter.’3 With money and money-creation helpfully obscured by economists, and regulation trained on meaningless capital adequacy targets, business is better than usual for credit-creating commercial bankers, even while their balance sheets effectively remain under water.


pages: 589 words: 147,053

The Age of Em: Work, Love and Life When Robots Rule the Earth by Robin Hanson

8-hour work day, artificial general intelligence, augmented reality, Berlin Wall, bitcoin, blockchain, brain emulation, business cycle, business process, Clayton Christensen, cloud computing, correlation does not imply causation, creative destruction, demographic transition, Erik Brynjolfsson, Ethereum, ethereum blockchain, experimental subject, fault tolerance, financial intermediation, Flynn Effect, hindsight bias, information asymmetry, job automation, job satisfaction, John Markoff, Just-in-time delivery, lone genius, Machinery of Freedom by David Friedman, market design, meta analysis, meta-analysis, Nash equilibrium, new economy, prediction markets, rent control, rent-seeking, reversible computing, risk tolerance, Silicon Valley, smart contracts, statistical model, stem cell, Thomas Malthus, trade route, Turing test, Vernor Vinge

We sometimes even cry for help, to show who will come running. Today, we spend a large fraction of our energy and wealth on such “signaling,” both because humans naturally care greatly about gaining status and respect in the eyes of others, and because being rich allows us to attend more to such concerns. As mentioned in Chapter 2, Era Values section, in terms of simple functionality, we seem today to spend excessive amounts on schools, medicine, financial intermediation, and huge projects. In contrast, while ems share most of our desires for respect, they live in a more competitive world, where they can less afford to indulge such desires. Thus ems are likely to spend less of their energies signaling to gain status. However, as signaling has functional value in assigning ems to tasks and teams, and as it can be hard to coordinate to discourage signaling, ems will likely still do a lot of signaling.

Sleep 37(8): 1327–1336. Perkins, Adam, and Philip Corr. 2005. “Can Worriers be Winners? The Association between Worrying and Job Performance.” Personality and Individual Differences 38(1): 25–31. Pfeffer, Jeffrey. 2010. Power: Why Some People Have It—and Others Don’t. HarperCollins. September 14. Philippon, Thomas. 2015. “Has the US Finance Industry Become Less Efficient? On the Theory and Measurement of Financial Intermediation.” American Economic Review 105(4): 1408–1438. Pickena, David, and Ben Ilozora. 2003. “Height and Construction Costs of Buildings in Hong Kong.” Construction Management and Economics 21(2): 107–111. Piller, Frank. 2008. “Mass Customization.” In The Handbook of 21st Century Management, edited by Charles Wankel, 420–430. Thousand Oaks, CA: Sage Publications. Pindyck, Robert. 2013. “Climate Change Policy: What Do the Models Tell Us?”


pages: 261 words: 57,595

China's Future by David Shambaugh

Berlin Wall, capital controls, demographic dividend, demographic transition, Deng Xiaoping, facts on the ground, financial intermediation, financial repression, Gini coefficient, high net worth, Kickstarter, knowledge economy, low skilled workers, market bubble, megacity, Mikhail Gorbachev, New Urbanism, offshore financial centre, open economy, Pearl River Delta, rent-seeking, secular stagnation, short selling, South China Sea, special drawing rights, too big to fail, urban planning, Washington Consensus, working-age population, young professional

If it can be effectively overhauled the possibilities of achieving the transformation of the entire economy will be much higher. But there are a variety of deep structural challenges in this sector that are not easily rectified. On the surface China’s financial system appears to have all the elements of modernity: banks, credit agencies, insurance companies, payments systems, equity and bond markets, etc. But banks dominate financial intermediation, providing about 60 percent of loans to the private sector, according to the Asian Development Bank. Moreover, the banking system is concentrated in the four main state banks (which provide 50 percent of loans). These enormous banks all rank among the ten largest in the world by capitalization. Thus the government maintains the dominant position in the financial system. Economists refer to this as “financial repression,” a situation where the government artificially depresses deposit and lending rates and orders the state banks to increase or decrease loans in line with government planning priorities.


pages: 225 words: 61,388

Dead Aid: Why Aid Is Not Working and How There Is a Better Way for Africa by Dambisa Moyo

affirmative action, Asian financial crisis, Bob Geldof, Bretton Woods, business cycle, buy and hold, colonial rule, correlation does not imply causation, credit crunch, diversification, diversified portfolio, en.wikipedia.org, European colonialism, failed state, financial innovation, financial intermediation, Hernando de Soto, income inequality, information asymmetry, invisible hand, Live Aid, M-Pesa, market fundamentalism, Mexican peso crisis / tequila crisis, microcredit, moral hazard, Ponzi scheme, rent-seeking, Ronald Reagan, sovereign wealth fund, The Chicago School, trade liberalization, transaction costs, trickle-down economics, Washington Consensus, Yom Kippur War

(China invested US$900 million in Africa in 2004, compared with just US$20 million in 1975.) Third, they should continue to press for genuine free trade in agricultural products, which means that the US, the EU and Japan must scrap the various subsidies they pay to their farmers, enabling African countries to increase their earnings from primary product exports. Fourth, they should encourage financial intermediation. Specifically, they need to foster the spread of microfinance institutions of the sort that have flourished in Asia and Latin America. They should also follow the Peruvian economist Hernando de Soto’s advice and grant the inhabitants of shanty towns secure legal title to their homes, so that these can be used as collateral. And they should make it cheaper for emigrants to send remittances back home.


pages: 221 words: 55,901

The Globalization of Inequality by François Bourguignon

Berlin Wall, Branko Milanovic, Capital in the Twenty-First Century by Thomas Piketty, collective bargaining, Credit Default Swap, deglobalization, deindustrialization, Doha Development Round, Edward Glaeser, European colonialism, Fall of the Berlin Wall, financial deregulation, financial intermediation, gender pay gap, Gini coefficient, income inequality, income per capita, labor-force participation, liberal capitalism, minimum wage unemployment, offshore financial centre, open economy, Pareto efficiency, purchasing power parity, race to the bottom, Robert Gordon, Simon Kuznets, structural adjustment programs, The Spirit Level, too big to fail, very high income, Washington Consensus

At the same time, we might think that by increasing the demand for credit, and financial capital in general, liberalization also increased its remuneration, which would naturally benefit the high end of the scale. Based on this simple theoretical interpretation, the total impact would seem to be ambiguous.13 But financial liberalization has had other effects that have been more clearly inegalitarian. Even if the initial aim was to encourage competition, today the financial sector as a whole is clearly oligopolistic, if only because of economies of scale in financial intermediation, which are themselves partly tied to innovations in information and communications technology. The existence of substantial rents and the nature of the financial sector’s activities have made 13 For a review of the ties between the development of finance and income distribution, see Asli Demirguc-­Kunt and Robert Levine, “Finance and Inequality: Theory and Evidence,” Annual Review of Financial Economics 1 (2009): 287–318.


pages: 218 words: 62,889

Sabotage: The Financial System's Nasty Business by Anastasia Nesvetailova, Ronen Palan

algorithmic trading, bank run, banking crisis, barriers to entry, Basel III, Bernie Sanders, big-box store, bitcoin, Black-Scholes formula, blockchain, Blythe Masters, bonus culture, Bretton Woods, business process, collateralized debt obligation, corporate raider, Credit Default Swap, credit default swaps / collateralized debt obligations, cryptocurrency, distributed ledger, diversification, Double Irish / Dutch Sandwich, en.wikipedia.org, Eugene Fama: efficient market hypothesis, financial innovation, financial intermediation, financial repression, fixed income, gig economy, Gordon Gekko, high net worth, Hyman Minsky, information asymmetry, interest rate derivative, interest rate swap, Joseph Schumpeter, Kenneth Arrow, litecoin, London Interbank Offered Rate, London Whale, Long Term Capital Management, margin call, market fundamentalism, mortgage debt, new economy, Northern Rock, offshore financial centre, Paul Samuelson, peer-to-peer lending, plutocrats, Plutocrats, Ponzi scheme, price mechanism, regulatory arbitrage, rent-seeking, reserve currency, Ross Ulbricht, shareholder value, short selling, smart contracts, sovereign wealth fund, Thorstein Veblen, too big to fail

While in the immediate aftermath of the crisis there were a few endeavours to focus on fostering a new ‘culture’ of banking and better ethics in the industry, most of these initiatives have remained vacuous. Unsavoury practices, including behaviour bordering on criminality, continue to be treated as aberrations, as random and highly unusual deviations from the otherwise stable, market-governed process of financial intermediation. Nor does the post-crisis literature dwell much on the link between competitive markets, profitability and the tactics of market control in today’s finance, control that inevitably causes harm. Not a surprise, you may think. The notion of the degrees and effects of market competition appears rather theoretical. Debating it may be appropriate in academic forums, but is likely to be a waste of time in the rather short-termist domain of policymaking.


pages: 733 words: 179,391

Adaptive Markets: Financial Evolution at the Speed of Thought by Andrew W. Lo

"Robert Solow", Albert Einstein, Alfred Russel Wallace, algorithmic trading, Andrei Shleifer, Arthur Eddington, Asian financial crisis, asset allocation, asset-backed security, backtesting, bank run, barriers to entry, Berlin Wall, Bernie Madoff, bitcoin, Bonfire of the Vanities, bonus culture, break the buck, Brownian motion, business cycle, business process, butterfly effect, buy and hold, capital asset pricing model, Captain Sullenberger Hudson, Carmen Reinhart, collapse of Lehman Brothers, collateralized debt obligation, commoditize, computerized trading, corporate governance, creative destruction, Credit Default Swap, credit default swaps / collateralized debt obligations, cryptocurrency, Daniel Kahneman / Amos Tversky, delayed gratification, Diane Coyle, diversification, diversified portfolio, double helix, easy for humans, difficult for computers, Ernest Rutherford, Eugene Fama: efficient market hypothesis, experimental economics, experimental subject, Fall of the Berlin Wall, financial deregulation, financial innovation, financial intermediation, fixed income, Flash crash, Fractional reserve banking, framing effect, Gordon Gekko, greed is good, Hans Rosling, Henri Poincaré, high net worth, housing crisis, incomplete markets, index fund, interest rate derivative, invention of the telegraph, Isaac Newton, James Watt: steam engine, job satisfaction, John Maynard Keynes: Economic Possibilities for our Grandchildren, John Meriwether, Joseph Schumpeter, Kenneth Rogoff, London Interbank Offered Rate, Long Term Capital Management, longitudinal study, loss aversion, Louis Pasteur, mandelbrot fractal, margin call, Mark Zuckerberg, market fundamentalism, martingale, merger arbitrage, meta analysis, meta-analysis, Milgram experiment, money market fund, moral hazard, Myron Scholes, Nick Leeson, old-boy network, out of africa, p-value, paper trading, passive investing, Paul Lévy, Paul Samuelson, Ponzi scheme, predatory finance, prediction markets, price discovery process, profit maximization, profit motive, quantitative hedge fund, quantitative trading / quantitative finance, RAND corporation, random walk, randomized controlled trial, Renaissance Technologies, Richard Feynman, Richard Feynman: Challenger O-ring, risk tolerance, Robert Shiller, Robert Shiller, Sam Peltzman, Shai Danziger, short selling, sovereign wealth fund, Stanford marshmallow experiment, Stanford prison experiment, statistical arbitrage, Steven Pinker, stochastic process, stocks for the long run, survivorship bias, Thales and the olive presses, The Great Moderation, the scientific method, The Wealth of Nations by Adam Smith, The Wisdom of Crowds, theory of mind, Thomas Malthus, Thorstein Veblen, Tobin tax, too big to fail, transaction costs, Triangle Shirtwaist Factory, ultimatum game, Upton Sinclair, US Airways Flight 1549, Walter Mischel, Watson beat the top human players on Jeopardy!, WikiLeaks, Yogi Berra, zero-sum game

“Stratigraphic Placement and Age of Modern Humans from Kibish, Ethiopia.” Nature 433: 733–736. Merton, Robert C. 1973. “Theory of Rational Option Pricing.” Bell Journal of Economics and Management Science 4: 141–183. –––. 1989. “On the Application of the Continuous-Time Theory of Finance to Financial Intermediation and Insurance.” Geneva Papers on Risk and Insurance 14: 225–262. –––. 1995a. “Financial Innovation and the Management and Regulation of Financial Institutions.” Journal of Banking and Finance 19: 461– 481. –––. 1995b. “A Functional Perspective of Financial Intermediation.” Financial Management 24: 23– 41. Merton, Robert C., Monica Billio, Mila Getmansky, Dale Gray, Andrew W. Lo, and Loriana Pelizzon. 2013. “On a New Approach for Analyzing and Managing Macrofinancial Risks.” Financial Analysts Journal 69: 22–33. Merton, Robert C., and Zvi Bodie. 2005.


pages: 225 words: 11,355

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

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

As we saw in the last chapter, the bank gets to lend or invest any deposit money you leave with it without your specific knowledge or permission. That is why the contract is one sided: You agree to the terms setting out how you can operate your account, and you may even agree to pay certain fees, but the bank can do what it wants. The Financial Market Made Simple BANK INTERMEDIATION Once you understand a financial contract between you and the bank this way, it is fairly easy to grasp the concept of ‘‘financial intermediation.’’ In theory, you or anyone with surplus deposit money or cash at a given time could find somebody somewhere in the world who at the same moment needed to use that money more than you did and was willing to pay you for its use. In reality, most of us want to get on with our lives and have neither the time nor the knowledge to find people who will pay for us for the use of our extra money.


pages: 318 words: 77,223

The Only Game in Town: Central Banks, Instability, and Avoiding the Next Collapse by Mohamed A. El-Erian

activist fund / activist shareholder / activist investor, Airbnb, balance sheet recession, bank run, barriers to entry, break the buck, Bretton Woods, British Empire, business cycle, capital controls, Capital in the Twenty-First Century by Thomas Piketty, Carmen Reinhart, carried interest, collapse of Lehman Brothers, corporate governance, currency peg, disruptive innovation, Erik Brynjolfsson, eurozone crisis, financial innovation, Financial Instability Hypothesis, financial intermediation, financial repression, fixed income, Flash crash, forward guidance, friendly fire, full employment, future of work, Hyman Minsky, If something cannot go on forever, it will stop - Herbert Stein's Law, income inequality, inflation targeting, Jeff Bezos, Kenneth Rogoff, Khan Academy, liquidity trap, Martin Wolf, megacity, Mexican peso crisis / tequila crisis, moral hazard, mortgage debt, Norman Mailer, oil shale / tar sands, price stability, principal–agent problem, quantitative easing, risk tolerance, risk-adjusted returns, risk/return, Second Machine Age, secular stagnation, sharing economy, sovereign wealth fund, The Great Moderation, The Wisdom of Crowds, too big to fail, University of East Anglia, yield curve, zero-sum game

In doing so, it feels that it would be well placed to continue to influence private sector expectations and thus align both private and public actions. Indeed, as noted by Ben Bernanke, “the more guidance a central bank can provide the public about how policy is likely to evolve, the greater the chance that market participants will make appropriate inferences.”2 — Meanwhile, less hindered by concerns about subdued financial intermediation fueling economic growth, regulation and supervision will be strengthened and expanded. Specifically, it will continue to encompass a larger set of institutions (including nonbanks) and seek to take into account a greater array of risks (including, as discussed earlier, the liquidity delusion that leads to periods of patchy liquidity, especially during shifts in market consensus). At the other end, the ECB will venture even deeper into unconventional policy terrain and, like the Bank of Japan, stay there for quite a while.


Technological Revolutions and Financial Capital: The Dynamics of Bubbles and Golden Ages by Carlota Pérez

agricultural Revolution, Big bang: deregulation of the City of London, Bob Noyce, Bretton Woods, business cycle, capital controls, commoditize, Corn Laws, creative destruction, David Ricardo: comparative advantage, deindustrialization, distributed generation, financial deregulation, financial innovation, Financial Instability Hypothesis, financial intermediation, full employment, Hyman Minsky, informal economy, joint-stock company, Joseph Schumpeter, knowledge economy, late capitalism, market fundamentalism, new economy, nuclear winter, offshore financial centre, post-industrial society, profit motive, railway mania, Robert Shiller, Robert Shiller, Sand Hill Road, Silicon Valley, Simon Kuznets, South Sea Bubble, Thomas Kuhn: the structure of scientific revolutions, Thorstein Veblen, trade route, tulip mania, Upton Sinclair, Washington Consensus

As Gibbons put it in the nineteenth century: ‘there is perhaps no record of a bank fraud extant of which the perpetrator was not honest yesterday’.169 But even among the legal activities there are some practices that certainly fall in the area of illegitimacy. For example, from the 1970s onward and with greater intensity in the 1990s, many financial ‘innovations’ can be classified as taking advantage of legal loopholes to evade regulation, such as seeking to hold funds that are not classified as deposits to reduce the reserve ratios or the many new ways of earning commissions for performing financial intermediation ‘off-the-record’.170 166. See Chancellor (1999) Ch. 9 and Reading (1992:1993) Ch. 7. 167. Minsky (1982) uses the term as a category for any sort of highly risky credit, including those which became so because of external conditions. 168. A sample of notorious frauds 1980–95 is given in Kindleberger (1978:1996 revised edn) pp. 78–9. 169. Gibbons (1959) quoted by Kindleberger (1978) p. 80. 170.


Global Governance and Financial Crises by Meghnad Desai, Yahia Said

Asian financial crisis, bank run, banking crisis, Bretton Woods, business cycle, capital controls, central bank independence, corporate governance, creative destruction, credit crunch, crony capitalism, currency peg, deglobalization, financial deregulation, financial innovation, Financial Instability Hypothesis, financial intermediation, financial repression, floating exchange rates, frictionless, frictionless market, German hyperinflation, information asymmetry, knowledge economy, liberal capitalism, liberal world order, Long Term Capital Management, market bubble, Mexican peso crisis / tequila crisis, moral hazard, Nick Leeson, oil shock, open economy, price mechanism, price stability, Real Time Gross Settlement, rent-seeking, short selling, special drawing rights, structural adjustment programs, Tobin tax, transaction costs, Washington Consensus

The drawing on the CCL, which must be redeemed three months ahead, could be financed by short-term borrowing of the Fund from the central banks issuing the currencies demanded. 66 Michel Aglietta Until now, the CCL has been an utter failure since no country has applied to be qualified. This rejection points out to the impossibility to transform a model of collective action in a piecemeal way. The changeover from a model of financial intermediation for developing countries to a model of crisis management requires the consistent reform of all its components: conditionality, surveillance, involvement of creditors in debt restructuring, leadership in the coordination of the official institutions participating to the containment of systemic risk, flexible liquidity assistance. If the Fund asserts its role of a leader in crisis management, it has also a comparative advantage in running the model of mutual assistance to solve balance of payment problems: exchange rate and macroeconomic policy advice, balance-of-payment standby lending.


The Rise of Carry: The Dangerous Consequences of Volatility Suppression and the New Financial Order of Decaying Growth and Recurring Crisis by Tim Lee, Jamie Lee, Kevin Coldiron

active measures, Asian financial crisis, asset-backed security, backtesting, bank run, Bernie Madoff, Bretton Woods, business cycle, capital asset pricing model, Capital in the Twenty-First Century by Thomas Piketty, collapse of Lehman Brothers, collateralized debt obligation, Credit Default Swap, credit default swaps / collateralized debt obligations, cryptocurrency, debt deflation, distributed ledger, diversification, financial intermediation, Flash crash, global reserve currency, implied volatility, income inequality, inflation targeting, labor-force participation, Long Term Capital Management, Lyft, margin call, market bubble, money market fund, money: store of value / unit of account / medium of exchange, moral hazard, negative equity, Network effects, Ponzi scheme, purchasing power parity, quantitative easing, random walk, rent-seeking, reserve currency, rising living standards, risk/return, sharing economy, short selling, sovereign wealth fund, Uber and Lyft, uber lyft, yield curve

A potentially important difference is that carry bubbles are more likely to misallocate the economy’s resources in unproductive investment (although there will be excessive consumption and deficient savings as well), whereas a pure Ponzi bubble is likely to manifest almost entirely in excessive consumption and deficient savings. From an economic perspective, a carry bubble can be characterized as a mispricing of risk, at least relative to a classical economic equilibrium. The Ponzi bubble, of course, is simple fraud—although the distinction is blurred 1. Utpal Bhattacharya, “The Optimal Design of Ponzi Schemes in Finite Economies,” Journal of Financial Intermediation, January 2003. Carry, Financial Bubbles, and the Business Cycle 143 in the case of the rational Ponzi bubble. The more fundamental difference between carry and Ponzi is that the carry regime is a more subtle manifestation of power imbalances in society, or indeed in the global economy. Because of that, it can ultimately be more dangerous. This page intentionally left blank 9 The Foundation of Carry in the Structure of Volatility Understanding the Carry Regime at a Deeper Level in Financial Terms THE CARRY REGIME—THE PROGRESSION OF CARRY BUBbles and carry crashes in asset (and also commodity) markets—is not merely some abstract representation of financial market behavior.


pages: 701 words: 199,010

The Crisis of Crowding: Quant Copycats, Ugly Models, and the New Crash Normal by Ludwig B. Chincarini

affirmative action, asset-backed security, automated trading system, bank run, banking crisis, Basel III, Bernie Madoff, Black-Scholes formula, business cycle, buttonwood tree, Carmen Reinhart, central bank independence, collapse of Lehman Brothers, collateralized debt obligation, collective bargaining, corporate governance, correlation coefficient, Credit Default Swap, credit default swaps / collateralized debt obligations, delta neutral, discounted cash flows, diversification, diversified portfolio, family office, financial innovation, financial intermediation, fixed income, Flash crash, full employment, Gini coefficient, high net worth, hindsight bias, housing crisis, implied volatility, income inequality, interest rate derivative, interest rate swap, John Meriwether, Kickstarter, liquidity trap, London Interbank Offered Rate, Long Term Capital Management, low skilled workers, margin call, market design, market fundamentalism, merger arbitrage, Mexican peso crisis / tequila crisis, Mitch Kapor, money market fund, moral hazard, mortgage debt, Myron Scholes, negative equity, Northern Rock, Occupy movement, oil shock, price stability, quantitative easing, quantitative hedge fund, quantitative trading / quantitative finance, Ralph Waldo Emerson, regulatory arbitrage, Renaissance Technologies, risk tolerance, risk-adjusted returns, Robert Shiller, Robert Shiller, Ronald Reagan, Sam Peltzman, Sharpe ratio, short selling, sovereign wealth fund, speech recognition, statistical arbitrage, statistical model, survivorship bias, systematic trading, The Great Moderation, too big to fail, transaction costs, value at risk, yield curve, zero-coupon bond

Such a firm should avoid directional bets, profiting instead from temporary supply and demand imbalances. PGAM worked to find imbalances, hedge away all unwanted or little-understood risk, and focus on the core risk that interested the firm. It used leverage to amplify returns, as most of its strategies had high Sharpe ratios and small absolute returns. The LTCM disaster had pointed to a key problem with financial intermediation: It contained tail risks during financial crises, including the August 1998 Russian crises that sealed LTCM’s fate. PGAM used about a quarter of the leverage that LTCM had used. Less leverage meant lower returns. PGAM’s returns were also about a quarter of LTCM’s returns before the 1998 crisis. Before 1998, LTCM’s average annual return was 27.76%. Before 2008, PGAM’s average annual return was 8.98% (see Table 14.1).

Since the financial crisis, similar activities have destroyed other good firms, including MF Global and even Madoff Securities.5 Big firms enjoy economies of scale and are usually more diversified than smaller firms, but they take an inherent risk by mixing different lines of business, and particularly by mixing client businesses with capital management businesses. Maybe a broker-dealer should just be a broker-dealer, a bank should just be a bank, and an insurance provider should just be an insurance provider.6 Systemic risk is ultimately a bigger risk for the entire economy than are “too big to fail” firms. Systemic risk is the widespread failure of financial institutions, or frozen capital markets that impair both financial intermediation payment systems and lending to corporations and households. More generally, systemic risk is an event that leads to the widespread loss of significantly important, linked institutions associated with economic functioning. The 2008 financial crisis had its roots in real estate exposure, which was the common link between banking institutions, including regular banks, investment banks, hedge funds, insurance companies, and government-sponsored enterprises.


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

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

In such circumstances debt stocks could grow more rapidly than ECUADOR UNDER DOLLARIZATION: OPPORTUNITIES AND RISKS 85 anticipated, for the dubious reason that anticipated depreciation failed to occur. Dollarization has several important advantages over conventional fixed exchange rates. Unless the permanence of the pegged exchange rate is extremely credible, residual fears of depreciation could affect financial intermediation. This is one reason why Latin American economies have generally been unable to place longer-term domestic-currency debt: Latin America’s longer-term financial markets are all dollar-denominated or index-linked, often leading to serious mismatches in corporations’ and individuals’ balance sheets. Dollarization reduces the scope for sharp relative price changes, of the kind that often accompany inflationary processes.


pages: 273 words: 87,159

The Vanishing Middle Class: Prejudice and Power in a Dual Economy by Peter Temin

"Robert Solow", 2013 Report for America's Infrastructure - American Society of Civil Engineers - 19 March 2013, affirmative action, Affordable Care Act / Obamacare, American Legislative Exchange Council, American Society of Civil Engineers: Report Card, anti-communist, Bernie Sanders, Branko Milanovic, Bretton Woods, business cycle, capital controls, Capital in the Twenty-First Century by Thomas Piketty, carried interest, clean water, corporate raider, Corrections Corporation of America, crack epidemic, deindustrialization, desegregation, Donald Trump, Edward Glaeser, Ferguson, Missouri, financial innovation, financial intermediation, floating exchange rates, full employment, income inequality, intangible asset, invisible hand, longitudinal study, low skilled workers, low-wage service sector, mandatory minimum, manufacturing employment, Mark Zuckerberg, mass immigration, mass incarceration, means of production, mortgage debt, Network effects, New Urbanism, Nixon shock, obamacare, offshore financial centre, oil shock, plutocrats, Plutocrats, Powell Memorandum, price stability, race to the bottom, road to serfdom, Ronald Reagan, secular stagnation, Silicon Valley, Simon Kuznets, the scientific method, War on Poverty, Washington Consensus, white flight, working poor

He was interested in gathering data on income inequality over several centuries, and he restricted his data on wealth to assets traded on markets. He then could sum varied forms of capital at market prices to get national capital stocks by adding their prices. Piketty drew on a literature that argued for the role of finance in economic growth. Economists collected data on the growth of financial intermediation and showed that while finance grew as a result of economic growth, there was good evidence that financial development caused economic growth. Piketty did not discuss this research directly, focusing instead on more concrete issues such as the imputed rent from owner-occupied houses.5 This procedure raises an important question of national income analysis. We do not have a good way of measuring the productivity of modern finance, even though all economists agree that financial activity is important for economic growth.


pages: 307 words: 82,680

A Pelican Introduction: Basic Income by Guy Standing

bank run, basic income, Bernie Sanders, Bertrand Russell: In Praise of Idleness, Black Swan, Boris Johnson, British Empire, centre right, collective bargaining, cryptocurrency, David Graeber, declining real wages, deindustrialization, Donald Trump, Elon Musk, Fellow of the Royal Society, financial intermediation, full employment, future of work, gig economy, Gunnar Myrdal, housing crisis, hydraulic fracturing, income inequality, intangible asset, job automation, job satisfaction, Joi Ito, labour market flexibility, land value tax, libertarian paternalism, low skilled workers, lump of labour, Mark Zuckerberg, Martin Wolf, mass immigration, mass incarceration, moral hazard, Nelson Mandela, offshore financial centre, open economy, Panopticon Jeremy Bentham, Paul Samuelson, plutocrats, Plutocrats, precariat, quantitative easing, randomized controlled trial, rent control, rent-seeking, Sam Altman, self-driving car, shareholder value, sharing economy, Silicon Valley, sovereign wealth fund, Stephen Hawking, The Future of Employment, universal basic income, Wolfgang Streeck, women in the workforce, working poor, Y Combinator, Zipcar

While this has implications for the design of a baseline household survey, it also requires a community-level benchmark and monitoring survey, and matching household and community evaluation surveys conducted over the period of the pilot. Then there are hypotheses that relate to the effects on the local economy and local society, such as the following: g. A basic income scheme leads to an improvement in income distribution, lessening income inequality, and it does so by more than a simple addition of the cash transfer. h. A basic income leads to the establishment of local financial agencies, leading to a growth of financial intermediation. i. A basic income scheme leads to the development of local businesses and more employment in the community. Hypothesis (g), for instance, is crucial to a proper evaluation of a basic income system. If the pilot design was not able to measure the impact on income distribution, it would fail to evaluate a key aspect of basic income. However, if only a minority of the community were provided with the basic income, it would be impossible to test this crucial hypothesis altogether.


pages: 275 words: 84,980

Before Babylon, Beyond Bitcoin: From Money That We Understand to Money That Understands Us (Perspectives) by David Birch

agricultural Revolution, Airbnb, bank run, banks create money, bitcoin, blockchain, Bretton Woods, British Empire, Broken windows theory, Burning Man, business cycle, capital controls, cashless society, Clayton Christensen, clockwork universe, creative destruction, credit crunch, cross-subsidies, crowdsourcing, cryptocurrency, David Graeber, dematerialisation, Diane Coyle, disruptive innovation, distributed ledger, double entry bookkeeping, Ethereum, ethereum blockchain, facts on the ground, fault tolerance, fiat currency, financial exclusion, financial innovation, financial intermediation, floating exchange rates, Fractional reserve banking, index card, informal economy, Internet of things, invention of the printing press, invention of the telegraph, invention of the telephone, invisible hand, Irish bank strikes, Isaac Newton, Jane Jacobs, Kenneth Rogoff, knowledge economy, Kuwabatake Sanjuro: assassination market, large denomination, M-Pesa, market clearing, market fundamentalism, Marshall McLuhan, Martin Wolf, mobile money, money: store of value / unit of account / medium of exchange, new economy, Northern Rock, Pingit, prediction markets, price stability, QR code, quantitative easing, railway mania, Ralph Waldo Emerson, Real Time Gross Settlement, reserve currency, Satoshi Nakamoto, seigniorage, Silicon Valley, smart contracts, social graph, special drawing rights, technoutopianism, the payments system, The Wealth of Nations by Adam Smith, too big to fail, transaction costs, tulip mania, wage slave, Washington Consensus, wikimedia commons

The queen would not have it called, as in other countries, the Bourse; but, when it was finished, came and dined with the founder, and with the heralds at arms, by sound of trumpets, proclaimed it by the name, of the Royal Exchange. He went on to die of apoplexy – which may well be a common fate for those who truly understand money – and left an astonishing legacy. Thus we move on to the critical point in this story. The development of banking institutions posed a threat to the existing sovereign state monopoly over money. If the benefits from banking and financial intermediation were not to be lost, the emergent nation state had to cope with the threat without actually suppressing the banks (Glasner 1998). Tulips from Amsterdam I cannot help but imagine that the London bankers of the early seventeenth century looked at free-thinking Amsterdam – the epicentre of innovation in financial services – as they look at the blockchain now: as a strange and exotic place where all sorts of bizarre experimentation in finance and financial services is underway, with outcomes that can only be guessed at.


pages: 318 words: 85,824

A Brief History of Neoliberalism by David Harvey

affirmative action, Asian financial crisis, Berlin Wall, Bretton Woods, business climate, business cycle, capital controls, centre right, collective bargaining, creative destruction, crony capitalism, debt deflation, declining real wages, deglobalization, deindustrialization, Deng Xiaoping, Fall of the Berlin Wall, financial deregulation, financial intermediation, financial repression, full employment, George Gilder, Gini coefficient, global reserve currency, illegal immigration, income inequality, informal economy, labour market flexibility, land tenure, late capitalism, Long Term Capital Management, low-wage service sector, manufacturing employment, market fundamentalism, mass immigration, means of production, Mexican peso crisis / tequila crisis, Mont Pelerin Society, mortgage tax deduction, neoliberal agenda, new economy, Pearl River Delta, phenotype, Ponzi scheme, price mechanism, race to the bottom, rent-seeking, reserve currency, Ronald Reagan, Silicon Valley, special economic zone, structural adjustment programs, the built environment, The Chicago School, transaction costs, union organizing, urban renewal, urban sprawl, Washington Consensus, Winter of Discontent

Heavy reliance upon foreign direct investment (a completely different economic development strategy to that taken by Japan and South Korea) has kept the power of capitalist class ownership offshore (Table 5.1), making it somewhat easier, at least in the Chinese case, for the state to control.4 The barriers erected to foreign portfolio investment effectively limit the powers of international finance capital over the Chinese state. The reluctance to permit forms of financial intermediation other than the state-owned banks—such as stock markets and capital markets— deprives capital of one of its key weapons vis-à-vis state power. The long-standing attempt to keep structures of state ownership intact while liberating managerial autonomy likewise smacks of an attempt to inhibit capitalist class formation. But the party also had to face a number of awkward dilemmas. The Chinese business diaspora provided key external links and Hong Kong, reabsorbed into the Chinese polity in 1997, was already structured along capitalistic lines.


pages: 322 words: 84,580

The Economics of Belonging: A Radical Plan to Win Back the Left Behind and Achieve Prosperity for All by Martin Sandbu

"Robert Solow", Airbnb, autonomous vehicles, balance sheet recession, bank run, banking crisis, basic income, Berlin Wall, Bernie Sanders, Boris Johnson, Branko Milanovic, Bretton Woods, business cycle, call centre, capital controls, carbon footprint, Carmen Reinhart, centre right, collective bargaining, debt deflation, deindustrialization, deskilling, Diane Coyle, Donald Trump, Edward Glaeser, eurozone crisis, Fall of the Berlin Wall, financial intermediation, full employment, future of work, gig economy, Gini coefficient, hiring and firing, income inequality, income per capita, industrial robot, intangible asset, job automation, John Maynard Keynes: technological unemployment, Kenneth Rogoff, knowledge economy, knowledge worker, labour market flexibility, liquidity trap, longitudinal study, low skilled workers, manufacturing employment, Martin Wolf, meta analysis, meta-analysis, mini-job, mortgage debt, new economy, offshore financial centre, oil shock, open economy, pattern recognition, pink-collar, precariat, quantitative easing, race to the bottom, Richard Florida, Robert Shiller, Robert Shiller, Ronald Reagan, secular stagnation, social intelligence, TaskRabbit, total factor productivity, universal basic income, very high income, winner-take-all economy, working poor

Over the last decade or so, the Bank for International Settlements, the International Monetary Fund, and the OECD—traditionally seen as the commanding heights of economic policy orthodoxy—and leading financial economists have all been producing research documenting that beyond a certain point, a larger financial sector (in particular banking) and more credit in the economy reduce growth, weaken productivity, and increase inequality.16 The reason is that while expanding financial intermediation can make the economy more efficient by providing finance for investment projects, continued expansion ends up drawing resources away from where they are best deployed. Rather than providing capital to people with good ideas and the businesses with the greatest potential for growth, an overgrown financial sector directs funding to activities such as construction, which are nicely suited to the banks’ model of secured lending but offer low productivity growth.


pages: 346 words: 90,371

Rethinking the Economics of Land and Housing by Josh Ryan-Collins, Toby Lloyd, Laurie Macfarlane

"Robert Solow", agricultural Revolution, asset-backed security, balance sheet recession, bank run, banking crisis, barriers to entry, basic income, Bretton Woods, business cycle, Capital in the Twenty-First Century by Thomas Piketty, collective bargaining, Corn Laws, correlation does not imply causation, creative destruction, credit crunch, debt deflation, deindustrialization, falling living standards, financial deregulation, financial innovation, Financial Instability Hypothesis, financial intermediation, full employment, garden city movement, George Akerlof, ghettoisation, Gini coefficient, Hernando de Soto, housing crisis, Hyman Minsky, income inequality, information asymmetry, knowledge worker, labour market flexibility, labour mobility, land reform, land tenure, land value tax, Landlord’s Game, low skilled workers, market bubble, market clearing, Martin Wolf, means of production, money market fund, mortgage debt, negative equity, Network effects, new economy, New Urbanism, Northern Rock, offshore financial centre, Pareto efficiency, place-making, price stability, profit maximization, quantitative easing, rent control, rent-seeking, Richard Florida, Right to Buy, rising living standards, risk tolerance, Second Machine Age, secular stagnation, shareholder value, the built environment, The Great Moderation, The Market for Lemons, The Spirit Level, The Wealth of Nations by Adam Smith, Thomas Malthus, transaction costs, universal basic income, urban planning, urban sprawl, working poor, working-age population

Oswald. 2013. ‘Does High Home-Ownership Impair the Labor Market?’ NBER Working Paper No. 19079, May. Blöchliger, Hansjörg. 2015. ‘Reforming the Tax on Immovable Property’. OECD Economics Department Working Papers No. 1205. Bogdanor, Vernon, and Robert J. A. Skidelsky. 1970. The Age of Affluence, 1951–1964. Macmillan. Boot, Arnoud W. A. 2000. ‘Relationship Banking: What Do We Know?’ Journal of Financial Intermediation 9 (1): 7–25. Booth, Robert. 2014. ‘Inside “Billionaires Row”: London’s Rotting, Derelict Mansions Worth £350m’. The Guardian, 31 January. Borio, Claudio. 2014. ‘The Financial Cycle and Macroeconomics: What Have We Learnt?’ Journal of Banking and Finance 45: 182–198. Borio, Claudio, R. McCauley, and P. McGuire. 2011. ‘Global Credit and Domestic Credit Booms’. BIS Quarterly Review, September.


pages: 606 words: 87,358

The Great Convergence: Information Technology and the New Globalization by Richard Baldwin

"Robert Solow", 3D printing, additive manufacturing, Admiral Zheng, agricultural Revolution, air freight, Amazon Mechanical Turk, Berlin Wall, bilateral investment treaty, Branko Milanovic, buy low sell high, call centre, Columbian Exchange, commoditize, Commodity Super-Cycle, David Ricardo: comparative advantage, deindustrialization, domestication of the camel, Edward Glaeser, endogenous growth, Erik Brynjolfsson, financial intermediation, George Gilder, global supply chain, global value chain, Henri Poincaré, imperial preference, industrial cluster, industrial robot, intangible asset, invention of agriculture, invention of the telegraph, investor state dispute settlement, Isaac Newton, Islamic Golden Age, James Dyson, Kickstarter, knowledge economy, knowledge worker, Lao Tzu, low skilled workers, market fragmentation, mass immigration, Metcalfe’s law, New Economic Geography, out of africa, paper trading, Paul Samuelson, Pax Mongolica, profit motive, rent-seeking, reshoring, Richard Florida, rising living standards, Robert Metcalfe, Second Machine Age, Simon Kuznets, Skype, Snapchat, Stephen Hawking, telepresence, telerobotics, The Wealth of Nations by Adam Smith, trade liberalization, trade route, Washington Consensus

It also decimated New World populations via the introduction of Old World diseases like smallpox, measles, and typhus. This set up a situation where the Old World had too many people and not enough land—an imbalance mirrored by the opposite imbalance in the New World. Note the scale for the Old World chart is about ten times that of the New World chart. DATA SOURCE: Maddison database (2013 version). The whole process was fostered by the rapid development of financial intermediation (centered on London). As a result, the British economy was reoriented from agriculture to manufacturing and the population shifted from rural to urban. The big changes were at first limited mostly to Britain, as the French Revolution of 1789 and decades-long Napoleonic Wars delayed the Industrial Revolution’s spread to the Continent. As David Landes puts it in his famous 1969 book The Unbound Prometheus, technological advances hit roadblocks on a continent suffering “capital destruction and losses of manpower; political instability and widespread social anxiety; the decimation of the wealthier entrepreneurial groups; all manner of interruptions to trade; violent inflations and alterations of currency.”11 In particular, trade was directly dampened during the Napoleonic Wars by competing trade blockades imposed by France and Britain.


pages: 322 words: 87,181

Straight Talk on Trade: Ideas for a Sane World Economy by Dani Rodrik

3D printing, airline deregulation, Asian financial crisis, bank run, barriers to entry, Berlin Wall, Bernie Sanders, blue-collar work, Bretton Woods, BRICs, business cycle, call centre, capital controls, Capital in the Twenty-First Century by Thomas Piketty, Carmen Reinhart, carried interest, central bank independence, centre right, collective bargaining, conceptual framework, continuous integration, corporate governance, corporate social responsibility, currency manipulation / currency intervention, David Ricardo: comparative advantage, deindustrialization, Donald Trump, endogenous growth, Eugene Fama: efficient market hypothesis, eurozone crisis, failed state, financial deregulation, financial innovation, financial intermediation, financial repression, floating exchange rates, full employment, future of work, George Akerlof, global value chain, income inequality, inflation targeting, information asymmetry, investor state dispute settlement, invisible hand, Jean Tirole, Kenneth Rogoff, low skilled workers, manufacturing employment, market clearing, market fundamentalism, meta analysis, meta-analysis, moral hazard, Nelson Mandela, new economy, offshore financial centre, open borders, open economy, Pareto efficiency, postindustrial economy, price stability, pushing on a string, race to the bottom, randomized controlled trial, regulatory arbitrage, rent control, rent-seeking, Richard Thaler, Robert Gordon, Robert Shiller, Robert Shiller, Ronald Reagan, Sam Peltzman, Silicon Valley, special economic zone, spectrum auction, Steven Pinker, The Rise and Fall of American Growth, the scientific method, The Wealth of Nations by Adam Smith, Thomas L Friedman, too big to fail, total factor productivity, trade liberalization, transaction costs, unorthodox policies, Washington Consensus, World Values Survey, zero-sum game, éminence grise

When entrepreneurship is hampered primarily by market failures rather than government failures, the country may rank high on standard creditworthiness measures like transparency or institutional quality, but private investment will remain low. A focus on binding constraints helps us see why remedies that are not well targeted—broad structural reforms—are ineffective, at best, and sometimes counterproductive. Cutting red tape and reducing regulation does little to spur private economic activity when the constraint lies on the finance side. Improving financial intermediation does not raise private investment when entrepreneurs expect low profits. Successful policy design must rely more on domestic experimentation and local institutional innovations—and much less on “best practices” and blueprints adopted from international experience. Going back to Greece, where was the binding constraint on that economy while structural reforms and fiscal austerity were being applied?


pages: 1,088 words: 228,743

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

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, business cycle, buy and hold, buy low sell high, capital asset pricing model, capital controls, Carmen Reinhart, central bank independence, collateralized debt obligation, commoditize, 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, G4S, George Akerlof, global reserve currency, Google Earth, high net worth, hindsight bias, Hyman Minsky, implied volatility, income inequality, incomplete markets, index fund, inflation targeting, information asymmetry, interest rate swap, invisible hand, Kenneth Rogoff, laissez-faire capitalism, law of one price, London Interbank Offered Rate, 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, Myron Scholes, negative equity, New Journalism, oil shock, p-value, passive investing, Paul Samuelson, 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, selection bias, Sharpe ratio, short selling, sovereign wealth fund, statistical arbitrage, statistical model, stochastic volatility, stocks for the long run, survivorship bias, 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, zero-sum game

• Although neoclassical models do not emphasize this, it seems plausible that financial crises are important “high MU” environments, especially if financial institutions have a major role in setting asset prices. If we can equate bad times with stock market losses we get back the old CAPM, but “bad times” are likely to be more multi-dimensional. Sometimes other aspects of financial crises—a bond or housing market selloff, vanishing liquidity, de-leveraging spirals, a breakdown in financial intermediation, spiking volatility, high correlations that limit diversification—boost MU even when stock markets are relatively stable. • The worst times are characterized by both financial and economic turbulence. Table 5.1 lists some periods that, in Justice Stewart’s spirit, were manifestly bad times. One might formalize the definition but there is no (academic or practitioner) consensus on how to do this.

.; Yakov Amihud; and Sreedhar T. Bharath (2010), “Liquidity risk of corporate bond returns,” New York University Stern School of Business working paper, available at SSRN: http://ssrn.com/abstract=1612287 Acharya, Viral; and Lasse H. Pedersen (2005), “Asset pricing with liquidity risk,” Journal of Financial Economics 77, 375–410. Adrian, Tobias; Emanuel Moench; and Hyun Song Shin (2010), “Financial intermediation, asset prices and macroeconomic dynamics,” Federal Reserve Bank of New York, Staff Report 422. Agarwal, Vikas; Gurdip S. Bakshi; and Joop Huij (2007), “Do higher-moment equity risks explain hedge fund returns?” Robert H. Smith School, Research Paper 06-066 available at SSRN: http://ssrn.com/abstract=1108635 Agarwal, Vikas; Naveen Daniel; and Narayan Y. Naik (2009) “Role of managerial incentives and discretion in hedge fund performance,” Journal of Finance 64, 2221–2256.


pages: 348 words: 97,277

The Truth Machine: The Blockchain and the Future of Everything by Paul Vigna, Michael J. Casey

3D printing, additive manufacturing, Airbnb, altcoin, Amazon Web Services, barriers to entry, basic income, Berlin Wall, Bernie Madoff, bitcoin, blockchain, blood diamonds, Blythe Masters, business process, buy and hold, carbon footprint, cashless society, cloud computing, computer age, computerized trading, conceptual framework, Credit Default Swap, crowdsourcing, cryptocurrency, cyber-physical system, dematerialisation, disintermediation, distributed ledger, Donald Trump, double entry bookkeeping, Edward Snowden, Elon Musk, Ethereum, ethereum blockchain, failed state, fault tolerance, fiat currency, financial innovation, financial intermediation, global supply chain, Hernando de Soto, hive mind, informal economy, intangible asset, Internet of things, Joi Ito, Kickstarter, linked data, litecoin, longitudinal study, Lyft, M-Pesa, Marc Andreessen, market clearing, mobile money, money: store of value / unit of account / medium of exchange, Network effects, off grid, pets.com, prediction markets, pre–internet, price mechanism, profit maximization, profit motive, ransomware, rent-seeking, RFID, ride hailing / ride sharing, Ross Ulbricht, Satoshi Nakamoto, self-driving car, sharing economy, Silicon Valley, smart contracts, smart meter, Snapchat, social web, software is eating the world, supply-chain management, Ted Nelson, the market place, too big to fail, trade route, transaction costs, Travis Kalanick, Turing complete, Uber and Lyft, uber lyft, unbanked and underbanked, underbanked, universal basic income, web of trust, zero-sum game

But on the other, the idea of a consortium of the world’s biggest banks having say-so over who and what gets included within the financial system’s single and only distributed ledger conjured up fears of excessive banking power and of the politically unpopular bailouts that happened after the crisis. Might Wall Street be building a “too-big-to-fail” blockchain? A Fix for Financial Crises? Let’s face it: even though it would be great to see the unnecessary layers of financial intermediation stripped away from the old boys’ club, regulatory and economic barriers make such revolutionary change almost impossible to achieve from within. None of this is to say, however, that the big brains at R3, as well as those of its member banks’ in-house blockchain labs and of distributed ledger startups such as Digital Asset Holdings and Symbiont, aren’t producing phenomenally powerful reforms to improve a bottlenecked financial system.


pages: 361 words: 97,787

The Curse of Cash by Kenneth S Rogoff

Andrei Shleifer, Asian financial crisis, bank run, Ben Bernanke: helicopter money, Berlin Wall, bitcoin, blockchain, Boris Johnson, Bretton Woods, business cycle, capital controls, Carmen Reinhart, cashless society, central bank independence, cryptocurrency, debt deflation, disruptive innovation, distributed ledger, Edward Snowden, Ethereum, ethereum blockchain, eurozone crisis, Fall of the Berlin Wall, fiat currency, financial exclusion, financial intermediation, financial repression, forward guidance, frictionless, full employment, George Akerlof, German hyperinflation, illegal immigration, inflation targeting, informal economy, interest rate swap, Isaac Newton, Johann Wolfgang von Goethe, Johannes Kepler, Kenneth Rogoff, labor-force participation, large denomination, liquidity trap, money market fund, money: store of value / unit of account / medium of exchange, moral hazard, moveable type in China, New Economic Geography, offshore financial centre, oil shock, open economy, payday loans, price stability, purchasing power parity, quantitative easing, RAND corporation, RFID, savings glut, secular stagnation, seigniorage, The Great Moderation, the payments system, The Rise and Fall of American Growth, transaction costs, unbanked and underbanked, unconventional monetary instruments, underbanked, unorthodox policies, Y2K, yield curve

A Monetary History of China (in two volumes). Translated by Edward H. Kaplan. Bellingham, Washington: Western Washington University. Pew Research Center. 2014. “As Growth Stalls, Unauthorized Immigrant Population Becomes More Settled” (September). Washington, DC: Pew Foundation. Philippon, Thomas. 2015. “Has the US Finance Industry Become Less Efficient? On the Theory and Measurement of Financial Intermediation.”American Economic Review 105 (4): 1408–38. Pissarides, Christopher A., and Guglielmo Weber. 1989. “An Expenditure-Based Estimate of Britain’s Black Economy.” Journal of Public Economics 39 (1): 17–32. Porter, Richard D. 1993. “Estimates of Foreign Holdings of U.S. Currency—An Approach Based on Relative Cross-Country Seasonal Variations.” In Nominal Income Targeting with the Monetary Base as Instrument: An Evaluation of McCallum’s Rule.


pages: 350 words: 109,220

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

Asian financial crisis, asset-backed security, bank run, banking crisis, banks create money, Berlin Wall, Black Swan, break the buck, business cycle, central bank independence, credit crunch, Credit Default Swap, crony capitalism, debt deflation, Fall of the Berlin Wall, financial innovation, financial intermediation, fixed income, full employment, George Akerlof, housing crisis, inflation targeting, information asymmetry, London Interbank Offered Rate, Long Term Capital Management, market bubble, money market fund, 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

For instance, there was this 2005 passage in one of his speeches: “We are in the midst of an unusual dynamic in financial markets, in which low realized volatility in macroeconomic outcomes [Translation: everyone thinks we’ve licked the boom-bust cycle], low realized credit losses [Translation: even deadbeats are paying their loans], greater confidence in the near term path of monetary policy [Translation: everyone assumes the Fed will never surprise them], low uncertainty about future inflation and interest rate [Translation: everyone really believes the Fed will never surprise them], rapid changes in the nature of financial intermediation [Translation: the rise of finance outside the core banking system in the securities markets], and a large increase in the share of global savings that is willing to move across borders [Translation: the huge sums of money sloshing around the world economy], have worked together to bring risk premia down across many asset prices [Translation: all of which have led prices of stocks and other assets to rise awfully high].”


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Broke: How to Survive the Middle Class Crisis by David Boyle

anti-communist, banking crisis, Berlin Wall, Big bang: deregulation of the City of London, Bonfire of the Vanities, bonus culture, call centre, collateralized debt obligation, corporate raider, Credit Default Swap, credit default swaps / collateralized debt obligations, deindustrialization, delayed gratification, Desert Island Discs, Eugene Fama: efficient market hypothesis, eurozone crisis, Fall of the Berlin Wall, financial deregulation, financial independence, financial innovation, financial intermediation, Francis Fukuyama: the end of history, Frederick Winslow Taylor, housing crisis, income inequality, Jane Jacobs, job satisfaction, Kickstarter, knowledge economy, knowledge worker, market fundamentalism, Martin Wolf, mega-rich, mortgage debt, Neil Kinnock, Nelson Mandela, new economy, Nick Leeson, North Sea oil, Northern Rock, Occupy movement, off grid, offshore financial centre, pension reform, pensions crisis, Plutonomy: Buying Luxury, Explaining Global Imbalances, Ponzi scheme, positional goods, precariat, quantitative easing, school choice, Slavoj Žižek, social intelligence, too big to fail, trickle-down economics, Vanguard fund, Walter Mischel, wealth creators, Winter of Discontent, working poor

Imagine another 1.5 per cent a year goes in capital gains taxes, that cuts the total down to £37,000 (and if you factor in an average inflation rate of 4 per cent, what you actually get is less than £6,000). It hasn’t all gone to the financial intermediaries, but most of it has.[25] ‘While the owners of business enjoy the dividend yields and earnings growth that our capitalistic system creates,’ wrote Bogle, ‘those who play in the financial markets capture those investment gains only after the costs of financial intermediation are deducted — a vast “losers game”.’ Like problem gamblers, our financial intermediaries — those we have given charge of our pensions — dip in and out of the markets with increasing frequency, constantly going back for more, ostensibly doing so on our behalf, but constantly extracting the croupier’s cut. There is a parallel problem here to the tragedy of the lost mutual banks. Mutual institutions have been despised in the financial sector over the past generation, but they are usually far better at delivering returns for savers.


pages: 408 words: 108,985

Rewriting the Rules of the European Economy: An Agenda for Growth and Shared Prosperity by Joseph E. Stiglitz

Airbnb, balance sheet recession, bank run, banking crisis, barriers to entry, Basel III, basic income, Berlin Wall, bilateral investment treaty, business cycle, business process, Capital in the Twenty-First Century by Thomas Piketty, central bank independence, collapse of Lehman Brothers, collective bargaining, corporate governance, corporate raider, corporate social responsibility, creative destruction, credit crunch, deindustrialization, discovery of DNA, diversified portfolio, Donald Trump, eurozone crisis, Fall of the Berlin Wall, financial intermediation, Francis Fukuyama: the end of history, full employment, gender pay gap, George Akerlof, gig economy, Gini coefficient, hiring and firing, housing crisis, Hyman Minsky, income inequality, inflation targeting, informal economy, information asymmetry, intangible asset, investor state dispute settlement, invisible hand, Isaac Newton, labor-force participation, liberal capitalism, low skilled workers, market fundamentalism, mini-job, moral hazard, non-tariff barriers, offshore financial centre, open economy, patent troll, pension reform, price mechanism, price stability, purchasing power parity, quantitative easing, race to the bottom, regulatory arbitrage, rent-seeking, Robert Shiller, Robert Shiller, Ronald Reagan, selection bias, shareholder value, Silicon Valley, sovereign wealth fund, TaskRabbit, too big to fail, trade liberalization, transaction costs, transfer pricing, trickle-down economics, tulip mania, universal basic income, unorthodox policies, zero-sum game

During the few decades before the financial crisis, Europe, though to a lesser degree than the United States, lost sight of the fact that the financial sector is supposed to serve society rather than the other way around, with the interests of society subservient to the interests of finance. No modern economy can function well without a well-functioning financial sector. But this sector worked poorly in both Europe and the United States. Both regions need a financial sector that will perform certain essential services, from managing the wealth of individuals for their retirement, to running a modern payments mechanism, to providing prudent financial intermediation. The financial system must ensure that scarce capital is allocated to the highest-return activities, thus providing the funds necessary for creating new firms and expanding old ones. Had they performed these services well, those in the financial sector would have been amply rewarded. However, their greed knew no bounds, and they realized that their position of trust gave them an unprecedented opportunity to exploit others.


pages: 374 words: 111,284

The AI Economy: Work, Wealth and Welfare in the Robot Age by Roger Bootle

"Robert Solow", 3D printing, agricultural Revolution, AI winter, Albert Einstein, anti-work, autonomous vehicles, basic income, Ben Bernanke: helicopter money, Bernie Sanders, blockchain, call centre, Capital in the Twenty-First Century by Thomas Piketty, Chris Urmson, computer age, conceptual framework, corporate governance, correlation does not imply causation, creative destruction, David Ricardo: comparative advantage, deindustrialization, deskilling, Elon Musk, en.wikipedia.org, Erik Brynjolfsson, everywhere but in the productivity statistics, facts on the ground, financial intermediation, full employment, future of work, income inequality, income per capita, industrial robot, Internet of things, invention of the wheel, Isaac Newton, James Watt: steam engine, Jeff Bezos, job automation, job satisfaction, John Markoff, John Maynard Keynes: Economic Possibilities for our Grandchildren, John Maynard Keynes: technological unemployment, John von Neumann, Joseph Schumpeter, Kevin Kelly, license plate recognition, Marc Andreessen, Mark Zuckerberg, market bubble, mega-rich, natural language processing, Network effects, new economy, Nicholas Carr, Paul Samuelson, Peter Thiel, positional goods, quantitative easing, RAND corporation, Ray Kurzweil, Richard Florida, ride hailing / ride sharing, rising living standards, road to serfdom, Robert Gordon, Robert Shiller, Robert Shiller, Second Machine Age, secular stagnation, self-driving car, Silicon Valley, Simon Kuznets, Skype, social intelligence, spinning jenny, Stanislav Petrov, Stephen Hawking, Steven Pinker, technological singularity, The Future of Employment, The Wealth of Nations by Adam Smith, Thomas Malthus, trade route, universal basic income, US Airways Flight 1549, Vernor Vinge, Watson beat the top human players on Jeopardy!, We wanted flying cars, instead we got 140 characters, wealth creators, winner-take-all economy, Y2K, Yogi Berra

It argued that essentially there was nothing special about manufacturing. The growth of manufacturing is not a prerequisite for the advance of developing economies nor is it the key to preventing a major gap between “good” and “bad” jobs. Moreover, the study found that several service sectors exhibited productivity growth equal to the top performing manufacturing industries. It cited postal services and telecommunications, financial intermediation and wholesale and retail distribution. The study concluded that “skipping” a traditional industrialization phase need not be a drag on economy-wide productivity growth for developing countries.30 Conclusion In the earlier discussion about the impact of the AI revolution on income inequality I argued that it is too soon to be sure of the overall effect and we need to keep an open mind.


EuroTragedy: A Drama in Nine Acts by Ashoka Mody

"Robert Solow", Andrei Shleifer, asset-backed security, availability heuristic, bank run, banking crisis, Basel III, Berlin Wall, book scanning, Bretton Woods, call centre, capital controls, Carmen Reinhart, Celtic Tiger, central bank independence, centre right, credit crunch, Daniel Kahneman / Amos Tversky, debt deflation, Donald Trump, eurozone crisis, Fall of the Berlin Wall, financial intermediation, floating exchange rates, forward guidance, George Akerlof, German hyperinflation, global supply chain, global value chain, hiring and firing, Home mortgage interest deduction, income inequality, inflation targeting, Irish property bubble, Isaac Newton, job automation, Johann Wolfgang von Goethe, Johannes Kepler, Kenneth Rogoff, Kickstarter, liberal capitalism, light touch regulation, liquidity trap, loadsamoney, London Interbank Offered Rate, Long Term Capital Management, low-wage service sector, Mikhail Gorbachev, mittelstand, money market fund, moral hazard, mortgage tax deduction, neoliberal agenda, offshore financial centre, oil shock, open borders, pension reform, premature optimization, price stability, purchasing power parity, quantitative easing, rent-seeking, Republic of Letters, Robert Gordon, Robert Shiller, Robert Shiller, short selling, Silicon Valley, The Great Moderation, The Rise and Fall of American Growth, too big to fail, total factor productivity, trade liberalization, transaction costs, urban renewal, working-age population, Yogi Berra

“State of the Union 2012 Address,” September 12. http://​europa.eu/​rapid/​press-​release_​SPEECH-​12-​596_​en.htm. Barroso, José Manuel. 2013. “State of the Union Address 2013,” September 11. http://​europa.eu/​rapid/​press-​release_​SPEECH-​13-​684_​en.htm. Barta, Patrick, and Mark Whitehouse. 2011. “Crisis Adds New Risk to Global Recovery.” Wall Street Journal, March 16. Barth, James, Gerard Caprio Jr., and Ross Levine. 2004. “Bank Regulation and Supervision: What Works Best?” Journal of Financial Intermediation 13: 205–​248. Bases, Daniel. 2012. “The Governments’ Man When Creditors Bay.” Reuters News, May 23. Batini, Nicoletta, Giovanni Callegari, and Giovanni Melina. 2012. “Successful Austerity in the United States, Europe and Japan.” IMF Working Paper 12/​190, Washington, D.C. Batsaikhan, Uuriintuya. 2017. “EU Posted Workers: Separating Fact and Fiction.” Bruegel Blog, August 31. http://​bruegel.org/​2017/​08/​ eu-​posted-​workers-​separating-​fact-​and-​fiction.

Pellegrino, Bruno, and Luigi Zingales. 2017. “Diagnosing the Italian Disease.” Stigler Center for the Study of the Economy and the State, University of Chicago Booth School of Business New Working Paper Series 14, Chicago, October. Peyrefitte, Alain. 1994. C’etait de Gaulle [It Was about de Gaulle]. Paris: Fayard. Philippon, Thomas. 2015. “Has the US Finance Industry Become Less Efficient? On the Theory and Measurement of Financial Intermediation.” American Economic Review 105, no. 4: 1408–​1438. Philippon, Thomas, and Ariell Reshef. 2013. “An International Look at the Growth of Modern Finance.” Journal of Economic Perspectives 27, no. 2: 73–​96. Phillips, Matt. 2010. “Can Words Still Soothe the Market’s Greece Worries?” Wall Street Journal Blogs, April 9. references 595 Pictet Wealth Management. 2016. “Bond Scarcity under New ECB QE Rules—​It Ain’t Over Till It’s Over,” December 14. http://​perspectives. pictet.com/​wp-​content/​uploads/​2016/​12/​Flash-​Note-​FD-​ECB-​QE​bond-​scarcity-​14-​December-​2016-​1.pdf.


pages: 393 words: 115,263

Planet Ponzi by Mitch Feierstein

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

In 1996, the UK boasted a sophisticated, competitive and fully functional financial system. It didn’t need to catch up any more. What happened in the period after 1996 was historically unprecedented‌—‌and inherently implausible. And remember that value added is a measure of output, not profit. If you examine profits, rather than value added, Planet Ponzi’s London division appears even more distended. Between 1948 and 1978, financial intermediation (a subsection of the financial services sector) accounted for around 1.5% of profits in the total economy. By 2008, that ratio had risen tenfold to 15%. That’s such an extreme change as to be effectively impossible. Banks weren’t making those profits, they were simply pretending that they did: manipulating their books to show profits that weren’t, in truth, ever there. The financial bust of 2008–9 showed what happens when some of those wheels started to come off the wagon.


pages: 573 words: 115,489

Prosperity Without Growth: Foundations for the Economy of Tomorrow by Tim Jackson

"Robert Solow", bank run, banking crisis, banks create money, Basel III, basic income, bonus culture, Boris Johnson, business cycle, carbon footprint, Carmen Reinhart, Cass Sunstein, choice architecture, collapse of Lehman Brothers, creative destruction, credit crunch, Credit Default Swap, David Graeber, decarbonisation, dematerialisation, en.wikipedia.org, energy security, financial deregulation, Financial Instability Hypothesis, financial intermediation, full employment, Growth in a Time of Debt, Hans Rosling, Hyman Minsky, income inequality, income per capita, Intergovernmental Panel on Climate Change (IPCC), Internet of things, invisible hand, job satisfaction, John Maynard Keynes: Economic Possibilities for our Grandchildren, Joseph Schumpeter, Kenneth Rogoff, Kickstarter, laissez-faire capitalism, liberal capitalism, Mahatma Gandhi, mass immigration, means of production, meta analysis, meta-analysis, moral hazard, mortgage debt, Naomi Klein, new economy, offshore financial centre, oil shale / tar sands, open economy, paradox of thrift, peak oil, peer-to-peer lending, Philip Mirowski, profit motive, purchasing power parity, quantitative easing, Richard Thaler, road to serfdom, Robert Gordon, Ronald Reagan, science of happiness, secular stagnation, short selling, Simon Kuznets, Skype, smart grid, sovereign wealth fund, Steve Jobs, The Chicago School, The Great Moderation, The Rise and Fall of American Growth, The Spirit Level, The Wealth of Nations by Adam Smith, Thorstein Veblen, too big to fail, universal basic income, Works Progress Administration, World Values Survey, zero-sum game

Community-centred enterprise engaged in delivering local services, such as nutrition, education, care, maintenance and repair, recreation, craft, creativity, culture: these activities contribute to flourishing and are embedded in the community. They have the potential for low carbon footprints and they provide meaningful work. There will still be some role for traditional economic sectors. Resource extraction will diminish in importance, as fewer materials are used and more are recycled. But manufacturing, construction, food and agriculture, retail, communication and financial intermediation will still be important. Doubtless, the digital economy will transform many of these activities. Certainly, they will need to look rather different from the way they do right now. Agriculture will pay more attention to the integrity of the land and the welfare of livestock. Manufacturing will pay more attention to durability and repairability. Construction must prioritise refurbishment of existing buildings and the design of new sustainable and repairable infrastructures.


pages: 471 words: 124,585

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

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, business cycle, capital asset pricing model, capital controls, Carmen Reinhart, Cass Sunstein, central bank independence, collateralized debt obligation, colonial exploitation, commoditize, Corn Laws, corporate governance, creative destruction, 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, information asymmetry, interest rate swap, Intergovernmental Panel on Climate Change (IPCC), Isaac Newton, iterative process, John Meriwether, joint-stock company, joint-stock limited liability company, Joseph Schumpeter, Kenneth Arrow, Kenneth Rogoff, knowledge economy, labour mobility, Landlord’s Game, liberal capitalism, London Interbank Offered Rate, Long Term Capital Management, market bubble, market fundamentalism, means of production, Mikhail Gorbachev, money market fund, money: store of value / unit of account / medium of exchange, moral hazard, mortgage debt, mortgage tax deduction, Myron Scholes, Naomi Klein, negative equity, Nelson Mandela, Nick Leeson, Northern Rock, Parag Khanna, 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, stocks for the long run, structural adjustment programs, technology bubble, The Wealth of Nations by Adam Smith, The Wisdom of Crowds, Thomas Bayes, Thomas Malthus, Thorstein Veblen, too big to fail, transaction costs, undersea cable, value at risk, Washington Consensus, Yom Kippur War

From the nineteenth, futures and options offered more specialized and sophisticated instruments: the first derivatives. And, from the twentieth, households were encouraged, for political reasons, to increase leverage and skew their portfolios in favour of real estate. Economies that combined all these institutional innovations - banks, bond markets, stock markets, insurance and property-owning democracy - performed better over the long run than those that did not, because financial intermediation generally permits a more efficient allocation of resources than, say, feudalism or central planning. For this reason, it is not wholly surprising that the Western financial model tended to spread around the world, first in the guise of imperialism, then in the guise of globalization.1 From ancient Mesopotamia to present-day China, in short, the ascent of money has been one of the driving forces behind human progress: a complex process of innovation, intermediation and integration that has been as vital as the advance of science or the spread of law in mankind’s escape from the drudgery of subsistence agriculture and the misery of the Malthusian trap.


pages: 602 words: 120,848

Winner-Take-All Politics: How Washington Made the Rich Richer-And Turned Its Back on the Middle Class by Paul Pierson, Jacob S. Hacker

accounting loophole / creative accounting, active measures, affirmative action, asset allocation, barriers to entry, Bonfire of the Vanities, business climate, business cycle, carried interest, Cass Sunstein, clean water, collective bargaining, corporate governance, Credit Default Swap, David Brooks, desegregation, employer provided health coverage, financial deregulation, financial innovation, financial intermediation, fixed income, full employment, Home mortgage interest deduction, Howard Zinn, income inequality, invisible hand, knowledge economy, laissez-faire capitalism, Martin Wolf, medical bankruptcy, moral hazard, Nate Silver, new economy, night-watchman state, offshore financial centre, oil shock, Powell Memorandum, Ralph Nader, Ronald Reagan, shareholder value, Silicon Valley, The Wealth of Nations by Adam Smith, too big to fail, trickle-down economics, union organizing, very high income, War on Poverty, winner-take-all economy, women in the workforce

In response to market failures on all these dimensions, the New Deal ushered in extensive new federal regulations designed to ensure investor confidence and align private ambitions more closely with broad economic goals such as financial stability.62 Over the last three decades, these relatively quiet and stable financial markets have given way to much more dynamic and unstable ones with far more pervasive effects on the rest of the economy. Some of the shift was clearly driven by changes in the nature of economic activity and the possibilities for financial intermediation. Technological innovation made possible the development of new financial instruments and facilitated spectacular experiments with securitization. Computers helped Wall Street transform from million-share trading days in the 1980s to billion-share trading days in the late 1990s, magnifying the possibilities for gains—and losses.63 The shredding of the post–New Deal rule book for financial markets did not, however, simply result from the impersonal forces of “financial innovation.”


pages: 538 words: 121,670

Republic, Lost: How Money Corrupts Congress--And a Plan to Stop It by Lawrence Lessig

asset-backed security, banking crisis, carried interest, circulation of elites, cognitive dissonance, corporate personhood, correlation does not imply causation, crony capitalism, David Brooks, Edward Glaeser, Filter Bubble, financial deregulation, financial innovation, financial intermediation, invisible hand, jimmy wales, Martin Wolf, meta analysis, meta-analysis, Mikhail Gorbachev, moral hazard, Pareto efficiency, place-making, profit maximization, Ralph Nader, regulatory arbitrage, rent-seeking, Ronald Reagan, Sam Peltzman, Silicon Valley, single-payer health, The Wealth of Nations by Adam Smith, too big to fail, upwardly mobile, WikiLeaks, Zipcar

Here, too, technology was critical. Technology not only enabled the crafting of complex mortgage-backed securities, but it also allowed mortgage lenders to lend on the basis of a portfolio of borrowers rather than the judgment a che ex bout the creditworthiness of one borrower at a time. See, e.g., William R. Emmons and Stuart I. Greenbaum, “Twin Information Revolutions and the Future of Financial Intermediation,” in Y. Amihud and G. Miller, eds., Mergers and Acquisitions (1998), 37–56; and Mitchell Petersen and Raghuram G. Rajan, “Does Distance Still Matter? The Information Revolution in Small Business Lending,” Journal of Finance 57 (Dec. 2002): 2533–70. 9. Frank Partnoy, Infectious Greed: How Deceit and Risk Corrupted the Financial Markets (New York: Times Books, 2003), 110–13. The crisis was caused when the Fed surprised markets by raising interest rates. 10.


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

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

However, once the industry becomes bigger and fraud inevitably sours some investors, it is likely that there will be calls for the sector to be regulated and required to comply with certain norms of borrowing and lending. Perhaps people will want some insurance to protect them against loan losses. Then, P2P companies begin to look much more like banks. In a way, P2P seems to be reinventing the wheel and substituting one financial intermediary for another. Perhaps the reinvention is necessary because the current wheel is broken, but P2P lending is just another form of financial intermediation for the Internet age. As such, it will likely face the same sorts of problems as banks face, such as profitability concerns for small loans and market pressure from other lenders. P2P lending has been and will likely continue to be a boon to small businesses—especially to artists, musicians, designers, and makers of all sorts who are too small for banks to bother with. But if P2P lending is to help the poor, it will require many socially minded lenders to lend charitably.


pages: 425 words: 122,223

Capital Ideas: The Improbable Origins of Modern Wall Street by Peter L. Bernstein

"Robert Solow", Albert Einstein, asset allocation, backtesting, Benoit Mandelbrot, Black-Scholes formula, Bonfire of the Vanities, Brownian motion, business cycle, buy and hold, buy low sell high, capital asset pricing model, corporate raider, debt deflation, diversified portfolio, Eugene Fama: efficient market hypothesis, financial innovation, financial intermediation, fixed income, full employment, implied volatility, index arbitrage, index fund, interest rate swap, invisible hand, John von Neumann, Joseph Schumpeter, Kenneth Arrow, law of one price, linear programming, Louis Bachelier, mandelbrot fractal, martingale, means of production, money market fund, Myron Scholes, new economy, New Journalism, Paul Samuelson, profit maximization, Ralph Nader, RAND corporation, random walk, Richard Thaler, risk/return, Robert Shiller, Robert Shiller, Ronald Reagan, stochastic process, Thales and the olive presses, the market place, The Predators' Ball, the scientific method, The Wealth of Nations by Adam Smith, Thorstein Veblen, transaction costs, transfer pricing, zero-coupon bond, zero-sum game

Journal of Finance, Vol. XXIX, No. 2 (May), pp. 449–470. Merton, Robert C. 1983. “Paul Samuelson’s Financial Economics.” In Paul Samuelson and Modern Economic Theory, Cary E. Brown and Robert M. Solow, eds. New York: McGraw-Hill Book Company. Merton, Robert C. 1988. Personal statement (unpublished manuscript). Merton, Robert C. 1989. “On the Application of the Continuous-Time Theory of Finance to Financial Intermediation and Insurance.” The Geneva Papers on Risk and Insurance, Vol. 14 (July), pp. 225–262. Merton, Robert C. 1990. Continuous-Time Finance. Cambridge, MA: Basil Blackwell. Miller, Merton H. 1986. “The Academic Field of Finance: Some Observations on Its History and Prospects.” Address at Katholieke Universiteit te Leuven, Leuven, Belgium, May 15. Miller, Merton H. 1987. “Behavioral Rationality in Finance: The Case of Dividends.”


pages: 316 words: 117,228

The Code of Capital: How the Law Creates Wealth and Inequality by Katharina Pistor

"Robert Solow", Andrei Shleifer, Asian financial crisis, asset-backed security, barriers to entry, Bernie Madoff, bilateral investment treaty, bitcoin, blockchain, Bretton Woods, business cycle, business process, Capital in the Twenty-First Century by Thomas Piketty, Carmen Reinhart, central bank independence, collateralized debt obligation, colonial rule, conceptual framework, Corn Laws, corporate governance, creative destruction, Credit Default Swap, credit default swaps / collateralized debt obligations, cryptocurrency, Donald Trump, double helix, Edward Glaeser, Ethereum, ethereum blockchain, facts on the ground, financial innovation, financial intermediation, fixed income, Francis Fukuyama: the end of history, full employment, global reserve currency, Hernando de Soto, income inequality, intangible asset, investor state dispute settlement, invisible hand, joint-stock company, joint-stock limited liability company, Joseph Schumpeter, Kenneth Rogoff, land reform, land tenure, London Interbank Offered Rate, Long Term Capital Management, means of production, money market fund, moral hazard, offshore financial centre, phenotype, Ponzi scheme, price mechanism, price stability, profit maximization, railway mania, regulatory arbitrage, reserve currency, Ronald Coase, Satoshi Nakamoto, secular stagnation, self-driving car, shareholder value, Silicon Valley, smart contracts, software patent, sovereign wealth fund, The Nature of the Firm, The Wealth of Nations by Adam Smith, Thorstein Veblen, time value of money, too big to fail, trade route, transaction costs, Wolfgang Streeck

Although functionally the equivalent of issuing a note that promises redemption in species on demand, deposit accounts passed legal muster and have since become the standard for raising funds from the broader public—another example of effective regulatory arbitrage.34 Competition in finance will always push some to find new ways of making money. State money is boring, as every banker would tell you; it can be used as a means of exchange and to store value, but it does not create much of a return. While every textbook about banking describes financial intermediation as the process by which 92 c h a P te r 4 household savings will be channeled to productive investments, more gains have always been made by minting debt. This private money, however, carries a risk that state money does not, and that is liquidity risk. Only state money comes potentially in unlimited quantities; private money is limited by the willingness of other private actors to accept it and that depends on its prospects to generate future returns.


World Cities and Nation States by Greg Clark, Tim Moonen

active transport: walking or cycling, Asian financial crisis, Berlin Wall, Big bang: deregulation of the City of London, Boris Johnson, business climate, cleantech, congestion charging, corporate governance, deindustrialization, Deng Xiaoping, financial independence, financial intermediation, Francis Fukuyama: the end of history, full employment, global supply chain, global value chain, high net worth, housing crisis, immigration reform, income inequality, informal economy, Kickstarter, knowledge economy, low skilled workers, megacity, new economy, New Urbanism, Norman Mailer, open economy, Pearl River Delta, rent control, Richard Florida, Silicon Valley, smart cities, sovereign wealth fund, special economic zone, stem cell, supply-chain management, The Wealth of Nations by Adam Smith, trade route, transaction costs, transit-oriented development, upwardly mobile, urban planning, urban renewal, urban sprawl, War on Poverty, zero-sum game

Under the moral and ­political aegis of the United Nations, the nation state was ratified and sustained as a sovereign institutional platform that had the final say on the trade of goods, 22 World Cities and Nation States Table 2.1: Differences between traditional and new development policies (developed from OECD) Traditional development policies: ‘Regional planning’ 1950s to 1990s Objectives Strategies Geographical focus Target Balance national economies by compensating for disparities Narrow economic focus Sectoral approach Political regions Lagging regions Context Tools National economy Subsidies, incentives, State aid and regulations Actors National governments and sometimes regional governments New development policies: ‘Territorial development’ 1990s to present Increase regional development performance across the whole nation Integrate economic with spatial, environmental and social development measures Integrated development programmes and projects Metropolitan regions and economic regions All regions – Metropolitan regions – connections between regions and across national borders International economy and local economies Assets, drivers of growth/productivity, soft and hard infrastructures, skills and entrepreneurship, collaboration incentives, development agencies, co‐operative governance, financial intermediation, investment incentives Multiple levels of government, private and civic actors, implementation agencies, collaborative governance. A major role for business and civic institutions the attraction and investment of capital and on the negotiation of trade agreements and strategic alliances. National‐level policies supported processes of mass production and consumption to manage demand, and national political cultures fundamentally shaped the character of their leading cities.


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

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, business cycle, buy and hold, 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, fixed income, Flash crash, floating exchange rates, forward guidance, G4S, George Akerlof, global reserve currency, global supply chain, Growth in a Time of Debt, income inequality, inflation targeting, information asymmetry, invisible hand, jitney, John Meriwether, Kenneth Rogoff, labor-force participation, 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 market fund, 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, undersea cable, uranium enrichment, Washington Consensus, working-age population, yield curve

Min Zhu is helping the IMF to develop a working risk-management model based on complexity, one that is far more advanced than those used by individual central banks or private financial institutions. ■ Updating Keynes Zhu is showing traditional Keynesians how their model of policy action, in conjunction with an individual or corporate response, is obsolete. This two-part action-response model must be modified to place financial intermediation between the policy maker and the economic agent. This distinction is illustrated as follows: Classic Keynesian Model Fiscal/Monetary Policy > Individual/Corporate Response New IMF Model Fiscal/Monetary Policy > Financial Intermediary > Individual/Corporate Response While financial institutions in earlier decades had been predictable and passive players in policy transmission to individual economic actors, today’s financial intermediaries are more active and materially mute or amplify policy makers’ wishes.


pages: 545 words: 137,789

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

"Robert Solow", 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, Blythe Masters, Bretton Woods, British Empire, business cycle, capital asset pricing model, centralized clearinghouse, collateralized debt obligation, Columbine, conceptual framework, Corn Laws, corporate raider, correlation coefficient, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, Daniel Kahneman / Amos Tversky, debt deflation, different worldview, diversification, Elliott wave, Eugene Fama: efficient market hypothesis, financial deregulation, financial innovation, Financial Instability Hypothesis, financial intermediation, full employment, George Akerlof, global supply chain, Gunnar Myrdal, Haight Ashbury, hiring and firing, Hyman Minsky, income per capita, incomplete markets, index fund, information asymmetry, Intergovernmental Panel on Climate Change (IPCC), invisible hand, John Nash: game theory, John von Neumann, Joseph Schumpeter, Kenneth Arrow, Kickstarter, laissez-faire capitalism, Landlord’s Game, liquidity trap, London Interbank Offered Rate, Long Term Capital Management, Louis Bachelier, mandelbrot fractal, margin call, market bubble, market clearing, mental accounting, Mikhail Gorbachev, money market fund, Mont Pelerin Society, moral hazard, mortgage debt, Myron Scholes, Naomi Klein, negative equity, Network effects, Nick Leeson, Northern Rock, paradox of thrift, Pareto efficiency, Paul Samuelson, 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, Vilfredo Pareto, wealth creators, zero-sum game

If information were perfectly accurate and free, there wouldn’t be any need for intermediaries such as banks: businesses could borrow directly from savers. But the fact of the matter is that banks and other financial institutions provide more than half of the financing for American businesses. (The rest comes from the financial markets and from funds that corporations generate internally.) A quick mental experiment might help to explain the principle of financial intermediation. Imagine that you had $100,000 of surplus funds that you wanted to loan out at a reasonable interest rate, say 5 percent a year. If you placed an ad in the local newspaper, or on Craigslist, you would surely get plenty of responses, but would you trust your money to any of the people who replied? Probably not—and for two good reasons. The first one is the lemons problem. All of the potential borrowers who showed up at your door would have business ideas for which they wanted money, but you would have no way of telling which ones were genuine opportunities and which were likely to fail.


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People, Power, and Profits: Progressive Capitalism for an Age of Discontent by Joseph E. Stiglitz

"Robert Solow", affirmative action, Affordable Care Act / Obamacare, barriers to entry, basic income, battle of ideas, Berlin Wall, Bernie Madoff, Bernie Sanders, business cycle, Capital in the Twenty-First Century by Thomas Piketty, carried interest, central bank independence, clean water, collective bargaining, corporate governance, corporate social responsibility, creative destruction, Credit Default Swap, crony capitalism, deglobalization, deindustrialization, disintermediation, diversified portfolio, Donald Trump, Edward Snowden, Elon Musk, Erik Brynjolfsson, Fall of the Berlin Wall, financial deregulation, financial innovation, financial intermediation, Firefox, Fractional reserve banking, Francis Fukuyama: the end of history, full employment, George Akerlof, gig economy, global supply chain, greed is good, income inequality, information asymmetry, invisible hand, Isaac Newton, Jean Tirole, Jeff Bezos, job automation, John Maynard Keynes: Economic Possibilities for our Grandchildren, John von Neumann, Joseph Schumpeter, labor-force participation, late fees, low skilled workers, Mark Zuckerberg, market fundamentalism, mass incarceration, meta analysis, meta-analysis, minimum wage unemployment, moral hazard, new economy, New Urbanism, obamacare, patent troll, Paul Samuelson, pension reform, Peter Thiel, postindustrial economy, price discrimination, principal–agent problem, profit maximization, purchasing power parity, race to the bottom, Ralph Nader, rent-seeking, Richard Thaler, Robert Bork, Robert Gordon, Robert Mercer, Robert Shiller, Robert Shiller, Ronald Reagan, secular stagnation, self-driving car, shareholder value, Shoshana Zuboff, Silicon Valley, Simon Kuznets, South China Sea, sovereign wealth fund, speech recognition, Steve Jobs, The Chicago School, The Future of Employment, The Great Moderation, the market place, The Rise and Fall of American Growth, the scientific method, The Wealth of Nations by Adam Smith, too big to fail, trade liberalization, transaction costs, trickle-down economics, two-sided market, universal basic income, Unsafe at Any Speed, Upton Sinclair, uranium enrichment, War on Poverty, working-age population

/tax-cuts-and-jobs-act-stock-market-economy. 17.In the modern literature, these are referred to as the adverse incentive and adverse selection effects of increasing interest rates. See, e.g., Joseph E. Stiglitz and Andrew Weiss, “Credit Rationing in Markets with Imperfect Information,” American Economic Review 71, no. 3 (1981): 393–410. 18.Though it had its origins back in the early 1990s. See Vitaly M. Bord and Joao A. C. Santos, “The Rise of the Originate-to-Distribute Model and the Role of Banks In Financial Intermediation,” Federal Reserve Bank of New York Policy Review, July 2012, 21–34, available at https://www.newyorkfed.org/medialibrary/media/research/epr/12v18n2/1207bord.pdf. 19.The role of reserves can be seen quite simply. Assume the bank has deposits of $1000 and lends $1000, but a net worth of $100 held in reserves; if more than 10 percent of the loans go bad, it gets back less than $900, which with the $100 in reserves, is insufficient to repay the depositors.


Adam Smith: Father of Economics by Jesse Norman

"Robert Solow", active measures, Andrei Shleifer, balance sheet recession, bank run, banking crisis, Basel III, Berlin Wall, Black Swan, Branko Milanovic, Bretton Woods, British Empire, Broken windows theory, business cycle, business process, Capital in the Twenty-First Century by Thomas Piketty, Carmen Reinhart, centre right, cognitive dissonance, collateralized debt obligation, colonial exploitation, Corn Laws, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, David Brooks, David Ricardo: comparative advantage, deindustrialization, Eugene Fama: efficient market hypothesis, experimental economics, Fall of the Berlin Wall, Fellow of the Royal Society, financial intermediation, frictionless, frictionless market, future of work, George Akerlof, Hyman Minsky, income inequality, incomplete markets, information asymmetry, intangible asset, invention of the telescope, invisible hand, Isaac Newton, Jean Tirole, John Nash: game theory, joint-stock company, Joseph Schumpeter, Kenneth Arrow, Kenneth Rogoff, lateral thinking, loss aversion, market bubble, market fundamentalism, Martin Wolf, means of production, money market fund, Mont Pelerin Society, moral hazard, moral panic, Naomi Klein, negative equity, Network effects, new economy, non-tariff barriers, Northern Rock, Pareto efficiency, Paul Samuelson, Peter Thiel, Philip Mirowski, price mechanism, principal–agent problem, profit maximization, purchasing power parity, random walk, rent-seeking, Richard Thaler, Robert Shiller, Robert Shiller, Ronald Coase, scientific worldview, seigniorage, Socratic dialogue, South Sea Bubble, special economic zone, speech recognition, Steven Pinker, The Chicago School, The Myth of the Rational Market, The Nature of the Firm, The Rise and Fall of American Growth, The Wealth of Nations by Adam Smith, The Wisdom of Crowds, theory of mind, Thomas Malthus, Thorstein Veblen, time value of money, transaction costs, transfer pricing, Veblen good, Vilfredo Pareto, Washington Consensus, working poor, zero-sum game

As Andy Haldane, the Chief Economist of the Bank of England, has pointed out, ‘In 1980, there was one UK regulator for roughly every 11,000 people employed in the UK financial sector. By 2011, there was one regulator for every 300 people.’ The effect of these trends has largely been to reduce competition, drive up costs and further disconnect the banking system from the public interest. Thus the unit cost of US financial intermediation has not fallen in a hundred years, as Haldane shows, despite astonishing breakthroughs in technology and immense cost reductions in other service industries. In the UK, far from commercial banks supporting business growth, only around 10 per cent of bank lending goes towards company and enterprise investment outside commercial property. Meanwhile, some 10 million US households and 1.5 million UK adults still have no bank account at all.


pages: 464 words: 139,088

The End of Alchemy: Money, Banking and the Future of the Global Economy by Mervyn King

"Robert Solow", Andrei Shleifer, Asian financial crisis, asset-backed security, balance sheet recession, bank run, banking crisis, banks create money, Berlin Wall, Bernie Madoff, Big bang: deregulation of the City of London, bitcoin, Black Swan, Bretton Woods, British Empire, business cycle, capital controls, Carmen Reinhart, Cass Sunstein, central bank independence, centre right, collapse of Lehman Brothers, creative destruction, Credit Default Swap, crowdsourcing, Daniel Kahneman / Amos Tversky, David Ricardo: comparative advantage, distributed generation, Doha Development Round, Edmond Halley, Fall of the Berlin Wall, falling living standards, fiat currency, financial innovation, financial intermediation, floating exchange rates, forward guidance, Fractional reserve banking, Francis Fukuyama: the end of history, full employment, German hyperinflation, Hyman Minsky, inflation targeting, invisible hand, John Maynard Keynes: Economic Possibilities for our Grandchildren, John Meriwether, joint-stock company, Joseph Schumpeter, Kenneth Arrow, Kenneth Rogoff, labour market flexibility, large denomination, lateral thinking, liquidity trap, Long Term Capital Management, manufacturing employment, market clearing, Martin Wolf, Mexican peso crisis / tequila crisis, money market fund, money: store of value / unit of account / medium of exchange, moral hazard, Myron Scholes, Nick Leeson, North Sea oil, Northern Rock, oil shale / tar sands, oil shock, open economy, paradox of thrift, Paul Samuelson, Ponzi scheme, price mechanism, price stability, purchasing power parity, quantitative easing, rent-seeking, reserve currency, Richard Thaler, rising living standards, Robert Shiller, Robert Shiller, Satoshi Nakamoto, savings glut, secular stagnation, seigniorage, stem cell, Steve Jobs, The Great Moderation, the payments system, The Rise and Fall of American Growth, Thomas Malthus, too big to fail, transaction costs, Tyler Cowen: Great Stagnation, yield curve, Yom Kippur War, zero-sum game

It would be easy for the banking community to portray such a move as unwarranted interference in the management of private banks, and even the much more limited ring-fencing adopted in the UK has come under attack for precisely this reason. Second, the complete separation of banks into two extreme types – narrow and wide – denies the chance to exploit potential economic benefits from allowing financial intermediaries to explore and develop different ways of linking savers, with a preference for safety and liquidity, and borrowers, with a desire to borrow flexibly and over a long period. Constraining financial intermediation would mean that the cost of financing investment in plant and equipment, houses and other real assets would be higher. The potential efficiencies in using different ways of bringing savers and investors together would be lost by legally mandating a complete prohibition on the financing of risky assets by safe deposits – provided that we could find other ways, as I discuss below, of following a path that would lead to the end of alchemy.


Principles of Corporate Finance by Richard A. Brealey, Stewart C. Myers, Franklin Allen

3Com Palm IPO, accounting loophole / creative accounting, Airbus A320, Asian financial crisis, asset allocation, asset-backed security, banking crisis, Bernie Madoff, big-box store, Black-Scholes formula, break the buck, Brownian motion, business cycle, buy and hold, buy low sell high, capital asset pricing model, capital controls, Carmen Reinhart, carried interest, collateralized debt obligation, compound rate of return, computerized trading, conceptual framework, corporate governance, correlation coefficient, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, cross-subsidies, discounted cash flows, disintermediation, diversified portfolio, equity premium, eurozone crisis, financial innovation, financial intermediation, fixed income, frictionless, fudge factor, German hyperinflation, implied volatility, index fund, information asymmetry, intangible asset, interest rate swap, inventory management, Iridium satellite, Kenneth Rogoff, law of one price, linear programming, Livingstone, I presume, London Interbank Offered Rate, Long Term Capital Management, loss aversion, Louis Bachelier, market bubble, market friction, money market fund, moral hazard, Myron Scholes, new economy, Nick Leeson, Northern Rock, offshore financial centre, Ponzi scheme, prediction markets, price discrimination, principal–agent problem, profit maximization, purchasing power parity, QR code, quantitative trading / quantitative finance, random walk, Real Time Gross Settlement, risk tolerance, risk/return, Robert Shiller, Robert Shiller, shareholder value, Sharpe ratio, short selling, Silicon Valley, Skype, Steve Jobs, The Nature of the Firm, the payments system, the rule of 72, time value of money, too big to fail, transaction costs, University of East Anglia, urban renewal, VA Linux, value at risk, Vanguard fund, yield curve, zero-coupon bond, zero-sum game, Zipcar

Some Evidence from International Data,” Journal of Finance 50 (December 1995), pp. 1421–1460. For a discussion of the allocation of control rights and cash-flow rights between stockholders and debt holders, see: O. Hart, Firms, Contracts, and Financial Structure (Oxford: Oxford University Press, 1995). Robert Merton gives an excellent overview of the functions of financial institutions in: R. Merton, “A Functional Perspective of Financial Intermediation,” Financial Management 24 (Summer 1995), 23–41. The Winter 2009 issue of the Journal of Financial Perspectives contains several articles on the crisis of 2007–2009. See also: V. V. Acharya and M. W. Richardson, eds., Restoring Financial Stability (Hoboken, NJ: John Wiley & Sons, 2009). The following works cover financial crises more generally: F. Allen and E. Carletti, “An Overview of the Crisis: Causes, Consequences and Solutions,” International Review of Finance 10 (March 2010), pp. 1–27.

Private equity Figure 32.2 shows how a private equity partnership is organized in the U.S. Do you think that this same type of organization will work in other countries with different laws and financial institutions? For a start in thinking about this question, review Section 15.1 and read the following article: S. Kaplan, F. Martel and P. Stromberg, “How do Legal Institutions and Experience Affect Financial Contracts?” Journal of Financial Intermediation 16 (2007), pp. 273–311. ___________ 1N. Mohan and C. R. Chen track the abnormal returns of RJR securities in “A Review of the RJR Nabisco Buyout,” Journal of Applied Corporate Finance 3 (Summer 1990), pp. 102–108. 2The whole story is reconstructed by B. Burrough and J. Helyar in Barbarians at the Gate: The Fall of RJR Nabisco (New York: Harper & Row 1990)—see especially Chapter 18—and in a movie with the same title. 3C.

Gale, “Financial Markets, Intermediaries, and Intertemporal Smoothing,” Journal of Political Economy 105 (June 1997), pp. 523–546. 28See M. Porter, “Capital Disadvantage: America’s Failing Capital Investment System,” Harvard Business Review, September/October 1992, pp. 65–82. 29There are counterexamples, such as the development of the chemical industry on a large scale in nineteenth-century Germany. 30See F. Allen and D. Gale, “Diversity of Opinion and the Financing of New Technologies,” Journal of Financial Intermediation 8 (April 1999), pp. 68–89. 31See R. Rajan and L. Zingales, “Banks and Markets: The Changing Character of European Finance,” in V. Gaspar, P. Hartmann, O. Sleijpen (eds.), The Transformation of the European Financial System, Second ECB Central Banking Conference, October 2002, Frankfurt, Germany (Frankfurt: European Central Bank, 2003), pp. 123–167. 32T. Hoshi and A. Kashyap, “Japan’s Financial Crisis and Economic Stagnation,” Journal of Economic Perspectives 18 (Winter 2004), pp. 3–26. 33Enron faced many further financial problems.


pages: 488 words: 144,145

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

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

In fact it would not be until the late 1990s, or half a century later, when U.S. economic growth levels had begun to slow and financial speculation again grew to significant levels, that the amount of private debt to GDP would again reach 200 percent and then go even higher.14 The decline in the rate of private investment during the New Deal and the fact that private debt in the United States did not reach the levels of the Roaring Twenties until 1996 has implications for how to interpret the subsequent decades. Benjamin Friedman found that there were three major trends in the U.S. financial markets in the postwar period: an increase in private borrowing, the rise of the use of financial intermediaries, and the increased reliance upon government guarantees, regulation, and financial intermediation by government agencies.15 The sustained rise in private debt financing observed following the end of WWII was made more dramatic by the sharp decline in the previous 20 years. Likewise the introduction of government support for housing and other types of domestic infrastructure projects, such as roads, bridges and other improvements, slowly changed the nature of the U.S. economy and made possible the real estate boom of the 1990s and 2000s.


pages: 423 words: 149,033

The fortune at the bottom of the pyramid by C. K. Prahalad

barriers to entry, business cycle, business process, call centre, cashless society, clean water, collective bargaining, corporate social responsibility, deskilling, disintermediation, farmers can use mobile phones to check market prices, financial intermediation, Hernando de Soto, hiring and firing, income inequality, information asymmetry, late fees, Mahatma Gandhi, market fragmentation, microcredit, new economy, profit motive, purchasing power parity, rent-seeking, shareholder value, The Fortune at the Bottom of the Pyramid, time value of money, transaction costs, wealth creators, working poor

Additionally, these MFIs were experiencing low savings to credit ratios, liquidity problems, high capacity-building costs and general The Fortune at the Bottom of the Pyramid 296 Represents value loss = Supply focus of MNCs = Economic pyramid Represents value opportunity Figure 3 Value opportunity and value loss. inefficiencies. ICICI saw a real opportunity in this area because many of the problems and risks with microfinance could be alleviated by the capital, expertise, scale, and reach of a major bank. By entering the microfinance field, ICICI has taken on the role of social mobilization as well as financial intermediation. In addition to looking at microfinance, ICICI also wanted to increase its banking presence in rural areas. To do this, the bank needed to rapidly proliferate its points-of-presence or distribution points. However, the traditional brick-and-mortar approach to expansion is prohibitively expensive given the vast and varied landscape of India. Additionally, it is very difficult to staff rural branches with competent bankers either because educated urbanites do not want to live in these areas or there is a paucity of qualified locals.


pages: 543 words: 147,357

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

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

Harvey and Shiva Rajgopal (2005) ‘The Economic Implications of Corporate Financial Reporting’, Journal of Accounting and Economics 40: 3–73. 24 Sanjeev Bhojraj, Paul Hribar, Marc Picconi and John McInnis (2009) ‘Making Sense of Cents: An Examination of Firms That Marginally Miss or Beat Analysts Forecasts’, Journal of Finance 64: 2359–86. 25 Stephen Davis, Jon Lukomnik and David Pitt-Watson (2006) The New Capitalists: How Citizen Investors Are Reshaping the Corporate Agenda, Harvard Business School Press. 26 Peter Hall and David Soskice (2001) Varieties of Capitalism: The Institutional Foundations of Comparative Advantage, Oxford University Press. See also Wendy Carlin and Colin Mayer, ‘Finance, Investment and Growth’, Journal of Financial Economics 69 (1): 191–226. 27 Franklin Allen, ‘Stock Markets and Resource Allocation’, in Colin Mayer and Xavier Vives (eds) (1993) Capital Markets and Financial Intermediation, Cambridge University Press. 28 Marcos Mollica and Luigi Zingales (2007) ‘The Impact of Venture Capital on Innovation and the Creation of New Businesses’, mimeo, University of Chicago. 29 Figures from Nottingham University Business School’s Centre for Management Buy-out Research, at http://www.nottingham.ac.uk/business/cmbor/Privateequity.html. 30 Nick Bloom, Raffaella Sadun and John Van Reenen (2009) ‘Do Private Equity Owned Firms Have Better Management Practices?’


pages: 504 words: 143,303

Why We Can't Afford the Rich by Andrew Sayer

accounting loophole / creative accounting, Albert Einstein, anti-globalists, asset-backed security, banking crisis, banks create money, basic income, Boris Johnson, Bretton Woods, British Empire, business cycle, call centre, capital controls, carbon footprint, collective bargaining, corporate raider, corporate social responsibility, creative destruction, credit crunch, Credit Default Swap, crony capitalism, David Graeber, David Ricardo: comparative advantage, debt deflation, decarbonisation, declining real wages, deglobalization, deindustrialization, delayed gratification, demand response, don't be evil, Double Irish / Dutch Sandwich, en.wikipedia.org, Etonian, financial innovation, financial intermediation, Fractional reserve banking, full employment, G4S, Goldman Sachs: Vampire Squid, high net worth, income inequality, information asymmetry, Intergovernmental Panel on Climate Change (IPCC), investor state dispute settlement, Isaac Newton, James Dyson, job automation, Julian Assange, Kickstarter, labour market flexibility, laissez-faire capitalism, land value tax, low skilled workers, Mark Zuckerberg, market fundamentalism, Martin Wolf, mass immigration, means of production, moral hazard, mortgage debt, negative equity, neoliberal agenda, new economy, New Urbanism, Northern Rock, Occupy movement, offshore financial centre, oil shale / tar sands, patent troll, payday loans, Philip Mirowski, plutocrats, Plutocrats, popular capitalism, predatory finance, price stability, pushing on a string, quantitative easing, race to the bottom, rent-seeking, Ronald Reagan, shareholder value, short selling, sovereign wealth fund, Steve Jobs, The Nature of the Firm, The Spirit Level, The Wealth of Nations by Adam Smith, Thorstein Veblen, too big to fail, transfer pricing, trickle-down economics, universal basic income, unpaid internship, upwardly mobile, Washington Consensus, wealth creators, WikiLeaks, Winter of Discontent, working poor, Yom Kippur War, zero-sum game

(As we saw, even if it isn’t a rentier organisation, their position still allows them to take a bigger share than others, over and above what their contribution might warrant.) So the fact that they are smart and workaholic doesn’t mean that they deserve their huge salaries. In the UK, it’s no surprise that the biggest concentration of the top 0.1%, with gross incomes of over £351,137, is in jobs where wealth-extraction opportunities are prominent – in financial intermediation (30%) and real estate, renting and other business activities (39%). Bonus payments are heavily concentrated at the top of the income distribution; the top 1% of employees get 40% of their annual pay in bonuses, while the bottom 90% get only 5% of their pay in bonuses. In the financial sector, over 25% of pay is in the form of cash bonuses, again heavily concentrated at the top, and often supplemented by bonuses in shares and options.121 Nor is it a surprise that 34% of the top 0.1% are company directors, and 24% of those in the rest of the top 1% are too, for this is a job that allows control over the disposal of company revenues.122 Those at the top are always likely to look after themselves before others.


India's Long Road by Vijay Joshi

Affordable Care Act / Obamacare, barriers to entry, Basel III, basic income, blue-collar work, Bretton Woods, business climate, capital controls, central bank independence, clean water, collapse of Lehman Brothers, collective bargaining, colonial rule, congestion charging, corporate governance, creative destruction, crony capitalism, decarbonisation, deindustrialization, demographic dividend, demographic transition, Doha Development Round, eurozone crisis, facts on the ground, failed state, financial intermediation, financial repression, first-past-the-post, floating exchange rates, full employment, germ theory of disease, Gini coefficient, global supply chain, global value chain, hiring and firing, income inequality, Indoor air pollution, Induced demand, inflation targeting, invisible hand, land reform, Mahatma Gandhi, manufacturing employment, Martin Wolf, means of production, microcredit, moral hazard, obamacare, Pareto efficiency, price mechanism, price stability, principal–agent problem, profit maximization, profit motive, purchasing power parity, quantitative easing, race to the bottom, randomized controlled trial, rent-seeking, reserve currency, rising living standards, school choice, school vouchers, secular stagnation, Silicon Valley, smart cities, South China Sea, special drawing rights, The Future of Employment, The Market for Lemons, too big to fail, total factor productivity, trade liberalization, transaction costs, universal basic income, urban sprawl, working-age population

They are expected primarily to reach poorer customers through mobile phones. Twelve ‘small finance banks’ have also been licensed. These have to have a larger capital base than payments banks and will be allowed to lend, with the restriction that 75 per cent of lending will have to be for priority sectors such as agriculture and small and medium enterprises. Despite teething problems, these various moves have the potential to increase financial intermediation at the lower end of the market, shake up the sclerotic Indian banking system by increasing competition, and eventually spur economic growth. (Needless to say, increased competition will have to be accompanied by sensible regulation.) AGRICULTURE Agriculture now accounts for only 15 per cent of GDP but the sector still contains nearly half of the country’s workforce and two-​thirds of the country’s poor.


pages: 547 words: 172,226

Why Nations Fail: The Origins of Power, Prosperity, and Poverty by Daron Acemoglu, James Robinson

"Robert Solow", Admiral Zheng, agricultural Revolution, Albert Einstein, Andrei Shleifer, Atahualpa, banking crisis, Bartolomé de las Casas, Berlin Wall, blood diamonds, BRICs, British Empire, central bank independence, clean water, collective bargaining, colonial rule, conceptual framework, Corn Laws, creative destruction, crony capitalism, Deng Xiaoping, desegregation, discovery of the americas, en.wikipedia.org, European colonialism, failed state, Fall of the Berlin Wall, falling living standards, financial independence, financial innovation, financial intermediation, Francis Fukuyama: the end of history, Francisco Pizarro, full employment, income inequality, income per capita, indoor plumbing, invention of movable type, invisible hand, James Hargreaves, James Watt: steam engine, Jeff Bezos, joint-stock company, Joseph Schumpeter, Kickstarter, land reform, mass immigration, Mikhail Gorbachev, minimum wage unemployment, Mohammed Bouazizi, Paul Samuelson, price stability, profit motive, Rosa Parks, Scramble for Africa, Simon Kuznets, spice trade, spinning jenny, Steve Ballmer, Steve Jobs, trade liberalization, trade route, transatlantic slave trade, union organizing, upwardly mobile, Washington Consensus, working poor

But selling patents was a good idea only for someone like Edison, who had ideas faster than he could put them to practice. (He had a world-record 1,093 patents issued to him in the United States and 1,500 worldwide.) The real way to make money from a patent was to start your own business. But to start a business, you need capital, and you need banks to lend the capital to you. Inventors in the United States were once again fortunate. During the nineteenth century there was a rapid expansion of financial intermediation and banking that was a crucial facilitator of the rapid growth and industrialization that the economy experienced. While in 1818 there were 338 banks in operation in the United States, with total assets of $160 million, by 1914 there were 27,864 banks, with total assets of $27.3 billion. Potential inventors in the United States had ready access to capital to start their businesses. Moreover, the intense competition among banks and financial institutions in the United States meant that this capital was available at fairly low interest rates.


pages: 584 words: 187,436

More Money Than God: Hedge Funds and the Making of a New Elite by Sebastian Mallaby

Andrei Shleifer, Asian financial crisis, asset-backed security, automated trading system, bank run, barriers to entry, Benoit Mandelbrot, Berlin Wall, Bernie Madoff, Big bang: deregulation of the City of London, Bonfire of the Vanities, Bretton Woods, business cycle, buy and hold, capital controls, Carmen Reinhart, collapse of Lehman Brothers, collateralized debt obligation, computerized trading, corporate raider, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, currency manipulation / currency intervention, currency peg, Elliott wave, Eugene Fama: efficient market hypothesis, failed state, Fall of the Berlin Wall, financial deregulation, financial innovation, financial intermediation, fixed income, full employment, German hyperinflation, High speed trading, index fund, John Meriwether, Kenneth Rogoff, Kickstarter, Long Term Capital Management, margin call, market bubble, market clearing, market fundamentalism, merger arbitrage, money market fund, moral hazard, Myron Scholes, natural language processing, Network effects, new economy, Nikolai Kondratiev, pattern recognition, Paul Samuelson, pre–internet, quantitative hedge fund, quantitative trading / quantitative finance, random walk, Renaissance Technologies, Richard Thaler, risk-adjusted returns, risk/return, Robert Mercer, rolodex, Sharpe ratio, short selling, Silicon Valley, South Sea Bubble, sovereign wealth fund, statistical arbitrage, statistical model, survivorship bias, technology bubble, The Great Moderation, The Myth of the Rational Market, the new new thing, too big to fail, transaction costs

See the introduction to Peter Blair Henry, “Capital Account Liberalization: Theory, Evidence and Speculation,” Journal of Economic Literature 45 (December 2007), pp. 887–935. For the sevenfold increase in manufacturing wages, see Peter Blair Henry and Diego Sasson, “Capital Account Liberalization, Real Wages and Productivity” (working paper, March 2008). Also relevant is Ross Levine, Norman Loayza, and Thorsten Beck, “Financial Intermediation and Growth: Causality and Causes,” Journal of Monetary Economics 46, no. 1 (2000). This paper finds that a doubling in the size of private credit in an average developing country is associated with a 2 percentage point rise in annual economic growth, meaning that after thirty-five years the economy would be twice as large as it would have been without ample opportunities to borrow. 7.


pages: 823 words: 206,070

The Making of Global Capitalism by Leo Panitch, Sam Gindin

accounting loophole / creative accounting, active measures, 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, business cycle, call centre, capital controls, Capital in the Twenty-First Century by Thomas Piketty, Carmen Reinhart, central bank independence, collective bargaining, continuous integration, corporate governance, creative destruction, 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, Kickstarter, land reform, late capitalism, liberal capitalism, liquidity trap, London Interbank Offered Rate, Long Term Capital Management, manufacturing employment, market bubble, market fundamentalism, Martin Wolf, means of production, money market fund, money: store of value / unit of account / medium of exchange, Monroe Doctrine, moral hazard, mortgage debt, mortgage tax deduction, Myron Scholes, 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, zero-sum game

Nevertheless, the generally decentralized and fragmented nature of American finance remained, and, as Konings has shown, it was largely because of this feature that the US financial system “held together by intricate networks of domestically grown institutional relations . . . [and] a complex set of linkages between banks and the stock market . . . was marked by capacities for liquidity creation and a degree of dynamism that had never been available to British banks.”20 Although this distinctive kind of financial intermediation would leave the US economy more prone to financial crises and initially limit the international role of the dollar, it would prove important for the eventual global dominance of US finance. American capital had in fact begun to invest and accumulate abroad long before the 1890s, although the banks played a very small part in this, at least until World War I. Even before the Civil War, the US had become the world leader in machine tools, guns, reapers, and sewing machines (all already linked with mass production), and the decades after the war spawned a new communications revolution worldwide with the telegraph, the telephone, the phonograph, and the microphone.


Migrant City: A New History of London by Panikos Panayi

Big bang: deregulation of the City of London, British Empire, Brixton riot, call centre, discovery of the americas, en.wikipedia.org, financial intermediation, ghettoisation, gig economy, glass ceiling, haute cuisine, immigration reform, income inequality, Mahatma Gandhi, manufacturing employment, mass immigration, multicultural london english, New Urbanism, offshore financial centre, plutocrats, Plutocrats, transatlantic slave trade, upwardly mobile, urban sprawl, white flight

By 1978 83.5 per cent of Jews in Redbridge owned their own homes compared with just 55 per cent for the population of the UK as a whole. Jews also revealed a much higher rate of university education.118 Such trends have continued into the twenty-first century. Jews held higher educational qualifications than the population as a whole,119 were more likely to work in ‘real estate, renting and business activities’, education and ‘financial intermediation’, and were also more likely to hold positions as ‘managers and senior officials’ as well as ‘corporate managers’, and ‘managers and proprietors in services’.120 The wealthiest Jews in Britain have included the descendants of both the nineteenth-century elites and the Russian refugees. We can reel out numerous names such as the Rothschilds, the Samuels, descended from Marcus Samuel who founded Shell, the Goldsmids and the Waley-Cohens amongst the former category, for example.121 These had originated as international families and continued to remain so, despite their assimilation and Anglicization.


pages: 920 words: 233,102

Unelected Power: The Quest for Legitimacy in Central Banking and the Regulatory State by Paul Tucker

Andrei Shleifer, bank run, banking crisis, barriers to entry, Basel III, battle of ideas, Ben Bernanke: helicopter money, Berlin Wall, Bretton Woods, business cycle, capital controls, Carmen Reinhart, Cass Sunstein, central bank independence, centre right, conceptual framework, corporate governance, diversified portfolio, Fall of the Berlin Wall, financial innovation, financial intermediation, financial repression, first-past-the-post, floating exchange rates, forensic accounting, forward guidance, Fractional reserve banking, Francis Fukuyama: the end of history, full employment, George Akerlof, incomplete markets, inflation targeting, information asymmetry, invisible hand, iterative process, Jean Tirole, Joseph Schumpeter, Kenneth Arrow, Kenneth Rogoff, liberal capitalism, light touch regulation, Long Term Capital Management, means of production, money market fund, Mont Pelerin Society, moral hazard, Northern Rock, Pareto efficiency, Paul Samuelson, price mechanism, price stability, principal–agent problem, profit maximization, quantitative easing, regulatory arbitrage, reserve currency, risk tolerance, risk-adjusted returns, road to serfdom, Robert Bork, Ronald Coase, seigniorage, short selling, Social Responsibility of Business Is to Increase Its Profits, stochastic process, The Chicago School, The Great Moderation, The Market for Lemons, the payments system, too big to fail, transaction costs, Vilfredo Pareto, Washington Consensus, yield curve, zero-coupon bond, zero-sum game

Policy statement on the scenario design framework for stress testing: https://www.federalreserve.gov/supervisionreg/dfa-stress-tests. 20 This problem is recognized but, in my view, not solved in Amtenbrink and Lastra, “Securing Democratic Accountability.” 21 Transparency is not complete: notably, the regulator’s own models are not published given the risk of gaming by the banks (Tarullo, “Departing Thoughts”), although that may change. 22 Constancio, “Macroprudential Stress Tests.” 23 Cecchetti and Tucker, “International Cooperation?” (While in office, I discussed inviting in materially interested observers with at least one overseas counterpart.) 24 Lehmann, “Varying Standards.” 22 Central Banking and the Fiscal State BALANCE-SHEET POLICY AND THE FISCAL CARVE-OUT The Federal Reserve … is, in effect, acting as the world’s largest financial intermediator.… Independence in a democratic society ultimately depends on … not be[ing] asked to do too much. —Paul Volcker, August 20131 Perhaps the most charged area for central bankers and their political overseers is their role in what is known as credit policy: public policy designed directly to stimulate the supply of credit by private sector institutions to private sector borrowers and, perhaps, even to steer it toward particular sectors or regions.


pages: 976 words: 235,576

The Meritocracy Trap: How America's Foundational Myth Feeds Inequality, Dismantles the Middle Class, and Devours the Elite by Daniel Markovits

"Robert Solow", 8-hour work day, activist fund / activist shareholder / activist investor, affirmative action, Anton Chekhov, asset-backed security, assortative mating, basic income, Bernie Sanders, big-box store, business cycle, capital asset pricing model, Capital in the Twenty-First Century by Thomas Piketty, carried interest, collateralized debt obligation, collective bargaining, computer age, corporate governance, corporate raider, crony capitalism, David Brooks, deskilling, Detroit bankruptcy, disruptive innovation, Donald Trump, Edward Glaeser, Emanuel Derman, equity premium, European colonialism, everywhere but in the productivity statistics, fear of failure, financial innovation, financial intermediation, fixed income, Ford paid five dollars a day, Frederick Winslow Taylor, full employment, future of work, gender pay gap, George Akerlof, Gini coefficient, glass ceiling, helicopter parent, high net worth, hiring and firing, income inequality, industrial robot, interchangeable parts, invention of agriculture, Jaron Lanier, Jeff Bezos, job automation, job satisfaction, John Maynard Keynes: Economic Possibilities for our Grandchildren, knowledge economy, knowledge worker, Kodak vs Instagram, labor-force participation, longitudinal study, low skilled workers, manufacturing employment, Mark Zuckerberg, Martin Wolf, mass incarceration, medical residency, minimum wage unemployment, Myron Scholes, Nate Silver, New Economic Geography, new economy, offshore financial centre, Paul Samuelson, payday loans, plutocrats, Plutocrats, Plutonomy: Buying Luxury, Explaining Global Imbalances, precariat, purchasing power parity, rent-seeking, Richard Florida, Robert Gordon, Robert Shiller, Robert Shiller, Ronald Reagan, savings glut, school choice, shareholder value, Silicon Valley, Simon Kuznets, six sigma, Skype, stakhanovite, stem cell, Steve Jobs, supply-chain management, telemarketer, The Bell Curve by Richard Herrnstein and Charles Murray, Thomas Davenport, Thorstein Veblen, too big to fail, total factor productivity, transaction costs, traveling salesman, universal basic income, unpaid internship, Vanguard fund, War on Poverty, Winter of Discontent, women in the workforce, working poor, young professional, zero-sum game

The gains that elite workers produce in a meritocratic world—where inequality-induced innovation has biased production toward their peculiar skills—should therefore be discounted by the reduced productivity that these innovations impose on non-elite workers. The precise balance between gain and loss of course remains speculative. But the best evidence suggests that the elite’s true product may be near zero. For all its innovations, modern finance seems not to have reduced the total transaction costs of financial intermediation or to have reduced the share of fundamental economic risk borne by the median household, for example. And modern management seems not to have improved the overall performance of American firms (although it may have increased returns specifically to investors). More generally, rising meritocratic inequality has not been accompanied by accelerating economic growth or increasing productivity.


Wealth and Poverty of Nations by David S. Landes

"Robert Solow", Admiral Zheng, affirmative action, agricultural Revolution, Atahualpa, Ayatollah Khomeini, Bartolomé de las Casas, British Empire, business cycle, Cape to Cairo, clean water, colonial rule, Columbian Exchange, computer age, David Ricardo: comparative advantage, deindustrialization, deskilling, European colonialism, Fellow of the Royal Society, financial intermediation, Francisco Pizarro, germ theory of disease, glass ceiling, illegal immigration, income inequality, Index librorum prohibitorum, interchangeable parts, invention of agriculture, invention of movable type, invisible hand, Isaac Newton, James Watt: steam engine, John Harrison: Longitude, joint-stock company, Just-in-time delivery, Kenneth Arrow, land tenure, lateral thinking, mass immigration, Mexican peso crisis / tequila crisis, MITM: man-in-the-middle, Monroe Doctrine, Murano, Venice glass, new economy, New Urbanism, North Sea oil, out of africa, passive investing, Paul Erdős, Paul Samuelson, Philip Mirowski, rent-seeking, Right to Buy, Scramble for Africa, Simon Kuznets, South China Sea, spice trade, spinning jenny, The Wealth of Nations by Adam Smith, trade route, transaction costs, transatlantic slave trade, Vilfredo Pareto, zero-sum game

Britain trained a factory labor force and accumulated capital as it went. In those early days, machines were typically small and cheap. Scale was small. Older buildings could be converted to industrial use. In short, threshold requirements were modest. S o British enterprise could grow by plowing back earnings, by pooling personal resources, by borrowing from relatives, by renting facilities. Financial intermedi­ aries, except for such loan brokers as attorney/solicitors, played a very small role. Banks confined themselves to supplying short-term or de­ mand loans to facilitate real transactions. Some o f this took the form of lines o f credit, renewed as paid down. In g o o d times, such lines were the equivalent o f medium- or even long-term credit. In g o o d times. In bad, they could be called in, or maturities could be shortened.