(Roughly) Daily

Posts Tagged ‘finance

“Optimism is highly valued, socially and in the market; people and firms reward the providers of dangerously misleading information more than they reward truth tellers”*…

 

43073849241_23eaff519b_z

 

It’s been 10 years since the beginning of the Great Recession…

Some of the more pessimistic commentators at the time of the credit crunch, myself included, said that the aftermath of the crash would dominate our economic and political lives for at least ten years. What I wasn’t expecting – what I don’t think anyone was expecting – was that ten years would go by quite so fast. At the start of 2008, Gordon Brown was prime minister of the United Kingdom, George W. Bush was president of the United States, and only politics wonks had ever heard of the junior senator from Illinois; Nicolas Sarkozy was president of France, Hu Jintao was general secretary of the Chinese Communist Party, Ken Livingstone was mayor of London, MySpace was the biggest social network, and the central bank interest rate in the UK was 5.5 per cent.

It is sometimes said that the odds you could get on Leicester winning the Premiership in 2016 was the single most mispriced bet in the history of bookmaking: 5000 to 1. To put that in perspective, the odds on the Loch Ness monster being found are a bizarrely low 500 to 1. (Another 5000 to 1 bet offered by William Hill is that Barack Obama will play cricket for England. I’d advise against that punt.) Nonetheless, 5000 to 1 pales in comparison with the odds you would have got in 2008 on a future world in which Donald Trump was president, Theresa May was prime minister, Britain had voted to leave the European Union, and Jeremy Corbyn was leader of the Labour Party – which to many close observers of Labour politics is actually the least likely thing on that list. The common factor explaining all these phenomena is, I would argue, the credit crunch and, especially, the Great Recession that followed…

The always-illuminating John Lanchester ponders what happened, why, and what we have– and haven’t– learned: “After the Fall.”

[image above: source]

* “However, optimism is highly valued, socially and in the market; people and firms reward the providers of dangerously misleading information more than they reward truth tellers. One of the lessons of the financial crisis that led to the Great Recession is that there are periods in which competition, among experts and among organizations, creates powerful forces that favor a collective blindness to risk and uncertainty.”   – Daniel Kahneman, Thinking, Fast and Slow

###

As we do our best to learn from our mistakes, we might wish a spectacularly happy birthday to Phineas Taylor (“P.T.”) Barnum; he was born on this date in 1810.

A sharp observer of the human condition, Barnum wrote and spoke frequently of characteristics that made “promotions” of the sort in which he specialized both possible and profitable:

Nobody ever lost a dollar by underestimating the taste of the American public.

There’s a sucker born every minute.

In what business is there not humbug?

Barnum came by his wisdom the round-about way: he founded and ran a small business, then a weekly newspaper in his native Connecticut before leaving for New York City and the entertainment business.  He parlayed a variety troop and a “curiosities” museum (featuring the ‘”Feejee” mermaid’ and “General Tom Thumb”) into a fortune…  which he lost in a series of legal setbacks.  He replenished his stores by touring as a temperance speaker, then served as a Connecticut State legislator and as Mayor of Bridgeport (a role in which he introduced gas lighting and founded the Bridgeport hospital)… It wasn’t until after his 60th birthday that he turned to endeavor for which he’s best remembered– the circus.

“I am a showman by profession…and all the gilding shall make nothing else of me.”

source: Library of Congress

 

Written by LW

July 5, 2018 at 1:01 am

“A firm’s income statement may be likened to a bikini- what it reveals is interesting but what it conceals is vital”*…

 

41052602860_a889faa191_z

A recent (Roughly) Daily noted (by way of a quote from James Surowiecki) that “the challenge for capitalism is that the things that breed trust also breed the environment for fraud.”  A painful recent example was, the failure of credit ratings agencies honestly to assess the risk of derivatives being traded against home mortgages, which contributed mightily to the crash that occasioned The Great Recession.

But, as Richard Brooks argues, there’s a bigger and more pervasive problem still lurking:  accountancy used to be boring – and safe.  Today it’s neither.  Have the ‘big four’ firms become too cosy with the system they’re supposed to be keeping in check?  Are we in for Enron all over again, only this time on the financial system-wide basis?

The demise of sound accounting became a critical cause of the early 21st-century financial crisis. Auditing limited companies, made mandatory in Britain around a hundred years earlier, was intended as a check on the so-called “principal/agent problem” inherent in the corporate form of business. As Adam Smith once pointed out, “managers of other people’s money” could not be trusted to be as prudent with it as they were with their own. When late-20th-century bankers began gambling with eye-watering amounts of other people’s money, good accounting became more important than ever. But the bean counters now had more commercial priorities and – with limited liability of their own – less fear for the consequences of failure. “Negligence and profusion,” as Smith foretold, duly ensued.

After the fall of Lehman Brothers brought economies to their knees in 2008, it was apparent that Ernst & Young’s audits of that bank had been all but worthless. Similar failures on the other side of the Atlantic proved that balance sheets everywhere were full of dross signed off as gold. The chairman of HBOS, arguably Britain’s most dubious lender of the boom years, explained to a subsequent parliamentary enquiry: “I met alone with the auditors – the two main partners – at least once a year, and, in our meeting, they could air anything that they found difficult. Although we had interesting discussions – they were very helpful about the business – there were never any issues raised.”

This insouciance typified the state auditing had reached. Subsequent investigations showed that rank-and-file auditors at KPMG had indeed questioned how much the bank was setting aside for losses. But such unhelpful matters were not something for the senior partners to bother about when their firm was pocketing handsome consulting income – £45m on top of its £56m audit fees over about seven years – and the junior bean counters’ concerns were not followed up by their superiors.

Half a century earlier, economist JK Galbraith had ended his landmark history of the 1929 Great Crash by warning of the reluctance of “men of business” to speak up “if it means disturbance of orderly business and convenience in the present”. (In this, he thought, “at least equally with communism, lies the threat to capitalism”.) Galbraith could have been prophesying accountancy a few decades later, now led by men of business rather than watchdogs of business…

A chilling, but important report: “The financial scandal no one is talking about.”

* Burton G. Malkiel

###

As we count beans, we might recall that it was on this date in 1873 that Samuel Clemens (the author known as Mark Twain) received a U.S. patent, his second, for a self-pasting scrapbook (No. 140,245).  His creation used a dried adhesive on its pages so that users need only moisten a page in order to attach pictures.

In 1871, Clemens had scored his first patent, for “an Improvement in Adjustable and Detachable Straps for Garments”–an adjustable strap that could be used to tighten shirts at the waist that was later used on women’s corsets, and is considered by many to be the precursor of the adjustable bra strap.  He earned his third patent in 1875 for a history trivia game,“Mark Twain’s Memory-Builder Game.”

 source

 

Written by LW

June 24, 2018 at 1:01 am

“The study of money, above all other fields in economics, is one in which complexity is used to disguise truth or to evade truth, not to reveal it”*…

 

As you grow up and experience more of the ups and downs of the economy, you will notice a piece of mindbending hypocrisy: during the good times, bankers, entrepreneurs—rich people in general—tend to be against government. They criticize it as a “brake on development,” a “parasite” feeding on the private sector through taxation, an “enemy of freedom and entrepreneurship.” The cleverer among them even go so far as to deny that government has any moral right, or duty, to serve society, by claiming that “there is no such thing as society—there are just individuals and families,” or “society is not well defined enough for the state to be able to serve it.” And yet, when a crash occurs that is brought on by their actions, those who have delivered the fieriest of speeches vehemently opposing substantial government intervention in the economy suddenly demand the state’s aid. “Where is the government when we need it?” they yelp.

This is not a new contradiction[**]…

Yannis Varoufakis, the motorcycle-riding economist who served as Greece’s Minister of Finance through the depths of their recent financial crisis, offers some plain speaking on economics in general and banking in particular: “A letter to my daughter about the black magic of banking.”

See also this.

* John Kenneth Galbraith, Money: Whence it came, where it went

** Indeed: “Since those who rule in the city do so because they own a lot, I suppose they’re unwilling to enact laws to prevent young people who’ve had no discipline from spending and wasting their wealth, so that by making loans to them, secured by the young people’s property, and then calling those loans in, they themselves become even richer and more honored.”   – Plato, The Republic

###

As we contemplate capital, we might send neoliberal birthday greetings to Maurice Félix Charles Allais; he was born on this date in 1911.  He won the 1988 Nobel Prize in Economics “for his pioneering contributions to the theory of markets and efficient utilization of resources.”  Indeed, the Nobel Committee suggested that Allais might be considered (with Paul Samuelson and John Hicks) ” the principal architect of the neoclassical synthesis” (in large measure because they formalized the notion of self-regulating markets).

Samuelson said “had Allais earliest writings been in English, a generation of economic theory would have taken a different course” and the Nobel Prize should have been awarded to him much earlier.  John Maynard Keynes, whose ideas the trio very selectively used, thought that Allais and the emerging neo-liberal idea were dangerously wrong.

 source

 

 

Written by LW

May 31, 2018 at 1:01 am

“Fortune’s bubbles rise and fall”*…

 

Gordon Gekko talks tulips. Wall Street: Money Never Sleeps / scottab140

Right now, it’s Bitcoin. But in the past we’ve had dotcom stocks, the 1929 crash, 19th-century railways and the South Sea Bubble of 1720. All these were compared by contemporaries to “tulip mania,” the Dutch financial craze for tulip bulbs in the 1630s. Bitcoin, according some sceptics, is “tulip mania 2.0”.

Why this lasting fixation on tulip mania? It certainly makes an exciting story, one that has become a byword for insanity in the markets. The same aspects of it are constantly repeated, whether by casual tweeters or in widely read economics textbooks by luminaries such as John Kenneth Galbraith.

Tulip mania was irrational, the story goes. Tulip mania was a frenzy. Everyone in the Netherlands was involved, from chimney-sweeps to aristocrats. The same tulip bulb, or rather tulip future, was traded sometimes 10 times a day. No one wanted the bulbs, only the profits – it was a phenomenon of pure greed. Tulips were sold for crazy prices – the price of houses – and fortunes were won and lost. It was the foolishness of newcomers to the market that set off the crash in February 1637. Desperate bankrupts threw themselves in canals. The government finally stepped in and ceased the trade, but not before the economy of Holland was ruined.

Yes, it makes an exciting story. The trouble is, most of it is untrue…

Drawing on ten years of research for her new book, Tulip mania: Money, Honor and Knowledge in the Dutch Golden AgeAnne Goldgar tells a different story, one that’s just as illuminating, but very different: “Tulip mania: the classic story of a Dutch financial bubble is mostly wrong.”

Like most trends, at the beginning it’s driven by fundamentals, at some point speculation takes over. What the wise man does in the beginning, the fool does in the end.”  The world went mad. What we learn from history is that people don’t learn from history.   — Warren Buffett, 2006 Berkshire Hathaway annual meeting

* John Greenleaf Whittier

###

As we curb our enthusiasm, we might recall that it was on this date in 1933 that banks began to re-open after the “Bank Holiday” declared by the Roosevelt Administration to calm the market after bank runs had threatened the nation’s financial system during the Depression.

 source

 

Written by LW

March 13, 2018 at 1:01 am

“Money doesn’t talk, it swears”*…

 

In 1858, the United States was an industrializing nation with a banking system stuck in frontier times… Heated battles over ‘the money question’ came to dominate the country’s politics, but no matter how unsatisfied the people, any solution that tended toward centralization was, due to the prevailing prejudice, off the table.

America was a monetary Babel with thousands of currencies; each state regulated its own banks and they collectively provided the country’s money. Officially, America was on a hard-money basis, but the amount of gold in circulation was insignificant…

And therein hangs a terrific tale, “Printing Money,” an excerpt from America’s Bank: The Epic Struggle to Create the Federal Reserve in the always worthy Delancey Street; read it here.

* Bob Dylan

###

As we bite our coins, we might recall that it was on this date in 1982 that money market deposit accounts were first offered by banks and S&Ls across the U.S.  Pioneered in the early 70s by brokerage houses, the accounts were a way around the Regulation Q prohibition on interest payments n demand accounts.

 source

 

Written by LW

December 14, 2015 at 1:01 am

“Got no checkbooks, got no banks”*…

 

Trinidad and Tobago, the tiny twin-island nation off the coast of Venezuela, has struck gold. Its newly re-released $50 note (TT) earned top billing in this year’s competition convened by the International Bank Note Society (IBNS).

Designed in partnership with the British banknote manufacturer De La Rue to commemorate the 50th (golden) anniversary of the country’s Central Bank, the $50 note shows familiar takes on its national symbols like its coat of arms, a red hibiscus flower, and a red capped cardinal bird, its wings fanned out like a palm tree. The back of the note depicts a smiling carnival dancer, collaged in front of the 22-story Central Bank and Ministry of Finance twin towers, which are the tallest buildings in the entire country…

Read the whole story and see the runners-up at “The world’s best banknotes of the year.”

* Irving Berlin, “I Got the Sun in the Morning”

###

As we reach for our wallets, we might recall that it was on this date in 2012 that Facebook went public.  The IPO was the biggest in technology and one of the biggest in Internet history, with a peak market capitalization of over $104 billion.  Some pundits called it a “cultural milestone”; in any case, a great deal of money was “printed.”

 source

 

Written by LW

May 18, 2015 at 1:01 am

%d bloggers like this: