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  • Michael Lewis on 'Flash Boys'

    Michael Lewis takes on Wall Street in his latest book, Flash Boys . The markets, Lewis argues, are rigged, as "a handful of insiders" have an inordinate amount of control. Lewis sat down with Charlie Rose to talk about the book, about high frequency traders, and the problems with the system. In this excerpt, he shares how he came across the story behind the book: In this clip, Lewis discusses his intended impact for the book on behavior on Wall Street: Watch the full episode here .
  • Rogoff on Potential Blocks to Sustained Economic Progress

    When you look at the collective rise in the quality of living for most people over the last century, it is easy to understand why Warren Buffett says he will continue to bet on economic prosperity. But, writing at Project Syndicate , Kenneth Rogoff warns that "past growth performance is no guarantee that a broadly similar trajectory can be maintained throughout this century." And he lays out four problems to consider: The first set of issues includes slow-burn problems involving externalities, the leading example being environmental degradation. When property rights are ill-defined, as in the case of air and water, government must step in to provide appropriate regulation. I do not envy future generations for having to address the possible ramifications of global warming and fresh-water depletion. A second set of problems concerns the need to ensure that the economic system is perceived as fundamentally fair, which is the key to its political sustainability. This perception can no longer be taken for granted, as the interaction of technology and globalization has exacerbated income and wealth inequality within countries, even as cross-country gaps have narrowed. Until now, our societies have proved remarkably adept at adjusting to disruptive technologies; but the pace of change in recent decades has caused tremendous strains, reflected in huge income disparities within countries, with near-record gaps between the wealthiest and the rest. Inequality can corrupt and paralyze a country’s political system – and economic growth along with it. The third problem is that of aging populations, an issue that would pose tough challenges even for the best-designed political system. How will resources be allocated to care for the elderly, especially in slow-growing economies where existing public pension schemes and old-age health plans are patently unsustainable? Soaring public debts surely exacerbate the problem, because future generations are being asked both to service our debt and to pay for our retirements. The final challenge concerns a wide array of issues that require regulation of rapidly evolving technologies by governments that do not necessarily have the competence or resources to do so effectively. We have already seen where poor regulation of rapidly evolving financial markets can lead. There are parallel shortcomings in many other markets. Read Malthus, Marx, and Modern Growth here .
  • CFTC Chair Gary Gensler on Efforts to Regulate Derivatives Market

    Gary Gensler is wrapping up his tenure as chairman of the Commodities Futures Trading Commission . It has not been an easy ride, and one might imagine he's be happy to take it easy, maybe attend a few going-away parties, and then slip away. But Gensler is trying to tighten up the derivatives market by making sure there are strong measures in place for the reporting of transactions. As Gensler tells Knowledge@Wharton 's Steve Sherretta , his goal is to insure there is more transparency in the market:
  • Simon Johnson on Getting the Financial Sector on Safer Tracks

    Simon Johnson is required reading at The Watch, especially at the Baseline Scenario blog. For years now, Johnson has been speaking out against the failure of policy makers to adequately oversee the finance sector. His warnings did not steer us clear of the near meltdown five years ago, and he remains dissatisfied with the overall response to the global financial crisis. He recently sat down with Marshall Auerback of the Institute for New Economic Thinking to discuss what he believes needs to be done to protect citizens and economies (as opposed to the banks themselves) from future crises.
  • Glenn Hubbard: Avoiding Next Great Financial Crisis Requires Clear Policy Framework

    Writing at The Atlantic , Glenn Hubbard gives his assessment of efforts to fix the financial sector and avoid a crisis like the one that peaked five years ago. Hubbard, now dean of the Columbia Business School, was chairman of the Council of Economic Advisers for President George W. Bush. He points to monetary policy during the Bush presidency as the primary cause for the crisis. In fixing the crisis, he argues for a response that is not simply technical, but rather provides a "policy framework." Hubbard: Five years ago, a massive failure on the part of financiers and financial regulators precipitated the fall of Lehman Brothers and nearly crashed the global economy. Today, investors, taxpayers, and elected officials are entitled to ask: Are we safer now? At one level, yes. We are both healthier and smarter. We are healthier because both banks and households have repaired their balance sheets, improving the economy’s ability to withstand future shocks. We are smarter, because we have discarded the myth that the Federal Reserve can easily clean up the fallout from financial excesses and replaced it with an attitude of vigilance and caution about financial excesses. This raises another question: have we created public policies that make us safer? It is hard to say. We know more today about how Washington can inflate bubbles. Government-sponsored enterprises encouraged excessive risk-taking in housing finance. Easy monetary policy in the early 2000s not only kept mortgage interest rates low, but also encouraged investors to reach for yield and amplify that reach with leverage. If investors perceive low rates to be lasting, the incentive for leverage is particularly great. Fed officials focused on low rates as coming from a global savings glut, without emphasizing large flows in to the United States from global banks, particularly European banks. The Fed did not restrain the housing bubble, and it was not alone. The European Central Bank stood back as credit surged in peripheral European economies. And, of course, tax policy encouraged leverage. Since the crisis, the Dodd-Frank Act increased transparency in many derivatives – a good thing. But it also made a complex system of bank and nonbank regulators more complex and created a class of systemically important banks (and even non-banks), codifying “too big to fail.” It did not – nor did other legislation – seriously address reform of housing finance or direct the central bank to focus more on financial stability. Writing the Act’s web of rules will take years. Globally, an emphasis on higher capital requirements leaves open questions of how one measures the risks taken against that capital – recall the sovereign bonds were deemed “riskless” for that purpose before the crisis – or how to limit the incentive for “shadow banking” forms of intermediation to grow outside more heavily regulated sectors. Read How to Stop the Next Financial Crisis: The Fed Might Be Our Last Great Hope here .
  • Brookings: 'Mobile Money in Developing Economies'

    One piece of technology is changing providing access to banking to millions of people in communities around the globe that have never had access before: the mobile phone. This Brookings video highlights M-Pesa , a mobile banking product that has changed the lived of an estimated 2 million Kenyans, and arguably lifted the economic fortunes of their communities. It is the story of an innovative product that scale s rapidly:
  • Timothy Geithner Defends his Response to the Libor Crisis

    Treasury Secretary Timothy Geithner was Charlie Rose 's guest last night. Geithner and Rose covered a lot of ground, but the Secretary spent a lot of time talking about Europe. He said that business and policy leaders around the globe are all feeling the pinch, and waiting for the EU to sort out debt problems. And in this excerpt, Sec. Geithner discussed the Libor crisis in Britain, and defended his own response to early warnings about what was happening at British banks: The full video is available here .
  • McKinsey: Basel III To Bring Drop in Revenue for Europe's Banks

    With new regulations scheduled to hit, Europe's banks can expect lower returns, according to a new report from McKinsey & Company . Down the road, banks have an opportunity to make up the lost ground and build more sustainable practices, but first the hit on returns will look something like this: We estimate that without any mitigating action by banks or material changes in the economic and competitive environment, recent global rules, especially Basel III,1 and new regional and national regulations will help reduce retail banking’s average return on equity (ROE) in Europe’s four largest markets to 6 percent, from about 10—a 41 percent decline. The analysis, based on 2010 financial-year data, assumes that the cumulative regulatory impact expected over the next several years will be realized immediately. The effects vary across the four markets, but in all cases the outlook is grim (exhibit). In France, ROE will fall to 9.5 percent, from 13.5—a 29 percent decline driven by changes affecting mortgages, debit cards, and investments. In Germany, ROE will fall to 3.5 percent, from 6.6 (a drop of 47 percent); almost all retail products will be affected and many will become unprofitable. ROE in Italy’s retail banks starts from a lower base, 5.1 percent, but will fall further, to 3.1 percent. In the United Kingdom, returns will fall to 7 percent, from 13.6 percent. The impact here, 48 percent, is high because of extensive country-specific regulation. Access the full report here .
  • Barry Ritholtz Reports Back from the Future on Effective Regulation of "Reckless Speculation"

    In his latest column for The Washington Post , Barry Ritholtz tells us he made a trip recently. A trip to 2015. And he brought back some good news. By then, apparently, " we had ended Too Big to Fail, eliminated taxpayer liability for reckless speculation, and freed hedge funds and investment banks from onerous regulations." To prove this seemingly unlikely development, Ritholtz brought back a letter from the chairman of the FDIC to bankers in which the chairman outlines some of the changes that the FDIC has put through after a round of very disheartening stress tests (performed in 2014). Here is an excerpt: 1. Effectively immediately, we have increased the FDIC deposit insurance for any U.S. bank that engages in ANY trading of derivatives or underwriting securities or other investment banking activities by threefold. This threefold fee increase goes into effect immediately. It applies whether these trades are hedges for proprietary trades or are made on behalf of clients. 2. Effective in 90 days, we are LOWERING the maximum insured deposit liability to $100,000 per account for derivative trading firms. Effective in 180 days, the insured maximum insured deposit liability will drop to $50,000 per account. 3. Effective one year from today, on May 23, 2016, we will no longer offer deposit insurance for any firm that engages in derivative trading or securities underwriting or that engages in investment banking. 4. Any bank with fewer than 1,000 depositors or less than $1 billion in assets may apply for a discretionary waiver of these rules. Read How the FDIC can curb banks’ reckless speculation here .
  • Robert Shiller's Speech to Finance Graduates

    Tis the season of graduations, and Robert Shiller has some thoughts to share with newly minted graduates looking to work in the field of finance. One key theme: Shiller wants new entrants into the fields of banking, economics, and finance to consider themselves as fiscal stewards and not simply people out to make money for money's sake. From Project Syndicate : Those of you deciding to pursue careers as economists and finance scholars need to develop a better understanding of asset bubbles – and better ways to communicate this understanding to the finance profession and to the public. As much as Wall Street had a hand in the current crisis, it began as a broadly held belief that housing prices could not fall – a belief that fueled a full-blown social contagion. Learning how to spot such bubbles and deal with them before they infect entire economies will be a major challenge for the next generation of finance scholars. Equipped with sophisticated financial ideas ranging from the capital asset pricing model to intricate options-pricing formulas, you are certainly and justifiably interested in building materially rewarding careers. There is no shame in this, and your financial success will reflect to a large degree your effectiveness in producing strong results for the firms that employ you. But, however imperceptibly, the rewards for success on Wall Street, and in finance more generally, are changing, just as the definition of finance must change if is to reclaim its stature in society and the trust of citizens and leaders. Finance, at its best, does not merely manage risk, but also acts as the steward of society’s assets and an advocate of its deepest goals. Beyond compensation, the next generation of finance professionals will be paid its truest rewards in the satisfaction that comes with the gains made in democratizing finance – extending its benefits into corners of society where they are most needed. This is a new challenge for a new generation, and will require all of the imagination and skill that you can bring to bear. Read the full speech here .
  • Phil Angelides on the 'Avoidable' Global Financial Crisis

    Are you watching the Frontline series, Money, Power and Wall Street ? The first two parts of the series are airing on PBS member stations this week. The series is packing a lot of history into a relatively short amount of time, but remains quite comprehensive. It is quite a teaching tool. Frontline has also made extended interviews with the experts and major players in the series available online. Here is Phil Angelides , chair of the Financial Crisis Inquiry Commission speaking about how the FCIC came to the conclusion that the financial crisis was avoidable: Watch The FRONTLINE Interview: Phil Angelides on PBS. See more from FRONTLINE. Watch more extended interviews here .
  • Esther Dyson on the 'Magical Thinking' behind the JOBS Act

    Esther Dyson is a big believer in startups and the power of entrepreneurship. So it may come as a bit of a surprise to learn that she is not on board with the JOBS Act . JOBS stands for Jumpstart Our Business Startups. Dyson doesn't seem to buy into the idea that government can do the jumpstart part effectively, and she likens such a move to policymakers thinking they could, or even should, help people fulfill the "American dream" of home ownership. Writing at Project Syndicate , Dyson commends the trusting spirit behind the JOBS Act, but explains that such a well-meaning initiative is rife for exploitation: I wish I had more faith in the system, but the problem is not a lack of good people, good investors, or good entrepreneurs. The problem is that, without regulation, bad people take advantage of the good ones. While regulation and restrictions may hamper small business, not all regulation and restrictions are useless. Yes, there are some wonderful, honest companies that deserve investment and can’t get it, but they are not that common. I see a lot of start-ups. Many are appealing and have good ideas, yet most of them fail. Now the quality of even the honest start-ups is likely to decline as more of them are established, and they will spend more of other people’s money before failing. For example, with more start-ups, it will be even harder for each of them to find management talent and the right employees. Indeed, many people whom an entrepreneur might have hired will probably become CEOs of competing start-ups. Meanwhile, all of them will be competing for a finite number of customers, and those companies that make progress will then have to compete for scarcer scale-up capital. Many investors in these startups are likely to lose their money. Even under the current system, many angel investors lose money. The best route to success in angel investing is to invest in, say, ten or more separate companies, so that you have the chance of at least one big winner. But, again, a broader investor pool is likely to reduce the average number of investments per investor, with inadequate diversification leading to many more losers than winners. The faith that drives the JOBS Act is the same magical thinking that drives many Internet phenomena: people are good and everyone means well. But the Internet’s easy accessibility and low entry barriers have led to spam and malware and bad behavior; each new service starts out “clean,” but then ends up requiring its own regulations. Read Markets of Magical Thinking here .
  • Ongoing Dangers with Shadow Banking

    At the Marketplace Whiteboard , Paddy Hirsch reminds us that the so-called "banking crisis" of 2008-2009 was really more of a "shadow banking crisis." The crisis seemed to be resolved, but were the underlying dangers taken out of the system? Not so much, says Hirsch, as shadow banking is bigger than ever.
  • Paddy Hirsch on the 'REALLY not cool' Practice of Insider Trading

    With the Senate taking up a House-passed bill to limit insider trading by members of Congress, Paddy Hirsch takes to the Marketplace Whiteboard to give his own, clear explanation of what the practice involves. But instead of using members of Congress in his example, he uses chickens and foxes:
  • Boston Globe: 'The Rise of Beeronomics'

    This week's Boston Globe Ideas section highlighted the burgeoning new field of beeronomics. Belgian economist Johan Swinnen is one of the leaders of the new field, and he is the editor of the new book, The Economics of Beer . The Ideas section interviewed Swinnen about the importance of beer to trade, industry regulation, and even the significance of microbeweries: SWINNEN: In terms of growth rate, it’s the fastest-growing segment of the beer market. It’s a bit paradoxical that it started in the US, as the type of beers they’re selling are more European-like or Belgian-like. In the US, there has been very strong consolidation of the traditional beer sector. Basically, you can see the microbrew movement as a counterrevolution against extreme consolidation, against the homogenization of beer. There were just a few breweries left, just producing lager beer. A lot of people who enjoyed more variety in beer couldn’t find anything. So people started their own breweries. It has been a tremendous success. IDEAS: For a while there, it seemed as though Americans simply loved light beer. Why did all this consolidation and homogenization happen if there was a market or a taste for other styles? SWINNEN: There is a fantastic chapter in the book by Lisa George, a professor. She argues that there are a number of different reasons. Really important was advertising. It became crucial after the breakthrough of TV. After the 1950s, you could have big companies advertising through the nation. There was the breakthrough of Budweiser and Miller Lite and whatever. Advertising spread the domination of a couple of big companies in the ’60s and ’70s. In Europe, this occurred 30 years later, because commercial TV only came to Europe in the ’90s. Before, it was state-organized broadcasting, and there was no advertising. Since the ’90s and 2000s, Europe has seen exactly the same phenomenon. IDEAS: So television killed local beer, or tried to. SWINNEN: There was also new science and technological innovation in the 18th century. Before, you had beer that was brewed locally, on a small scale. Most of the beer that was brewed was what we now call “specialty beer.” Then people discovered how yeast really worked. When you could control the yeast and the brewing process, you could brew really crystal-clear beer. And you could produce good bottles and ways of cooling better and putting tops on bottles, which made it possible to produce beer on an industrial scale. Read the full interview here .
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