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  • McKinsey Global Institute: "Financial Globalization: Retreat or Reset"

    The McKinsey Global Institute has put out a new report on the global slowdown of financial assets. The report says that the value of financial assets, globally, has grown 1.9 percent annually since the global economic crisis. That's a big drop from the decade prior to the crisis: From the report: One-quarter of financial deepening before the crisis was due to equity market valuations rising above long-term norms—gains that were erased in the crisis. Initial public offerings and new equity raising have fallen significantly since the crisis. Another factor adding to financial deepening during this period was a steady rise in government debt—a trend that is sustainable only up to a certain point. Financing for households and non-financial corporations accounted for just over one-fourth of the rise in global financial depth from 1995 to 2007—an astonishingly small share, given that this is the fundamental purpose of finance. Since then, financing for this sector has stalled in the United States, as households and companies have deleveraged. Despite the lingering euro crisis, however, financing to households and corporations in Europe has continued to grow in most countries, as banks have stepped up domestic lending while reducing foreign activities. The risk now is that continued slow growth in global financial assets may hinder the economic recovery, stifling business investment, homeownership, and investment in innovation and infrastructure. Our analysis suggests a link between financing and growth, showing a positive correlation between financing for the household and corporate sectors and subsequent GDP growth. A continuation of current trends could therefore slow the economic recovery. Cross-border capital flows—including lending, foreign direct investment, and purchases of equities and bonds—reflect the degree of integration in the global financial system. While some of these flows connect lenders and investors with real-economy borrowers, interbank lending makes up a significant share. In recent decades, financial globalization took a quantum leap forward as cross- border capital flows rose from $0.5 trillion in 1980 to a peak of $11.8 trillion in 2007. But they collapsed during the crisis, and as of 2012, they remain more than 60 percent below their former peak (Exhibit E2). Access the full report (free download) here .

  • Marketplace Whiteboard: 'Why a currency war could hurt you'

    Marketplace 's Paddy Hirsch is back at the Whiteboard . This time he's trying to get us to understand how currency wars affect us all. As usual, he removes the wonk from the discussion. This time using a story of sibling rivalry, honey, and the US-Canada border:

  • Jeremy Siegel Still Sees Bright Future for Equities

    Wharton finance professor Jeremy Siegel always strikes us as a glass-three-quarters-full kind of guy--at least when it comes to the markets. He has been projecting stronger growth than many of his friends and colleagues for some time now . So the below interview will be welcome to those looking for hope in uncertain times. To be sure, it has been another volatile week in the global markets, with Italy's inconclusive elections and another budgets standoff in Washington. But Siegel is undeterred and he thinks more bullish investing will be rewarded:

  • The Use of Credit in Roman Times

    When most of us read about the Roman Empire at its height, we imagine coins, and maybe barter items, as essential to every transaction. But just because there isn't an historical record of banks--at least as far as we think of them--doesn't mean there wasn't a somewhat sophisticated finance system. At The Big Picture , Marco Del Negro and Mary Tao take us back to the time of Cicero: Large sums of money changed hands in Roman times. People bought real estate, financed trade, and invested in the provinces occupied by the Roman legions. How did that happen? Cicero writes, in Epistulae ad Familiares 5.6 and Epistulae ad Atticum 13.31, respectively: “I have bought that very house for 3.5 million sesterces” and “Gaius Albanius is the nearest neighbor: he bought 1,000 iugera [625 acres] of M. Pilius, as far as I can remember, for 11.5 million sesterces.” How? asks historian H. W. Harris (in “The Nature of Roman Money”)–“mechanically speaking, did Cicero pay three and half million sesterces he laid out for his famous house in the Palatine . . . . That would have meant packing and carrying some three and half tons of coins through the streets of Rome. When C. Albanius bought an estate from C. Pilius for eleven and half million sesterces, did he physically send the sum in silver coins?” Harris’ answer is: “Without much doubt, these were at least for the most part documentary [i.e., paper] transactions. The commonest procedure for large property purchases in this period was the one casually alluded to by Cicero [De Officiis 3.59] . . . ‘nomina facit, negotium conficit’ . . . provides the credit [or ‘bonds’–nomina], completes the purchase.” What exactly are these nomina?–from which, by the way, comes the term “nominal,” so commonly used in economics. In his Ph.D. dissertation “Bankers, Moneylenders, and Interest Rates in the Roman Republic,” C. T. Barlow writes (pp. 156-7): “An entry in an account book was called a nomen. Originally the word meant just that–a name with some numbers attached. By Cicero’s day . . . [n]omen could also mean “debt,” referring to the entries in the creditor’s and the debtor’s account books.” And this “debt was in fact the lifeblood of the Roman economy, at all levels . . . nomina were a completely standard part of the lives of people of property, as well as being an everyday fact of life for a great number of others” (Harris, p. 184). Pliny the Younger writes, for example, (in Epistulae 3.19): “Perhaps you will ask whether I can raise these three millions without difficulty. Well, nearly all my capital is invested in land, but I have some money out at interest and I can borrow without any trouble.” For concreteness, say that some fellow, Sempronius, owes you one million sesterces. You–or in case you’re a wealthy senator, or eques, your financial advisor (procurator–Titus Pomponius Atticus was Cicero’s)–would record the debt in the ledger. What if you suddenly needed the money to buy some property? Do you have to wait for Sempronius to bring you a bag with 1 million sesterces? No! As long as Sempronius is a worthy creditor (a bonum nomen [see Barlow, p. 156]; in the modern parlance of credit rating agencies, a triple-A creditor), you’d do what Cicero says: transfer the nomina, strike the deal. For example, Cicero writes to his financial advisor Atticus (Ad Atticum 12.31): “If I were to sell my claim on Faberius, I don’t doubt my being able to settle for the grounds of Silius even by a ready money payment.” As Harris (p. 192) observes: “Nomina were transferable, and by the second century B.C., if not earlier, were routinely used as a means of payment for other assets . . . . The Latin term for the procedure by which the payer transferred a nomen that was owed to him to the seller was delegatio.” Read Historical Echoes: Cash or Credit? Payments and Finance in Ancient Rome here .

  • Vox: 'Was the currency war inevitable?'

    Writing at VoxEU , Simon J Evenett --Professor of International Trade, University of St. Gallen in Switzerland-likens a currency war to a "rash" likely to break out depending on how policy makers respond to a global recession. But does that make currency wars inevitable? Evenett writes: Is it possible to design an economic recovery package that takes account of the lessons of history while doing the least possible harm – even potentially benefiting – foreign trading partners? For sure some won’t like this question, reasoning no doubt as follows: when (not if) monetary easing leads to economic recovery, the associated expansion in corporate and personal spending will increase demand for foreign goods and services – so in the long run everything will be hunky dory for trading partners, even with monetary easing. Still, the question is a good one because if there are plausible alternatives then (a) maybe the currency war was not inevitable or (b) the decisions not to pursue these policy alternatives points to underappreciated causes of the currency war. Taking as given that the effect of monetary easing on the exchange rate will harm, at least in the short run, foreign trading partners, what other complementary measures could have been taken to limit international tensions? One such measure would have been to combine monetary easing with expansionary fiscal policy. To the extent that the latter directly or indirectly (through supply chains, the demand for commodities, parts, and components, and induced private-sector capital formation) increased demand for imports then this would have offset, possibly fully, the impact of any currency depreciation by industrialised countries. Seen in this light, no wonder trading partners were worried that currency devaluations that accompanied austerity measures (restrictive fiscal policy) in industrialised economies further harmed their commercial interests. The adoption of austerity measures from 2010 closed the door on policy measures that could have mitigated the international tensions created by go-it-alone monetary easing by in the industrialised countries. There are other ways to bolster demand for foreign goods and services. Another road not taken in recent years was far-reaching trade and investment reforms, which would have provided a fillip to trade partners harmed by adverse currency movements. It is difficult to see how a package of extensive trade reform and monetary easing could have been received worse by trading partners than what actually came to pass. This is not the place to recount the trials and tribulations of completing the Doha Round, but it is worth noting that the unwillingness to further integrate the world markets has exacerbated today currency war. Read Root causes of currency wars here .

  • Knowledge@Wharton: 'Did Japan Just Spark a Currency War?'

    When the G20 meets later this week, avoiding a currency war will be one of the top issues for discussion . With Japan lowering the value of the yen, European nations are highly concerned that an artificially high euro (not just against the yen, but also against a relatively weak dollar) is exacerbating economic distress in the Euro Zone. In an interview with Knowledge@Wharton , Wharton School finance professor Franklin Allen explains how the actions of Japan's leaders might affect economies from Brazil to Russia:

  • The Cost of Sleep to U.S. Productivity

    Many Americans need to get some sleep in order to get to work. The Wall Street Journal 's Lauren Weber , citing a Harvard Medical School study, reports that exhaustion is costing the U.S. economy "billions of dollars in lost productivity." Some companies are realizing that the nonstop work culture isn't producing enough work and are training their employees to be better sleepers. Weber: The Centers for Disease Control and Prevention estimates 40.6 million American workers, or 30% of the civilian workforce, don't get enough rest. And the Harvard scientists estimated in 2011 that sleep deprivation costs U.S. companies $63.2 billion in lost productivity per year, mainly because of "presenteeism," people showing up for work but operating at subpar levels. One example, from a separate team at Singapore Management University: Workers waste an extra 8.4 minutes online—checking email, refreshing the TMZ.com home page, and so on—for every hour of interrupted sleep the previous night. Managers struggle to motivate exhausted workers. During busy holiday periods at the Park Hyatt Beaver Creek resort in Avon, Colo., long hours sometimes lead to short fuses among staff. "You have to try to figure out who's feeling frustrated and help them cut loose to get some rest," said Scott Gubrud, director of sales and marketing at the hotel, which last week began a series of better-sleep initiatives for both employees and guests. "If we treated machinery like we treat the human body, there would be breakdowns all the time," said James Maas, a former Cornell University psychologist and author of "Sleep for Success." Companies have been slow to grasp the effects of sleep deprivation on productivity, but it is now a hot topic even in hard-driving industries, such as finance, where pulling all-nighters is often viewed as crucial to getting ahead. Read Go Ahead, Hit the Snooze Button here . (h/t Boston Innovation )

  • Economist Editors Review: Barclay and the LIBOR Rate-Rigging

    Before we get too far down the road of 2013, it may be worth looking back at some of the top stories and lessons from 2012. To that end, The Economist 's series of Editor Reviews are useful. In this review, The Economist finance editor Andrew Palmer takes us back to the LIBOR rate rigging scandal:

  • Extending Access to Finance

    One barrier to growth in under-developed markets is access to finance. Aishwarya Ratan , director of the Global Financial Inclusion Initiative at Yale University, says there has been some progress in giving more people access to finance, thanks largely to the growth of micro-lending. But significant barriers remain, and they don't all have to do with the global banking sector. Here is Ratan addressing poverty economics in a PopTech talk:

  • Bloomberg Global Poll: Investor Optimism Reaches Highest Level in 18 Months

    Two-thirds of the those surveyed for the Bloomberg Global Poll of investors believe the world economy is "either stable or improving." That's the most optimistic response to the poll since May of 2011. The U.S. was ranked as the top market for investing, with China second. This suggests that investors are expecting Washington to come to some agreement over deficit reduction before going over the so-called fiscal cliff. Bloomberg 's Rich Miller reports that the optimism does not reflect confidence in the baking sector: The growing optimism among investors about the world economy was not reflected in their views of the prospects for the financial services industry. About seven in ten said they expect large banks to reduce payrolls further in the next year after cutting at least 188,000 jobs over the last two years. A majority blame regulatory changes for the reductions. Banking authorities have tightened rules and raised capital standards on banks after the worst financial crisis since the Great Depression forced governments to spend billions of dollars to rescue ailing financial institutions. “Many countries have oversized banking sectors, which need to go back to more sustainable sizes,” Guzzi said in an e-mail from Zurich. The optimism on the world economy is based in part on an expectation that the U.S. will avert $607 billion in automatic spending cuts and tax increases scheduled for Jan. 1. Three out of four surveyed anticipate that President Barack Obama and Congressional leaders will reach a short-term agreement to avoid the fiscal cliff. Read the full article here .

  • Economist: Lessons Not Learned from Black Monday

    Today marks the biggest one-day decline in the Dow Jones Industrial Average's history--it dropped 508 points, nearly 23%--which we have come to know as Black Monday. The Economist says the response was to look back and make comparisons with the 1929 crash. But had analysts looked forward, they may have made some decisions that could have helped us avoid some of the problems of the last 5 years. The Economist lists three reasons "why the crunch happened in 2007 date back to 1987." Here's the first: The biggest mistake was to do with monetary policy. Central banks around the world responded quickly to the crash, some cutting interest rates, others pumping money into the system. “The Federal Reserve, consistent with its responsibilities as the nation’s central bank, affirmed today its readiness to serve as a source of liquidity to support the economic and financial system,” said Alan Greenspan, recently appointed as head of the Fed. Calming a fraught financial system made sense at the time, but it introduced the idea of the “Greenspan put”, the notion that central banks would always intervene to support the markets when they fell sharply. This was compounded by Mr Greenspan taking the opposite position when it came to asset bubbles: that even when prices were sky-high, it was not the job of central banks to outguess markets by trying to bring them back to earth. The one-day price fall of 23% in 1987, seemingly unconnected to economic fundamentals, gave a hint that markets are not always efficient. But Mr Greenspan declined this newspaper’s advice to intervene both when dotcom stocks surged in the late 1990s and when house prices rocketed in the early 2000s. For investors, markets became a one-way bet: central banks would intervene when markets were falling, but not when they were rising. The “great moderation” was a long period of steady growth and low inflation—and a huge build-up of debt. Read Black Marks from Black Monday here . The Big Picture has compiled some archive media from 25 years ago. Click here and here to go into the way back machine and see some of the coverage of Black Monday.

  • Quantitative Easing and Charges of Currency Wars

    Brazil's finance minister, Guido Mantega , has been sharply critical of the Federal Reserve's latest round of quantitative easing, calling it "protectionist" and warning that it could spark a currency war . José Antonio Ocampo , former United Nations Under-Secretary-General for Economic and Social Affairs and former Finance Minister of Colombia, is reluctant to pick a side. Writing at Project Syndicate , Ocampo argues that "both sides are right": In particular, expansionary monetary policies in the US (indeed, in all advanced countries) are generating high risks for emerging economies. Because interest rates must remain very low in developed countries at least for the next several years, there are now strong incentives to export capital to higher-yielding emerging economies. But such capital inflows threaten exchange-rate overvaluation, rising current-account deficits, and asset-price bubbles, all of which have in the past led to crises in these economies. In short, the medium-term benefits that emerging economies could receive from faster growth in the US are now being swamped by short-term risks generated by the “capital tsunami,” as Brazilian President Dilma Rousseff has called it. The basic problem is the lack of a broader agenda that would make the Fed’s position consistent with that of Mantega and other emerging-country officials. That agenda must include two issues of global monetary reform that remain unaddressed: coordinated global regulation of capital flows in the short term, and a long-term shift toward a new international monetary system based on a true global reserve currency (possibly based on the International Monetary Fund’s Special Drawing Rights). The US could benefit from such policies, as capital-account regulation would force investors to find opportunities at home, while a true global reserve currency would free the US from concerns – and harsh rebukes – about the implications of its monetary policy on the global economy. At the same time, emerging markets would gain the full benefits of expansionary monetary policy in the US, to the extent that it boosts demand for their exports. Read The Federal Reserve and the Currency Wars here .

  • Ritholtz's Rules

    In his column for the Washington Post , Barry Ritholtz shares a bit of his wisdom in investing. We follow Ritholtz's analysis of the economy at The Big Picture closely, as he provides an important perspective on the ups and downs--that of a successful investor. So it is interesting to note what he thinks works and does not for those tracking the markets. Here are his six rules: 1) Cut your losers short and let your winners run 2) Avoid predictions and forecasts 3) Understand crowd behavior 4) Think like a contrarian 5) Asset allocation is crucial 6) Are you an active or passive investor Rule #2 caught our eye. Here's what Rithotz writes about predictions and forecasts: Humans are very bad at guessing what the future will bring. The academic literature overwhelmingly proves this. If you prefer anecdotal evidence, recall how many economists forecast the Great Recession (almost none), the initial reviews of the iPad (mostly panned) or even the iPhone (meh!). For your own investing, you should ignore other people’s forecasts. And you should avoid making any yourself. Why? Because when investors make forecasts they focus more on being right than making money. They unconsciously shift their portfolio toward their predictions rather than what is occurring in the markets. This is a recipe for disaster. Consider how many people completely missed the huge rally since the March 2009 lows, mostly because of forecasts of another crash. They were rooting for their prediction, instead of spotting the opportunity. Read Ritholtz’s rules of investing here .

  • Christopher Steiner On How Algorithms Changed Finance

    Christopher Steiner has an interesting perspective on today's world. He helped bring rapid change to finance in the early days of high tech trading. Now, in his new book Automate This: How Algorithms Came To Rule Our World , he's trying to explain the world in which we now function. And judging from an interview with Planet Money , Steiner is not very comfortable with how algorithms have changed finance. Take a listen:

  • Bad at Decision-Making, Bad with Money

    Why are we often so bad with our money? Noted psychologist Daniel Kahneman says it is because we make bad decisions when we are looking narrowly at a problem. That explains, he says, why we do things like borrow and save at the same time. From Big Think :
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