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from Edward Hadas:

In defence of financial coercion

Last week the British government gave a new freedom to its citizens, or at least to a relatively privileged group of them. No longer will pensioners with defined contribution retirement plans be forced to invest their accumulated funds in an annuity. The old requirement was a form of financial coercion: government rules which influence behaviour.

For the pensioners in question, the new arrangement may feel like liberation. They will no longer be enslaved to a product which offers meagre yields. For the rest of Britain, though, financial freedom has probably been reduced. All taxpayers will end up paying more for the medical bills of some pensioners, those who would have had an annuity income but who might now be forced to turn to the state if they run out of money when they need expensive care.

The elimination of one sort of coercion for some people brings a new coercion for others. The pattern is typical, and not merely in finance. Freedom is usually tied to constraint. If I am free to play loud music, my neighbour is forced to endure a racket. If I am free to charge as much as I want for a product that is in short supply, the rich are free to buy but poorer people are forced to do without.

In complicated modern economies, this financial coercion is inevitable. Banks and other institutions which collect and disperse money cannot operate well without trusting customers. These intermediaries are so big and distant that customers will not trust them without strong regulatory and legal protection. So the freedom of banks to decide about their capital structures and lending practices is justly restricted for the sake of protecting the value of the funds deposited in the banks. Indeed, more of that sort of financial coercion a few years ago would have saved the global economy a great deal of trouble.

from Photographers' Blog:

City Slickers

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London, Britain

By Eddie Keogh

The beast that is Canary Wharf underground station spits out its batch of workers every morning and swallows them up again every evening, Monday to Friday.

The relentless cycle never seems to change for the financial markets’ suited workers, who return every day, smartphone in hand. They are concentrating on their emails – the oxygen of business.

from Breakingviews:

Wealth Addicts Anonymous? It misses the point

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By Edward Hadas

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

Sam Polk has seen the light. Once a derivatives trader who measured his income in millions of dollars, he quit for a new life. Now he reckons his extravagantly rewarded former colleagues should realise that they have a problem - an addiction to wealth. Writing in the New York Times, he suggests others join him to “form a group and confront our addiction together.”

from Ben Walsh:

How Blackstone made $8.5 billion from Hilton’s $6 billion increase in value

In July 2007, Blackstone took Hilton private for $26 billion. On Monday, Hilton IPO’d at $20 a share. Using the same measure to value the company as when Blackstone acquired it, Hilton’s enterprise value is now $32 billion. That’s $6 billion above Blackstone’s takeover price.So it’s a bit confusing to read that Blackstone has an made an $8.5 billion profit on its investment in Hilton.

Here’s how Blackstone, in Matt Levine’s words, “made more on Hilton, in dollar terms, than Hilton has made itself”.

from Breakingviews:

White male banker jabs at finance’s glass ceiling

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By Peter Thal Larsen

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

A white male banker is trying to tackle the finance industry’s glass ceiling. HSBC chief executive Stuart Gulliver has spent the past few years trying to cut costs and raise ethical standards. Now he wants the bank to change its culture in order to attract and retain more senior women. Though the insight is hardly new, it’s significant that a male CEO is publicly acknowledging the problem.

from Edward Hadas:

Small is beautiful in finance

Some economic activity makes the world better, some is a cost of making the world better, and some actually makes the world worse. Where does the business of finance - lending, borrowing and securities trading – fit in? Mark Carney, the new governor of the Bank of England, recently said: “a vibrant financial sector brings substantial benefits.” The implication is that more finance is a good thing, as long as it is safe. That is simply wrong.

True, empirical studies show that financial activity increases along with incomes in poor countries. But this correlation has little bearing on developed economies with mature financial systems. In these countries, additional financial activity unquestionably adds to GDP, but the same can be said for the substitution of expensive medical care for cheap preventative action. The question is whether additional finance promotes overall economic good.

from Counterparties:

Twitter economics

Welcome to the Counterparties email. The sign-up page is here, it’s just a matter of checking a box if you’re already registered on the Reuters website. Send suggestions, story tips and complaints to Counterparties.Reuters@gmail.com.

As its mid-November IPO approaches, Twitter is losing money at an accelerating pace. The company’s amended filings show that last quarter it approximately doubled revenues to $168.6 million compared to a year ago, while its net loss more than tripled to $64.6 million. Fortune’s Stephen Gandel digs into the new numbers, and how Twitter changed the way it's booking revenue:

from Edward Hadas:

A call for radical financial reform

The governments of developed countries have the power to rescue economies from defective finance. There is a radical solution. It would be relatively easy and at least as fair as the current slow generation-long recovery from the 2008 financial collapse.

I have been suggesting massive “start from scratch” financial reform for several years. The response is usually a mix of incredulity (it’s too hard to do) and indignation (it would be unjust). A thought experiment might help deal with those objections. Pretend that the current situation - excessive debts and deficits, unprecedented and risky monetary policy, overly powerful banks, slow GDP growth and unacceptably high levels of unemployment - was the result of a recent war.

from Breakingviews:

Review: A blunt-edged hatchet job of free markets

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By Robert Cole

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

Bryan Gould’s new book is a closely argued critique of current trends in globalisation, monetary policy, and big business. Gould, a senior figure in the UK Labour Party in the 1980s has found some culpable targets. But his own answers are unconvincing.

from Edward Hadas:

A dangerous lie about debt

I have spent much of the last five years searching for financial villains. The 2008 crisis and the extremely slow subsequent economic recovery have exposed a deeply flawed system, and some people, groups or ideas must be responsible.

There are many obvious culprits: greedy bankers, undercapitalised banks, lax monetary policymakers, reckless governments, weak international institutions and imprudent lenders and borrowers. They’re all guilty, but some of the worst offenders are intellectual - the dangerous ideas that encouraged overconfidence during the credit bubble and ineffective policy in the aftermath. Financial theory is a big problem. In particular, I accuse the risk-free rate of return of being the devil’s work.

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