Opinion

Edward Hadas

Bitcoin is a step back not forward

Edward Hadas
Nov 27, 2013 16:00 UTC

The developers of bitcoin are trying to show that money can be successfully privatised. They will fail, because money that is not issued by governments is always doomed to failure. Money is inevitably a tool of the state.

Bitcoin relies on thoroughly contemporary technology. It consists of computer-generated tokens, with sophisticated algorithms guaranteeing the anonymity, transparency and integrity of transactions. However, the monetary philosophy behind this web-based phenomenon can be traced back to one of the oldest theories of money.

Economists have long declared that currencies are essentially a tool to increase the efficiency of barter, which they consider the foundation of all organised economic activity. On this view, money is a convenient instrument used by individuals to get things done. It is not inherently part of the apparatus of government.

I think of the concept of privately issued tender as “right money,” because the whole idea appeals instinctively to right-wing thinkers. They dislike centralised authority of all sorts, including monetary authority. For example, Friedrich Hayek, Margaret Thatcher’s favourite economist, proposed replacing the state’s monopoly on legal tender with competing currencies offered by rival banks.

Hayek presumably would have approved of bitcoin. The currency’s issuer is an unknown computer programmer, about as far from a government as can be imagined. Right now bitcoin is tiny; at the current exaggerated exchange rate the total projected volume of “coins” is worth less than the GDP of Mongolia. Still, Hayek might well have dreamt of bitcoins becoming a global currency for wages, prices and loans. He would, though, have hoped for a more stable value, not the increase from $13 to $900 per bitcoin in less than a year.

Favour labour over consumption

Edward Hadas
Nov 13, 2013 16:09 UTC

Unemployment is a problem in most developed economies. Any politician, central banker or professional economist in the United States or Europe will admit that the published rates are unacceptably high, that too many people have left the paid labour force and that young people starting out have a particularly bad deal.

Americans often say their problem was caused by the 2008 financial crisis. That isn’t exactly wrong. After the failure of Lehman Brothers, many indicators of labour market depression – for example, the proportion of unemployed people who have been unemployed for more than six months – jumped to the highest levels on record (generally since 1948). Most of these indicators have improved, but remain uncomfortably high.

However, I think that the recession only uncovered longstanding structural weaknesses, and the problems I have in mind are not exclusively American. They just showed up in European statistics much earlier. Unemployment rates there have been persistently high, especially among the young, for decades. And the recorded unemployment numbers are flattered everywhere by the expansion of what might be called the non-labour force: those classified as suffering from incapacity, involuntary students and healthy retirees.

Small is beautiful in finance

Edward Hadas
Nov 6, 2013 16:14 UTC

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.

It can do so, but not directly. Finance is a cost. It is a means not an end, an input not an output. People and companies should engage in financial activity only to help them do other things – most notably to preserve or increase wealth, to coordinate expenditure with incomes and to help organise real investments, production and distribution.

Economists overvalue stock markets

Edward Hadas
Oct 31, 2013 13:07 UTC

Is it possible to construct portfolios which perform better than the overall stock market? Two of the three recipients of the latest Nobel prize in economics have tried to answer that question. Roughly speaking, Eugene Fama said that all efforts are in vain, while Robert Shiller said that they are not.

These nearly contradictory views are typical of an intense but inconclusive argument stretching back four decades. Market researchers have produced a mountain of studies, but they rarely consider the macroeconomic, ethical and social meaning of equity investing. That’s a shame. If more attention were paid to these issues, everyone could calm down.

Start with the economics. For the economy as a whole, changes in individual stock prices are basically irrelevant. The companies receive no cash when existing shares trade hands, whatever the price. The trading shareholders may have gains and losses, but they cancel each other out. The net economic effect of frenetic stock markets is zero.

A call for radical financial reform

Edward Hadas
Oct 9, 2013 14:56 UTC

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.

Under those tragic circumstances, it would not be strange to say that the prevailing financial order was a relic from a lost period. Perhaps the arrangements were effective and fair back then, leaders would say, but the old promises, practices and privileges are now helping the few, hurting the many and holding the economy back. So finance needs to be reconstructed.

Elop and the neo-feudal revolution

Edward Hadas
Oct 2, 2013 15:17 UTC

I have nothing against Stephen Elop. The former and future Microsoft executive seems to have done a pretty good job running Nokia. It’s a little awkward that he was offered $7.3 million to move from Microsoft to the Finnish phone-maker and stands to receive $25.4 million to rejoin the his former employer. But the tech industry often has a slightly incestuous feeling, and there were plausible strategic arguments for both moves. Elop did what almost any senior American executive would have done – negotiated and renegotiated favourable contracts.

However, Elop’s packages are part of an outrageous system of executive remuneration. It features pointlessly complex arrangements – base salary, cash bonus, a small collection of share plans plus substantial payments for coming and going. The deals are rigged in the executive’s favour; Elop obtained highly attractive last minute alterations just before the sale of the phone business. And the numbers are all unjustly large, by any relevant standard.

The announcement of Elop’s terms was understandably met with widespread disgust. The same response is typical whenever executive pay comes up.

America says it has got poorer. That’s rich

Edward Hadas
Sep 25, 2013 14:45 UTC

The U.S. Census Bureau says the median American household’s income was 1.3 percent lower in 2012 than in 1989 after adjusting for inflation. That suggests stagnant American consumption for the last 24 years. That assertion is not as ridiculous as North Korean propaganda about the United States – “their houses blow down very easily and they have to live in tents” – but it’s still misleading.

To start, the country is currently enjoying the fruits of major technological advances in electronics. In 1989, there were almost no mobile phones. Today, more than 90 percent of American adults have one, according to the Pew Internet and American Life Project – and more than half of those phones count as “smart”. The same project estimates that about 70 percent of U.S. adults are daily internet users, compared to zero in 1989.

Considering the increased consumption of electronic goods, a typical American household could only be poorer now than then if there were matching declines in the consumption of other goods and services. But none of the statistics I could find shows this. On the contrary.

Has quantitative easing worked?

Edward Hadas
Sep 4, 2013 15:05 UTC

It is nearly five years since the U.S. Federal Reserve slid into quantitative easing, the deployment of artificially created money into the bond market. QE and a prolonged period of near-zero interest rates have been the highlights of post-crisis monetary policy. That era is far from over, but it has lasted long enough for a preliminary judgment of monetary policy – especially as the Fed says it is now preparing to “taper” its bond purchases. My verdict: QE could have been worse, and it should have been better.

We know that policymakers might have done a worse job, because that is what they did in 1929, the last time a cross-border credit boom ended in a cross-border credit bust. Today’s central bankers have done better than their professional ancestors. In the 1930s, central bankers in many countries presided over debilitating deflation, and failed to prevent banking crises. This time, prices have neither collapsed nor exploded, and Lehman Brothers was the only big financial institution to topple.

While monetary policy helped stabilise economic and financial conditions, government bank rescues, large fiscal deficits and the automatic benefits of welfare states all played more important roles. The central banks’ support of weak institutions, and, in the euro zone, of weak governments was more important than their monetary policy.

The overvaluing of overwork

Edward Hadas
Aug 29, 2013 16:12 UTC

Moritz Erhardt has become a tragic symbol. The 21-year-old summer intern at Bank of America Merrill Lynch was found dead on Aug. 15 at his rented London apartment. There is no official report of what happened, but coworkers blogged that Erhardt died after working three consecutive 20-hour days. Whether or not that is true, the tragedy has prompted a worthwhile debate about the work culture in banking and other high-pressure professions.

Erhardt’s schedule was not extraordinary for the ambitious young people who are trying to advance on the fast track at investment banks, law firms, consultancies and other practitioners of long working hours. The normal career starts with a period of white-collar slavery: 80 or more hours a week of drudgery in air-conditioned offices, with occasional breaks for take-away meals. The tasks eventually become more interesting, but the years of mega-hours drag on. Later, workers often have lives of privileged desperation: lots of money, luxuriant houses and holidays, and a trail of damage.

Deaths from overwork are rare. But exhaustion, family breakdowns and substance abuse are common in high-stress jobs with ultra-long days. The extent of the gradual degradation of character – intelligent and interesting people reduced to narrow-minded careerists – is a matter of ongoing debate.

A dangerous lie about debt

Edward Hadas
Aug 21, 2013 09:41 UTC

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.

Some aspects of the theory have already received a great deal of criticism, but the complaints are mostly quite technical. Beta, or market return, is too often dressed up as alpha, the extra return attributed to an investor’s skill (or luck) picking particular investments. And the distribution of daily returns is actually not mathematically normal, as much of the theory assumes. But I think the problem starts right at the beginning, with the assumption that there is a readily available, perfectly safe investment. The theory basically compares the range of likely returns on every other investment to the certain gain from the risk-free alternative. Additional returns are expected to compensate for additional risk.

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