Opinion

The Great Debate

from The Great Debate UK:

A history lesson for lenders

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-Laurence Copeland is a professor of finance at Cardiff University Business School. The opinions expressed are his own.-

Anyone looking for a broader perspective on the events of the last three years could hardly do better than choose for bedtime reading “This Time is Different” by Carmen Reinhart and Kenneth Rogoff.

It is nothing less than a history of financial crises through the ages, starting in late medieval England and continuing via 15th and 16th century Spain and its New World colonies on to the teething problems of Britain’s banks in the industrial revolution and the upheavals of the 20th century, ending in 2008 with the bankruptcy of Lehman Brothers.

The emphasis throughout is on sovereign default. For many politicians, bankers and economists, it ought to read not just as a lesson, but as a severe rebuke, because its basic message is that there is nothing new under the sun and that financial history reads like a long catalogue of facts we have chosen to forget.

So, as the authors show, no country’s history is free of bank collapses, sovereign defaults and currency debasement in one form or another.

from The Great Debate UK:

Greenspan and the curse of counterfactual

Laurence_Copeland-150x150- Laurence Copeland is a professor of finance at Cardiff University Business School and a co-author of “Verdict on the Crash” published by the Institute of Economic Affairs. The opinions expressed are his own. -

Suppose that, instead of appeasing Nazi dictator Adolf Hitler at Munich in 1938, Neville Chamberlain had taken Britain to war, what would today’s history books say about the episode?

It is of course impossible to know. Perhaps something along the lines: “the British prime minister’s stubborn refusal to compromise resulted in a war which dragged on for 6 months at a cost of over 300,000 lives.....” Make up your own scenario.

from The Great Debate UK:

Bankers’ bonuses: the fish stinks from the head

copelandl- Laurence Copeland is a professor of finance at Cardiff University Business School and a co-author of “Verdict on the Crash” published by the Institute of Economic Affairs. The opinions expressed are his own. -

The awful thing about lynch mobs is they so often hang an innocent man, leaving the guilty totally untouched.  In the case of the banks, the danger is acute.  As I have already argued, hedge funds and private equity are being unfairly targeted, especially in Europe. But there is another, even less popular class which is likely to end up in the firing line, for no good reason and with consequences which could be damaging for all of us.

Broadly speaking, the banks pay 6- and 7-figure bonuses to two quite different sorts of people. First, there is a layer of what we might call technocrats: the striped-shirted traders of legend, with their loud voices and even louder dress codes, along with the managers who try to control them, the quants who invent complex trading strategies and price exotic new instruments, and a variety of others with specialised skills. Since they are rewarded in proportion to the profit they generate for their employer, which can usually be measured with considerable accuracy, their bonuses are often very large indeed. The question is: should we treat these professionals who trade on their expertise and who heavily outnumber senior management in the same way as their bosses? Not as far as I can see.

Did Asperger’s help cause the crisis?

Did the financial system blow up because it was built and largely operated by people with many of the characteristics of a mild form of autism called Asperger’s syndrome?

As explanations for the crisis go, it’s on the extreme side but forms an interesting counterpoint to the “blame the looting bankers” story line.

People with Asperger’s, a mild form of autism, are characterized by, among other things, a deficit of “theory of mind,” essentially the ability to understand that other people have different beliefs or knowledge than themselves. Nicholas Nassim Taleb, author of The Black Swan, has written that a lack of theory of mind left many in positions of responsibility without the ability to conceive of and guard against black swans, which are rare, high-impact and hard to predict events.

from The Great Debate UK:

Residue of the Great Recession

Drummond- Don Drummond is Chief Economist at TD Bank Financial Group. The opinions expressed are his own. -

The Great Recession is over in North America.  But repair will be a slow work in progress and great risks remain.  Many of these risks are centred on policy matters.  The recession shook our understanding of some policy matters to the core, leaving more questions than answers.

The Great Recession produced deep output and employment losses in many countries, certainly including Britain and the U.S., but also an unprecedented degree of synchronization around the globe. 

from The Great Debate UK:

A year of austerity looms in 2010

david-kuo_motley-foolthumbnail-David Kuo is director at the Motley Fool. The opinions expressed are his own.-

If you thought 2009 was as bad as things will get, then think again: 2010 could be worse. It is likely to be a year of enforced austerity with both the government and households making obligatory cuts to their budgets.

High on the government’s agenda will be reducing the Budget deficit, if the UK is to avoid the embarrassment of having its sovereign debt rating cut by rating agencies. This will have a knock-on effect on households, which could see their disposable incomes slashed by hikes in both direct and indirect taxes.

There are two possible ways for the government to reduce the Budget deficit. The first is to increase tax revenues and the second will be to slash expenditure – both of which will have an adverse impact on the economy. There is a third, which is to raise revenue through the sale of state assets. These may include the Royal Mint, the nations stake in part-nationalised banks, and anything else the Chancellor might find lurking at the back of the wardrobe.

from The Great Debate UK:

2010: the year of fiscal clean up

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- Jane Foley is research director at Forex.com. The opinions expressed are her own. -

At the height of the financial crisis few argued against the need for a huge fiscal and monetary policy response.  As a result the global economy has moved away from the precipice.  For many governments 2010 will bring a different kind of precipice, this will be the year in which many electorates will be made to start paying for their governments’ huge fiscal binges.

Certain countries will enter this process severely disadvantaged.  Earlier this year UK debt was singled out by S&P for a possible downgrade.  This week Moody’s commented that UK debt along with that of the US will test the boundaries of its top AAA rating.

from The Great Debate UK:

When firms “Too Big to Fail” fall

Amid the turmoil of the 2008 financial crisis a myriad of events unfolded that the general public knew nothing about, writes New York Times reporter Andrew Ross Sorkin in a new book titled "Too Big to Fail."

Wall Street fell from the dizzying heights of good fortune to calamity in a matter of months. To a large degree it's still to early to tell whether financiers and politicians involved made the right choices.

"At its core 'Too Big to Fail' is a chronicle of failure -- a failure that brought the world to its knees and raised questions about the very nature of capitalism," writes Sorkin in his behind-the-scenes account.

from The Great Debate UK:

Narrow banking: reforms for the future

British economist and author John Kay argues in "Narrow Banking: the reform of banking legislation" that the financial services industry should be restructured to ensure that regulation serves the interests of the public.

"A competitive marketplace is one in which well run businesses earn profits through domestic and international competition, and badly run businesses go to the wall," he says.

"That is the process by which the market system promotes innovation and economic progress, and suppression of that process damages innovation and economic progress."

Time for a shareholder revolt

jamessaft1(James Saft is a Reuters columnist. The opinions expressed are his own)

There are encouraging signs that shareholders are becoming more assertive in defending their interests.

The Financial Times reported on Monday that some of Britain’s largest institutional shareholders – including Standard Life, Legal & General and M&G – are working on a plan to bypass investment banks by creating a club to underwrite new issues of equity by small and medium-sized British companies, a move that could save hugely on fees.

What, you may wonder, took them so long?

Second only to taxpayers, investors have been the great patsies of the financial crisis, paying massive costs to a financial services industry which has, to put it mildly, not served them well.

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