Central banks, which are the most important financial institutions in most countries, have typically employed lots of economcs graduates in the past. They might benefit from adding a few finance graduates in future. Central banks have responsibility for controlling inflation and influencing the wider economy. In some nations they also have responsibility for regulating the financial… Continue Reading
Category Archives: Financial products
Money, money, money – three different meanings
Money can mean physical cash, or the funds in a bank account or the flows of short term funding used by government and companies. No wonder finance can be confusing. * Finance is a subject bedevilled by jargon – words, phrases and acronyms that are barriers to understanding the relatively simple things that actually go on… Continue Reading
US inflation: still showing no signs of being a problem, let alone hyperinflation
Every year when the new MFin class starts, there is usually at least one person who asks the question: when will QE cause a big rise in inflation? The person is often from a hedge fund or trading background because that seems to be where this point of view is most commonly found. The assumption is… Continue Reading
Financial innovation: peer to peer lending
Peer to peer lending (P2PL) is an old idea given a new twist by the Internet: lending from households to businesses without a bank in between. P2P has flourished in the UK in recent years and is now growing fast in China. Small businesses normally rely on banks for funding because they are too small… Continue Reading
What is shadow banking?
Shadow banking is a term that was invented by Paul McCulley, the former chief economist of the giant fund manager PIMCO, in 2007. He was one of the first to identify and analyse the growth of chains of financial transactions in the US that had the economic substance of commercial banking but weren’t regulated, and… Continue Reading
US government bonds no longer have to be fixed income
Bonds, which are debt securities, are often known as “fixed income” investments. This is mostly correct but not strictly accurate. A typical bond pays a fixed coupon, which is an amount of money normally paid twice a year, for a set number of years after which the bond principal is repaid. But it is possible… Continue Reading
Meeting Merton
It is rare to meet your heroes. I wouldn’t exactly describe Professor Robert C. Merton as one of my heroes – I’m not sure I have any heroes actually – but he is somebody I admire greatly. He is probably the most distinguished financial economist in the world today. He won the Nobel prize (*) … Continue Reading
Islamic banking: small but fast growing
In the wake of the financial crisis, which showed the surprisingly fragile state of conventional western banks, people have looked for alternative ways of delivering financial services, especially credit. The IMF recently compared two types of banking that may offer lessons: cooperative banks and Islamic banking. Cooperative banks are owned by their depositors. They may… Continue Reading
Regulation leads to innovation
The Chinese government is in the process of deregulating interest rates. It took the first step in July 2013 when the People’s Bank of China (PBOC) freed the banks to set the rate charged to borrowers, other than some mortgage-related restrictions. It is expected soon to stop controlling the rate paid by banks to depositors.… Continue Reading
The ever growing foreign exchange market
The Bank for International Settlements (BIS) produced its triennial detailed review of foreign exchange (FX) markets on 5 September 2013. What we learn from this is that the FX market is vast, growing and still dominated by dollar trading in London. It’s vast The global FX market turns over $5.3 trillion a day (which is… Continue Reading
Analysing changes in long term interest rates: the term premium in US Treasury bonds
Long term interest rates, as captured by the yield on long term US Treasury Bonds, have recently swung upwards after falling for three decades. It’s still too soon to say that the long bull market in bonds has ended, because rates could fall again, but yields are at historically low levels still so the scope… Continue Reading
Commodities don’t help an investment portfolio
Investing in commodities (oil, gas, metals etc.) has gone from being a niche activity to a mainstream portfolio choice in the last fifteen years. This was driven by the long period of fast growth of commodity prices, which made a number of people very rich. The wider argument for commodities investment though has been that… Continue Reading
How to bankrupt a bank
The aftermath of the global financial crisis left many people with an impression of modern finance as extraordinarily complex, a web of multi-layered securities financed through strange off-balance sheet vehicles and held together by impenetrable mathematical formulas. There is something in this account but it’s important to remember that the most important reasons for bank… Continue Reading
The great mutual fund rip off
When I used to teach an MBA elective on capital markets, I would say that if the students remembered only one thing from the course it should be that on average active fund managers fail to beat the market and you are wasting your money paying for their advice. (I was gratified when I met… Continue Reading
The dark side of share trading
A New York Times article recently reported data from Rosenblatt Securities showing that the percentage of total US stock trading done “off-exchange” has risen from about 15% in 2008 to over 35% in 2013 and occasionally as high as 40%. What does this mean? Conventionally, stocks (shares) are traded on an exchange, which is an organised… Continue Reading