Category Archives: Financial products

Bankers were deluded rather than evil – some evidence

A great piece of research from the authors at the University of Michigan and Princeton University (*) tests the hypothesis that the bankers inside the sub-prime mortgage bubble knew it was all too good to last. They find the hypothesis false. Many of the bankers in mortgage securitisation (transforming bank mortgage loans into bonds that were… Continue Reading

Why rich country debt won’t be inflated away

Despite persistently low inflation since the global financial crisis, there are plenty of commentators and investors who predict inflation will rise. They base this on i) the huge increase in central bank balance sheets arising from unconventional monetary policy “quantitative easing” and ii) the argument that the only way to deal with the large levels… Continue Reading

The origins of “piggy bank”

I hadn’t ever wondered about why people save spare change in a pig-shaped china container. But the ever-interesting Federal Reserve Bank of New York blog Liberty Street has just told me. It seems that it originally had nothing to do with pigs. The old English word “pygg” means a type of clay, out of which… Continue Reading

US healthcare spending as the central budgetary problem

I make the point in classroom discussions of the US fiscal outlook that, simplifying only a little, the problem of US federal spending reduces to the problem of the US health care system. All rich countries face an increase in public spending arising from a combination of a higher proportion older people and a rise… Continue Reading

Paying for a coffee and habit persistence

An essential function of the financial system is paying for things. We take for granted the ability to move money from companies to employees, from customers back to companies and for a myriad of daily transactions. This aspect of the system is a bit like plumbing – essential but largely ignored until it goes wrong.… Continue Reading

Evidence on consistency of attitudes to risk

Finance theory is rooted in the conventional neoclassical economics assumptions of how rational people approach risk. It assumes that people can mostly be thought of as having consistent preferences over outcomes, evaluated according to the probability of their happening. Rationality, in the economics world, is pretty much defined by consistency. If you’re faced with two… Continue Reading

Fixing the market? Stabilising the price of IPO stocks

Financial markets set the prices of assets such as stocks and bonds through the interaction of demand and supply. Deliberate attempts to fix or distort those prices, termed “market abuse” in the EU, are therefore usually illegal. But there is an exception. When companies first list their shares on a stock exchange in an Initial… Continue Reading

Ponzi and Pyramid Schemes

I was recently asked the difference between a Ponzi scheme and a pyramid scheme. They are closely related but there is a key difference, which is that a pyramid scheme is not necessarily fraudulent, though it frequently is marketed with fraudulent claims. A pyramid scheme is closely related to any financial bubble, with the difference… Continue Reading

Internationalisation of the RMB: what does that mean?

A phrase that pops up regularly in Chinese financial and economic commentary is the internationalisation of the RMB (renminbi – the people’s currency). What does this actually mean? Internationalisation is not an official or recognised economics term but China uses it to convey what economists would term a move to currency “full convertibility”. What does… Continue Reading

Warren Buffet and the case against gold

The latest annual letter to shareholders of Berkshire Hathaway, the investment company run by Warren Buffet and Charlie Munger, has a short section on gold which has made waves round the investment world. It’s the best statement of the investment case against gold I’ve ever seen. Buffet, the “sage of Omaha,” is not infallible but… Continue Reading

American consumerism: an historic perspective

Here’s a statement about the US consumer: “… certain dominant trends emerge: the increase in national income and in the purchasing power of a large section of the population; an increase in the availability of consumer credit; a sharp increment both in volume and variety of consumer’s goods available … and also acute choices between… Continue Reading

The seven per cent solution (or why European capital markets beat those of the US)

It is widely believed, especially by Americans, that US capital markets are superior to those in Europe and elsewhere. But whatever the general truth of this may be, in one area the US client gets a far worse deal than in Europe. A company raising equity capital in an IPO (initial public offering, where a… Continue Reading