Posts Tagged ‘Financial Regulation’

What Can We Learn From the Goldman Sachs Affair?

Sunday, June 13th, 2010

Investment-banking giant Goldman Sachs is facing a federal indictment.
By far the most significant thing about this indictment is the public reaction to it. Press accounts have not focused on the issue of fraud, which is what Goldman Sachs is actually charged with. Instead, the headlines screamed that Goldman Sachs’ managers “gloated” when housing prices plummeted in 2007 because the firm had sold mortgage securities instruments short – essentially betting that their value would decline. The clear implication in the news stories was that millions of people were economically devastated by the price declines and that Goldman Sachs employees were rejoicing [...]

The Internet and Retirement

Monday, May 10th, 2010

Some aspects of retirement are eternal and immutable. In other ways, today’s retirees are unlike any others in human history. Living standards depend on productivity, which is spearheaded by technology. Current retirees benefit from a technological revolution of staggering breadth and depth. The Internet provides the nexus to that revolution.
The Internet as Shopping Mall
If the Internet did no more than serve as a mobile shopping mall for retirees, its impact would be dramatic. Aging makes it progressively more difficult for retirees to travel and transact outside the home. Economists describe these difficulties as “transaction costs.” They consist not merely of [...]

How is the Municipal Bond Market Like the Grocery-Checkout Line?

Sunday, February 14th, 2010

Bonds are big these days. They’ve always been big among fixed-income investors – older people who have begun to prize the return of their money more than the return on their money, in Will Rogers’ immortal phrase. These security-conscious people are also the same kind of people who buy annuities. Nowadays more people are thinking about safety in investments than at any time in living memory.
Municipal Bonds – a Paragon of Bond Safety
Municipal bonds enable cities and states to borrow to finance big projects like roads and bridges. Sometimes municipal bonds are backed by the general revenue collected by the [...]

What Is It With Insurance Companies, Anyway?

Tuesday, February 9th, 2010

A film about insurance companies could aptly be titled Rashomon. Commentators and public figures each paint a different picture of insurance companies, each one viewed through a special-interest lens.
 Politicians cast insurance companies as characters in a morality play. The companies are villains who earn monopoly profits at the expense of their customers. Only the efforts of idealistic lawmakers and well-meaning regulators prevent the insurance companies from defrauding their policyholders.
 Internet savants portray insurance companies as clever malefactors who profit from knowledge denied to the rest of the world. Fortunately, the savants are on the job telling us the “things the insurance [...]

Are Consumers Rational?

Wednesday, January 6th, 2010

The financial crisis of 2008 had numerous repercussions, many of which are still percussing. Perhaps the most profound was the shaken faith in the efficacy of markets.
This complaint is not new. It origin goes at least as far back as the 19th century. How much of it is true?
What Happened to the Irrational Housing Consumers?
As a preface to the answer, consider this bit of news. Bloomberg Financial News Service reports that home mortgage applications fell during the first week in November to their lowest level in nearly 9 years. Why? Because Congress was considering a bill that would extend a [...]

What is Government Regulation Trying to Accomplish?

Wednesday, December 30th, 2009

A few months ago, the Federal Reserve made a bid to enlarge its current responsibilities. Not content with control of monetary policy, the Fed proposed to tackle the problem of “systemic risk” – the question of which firms should be bailed out by taxpayers in order to prevent economywide collapse.
Now Democrats in the U.S. Senate have entered a competing bid. They have proposed not one, but three brand new federal government agencies to handle financial regulation. The chief proposer was Senator Christopher Dodd, who when last heard from was trying to escape responsibility for having helped to engineer the housing [...]

Does the Placebo Effect Explain Government Intervention?

Thursday, December 24th, 2009

The news ( brings word that many doctors occasionally prescribe or recommend substances that have no physical effect on their patients, but that are intended to instill the belief that the patient will improve. This result is called the “placebo effect.” The news report claims that it “accounts for about a third of the benefits of any treatment….”
It seems outrageous that doctors deliberately advise a course of treatment that has no objective basis. Yet they have a justification. Placebos work – or at least they often make the patient feel better.
It is hard to avoid the reaction that the vast [...]

Bailouts Destroy Market Efficiency

Thursday, November 12th, 2009

The hottest economic topic these days is the recession – or the recovery, if we can believe 80% of business economists who tell us that it is already underway. It vastly overshadows the importance of everything else. Will the recovery be V-shaped or U-shaped or J-shaped? Will it be fast or slow? Will it be throttled by unusually-high unemployment? The implication is that cyclical concerns are the only ones worth worrying about.
If you’re an investor, here’s something else you should worry about: the efficiency of financial markets. The following case history illustrates the basis for concern.
The Rise of Bill Miller
For [...]