I have to agree with those who believe that the TBTF inherent policy is the antithesis to capitalism.  It has been shown time and again to allow firms to take on reckless amounts of risk.  These institutions then take advantage of the upside of a cycle by rewarding their success with large salaries and bonuses which during good economic times do not receive as much public condemnation.  Then, when the bets go bad, the firm, because of its large size receives a bail-out from the taxpayers to prevent complete meltdown.  We saw this most notably with Long Term Capital Management in the 90’s and again in 2007 with the mortgage crisis and as long as the TBTF policy is in place this type of behavior will continue.

Regulatory discussions have focused on this issue of TBTF but there is also a push for resolution authority which would allow the government to lead firms through a cleaner bankruptcy.  Resolution authority to me seems like a way to continue business as usual and stands out as a reactionary ad-hoc fix instead of a preventive measure.  We need policies in place that will ensure an environment which will have the least probability of boom-and-bust.  One of the congressman poignantly addressed this issue during a debate when he posed the question whether anyone knew a well capitalized, well regulated, well managed bank to fail.

One of the reforms being discussed is to limit the size of banks.  A number that I remember being put foreword is $100 billion dollars.  This would be the size that would not be TBTF.  It has also been questioned how much is actually gained in efficiency for banks larger than this size.  One problem asserted about this cap is that it does not address the issue of counter party risk.  From my understanding a scenario could still result in which all banks were within the $100 billion limit but because of large amounts of counter party risk a massive meltdown would still take effect.  However, it seems that if banks became better capitalized in conjunction with cap limits the chain reaction could be cut short.

The scope of the TBTF issue is huge and delving into every aspect would fill a book, but as I said at the beginning of this article it is encouraging to see it being addressed.  Regulators however still can expect to face many roadblocks ahead.  Reforms would have many logistical problems such as aligning the regulation with the global structure of bank regulation.  Capping the bank size would mean breaking up colossal banks and reforms would  have to be wide reaching so that all financial firms regardless of legal make-up would be effected equally.  We then would need to be vigilant so that new rules are enforced and of course ensure that new regulation won’t strip away the competitiveness of the US banking industry.

I expect to see increasing coverage of TBTF in the future and I encourage those who still want more information on this topic to watch the video posted further up or visit The Baseline Scenario, where you will find numerous posts regarding this issue.

Economics would likely not be described as a lively topic for most people; however, its importance encompasses us all.  Whether we like it or not, knowing a thing or two about economics can be useful in understanding the world around us.  Above is a video created by John Papola & Russ Roberts, George Mason University economist and Spike TV executive producer respectively, which will cover the opposing philosophies of the economists John Maynard Keynes and F.A. Hayek.  The catch?  It is presented as a semi-rap battle with obvious similarities to what you will find in mainstream rap music.  Perhaps to address and reach a larger audience.  You can view the original post here, where you will also find the lyrics.  Enjoy!

“Annual income, twenty pounds; annual expenditure, nineteen nineteen six; result, happiness.  Annual income twenty pounds, annual expenditure, twenty pounds ought and six; result, misery.”

-Charles Dickens, David Copperfield, pg 153

While reading the World In 2010, an annual production by the Economist magazine to predict and analyze the coming year, I found one article titled “The end of the affair”, to sadly mirror my own feelings about the future of the MBA or more importantly the value of business education.

Years ago when I applied to become a Finance major for my undergrad, business seemed to be the sure thing to go into;  a field that could be pinned down and quantified just as any other scientific discipline. Unfortunately, in the aftermath of a financial collapse reading about corporate greed and ethics are much more common than hearing of the brilliance of top finance companies.

As I have myself struggled to even find work with a finance undergrad in the poor economy, it looks to be much worse for the thousands of people graduating with their shiny new MBA.  With massive school debt looming and jobs under fierce competition, these new graduates will I think find it hard to justify the money spent.  The glamor of wanting to enroll into the program myself has diminished.

Business school in my view may have been overvalued.  Many leave school, I speak for myself but can only assume others feel similarly, with an unimpressive amount of tangible skills.  Often one of the biggest tools at your disposal upon graduation is the ability to speak the jargon but the inability to understand the mathematics or complex systems underneath is lacking.  I don’t expect an MBA program to be much different.

To self-criticize, I have not gone through the program myself, and therefore can only speak to what I have read and heard.  The MBA program may well still be a valuable program for some who already have a technical background e.g., engineering, math, IT, and are pursuing a more managerial role in their office.  However, I think with a gluton of MBAs looking for work and a need for workers with more at their disposal than fancy terminology, the program overall looks less enticing.

The argued main cause of delistings in the US exchanges is from a process they termed “The Great Delisting Machine,” or a trend towards lower commission and trading costs, which they see as starting back in 1996 with the birth of online brokerages.  One of the damaging products of this Delisting Machine is “Casino Capitalism.”  Casino Capitalism they claim is pushing out long-term quality investors through such means as: black pools, hedge funds, naked shorts, predatory shorts, high-frequency trading firms, OTC derivatives and credit-default swaps, credit surrogates (see full report for detail).

At this point, you may be wondering the obvious question, and the one assumed by this report: is a decline in the amount of publicly listed companies a bad thing?  Their answer is an emphatic YES.  The highest projection they calculated (formula explained in report) shows the loss of potential jobs at 22 million, and this number doesn’t account for any multiplier factors.  They point to a study by Global Insight which finds that “92% of job growth occurs after a company goes public.”  Accordingly, if the amount of IPOs is decreasing you could expect that potential jobs are being lost.

One additional concern is that this is not a global phenomenon but a US one.  The time period covered for their analysis was 1991-2008 and of all the developed nations who had reliable data no one suffered as much as the US.  In fact, Hong Kong over this span of time achieved a 253.2% growth in listings compared to a -22.2% reduction for the US.

For the complete report and Grant Thornton’s recommended solutions to this problem please turn to the pdf file they have at their website found here.

I have just finished listening to a great pre-recorded radio broadcast of This American Life, the issue titled, The Giant Pool of Money.  It is slightly dated now having been recorded back on 5/9/2008 but still, I believe, highly relevant.  It last for about an hour and covers the mortgage crisis and what exactly happened at varying levels from the CDO trader to the new homeowner.  I encourage everyone reading this to give it a listen and if you don’t have the time at the moment, bookmark it!  You can listen to the full episode by simply clicking on full episode link under the picture of the dollar bill.

This American Life: The Giant Pool of Money

“Andrew Lo, of MIT’s Sloan School of Management, was fond of pointing out that in the physical sciences three laws can explain 99% of behaviour, whereas in finance 99 laws can explain at best 3% of behaviour.”

-The Economist, Sept. 26th - Oct. 2nd 2009

“The cost of heart disease and stroke in the United States has been estimated at $432 billion for 2007, including health care expenditures and lost productivity.”
-The Blue Zone by Dan Buettner

This is a pretty shocking estimate and although the number could have quite a bit a fidget room even at half that amount it is a considerable amount. I think this makes the case as has been brought up on numerous occasions for the practice and additional emphasis on preventative medicine in our county. Encouraging and creating incentives to not smoke, live a non-sedentary lifestyle, and have a healthy diet could save our state billions of dollars while also having many positive side-effects.

Where ever you might stand on this issue it will certainly be heavily debated as the US looks for ways to save on spending and improve the state of our health care system. Simple changes in philosophy could make a dramatic difference.

Math, yes, the stereotypically nerdy, the unjustly named boring, and maybe not so wrongly named difficult.  It is, despite these truths and fictions, a matter of great concern especially for those who wish to further their knowledge of finance and economics. Readings of many graduate level or higher papers in these fields are littered with mathematical terms and without the appropriate level of understanding can be impossible to follow.  More importantly, mathematics and it’s applications can have major consequences for the financial industry and beyond.

In a extremely interesting article posted on wired.com, Felix Salmon discusses how a formula designed by David X. Li brought the financial system to a halt in the current crisis.  It is an important reminder that math can be extremely powerful (profitable) but also dangerous if not correctly understood.  I think that had financial institutions better understood the true risk that they had been taking they would be in a better position today.

Now, if you are like me and are curious to continue to learn mathematics as a way of furthering your understanding of finance, economics, or math itself, I have a couple recommended sites I would like to share with you that have been invaluable to me.  The first is MIT OpenCourseWare, which is not only a superb access point for watching full classroom periods for select MIT math courses but is a great source for numerous other disciplines.  Second, Free Online Books, which appears to be a legit website and has been a great resource for working through whole textbooks at no cost.

Happy Learning!

Image courtesy of SXC.hu, HAAP Media Ltd