The star-studded new film “The Big Short” is based on Michael Lewis’s best-selling expose of the 2008 financial crisis. Reviewers are calling it the “ultimate feel-furious movie about Wall Street.” It emphasizes the oddball and maverick character of four mid-level hedge fund managers in order to explain what it would take to ignore the rating agencies’ evaluations and bet against the subprime industry—that is, their own industry.

The post The Big Picture and “The Big Short”: How Virtue helps us explain something as complex as the Financial Crisis appeared first on OUPblog.

In a widely quoted interview with USA Today, Ben Bernanke said that ‘It would have been my preference to have more investigations of individual actions because obviously everything that went wrong or was illegal was done by some individual, not by an abstract firm.’ He makes it clear that he thought some Wall Street executives should have gone to jail.

The post Ben Bernanke and Wall Street Executives appeared first on OUPblog.

By Richard S. Grossman

As an early-stage graduate student in the 1980s, I took a summer off from academia to work at an investment bank. One of my most eye-opening experiences was discovering just how much effort Wall Street devoted to “Fed watching”, that is, trying to figure out the Federal Reserve’s monetary policy plans.

If you spend any time following the financial news today, you will not find that surprising. Economic growth, inflation, stock market returns, and exchange rates, among many other things, depend crucially on the course of monetary policy. Consequently, speculation about monetary policy frequently dominates the financial headlines.

Back in the 1980s, the life of a Fed watcher was more challenging: not only were the Fed’s future actions unknown, its current actions were also something of a mystery.

You read that right. Thirty years ago, not only did the Fed not tell you where monetary policy was going but, aside from vague statements, it did not say much about where it was either.

Given that many of the world’s central banks were established as private, profit-making institutions with little public responsibility, and even less public accountability, it is unremarkable that central bankers became accustomed to conducting their business behind closed doors. Montagu Norman, the governor of the Bank of England between 1920 and 1944 was famous for the measures he would take to avoid of the press. He adopted cloak and dagger methods, going so far as to travel under an assumed name, to avoid drawing unwanted attention to himself.

The Federal Reserve may well have learned a thing or two from Norman during its early years. The Fed’s monetary policymaking body, the Federal Open Market Committee (FOMC), was created under the Banking Act of 1935. For the first three decades of its existence, it published brief summaries of its policy actions only in the Fed’s annual report. Thus, policy decisions might not become public for as long as a year after they were made.

Limited movements toward greater transparency began in the 1960s. By the mid-1960s, policy actions were published 90 days after the meetings in which they were taken; by the mid-1970s, the lag was reduced to approximately 45 days.

Since the mid-1990s, the increase in transparency at the Fed has accelerated. The lag time for the release of policy actions has been reduced to about three weeks. In addition, minutes of the discussions leading to policy actions are also released, giving Fed watchers additional insight into the reasoning behind the policy.

More recently, FOMC publicly announces its target for the Federal Funds rate, a key monetary policy tool, and explains its reasoning for the particular policy course chosen. Since 2007, the FOMC minutes include the numerical forecasts generated by the Federal Reserve’s staff economists. And, in a move that no doubt would have appalled Montagu Norman, since 2011 the Federal Reserve chair has held regular press conferences to explain its most recent policy actions.

The Fed is not alone in its move to become more transparent. The European Central Bank, in particular, has made transparency a stated goal of its monetary policy operations. The Bank of Japan and Bank of England have made similar noises, although exactly how far individual central banks can, or should, go in the direction of transparency is still very much debated.

Despite disagreements over how much transparency is desirable, it is clear that the steps taken by the Fed have been positive ones. Rather than making the public and financial professionals waste time trying to figure out what the central bank plans to do—which, back in the 1980s took a lot of time and effort and often led to incorrect guesses—the Fed just tells us. This make monetary policy more certain and, therefore, more effective.

Greater transparency also reduces uncertainty and the risk of violent market fluctuations based on incorrect expectations of what the Fed will do. Transparency makes Fed policy more credible and, at the same time, pressures the Fed to adhere to its stated policy. And when circumstances force the Fed to deviate from the stated policy or undertake extraordinary measures, as it has done in the wake of the financial crisis, it allows it to do so with a minimum of disruption to financial markets.

Montagu Norman is no doubt spinning in his grave. But increased transparency has made us all better off.

Richard S. Grossman is a Professor of Economics at Wesleyan University in Connecticut, USA and a visiting scholar at Harvard University’s Institute for Quantitative Social Science. His most recent book is WRONG: Nine Economic Policy Disasters and What We Can Learn from Them. His homepage is RichardSGrossman.com, he blogs at UnsettledAccount.com, and you can follow him on Twitter at @RSGrossman. You can also read his previous OUPblog posts.

The post Transparency at the Fed appeared first on OUPblog.

        

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In 1970 I organized a protest march against the wearing of fur at a fashion show. This was the first of its kind in Anchorage, Alaska at the time, so the media turned out in force, even though there were only about 12 of us marching on that March day. Nearly all my social sorority sisters were inside that fashion show that day, wearing their furs. They stared at me in shock and horror as they crossed our line to enter the hotel that day. Some spoke to me. And that was the first time I heard the argument that a person could not protest the wearing of fur if she ate meat or wore leather. "What are your shoes made of?" Apparently, if a protestor wore a speck of leather, she had no right to protest the clubbing of baby seals -- which was rampant at that time in Alaska. My hand-made sign had a picture of a baby seal, and the words "He died for your skins!"
Now all of PETA is overly familiar with fur wearers arguments. Those arguments probably contributed greatly to veganism. Fine. I have no problem with veganism and pleather and options to wearing animal skins. I'm a vegetarian. I was then.
Here's the thing though. This is a free country. We have the right to free speech. We have the right to protest whatever we feel is wrong. And we do not have to be pure before we can speak out. So, please if you feel in your heart that you should say something about the fact that the makers of UGG boots are using the skins of raccoon dogs that have been SKINNED ALIVE (see www.hearldsun.com.au), but you eat meat and wear leather shoes, don't let that stop you. Okay?
If you want to join with other protestors in Pioneer Square this Thursday at noon October 6, and protest Wall Street, but you happen to own stocks, or invest your money in bonds, or some combination that you don't even understand, but you still don't believe that the people who brought this country to its knees should get away with it -- well go protest!
Remember the last line from "Some Like it Hot": "Nobody's perfect." That's right, none of us are, and if we all speak up, stand together, do our part, we CAN make this world a better place.

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By Elvin Lim

Tea Party Republicans are about to be force-fed a slice of humble pie. In the first test of their political acumen since sweeping into Congress last year, they showed an ignorance of the first rule of democratic politics: never say never, because a politician’s got to be a politician.

Especially on an issue, the federal debt ceiling, with stakes as high as financial Armageddon itself! All the best intentions in the world, served up on the high horse of ideological purity, are about to bring the entire Republican party to its knees before Obama on this issue.

Ronald Reagan presided over 16 debt ceiling raises, Bush saw it raised 7 times. Did Tea Party Republicans really think that they could out-Republican Reagan and Bush? There’s the crux of any bargaining game — know thine chips. There is simply no way Wall Street and the Chambers of Commerce around the nation were going to sit around and let the Tea Party faction within the Republican fold play with this financial matter of life and death. Maybe it was the residue of last year’s electoral hubris, or maybe they believed the myth that fiscal conservatism is the one thing that unites Republicans, or maybe they forgot that the president wields a veto, but Tea Partiers and their leaders in Congress should never have done a repeat of George H. W. Bush’s “Read my lips, no new taxes.” Doing this backed them into a corner, flanked by no debt ceiling increases on the one side, and no tax increases on the other. Leaving no standing room left for compromises, the Tea Party caucus is about to realize that two negatives do not together make a “yes” from the White House. In fact, the only one who gets to say “no” with no less than constitutional gravity is the President.

Obama knew this issue was his to win all along, and he has played the Republicans like a fiddle, presenting himself as a grand negotiator and eminent pragmatist; the go-getter who slyly had it implied that checks for social security may not be sent out in August, and the media played along and covered the circus. But Obama knew that he never ever had to compromise, which is why he raised the goal of achieving a $4 trillion plan to ensure both that he looked presidentially ambitious, and that he would get exactly what he wants when the deal inevitably fails. Republican leaders trotted along to the White House negotiation table, willingly playing his game in part because they had to look like they were trying, but for the most part they were clueless about the plastic value of their bargaining chips.

It is one thing to take an extreme position, but it is another to take an extreme position on a matter that could precipitate financial Armageddon. I have to believe that anyone who is willing to take that risk has a part of herself who would like to see financial collapse on Wall Street, the decimation of corporate capitalism, and a return to Jacksonian laissez faire. The President is rather smugly playing this game because he knows that he doesn’t have to lift a hand because in the end, Wall Street will rein the Tea Party in. And so mainstream Republicans have allowed themselves to lose control of the message — which worked so very well in their favor when they were still focused on jobs — by talking themselves into corner on an issue they wrongly thought was more on their side than on the President’s. Wall Street is not conservative or Republican, Tea Partiers! It’s even more powerful than the liberals, and that’s why the Dow’s not even flinching.

Worse still,

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In Economics of Good and Evil, Tomas Sedlacek asks: does it pay to be good? In order to answer this question, he looks at the way societies have reconciled their moral values with economic forces. He explores economic ideas in world literature, from concepts of productivity and employment in Gilgamesh to consumerism in Fight Club. In the videos below Sedlacek talks about why he wrote the book, before going on to explain ‘the story of Joseph and bastard-Keynesianism’.

Click here to view the embedded video.

Click here to view the embedded video.

Tomas Sedlacek works for the National Economic Council in the Czech Republic and is a former economic advisor to President Václav Havel. The Yale Economic Review called him one of the ‘5 Hot Minds in Economics’. He will be talking about his book at the RSA in London on Thursday 16 June.

View more about this book on the

As we previously noted, Liberty Media Corporation, a company chaired by entrepreneur John C. Malone, has submitted a proposal to bid for Barnes & Noble. The offer of $17 per share appraises the company valuation at $1.02 billion. Last week a New York Times article speculated on why Liberty bid for Barnes & Noble.

Here’s more from the article: “So far, most of the reasons given for the interest in Barnes & Noble center on its e-reader, the Nook. Mr. Malone implied that the Nook was a primary reason for Liberty Media’s bid at the company’s shareholder meeting on Monday. Though exact figures are unavailable, Barnes & Noble captured as much as 27 percent of the e-book market with its Nook, according to a Goldman Sachs report.”

The article also offered the theory that Borders’ bankruptcy has also influenced Malone’s offer. Borders’ struggles helped eliminate competition on the brick and mortar side of the business. What do you foresee for the bookseller’s future? (via Publishers Weekly)

New Career Opportunities Daily: The best jobs in media.

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By Louis René Beres

Adam Smith published his Inquiry into the Nature and Causes of the Wealth of Nations in 1776. A revolutionary book, Wealth did not aim to support the interests of any one particular class, but rather the overall well-being of an entire nation. He sought, as every American high-school student learns, “an invisible hand,” whereby “the private interests and passions of men” will lead to “that which is most agreeable to the interest of a whole society.”

Still, this system of “perfect liberty,” as he called it, could never be based upon encouragements of needless consumption. Instead, argued Smith, the laws of the market, driven by competition and a consequent “self-regulation,” actually demanded explicit disdain for any gratuitous or vanity-driven consumption.

What does this all mean for better understanding current economic dislocations and volatility? Above all, it suggests that modern commentators and pundits often speak in blithe disregard for Smith’s true beliefs, ignoring that his primary concern for consumption was always tempered and bounded by a genuine hatred for “conspicuous consumption” (a phrase to be used more pointedly by Thorsten Veblen in a later century).

For Adam Smith, it was only proper that the market regulate both the price and quantity of goods according to the final arbiter of public demand, yet, he continued, this market ought never to be manipulated by any avaricious interferers. In fact, Smith plainly excoriated all those who would artificially create or encourage any such contrived demand as mischievously vain meddlers of “mean rapacity.”

Today, of course, where engineered demand and hyper consumption are permanent and allegedly purposeful features of the market, especially here in the United States, we have lost all sight of Smith’s “natural liberty.” As a result, we try, foolishly and interminably, to build our economic recovery and vitality upon sand. Below the surface, we still fail to recognize, lurks a core problem that is not at all economic, fiscal or financial. Rather, as Adam Smith would have understood, it is a starkly psychological and deeply human dilemma.

Wall Street’s persisting fragility is largely a mirror image of Main Street’s insatiable drive toward hyper consumption. This manipulated drive, so utterly execrable to Adam Smith, has already become so overwhelming that many learned economists warn us sternly against saving too much.

If only we could all buy just a little more, they argue, life in America would be better. Retail sales are the authentic barometer of the “good life.”

Collectively, our national economic effort is always oriented, breathlessly, toward buying more. Many of our country’s troubling and troubled economic policies are a more-or-less direct consequence of this sorely misdirected effort. Until we can get an effective reversal of the frenetic public need for more and more things, any “recovery” will remain transient and partial.

Not from the start has contrived demand been a basic driving force of our economy. Obviously, before television and before our newer surrenders to an avalanche of high-tech gadgets, such demand would not have had any such compelling power. Nonetheless, for the foreseeable future, it will take herculean efforts to detach healthy patterns of consumption from a distressingly ceaseless barrage of advertisement.

At the recently-played Super

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YEMEN

Why Yemen, you ask?

It’s a place that seems to be on the brink of collapse, and even as we prepared to make this announcement, Yemen again emerged as a home base for terrorist plots. The stakes are high and the future is unclear for Oxford’s 2010 Place of the Year.

According to geographer Harm de Blij, author of The Power of Place and Why Geography Matters, “In the modern world of terrorist cells and jihadist movements, Yemen’s weakness spells opportunity.” Regional conflicts like the Houthi rebellion in the north and revival of the southern secessionist movement diminish the power of the government. Terrorist bases now reside in the remote countryside, posing a familiar dilemma for the United States: Is shoring up the country’s army and police worth the risk of increasing Al Qaeda protection and loyalty? At the same time Yemen stands to be the poorest country in the Arab world, nearly depleted of its leading export, oil, while facing a water shortage experts say is heighten by the country’s addiction to qat, a mildly narcotic leaf.

Once a promising experiment in Muslim-Arab democracy, Western opinion now recognizes Yemen to have all the features of a failed state. Obscured by the attention of the political geography, is what de Blij calls “a Yemen that might have been.”

To hear more from de Blij on Place of the Year be sure to check in tomorrow!

Yemen at a glance:

Population: 22,858,000
Capital(s): Sana’
Government: Multiparty Republic
Ethnic Groups: Predominantly Arab
Languages: Arabic
Religions: Islam
Currency: Yemeni rial= 100 fils
Cash crops: coffee and cotton
President: Ali Abdullah Saleh

And now for the runners-up…

Greece
Haiti
Gulf Coast (of the United States)
the Eyjafjallajokull volcano
Mexico
Seaside Heights, NJ
California
Rio de Janeiro
Wall Street
The Gulf of Aden (“Pirate Alley”)

OUP Employee Votes:

“I’d go with Mexico. A fascinating failing state in which our stake couldn’t be greater, and compelling for all the reasons the other places mentioned might be interesting (or in crisis) individually–you have natural disaster (or the ongoing potential thereof), man-made disaster, social unrest, crime (and how), political chaos and corruption, etc. Whatever you do, don’t pick Seaside Heights, N.J., though I’ve nothing whatever against the place.” -Tim Bent, Executive Editor, Trade History

“Haiti—so we don’t forget the hundreds of thousands of people who lost their families and homes and way of life.” -Jessica Ryan, Copyediting Lead

“Eyjafjallajokull. It’s perfect in that it had a world-wide impact, or close to it; it was hard to pronounce; and it was the proverbial flash-in-the-pan issue.” -Niko Pfund, VP and Publisher

“You totally made up that v

Elvin Lim is Assistant Professor of Government at Wesleyan University and author of The Anti-intellectual Presidency, which draws on interviews with more than 40 presidential speechwriters to investigate this relentless qualitative decline, over the course of 200 years, in our presidents’ ability to communicate with the public. He also blogs at www.elvinlim.com. In the article below he looks at regulation. Read his previous OUPblogs here.

Government regulation of the market in American has always been either too invasive or too superficial, never just right. This tells us more about ourselves than the day-by-day report card of Obama’s fledgling administration.

The Obama adminstration’s firing of GM CEO Rick Wagoner seem to some to have been a power grab and an overkill; yet others feel that the administration’s plan to help to buy up some of the toxic assets owned by banks will be too easy on the banks.

We swing between the extremes of excessive regulation and unfettered laissez faire - indeed we have majority factions within both major parties staunchly defending both extremes - because our country has never properly worked out the tension between the two.

Consider the last time an economic crisis of even greater proportions rocked the country. The New Deal and in particular the National Industrial Recovery Act (NRA) represented an even greater power grab by the Roosevelt administration than the one Obama is being accused of today, including the right by the president to approve of a set of “codes of fair competition” for every industry regulating minimum wages and maximum weekly hours. The Supreme Court unanimously declared the NRA unconstitutional in 1936.

As a country born without the feudal baggage of the old world and one which has constructed the self-fulfilling myth of the American Dream, we have never had to fully confront the crisis of capitalism that industrialization provoked elsewhere. Even having experienced the Great Depression, we still have not found, and no politician has successfully articulated, a sustained national consensus about the relationship between the state and the economy. Our love-hate relationship with the federal government explains American exceptionalism, but it also the source of our current woes.

Because ours is a capitalist economy which concedes the value of government intervention and regulation, we must lived with mixed (and hence often botched) solutions to our current economic crisis. We can neither nationalize the banks - and hence control how they are run including how executive compensation is structured, nor can we leave the banks alone - no politician would dare risk a depression on the heels of his/her inaction. In trying to find a compromise between market liberalism and political control of the market, we often end up achieving neither. So the Obama administration will alternately be accused of sleeping with Wall Street or witch-hunting it; decades after we have weathered the current crisis, we will still be debating whether or not what Obama did helped or worsened the problem. This is America, where we have a right, nay, a duty, to earnestly debate - as our Founders did - the necessity of even having a federal government at all.

Today the world turned its eyes to Washington, DC where the United States inaugurated its 44th President, Barack Hussein Obama. And while most of our executives have been sworn in here on the banks of the Potomac, our first head of state actually took office a stone’s throw from another river: the Hudson. On April 30, 1789, George Washington took his oath of office in front of a crowd assembled on Wall Street in lower Manhattan. After a long trip from his home in Virginia, he was rowed to New York and walked to Federal Hall, the site of his inauguration and the birthplace of American government. At the time, the city’s inhabitants numbered roughly 30,000, and its homes and businesses did not extend much further than the modern location of Canal Street. Just ten years later, the population of the country’s first capital had swelled to more than 60,000 residents.

We witnessed a fair amount of wonkiness on Wall Street today. Biggest drop in history! Run for your lives! 

But, but, but, percentage wise, the dow fell 6.98%, also known as not quite 7%, less than 7%, under 7%.

Compare that with Black Monday and the Depression when the dow fell more than 20%, also known as a helluva lot more than today, three times more than today, way, way, way more than today. I'm just sayin'.

Now if this writing gig doesn't work out, does anyone think I have a future as a math teacher?

Disclaimer: the above excerpt is an example of how word choice creates tension in a scene, not a lesson in economics, which I am grossly unqualified to teach.

My thought on all this politics and financial crisis is that we can make a difference. We MUST make a difference!

What can we do right now to ensure that the youth and children of now are smart enough and prepared enough and willing enough to care about this country like we do and to run it effectively?

Education is the key to our survival. Look around you; look at the average kid walking down the street. Is that who you want running our country in 40 years? Would they even care enough to want to?

By putting more of a focus on the education of this and the next generations we can ensure that our country will be worth the respect of those around us and that we won't have to worry about the next big crisis.

I think that Robert Kiyosaki and Donald Trump have the right idea. In WHY WE WANT YOU TO BE RICH, they talk a lot about financial education. It is crucial to not only teach kids the basics, but to also teach them about the wonders of respect and accomplishment and self-worth. By giving them a financial education, we can increase the chances of them being successfully independent. Part of that education needs to be the analysis of situations like what we face now in the financial sector. I once heard someone say that Wall Street didn't affect them because they owned no stock. I wonder what they are thinking now.

Kids are leaving schools without the basic skills to do simple math or even to know how to read in many cases. I've seen this. It is frightening.

Is it up to government to fix our education problems? Isn't it up to the people? This is no time for pointing fingers and saying "you did it." It is a time to come together and find a solution to the problem. Don't like the schools your kids go to? Home school, give them the level of education you think they require, but be sure you include the things that are important. WE have to make certain that we all begin and master the basic skills before moving on to the "fun" stuff.

Where is the support for our educators. I do believe that a lot of the problem with education lies with the teachers. It is not their fault! But they are tired. They are overworked, they are underpaid, and they are seriously underappreciated. What incentive do they have to even care? Now, don't get me wrong, they chose their career and they had to know going in that it would have its down side, but overpopulated classrooms, lack of financial support for curriculum materials and basic tools? Was this part of the deal? When was the last time you thanked your child's teacher for their efforts. How many teachers actually feel like anyone cares?

Well, I care. I don't have children, but I am educated enough to know that if we, as a people, don't do something to support education in this country, we are all in a lot of trouble, now, and in the future!