Thursday, July 19, 2012

Ethics in business schools

I'm with Zingales here: an ethical dimension should be added as an orthoganal line of thought to the profit-maximising dimension when it comes to business school instruction. However, I am a bit more skeptical on a claim by Yglesias  that the unethical/criminal behavior in business has been on the uptic in the wake of Milton Friedman's ideas. This is just a general view I have: mores and morals do change, but they do so slowly and the basic reality of human nature stays relatively constant over extended periods of time. Certainly, I would not expect that the propensity of humans to cheat and steal would change over as little as 30 years because of some thought that some guy had.

I think, rather, that what we see is confirmation bias at work. That is, when a particular industry or a political unit (city, state, country, whatever) is embroilled in deep economic trouble and/or is on the verge of collapse, evidence of corrupt, unethical, dishonest and illegal practices tends to come to the surface. When things are going swimmingly for everyone, on the other hand, people just tend not to notice these things. When the tide recedes, all sorts of flotsam, jetsam and other junk is bared for all to see. Consider this:

- the securities industry of the late 1920s is associated in our minds with - crudely put - snake oil salesmen being everywhere. Not coincidentally, the biggest financial and economic crisis of the 20th century followed and 1933 and 1934 were seminal years for the federal regulation of banking and securities sectors.

- the next set of scanal-prone bankers came upon us in late 1980s and early 90s, culminating in the Savings and Loan crisis and a bunch of said bankers ending up behind bars.

- as minor distractions compared to what followed 6 years hence, the WorldCom and Enron scandals roughly coincided with a recession of the early 2000s that followed the dotcom bust.

- we're currently living through the next set of scandals, which, predictably enough came hot on the heels of the biggest financial clusterfuck catastrophe in 80 years.

Now, do we really think that the financial industry professionals have been living open, honest and modest lives between the 1930s and 1990, between 1990s and 2002 and between 2002 and 2008? I suppose it could be that prevailing regulatory regime at the time and/or the overall profitability of the industry just squeezed the lying cheats into other sectors of the economy as between 1930 and 1990. But the lying cheats are always with us. And always have been. And always will be. With or without Milton Friedman's encouragement. We just need to try to make their lives very difficult where it matters.

Wednesday, July 18, 2012

Is QE a monetary easing

Or is it just an asset swap?

It's an important question and one that's been debated a bit on the blogosphere. QE seems to be the only monetary policy instrument that the Fed is capable (and claims to be legally allowed) of deploying at this point, whilst currently refusing to do so for reasons unknown. But nevermind the present action/inaction dilemma. Is QE actually effective as an instrument - in other wors, does it ease monetary policy - by which (I think) we all mean "increase base money."

As evidence that this is not, consider this. FT Alphaville implies that Polish yields are being driven negative by SNB in its continued quest of keeping the Euro/Swissie at 1.20. Well, without any evidence to back this - suppose that this is indeed what's happening. Is the Swiss National Bank now acting to ease monetary policy in Poland? If not, what is the difference between what SNB is doing and what ECB could be doing via QE?

Thursday, July 5, 2012

Banks as Pariahs

This here by Izabella Kaminska is by far my favorite blog post in a long while.  My hat's off.

I am going to try to supplement this loveliness with a very simple bottom line. In the world we're in right now, the banks are completely failing in their function as trasmittors of monetery policy. In fact, they have become pariahs on the real economy.
This is why monetary stimulus has been ineffective - because the CBs continue to work through the banking system, rather than through the real economy.
This is also why in order to be effective, the CBs need to avoid the banking system and inject money directly into household budgets via helicopter drops or what have you.
Finally, this is also why, in the absense of helicopter drops by the CBs, fiscal expansion (whether via tax cuts or boosted spending) will remain a more effective tool - because the state can return us to the state of scarcity of real resources relative to money in relatively short order. For those in doubt - see World War II.
I will go even further. With rate curves as flat as they are, much of the government debt in countries like U.S., UK, Japan and Germany has become entirely money like. Anything from cash to treasuries up to 2 years duration can be described as a "government obligation bearing zero nominal interest rate". Under these circumstances, the distinction between creation of money by the central banks and creation of additional debt instrument by the state is moot. The key question is solely whether this new "money" or "money-like debt" is actually exchanged for goods and services (i.e., invested in real economy).