Basel III

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pages: 726 words: 172,988

The Bankers' New Clothes: What's Wrong With Banking and What to Do About It by Anat Admati, Martin Hellwig

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Andrei Shleifer, asset-backed security, bank run, banking crisis, Basel III, Bernie Madoff, Big bang: deregulation of the City of London, Black Swan, bonus culture, break the buck, Carmen Reinhart, central bank independence, centralized clearinghouse, collapse of Lehman Brothers, collateralized debt obligation, corporate governance, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, diversified portfolio, en.wikipedia.org, Exxon Valdez, financial deregulation, financial innovation, financial intermediation, fixed income, George Akerlof, Growth in a Time of Debt, income inequality, invisible hand, Jean Tirole, joint-stock company, joint-stock limited liability company, Kenneth Rogoff, Larry Wall, light touch regulation, London Interbank Offered Rate, Long Term Capital Management, margin call, Martin Wolf, money market fund, moral hazard, mortgage debt, mortgage tax deduction, negative equity, Nick Leeson, Northern Rock, open economy, peer-to-peer lending, regulatory arbitrage, risk tolerance, risk-adjusted returns, risk/return, Robert Shiller, Robert Shiller, Satyajit Das, shareholder value, sovereign wealth fund, technology bubble, The Market for Lemons, the payments system, too big to fail, Upton Sinclair, Yogi Berra

The fact that these margins of safety were so thin played a major role in the crisis.55 For example, without help from the Singapore Sovereign Wealth Fund and from the Swiss government, the Swiss bank UBS would have become insolvent, destroyed by losses from mortgage-backed securities and related derivatives that had been treated as riskless.56 In the aftermath of the crisis, regulators set out to strengthen capital regulation. Although the resulting accord, “Basel III,” eliminates some abuses, it fails to address the basic problem that banks can easily game the regulation. Banks’ equity can still be as low as 3 percent of their total assets. It is not clear that anything would have been substantially different in the 2007–2009 crisis had Basel III already been in place. The weakness of Basel III was the result of an intense lobbying campaign mounted by bankers against any major change in regulation. This campaign has continued since. By now even the full implementation of Basel III is in doubt.57 Nonsense in the Debate According to bankers, higher equity requirements for banks will restrict bank lending and reduce economic growth.

For example, Jamie Dimon, CEO of JPMorgan Chase, called Basel III “anti-American.”11 According to him, Basel III is biased in favor of European institutions and might lead to Asian banks’ taking some of the U.S. market share. Similarly, French banks complained that the new rules do not take account of the special situation of their bank and insurance conglomerates, and German public banks thought the new rules were biased against them.12 Public officials often sing the same songs. When criticized for watering down Basel III in response to French and German lobbying, Michel Barnier, the European commissioner for Internal Markets and Services, who is in charge of financial regulation, complained that the United States was slow to adopt Basel III, had not even fully adopted the previous Basel II agreement, and had gone back on a G20 agreement to limit incentives for bankers’ risk taking.13 The U.S.

This is true even if the economy is hurting. The long transition period is not the only flaw of Basel III. Other flaws are the very low level of equity that is still permitted and the complexity of the regulation. Regulations that attempt to fine-tune equity requirements using quantitative risk models and stress tests can be easily manipulated. Flawed regulation has caused excessive fragility in the past; it has diverted banks away from making loans to small- and medium-sized enterprises and toward investing in tradable assets. Basel III maintains this flawed approach with hardly any change. “Now Is Not the Time” After the financial crisis of 2007–2009, the equity level of banks has not been much increased. Basel III, the international agreement designed to increase bank equity, has a transition period that will last until 2019.


pages: 304 words: 80,965

What They Do With Your Money: How the Financial System Fails Us, and How to Fix It by Stephen Davis, Jon Lukomnik, David Pitt-Watson

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activist fund / activist shareholder / activist investor, Admiral Zheng, banking crisis, Basel III, Bernie Madoff, Black Swan, centralized clearinghouse, clean water, computerized trading, corporate governance, correlation does not imply causation, credit crunch, Credit Default Swap, crowdsourcing, David Brooks, Dissolution of the Soviet Union, diversification, diversified portfolio, en.wikipedia.org, financial innovation, financial intermediation, fixed income, Flash crash, income inequality, index fund, information asymmetry, invisible hand, Kenneth Arrow, light touch regulation, London Whale, Long Term Capital Management, moral hazard, Myron Scholes, Northern Rock, passive investing, performance metric, Ponzi scheme, principal–agent problem, rent-seeking, Ronald Coase, shareholder value, Silicon Valley, South Sea Bubble, sovereign wealth fund, statistical model, Steve Jobs, the market place, The Wealth of Nations by Adam Smith, transaction costs, Upton Sinclair, value at risk, WikiLeaks

He looked in particular at the international rules used to calculate a bank’s “solvency,” and hence whether a bank had adequate reserves to withstand future crises. In the 1980s, these had been calculated using simple rules of thumb, set out in the convention known as Basel I. By 2012, the Basel III convention had laid out a much more sophisticated system, aimed at ensuring that loans that were more likely to go bad required greater reserves. After all these years of work, how much better was Basel III than Basel I? Haldane brought two pieces of bad news. First, neither of the Basel rules was very good at predicting failure.2 Second, despite its sophistication, Basel III was actually a worse predictor of bank failure than Basel I, and Basel I was worse than simple accounting ratios. In other words, the boom in financial regulation had not improved the predictability and reliability of the financial system but had done the exact opposite.3 The ineffectual response of regulators, both before and after the crisis, has left the financial system—and by extension every citizen—vulnerable to future economic shock.

But this just means that we end up with ever more detailed plans for fighting the last war. Here is how banking expert Stilpon Nestor put it. He was speaking to the United Kingdom’s Parliamentary Commission on Banking Standards about the regulatory regime known as “Basel III,” which is today’s new, improved response to the crisis, but his description could apply to any doctrinaire modeling system. Before the crisis, he noted, “boards were following detailed Basel II capital adequacy metrics but ended up missing more than one elephant in the risk room, such as rapidly increasing gross leverage and decreasing liquidity. While Basel III now ‘catches’ these particular elephants, history teaches us that there are others roaming free and undetected—and that sooner or later they will strike. Sovereign risk exposures … are a good reminder of the dangers that lie ahead.

They were so intent on explaining the world in terms of the economic and risk models they had been taught that they continued, and still continue, to adhere to the ways of thinking that failed us last time. This book is filled with examples of where this has happened. In chapter 5, we looked at the Basel III rules that have been put in place to regulate banks. We noted that they were not a good predictor of whether a bank would fail and that there was little reason to believe they would be effective in preventing the next crisis. One reason is that they used the risk measures we have just discussed. Regulators reasoned that the 2008 crash happened because the banks made too many risky loans. Basel III therefore requires that banks place their loans in different risk categories and hold more reserves against the risky ones. But that implies that we can predict the likelihood of loans going bad, and in a financial crisis, such predictions fail.


pages: 701 words: 199,010

The Crisis of Crowding: Quant Copycats, Ugly Models, and the New Crash Normal by Ludwig B. Chincarini

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affirmative action, asset-backed security, automated trading system, bank run, banking crisis, Basel III, Bernie Madoff, Black-Scholes formula, buttonwood tree, Carmen Reinhart, central bank independence, collapse of Lehman Brothers, collateralized debt obligation, collective bargaining, corporate governance, correlation coefficient, Credit Default Swap, credit default swaps / collateralized debt obligations, delta neutral, discounted cash flows, diversification, diversified portfolio, family office, financial innovation, financial intermediation, fixed income, Flash crash, full employment, Gini coefficient, high net worth, hindsight bias, housing crisis, implied volatility, income inequality, interest rate derivative, interest rate swap, John Meriwether, labour mobility, liquidity trap, London Interbank Offered Rate, Long Term Capital Management, low skilled workers, margin call, market design, market fundamentalism, merger arbitrage, Mexican peso crisis / tequila crisis, money market fund, moral hazard, mortgage debt, Myron Scholes, negative equity, Northern Rock, Occupy movement, oil shock, price stability, quantitative easing, quantitative hedge fund, quantitative trading / quantitative finance, Ralph Waldo Emerson, regulatory arbitrage, Renaissance Technologies, risk tolerance, risk-adjusted returns, Robert Shiller, Robert Shiller, Ronald Reagan, Sharpe ratio, short selling, sovereign wealth fund, speech recognition, statistical arbitrage, statistical model, survivorship bias, systematic trading, The Great Moderation, too big to fail, transaction costs, value at risk, yield curve, zero-coupon bond

Derivatives and repos cleared through Central Counterparties (CCPs) are no longer risk free and have a 2% risk weight and clearing members shares in CCPs default funds shall be capitalized. Additionally, Basel III introduces a higher correlation factor (applicable to internal ratings-based approaches) to risk weight large and unregulated financial institutions. It also contains changes concerning collateral eligibilities and haircuts rules. Some Thoughts on Basel III It is without question that Basel III is more prudent than Basel II, but it brings some questions. First, is the tradeoff between the increased costs for banks and the financial system stability worth it? Second, does Basel III do enough to address key problems? Third, none of the risk weights for mortgages were altered despite the mess it caused. Let’s start with the first proposition.

The fifth tool is market-related measuring tools which are vaguely specified but amount to saying that banks should monitor early movements in market prices to realize whether severe disruptions might be taking place in the market environment that could adversely effect them. Other Changes Basel III did not make any changes to where credit ratings come from. That is, many of the credit charges to various financial instruments of a bank depend on the credit rating of a particular instrument. For example, a C rating gets a much higher risk weighting than a AAA rating. These ratings implicitly come from credit rating agencies. During the financial crisis, credit rating agencies were very inaccurate with assessing the credit ratings of many structured products. Thus, banks relying on these ratings will still have inaccurate or not forward-looking assessments of risk unless the problems associated with rating agencies are fixed. Basel III made some modifications to the credit risk analysis methods for banks using their own models. Basel III introduces capital requirements to cover Credit Value Adjustment risk and higher capital requirements for securitization products.

The losses of many banks, investment banks, and even governnment agencies was so large that it wiped out their capital base leading to either bankruptcy or the takeover of the bank by another institution, the FDIC, or the U.S. government. Basel III is a modification of Basel II by adding a new liquidity ratio consideration, a new leverage consideration, increased capital requirements to the existing Basel II requirements, and modifications to the credit risk portion of Basel II. Increased Capital Requirements for Banks The Basel Committee found that, perhaps, one of the shortcomings of their previous proposals was that the required capital by banks was too low. Thus, one of the modifications of Basel III was to increase capital requirements. The new requirements have mainly to do with the numerator of the capital ratio. The minimum common equity requirements have been raised from 2% to 4.5%.


pages: 524 words: 143,993

The Shifts and the Shocks: What We've Learned--And Have Still to Learn--From the Financial Crisis by Martin Wolf

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air freight, anti-communist, Asian financial crisis, asset allocation, asset-backed security, balance sheet recession, bank run, banking crisis, banks create money, Basel III, Ben Bernanke: helicopter money, Berlin Wall, Black Swan, bonus culture, break the buck, Bretton Woods, call centre, capital asset pricing model, capital controls, Capital in the Twenty-First Century by Thomas Piketty, Carmen Reinhart, central bank independence, collateralized debt obligation, corporate governance, creative destruction, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, currency manipulation / currency intervention, currency peg, debt deflation, deglobalization, Deng Xiaoping, diversification, double entry bookkeeping, en.wikipedia.org, Erik Brynjolfsson, Eugene Fama: efficient market hypothesis, eurozone crisis, Fall of the Berlin Wall, fiat currency, financial deregulation, financial innovation, financial repression, floating exchange rates, forward guidance, Fractional reserve banking, full employment, global rebalancing, global reserve currency, Growth in a Time of Debt, Hyman Minsky, income inequality, inflation targeting, information asymmetry, invisible hand, Joseph Schumpeter, Kenneth Rogoff, labour market flexibility, labour mobility, light touch regulation, liquidationism / Banker’s doctrine / the Treasury view, liquidity trap, Long Term Capital Management, mandatory minimum, margin call, market bubble, market clearing, market fragmentation, Martin Wolf, Mexican peso crisis / tequila crisis, money market fund, moral hazard, mortgage debt, negative equity, new economy, North Sea oil, Northern Rock, open economy, paradox of thrift, Paul Samuelson, price stability, private sector deleveraging, purchasing power parity, pushing on a string, quantitative easing, Real Time Gross Settlement, regulatory arbitrage, reserve currency, Richard Feynman, Richard Feynman, risk-adjusted returns, risk/return, road to serfdom, Robert Gordon, Robert Shiller, Robert Shiller, Ronald Reagan, savings glut, Second Machine Age, secular stagnation, shareholder value, short selling, sovereign wealth fund, special drawing rights, The Chicago School, The Great Moderation, The Market for Lemons, the market place, The Myth of the Rational Market, the payments system, The Wealth of Nations by Adam Smith, too big to fail, Tyler Cowen: Great Stagnation, very high income, winner-take-all economy, zero-sum game

‘Declaration on Strengthening the Financial System’, London Summit, 2 April 2009, http://www.mofa.go.jp/policy/economy/g20_summit/2009-1/annex2.html. 4. On Basel III, see http://en.wikipedia.org/wiki/Basel_III. 5. On Basel I, see http://en.wikipedia.org/wiki/Basel_I. 6. On Basel II, see http://en.wikipedia.org/wiki/Basel_II. 7. Basel Committee on Banking Supervision, ‘Basel III: A Global Regulatory Framework for More Resilient Banks and Banking Systems’, December 2010 (revised June 2011), http://www.bis.org/publ/bcbs189.pdf. See also Independent Commission on Banking, Final Report: Recommendations, London, September 2011, p. 84, https://hmt-sanctions.s3.amazonaws.com/ICB20final%20reportICB%2520Final%2520Report%5B1%5D.pdf. 8. On Basel III and US implementation, see Daniel K. Tarullo, ‘Statement by Daniel K. Tarullo, Board of Governors of the Federal Reserve System before the Committee on Banking, Housing, and Urban Affairs, US Senate’, Washington DC, 11 July 2013, http://www.federalreserve.gov/newsevents/testimony/tarullo20130711a.htm and Board of Governors of the Federal Reserve Board, ‘Agencies Adopt Enhanced Supplementary Leverage Ratio Final Rule and Issue Supplementary Leverage Ratio Notice of Proposed Rulemaking’, 8 April 2014, http://www.federalreserve.gov/newsevents/press/bcreg/20140408a.htm. 9.

Subsequently, the authorities added yet more objectives: structural change (altering the way banks are allowed to organize themselves internally), stress tests (assessments of the ability of banks to survive extreme conditions), resolution regimes (new legal mechanisms for reorganizing the finances of failing financial institutions), changes to market structure (shifting trading from over-the-counter markets towards exchanges and clearing houses); and reforms of regulatory structures. They were trying to close all the stable doors at once. So what has happened with this complex agenda? Basel III A first area of focus was reaching agreement on a new Basel III accord (after the failures of Basel I and II demonstrated by the crisis) governing bank capital, risk-management – including management of market risk – macroprudential regulation and liquidity risk.4 Basel I, which imposed a minimum set of capital requirements for banks, had been agreed by the Basel Committee on Banking Supervision in 1988. Ironically, one of its main aims was to weaken the feared competition from undercapitalized Japanese banks, which then promptly failed in the financial crisis of the 1990s.

Together, this could bring capital, broadly defined, to 15.5 per cent of risk-weighted assets for the G-SIBs, in good times. The hard minimum of broadly defined capital would be 8 per cent of risk-weighted assets.7 In addition, Basel III substantially tightened oversight of the risk-weighting procedures adopted by financial institutions. This was partly because the latter had proved hopelessly over-optimistic prior to the crisis and partly because different institutions applied radically different weights to the same assets. Because risk-weighting is vulnerable to gaming by financial firms, policymakers also agreed to impose a leverage ratio without risk-weighting. But the ratio under discussion among regulators in Basel has been a mere 3 per cent. Basel III promotes macroprudential regulation, by introducing strong stress tests, estimating probabilities of losses over long time-horizons and calling on regulators to pay attention to the building up of systemic risks.


pages: 183 words: 17,571

Broken Markets: A User's Guide to the Post-Finance Economy by Kevin Mellyn

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banking crisis, banks create money, Basel III, Bernie Madoff, Big bang: deregulation of the City of London, Bonfire of the Vanities, bonus culture, Bretton Woods, BRICs, British Empire, call centre, Carmen Reinhart, central bank independence, centre right, cloud computing, collapse of Lehman Brothers, collateralized debt obligation, corporate governance, corporate raider, creative destruction, credit crunch, crony capitalism, currency manipulation / currency intervention, disintermediation, eurozone crisis, fiat currency, financial innovation, financial repression, floating exchange rates, Fractional reserve banking, global reserve currency, global supply chain, Home mortgage interest deduction, index fund, information asymmetry, joint-stock company, Joseph Schumpeter, labor-force participation, labour market flexibility, light touch regulation, liquidity trap, London Interbank Offered Rate, lump of labour, market bubble, market clearing, Martin Wolf, means of production, mobile money, money market fund, moral hazard, mortgage debt, mortgage tax deduction, negative equity, Ponzi scheme, profit motive, quantitative easing, Real Time Gross Settlement, regulatory arbitrage, reserve currency, rising living standards, Ronald Coase, seigniorage, shareholder value, Silicon Valley, statistical model, Steve Jobs, The Great Moderation, the payments system, Tobin tax, too big to fail, transaction costs, underbanked, Works Progress Administration, yield curve, Yogi Berra, zero-sum game

Second, the Basel Committee learned from the crisis to appreciate the need for banks dependent on interbank markets to have funding to stay afloat if those markets suddenly dry up. As a result, Basel III requires banks to bolster their liquid asset and cash holding enough to survive such episodes. Finally, the process identified 29 global systemically important financial institutions (GSIFIs) for Broken Markets additional capital requirements and more intense supervision—yet another fudge on too-big-to-fail. While only large and internationally active US banks will fall under Basel III, many GSIFIs are US domiciled. How to reconcile Basel III and Dodd-Frank is yet to be resolved. The original sin of Basel, zero capital weights on sovereign debt, was left unaddressed in a process that was run, not surprisingly, by central banks— institutions that managed their own nations’ sovereign debt.

Obviously, governments around the world strive to protect consumers from sharp practices, but it is highly unusual to shield such a function from political accountability. Basel III As noted, the Basel process has always been about bank capital, the first line of defense in a financial crisis. Before the crisis, the so-called Basel II rules (which the United States never fully implemented) tried to more closely tie the capital to the actual risks banks were carrying and their ability to measure and manage them. The crisis showed that “scientific” risk ­management left a lot to be desired, so it was back to capital, and more of it. Basel III added three new wrinkles to global bank regulatory standards. First, the amount and quality of bank capital required against various risk assets will be gradually increased until, by 2019, banks will have to hold, on average, about three times as much tier-one capital—essentially equity and cash equivalents.

The Banking Act of 1933 ushered in an age of financial repression (and so-called utility banking) in the United States that lasted almost 40 years, until the rise of the euromarkets in London during the 1960s and 1970s allowed US banks and their corporate customers to create a parallel unregulated dollar market outside of US jurisdiction. The much-maligned deregulation of US financial markets only took place much later (the final demise of Glass-Steagall took place on President Bill Clinton’s watch), after the repression was no longer effective. And deregulation has proved remarkably easy to throw into reverse. The Dodd-Frank Act, the new Basel III international bank capital regime, and the policies of the European Central Bank make up the new financial repression regime on the hoof, a regime that will likely last for a generation or two. The result will be far slower growth than the finance-driven economy produced from 1983 to 2007. The impact of this will be felt globally because fastgrowing export economies and commodity producers in developing markets rely on growth and consumption in the developed economies.


The Blockchain Alternative: Rethinking Macroeconomic Policy and Economic Theory by Kariappa Bheemaiah

accounting loophole / creative accounting, Ada Lovelace, Airbnb, algorithmic trading, asset allocation, autonomous vehicles, balance sheet recession, bank run, banks create money, Basel III, basic income, Ben Bernanke: helicopter money, bitcoin, blockchain, Bretton Woods, business process, call centre, capital controls, Capital in the Twenty-First Century by Thomas Piketty, cashless society, cellular automata, central bank independence, Claude Shannon: information theory, cloud computing, cognitive dissonance, collateralized debt obligation, commoditize, complexity theory, constrained optimization, corporate governance, creative destruction, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, crowdsourcing, cryptocurrency, David Graeber, deskilling, Diane Coyle, discrete time, distributed ledger, diversification, double entry bookkeeping, ethereum blockchain, fiat currency, financial innovation, financial intermediation, Flash crash, floating exchange rates, Fractional reserve banking, full employment, George Akerlof, illegal immigration, income inequality, income per capita, inflation targeting, information asymmetry, interest rate derivative, inventory management, invisible hand, John Maynard Keynes: technological unemployment, John von Neumann, joint-stock company, Joseph Schumpeter, Kenneth Arrow, Kenneth Rogoff, Kevin Kelly, knowledge economy, labour market flexibility, large denomination, liquidity trap, London Whale, low skilled workers, M-Pesa, Marc Andreessen, market bubble, market fundamentalism, Mexican peso crisis / tequila crisis, money market fund, money: store of value / unit of account / medium of exchange, mortgage debt, natural language processing, Network effects, new economy, Nikolai Kondratiev, offshore financial centre, packet switching, Pareto efficiency, pattern recognition, peer-to-peer lending, Ponzi scheme, precariat, pre–internet, price mechanism, price stability, private sector deleveraging, profit maximization, QR code, quantitative easing, quantitative trading / quantitative finance, Ray Kurzweil, Real Time Gross Settlement, rent control, rent-seeking, Satoshi Nakamoto, Satyajit Das, savings glut, seigniorage, Silicon Valley, Skype, smart contracts, software as a service, software is eating the world, speech recognition, statistical model, Stephen Hawking, supply-chain management, technology bubble, The Chicago School, The Future of Employment, The Great Moderation, the market place, The Nature of the Firm, the payments system, the scientific method, The Wealth of Nations by Adam Smith, Thomas Kuhn: the structure of scientific revolutions, too big to fail, trade liberalization, transaction costs, Turing machine, Turing test, universal basic income, Von Neumann architecture, Washington Consensus

The authority that sets out these international banking regulations is the Basel Committee on Bank Supervision, which is part of the Bank for International Settlements (BIS), an international financial institution owned by central banks.8 The total capital that is held by a commercial bank is classified as Tier 1, Tier 2, and Tier 3 capital.9 As per the Basel III stipulations, the minimum amount of capital to be held by the central bank depends on the size of the commercial bank. Banks are grouped into two categories: Group 1 banks are those with Tier 1 capital in excess of €3 billion and are internationally active. All other banks are categorised as Group 2 banks (European Banking Authority, 2013). As of March 2016, under the implementation of the Basel III framework, the average capital ratio for Group 1 banks is 11.5%, with a Tier 1 capital ratio of 12.2% and total capital ratio of 13.9%. For Group 2 banks, the average capital ratio is at 12.8%, with a Tier 1 capital ratio of 13.2% and a total capital ratio of 14.5% (BIS, 2016).

GAs also work particularly well on mixed (continuous and discrete) combinatorial problems, as they are less susceptible to getting ‘stuck’ at local optima than classical gradient search methods. However, they tend to be computationally expensive. 225 APPENDIX A Bibliography and References Bibliography Chapter 1 Basel Committee on Banking Supervision. (2016). Basel III Monitoring Report. Basel: Bank for International Settlements. BIS. (2008). Credit Risk Transfer - Developments from 2005 to 2007. Basel Committee on Banking Supervision. BIS. (2011). Basel III definition of capital - Frequently asked questions. Basel: Bank for International Settlements. Retrieved from http://www.bis.org/publ/bcbs198.pdf BIS. (2015). OTC derivatives statistics at end-June 2015. Bank for International Settlements - Monetary and Economic Department. Braudel, F. (1982). Civilization and Capitalism, 15th-18th Century: The wheels of commerce.

All of these measures and a number of other changes were the result of the Dodd-Frank Act which was passed to limit systemic risk, allow for the safe resolution of the largest intermediaries, submit risky nonbanks to greater scrutiny, and reform derivatives trading (Lopez and Saeidinezhad, 2016). Following the crisis, these measures have been enacted not only in the USA, but also across other markets. As per the Basel III accord, large banks in every country are required to have higher capital requirements, annual stress tests, additional capital mandates, and new liquidity and asset-liability matching requirements (Bipartisan Policy Center, 2014). Thus, stress tests done by regulators today gauge whether the most centrally important institutions can withstand external and internal shocks to the economy. To ensure that banks can fail without requiring massive taxpayer bailouts, regulators have adopted the use of the “Living Will12 Review” process, which makes banks essentially think about their demise, and forces the banks to describe their company, their risk exposures, as well as their strategy for reorganizing themselves in bankruptcy without causing financial instability or using taxpayer dollars.


pages: 504 words: 126,835

The Innovation Illusion: How So Little Is Created by So Many Working So Hard by Fredrik Erixon, Bjorn Weigel

Airbnb, Albert Einstein, asset allocation, autonomous vehicles, barriers to entry, Basel III, Bernie Madoff, bitcoin, Black Swan, blockchain, BRICs, Burning Man, Capital in the Twenty-First Century by Thomas Piketty, Cass Sunstein, Clayton Christensen, Colonization of Mars, commoditize, corporate governance, corporate social responsibility, creative destruction, crony capitalism, dark matter, David Graeber, David Ricardo: comparative advantage, discounted cash flows, distributed ledger, Donald Trump, Elon Musk, Erik Brynjolfsson, fear of failure, first square of the chessboard / second half of the chessboard, Francis Fukuyama: the end of history, George Gilder, global supply chain, global value chain, Google Glasses, Google X / Alphabet X, Gordon Gekko, high net worth, hiring and firing, Hyman Minsky, income inequality, income per capita, index fund, industrial robot, Internet of things, Jeff Bezos, job automation, job satisfaction, John Maynard Keynes: Economic Possibilities for our Grandchildren, John Maynard Keynes: technological unemployment, joint-stock company, Joseph Schumpeter, Just-in-time delivery, Kevin Kelly, knowledge economy, labour market flexibility, laissez-faire capitalism, lump of labour, Lyft, manufacturing employment, Mark Zuckerberg, market design, Martin Wolf, mass affluent, means of production, Mont Pelerin Society, Network effects, new economy, offshore financial centre, pensions crisis, Peter Thiel, Potemkin village, price mechanism, principal–agent problem, Productivity paradox, QWERTY keyboard, RAND corporation, Ray Kurzweil, rent-seeking, risk tolerance, risk/return, Robert Gordon, Ronald Coase, Ronald Reagan, savings glut, Second Machine Age, secular stagnation, Silicon Valley, Silicon Valley startup, Skype, sovereign wealth fund, Steve Ballmer, Steve Jobs, Steve Wozniak, technological singularity, telemarketer, The Chicago School, The Future of Employment, The Nature of the Firm, The Wealth of Nations by Adam Smith, too big to fail, total factor productivity, transaction costs, transportation-network company, tulip mania, Tyler Cowen: Great Stagnation, University of East Anglia, unpaid internship, Vanguard fund, Yogi Berra

(i) Angry Birds (app game) (i) Anheuser-Busch (i) Ansoff, Igor (i) antitrust laws (i) anxiety and automation/high-tech employment (i), (ii) psychology of, and low growth expectations (i) Apollo, moon landing (i) Apple and Foxconn (i) iOS (i) iPad (i), (ii) iPhone (i), (ii), (iii), (iv), (v) iPod and value chains (i) and Nokia (i) unutilized cash balances (i) apps (i), (ii), (iii), (iv), (v), (vi), (vii) Arab Spring (2011) (i) Arendt, Hannah (i) Art Vandelay character (Seinfeld TV series) (i), (ii), (iii) artificial intelligence (AI) (i), (ii) see also automation; robotics/robots Asia Asian markets (i), (ii) labor market flexibility (i) regionalization of trade growth (i) see also East Asia Asian Tigers (Hong Kong, Singapore, South Korea, Taiwan) (i) Asimov, Isaac (i) aspirations (i), (ii), (iii), (iv), (v) asset bubbles (i) asset managers and financial regulation (i) and gray capitalism (i), (ii), (iii), (iv), (v), (vi) and modern portfolio theory (i) and retirement savings (i) AT&T, Bell Labs (i) automated teller machines (ATMs), and teller jobs (i) automation and labor (i), (ii), (iii), (iv), (v) see also artificial intelligence; New Machine Age thesis; robotics/robots; technology automobile industry see car industry “average is over” thesis (i) Babson College, entrepreneurship study (i) baby boomer (or boomer) generation (i), (ii), (iii), (iv) Back to the Future II (movie) (i) Bacon, Francis (i) Bailey, Ronald (i) Baldwin, Richard (i) Ballmer, Steve (i), (ii) ballooning (i) Balsillie, Jim (i) Bank for International Settlements (BIS) economists (i), (ii) banks bank services and globalization (i) bank teller jobs and ATMs (i) European banks and Basel III rules (i), (ii) and financial regulation (i), (ii) mobile banking in Africa (i) proneness to risk (i) “put option” (i) US banks and compliance officers (i) barber profession, evolution of (i) Basel III (i), (ii) BASF (i), (ii) Baumol, William (i), (ii), (iii), (iv)n70 “bazaar economy” (Hans-Werner Sinn) (i) Beals, Vaughn (i) Bean, Charles “Independent Review of UK Economic Statistics” (i) on UK productivity puzzle (i) Beer, Stafford (i), (ii) Being There (movie), Mr. Chance character (i), (ii) Belgium profit margins (i) taxi services and regulation (i) Bell, Alexander Graham (i), (ii) Bell Labs (AT&T) (i) Bellamy, Edward (i) Bellman, Richard (i) benchmarking (i), (ii) benefits, and incomes (i) Benz, Karl (i) Bergman, Ingmar (i) Berkshire Hathaway (i) Berle, Adolf (i) Berra, Yogi (i) Bezos, Jeff (i) Bhide, Amar (i) big firms big firm market dominance (i) and investment allocation for innovation (i) and private standards (i) relative importance of in European countries (i) reputation of (i) see also firm boundaries; firms; multinational (global) companies “big swinging dicks” (i) big-data business models (i) biofuels and EU regulation (i) see also energy sector biotechnological sector, and EU regulation (i) Bismarck, Otto von (i) bitcoin (i) BlackBerry (i) blackboard economics (i) Blackrock (i) blockchain (mutual distributed ledger) technology (i) Blue Ribbon Commission (US) (i) The Blues Brothers (movie) (i) boom and bust cycles (i), (ii), (iii) boomer (or baby boomer) generation (i), (ii), (iii), (iv) Boston Consulting Group index of complicatedness (i) on performance imperatives (i) on working time of managing teams (i) branding (i), (ii) Brazil and BRIC concept (i), (ii) taxi services and regulation (i) BRIC as a Bloody Ridiculous Investment Concept (i) countries (Brazil, India, Russia, and China) (i), (ii) Bridgewater (i) Brin, Sergey (i) Britain see United Kingdom (UK) British managerialism (i) Brockovich, Erin (i) Brookings (i) Brown, Gordon (i) Brynjolfsson, Erik, The Second Machine Age (Brynjolfsson and McAfee) (i), (ii) budget process, and compliance officers (i) Buffett, Warren (i), (ii) bureaucracy and capitalism (i), (ii) and competition (i) and compliance officers (i) and globalization (i), (ii), (iii), (iv) and IBM (i) and index of complicatedness (Boston Consulting Group) (i) and Indian economy (i) and managerialism (i), (ii), (iii) and organizational diversification (i) and principal–agent debate (i) and socialism (i) see also bureaucracy brake; bureaucrats; corporate managerialism; managerialism bureaucracy brake, and regulation (Germany) (i) bureaucrats vs. entrepreneurs (i), (ii) see also bureaucracy; bureaucracy brake Burning Man festival (Nevada) (i) Burns, Scott, The Clash of Generations (Kotlikoff and Burns) (i) business-building skills, vs. financial skills (i) business cycles, and productivity (i) business development, and strategy (i), (ii) business information technology (IT) services (i) business investment and cash hoarding (i) and corporate net lending (i), (ii) declining trend (i) explanations for decline (i) and financial regulation (i), (ii) and gray capitalism (i) investment allocation for innovation and big firms (i) low investment growth vs. fast corporate borrowing growth (i) measuring issues (i) and mergers and acquisitions (i) and policy uncertainty (i), (ii) and shareholders (i), (ii), (iii) UK business investment (i), (ii) US business investment (i), (ii) see also asset managers; investment; R&D business management (i), (ii) see also corporate managerialism business productivity growth (i) Business Week, on Peter Drucker (i) CAC 40 index (France) (i) cadmium (i), (ii) Canada diffusion of innovations (i) GDP figures (i) North American Free Trade Agreement (i) cancer research, and innovation (i), (ii) capital accumulation, and capitalism (i) capital expenditure (capex) (i), (ii), (iii), (iv)n39 capital markets (external) (i), (ii), (iii), (iv), (v) capitalism and agency (i) and asset bubbles (i) and bureaucracy (i), (ii) and capital accumulation (i) “complex by design” capitalism (i) criticism of Western capitalism (i) crony capitalism (i) death of capitalism utopia and socialism (i) decline of Western capitalism (i) and digital age (i) and dissent (i), (ii), (iii) and eccentricity (i), (ii), (iii), (iv), (v) and economic dynamism (i), (ii), (iii) and Enlightenment (i), (ii) and entrepreneurship (i), (ii) financial capitalism (i), (ii), (iii), (iv) free-market capitalism (i) and individual freedom (i), (ii), (iii) and innovation (i), (ii), (iii), (iv), (v) joint-stock capitalism (i), (ii) and labor vs. work (i) vs. the market (i), (ii) Marxist monopolistic theory of (i) “middle-aged” capitalism (i), (ii), (iii) “money manager capitalism” (Hyman Minsky) (i) and organization (i) and planning machines (i) rentier capitalism (i), (ii), (iii), (iv), (v), (vi) and Swedish hybrid economy (i) and technology (i) see also capitalist ownership; corporate managerialism; entrepreneurs; entrepreneurship; the future (and how to prevent it); globalization; gray capitalism; regulation; rich people capitalist ownership and corporate globalism (i) and diversification (i) and gray capitalism: case of Harley-Davidson Motor Company (HD) (i); decline/obituary of capitalist ownership (i); dispersed ownership (i); gray ownership (i), (ii), (iii), (iv), (v), (vi); severing gray capital–corporate ownership link (i) ownership structure reforms (i) and pensions (i) and principal–agent problem (i) and uncertainty (i) car industry car sales and regulation (i) driverless vehicles (i), (ii), (iii), (iv) German car production and value chains (i) lean production (i) US environment-related regulations (i) Carew, Diana G.

Strangelove character (i) driverless vehicles (i), (ii), (iii), (iv) drones, and regulation (i) Drucker, Peter (i), (ii) drugs see pharmaceutical sector dual class stock structures (i) Dutch disease (i) Dutch tulip mania (i) dynamism see discriminate dynamism theory; economic dynamism East Asia, trade and value chains (i) Ebenezer Scrooge character (i) eccentricity (i), (ii), (iii), (iv), (v) see also culture of individualism; dissent economic dynamism and capitalism (i), (ii), (iii) and innovation (i), (ii), (iii) and market contestability (i) economic growth compound growth (i) and productivity (i), (ii) and regulatory complexity/uncertainty (i) see also GDP (gross domestic product) Economic Policy Institute (Washington, DC) (i) The Economist on global corporations (i) on new technology and social dislocation (i) on pensioners vs. working-age households incomes (i) “Planet of the Phones” (i) on share buybacks (i) economy “bazaar economy” (Hans-Werner Sinn) (i) data economy (i) knowledge-based economy (i) “new economy” (i) and technology (i), (ii), (iii) see also economic dynamism; economic growth; financial economy; GDP (gross domestic product) EFAMA, on asset management industry (i) Einstein, Albert (i), (ii) electronic devices (i) electronic wallets (i) embedded liberalism (i) emerging markets (i), (ii), (iii), (iv), (v) employment protection legislation (i) see also labor; unemployment Energy Policy and Conservation Act (EPCA, US) (i) energy sector and antitrust laws (i) and innovation (i) and regulation (i), (ii) renewable/green energy: and regulation in Europe (i), (ii); and sunk costs (i) Engels, Friedrich, Communist Manifesto (Marx and Engels) (i), (ii) Enlightenment (i), (ii) Enron (i) entrepreneurs vs. bureaucrats (i), (ii) vs. managerialists (i) and passion vs. market complexity (i), (ii) Schumpeter on (i) tech entrepreneurs (i) see also entrepreneurship entrepreneurship aging trend (i), (ii) and capitalism (i), (ii) and dual class stock structures (i) and equity financing (i) and globalization (i), (ii) and innovation (i), (ii) and organizational diversification (i) vs. planning machines (i), (ii) and precautionary regulations (i) and size of firms (i) and strategy (i) and uncertainty (i) see also culture of experimentation; culture of individualism; entrepreneurs; start-ups equity vs. debt funding (i), (ii), (iii), (iv), (v), (vi), (vii) and institutional investors (i) and retirement savings (i), (ii) Ericsson (i), (ii) Ericsson, John (i) Europe asset management industry (i) big firms’ relative importance (i) capital expenditure (capex) (i), (ii)n39 corporate renewal levels (i) corporate savings (i) debt vs. equity financing (i) energy sector and antitrust laws (i) German-Central European supply chain (i) higher- vs. lower-income countries (i) labor, and tax (i) labor markets: low rates of flexibility (i); and lower productivity (i) mergers and acquisitions (i) pensions (i) productivity (i), (ii), (iii); total factor productivity (TFP) growth (i) R&D spending (i), (ii) regulation: compliance officers and Basel III (i); deregulation trend (i); index of regulatory freedom (i), (ii); index of regulatory trade barriers (i), (ii); medical devices (i); occupational/professional standards (i); technological platforms (i) services and globalization (i) trade: and big business (i); index of regulatory trade barriers (i), (ii); and value chains (i) see also eurozone; European Union European Food Safety Authority (EFSA) (i) European Union biofuels regulations (i) cadmium exemption issue (i), (ii) capitalist ownership and dual class stocks (i) chemicals regulations (i), (ii) exports to China (i) financial regulations (i), (ii); banks and Basel III rules (i), (ii) genetically modified organisms (GMOs) regulations (i), (ii), (iii) GM potato regulations (i) Leave campaign and older generation (UK) (i) nanotechnology regulations (i), (ii) precautionary principle (i) R&D scoreboards (i), (ii) Single Market (i) see also eurozone; Europe eurozone Germany and “sick man of the euro” label (i) pensions (i) see also Europe; European Union experimentation, culture of (i), (ii) see also entrepreneurs; entrepreneurship external capital markets (i), (ii), (iii), (iv), (v) Fabian Society (i) Facebook (i), (ii), (iii), (iv) failure failing companies and planning (i) formula of failure (i) and innovation process (i) Fairchild Semiconductor (i) FDI (foreign direct investment) (i), (ii), (iii) Federal Deposit Insurance Corporation (i) Federal Express (FedEx) (i), (ii) Feldstein, Martin (i) Fernald, John (i) fiduciary duties and laws (i) financial capitalism (i), (ii), (iii), (iv) see also financial economy financial crisis (2007) and aspirations (i) and financial regulations (i), (ii), (iii) and globalist worldview (i) and rich people vs. capitalists issue (i) and sovereign wealth funds (i) and stock markets (i) and Wall Street (i), (ii) see also Great Recession financial economy and gray capitalism (i), (ii), (iii) vs. real economy (i), (ii), (iii) financial institutions and financial regulations (i), (ii) and globalization (i) SIFIs (systemically important financial institutions) (i) see also banks financial regulations (i), (ii), (iii), (iv) financial sector growth of and productivity (i) financial services, and globalization (i) financial skills, vs. business-building skills (i) Financial Times on compliance officers (i) on French ban on Mercedes-Benz cars (i) Fink, Lawrence (i) Finland dependence on larger enterprises (i) Nokia story (i) firm boundaries and competition (i), (ii) and corporate managerialism (i), (ii), (iii), (iv), (v), (vi), (vii) and globalization (i) and innovation (i), (ii), (iii) and market concentration (i) and multinationals (i), (ii) and pharmaceutical sector (i) and R&D (i), (ii) and specialization (i), (ii), (iii), (iv), (v) see also firms firms entry-and-exit rates (i), (ii), (iii), (iv) high-growth firms (i) home-market firms vs. multinationals (i) interfirm vs. intrafirm trade (i) joint-stock companies (i), (ii) as logistics hubs (i), (ii) role of in the economy (i) start-ups (i), (ii), (iii), (iv), (v) unicorns (i) see also big firms; corporate size; firm boundaries; multinational (global) companies first-mover advantage (i) Food and Drug Administration (FDA, US) (i), (ii), (iii) food retailing, and globalization (i) Ford, Henry (i), (ii) Ford, Martin, The Rise of the Robots (i), (ii) foreign direct investment (FDI) (i), (ii), (iii) Fortune 500 companies (i) Foster, George (i) Foxconn (i) France ban on Mercedes-Benz cars (i) CAC 40 index (i) corporate renewal levels (i) dependence on larger enterprises (i) dirigisme (i) exports to China (i) and globalization (i) productivity, decline in and labor market rules (i) profit margins (i) public debt (i) R&D spending (i) regulation: index of regulatory freedom (i), (ii); index of regulatory trade barriers (i), (ii); medical devices (i); taxi services (i) trade: and big business (i); index of regulatory trade barriers (i), (ii) Fraser Institute, index of regulatory freedom (i), (ii) free-market capitalism (i) free speech, and academia (i) freedom (i), (ii), (iii) see also culture of individualism; dissent; eccentricity French Mississippi finance bubble (i) Frey, Carl Benedikt (i) Friedman, Milton (i) Fukuyama, Francis, The End of History and the Last Man (i) future, the (and how to prevent it) capitalist decline and pessimism (i) from corporate globalism to global corporatism (i) rise of regulatory uncertainty (i) “silver tsunami” for cash and pensions (i) state of Western economies and future imperfect (i) suggested steps to prevent the future: agency and economic history (i); boosting market contestability (i); nurturing culture of dissent and eccentricity (i); severing gray capital–corporate ownership link (i) Future Perfect, A (Micklethwait and Wooldridge) (i) G7 (Group of Seven) countries, labour productivity (i), (ii) Galbraith, John Kenneth, The New Industrial State (i), (ii), (iii), (iv), (v), (vi) Gallup, job satisfaction survey (i) Galston, William (i) Gates, Bill (i) GATT (General Agreement on Tariffs and Trade) (i) see also World Trade Organization (WTO) GDP (gross domestic product) and business investment (i), (ii), (iii) China’s (2014) (i), (ii) declining trend (i), (ii) and financial sector growth (i) GDP statistics issues (i) and global trade (i) and globalization (i) ICT hardware investment as share of (i), (ii) labor’s share of (i) and pensions (i) and R&D spending (i), (ii) and robots (i) Gekko character (Wall Street movie) (i) General Electric (GE) (i), (ii) generations boomer (or baby boomer) generation (i), (ii), (iii), (iv) The Clash of Generations (Kotlikoff and Burns) (i) EU Leave campaign and older generation (UK) (i) and income inequality (i) technology-frustrated generation (i) genetically modified (GM) potato, and EU regulation (i) genetically modified organisms (GMOs), and EU regulation (i), (ii), (iii) geographical zoning laws (i) Germany aging population (i) business investment declining trend (i) car industry: French ban on Mercedes-Benz cars (i); and value chains (i) corporate profit margins (1990–2014) (i), (ii), (iii), (iv) corporate renewal levels (i) DAX 30 index (i) dependence on larger enterprises (i) exports to China (i) German-Central European supply chain (i), (ii) and globalization (i), (ii), (iii), (iv) income inequality and generations (i) pensions (i) productivity: decline in and labor market rules (i); and wages (i) regulation: bureaucracy brake (i); deregulated vs. regulated sectors 148–9 index of regulatory freedom 151, (i); index of regulatory trade barriers 152, (i); medical devices (i); taxi services (i) “sick man of the euro” (i) trade: index of regulatory trade barriers (i), (ii); and value chains (i) Gerschenkron, Alexander (i), (ii) Gerstner, Louis (i) Ghosh, Shikhar (i) Gilder, George (i) global firms see multinational (global) companies global trade and containerization (i) expansion phases (i) and globalization, 2nd phase of (i) growth statistics (i) and market contestability (i) and multinationals (i), (ii) regionalization of Asia’s trade growth (i) regulatory trade barriers (i), (ii), (iii) see also mercantilism; protectionism; trade “Globalise or Fossilise!”

And when most managers think and act in the same way, the whole organization loses its competitive vitality. The role of compliance officers has expanded hugely in recent years. Tougher legislation and growing market and regulatory complexity have fueled the rise of the trade.63 “The age of the compliance officer arrives,” the Financial Times recently concluded.64 In Europe alone, suggests McKinsey, the Basel III rules will require banks to hire up to 70,000 new compliance officers.65 A survey of the US Federal Register estimated that the 30 “Dodd–Frank rules” that had been introduced a year after the full Act came into force (representing no more than 10 percent of all “Dodd–Frank rules”) would require banks in the US to put in an extra 2,260,631 labor hours every year.66 In 2014, a study by PwC shows, almost 50 percent of companies across US industries increased the number of compliance officers, while only 5 percent of companies reduced them.67 This is disturbing news for anyone who does not view corporate guardians as having a positive impact on a corporation’s dynamism, experimentation, and innovation.


India's Long Road by Vijay Joshi

Affordable Care Act / Obamacare, barriers to entry, Basel III, basic income, blue-collar work, Bretton Woods, business climate, capital controls, central bank independence, clean water, collapse of Lehman Brothers, collective bargaining, colonial rule, congestion charging, corporate governance, creative destruction, crony capitalism, decarbonisation, deindustrialization, demographic dividend, demographic transition, Doha Development Round, eurozone crisis, facts on the ground, failed state, financial intermediation, financial repression, first-past-the-post, floating exchange rates, full employment, germ theory of disease, Gini coefficient, global supply chain, global value chain, hiring and firing, income inequality, Indoor air pollution, Induced demand, inflation targeting, invisible hand, land reform, Mahatma Gandhi, manufacturing employment, Martin Wolf, means of production, microcredit, moral hazard, obamacare, Pareto efficiency, price mechanism, price stability, principal–agent problem, profit maximization, profit motive, purchasing power parity, quantitative easing, race to the bottom, randomized controlled trial, rent-seeking, reserve currency, rising living standards, school choice, school vouchers, secular stagnation, Silicon Valley, smart cities, South China Sea, special drawing rights, The Future of Employment, The Market for Lemons, too big to fail, total factor productivity, trade liberalization, transaction costs, universal basic income, urban sprawl, working-age population

International Money and Finance The global financial crisis (GFC) of 2008 exposed many long-​standing flaws in international monetary and financial arrangements, of which the most striking was the lax regulatory supervision of financial institutions. In response, tightening and harmonization of bank regulation was accelerated under the aegis of the BCBR, and the G20 gave the go-​ahead for implementation and phasing-​in of the so-​called Basel III standards by 2018. These require that banks keep more capital, and better-​quality capital, in relation to risk-​weighted assets than hitherto, as well as introduce an overall minimum leverage ratio.20 On cross-​border banks, Basel III has recommended that foreign branches of banks should be converted into subsidiaries in the host countries in order to separate their assets and liabilities more clearly from those of their parent banks. In addition, the Basel Committee has announced its intention to lay down minimum levels of liquidity and ‘stable funding’ for banks, to ensure that they can withstand short-​term funding stress and longer-​term liquidity mismatches.

Regulations are also being contemplated in several other areas such as ‘shadow banks’, derivatives, bank resolution, and banks that are ‘too big to fail’. India has adopted the Basel III capital adequacy and leverage standards, indeed slightly tougher ones, to err on the side of safety.21 The RBI has also issued guidelines on liquidity management, and the expectation is that it will go along with the Basel Committee’s liquidity ratios, and its regulations on shadow banking, derivatives trading etc., as and when they arrive. In addition, the more welcoming policy towards the entry of foreign banks, recently announced by the RBI, is predicated on their coming in as subsidiaries, exactly as Basel III has proposed. All this makes good sense as an accompaniment of further liberalization of the financial sector. If India is to have more inward and outward foreign investment in [ 258 ] Political Economy 259 banking, it cannot afford to ignore harmonized global standards, which promote financial soundness, and level the playing field for competition among banks.22 Though inadequate regulation of the financial sector was one of the main villains of the piece, there is little doubt that various other flaws in the international monetary system (IMS) also played a part in causing and amplifying the GFC.

In addition, it has emerged as a significant contributor to multilateral assistance, through financial contributions to the UN system and multilateral organizations. It remains to be seen whether India will try to marshal its limited foreign aid resources through bilateral channels, and those small multilateral institutions where it has a leadership role, or operate through large global institutions where its voice is relatively limited. 19. See Joshi (2009), Joshi and Patel (2009), and Kapur, Khosla, and Mehta (2009). 20. The main ratios mandated by Basel III for banks are as follows: i) the minimum ratio of capital to risk-​weighted assets (CRWA) goes up from 8 per cent to 10.5 per cent, of which the extra 2.5 per cent is a ‘capital conservation buffer’; ii) the common equity component of CRWA goes up from 2.0 to 4.5 percentage points (7 per cent inclusive of the capital conservation buffer); iii) on top of the CRWA there is to be a ‘counter-​cyclical buffer’ of up to 2.5 percentage points, to be imposed by policymakers, if necessary, for ‘macro-​prudential purposes’ (to moderate a boom); iv) separately from all of the above, banks will have to maintain a minimum leverage ratio (i.e. ratio of equity capital to assets not weighted by risk).


pages: 261 words: 86,905

How to Speak Money: What the Money People Say--And What It Really Means by John Lanchester

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asset allocation, Basel III, Bernie Madoff, Big bang: deregulation of the City of London, bitcoin, Black Swan, blood diamonds, Bretton Woods, BRICs, Capital in the Twenty-First Century by Thomas Piketty, Celtic Tiger, central bank independence, collapse of Lehman Brothers, collective bargaining, commoditize, creative destruction, credit crunch, Credit Default Swap, crony capitalism, Dava Sobel, David Graeber, disintermediation, double entry bookkeeping, en.wikipedia.org, estate planning, financial innovation, Flash crash, forward guidance, Gini coefficient, global reserve currency, high net worth, High speed trading, hindsight bias, income inequality, inflation targeting, interest rate swap, Isaac Newton, Jaron Lanier, joint-stock company, joint-stock limited liability company, Kodak vs Instagram, liquidity trap, London Interbank Offered Rate, London Whale, loss aversion, margin call, McJob, means of production, microcredit, money: store of value / unit of account / medium of exchange, moral hazard, Myron Scholes, negative equity, neoliberal agenda, New Urbanism, Nick Leeson, Nikolai Kondratiev, Nixon shock, Northern Rock, offshore financial centre, oil shock, open economy, paradox of thrift, Plutocrats, plutocrats, Ponzi scheme, purchasing power parity, pushing on a string, quantitative easing, random walk, rent-seeking, reserve currency, Richard Feynman, Richard Feynman, Right to Buy, road to serfdom, Ronald Reagan, Satoshi Nakamoto, security theater, shareholder value, Silicon Valley, six sigma, South Sea Bubble, sovereign wealth fund, Steve Jobs, survivorship bias, The Chicago School, The Wealth of Nations by Adam Smith, The Wisdom of Crowds, trickle-down economics, Washington Consensus, wealth creators, working poor, yield curve

I met him once, when we were on the TV current affairs show Newsnight together, and liked him, though you could tell the subdued man in his forties who’d spent years in jail and recovered from cancer was a different man from the trader in his twenties who destroyed the bank. As I’m writing, the Nikkei is still at less than 14,500, so twenty years on it’s still a distance below the level Leeson was betting on. Basel III Officially the Third Basel Accord, it is an ongoing attempt to come up with a set of rules for international banking. The idea underlying Basel III is to save banks from themselves by setting up rules that make it harder for them to go broke. It is a voluntary process, with a global remit, and both of those are good things since the risks of banking are carried internationally, thanks to the interlinked and interdependent nature of financial markets. The trouble with the Basel process is twofold: it tends to focus on actions that would have prevented the last crisis, rather than on actions to prevent the next one; and it is vulnerable to lobbying from the powerful, and powerfully shameless, sector that it’s attempting to regulate.

The trouble with the Basel process is twofold: it tends to focus on actions that would have prevented the last crisis, rather than on actions to prevent the next one; and it is vulnerable to lobbying from the powerful, and powerfully shameless, sector that it’s attempting to regulate. At the time of writing, the financial sector has succeeded in having the timetable for implementation of Basel III extended to 2019, and also in weakening the rules on the kinds of asset that banks are allowed to count on their balance sheets as being safe. basis point One hundredth of a percentage point. Basis points are used a lot in talking about interest rates. If an interest rate moves by 50 basis points it has moved by 0.5 percent. Referring to basis points is one of the quickest and easiest ways of pretending to know what you’re talking about when it comes to money.

All of these measures, which under different regulatory regimes permit different types of accounting techniques, have the effect of increasing the bank’s core capital number. They are ways of making the bank sound safer than it is. Critics of modern banking prefer a simpler number, the leverage ratio or multiple between the bank’s simple equity—the number that stands out clearly in the chart above—and its assets. The banks hate that, because it makes them look less safe. Core capital is one of the central subjects at issue in the Basel III accords on banking; the gnomes of Basel call it Tier One and Tier Two equity. correlation and cause Confusing these two things is the commonest mistake not just in economics, not just in the social sciences and humanities more generally, but in how most of us think about life most of the time. When we observe two things going together, we seem to have a hardwired tendency to believe that one of them caused the other.


pages: 593 words: 189,857

Stress Test: Reflections on Financial Crises by Timothy F. Geithner

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Affordable Care Act / Obamacare, asset-backed security, Atul Gawande, bank run, banking crisis, Basel III, Bernie Madoff, Bernie Sanders, break the buck, Buckminster Fuller, Carmen Reinhart, central bank independence, collateralized debt obligation, correlation does not imply causation, creative destruction, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, currency manipulation / currency intervention, David Brooks, Doomsday Book, eurozone crisis, financial innovation, Flash crash, Goldman Sachs: Vampire Squid, housing crisis, Hyman Minsky, illegal immigration, implied volatility, London Interbank Offered Rate, Long Term Capital Management, margin call, market fundamentalism, Martin Wolf, McMansion, Mexican peso crisis / tequila crisis, money market fund, moral hazard, mortgage debt, Nate Silver, negative equity, Northern Rock, obamacare, paradox of thrift, pets.com, price stability, profit maximization, pushing on a string, quantitative easing, race to the bottom, RAND corporation, regulatory arbitrage, reserve currency, Saturday Night Live, savings glut, selection bias, short selling, sovereign wealth fund, The Great Moderation, The Signal and the Noise by Nate Silver, Tobin tax, too big to fail, working poor

From 2009 through 2012, as a result of the new rules as well as our strategy to recapitalize the system through TARP and the stress test, the eighteen largest U.S. banking institutions doubled their common capital, from $400 billion to $800 billion. Stronger New Global Shock Absorbers Capital Requirements Under Basel III The Basel III reforms dramatically increased the quantity and the quality of capital that banks have to hold, with even stronger requirements for systemically important banks. The reforms also redefined risk-weighted assets, so the full impact of the rules (right bar) effectively requires the biggest banks to hold more than twice as much Tier 1 capital and four times as much of the highest-quality common equity as they were required to hold before the crisis. Sources: Bank for International Settlements, Bloomberg, Federal Reserve Board, and company estimates. Basel III also introduced the first international leverage restrictions, another way of limiting risk-taking, and U.S. regulators have proposed even stricter limits for the biggest banks.

But imposing haircuts on secured creditors would mean that they could no longer count on the full value of their collateral to backstop their loan, making them far more likely to run for the exits during times of financial distress. 5 Chart, Stronger New Global Shock Absorbers: Basel I: Tier 1 Common requirement extrapolated from regulatory guidance that common equity should be the “dominant component” of the 6 percent Tier 1 Capital “well capitalized” standard. Basel III: 7 percent Tier 1 Common includes a 4.5 percent minimum and a 2.5 percent capital conservation buffer. Common capital surcharge reflects the 2.5 percent maximum surcharge currently applied to the largest global banks. The only U.S. bank currently in the 2.5 percent bucket is JPMorgan. In total, eight U.S. banks are subject to a common capital surcharge as of November 2013 under BIS standards, which will be phased in through 2019. Basel III Adjustments: In addition to increasing capital requirements, Basel III substantially increased the risk weights on certain types of assets and limited the extent to which various factors could count to the common equity requirement.

If we had unilaterally imposed strict new limits on risk, without encouraging higher standards globally, we simply would have reduced the market share of U.S. firms around the world, without making the global system more resilient. So starting at that G-20 summit in London, we began leading the push for tougher international financial reforms, including the new capital, leverage, and liquidity requirements that became known as Basel III; broader oversight of derivatives markets; and better ways to deal with the failures of global banks. This would require a messy, protracted process of behind-the-scenes diplomatic negotiation, but it would be absolutely crucial to strengthening the system. We would pursue the rest of our reforms in Washington, and the process there would be messy and protracted as well. There were vast sums of money at stake, and a vast array of powerful lobbies with interests in the outcome.


pages: 261 words: 103,244

Economists and the Powerful by Norbert Haring, Norbert H. Ring, Niall Douglas

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accounting loophole / creative accounting, Affordable Care Act / Obamacare, Albert Einstein, asset allocation, bank run, barriers to entry, Basel III, Bernie Madoff, British Empire, central bank independence, collective bargaining, commodity trading advisor, corporate governance, creative destruction, credit crunch, Credit Default Swap, David Ricardo: comparative advantage, diversified portfolio, financial deregulation, George Akerlof, illegal immigration, income inequality, inflation targeting, information asymmetry, Jean Tirole, job satisfaction, Joseph Schumpeter, Kenneth Arrow, knowledge worker, labour market flexibility, law of one price, light touch regulation, Long Term Capital Management, low skilled workers, mandatory minimum, market bubble, market clearing, market fundamentalism, means of production, minimum wage unemployment, moral hazard, new economy, obamacare, old-boy network, open economy, Pareto efficiency, Paul Samuelson, pension reform, Ponzi scheme, price stability, principal–agent problem, profit maximization, purchasing power parity, Renaissance Technologies, rolodex, Sergey Aleynikov, shareholder value, short selling, Steve Jobs, The Chicago School, the payments system, The Wealth of Nations by Adam Smith, too big to fail, transaction costs, ultimatum game, union organizing, Vilfredo Pareto, working-age population, World Values Survey

In two countries with a particularly outsized banking sector, the UK and Switzerland, even the heads of the central banks broke the taboo and suggested that excessively big banks should be broken into smaller pieces. Interestingly, in both the UK and Switzerland, steps to force primary loss-absorbing capacity for “too big to fail” banks to more than twice that required by Basel III (to around 15–20 percent), and the separation of deposit operations from all other kinds of banking as the sole kind protected by government guarantee, are well under way – and up to the time of writing the dire warnings from bankers that banks would relocate in response have been ignored by policymakers. Unfortunately, the Fed has elected to implement the minimum required by Basel III for most banks, and is still deciding what capacity will apply to the eight largest “too big to fail” banks. It seems unlikely that they will be as principled and erudite as the British or Swiss. As of now, there isn’t much indication that banks are losing control.

To get there, central banks should not withdraw the abundant amount of central bank money they have created to combat the financial crisis, but rather they should raise the minimum reserve requirement (the cash balances that banks have to hold with the central bank) as the crisis abates. In effect, the composition of all money would be changed in favor of money created by central banks. Increasing liquidity requirements for banks is at least as important as fiddling with capital requirements, the overwhelming focus of banking regulation so far. The Basel III Accord of 2010–11 does have some liquidity requirements, but they are far from stringent and appear to assume in their design the availability of government bailouts after 30 days of trouble beginning. Nevertheless, banks are fighting them tooth and claw, as there is nothing that they detest more than any impediment to this highly lucrative prerogative of creating money. Any reasonable amount of bank capital cannot prevent bank runs if banks have a high multiple of their cash balances as short-term liabilities.

D. 13 American Economic Association ix, 10, 17, 20, 26–7, 44 American Economic Review 8, 20, 26–7 American International Group (AIG) 70, 90–91 Anglo-Saxon economics ix Arrow, Kenneth 7, 23–4, 212; see also impossibility theorem (Arrow’s) asset bubble 104 asymmetric information: see information, asymmetric AT&T 147 authoritarianism 24, 210 average cost 148, 151 Bank of America 77, 86, 94 barriers to entry 54, 160 Basel III Accord 104–5 Bear Stearns 90, 96, 107, 111 Becker, Gary S. 186 Bemis, Edward 9–10 Bentham, Jeremy 11 Berlin, Isaiah 25 Bernays, Edward 15–17 Bill of Rights (US) 208 Bolsa Família program 41 Boskin Commission 36 Bourdieu, Pierre 25, 115, 160 Bridgestone (tire manufacturer) 163–4, 166–7 British Empire ix, 16, 100 Buchanan, James 23–4 Buffett, Warren 93, 107–9 Bullionists 2 Bureau of Labor Statistics 32–3, 35 capitalism vii–viii, ix, 2, 5–6, 10, 18–19, 21, 31, 46, 142, 153, 158, 165 central bank 43, 67, 79–88, 104–5 CEO: see chief executive officer (CEO) Chicago, University of 10, 17, 19, 26, 27, 44, 80, 84, 168, 186, 193 chief executive officer (CEO) xi, 16, 47, 61, 70, 93, 95–6, 103, 107–13, 115–27, 132, 138–9, 215, 217 Chrysler xi, 113 Citicorp (bank) 43 Citigroup (bank) xi, 61, 63, 96, 105, 112, 125 Clark, John Bates 6, 10–11, 155, 193 classical value theory 5 Cold War 2, 18, 21, 25–8, 46 collective bargaining 185 Commodity Futures Trading Commission (CTFC) 90, 92 Commons, John R. 8–10 communism xii, 2, 19, 21, 25, 139 comparative advantage 4 Condorcet, Marquis de 23 conflict 165 consumption viii, 11, 13, 32, 78, 158, 192, 203, 211 control fraud 94–5 convergence vii 242 ECONOMISTS AND THE POWERFUL cooperation 73–5, 165, 167, 170, 198 cooperative 102 Cornell University 10 corporate elite x, xii, 115, 117, 140 corporate governance 92, 119, 127, 135, 136 corporate government 135 corporate management 109 corporation tax 139 corruption 220 credit x, xi, 29, 48–50, 59–60, 62, 65, 71, 73, 75, 77–84, 90–91, 95–8, 100, 104, 110, 149, 183 credit default swap 91, 93 CTFC: see Commodity Futures Trading Commission (CTFC) Darwinism 167 Debreu, Gerard 7 demand curve 146 democracy 18, 207, 211–13, 220 depreciation 33, 147 derivatives 67, 90–93, 96–7 Deutsche Bank 105, 121 disability adjusted life expectancy vii discrimination 130, 186–7 earnings management 129–30 economic growth xi, 80 economic policy xi, 46, 66, 76, 152 economic utility 4–5, 13 economics, mainstream viii, x–xi, xiii, 1, 29, 47, 136, 145, 164, 170, 208, 211, 214 economics, neoclassical ix, xii, 6, 8, 10–11, 13, 21–2, 25, 30, 38, 42, 45, 141, 143–4, 153–5, 157–60, 163–4, 168, 170–71, 173, 180–82, 188, 191–2, 210, 213 economies of scale 3, 54, 152, 161 economies of scope 54 Edgeworth, Francis Y. 10 efficiency vii, x, xi, xii, 13, 19, 25, 39, 43, 48, 62, 73, 101, 108, 136–7, 143, 144, 146–7, 149, 156, 160, 170, 176, 179, 183, 190, 193, 197, 202–4, 216, 219 efficient markets x Ely, Richard T. 9–10 employment protection 188, 200–203, 205 Enron 52, 92, 98, 110, 128, 132, 217 entrenchment 126, 135 equality of opportunity vii–ix, xii, 37, 39–41, 45, 53, 114, 124, 172 equality of outcome vii equilibrium x, 6–7, 37, 47, 146, 159, 161, 181–2, 197, 208 euro ix, 67, 82, 102 European Central Bank 103, 189, 215 European Commission/Union 67, 152 executive compensation 120–21, 138 exploitation 6, 156, 209, 212 exports 2, 34, 180–81 fairness ix, 13, 37, 39–40, 160, 164–6, 169–70, 177, 220 Fannie Mae (US government subsidizer of mortgages) 217 fear, uncertainty, doubt (FUD) 145 Federal Reserve (US) 43–4, 69–70, 85, 87–92, 143, 215 feedback loop 40, 216, 220 fiat money 75, 81 filibuster (US antilegislative maneuver) 218 financial industry xi, 44, 46–8, 51, 54–6, 64, 70, 89, 91–2, 121, 129, 217 financial markets xi, 47, 92, 108, 110, 128 financial rating agencies: see rating agencies financial sector xi, 43–4, 47–8, 53–4, 60, 64, 69, 79, 81, 83, 88–9, 100–101, 103, 105 Financial Stability Board 103 First (Workingmen’s) International 5 first mover advantage 132 Fisher, Irving 10, 13, 60, 75, 81, 83–4, 214 Fitch (ratings agency) 97 fixed costs 143 INDEX Fortune (magazine) 128 Fortune 500 (index) 49, 139 forwards (financial instrument) 67 founding fathers (of the United States) 207, 218 Freddie Mac (US government subsidizer of mortgages) 217 free market 6–7, 24, 46, 84, 147, 188, 193, 209 free riding 24, 37, 164 free trade 3–4, 16, 46, 209 freedom viii, 10, 18, 21, 25, 80, 94, 188, 191, 218 Freud, Sigmund 15 Friedman, Milton 44, 57, 81 front running (trading strategy) 65–6 FUD: see fear, uncertainty, doubt (FUD) fund managers 56–8, 63–4, 68, 134 futures (financial instrument) 67 Galbraith, John Kenneth 11, 74 GDP: see gross domestic product (GDP) General Motors xi, 16, 184–5 global financial crisis ix, 90; see also Great Financial Crisis God 24 gold 2, 72–7, 79–80, 86–7, 89 golden parachutes 112 Goldman Sachs 47, 49, 54, 56, 63, 66, 69, 88, 93, 105, 121, 215 goodwill 131 Great Depression 11, 70, 80, 138–9, 181, 204 Great Financial Crisis 79, 100, 111, 136; see also global financial crisis gross domestic product (GDP) vii–ix, xi, 28–31, 143 growth 27–8, 31, 33, 35, 39, 71, 90, 102, 108, 128, 132, 135, 151, 195, 203–4 Hadley, Arthur 10 happiness 202 Harvard Business Review 17–18 Harvard University 17–18, 26, 109, 208 243 hedge fund 29, 43, 46, 53, 58, 64–8, 92, 96, 101, 107 hedonic method 33–6 Hicks, John 13–14, 21 Homo economicus 164–6, 173 hostile takeovers 126 human capital 128 imports 2, 12, 34, 35 impossibility theorem (Arrow’s) 23–4, 212–13 incentives 39–40, 42–5, 52, 91, 93, 109, 114–15, 129, 132, 140, 172–4, 177, 182, 214 income guarantee 41 incompleteness viii, 12, 49, 145, 169, 184 incumbency 121, 134, 149 index tracking fund 55, 58 indifference 141, 168 industrial goods 2–3, 142 industrial production 2, 179 Industrial Revolution 5, 143, 181 inequality vii, 40, 138, 140 inflation 32–3, 36, 50, 78, 81, 104, 109, 120 information advantage 48, 131 information, asymmetric x, 191 information costs 144 information goods 143 information, imperfect x, xii, 142, 145, 149, 220 information technology 34, 218 innovation 34, 43, 147, 150–52, 160, 208 insider information 53–4, 62–3, 131 insider knowledge 131 insider trading 63–4, 131 institutionalism 8, 21 insurance xi, 39, 69, 82, 89–91,152, 189, 198, 204, 210 interest rate, real 50, 159 International Monetary Fund 27, 31, 48, 69, 74 International Workingmen’s Association 5 244 ECONOMISTS AND THE POWERFUL investment 32–3, 37, 41, 51, 56–7, 68, 78, 96–100, 103–4, 128–30, 133, 135, 140, 157, 184, 217 advice 51, 54, 56, 129 banking 29, 43, 47, 51, 52, 54, 55, 60–62, 64, 70–71, 89–90, 93, 94, 96, 97, 101, 107, 111–12, 125, 132 personal viii irrationality vii, 1, 13, 16, 38, 40, 151, 205, 211–12 Ivy League 27 Jevons, William Stanley 5, 16 job security viii, 108, 199–200, 202–4 J.P.


pages: 481 words: 120,693

Plutocrats: The Rise of the New Global Super-Rich and the Fall of Everyone Else by Chrystia Freeland

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activist fund / activist shareholder / activist investor, Albert Einstein, algorithmic trading, assortative mating, banking crisis, barriers to entry, Basel III, battle of ideas, Bernie Madoff, Big bang: deregulation of the City of London, Black Swan, Branko Milanovic, Bretton Woods, BRICs, business climate, call centre, carried interest, Cass Sunstein, Clayton Christensen, collapse of Lehman Brothers, commoditize, conceptual framework, corporate governance, creative destruction, credit crunch, Credit Default Swap, crony capitalism, Deng Xiaoping, don't be evil, double helix, energy security, estate planning, experimental subject, financial deregulation, financial innovation, Flash crash, Frank Gehry, Gini coefficient, global village, Goldman Sachs: Vampire Squid, Gordon Gekko, Guggenheim Bilbao, haute couture, high net worth, income inequality, invention of the steam engine, job automation, John Markoff, joint-stock company, Joseph Schumpeter, knowledge economy, knowledge worker, liberation theology, light touch regulation, linear programming, London Whale, low skilled workers, manufacturing employment, Mark Zuckerberg, Martin Wolf, Mikhail Gorbachev, Moneyball by Michael Lewis explains big data, NetJets, new economy, Occupy movement, open economy, Peter Thiel, place-making, Plutocrats, plutocrats, Plutonomy: Buying Luxury, Explaining Global Imbalances, postindustrial economy, Potemkin village, profit motive, purchasing power parity, race to the bottom, rent-seeking, Rod Stewart played at Stephen Schwarzman birthday party, Ronald Reagan, self-driving car, short selling, Silicon Valley, Silicon Valley startup, Simon Kuznets, Solar eclipse in 1919, sovereign wealth fund, stem cell, Steve Jobs, the new new thing, The Spirit Level, The Wealth of Nations by Adam Smith, Tony Hsieh, too big to fail, trade route, trickle-down economics, Tyler Cowen: Great Stagnation, wage slave, Washington Consensus, winner-take-all economy, zero-sum game

They were particularly interested to talk to the Canadian not only because of his strong performance in the financial crisis—Canada was the only G7 country that didn’t need to bail out its banks—but also because Carney was tipped to become the next head of the Financial Stability Board, a body of international regulators that comes closest to being the world’s banking boss. The FSB’s big job at the moment is refining and implementing new international bank capital rules. These regulations, known as Basel III, have taken on particular importance because a lack of capital in many U.S. and European banks was a central cause of the 2008 financial meltdown. Meetings of bankers are generally pretty dry affairs, and relatively large international gatherings of this sort, whose participants don’t know one another well, are usually even more decorous. But this particular conversation soon heated up. Jamie Dimon, CEO of JPMorgan Chase, told Carney he thought the proposed Basel III rules were “cockamamie nonsense.” In fact, the bank chief said, the rules ran counter to the national interest. “I have called it anti-American,” Dimon said, according to one participant.

If some institutions feel pressure today, it is because they have done too little for too long, rather than because they are being asked to do too much too soon,” Carney said. “Everyone is claiming to be a Boy Scout while accusing others of juvenile delinquency,” he said. “However, neither merit badges nor detentions will be self-selected but, rather, determined by impartial peer review and mutual oversight.” Dimon and Carney were fighting about a lot of money: the Basel III requirements would significantly increase JPMorgan’s cost of doing business and could cut into its profits. But much more is at stake than JPMorgan’s balance sheet. That weekend exchange is a telling moment in the story of the plutocrats’ relationship with the state—more significant, even, than high-profile wrangling over taxes on the plutocracy, like carried interest or the charge on large estates.

The complete loss of confidence in private finance—your membership—could only be arrested by the provision of comprehensive backstops by the richest economies in the world. With about $4 trillion in output and almost twenty-eight million jobs lost in the ensuing recession, the case for reform was clear then and remains so today.” Carney then cited a Bank of Canada calculation that found that “even if Basel III were to reduce slightly the probability of such crises in the future,” the economic value of that decreased risk to the G20 countries would be about $13 trillion. In other words, this may hurt your business a little, but it will help the economy as a whole a lot. Luigi Zingales, a professor at the University of Chicago’s Booth School of Business, frames this as the choice between being promarket and being probusiness.


pages: 823 words: 206,070

The Making of Global Capitalism by Leo Panitch, Sam Gindin

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accounting loophole / creative accounting, active measures, airline deregulation, anti-communist, Asian financial crisis, asset-backed security, bank run, banking crisis, barriers to entry, Basel III, Big bang: deregulation of the City of London, bilateral investment treaty, Branko Milanovic, Bretton Woods, BRICs, British Empire, call centre, capital controls, Capital in the Twenty-First Century by Thomas Piketty, Carmen Reinhart, central bank independence, collective bargaining, continuous integration, corporate governance, creative destruction, Credit Default Swap, crony capitalism, currency manipulation / currency intervention, currency peg, dark matter, Deng Xiaoping, disintermediation, ending welfare as we know it, eurozone crisis, facts on the ground, financial deregulation, financial innovation, Financial Instability Hypothesis, financial intermediation, floating exchange rates, full employment, Gini coefficient, global value chain, guest worker program, Hyman Minsky, imperial preference, income inequality, inflation targeting, interchangeable parts, interest rate swap, Kenneth Rogoff, land reform, late capitalism, liberal capitalism, liquidity trap, London Interbank Offered Rate, Long Term Capital Management, manufacturing employment, market bubble, market fundamentalism, Martin Wolf, means of production, money market fund, money: store of value / unit of account / medium of exchange, Monroe Doctrine, moral hazard, mortgage debt, mortgage tax deduction, Myron Scholes, new economy, non-tariff barriers, Northern Rock, oil shock, precariat, price stability, quantitative easing, Ralph Nader, RAND corporation, regulatory arbitrage, reserve currency, risk tolerance, Ronald Reagan, seigniorage, shareholder value, short selling, Silicon Valley, sovereign wealth fund, special drawing rights, special economic zone, structural adjustment programs, The Chicago School, The Great Moderation, the payments system, The Wealth of Nations by Adam Smith, too big to fail, trade liberalization, transcontinental railway, trickle-down economics, union organizing, very high income, Washington Consensus, Works Progress Administration, zero-coupon bond, zero-sum game

By contrast, in September 2009, less than a year after the 2008 G20 meeting in Washington, the BIS Committee arrived at a framework for Basel III, and this was endorsed by the G20 the following year at its November 2010 meeting in Seoul. Indeed, the fact that Dodd-Frank largely left the specifics of new capital-adequacy requirements to be worked out by the Basel Committee already reflected Washington’s confidence that an international consensus would quickly be reached which, like Dodd-Frank itself, would not disturb the basic pillars of the existing regulatory system. Despite the fact that more emerging market states, including China, were now involved, the Basel III framework did not depart from the basic principles of Basel I and II. The negotiations took off from rules already being developed, not only in the US but also in Germany and the United Kingdom, that were designed to tighten and improve the bank’s methods of measuring risk, and increase the amount of top-quality capital that banks would eventually be required to set aside.93 The overall result was that, with the G20’s blessing, “the dominant outcome of the crisis has been, and is likely to continue to be, a strengthening of the international standards regime and reduction in variation across jurisdictions,” as Tony Porter has put it.

“Alternatives such as bank taxes, breaking up banks seen as too big to fail, or the separation of deposit taking and investment banking activities, have not made it onto the agenda.”94 Basel III was deliberately constructed to produce a greater symmetry between national and international regulations than in the past, but the accord still left room for further contention and compromise as to the form in which these would actually be applied by individual states, and the schedule for full implementation was stretched out over nine years. This was much longer than the US Treasury and Fed would have preferred and, especially in light of the fact that the largest US banks had already more than reached the capital-adequacy levels specified in Basel III, it did not take long before they were exerting pressure on other states to speed up implementation along US lines.

,” New York Times, May 29, 2011. 91 Li Daokui, quoted in Mark MacKinnon, “China Sees Yuan Becoming Third Global Currency,” Globe and Mail, June 4, 2011. 92 Just as this book was being completed, Charles Goodhardt published The Basel Committee on Banking Supervision: A History of the Early Years, 1974–97, Cambridge, UK: CUP, 2011. 93 See Walter W. Eubanks, “The Status of the Basel III Capital Adequacy Accord,” Congressional Research Service, October 28, 2010. The biggest source of contention during the negotiations centered around types of capital that would be considered top-quality reserve holdings, and the imposition of a 40 percent cap on the use of highly-rated securities as liquid assets. 94 Tony Porter, “Third Time Lucky or Out after Three Strikes? The Political Significance of the Basel III Transnational Standards for Bank Regulation,” paper prepared for presentation at the Canadian Political Science Association meeting, May 18, 2011, p. 2. 95 The quotations in this paragraph are from Andrew Walters, “Chinese Attitudes towards Global Regulatory Co-operation: Revisionist or Status Quo,” in Helleiner, Pagliari and Zimmermann, Global Finance in Crisis, pp. 154, 162, 168. 96 For a particularly scathing attack on Geithner’s June 2011 speech to the International Monetary Conference in this respect, see Simon Johnson, “The Banking Emperor Has No Clothes,” New York Times Economix Blog, June 9, 2011. 97 See Tom Braithwaite, Brooke Masters, and Jeremy Grant, “Financial Regulation: A Shield Asunder,” Financial Times, May 20, 2011.


pages: 363 words: 107,817

Modernising Money: Why Our Monetary System Is Broken and How It Can Be Fixed by Andrew Jackson (economist), Ben Dyson (economist)

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bank run, banking crisis, banks create money, Basel III, Bretton Woods, call centre, capital controls, cashless society, central bank independence, credit crunch, David Graeber, debt deflation, double entry bookkeeping, eurozone crisis, financial exclusion, financial innovation, Financial Instability Hypothesis, financial intermediation, floating exchange rates, Fractional reserve banking, full employment, Hyman Minsky, inflation targeting, informal economy, information asymmetry, intangible asset, land reform, London Interbank Offered Rate, market bubble, market clearing, Martin Wolf, means of production, money: store of value / unit of account / medium of exchange, moral hazard, mortgage debt, negative equity, Northern Rock, price stability, profit motive, quantitative easing, Real Time Gross Settlement, regulatory arbitrage, risk-adjusted returns, seigniorage, shareholder value, short selling, South Sea Bubble, The Great Moderation, the payments system, The Wealth of Nations by Adam Smith, too big to fail, total factor productivity, unorthodox policies

This is intended to give depositors and other creditors confidence in the bank and hopefully the banking sector as a whole. Second, it is thought that the ratio of capital to assets can be used as a regulatory tool to control a bank’s lending. This is a key aspect of the Basel Capital Accords, which stipulate that the ratio of a bank’s capital to its (risk-weighted) assets must not fall below some pre-determined amount. For Basel I and II, this was 8%. For Basel III the ratio will rise to 10.5%.7 In theory under Basel II if the ratio of a bank’s capital to its risk-weighted assets falls below 8% the bank would be unable to increase its lending any further. However, capital requirements do not fully constrain bank lending for several reasons. First, banks profit through charging interest on loans. Any profits that are retained increase shareholder equity, and therefore capital.

(Financial Services Authority, 2009) Before the financial crisis the FSA’s regulatory stance borne out by this philosophy was commonly referred to as ‘light touch’. Although there has been a change of direction since then, as a result of the other issues highlighted in this section, capital remains an ineffective tool for controlling bank credit creation, even taking into account the countercyclical buffer proposed by Basel III. Reserve ratios & limiting the supply of central bank reserves Recall that central bank reserves are used by commercial banks in order to make payments between each other, and the central bank has the monopoly on their creation. In theory, by forcing banks to hold a certain percentage of central bank reserves against their deposits, the central bank can restrict the quantity of deposits to a multiple of the quantity of central bank reserves.

A common example of a negative externality is pollution. 7. However, banks classified as ‘Systemically Important Financial Institutions’ (SIFIs) will be required to hold up to 3.5% in additional capital, and, depending on the level of credit in an economy all banks may be required to hold an additional 2.5% in capital as a countercyclical buffer. As a result the total level of capital some banks will be required to hold under Basel III may be as high as 16.5%. 8. Although technically they attempted to do this through interest rates rather than by limiting reserves. 9. In the short run the price level can change for a variety of reasons. For example, sudden increases in demand for goods and services may push up their prices (demand-pull inflation). Or increases in the cost of production may force producers to increase the price they charge in order to maintain margins (cost-push inflation).


pages: 357 words: 110,017

Money: The Unauthorized Biography by Felix Martin

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bank run, banking crisis, Basel III, Bernie Madoff, Big bang: deregulation of the City of London, Bretton Woods, British Empire, call centre, capital asset pricing model, Carmen Reinhart, central bank independence, collapse of Lehman Brothers, creative destruction, credit crunch, David Graeber, en.wikipedia.org, financial deregulation, financial innovation, Financial Instability Hypothesis, financial intermediation, fixed income, Fractional reserve banking, full employment, Goldman Sachs: Vampire Squid, Hyman Minsky, inflation targeting, invention of writing, invisible hand, Irish bank strikes, joint-stock company, Joseph Schumpeter, Kenneth Arrow, Kenneth Rogoff, mobile money, moral hazard, mortgage debt, new economy, Northern Rock, Occupy movement, Plutocrats, plutocrats, private military company, Republic of Letters, Richard Feynman, Richard Feynman, Robert Shiller, Robert Shiller, Scientific racism, seigniorage, Silicon Valley, smart transportation, South Sea Bubble, supply-chain management, The Wealth of Nations by Adam Smith, too big to fail

Most of the definition and all of the implementation of prudential regulatory standards remains in the hands of national regulators, however—and after the crisis, many national regulators too proposed more stringent capital or liquidity requirements in addition to those agreed on in the Basel III accords (see n. 4 below). 2. Alessandri and Haldane, 2009, p. 3 and Chart 2. 3. Ibid., p. 3 and Chart 3. 4. Basel Committee on Banking Supervision, 2010, commonly called the Basel III Framework. As its name suggests, the Basel III Framework incorporated a more explicit focus on internationally co-ordinated measurement and standards of bank liquidity as well as capital. 5. This analogy is drawn from Haldane, 2010. 6. Ibid. 7. Haldane, 2010, presented illustrative estimates of the present value of the total economic cost of the global financial crisis, depending on how much of the output loss proved permanent.


pages: 349 words: 95,972

Messy: The Power of Disorder to Transform Our Lives by Tim Harford

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affirmative action, Air France Flight 447, Airbnb, airport security, Albert Einstein, Amazon Mechanical Turk, Amazon Web Services, assortative mating, Atul Gawande, autonomous vehicles, banking crisis, Barry Marshall: ulcers, Basel III, Berlin Wall, British Empire, Broken windows theory, call centre, Cass Sunstein, Chris Urmson, cloud computing, collateralized debt obligation, crowdsourcing, deindustrialization, Donald Trump, Erdős number, experimental subject, Ferguson, Missouri, Filter Bubble, Frank Gehry, game design, global supply chain, Googley, Guggenheim Bilbao, high net worth, Inbox Zero, income inequality, industrial cluster, Internet of things, Jane Jacobs, Jeff Bezos, Loebner Prize, Louis Pasteur, Marc Andreessen, Mark Zuckerberg, Menlo Park, Merlin Mann, microbiome, out of africa, Paul Erdős, Richard Thaler, Rosa Parks, self-driving car, side project, Silicon Valley, Silicon Valley startup, Skype, Steve Jobs, Steven Levy, Stewart Brand, telemarketer, the built environment, The Death and Life of Great American Cities, Turing test, urban decay, William Langewiesche

A final grim consequence of Basel was that the perverse incentives were the same for everybody. Rather than competing in a natural way, investing in real projects all over the world, banks tended to try to squeeze through the same loopholes—lending money to Greece, buying subprime derivatives—and so all found themselves in distress at the same time for the same reason. Has follow-up legislation solved the problem? Perhaps; the post-crisis Basel III agreement is more conservative than Basel II. But it is also more complex. Basel III is twice as long as Basel II, and domestic legislation such as the Dodd-Frank Act in the United States is even longer—tens of thousands of pages. The lesson of Basel II seems to be that making targets more complex doesn’t stop their being gamed—it merely leads to their being gamed in more complex and unpredictable ways. • • • A few years after the crisis had broken, one of central banking’s most imaginative figures asked a daring question.

• • • A few years after the crisis had broken, one of central banking’s most imaginative figures asked a daring question. His name is Andy Haldane; he is chief economist of the Bank of England. His question was this: What if these ever more refined attempts to quantify risk were useless—or worse?16 Haldane reviewed what was known about banks that had gone bankrupt in the crisis, and how safe they had looked earlier according to the various sophisticated criteria laid out in Basel II and Basel III. He compared those numbers with the crudest possible measure of risk: Had the bank borrowed a lot of money? At an annual convocation of central bankers at Jackson Hole, Wyoming, Haldane presented his conclusions: every single way you sliced the data, the highly rational, hyper-quantified risk management methods were less effective than a crude rule of thumb: “Beware indebted banks.” Perhaps Basel I hadn’t been too crude in dividing leverage into only five categories; perhaps instead, it had been too clever in dividing it up at all.


pages: 892 words: 91,000

Valuation: Measuring and Managing the Value of Companies by Tim Koller, McKinsey, Company Inc., Marc Goedhart, David Wessels, Barbara Schwimmer, Franziska Manoury

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activist fund / activist shareholder / activist investor, air freight, barriers to entry, Basel III, BRICs, business climate, business process, capital asset pricing model, capital controls, Chuck Templeton: OpenTable, cloud computing, commoditize, compound rate of return, conceptual framework, corporate governance, corporate social responsibility, creative destruction, credit crunch, Credit Default Swap, discounted cash flows, distributed generation, diversified portfolio, energy security, equity premium, fixed income, index fund, intangible asset, iterative process, Long Term Capital Management, market bubble, market friction, meta analysis, meta-analysis, Myron Scholes, negative equity, new economy, p-value, performance metric, Ponzi scheme, price anchoring, purchasing power parity, quantitative easing, risk/return, Robert Shiller, Robert Shiller, shareholder value, six sigma, sovereign wealth fund, speech recognition, survivorship bias, technology bubble, time value of money, too big to fail, transaction costs, transfer pricing, value at risk, yield curve, zero-coupon bond

Based on your forecasts for growth across different loan categories, VaR requirements for trading activities, and a bank’s net revenues, you can estimate the total RWA in each future year. Basel III establishes stricter rules for banks regarding how much capital they must hold based on their level of RWA. Requirements are defined for the bank’s so-called common-equity Tier 1 (CET1), additional Tier 1, and Tier 2 capital levels, relative to RWA. Of these capital ratios, CET1 to RWA is typically the most stringent. The total minimum CET1 requirements for a bank consist of different layers that add up to a total of 7.0 to 9.5 percent of RWA: Basel III CET1 capital requirements Percent of risk-weighted assets Legal minimum Capital conservation buffer G-SIB countercyclical buffer 4.5 2.5 0.0–2.5 Total 7.0–9.5 780 BANKS The first 4.5 percent is the so-called legal minimum that applies to any bank in any given year.

Any required increase in the loan loss provision translates into less equity value. Many banks may need to make such an increase in the wake of the credit crisis. Risk-Weighted Assets and Equity Risk Capital Banks are required to hold a minimum level of equity capital that can absorb potential losses to safeguard the bank’s obligations to its customers and financiers. In December 2010, new regulatory requirements for capital adequacy were specified in the Basel III guidelines, replacing the 2007 Basel II accords, which were no longer considered adequate in the wake of the 2008 and 2010 financial crises.15 The new guidelines are being gradually implemented by banks across the world between 2013 and 2019. 15 The Basel accords are recommendations on laws and regulations for banking and are issued by the Basel Committee on Banking Supervision (BCBS). 778 BANKS EXHIBIT 34.13 Estimating Risk-Weighted Assets (RWA) for a Large European Bank billion Reported RWA Asset category 2013 Loans to countries Loans to banks Loans to corporations Residential mortgages Other consumer loans Overall Operational risk Market risk Credit risk Year Estimated RWA parameters, % Loans outstanding RWA 16,228 25,100 147,242 148,076 45,440 382,086 202,219 Standardized Standardized Allocated RWA/loans RWA RWA 10 35 35 35 75 Year VaR trading book RWA Estimated RWA/ VaR 2013 19,564 47,259 242 Year Revenues RWA Estimated RWA/ revenues 2013 32,826 50,891 155 1,623 8,785 51,535 51,827 34,080 147,489 2,220 12,016 70,486 70,885 46,613 202,219 Estimated RWA/loans 14 48 48 48 103 53 Basel III specifies rules for banks regarding how much equity capital they must hold based on the bank’s so-called risk-weighted assets (RWA).16 The level of RWA is driven by the riskiness of a bank’s asset portfolio and its trading book.

In December 2010, new regulatory requirements for capital adequacy were specified in the Basel III guidelines, replacing the 2007 Basel II accords, which were no longer considered adequate in the wake of the 2008 and 2010 financial crises.15 The new guidelines are being gradually implemented by banks across the world between 2013 and 2019. 15 The Basel accords are recommendations on laws and regulations for banking and are issued by the Basel Committee on Banking Supervision (BCBS). 778 BANKS EXHIBIT 34.13 Estimating Risk-Weighted Assets (RWA) for a Large European Bank billion Reported RWA Asset category 2013 Loans to countries Loans to banks Loans to corporations Residential mortgages Other consumer loans Overall Operational risk Market risk Credit risk Year Estimated RWA parameters, % Loans outstanding RWA 16,228 25,100 147,242 148,076 45,440 382,086 202,219 Standardized Standardized Allocated RWA/loans RWA RWA 10 35 35 35 75 Year VaR trading book RWA Estimated RWA/ VaR 2013 19,564 47,259 242 Year Revenues RWA Estimated RWA/ revenues 2013 32,826 50,891 155 1,623 8,785 51,535 51,827 34,080 147,489 2,220 12,016 70,486 70,885 46,613 202,219 Estimated RWA/loans 14 48 48 48 103 53 Basel III specifies rules for banks regarding how much equity capital they must hold based on the bank’s so-called risk-weighted assets (RWA).16 The level of RWA is driven by the riskiness of a bank’s asset portfolio and its trading book. Banks have some flexibility to choose either internal risk models or standardized Basel approaches to estimate their RWA. All such models rest on the general principle that the total RWA is the sum of separate RWA estimates for credit risk, market risk, and operational risk.


pages: 497 words: 150,205

European Spring: Why Our Economies and Politics Are in a Mess - and How to Put Them Right by Philippe Legrain

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3D printing, Airbnb, Asian financial crisis, bank run, banking crisis, barriers to entry, Basel III, battle of ideas, Berlin Wall, Big bang: deregulation of the City of London, Bretton Woods, BRICs, British Empire, business process, capital controls, Capital in the Twenty-First Century by Thomas Piketty, Carmen Reinhart, Celtic Tiger, central bank independence, centre right, cleantech, collaborative consumption, collapse of Lehman Brothers, collective bargaining, corporate governance, creative destruction, credit crunch, Credit Default Swap, crony capitalism, currency manipulation / currency intervention, currency peg, debt deflation, Diane Coyle, Downton Abbey, Edward Glaeser, Elon Musk, en.wikipedia.org, energy transition, eurozone crisis, fear of failure, financial deregulation, first-past-the-post, forward guidance, full employment, Gini coefficient, global supply chain, Growth in a Time of Debt, hiring and firing, hydraulic fracturing, Hyman Minsky, Hyperloop, immigration reform, income inequality, interest rate derivative, Intergovernmental Panel on Climate Change (IPCC), Irish property bubble, James Dyson, Jane Jacobs, job satisfaction, Joseph Schumpeter, Kenneth Rogoff, labour market flexibility, labour mobility, liquidity trap, margin call, Martin Wolf, mittelstand, moral hazard, mortgage debt, mortgage tax deduction, North Sea oil, Northern Rock, offshore financial centre, oil shale / tar sands, oil shock, open economy, peer-to-peer rental, price stability, private sector deleveraging, pushing on a string, quantitative easing, Richard Florida, rising living standards, risk-adjusted returns, Robert Gordon, savings glut, school vouchers, self-driving car, sharing economy, Silicon Valley, Silicon Valley startup, Skype, smart grid, smart meter, software patent, sovereign wealth fund, Steve Jobs, The Death and Life of Great American Cities, The Wealth of Nations by Adam Smith, too big to fail, total factor productivity, Tyler Cowen: Great Stagnation, working-age population, Zipcar

In 2012, the figure was 306 per cent in Ireland, 230 per cent in Portugal and 104 per cent in Britain. 67 http://ftalphaville.ft.com/2010/11/08/397221/the-likely-cost-of-irelands-bank-bailout/ GNP figure in 2012 is €127 billion: https://namawinelake.wordpress.com/2012/12/16/irelands-gnp-and-gdp-in-2012/ 68 See in particular pages 72-75 of Aftershock: Reshaping the World After the Crisis, Little, Brown: 2010. 69 Ibid, page 74 70 See http://online.wsj.com/article/SB123371182830346215.html and http://blogs.ft.com/maverecon/2009/01/the-good-bank-solution/ 71 Philippe Legrain, Aftershock: Reshaping the World After the Crisis, Little, Brown: 2010, page 75. 72 http://en.wikipedia.org/wiki/List_of_bank_failures_in_the_United_States_(2008–present). Checked on 18 May 2013 73 http://uk.reuters.com/article/2013/02/01/uk-dutch-finance-cbank-idUKBRE9100A420130201 74 http://www.ft.com/cms/s/0/645b24e6-adbc-11e2-82b8-00144feabdc0.html 75 http://www.eba.europa.eu/-/eba-publishes-results-of-the-basel-iii-monitoring-exercise-as-of-end-2012 Around a third of the 170 banks surveyed by the EBA failed to meet the very weak Basel target of a 3-per-cent equity buffer, with a combined capital shortfall of €133 billion. When in October 2011 EU leaders did agree to force banks to boost their capital buffers somewhat, they unfortunately botched the decision, as Chapter 4 explains. At the end of 2012, the EU’s forty-two biggest banks still funded their assets with more than 97 per cent debt. 76 The FPC determined that banks’ capital positions, as of end-2012, were overstated by £52 billion.

This was attributed to under-provisioning for expected credit and trading book valuation losses (£30 billion) and conduct costs (£10 billion), and the overstatement of capital ratios resulting from an aggressive use of risk weights (£12 billion). International Monetary Fund, United Kingdom 2013 Article IV Consultation, July 2013 77 The FPC’s target was an end-2013 benchmark of a 7 percent fully-loaded Basel-III common equity tier 1 capital ratio, computed after making appropriate adjustments for expected loan losses and conduct costs over the next three-years, and for prudent risk weights. Systemically important banks will ultimately need to hit a 9.5-10 per cent ratio. 78 International Monetary Fund, United Kingdom 2013 Article IV Consultation, July 2013, Figure 5. 79 Bank of England, Bankstats (Monetary & Financial Statistics) December 2013, Table A8.1 Monetary financial institutions loans to non-financial businesses http://www.bankofengland.co.uk/statistics/Pages/bankstats/2013/Dec13/default.aspx 80 ECB, MFI loans to non-financial corporations, annual growth rate at end of December 2013.

The greatest ruffian, the most hardened violator of the laws of society, is not altogether without it.” 540 Eric Beinhocker, The Origin of Wealth: Evolution, Complexity and the Radical Remaking of Economics, Harvard Business School Press: 2006 541 John Maynard Keynes, The General Theory of Employment, Interest and Money, 1936 542 John Maynard Keynes, The Great Slump of 1930, 1930 543 Friedrich Hayek, The Fatal Conceit: The Errors of Socialism, Chicago: 1988 544 http://articles.latimes.com/2006/jul/16/business/fi-overheat16 545 The unemployment rate rose by only two percentage points. 546 James Mirrlees and others, "Mirrlees Review: Reforming the tax system for the 21st century", Institute for Fiscal Studies, 2010. http://www.ifs.org.uk/mirrleesReview/design 547 http://www.ifs.org.uk/mirrleesreview/design/ch17.pdf 548 The new Basel III capital-adequacy rules, which have been transposed into EU law through a package of regulations known as CRD IV. 549 Some countries, such as Switzerland, Iceland, Luxembourg, Netherlands and Slovenia do tax the imputed rental stream of owner-occupied housing. http://ec.europa.eu/economy_finance/events/2011/2011-11-24-property_taxation/pdf/andrews_housing_taxation_for_stability_and_growth_en.pdf 550 http://ec.europa.eu/economy_finance/events/2011/2011-11-24-property_taxation/pdf/andrews_housing_taxation_for_stability_and_growth_en.pdf 551 http://ec.europa.eu/economy_finance/events/2011/2011-11-24-property_taxation/pdf/andrews_housing_taxation_for_stability_and_growth_en.pdf 552 http://www.economist.com/node/13725843 553 http://www.indyposted.com/226135/airbnb-adds-250000-properties-6-million-guests-2013/ 554 http://www.bbc.co.uk/news/business-20890174 555 http://www.lamachineduvoisin.fr/ 556 http://www.ft.com/cms/s/0/fd8a20ca-3b3a-11e3-a7ec-00144feab7de.html 557 On 1 January 2012 there were 78.6 million under 15s in the EU and 98.4 million people aged 50–64.


pages: 223 words: 10,010

The Cost of Inequality: Why Economic Equality Is Essential for Recovery by Stewart Lansley

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banking crisis, Basel III, Big bang: deregulation of the City of London, Bonfire of the Vanities, borderless world, Branko Milanovic, Bretton Woods, British Empire, business process, call centre, capital controls, collective bargaining, corporate governance, corporate raider, correlation does not imply causation, creative destruction, credit crunch, Credit Default Swap, crony capitalism, David Ricardo: comparative advantage, deindustrialization, Edward Glaeser, falling living standards, financial deregulation, financial innovation, Financial Instability Hypothesis, floating exchange rates, full employment, Goldman Sachs: Vampire Squid, high net worth, hiring and firing, Hyman Minsky, income inequality, James Dyson, Jeff Bezos, job automation, John Meriwether, Joseph Schumpeter, Kenneth Rogoff, knowledge economy, laissez-faire capitalism, light touch regulation, Long Term Capital Management, low skilled workers, manufacturing employment, market bubble, Martin Wolf, mittelstand, mobile money, Mont Pelerin Society, Myron Scholes, new economy, Nick Leeson, North Sea oil, Northern Rock, offshore financial centre, oil shock, Plutocrats, plutocrats, Plutonomy: Buying Luxury, Explaining Global Imbalances, Right to Buy, rising living standards, Robert Shiller, Robert Shiller, Ronald Reagan, savings glut, shareholder value, The Great Moderation, The Spirit Level, The Wealth of Nations by Adam Smith, Thomas Malthus, too big to fail, Tyler Cowen: Great Stagnation, Washington Consensus, Winter of Discontent, working-age population

Indeed, a number of amendments to toughen up the Act—on capital ratios, leveraging and breaking up the biggest banks—were killed off in Congress under pressure from the White House. Moreover, subsequent negotiations to finalise the details of the new rules have led to further watering down. ‘Taken overall, the reform effort amounts to tinkering with the existing system rather than fundamentally reforming it’ wrote John Cassidy in the New York Review of Books . ‘Any comparison with FDR’s regulatory response to the Great Depression is specious.’397 New rules—called Basel III—were drawn up by the group of 27 central bankers across the world imposing tighter restrictions on banks’ capital requirements. Yet these are less stringent than thought necessary by analysts to prevent another bout of irresponsible lending and will not be fully implemented until 2019. In the UK, before they left office, Labour imposed a £3.5 billion ‘supertax’ on bank bonuses. The incoming coalition chancellor, George Osborne, introduced a permanent levy on banks’ balance sheets to replace this one-off measure.

The City, they argued, should also ‘be motivated by, and subject to, a larger social and moral purpose which governs and limits how they behave.’ That reform has failed to go far enough was admitted by the Governor of the Bank of England, Mervyn King, in a remarkably frank speech in New York on October 25 2010.440 The Governor accused the bailed-out investment banks of ‘financial alchemy’, criticised the proposed bank levy as a ‘foolish’ way to rein in the banks and called the new Basel III accord on capital ratios inadequate to ‘prevent another crisis’. He summed up his views as follows: ‘Of all the many ways of organizing banking, the worst is the one we have today.’ Whether these calls to action have much effect remains to be seen. There are many obstacles to reform. The banking and billionaire lobby continues to exercise a powerful grip on the US and UK governments and global finance forums.


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Adapt: Why Success Always Starts With Failure by Tim Harford

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Andrew Wiles, banking crisis, Basel III, Berlin Wall, Bernie Madoff, Black Swan, car-free, carbon footprint, Cass Sunstein, charter city, Clayton Christensen, clean water, cloud computing, cognitive dissonance, complexity theory, corporate governance, correlation does not imply causation, creative destruction, credit crunch, Credit Default Swap, crowdsourcing, cuban missile crisis, Daniel Kahneman / Amos Tversky, Dava Sobel, Deep Water Horizon, Deng Xiaoping, double entry bookkeeping, Edmond Halley, en.wikipedia.org, Erik Brynjolfsson, experimental subject, Fall of the Berlin Wall, Fermat's Last Theorem, Firefox, food miles, Gerolamo Cardano, global supply chain, Intergovernmental Panel on Climate Change (IPCC), Isaac Newton, Jane Jacobs, Jarndyce and Jarndyce, Jarndyce and Jarndyce, John Harrison: Longitude, knowledge worker, loose coupling, Martin Wolf, mass immigration, Menlo Park, Mikhail Gorbachev, mutually assured destruction, Netflix Prize, New Urbanism, Nick Leeson, PageRank, Piper Alpha, profit motive, Richard Florida, Richard Thaler, rolodex, Shenzhen was a fishing village, Silicon Valley, Silicon Valley startup, South China Sea, special economic zone, spectrum auction, Steve Jobs, supply-chain management, the market place, The Wisdom of Crowds, too big to fail, trade route, Tyler Cowen: Great Stagnation, web application, X Prize, zero-sum game

‘We’re a million miles away from that at the moment,’ Haldane readily admits. The Dodd–Frank reform act, signed by President Obama in July 2010, establishes a new Office for Financial Research which seems likely to try to draw up a map. The technology should, in principle, reveal which companies are systemically important – ‘too big to fail’ – and how systemic importance is changing over time. (The new ‘Basel III’ regulations discuss what rules should apply to systemically important institutions, but at present the definition of systemic importance is no clearer than the definition of art, literature or pornography.) A future Tim Geithner should never again be surprised to discover the unexpected importance of an institution such as AIG. For all the attractions of a systemic heat map, it is unlikely to solve the problem by itself, any more than Donald Rumsfeld’s ‘information dominance’ solved the problem of waging war.

., 55, 59, 71 catastrophe experts, 184–6, 191, 194–5, 208 Cave-Brown-Cave, Air Commodore Henry, 81, 83, 85, 88, 114 centralised decision making, 70, 74–5, 226, 227, 228; warfare and, 46–7, 67–8, 69, 71, 76, 78–9 centrally planned economies, 11, 21, 23–6, 68–9, 70 Challenger shuttle disaster, 184 Charles, Prince, 154 Chernobyl disaster, 185 Chile, 3, 69–72, 76, 148 China, 11, 94, 131, 143, 147, 150, 152 Christensen, Clayton, 239–40, 242, 245 Chuquicamata mine (Chile), 3 Churchill, Winston, 41–2, 82, 85 Citigroup, 205131 Clay Mathematics Institute, 110 climate change, 4, 20; carbon dioxide emissions and, 132, 156, 159–65, 166–9, 173, 176, 178–80; ‘carbon footprinting’, 159–66; carbon tax/price idea, 167–9, 178–80, 222; environmental regulations and, 169–74, 176, 177; ‘food miles’ and, 159, 160–1, 168; governments/politics and, 157–8, 163, 169–74, 176, 180; greenhouse effect and, 154–6; individual behaviour and, 158–63, 164, 165–6; innovation prizes and, 109, 179; methane and, 155, 156, 157, 159–60, 173, 179, 180; new technologies and, 94–5; simplicity/complexity paradox, 156, 157–8; Thaler-Sunstein nudge, 177–8; uncertainty and, 156 Coca-Cola, 28, 243 Cochrane, Archie, 123–7, 129, 130, 140, 238, 256 cognitive dissonance, 251–2 Cold War, 6, 41, 62–3 Colombia, 117, 147 complexity theory, 3–4, 13, 16, 49, 72103, 237 computer games, 92–3 computer industry, 11–12, 69, 70–1, 239–42 corporations and companies: disruptive technologies and, 239–44, 245–6; environmental issues and, 157–8, 159, 161, 165, 170–1, 172–3; flattening of hierarchies, 75, 224–5, 226–31; fraud and, 208, 210, 212–13, 214; innovation and, 17, 81–2, 87–9, 90, 93–4, 95–7, 108–11, 112, 114, 224–30, 232–4; limited liability, 244; patents and, 95–7, 110, 111, 114; randomised experiments and, 235–9; skunk works model and, 89, 91, 93, 152, 224, 242–3, 245; strategy and, 16, 18, 27–8, 36, 223, 224–34; see also business world; economics and finance cot-death, 120–1 credit-rating agencies, 188, 189, 190 Criner, Roy, 252 Crosby, Sir James, 211, 214, 250, 256 Cuban Missile Crisis, 41, 63 Cudahy Packing, 9 dairy products, 158, 159–60, 164–5, 166 Darwin, Charles, 86 Dayton Hudson, 243 de Montyon, Baron, 107–8 Deal or No Deal (TV game show), 33–5, 253 decentralisation, 73, 74–8, 222, 224–5, 226–31; Iraq war and, 76–8, 79; trial and error and, 31, 174–5, 232, 234 decision making: big picture thinking, 41, 42, 46, 55; consistent standards and, 28–9; diversity of opinions, 31, 44–5, 46, 48–50, 59–63; doctrine of unanimous advice, 30–1, 47–50, 62–3, 64, 78; grandiosity and, 27–8; idealized hierarchy, 40–1, 42, 46–7, 49–50, 55, 78; learning from mistakes, 31–5, 78, 119, 250–1, 256–9, 261–2; local/on the ground, 73, 74, 75, 76–8, 79, 224–5, 226–31; reporting lines/chain of command, 41, 42, 46, 49–50, 55–6, 58, 59–60, 64, 77–8; supportive team with shared vision, 41, 42, 46, 56, 62–3; unsuccessful, 19, 32, 34–5, 41–2; see also centralised decision making Deepwater Horizon disaster (April 2010), 36, 216–19, 220 Democratic Republic of Congo, 139–40 Deng Xiaoping, 1 Denmark, 148 Department for International Development (DFID), 133, 137–8 development aid: charter cities movement, 150–3; community-driven reconstruction (CDR), 137–40; corruption and, 133–5, 142–3; economic ‘big push’ and, 143–5, 148–9; feedback loops, 141–3; fundamentally unidentified questions (FUQs), 132, 133; governments and, 118, 120, 143, 144, 148–9; identification strategies, 132–5; microfinance, 116, 117–18, 120; Millennium Development Villages, 129–30, 131; product space concept, 145–8; randomised trials and, 127–9, 131, 132, 133, 134, 135–6, 137–40, 141; randomistas, 127–9, 132, 133, 135–40, 258; selection principle and, 117, 140–3, 149; SouthWest project in China, 131; success and failure, 116, 118–20, 130–1; Muhammad Yunus and, 116, 117–18 digital photography, 240–1, 242 Dirks, Ray, 211–12, 213 disk-drive industry, 239–40, 242 Djankov, Simeon, 135 domino-toppling displays, 185, 200–1 Don Basin (Russia), 21–2, 24, 27 dot-com bubble, 10, 92 Dubai, 147, 150 Duflo, Esther, 127, 131, 135, 136 Dyck, Alexander, 210, 213 eBay, 95, 230 econometrics, 132–5 economics and finance: banking system as complex and tightly coupled, 185, 186, 187–90, 200, 201, 207–8, 220; bankruptcy contingency plans, 204; Basel III regulations, 195; bond insurance business, 189–90; bridge bank/rump bank approach, 205–6; capital requirements, 203, 204; centrally planned economiepos=0000032004 >11, 21, 23–6, 68–9, 70; CoCos (contingent convertible bonds), 203–4; complexity and, 3–4; decoupling of financial system, 202, 203–8, 215–16, 220; Dodd-Frank reform act (2010), 195; employees as error/fraud spotters, 210, 211, 212, 213, 215; energy crisis (1970s), 179; evolutionary theory and, 14–17, 18–19, 174–5; improvements since 1960s, 215; inter-bank payments systems, 207; latent errors and, 209–10, 215; ‘LMX spiral’, 183–4, 189; narrow banking approach, 206–7, 215; need for systemic heat maps, 195–6; reinsurance markets, 183; zombie banks, 201–2; see also business world; corporations and companies; financial crisis (from 2007) Edison, Thomas, 236, 238 Eliot, T.S., 260 Elizabeth House (Waterloo), 170–1, 172 Endler, John, 221–2, 223, 234, 239 Engineers Without Borders, 119 Enron, 197–8, 200, 208, 210 environmental issues: biofuels, 84, 173, 176; clean energy, 91, 94, 96, 245–6; corporations/companies and, 159, 161, 165, 170–1, 172–3; renewable energy technology, 84, 91, 96, 130, 168, 169–73, 179, 245; see also climate change Equity Funding Corporation, 212 Ernst and Young, 199 errors and mistakes, types of, 208–10; latent errors, 209–10, 215, 218, 220 European Bank for Reconstruction and Development (EBRD), 188 European Union, 169, 173 Evans, Martin, 100 evolutionary theory, 6, 12–13, 15–17, 174, 258; business world and, 14–17, 174–5, 233–4; Darwin and, 86; digital world and, 13–14, 259–60; economics and, 14–17, 174–5; Endler’s guppy experiments, 221–2, 223, 239; fitness landscapes, 14–15, 259; Leslie Orgel’s law, 174, 175, 176, 177, 178, 180; problem solving and, 14–15, 16; selective breeding and, 175–6 expertise, limits of, 6–8, 16, 17, 19, 66 extinction events, biological, 18–19 Exxon (formerly Jersey Standard), 9, 12, 188, 245 F-22 stealth fighter, 93 Facebook, 90, 91 failure: in business, 8–10, 11–12, 18–19, 36, 148–9, 224, 239–46; chasing of losses, 32–5, 253–4, 256; in complex and tightly coupled systems, 185–90, 191–2, 200, 201, 207–8, 219, 220; corporate extinctions, 18–19; denial and, 32, 34–5, 250–3, 255–6; disruptive technologies, 239–44, 245–6; of established industries, 8–10; government funding and, 148–9; hedonic editing and, 254; honest advice from others and, 256–7, 258, 259; learning from, 31–5, 78, 119, 250–1, 256–9, 261–2; modern computer industry and, 11–12, 239–42; as natural in market system, 10, 11, 12, 244, 245–6; niche markets and, 240–2; normal accident theory, 219; recognition of, 36, 224; reinterpreted as success, 254–5, 256; shifts in competitive landscape, 239–46; ‘Swiss cheese model’ of safety systems, 186–7, 190, 209, 218; types of error and mistake, 208–10; willingness to fail, 249–50, 261–2; of young industries, 10 Fearon, James, 137, Federal Aviation Administration, 210 Federal Reserve Bank, 193–4 feedback, 25, 26, 42, 178, 240; in bureaucratic hierarchies, 30–1; development and, 141–3; dictatorships’ immunity to, 27; Iraq war and, 43–5, 46, 57–8, 59–62; market system and, 141; praise sandwich, 254; public services and, 141; self-employment and, 258; yes-men and, 30 Feith, Douglas, 44, 45 Ferguson, Chris ‘Jesus’, 32 Fermi nuclear reactor (near Detroit), 187 Festinger, Leon, 251 financial crisis (from 2007), 5, 11, 25; AIG and, 189, 193–5, 215–16, 228; bankers’ bonuses, 198; banking system as complex and tightly coupled, 185, 186, 187–90, 200, 201, 207–8, 220; bond insurance business and, 189–90; collateralised debt obligations (CDOs), 190, 209; credit default swaps (CDSs), 187–9, 190, 194; derivatives deals and, 198, 220; faulty information systems and, 193–5; fees paid to administrators, 197; government bail-outs/guarantees, 202, 214, 223; Lehman Brothers and, 193, 194, 196–200, 204–5, 208, 215–16; ‘LMX spiral’ comparisons, 183–4, 189; Repo 105 accounting trick, 199 Financial Services Authority (FSA), 214 Firefox, 221, 230 Fleming, Alexander, 83 Food Preservation prize, 107, 108 Ford Motor Company, 46–7 fossil record, 18 Fourier, Joseph, 155 fraud, corporate, 208, 210, 212–13, 214 Friedel, Robert, 80 Frost, Robert, 260 A Funny Thing Happened on the Way to the Forum (musical), 248 Gage, Phineas, 21, 27 Galapagos Islands, 86, 87 Gale (US developer), 152 Galenson, David, 260 Galileo, 187 Galland, Adolf, 81 Gallipoli campaign (1915), 41–2 Galvin, Major General Jack, 62, 256 game theory, 138, 205 Gates, Bill, 110, 115 Gates, Robert, 59, 64, 78 Gates Foundation, 110 Geithner, Tim, 193–5, 196 GenArts, 13 General Electric, 9, 12, 95 Gilbert, Daniel, 255, 256 GlaxoSmithKline, 95 Glewwe, Paul, 127–8 Global Positioning System (GPS), 113 globalisation, 75 Google, 12, 15, 90, 91, 239, 245, 261; corporate strategy, 36, 231–4; Gmail, 233, 234, 241, 242; peer monitoring at, 229–30 Gore, Al, An Inconvenient Truth, 158 Göring, Hermann, 81 government and politics: climate change and, 157–8, 163, 169–74, 176, 180; development aid and, 118, 120, 143, 144, 148–9; financial crisis (from 2007) and, 193–5, 198–9, 202, 214, 215–16, 223; grandiosity and, 27–8; ideal hierarchies and, 46pos=00002pos=0000022558 >7, 49–50, 62–3, 78; innovation funding, 82, 88, 93, 97, 99–101, 102–3, 104, 113; lack of adaptability rewarded, 20; pilot schemes and, 29, 30; rigorous evaluation methods and, 29* Graham, Loren, 26 Grameen Bank, 116, 117 Greece, 147 Green, Donald, 29* greenhouse effect, 154–6 Gulf War, first, 44, 53, 65, 66, 67, 71; Battle of 73 Easting, 72–3, 74, 79 Gutenberg, Johannes, 10 Haldane, Andrew, 195, 258 Halifax (HBOS subsidiary), 211 Halley, Edmund, 105 Halliburton, 217 Hamel, Gary, 221, 226, 233, 234 Hanna, Rema, 135 Hannah, Leslie, 8–10, 18 Hanseatic League, 150 Harrison, John, 106–7, 108, 110, 111 Harvard University, 98–9, 185 Hastings, Reed, 108 Hausmann, Ricardo, 145 Hayek, Friedrich von, 1, 72, 74–5, 227 HBOS, 211, 213, 214 healthcare sector, US, 213–14 Heckler, Margaret, 90–1 Henry the Lion, 149, 150, 151–2, 153 Hewitt, Adrian, 169 Hidalgo, César, 144–7, 148 Higginson, Peter, 230 Hinkley Point B power station, 192–3, 230–1 Hitachi, 11 Hitler, Adolf, 41, 82, 83, 150 HIV-AIDS, 90–1, 96, 111, 113 Holland, John, 16, 103 Hong Kong, 150 Houston, Dame Fanny, 88–9, 114 Howard Hughes Medical Institute (HHMI), 101–3, 112 Hughes (computer company), 11 Humphreys, Macartan, 136, 137, 138–40 Hurricane aircraft, 82* IBM, 11, 90, 95–6 In Search of Excellence (Peters and Waterman, 1982), 8, 10 India, 135, 136, 143, 147, 169 individuals: adaptation and, 223–4, 248–62; climate change and, 158–63, 164, 165–6; experimentation and, 260–2; trial and error and, 31–5 Indonesia, 133–4, 142, 143 Innocentive, 109 innovation: corporations and, 17, 81–2, 87–9, 90, 93–4, 95–7, 108–11, 112, 114, 224–30, 232–4; costs/funding of, 90–4, 99–105; failure as price worth paying, 101–3, 104, 184, 215, 236; government funding, 82, 88, 93, 97, 99–101, 102–3, 104, 113; grants and, 108; in health field, 90–1, 96; large teams and specialisation, 91–4; market system and, 17, 95–7, 104; new technologies and, 89–90, 91, 94–5; parallel possibilities and, 86–9, 104; prize methodology, 106–11, 112, 113–14, 179, 222–3; randomistas and, 127–9, 132, 133, 135–40, 258; return on investment and, 83–4; skunk works model, 89, 91, 93, 152, 224, 242–3, 245; slowing down of, 90–5, 97; small steps and, 16, 24, 29, 36, 99, 103, 143, 149, 153, 224, 259–60; space tourism, 112–13, 114; specialisation and, 91–2; speculative leaps and, 16, 36, 91, 99–100, 103–4, 259–60; unpredictability and, 84–5 Intel, 11, 90, 95 International Christelijk Steunfonds (ICS), 127–9, 131 International Harvester, 9 International Rescue Committee (IRC), 137–8, 139 internet, 12, 15, 63, 90, 113, 144, 223, 233, 238, 241; randomised experiments and, 235–6, 237; see also Google Iraq war: al Anbar province, 56–7, 58, 64, 76–7; civil war (2006), 39–40; Commander’s Emergency Response Program (CERP), 77; counterinsurgency strategy, 43, 45, 55–6, 58, 60–1, 63–4, 65; decentralisation and, 76–8, 79; feedback and, 43–5, 46, 57–8, 59–62; FM 3–24 (counter-insurgency manual), 63; Forward Operating Bases (FOBs), 51–3, 57, 65; Haditha killings (19 November 2005), 37–9, 40, 42, 43, 52; new technologies and, 71, 72, 74, 78–9, 196; Samarra bombing (22 February 2006), 39; Tal Afar, 51, 52, 53–5, 61, 64, 74, 77, 79; trial and error and, 64–5, 66–7; US turnaround in, 35, 40, 46, 50–1, 53–6, 57–8, 59–61, 63–5, 78; US/allied incompetence and, 38, 39–40, 42–5, 46, 50, 64, 67, 79, 223; Vietnam parallels, 46 J&P Coats, 9 Jacobs, Jane, 87 James, Jonathan, 30 Jamet, Philippe, 192 Janis, Irving, 62 Japan, 11, 143, 176, 204, 208 Jay-Z, 119 Jo-Ann Fabrics, 235 Jobs, Steve, 19 Joel, Billy, 247–8, 249 Johnson, President Lyndon, 46, 47, 49–50, 60, 62, 64, 78 Jones, Benjamin F., 91–2 Joyce, James, 260 JP Morgan, 188 Kahn, Herman, 93 Kahneman, Daniel, 32, 253 Kantorovich, Leonid, 68–9, 76 Kaplan, Fred, 77 Karlan, Dean, 135 Kauffmann, Stuart, 16, 103 Kay, John, 206–7, 208, 215, 259 Keller, Sharon, 252 Kelly, Terri, 230 Kennedy, President John F., 41, 47, 62–3, 84, 113 Kenya, 127–9, 131 Kerry, John, 20 Keynes, John Maynard, 181 Kilcullen, David, 57, 60–1 Klemperer, Paul, 96, 205 Klinger, Bailey, 145 Kotkin, Stephen, 25 Kremer, Michael, 127–8, 129 Krepinevich, Andy, 45 Lanchester, John, 188 leaders: decision making and, 40–2; failure of feedback and, 30–1, 62; grandiosity and, 27–8; ignoring of failure, 36; mistakes by, 41–2, 56, 67; need to believe in, 5–6; new leader as solution, 59 Leamer, Ed, 132* Leeson, Nick, 184–5, 208 Lehman Brothers, 193, 194, 196–200, 204–5, 208, 215–16 Lenin Dam (Dnieper River), 24 Levine, John, 48–9 Levitt, Steven, 132–3 Liberia, 136–9 light bulbs, 162, 177 Lind, James, 122–3 Lindzen, Richard, 156 Livingstone, Ken, 169 Lloyd’s insurance, 183 Lloyds TSB, 214 Local Motors, 90 Lockheed, Skunk Works division, 89, 93, 224, 242 Lomas, Tony, 196, 197–200, 204, 205, 208, 219 Lomborg, Bjorn, 94 longitude problem, 105–7, 108 Lu Hong, 49 Lübeck, 149–50, 151–2, 153 Luftwaffe, 81–2 MacFarland, Colonel Sean, 56–7, 64, 74, 76–7, 78 Mackay, General Andrew, 67–8, 74 Mackey, John, 227, 234 Madoff, Bernard, 208212–13 Magnitogorsk steel mills, 24–5, 26, 153 Malawi, 119 Mallaby, Sebastian, 150, 151 management gurus, 8, 233 Manhattan Project, 82, 84 Manso, Gustavo, 102 Mao Zedong, 11, 41 market system: competition, 10–11, 17, 19, 75, 95, 170, 239–46; ‘disciplined pluralism’, 259; evolutionary theory and, 17; failure in as natural, 10, 11, 12, 244, 245–6; feedback loops, 141; innovation and, 17, 95–7, 104; patents and, 95–7; trial and error, 20; validation and, 257–8 Markopolos, Harry, 212–13 Marmite, 124 Maskelyne, Nevil, 106 mathematics, 18–19, 83, 146, 247; financial crisis (from 2007) and, 209, 213; prizes, 110, 114 Mayer, Marissa, 232, 234 McDonald’s, 15, 28 McDougal, Michael, 252 McGrath, Michael, 252 McMaster, H.R.


pages: 329 words: 95,309

Digital Bank: Strategies for Launching or Becoming a Digital Bank by Chris Skinner

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algorithmic trading, Amazon Web Services, Any sufficiently advanced technology is indistinguishable from magic, augmented reality, bank run, Basel III, bitcoin, business intelligence, business process, business process outsourcing, call centre, cashless society, clean water, cloud computing, corporate social responsibility, credit crunch, crowdsourcing, cryptocurrency, demand response, disintermediation, don't be evil, en.wikipedia.org, fault tolerance, fiat currency, financial innovation, Google Glasses, high net worth, informal economy, Infrastructure as a Service, Internet of things, Jeff Bezos, Kevin Kelly, Kickstarter, M-Pesa, margin call, mass affluent, mobile money, Mohammed Bouazizi, new economy, Northern Rock, Occupy movement, Pingit, platform as a service, Ponzi scheme, prediction markets, pre–internet, QR code, quantitative easing, ransomware, reserve currency, RFID, Satoshi Nakamoto, Silicon Valley, smart cities, software as a service, Steve Jobs, strong AI, Stuxnet, trade route, unbanked and underbanked, underbanked, upwardly mobile, We are the 99%, web application, Y2K

The mobile internet world squeezes and exposes the legacy on the one hand – this is why many banks have struggled to incorporate mobile services with their internet banking services – whilst the global, European and national regulatory requirements are placing further pressures on the core processes as well. Just look at the erosion of processing fees thanks to the Payment Services Directive in Europe or the Durbin amendment to Dodd-Frank in the USA, or the intraday and soon real-time margin calls for collateralisation under the European Market Infrastructure Regulation and Dodd-Frank, if you want to see how that changes things (not to even mention Basel III). Finally, assuming you managed a successful migration to the new world, there are still massive exposures to risk. We live in a world where technology drives our markets and yet the fear of changing technology is killing us. Therefore banks avoid migration to new core systems, and are handcuffed into legacy operations through their legacy systems. We talk about front ending such systems with single customer view through middleware integration, but it’s all sticking plasters on the open wound.

Anthony tells me that the bank has 80,000 customer accounts today and is opening around 2,000 new accounts a week but it’s not all plain sailing as, in the first 15 months of operation, the bank made just 100 mortgage loans. Nevertheless, the latest funding was over-subscribed and follows on from the first two funding rounds in 2010 of £75 million and £50 million, to give the bank over £250 million of backing and a Tier 1 Capital Ratio in the high teens (better than Basel III’s requirements and way above most European banks today). Interestingly, the bank advocates many of the same messages I hear from other upstarts, such as Virgin Money and ING Direct. For example, a big headline is: hire staff for attitude, not skills. You can train people once they join the bank, but you don’t need them to be bankers up front. As a result, the bank’s major hiring policy is whether, in the first interview, you smile.

When the Money Runs Out: The End of Western Affluence by Stephen D. King

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Albert Einstein, Asian financial crisis, asset-backed security, banking crisis, Basel III, Berlin Wall, Bernie Madoff, British Empire, capital controls, central bank independence, collapse of Lehman Brothers, collateralized debt obligation, congestion charging, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, cross-subsidies, debt deflation, Deng Xiaoping, Diane Coyle, endowment effect, eurozone crisis, Fall of the Berlin Wall, financial innovation, financial repression, fixed income, floating exchange rates, full employment, George Akerlof, German hyperinflation, Hyman Minsky, income inequality, income per capita, inflation targeting, invisible hand, John Maynard Keynes: Economic Possibilities for our Grandchildren, joint-stock company, liquidationism / Banker’s doctrine / the Treasury view, liquidity trap, London Interbank Offered Rate, loss aversion, market clearing, mass immigration, moral hazard, mortgage debt, new economy, New Urbanism, Nick Leeson, Northern Rock, Occupy movement, oil shale / tar sands, oil shock, old age dependency ratio, price mechanism, price stability, quantitative easing, railway mania, rent-seeking, reserve currency, rising living standards, South Sea Bubble, sovereign wealth fund, technology bubble, The Market for Lemons, The Spirit Level, The Wealth of Nations by Adam Smith, Thomas Malthus, Tobin tax, too big to fail, trade route, trickle-down economics, Washington Consensus, women in the workforce, working-age population

The growth rate of the economy inevitably atrophies: surviving is not the same thing as thriving.12 The Regulatory Trap Quantitative easing provides one way for governments to jump to the front of the credit queue. It is not, however, the only way. Regulations designed to reduce the risk of financial implosion are another useful device to divert funds into the hands of government. Again, the intention may never have been there initially, but that, however, is not really the point. Like quantitative easing, regulation can trigger the law of unintended consequences. The Basel III regulations provide a good example. Even with the revisions announced on 6 January 2013,13 which relaxed the constraints on banks, the rules still make it easier for governments than other would-­be borrowers to raise funds from the banking system. To understand why, it’s worth taking a look at the Liquidity Coverage Ratio (LCR), defined as the ratio of high quality liquid assets (HQLA) to total net cash outflows over the next 30 days and designed to protect an institution in the light of a 2008-­style liquidity stress scenario.

‘Forecasting Recessions under the Gramm-­Rudman-­Hollings Law’, NBER Working Paper No. 2066, Nov. 1986 278 4099.indd 278 29/03/13 2:23 PM INDEX Africa 19 ageing populations 78, 88, 250 age-related expenditure 48 generational divide 171–4, 241, 243–5 Germany 136 Japan 23, 25 AIG 30 Akerlof, George 123–4 American War of Independence 154 ancien régime and the French Revolution 151–7 Angola 19, 82 Anwar Ibrahim 200 Arab Spring 160 Argentina 13–19, 24–6, 39, 42, 161 Arizona Support Our Law Enforcement and Safe Neighbourhoods Act (SB 1070) 192 Armstrong, Neil 9–10, 35 Arrow, Kenneth J. 132–3 Asian crisis 192–6 recovery from 204–5, 206, 208–9 asset prices 62–3 asset-backed securities 73 Audit Commission 173–4 austerity 67–8, 111, 205, 226, 242 and political extremism 227 Statute of Labourers 211 versus stimulus 4 wartime 114, 143 see also Snowden’s budget Australia 15, 16, 117, 187 Austria 225 baby boomers 1, 7, 243 bailouts 61–2, 241 Balls, Ed 101 Bank Negara 199 Bank of England 33, 61, 90–2 economic growth forecasts 74 interest rates 71, 102 and Libor 126 Bank of Japan 21 banking free 255, 257 and protectionism 215 union (eurozone) 256 banks 125–31, 252–7 bankers’ rewards 48–9 failure 30–1, 255 liquidity buffers 84, 90 mortgage loan-to-value ratios 51–2 regulatory uncertainty 251–2 and savers 136 see also central banks Barclays Bank plc 126, 127–8 279 4099.indd 279 29/03/13 2:23 PM When the Money Runs Out Basel III regulations 83 Bean, Charlie 63–5, 75 Bear Stearns 30 Belgium 184 Ben Ali, Zine al-Abidine 160 Benedetti, Count 182 benefits 47, 203–4 see also social spending Bernanke, Ben 4, 21–2 Beveridge, William 44–5 bimetallism 184–5 Bismarck, Otto von 182 Black Death 209–10, 213 blame culture 108, 161, 189, 200–1, 226–7 Blenheim Palace 222–3 bonds 73, 77, 80, 86, 221 borrowers 97, 133–4, 137 borrowing, government borrower of last resort 86–7 heavy 143–4 international 142 and low interest rates 71, 245 and the New Deal 109 to offset private saving 217–18 relative to national income 198, 247 rising 32 see also credit: queues Botswana 19 Brazil 19, 89, 163 Britain see UK (United Kingdom) British Empire 14, 15, 16 Bryan, William Jennings 187 budget deficits 58, 69, 79, 110, 117 France 54 Germany 54 Spain 54 UK 52, 54, 66–7 US 53–4, 66–7, 118 Buenos Aires 15 Business Week 29–30 Buxton, Thomas Fowell 128 California 173 Calonne, Charles-Alexandre de 154–5 Canada 15, 16 capital adequacy ratios 256 controls 16, 199–200, 201, 234 flight and the euro 191 foreign 198, 202 immobile 250–2 markets 31, 133 and the rise of living standards 180 Carr, Jimmy 148 Case-Shiller house price index 63 Catalonia 153 Central African Republic 163 central banks and bailouts 241 expansion of remit 86 and government debt 80–1 and illusory wealth 64–5 interest rates 71 and a new monetary framework 245–6 nominal GDP targeting 247–50 and politics 78, 89–90, 91–5 and redistribution 121 see also quantitative easing (QE) Chicago 15 China and commodity prices 77 financial systems 135 and globalization 167 income inequality 160, 163 living standards 27 per capita incomes 251 and regional tensions 228 renminbi currency 177 silver standard 183, 185 trading partners 82 and the US 12, 139 Chinese Exclusion Act 188–9 Chrysi Avgi 227 Churchill, Winston 103 circuit breakers 242, 256 Coinage Act 184–5 Committee on National Expenditure 98–9 commodity prices 77, 109, 116–17 conduits 129–30 Connecticut 163 consumer credit 11–12, 52, 135 contingent redistribution 236 credit consumer 11–12, 52, 135 derivation of word 125 expansion 56–7 and the property boom 61 and protectionism 215 queues 80–1, 83–4, 85–9, 217 Creditanstalt 225 creditors creditor nations 224–5, 232 and debtors 139–43, 174–7, 188, 191, 232–4 280 4099.indd 280 29/03/13 2:23 PM Index foreign 193, 221, 223 home grown 138 Japan 22 cross-subsidization, of banking services 256–7 currencies 177, 221 ‘currency wars’ 82, 190 see also eurozone; renminbi; ringgit; sterling Darling, Alistair 92–3 debt and asset prices 63 and central banks 241–2 eurozone crisis 145, 235–9 excessive 67, 213–14 France 154 household 12, 63–4, 85 and inflation 220 Japan 23 and national incomes 52, 118, 141–2 and quantitative easing (QE) 79–80 repaying 34 debt deflation 115 debtors and creditors 139–43, 174–7, 188, 191, 232–4 eurozone 224–5 home grown 138 deficient demand 57, 59 deficit expansion 119 deficit reduction 242 deficits 58, 69, 79, 110, 117 France 54 Germany 54 Korea 202 pension funds 75, 172 Spain 54 and surpluses 134–7, 232–4 UK 52, 54, 66–7 US 53–4, 66–7, 118 deflation 21–2, 185 democratic deficit 143, 221 Deng Xiaoping 12, 160 Denmark 158 the Depression 55–7, 59, 70, 106–10, 131 and the UK 98, 101 Dexia 30 Diamond, Bob 126 Dickens, Charles 43 disaster-avoidance 7 District of Columbia 163 dollar standard 190 dotcom bubble 169 Draghi, Mario 94 economics profession 3–4, 5–6, 258–9 Edelman Trust Barometer 148 education 12 financial 257–9 literacy 15 training 254 Edward III 211 Egana, Amaia 153 emerging nations 28, 116 employment 115–16 see also labour; unemployment enfranchisement 222, 242–4 the Enlightenment 6, 11, 154 entitlement culture 45, 48, 137, 143, 209, 218 absent from Asia 204, 209 need to reduce 178, 205 equities 79, 172 ethics 254 Ethiopia 19 European Central Bank (ECB) 92, 93–5, 119–20, 144–5, 146 eurozone banking union 256 crisis 224–6, 235–9 and the European Central Bank 93–5 northern creditors and southern debtors 67, 139, 145, 157, 191, 232–3 and trust 145–6 and the UK 111, 214 variations in borrowing costs 215–16 exchange rates 81–2, 111–12, 175, 239–42 executive pay 48 exports 11, 112 extremism, political 226–9 Fannie Mae 190 Federal Reserve 74, 92, 105, 241 and the Great Depression 59, 106–7 Ferguson, Niall 26 Ferguson, Roger 194 feudalism 213 financial services 168–70 innovations 11–12, 38, 133–4 Financial Services Authority (FSA) 171 Finland 158 First World War 103, 114 ‘fiscal club’ concept 237–9 fiscal policy 58, 66–7, 69–70, 77–8, 246–7 fiscal trap 79–81 281 4099.indd 281 29/03/13 2:23 PM When the Money Runs Out fiscal unions 236–7 Fisher, Irving 108, 115 football 165 forecasting 52–3, 63, 71–2, 74, 108 Fortis 30 France age-related expenditure 48 ancien régime and the Revolution 151–7 and Austria 225–6 benefits 204 budget deficit 54 exports 82 Latin monetary union 184 per capita incomes 101, 105 and political extremism 192 and public spending 49 Franco-Prussian War 182 Frank, Barney 65 fraudulent acts 35–6 Freame, John 127–8 Freddie Mac 190 free banking 255, 257 French Revolution, and the ancien régime 151–7 Freud, Sigmund 51 Friedman, Milton 59, 60, 86, 106, 188 Fuld, Dick 253 GDP forecasts 48, 52–4 targeting 247–50 General Strike 104 generational divide 171–4, 241, 243–5 see also ageing populations Germany ageing population 48, 136, 171 benefits 204 budget deficit 54 and the eurozone crisis 34, 191, 225, 232–3, 235 exports 82 Franco-Prussian War reparations 184, 186 government borrowing 71, 144 interest rates 146 late 19th-century economy 186, 189–90 living standards 13–14 national income 32 per capita incomes 101, 105 and the Protestant work ethic 26 and public spending 50 surplus 135–7 Treaty of Versailles 103 unification 182–3 Weimar Republic 55–6, 89 GfK/NOP Inflation Attitudes Survey 92 globalization 166–7, 169, 214–16, 224–6, 250–1 Gold Standard 186 and Germany 184 and the UK 57, 98–9, 102, 103, 105 and the US 107, 109, 187–8 gold standards 183–4, 185 Golden Dawn Party 227 Goodwin, Fred 253 Gordon, Robert J. 4 government bonds 73, 77, 80, 86, 221 government borrowing borrower of last resort 86–7 heavy 143–4 international 142 and low interest rates 71, 245 and the New Deal 109 to offset private saving 217–18 relative to national income 198, 247 rising 32 see also credit: queues government debt and central banks 241–2 eurozone crisis 145 excessive 67, 213–14 France 154 and inflation 220 and national incomes 52, 118, 141–2 and quantitative easing (QE) 79–80 governments and central bank bailouts 241 and credit queues 83–92 mistrust 140, 147–8, 217–18 social spending 45–7 spending 58, 109, 119, 142, 203 spending increases 49–50, 66 Gramm-Rudman-Hollings Act 242 Great Depression 55–7, 59, 70, 106–10, 131 and the UK 98, 101 Great Railroad Strike 187 Greece 82, 134, 140–1, 144–6, 234 and the euro 191 and political extremism 192, 227 Greenback Party 187 Greenspan, Alan 61–2 growth forecasting 74 global 28 start of the 21st century 169–70 targeting 247–50 282 4099.indd 282 29/03/13 2:23 PM Index Hamada Marine Bridge 23 Hayek, Friedrich 56, 207 HBOS 30 health spending 45–6 Helmsley, Leona 148 high-quality liquid assets (HQLA) 83–4 home bias 215–16, 251–2 Hong Kong 163, 204 Hoover administration 118 housing markets 30–1, 61, 63–5, 115–16, 130 foreign buyers 177, 223 see also mortgage-backed securities; subprime HSBC 126, 254 Hundred Years War 209–10 Hungary 89 hyperinflation 78, 89 Iceland 32 Illinois 173, 174 illusions and asset prices 62–3 illusory prosperity 49–51, 56–7, 64–5, 68 and investment philosophy 137–8 public sector 52–3 IMF 200, 202 import tariffs 16 income inequalities 25, 34, 48, 158–70 income, national 32, 49–50, 141–2, 247 Germany 33 Japan 32 UK 110–11, 112 US 117–18 incomes, per capita 27, 49, 159–60, 163 Argentina 14 China 251 France 101, 105 Germany 14, 101, 105 India 27, 251 Indonesia 197 Japan 21 Korea 202 Malaysia 198 UK 1, 44, 101, 105 US 14, 101 India 27, 183, 185, 251 Indonesia 193, 195, 196–7 industrial relations 103–4 Industrial Revolution 38 IndyMac 30 inflation and ageing populations 250 Argentina 18 and commodity prices 116–17 deflation 21–2, 185 excessive 77–8, 89 housing market 64 and the New Deal 109 and stagnation 219–20 targeting 59–61, 87–8, 246, 247 UK 114 US 115 infrastructure projects 236 innovations, financial 11–12, 38, 133–4 interest rates and asset prices 63 credit queue jumping 83–92, 217 expected future 87–8 falls 32, 69, 137, 146–7 inflation versus GDP targeting 248–9 Libor 126 and monetary and fiscal policies 245–6 persistently low 72, 75, 76, 89–91, 239 and stimulus 58 subsidizing 190 UK 61, 71, 102 US 57, 61, 105, 135, 193 intergenerational divide 171–4, 241, 243–5 see also ageing populations International Monetary Fund (IMF) 144–5, 200, 201, 202 international/domestic conflict 232–5 investment demand for financial services 168 and income inequality 162–3 international 134, 136, 176–7, 193, 232 private investors 144–5 Ireland 49, 134 Israeli–Palestinian conflict 122–3 Italy 49–50, 82, 146, 184, 191 ageing populations 171 Japan 20–6 ageing populations 171 attempted reforms 42 debt repayment 135 exports 11 government borrowing 144 government debt 52 liquidity trap 72 living standards 14 national income 32–3 and quantitative easing (QE) 85 stockpile of assets 240 and trust 161 unreliable estimates 113 283 4099.indd 283 29/03/13 2:23 PM When the Money Runs Out Jay Cooke and Company 186 Jerusalem trip 122–3 Jews, attitudes towards 189, 200–1, 213 jobs 115–16 see also labour; unemployment Kahneman, D. 41 Kalecki, Michael 59 Das Kapital(Marx) 179 Keynes, John Maynard 38, 57–9, 72, 86, 108 ‘Economic Possibilities for our Grandchildren’ 259–60 Essays in Persuasion 100 The General Theory of Employment, Interest and Money 58–9, 89 on the Gold Standard 104 How to Pay for the War 114 Keynes Plan 233 Keynesian policies 60 on the Snowden budget 99 King, Mervyn 73, 90–1, 92–3, 180 Knetsch, J.


pages: 662 words: 180,546

Never Let a Serious Crisis Go to Waste: How Neoliberalism Survived the Financial Meltdown by Philip Mirowski

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Alvin Roth, Andrei Shleifer, asset-backed security, bank run, barriers to entry, Basel III, Berlin Wall, Bernie Madoff, Bernie Sanders, Black Swan, blue-collar work, Bretton Woods, Brownian motion, capital controls, Carmen Reinhart, Cass Sunstein, central bank independence, cognitive dissonance, collapse of Lehman Brothers, collateralized debt obligation, complexity theory, constrained optimization, creative destruction, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, dark matter, David Brooks, David Graeber, debt deflation, deindustrialization, Edward Glaeser, Eugene Fama: efficient market hypothesis, experimental economics, facts on the ground, Fall of the Berlin Wall, financial deregulation, financial innovation, Flash crash, full employment, George Akerlof, Goldman Sachs: Vampire Squid, Hernando de Soto, housing crisis, Hyman Minsky, illegal immigration, income inequality, incomplete markets, information asymmetry, invisible hand, Jean Tirole, joint-stock company, Kenneth Arrow, Kenneth Rogoff, knowledge economy, l'esprit de l'escalier, labor-force participation, liberal capitalism, liquidity trap, loose coupling, manufacturing employment, market clearing, market design, market fundamentalism, Martin Wolf, money market fund, Mont Pelerin Society, moral hazard, mortgage debt, Naomi Klein, Nash equilibrium, night-watchman state, Northern Rock, Occupy movement, offshore financial centre, oil shock, Pareto efficiency, Paul Samuelson, payday loans, Philip Mirowski, Ponzi scheme, precariat, prediction markets, price mechanism, profit motive, quantitative easing, race to the bottom, random walk, rent-seeking, Richard Thaler, road to serfdom, Robert Shiller, Robert Shiller, Ronald Coase, Ronald Reagan, savings glut, school choice, sealed-bid auction, Silicon Valley, South Sea Bubble, Steven Levy, technoutopianism, The Chicago School, The Great Moderation, the map is not the territory, The Myth of the Rational Market, the scientific method, The Wisdom of Crowds, theory of mind, Thomas Kuhn: the structure of scientific revolutions, Thorstein Veblen, Tobin tax, too big to fail, transaction costs, Vilfredo Pareto, War on Poverty, Washington Consensus, We are the 99%, working poor

If you don’t have a working comprehension of how the economic system failed—and a major thesis of this book is that most economists did not understand the economy’s peculiar path prior to the crisis, and persisted in befuddlement in the aftermath—then the notion that one could impose some one-size-fits-all format of rational regulation is a vain delusion. This catastrophic intellectual failure of the economics profession at large should quash wistful evocations of Cold War versions of “regulation” on the left, and further, frame the implosion of things such as the Dodd-Frank initiative and Basel III. The intellectual wing of the neoliberal movement had actually long made this argument concerning easy appeals to regulation many times before; the difference is that they currently preach that all and sundry consequently should simply capitulate to their natural state of ignorance, and give up most (but not all—an important caveat) attempts at steering the economy. Conspicuously, the neoliberals themselves do not themselves practice what they preach; and it is incumbent upon the left to develop an alternative framework to explain that fact, as part of a project to build an economy that conforms to open advocacy of a roster of social goals.

The papers, once available on the Mont Pèlerin website, have since been removed. For some further description, see Plehwe, “Neoliberal Think Tanks and the Crisis.” The dominant neoliberal narrative of the crisis, which had stabilized by 2010, blaming it entirely on government policies, is described below in chapter 5. 11 Lehmann, “Let Them Eat Dogma.” 12 This statement takes into account the numerous assertions of “reform,” from the Dodd-Frank bill in the U.S. to the Basel III international bank regulations. On these issues, see R. Lee, Running the World’s Markets; Konzelman et al., “Governance, Regulation and Financial Market Instability”; and Konczal, Will It Work? How Will We Know? “I am surprised—more than surprised, shocked even—that all that’s transpired since 2007–8 has produced as little as it has” (the historian Steve Fraser quoted in Chan, “Dissenters Fault Report on Crisis in Finance”).

Index A Acemoglu, Daron Adbusters Admati, Anat AEA (American Economics Association), AEI (American Enterprise Institute) “After the Crash of 2008” (Prasch), The Age of Uncertainty (PBS series) Agnotology, defined Agriculture, Department of AIG Financial Products Akerlof, George Allais, Maurice AlphaSimplex American Economic Review American Economics Association (AEA) American Enterprise Institute (AEI) American Finance Association American Institute of Certified Public Accountants American Majority Americans for Prosperity Ameriquest Angelides, Phil Anglo Irish Bank Animal Spirits (Akerlof and Shiller) Annapolis Center AOL Armey, Dick Arnsperger, Christian Aron, Raymond Arrow–Debreu theory Arrow, Kenneth Artaud, Antonin, The Theatre and Its Double, Atlanta Federal Reserve Bank Atlas Economic Research Foundation Atlas Shrugged (Ayn Rand) Audacity of Intervention Auerbach, Robert Austrian School of economics Austrian-inflected Hayekian legal theory Austro-libertarianism Ausubel, Lawrence B Bailey, Martin Baker, Dean Bank concentration in US Bank of America Bank of New York Mellon Bank of Sweden Bank of Sweden Nobel Prize Barclays Barnett, Clive Barro, Robert Basel III Bayesian Nash equilibrium Bear Stearns Beck, Glenn Becker, Gary The Beginning of History (De Angelis) Behrent, Michael Benjamin, Walter Benson, Bruce Berliner Zeitung Bernal, J. D. Bernanke, Ben on asset purchase program Brunnermeier on as Chairman of Federal Reserve Bank Board on CRA on economic crisis as economic influence on EMH on Friedman on Great Moderation on Great Recession “hold-to-maturity” prices Kestenbaum on on Lehman failure Mirowski on on mortgage market on “Panic of 2007” paper pronounced absolution upon orthodox economics profession shadow banking on TARP testimony before FCIC Bernard, Andrew Bernstein, Jared Bertelsmann AG Besley, Tim Bhagwati, Jagdish Big Lie The Big Short (Lewis) The Birth of Biopolitics (Foucault) Black Rock Black-Scholes option pricing Blackstone Group Blackwater (Scahill) Blanchard, Olivier Blinder, Alan Bloomberg, Michael Bockman, Johanna, Markets in the Name of Socialism Body Alteration Boettke, Peter Bookstaber, Richard Bootle, Roger Born, Brooksley Boskin, Michael Bradley Foundation “Break the Glass: Bank Recapitalization Plan” (Swagel) Brenner, Robert Bretton Woods Bristol University British Academy British National Health Service British Royal Society Brookings Institution Brooks, David Brown, Gordon Brown, Wendy Brunnermeier, Markus Buchanan, James Buiter, Willem Bulow, Jeremy Bush, George Business Week Buycott C Calabria, Mark Caldwell, Bruce Calomiris, Charles Calvo, Guillermo Cambridge University Cameron, David Campbell, John Capitalism and Freedom (Friedman) Carbon emission permits Cassano, Joseph Cassidy, John Cato Institute CDS (Credit Default Swap) Center for Audit Quality Center for Market Processes at GMU Center for the Dissemination of Economic Information CETUSA (Council for Educational Travel in the USA) CFPB (Consumer Financial Protection Bureau) Change.org Chari, V.


pages: 483 words: 141,836

Red-Blooded Risk: The Secret History of Wall Street by Aaron Brown, Eric Kim

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activist fund / activist shareholder / activist investor, Albert Einstein, algorithmic trading, Asian financial crisis, Atul Gawande, backtesting, Basel III, Bayesian statistics, beat the dealer, Benoit Mandelbrot, Bernie Madoff, Black Swan, capital asset pricing model, central bank independence, Checklist Manifesto, corporate governance, creative destruction, credit crunch, Credit Default Swap, disintermediation, distributed generation, diversification, diversified portfolio, Edward Thorp, Emanuel Derman, Eugene Fama: efficient market hypothesis, experimental subject, financial innovation, illegal immigration, implied volatility, index fund, Long Term Capital Management, loss aversion, margin call, market clearing, market fundamentalism, market microstructure, money market fund, money: store of value / unit of account / medium of exchange, moral hazard, Myron Scholes, natural language processing, open economy, Pierre-Simon Laplace, pre–internet, quantitative trading / quantitative finance, random walk, Richard Thaler, risk tolerance, risk-adjusted returns, risk/return, road to serfdom, Robert Shiller, Robert Shiller, shareholder value, Sharpe ratio, special drawing rights, statistical arbitrage, stochastic volatility, The Myth of the Rational Market, Thomas Bayes, too big to fail, transaction costs, value at risk, yield curve

There is genuine scope for innovation and teamwork, even if no one outside the back office will ever appreciate it. Back-office risk management means compiling what has become a huge volume of risk reports for decision makers, regulators, and investors. Risk IT people build the computer systems, risk controllers get the data right, and risk reporting specialists know how to put it together. Within risk reporting there are regulatory experts, especially in Basel II and Basel III capital rules, and people who specialize in specific types of risk: market risk, credit risk, and operational risk (the last named is everything other than market risk and credit risk; it actually is mostly concerned with dangers, not risks). While I have done both front-office and back-office risk management, I consider myself a middle-office risk manager. As I mentioned, this is a term made up for risk managers; there are no other middle-office jobs.

Plus it was possible to understand each business in isolation and still miss gigantic risks that resulted from interactions among businesses, like everyone making the same bet in different ways. Once we built a middle office, regulators discovered it. Their interests were similar to those of CEOs. So the middle office took over the job of communicating with regulators. The regulatory reports were still produced in the back office, but the middle office designed and explained them. The Basel II and later Basel III capital accords are based on middle-office concepts and data. Investors never showed much interest in middle-office reports, which I find curious since that’s the information you need to evaluate the risk of an investment in a bank. Financial statements of large, diversified financial firms have little meaning. However, the Securities and Exchange Commission in 1998 ordered financial firms to include risk information in their annual and quarterly reports, and suggested disclosing value at risk as one of the allowed methods.


pages: 294 words: 82,438

Simple Rules: How to Thrive in a Complex World by Donald Sull, Kathleen M. Eisenhardt

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Affordable Care Act / Obamacare, Airbnb, asset allocation, Atul Gawande, barriers to entry, Basel III, Berlin Wall, carbon footprint, Checklist Manifesto, complexity theory, Craig Reynolds: boids flock, Credit Default Swap, Daniel Kahneman / Amos Tversky, diversification, drone strike, en.wikipedia.org, European colonialism, Exxon Valdez, facts on the ground, Fall of the Berlin Wall, haute cuisine, invention of the printing press, Isaac Newton, Kickstarter, late fees, Lean Startup, Louis Pasteur, Lyft, Moneyball by Michael Lewis explains big data, Nate Silver, Network effects, obamacare, Paul Graham, performance metric, price anchoring, RAND corporation, risk/return, Saturday Night Live, sharing economy, Silicon Valley, Startup school, statistical model, Steve Jobs, TaskRabbit, The Signal and the Noise by Nate Silver, transportation-network company, two-sided market, Wall-E, web application, Y Combinator, Zipcar

For example, governments tend to manage complexity by trying to anticipate every possible scenario that might arise, and then promulgate regulations to cover every case. Consider how central bankers responded to increased complexity in the global banking system. In 1988 bankers from around the world met in Basel, Switzerland, to agree on international banking regulations, and published a 30-page agreement (known as Basel I). Sixteen years later, the Basel II accord was an order of magnitude larger, at 347 pages, and Basel III was twice as long as its predecessor. When it comes to the sheer volume of regulations generated, the U.S. Congress makes the central bankers look like amateurs. The Glass-Steagall Act, a law passed during the Great Depression, which guided U.S. banking regulation for seven decades, totaled 37 pages. Its successor, Dodd-Frank, is expected to weigh in at over 30,000 pages when all supporting legislation is complete.


pages: 741 words: 179,454

Extreme Money: Masters of the Universe and the Cult of Risk by Satyajit Das

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affirmative action, Albert Einstein, algorithmic trading, Andy Kessler, Asian financial crisis, asset allocation, asset-backed security, bank run, banking crisis, banks create money, Basel III, Benoit Mandelbrot, Berlin Wall, Bernie Madoff, Big bang: deregulation of the City of London, Black Swan, Bonfire of the Vanities, bonus culture, Bretton Woods, BRICs, British Empire, capital asset pricing model, Carmen Reinhart, carried interest, Celtic Tiger, clean water, cognitive dissonance, collapse of Lehman Brothers, collateralized debt obligation, corporate governance, corporate raider, creative destruction, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, Daniel Kahneman / Amos Tversky, debt deflation, Deng Xiaoping, deskilling, discrete time, diversification, diversified portfolio, Doomsday Clock, Edward Thorp, Emanuel Derman, en.wikipedia.org, Eugene Fama: efficient market hypothesis, eurozone crisis, Fall of the Berlin Wall, financial independence, financial innovation, financial thriller, fixed income, full employment, global reserve currency, Goldman Sachs: Vampire Squid, Gordon Gekko, greed is good, happiness index / gross national happiness, haute cuisine, high net worth, Hyman Minsky, index fund, information asymmetry, interest rate swap, invention of the wheel, invisible hand, Isaac Newton, job automation, Johann Wolfgang von Goethe, John Meriwether, joint-stock company, Joseph Schumpeter, Kenneth Arrow, Kenneth Rogoff, Kevin Kelly, labour market flexibility, laissez-faire capitalism, load shedding, locking in a profit, Long Term Capital Management, Louis Bachelier, margin call, market bubble, market fundamentalism, Marshall McLuhan, Martin Wolf, mega-rich, merger arbitrage, Mikhail Gorbachev, Milgram experiment, money market fund, Mont Pelerin Society, moral hazard, mortgage debt, mortgage tax deduction, mutually assured destruction, Myron Scholes, Naomi Klein, negative equity, Network effects, new economy, Nick Leeson, Nixon shock, Northern Rock, nuclear winter, oil shock, Own Your Own Home, Paul Samuelson, pets.com, Philip Mirowski, Plutocrats, plutocrats, Ponzi scheme, price anchoring, price stability, profit maximization, quantitative easing, quantitative trading / quantitative finance, Ralph Nader, RAND corporation, random walk, Ray Kurzweil, regulatory arbitrage, rent control, rent-seeking, reserve currency, Richard Feynman, Richard Feynman, Richard Thaler, Right to Buy, risk-adjusted returns, risk/return, road to serfdom, Robert Shiller, Robert Shiller, Rod Stewart played at Stephen Schwarzman birthday party, rolodex, Ronald Reagan, Ronald Reagan: Tear down this wall, Satyajit Das, savings glut, shareholder value, Sharpe ratio, short selling, Silicon Valley, six sigma, Slavoj Žižek, South Sea Bubble, special economic zone, statistical model, Stephen Hawking, Steve Jobs, survivorship bias, The Chicago School, The Great Moderation, the market place, the medium is the message, The Myth of the Rational Market, The Nature of the Firm, the new new thing, The Predators' Ball, The Wealth of Nations by Adam Smith, Thorstein Veblen, too big to fail, trickle-down economics, Turing test, Upton Sinclair, value at risk, Yogi Berra, zero-coupon bond, zero-sum game

When London introduced higher taxes and intrusive regulations, banks considered moving to Geneva, Monaco, Bulgaria, or Macedonia—any place with lower taxes, the required infrastructure, minimal regulations, good-looking women or men, recreational facilities, and favorable divorce laws. The U.S. Financial Reform Act that emerged was 2,300 pages long. The Congress website warned: “This bill is very large, and loading it may cause your web browser to perform sluggishly, or even freeze.” As one commentator put it: “it’s no longer an act, it’s word processors gone mad.”12 In 2010, 500 central bankers and regulators from 27 nations produced Basel III, 440 pages of new rules. The frenetic activity recalled Italian author Giuseppe di Lampedusa: “everything must change so that everything can stay the same.” As before, the revised rules were susceptible to being manipulated, through regulatory arbitrage. Many of the rules had little to do with improving regulation, instead focusing on familiar regulatory turf wars or battles for power, staff and budgets, as well as settling of old scores.

See also AIG Greece, 355 Baker, Martin, 239 Bakkavo, 275 balance sheets, parking assets, 288 balloon payment mortgages, 182 Balls, Ed, 82 Baltic Dry Index, 344 Baltimore, Maryland, 333 Banco Santander, 79 bancor, 30 Bank of America, 191 merger with Merrill Lynch, 339 Bank of America (BA), 291 Bank of China, 333 Bank of England, 25, 50, 81, 195, 240, 272, 299, 342 analysis of financial networks, 272 Bank of International Settlement (BIS), 74-75, 268 Bank of Manhattan Trust, 79 Bank, The, 308 bankers earnings, 323-324 extravagances of, 322-323 Bankers Trust (BT), 141 Bankhead, Tallulah, 247 bankruptcies, 56, 242 Enron, 49 Lehman Brothers, 333, 339 banks, 32-33 bad loans (2008), 343-344 capital injections into, 348-350 CitiGroup, 75-77 credit cards, 71-72 culture of, 311-312 exotic products, 73-74 failures, 179, 358 investment, 57 jobs, 307-308 leveraged buyouts (LBOs), 147-148 loans, 70-71 networks, 270 regulations, 65-67 risks, 67-70 shadow banking system, 192 Banks, Tyra, 322 banksters, 294 Banksy, 365 Barbarians at the Gate: The Fall of RJR Nabisco, 135 Barclaycard, 71 Barclays Bank, 71, 275 Barclays Global Investors (BGI), 123 Barings, 227 BARRA, 123 Barrack, Tom, 327 Barron’s financial paper, 34 Barron, Clarence, 34 bartering, 23 Bartiromo, Maria, 93 Basel 2, 200 Basel III, 353 Basel, Switzerland, 74 basis risk, 213 Bass, Robert M., 137 Bateman, Patrick, 313 Baum, L. Frank, 26 Bauman, Zegmunt, 44, 312 Beach Boys, The, 157 Bean, Charles, 50 Bear Stearns, 162, 191, 204, 249, 316, 318, 326, 338 Asset Management, 191 Beasley, Jane, 62 Beat the Market, 121 Beatles, The, 157, 166 Beatrice, 141 Beckham, David, 339 Beerbohm, Max, 253 beggar-thy-neighbor policies, 349 behavioral economists, 125-126 bell-shaped normal distribution curves, 117 Beller, Ron, 321 benchmarking exercises, 315 benefits, employee, 47 Benna, Ted, 48 Berdymukhamedov, Gurbanguly, 299 Bergdorf Goodman, 330 Bergerac, Michel, 147 Berkshares program, 36 Berkshire Hathaway, 261, 322.


pages: 397 words: 112,034

What's Next?: Unconventional Wisdom on the Future of the World Economy by David Hale, Lyric Hughes Hale

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affirmative action, Asian financial crisis, asset-backed security, bank run, banking crisis, Basel III, Berlin Wall, Black Swan, Bretton Woods, capital controls, Cass Sunstein, central bank independence, cognitive bias, collapse of Lehman Brothers, collateralized debt obligation, corporate governance, corporate social responsibility, creative destruction, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, currency manipulation / currency intervention, currency peg, Daniel Kahneman / Amos Tversky, debt deflation, declining real wages, deindustrialization, diversification, energy security, Erik Brynjolfsson, Fall of the Berlin Wall, financial innovation, floating exchange rates, full employment, Gini coefficient, global reserve currency, global village, high net worth, Home mortgage interest deduction, housing crisis, index fund, inflation targeting, information asymmetry, Intergovernmental Panel on Climate Change (IPCC), invisible hand, Just-in-time delivery, Kenneth Rogoff, labour market flexibility, labour mobility, Long Term Capital Management, Mahatma Gandhi, Martin Wolf, Mexican peso crisis / tequila crisis, Mikhail Gorbachev, money market fund, money: store of value / unit of account / medium of exchange, mortgage tax deduction, Network effects, new economy, Nicholas Carr, oil shale / tar sands, oil shock, open economy, passive investing, payday loans, peak oil, Ponzi scheme, post-oil, price stability, private sector deleveraging, purchasing power parity, quantitative easing, race to the bottom, regulatory arbitrage, rent-seeking, reserve currency, Richard Thaler, risk/return, Robert Shiller, Robert Shiller, Ronald Reagan, sovereign wealth fund, special drawing rights, technology bubble, The Great Moderation, Thomas Kuhn: the structure of scientific revolutions, Tobin tax, too big to fail, total factor productivity, trade liberalization, Washington Consensus, Westphalian system, women in the workforce, yield curve

Minimum Canadian banks’ Tier 1 and Tier 2 capital ratios were already at 7 and 10 percent, respectively, when Basel II requirements were at 4 and 8 percent. Moreover, Tier 1 capital was required to be at least 75 percent common equity. Since then, Canadian banks have significantly increased their capital ratios and, at well into double-digit territory for both Tier I and total capital, are well ahead of the new 7 percent Basel III capital guidelines agreed to at the November 2010 G-20 meeting in Seoul. Along with the constraints noted above, Canadian banks also face a regulatory limit on total leverage of twenty time’s total capital, which has been more conservative than in most other jurisdictions. (Depending on individual institution performance, OSFI can allow a somewhat higher ratio or demand a lower ratio.) Separately, regulations affecting home buying and the mortgage market also helped Canada and its banks avoid the housing meltdown that occurred in the United States and other countries.


pages: 350 words: 103,270

The Devil's Derivatives: The Untold Story of the Slick Traders and Hapless Regulators Who Almost Blew Up Wall Street . . . And Are Ready to Do It Again by Nicholas Dunbar

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asset-backed security, bank run, banking crisis, Basel III, Black Swan, Black-Scholes formula, bonus culture, break the buck, capital asset pricing model, Carmen Reinhart, Cass Sunstein, collateralized debt obligation, commoditize, Credit Default Swap, credit default swaps / collateralized debt obligations, delayed gratification, diversification, Edmond Halley, facts on the ground, financial innovation, fixed income, George Akerlof, implied volatility, index fund, interest rate derivative, interest rate swap, Isaac Newton, John Meriwether, Kenneth Rogoff, Long Term Capital Management, margin call, market bubble, money market fund, Myron Scholes, Nick Leeson, Northern Rock, offshore financial centre, Paul Samuelson, price mechanism, regulatory arbitrage, rent-seeking, Richard Thaler, risk tolerance, risk/return, Ronald Reagan, shareholder value, short selling, statistical model, The Chicago School, Thomas Bayes, time value of money, too big to fail, transaction costs, value at risk, Vanguard fund, yield curve, zero-sum game

Treasury new powers to take over mortgage agencies Lehman Brothers tries to raise capital from Korea Development Bank, but talks go nowhere (September 8) Fannie Mae and Freddie Mac placed into conservatorship by Treasury (September 12) Counterparties lose confidence in Lehman, prompting a weekend of attempted deal making at the New York Fed Credit ratings agencies warn of imminent downgrade of AIG; New York Fed holds discussions concurrent with Lehman talks (September 14) U.K. government declines to facilitate takeover of Lehman by Barclays; Bank of America takes over Merrill Lynch (September 15) Lehman files for bankruptcy (September 16) New York Fed provides an emergency $85 billion loan facility to save AIG from bankruptcy triggered by collateral calls, and appoints a new CEO at AIG Reserve Primary Fund, invested in Lehman, “breaks the buck,” forcing the Fed to support money market funds (September 24) Goldman Sachs and Morgan Stanley receive new equity investments and become bank holding companies, formalizing their “too big to fail” status FDIC seizes Washington Mutual (September 29) Congress fails to pass TARP, and the Dow falls 770 points (October 3) Revised TARP bill passes Congress (October 6) Wells Fargo acquires Wachovia Germany, Belgium, and The Netherlands announce bailouts for problem banks (October 8) Federal Reserve and international central banks impose coordinated emergency interest rate cuts (October 10) OIS-Libor spread peaks at 364 basis points: interbank lending has broken down (October 12) Royal Bank of Scotland receives emergency bailout from U.K. government, and CEO Sir Fred Goodwin is ousted (October 14) U.S. government announces injection of $250 billion of TARP capital into U.S. banks New York Fed creates two special companies to buy AIGFP-related CDOs and securities lending-related mortgage bonds, paying counterparties such as Goldman 100 percent of market value (October 3) Avoiding the need for U.K. government funds, Barclays raises £7 billion of capital from Middle Eastern investors (November) President Obama elected; Geithner tapped as Treasury Secretary HSH Nordbank receives German government bailout (December) Irish government bails out banks Citigroup receives an additional $20 billion TARP bailout and $300 billion of debt guarantees from the U.S. government 2009 (January) U.K. government announces additional bailout of Royal Bank of Scotland and other banks President Obama inaugurated (April) Case-Shiller house price index reaches a trough 2010 (May) Greece is frozen out of bond markets, leading to an EU and IMF bailout (July) Goldman pays $550 million to settle SEC lawsuit over Abacus 2007 AC-1 Dodd-Frank bill signed into law (September) Basel III banking rules finalized (October) “Robo-signing” foreclosure scandal leads to wave of lawsuits against banks (November) Market confidence in Ireland evaporates, leading to an IMF/EU bailout in December Notes Chapter One 1. According to the Bank for International Settlements (Triennial Central Bank Surveys, December 2007 and September 2010), the global turnover in currency forwards outstripped spot transactions in 1995 and today is twice the size of the spot market. 2.


pages: 378 words: 110,518

Postcapitalism: A Guide to Our Future by Paul Mason

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Alfred Russel Wallace, bank run, banking crisis, banks create money, Basel III, basic income, Bernie Madoff, Bill Gates: Altair 8800, bitcoin, Branko Milanovic, Bretton Woods, BRICs, British Empire, business process, butterfly effect, call centre, capital controls, Cesare Marchetti: Marchetti’s constant, Claude Shannon: information theory, collaborative economy, collective bargaining, Corn Laws, corporate social responsibility, creative destruction, credit crunch, currency manipulation / currency intervention, currency peg, David Graeber, deglobalization, deindustrialization, deskilling, discovery of the americas, Downton Abbey, drone strike, en.wikipedia.org, energy security, eurozone crisis, factory automation, financial repression, Firefox, Fractional reserve banking, Frederick Winslow Taylor, full employment, future of work, game design, income inequality, inflation targeting, informal economy, information asymmetry, intangible asset, Intergovernmental Panel on Climate Change (IPCC), Internet of things, job automation, John Maynard Keynes: Economic Possibilities for our Grandchildren, Joseph Schumpeter, Kenneth Arrow, Kevin Kelly, knowledge economy, knowledge worker, late capitalism, low skilled workers, market clearing, means of production, Metcalfe's law, money: store of value / unit of account / medium of exchange, mortgage debt, Network effects, new economy, Norbert Wiener, Occupy movement, oil shale / tar sands, oil shock, Paul Samuelson, payday loans, Pearl River Delta, post-industrial society, precariat, price mechanism, profit motive, quantitative easing, race to the bottom, RAND corporation, rent-seeking, reserve currency, RFID, Richard Stallman, Robert Gordon, Robert Metcalfe, secular stagnation, sharing economy, Stewart Brand, structural adjustment programs, supply-chain management, The Future of Employment, the scientific method, The Wealth of Nations by Adam Smith, Transnistria, union organizing, universal basic income, urban decay, urban planning, Vilfredo Pareto, wages for housework, women in the workforce

Restructure the banking system into a mixture of utilities earning capped profit rates; non-profit local and regional banks; credit unions and peer-to-peer lenders; and a comprehensive state-owned provider of financial services. The state would stand explicitly as lender of last resort to these banks. Leave a well-regulated space for complex financial activities. The aim would be to ensure the global finance system could, in the short to medium term, return to its historic role: efficiently allocating capital between firms, sectors, savers and lenders, etc. The regulations could be a lot simpler than the Basel III Treaty, because they would be backed up by strict criminal enforcement and professional codes in banking, accountancy and law. The guiding principles would be to reward innovation and to penalize and discourage rent-seeking behaviour. For example, it would become a breach of professional ethics for a chartered accountant or qualified lawyer to propose a tax avoidance scheme, or for a hedge fund to store uranium in a warehouse to drive its spot price higher.


pages: 438 words: 109,306

Tower of Basel: The Shadowy History of the Secret Bank That Runs the World by Adam Lebor

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banking crisis, Basel III, Berlin Wall, Big bang: deregulation of the City of London, Bretton Woods, British Empire, business climate, central bank independence, corporate governance, corporate social responsibility, deindustrialization, eurozone crisis, fiat currency, financial independence, financial innovation, forensic accounting, Goldman Sachs: Vampire Squid, haute cuisine, IBM and the Holocaust, Occupy movement, offshore financial centre, Ponzi scheme, price stability, quantitative easing, reserve currency, special drawing rights, V2 rocket

So there has to be a trade where one does the best one can.”4 Looking back with hindsight at the economic crash of late 2007, it is clear that the capital requirements of Basel II were insufficient, said McDonough. “The aim of Basel II was to bring up capital requirements but to do so in a way that would not stifle the world economy. In the event the rules were not as strong or as fine-tuned as they needed to be when the crisis came.”5 The Basel III accords, which have not yet been implemented, aim to further hone the regulations governing banks’ capital requirements. No matter how dedicated the regulators are, they are always behind the traders. McDonough said, “We did not anticipate the blowing up of the exotic instruments that brought down Lehman Brothers and the spin effect that resulted from that. If it had been, then hopefully somebody would have tried to avoid it.”6 But the regulators, like generals, are inevitably fighting the last battle.


pages: 351 words: 93,982

Leading From the Emerging Future: From Ego-System to Eco-System Economies by Otto Scharmer, Katrin Kaufer

Affordable Care Act / Obamacare, agricultural Revolution, Albert Einstein, Asian financial crisis, Basel III, Berlin Wall, Branko Milanovic, cloud computing, collaborative consumption, collapse of Lehman Brothers, colonial rule, Community Supported Agriculture, creative destruction, crowdsourcing, dematerialisation, Deng Xiaoping, en.wikipedia.org, European colonialism, Fractional reserve banking, global supply chain, happiness index / gross national happiness, high net worth, housing crisis, income inequality, income per capita, Intergovernmental Panel on Climate Change (IPCC), invisible hand, Johann Wolfgang von Goethe, Joseph Schumpeter, market bubble, mass immigration, Mikhail Gorbachev, Mohammed Bouazizi, mutually assured destruction, Naomi Klein, new economy, offshore financial centre, peak oil, ride hailing / ride sharing, Ronald Reagan, Silicon Valley, smart grid, Steve Jobs, technology bubble, The Spirit Level, The Wealth of Nations by Adam Smith, Thomas L Friedman, too big to fail, Washington Consensus, working poor, Zipcar

While at first this injects much more money into the economy and thereby fuels growth and development, sooner or later the financial and the real economy begin gradually to decouple. Act 3.0: regulated commodity. As a commodity, money turns into a vehicle for creating financial bubbles. The moment the bubble bursts, the real economy falters and everyone pays the price. The response to these crises are regulations such as the Glass-Steagall Act of 1933, which followed the stock market crash of 1929, and Basel III, which followed the market crash of 2007–08. The market deals with money as a regulated commodity. Regulations aim to ensure that the mistakes of the past don’t repeat themselves. In that regard, they are effective. The shortcoming of most regulations is that they only look one way: into the past. They fix the problem of yesterday’s bubble but are usually unable to anticipate the next bubble. Act 4.0: intentional money for the realization of creativity.


pages: 514 words: 152,903

The Best Business Writing 2013 by Dean Starkman

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Asperger Syndrome, bank run, Basel III, call centre, clean water, cloud computing, collateralized debt obligation, Columbine, computer vision, Credit Default Swap, credit default swaps / collateralized debt obligations, crowdsourcing, Erik Brynjolfsson, eurozone crisis, Exxon Valdez, factory automation, fixed income, full employment, Goldman Sachs: Vampire Squid, hiring and firing, hydraulic fracturing, income inequality, jimmy wales, job automation, John Markoff, late fees, London Whale, low skilled workers, Mahatma Gandhi, market clearing, Maui Hawaii, Menlo Park, Occupy movement, oil shale / tar sands, Parag Khanna, Pareto efficiency, price stability, Ray Kurzweil, Silicon Valley, Skype, sovereign wealth fund, stakhanovite, Steve Jobs, Stuxnet, the payments system, too big to fail, Vanguard fund, wage slave, Y2K, zero-sum game

The more sensible response, if you want to prevent this sort of thing from blowing up the universe, is something like “stop doing sophisticated things” or at least “raise unsophisticated but large amounts of capital against your sophisticated things.” Because obviously forcing JPMorgan to have capital equal to 20 percent of its non-risk-weighted assets would make it less likely that this would bring down JPMorgan. So, fine, that’s probably right. But JPMorgan’s Basel III capital (for what it’s worth!) is down like twenty basis points on the loss, and there’s no evidence at all that this brought down JPMorgan or did anything close to it. That’s not much of an argument—many other banks are less well capitalized, and less well endowed with modeling skills, than JPMorgan, so if this did some small damage there it could do much larger damage elsewhere. On the other hand, there’s at least a chance that JPMorgan is doing more sophisticated-cum-dangerous trades than other, less sophisticated banks because it is more sophisticated, and the reason that this screw-up happened at JPMorgan is that only JPMorgan dared to dream big enough to screw up this big.


pages: 478 words: 126,416

Other People's Money: Masters of the Universe or Servants of the People? by John Kay

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Affordable Care Act / Obamacare, asset-backed security, bank run, banking crisis, Basel III, Bernie Madoff, Big bang: deregulation of the City of London, bitcoin, Black Swan, Bonfire of the Vanities, bonus culture, Bretton Woods, call centre, capital asset pricing model, Capital in the Twenty-First Century by Thomas Piketty, cognitive dissonance, corporate governance, Credit Default Swap, cross-subsidies, dematerialisation, diversification, diversified portfolio, Edward Lloyd's coffeehouse, Elon Musk, Eugene Fama: efficient market hypothesis, eurozone crisis, financial innovation, financial intermediation, financial thriller, fixed income, Flash crash, forward guidance, Fractional reserve banking, full employment, George Akerlof, German hyperinflation, Goldman Sachs: Vampire Squid, Growth in a Time of Debt, income inequality, index fund, inflation targeting, information asymmetry, intangible asset, interest rate derivative, interest rate swap, invention of the wheel, Irish property bubble, Isaac Newton, John Meriwether, light touch regulation, London Whale, Long Term Capital Management, loose coupling, low cost carrier, M-Pesa, market design, millennium bug, mittelstand, money market fund, moral hazard, mortgage debt, Myron Scholes, new economy, Nick Leeson, Northern Rock, obamacare, Occupy movement, offshore financial centre, oil shock, passive investing, Paul Samuelson, peer-to-peer lending, performance metric, Peter Thiel, Piper Alpha, Ponzi scheme, price mechanism, purchasing power parity, quantitative easing, quantitative trading / quantitative finance, railway mania, Ralph Waldo Emerson, random walk, regulatory arbitrage, Renaissance Technologies, rent control, Richard Feynman, risk tolerance, road to serfdom, Robert Shiller, Robert Shiller, Ronald Reagan, Schrödinger's Cat, shareholder value, Silicon Valley, Simon Kuznets, South Sea Bubble, sovereign wealth fund, Spread Networks laid a new fibre optics cable between New York and Chicago, Steve Jobs, Steve Wozniak, The Great Moderation, The Market for Lemons, the market place, The Myth of the Rational Market, the payments system, The Wealth of Nations by Adam Smith, The Wisdom of Crowds, Tobin tax, too big to fail, transaction costs, tulip mania, Upton Sinclair, Vanguard fund, Washington Consensus, We are the 99%, Yom Kippur War

The capital resources needed to reconcile these trading volumes with economic stability have not been available; nor will they be. The scale of activities undertaken by traders within a modern investment bank is not viable without the implicit and explicit support provided by retail deposits and the taxpayer. The existing structure of the finance sector requires much more capital, not the small additional amounts required by Basel III. But equity investors will not provide financial conglomerates with fresh capital on the scale necessary. Investors no longer trust the financial statements of banks or the people who run these banks. They have little confidence in the long-term profitability of these institutions, and fear that, if banks do make profits, both regulators and senior executives will have priorities other than distributions to shareholders.


pages: 497 words: 144,283

Connectography: Mapping the Future of Global Civilization by Parag Khanna

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1919 Motor Transport Corps convoy, 2013 Report for America's Infrastructure - American Society of Civil Engineers - 19 March 2013, 3D printing, 9 dash line, additive manufacturing, Admiral Zheng, affirmative action, agricultural Revolution, Airbnb, Albert Einstein, amateurs talk tactics, professionals talk logistics, Amazon Mechanical Turk, Asian financial crisis, asset allocation, autonomous vehicles, banking crisis, Basel III, Berlin Wall, bitcoin, Black Swan, blockchain, borderless world, Boycotts of Israel, Branko Milanovic, BRICs, British Empire, business intelligence, call centre, capital controls, charter city, clean water, cloud computing, collateralized debt obligation, commoditize, complexity theory, continuation of politics by other means, corporate governance, corporate social responsibility, credit crunch, crony capitalism, crowdsourcing, cryptocurrency, cuban missile crisis, data is the new oil, David Ricardo: comparative advantage, deglobalization, deindustrialization, dematerialisation, Deng Xiaoping, Detroit bankruptcy, digital map, diversification, Doha Development Round, edge city, Edward Snowden, Elon Musk, energy security, ethereum blockchain, European colonialism, eurozone crisis, failed state, Fall of the Berlin Wall, family office, Ferguson, Missouri, financial innovation, financial repression, fixed income, forward guidance, global supply chain, global value chain, global village, Google Earth, Hernando de Soto, high net worth, Hyperloop, ice-free Arctic, if you build it, they will come, illegal immigration, income inequality, income per capita, industrial cluster, industrial robot, informal economy, Infrastructure as a Service, interest rate swap, Intergovernmental Panel on Climate Change (IPCC), Internet of things, Isaac Newton, Jane Jacobs, Jaron Lanier, John von Neumann, Julian Assange, Just-in-time delivery, Kevin Kelly, Khyber Pass, Kibera, Kickstarter, labour market flexibility, labour mobility, LNG terminal, low cost carrier, manufacturing employment, mass affluent, mass immigration, megacity, Mercator projection, Metcalfe’s law, microcredit, mittelstand, Monroe Doctrine, mutually assured destruction, New Economic Geography, new economy, New Urbanism, off grid, offshore financial centre, oil rush, oil shale / tar sands, oil shock, openstreetmap, out of africa, Panamax, Parag Khanna, Peace of Westphalia, peak oil, Pearl River Delta, Peter Thiel, Philip Mirowski, Plutocrats, plutocrats, post-oil, post-Panamax, private military company, purchasing power parity, QWERTY keyboard, race to the bottom, Rana Plaza, rent-seeking, reserve currency, Robert Gordon, Robert Shiller, Robert Shiller, Ronald Coase, Scramble for Africa, Second Machine Age, sharing economy, Shenzhen was a fishing village, Silicon Valley, Silicon Valley startup, six sigma, Skype, smart cities, Smart Cities: Big Data, Civic Hackers, and the Quest for a New Utopia, South China Sea, South Sea Bubble, sovereign wealth fund, special economic zone, spice trade, Stuxnet, supply-chain management, sustainable-tourism, TaskRabbit, telepresence, the built environment, The inhabitant of London could order by telephone, sipping his morning tea in bed, the various products of the whole earth, Tim Cook: Apple, trade route, transaction costs, UNCLOS, uranium enrichment, urban planning, urban sprawl, WikiLeaks, young professional, zero day

Without the risk-taking appetite of private investors, credit markets across the developing world would be in as sorry a state as their infrastructure, undercapitalized and institutionally rudimentary. Trade finance is a perfect example of markets doing their best to help people build connectivity. According to the WTO, 80 percent of global trade is supported by financial institutions, but postcrisis regulations (such as Basel III, which requires banks to hold more capital onshore) inadvertently choked this crucial conduit between the financial sector and the real economy that helps companies produce exportable goods and has proven to be a reliable investment given its low default rate. Funds such as the European Investment Bank and the Abraaj Group have stepped in to back region-wide funding exchanges for the Middle East and Africa so that SMEs can more easily raise capital.


pages: 475 words: 155,554

The Default Line: The Inside Story of People, Banks and Entire Nations on the Edge by Faisal Islam

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Asian financial crisis, asset-backed security, balance sheet recession, bank run, banking crisis, Basel III, Ben Bernanke: helicopter money, Berlin Wall, Big bang: deregulation of the City of London, British Empire, capital controls, carbon footprint, Celtic Tiger, central bank independence, centre right, collapse of Lehman Brothers, credit crunch, Credit Default Swap, crony capitalism, dark matter, deindustrialization, Deng Xiaoping, disintermediation, energy security, Eugene Fama: efficient market hypothesis, eurozone crisis, financial deregulation, financial innovation, financial repression, floating exchange rates, forensic accounting, forward guidance, full employment, G4S, ghettoisation, global rebalancing, global reserve currency, hiring and firing, inflation targeting, Irish property bubble, Just-in-time delivery, labour market flexibility, light touch regulation, London Whale, Long Term Capital Management, margin call, market clearing, megacity, Mikhail Gorbachev, mini-job, mittelstand, moral hazard, mortgage debt, mortgage tax deduction, mutually assured destruction, Myron Scholes, negative equity, North Sea oil, Northern Rock, offshore financial centre, open economy, paradox of thrift, Pearl River Delta, pension reform, price mechanism, price stability, profit motive, quantitative easing, quantitative trading / quantitative finance, race to the bottom, regulatory arbitrage, reserve currency, reshoring, Right to Buy, rising living standards, Ronald Reagan, savings glut, shareholder value, sovereign wealth fund, The Chicago School, the payments system, too big to fail, trade route, transaction costs, two tier labour market, unorthodox policies, uranium enrichment, urban planning, value at risk, working-age population, zero-sum game

They based their risk judgements on data that stretched back before the boom. Unfortunately, many banks saw these flawed models as a target to hit rather than as a guide to their safety. So how did this soup of mismeasurement and misspecification come to be hardwired into the rules that seek to ensure the solvency of every major bank in the world? New rules for bank capital requirements, Basel II and Basel III, have emerged over the past decade. At their heart they make use of Vasicek’s work. For the trading book, it is the VaR method, as discussed already. For calculating possible losses on their traditional loan book, banks can volunteer to use the ‘advanced internal ratings basis’ (AIRB) for calculating capital, which was identified in 2005 as a modified version of the Vasicek model. I showed this to the man himself.


pages: 515 words: 132,295

Makers and Takers: The Rise of Finance and the Fall of American Business by Rana Foroohar

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3D printing, accounting loophole / creative accounting, activist fund / activist shareholder / activist investor, additive manufacturing, Airbnb, algorithmic trading, Alvin Roth, Asian financial crisis, asset allocation, bank run, Basel III, bonus culture, Bretton Woods, British Empire, call centre, Capital in the Twenty-First Century by Thomas Piketty, Carmen Reinhart, carried interest, centralized clearinghouse, clean water, collateralized debt obligation, commoditize, computerized trading, corporate governance, corporate raider, corporate social responsibility, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, crowdsourcing, David Graeber, deskilling, Detroit bankruptcy, diversification, Double Irish / Dutch Sandwich, Emanuel Derman, Eugene Fama: efficient market hypothesis, financial deregulation, financial intermediation, Frederick Winslow Taylor, George Akerlof, gig economy, Goldman Sachs: Vampire Squid, Gordon Gekko, greed is good, High speed trading, Home mortgage interest deduction, housing crisis, Howard Rheingold, Hyman Minsky, income inequality, index fund, information asymmetry, interest rate derivative, interest rate swap, Internet of things, invisible hand, John Markoff, joint-stock company, joint-stock limited liability company, Kenneth Rogoff, knowledge economy, labor-force participation, labour mobility, London Whale, Long Term Capital Management, manufacturing employment, market design, Martin Wolf, money market fund, moral hazard, mortgage debt, mortgage tax deduction, new economy, non-tariff barriers, offshore financial centre, oil shock, passive investing, Paul Samuelson, pensions crisis, Ponzi scheme, principal–agent problem, quantitative easing, quantitative trading / quantitative finance, race to the bottom, Ralph Nader, Rana Plaza, RAND corporation, random walk, rent control, Robert Shiller, Robert Shiller, Ronald Reagan, Satyajit Das, Second Machine Age, shareholder value, sharing economy, Silicon Valley, Silicon Valley startup, Snapchat, sovereign wealth fund, Steve Jobs, technology bubble, The Chicago School, the new new thing, The Spirit Level, The Wealth of Nations by Adam Smith, Tim Cook: Apple, Tobin tax, too big to fail, trickle-down economics, Tyler Cowen: Great Stagnation, Vanguard fund, zero-sum game

Morgan Could Be Worth More Broken Up,” Wall Street Journal, January 5, 2015. 50. McKinsey Global Institute data. See also Neil Irwin, “Wall Street Is Back, Almost as Big as Ever,” New York Times, May 18, 2015; and Ratna Sahay et al., “Rethinking Financial Deepening: Stability and Growth in Emerging Markets,” Staff Discussion Note no. 15/08, International Monetary Fund, May 2015. 51. Financial Stability Board, “Global Shadow Banking Monitoring Report 2015.” 52. “Basel III Capital: A Well-Intended Illusion,” remarks by FDIC Vice Chairman Thomas M. Hoenig to the International Association of Deposit Insurers 2013 Research Conference in Basel, Switzerland, April 9, 2013. 53. Warren, A Fighting Chance, 124. 54. Author interview with Warren for this book. 55. Warren, A Fighting Chance, 106. 56. Author interview with Brown for this book. 57. Piketty, Capital in the Twenty-First Century, 188. 58.


pages: 479 words: 113,510

Fed Up: An Insider's Take on Why the Federal Reserve Is Bad for America by Danielle Dimartino Booth

Affordable Care Act / Obamacare, asset-backed security, bank run, barriers to entry, Basel III, Bernie Sanders, break the buck, Bretton Woods, central bank independence, collateralized debt obligation, corporate raider, creative destruction, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, diversification, Donald Trump, financial deregulation, financial innovation, fixed income, Flash crash, forward guidance, full employment, George Akerlof, greed is good, high net worth, housing crisis, income inequality, index fund, inflation targeting, interest rate swap, invisible hand, John Meriwether, Joseph Schumpeter, liquidity trap, London Whale, Long Term Capital Management, margin call, market bubble, Mexican peso crisis / tequila crisis, money market fund, moral hazard, Myron Scholes, natural language processing, negative equity, new economy, Northern Rock, obamacare, price stability, pushing on a string, quantitative easing, regulatory arbitrage, Robert Shiller, Robert Shiller, Ronald Reagan, selection bias, short selling, side project, Silicon Valley, The Great Moderation, The Wealth of Nations by Adam Smith, too big to fail, trickle-down economics, yield curve

The best and the brightest, knowing their incomes would be restrained under the new regulatory regime, could be seen jumping ship, their Hermès ties billowing in the wind. Their destination? Private equity firms. I began to cover the subject of collapsing bond inventories at the biggest banks. The twenty-one primary dealers that traded with the Federal Reserve had trimmed their debt holdings to $56 billion by March 27, 2013, down from $235 billion in 2007. The combination of Dodd-Frank, with its aim of limiting risk-taking, and Basel III, with its increased capital requirements, had proved to be a toxic combination. Was it any wonder that commercial bank officers were stumped? The stated aim of QE was to encourage banks to loan money. But other rules required they hold more capital against fresh loans if they did—to say nothing of the risk they assumed if yield curve normality ever made a comeback. Private equity kingpins had become the new overlords of the corporate bond market.


pages: 580 words: 168,476

The Price of Inequality: How Today's Divided Society Endangers Our Future by Joseph E. Stiglitz

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affirmative action, Affordable Care Act / Obamacare, airline deregulation, Andrei Shleifer, banking crisis, barriers to entry, Basel III, battle of ideas, Berlin Wall, capital controls, Carmen Reinhart, Cass Sunstein, central bank independence, collapse of Lehman Brothers, collective bargaining, colonial rule, corporate governance, Credit Default Swap, Daniel Kahneman / Amos Tversky, Dava Sobel, declining real wages, deskilling, Exxon Valdez, Fall of the Berlin Wall, financial deregulation, financial innovation, Flash crash, framing effect, full employment, George Akerlof, Gini coefficient, income inequality, income per capita, indoor plumbing, inflation targeting, information asymmetry, invisible hand, jobless men, John Harrison: Longitude, John Markoff, John Maynard Keynes: Economic Possibilities for our Grandchildren, Kenneth Arrow, Kenneth Rogoff, labour market flexibility, London Interbank Offered Rate, lone genius, low skilled workers, Marc Andreessen, Mark Zuckerberg, market bubble, market fundamentalism, mass incarceration, medical bankruptcy, microcredit, moral hazard, mortgage tax deduction, negative equity, obamacare, offshore financial centre, paper trading, Pareto efficiency, patent troll, Paul Samuelson, payday loans, price stability, profit maximization, profit motive, purchasing power parity, race to the bottom, rent-seeking, reserve currency, Richard Thaler, Robert Shiller, Robert Shiller, Ronald Coase, Ronald Reagan, shareholder value, short selling, Silicon Valley, Simon Kuznets, spectrum auction, Steve Jobs, technology bubble, The Chicago School, The Fortune at the Bottom of the Pyramid, The Myth of the Rational Market, The Spirit Level, The Wealth of Nations by Adam Smith, too big to fail, trade liberalization, transaction costs, trickle-down economics, ultimatum game, uranium enrichment, very high income, We are the 99%, wealth creators, women in the workforce, zero-sum game

Executing this strategy would have required modifications to existing law, but the bankers—and the Obama administration—rejected this approach out of hand, at least until the 2012 election approached.46 The banks saw that restructuring mortgages would make them recognize their losses, an outcome they had successfully kept at bay with deceptive but legal accounting maneuvers that treated impaired mortgages—those in which the borrower was not keeping up with his payments—as if they eventually would be repaid. The true market value of these nonperforming mortgages was often a fraction of the face value. But recognizing the losses would have required the banks to come up with more capital, and they were struggling to get enough capital under the current regulations, let alone the new regulations (called Basel III) adopted in fall 2010. Of course, the Obama administration and the bankers didn’t present their case this way.47 Two main arguments were advanced for not doing much for homeowners. It would be “unfair” to help those who were struggling with their mortgages when there were so many good and responsible citizens who had worked hard and paid off their mortgage, or were able to make their current payments.


pages: 772 words: 203,182

What Went Wrong: How the 1% Hijacked the American Middle Class . . . And What Other Countries Got Right by George R. Tyler

8-hour work day, active measures, activist fund / activist shareholder / activist investor, affirmative action, Affordable Care Act / Obamacare, bank run, banking crisis, Basel III, Black Swan, blood diamonds, blue-collar work, Bolshevik threat, bonus culture, British Empire, business process, capital controls, Carmen Reinhart, carried interest, cognitive dissonance, collateralized debt obligation, collective bargaining, commoditize, corporate governance, corporate personhood, corporate raider, corporate social responsibility, creative destruction, credit crunch, crony capitalism, crowdsourcing, currency manipulation / currency intervention, David Brooks, David Graeber, David Ricardo: comparative advantage, declining real wages, deindustrialization, Diane Coyle, Double Irish / Dutch Sandwich, eurozone crisis, financial deregulation, financial innovation, fixed income, Francis Fukuyama: the end of history, full employment, George Akerlof, George Gilder, Gini coefficient, Gordon Gekko, hiring and firing, income inequality, invisible hand, job satisfaction, John Markoff, joint-stock company, Joseph Schumpeter, Kenneth Rogoff, labor-force participation, labour market flexibility, laissez-faire capitalism, lake wobegon effect, light touch regulation, Long Term Capital Management, manufacturing employment, market clearing, market fundamentalism, Martin Wolf, minimum wage unemployment, mittelstand, moral hazard, Myron Scholes, Naomi Klein, Northern Rock, obamacare, offshore financial centre, Paul Samuelson, pension reform, performance metric, pirate software, Plutocrats, plutocrats, Ponzi scheme, precariat, price stability, profit maximization, profit motive, purchasing power parity, race to the bottom, Ralph Nader, rent-seeking, reshoring, Richard Thaler, rising living standards, road to serfdom, Robert Gordon, Robert Shiller, Robert Shiller, Ronald Reagan, Sand Hill Road, shareholder value, Silicon Valley, South Sea Bubble, sovereign wealth fund, Steve Ballmer, Steve Jobs, The Chicago School, The Spirit Level, The Wealth of Nations by Adam Smith, Thorstein Veblen, too big to fail, transcontinental railway, transfer pricing, trickle-down economics, tulip mania, Tyler Cowen: Great Stagnation, union organizing, Upton Sinclair, upwardly mobile, women in the workforce, working poor, zero-sum game

Rubin, Shrinking the Federal Government: The Effect of Cutbacks on Five Federal Agencies (New York: Longman, 1985) and Thomas Frank, The Wrecking Crew, 134–135. 43 James K. Galbraith, Predator State, How Conservatives Abandoned the Free Market and Why Liberals Should Too (New York: Free Press, 2008), 182. 44 Niall Ferguson, The Ascent of Money, 50. 45 Leon Gettler, “It Will Happen Again,” Sydney Morning Herald, July 20, 2010. 46 Brooke Masters, Tom Braithwaite, and Helen Thomas, “Bankers Target ‘Anti-US’ Parts of BASEL III,” Financial Times, Sept. 15, 2011. 47 Paul Krugman, “Reagan Did It,” New York Times, June 1, 2009. 48 Gretchen Morgenson, “Into the Bailout Buzzsaw,” New York Times, July 2012. 49 Niall Ferguson, The Ascent of Money, 255. 50 Kevin Phillips, Bad Money, 41. 51 Paul Krugman, “Disaster and Denial,” New York Times, Dec. 14, 2009, and Thomas Heath, “Making Money From the Collapse,” Washington Post, Oct. 4, 2008. 52 “Insiders Off Side,” Editorial, Financial Times, Nov. 28, 2010. 53 Paul Krugman, “Blindly into the Bubble,” New York Times, Dec. 21, 2007. 54 Alan Greenspan, “Corporate Governance,” Speech to 2003 Conference on Bank Structure and Competition, Chicago, May 8, 2003. http://www.bis.org/review/r030509a.pdf.