collapse of Lehman Brothers

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pages: 249 words: 66,383

House of Debt: How They (And You) Caused the Great Recession, and How We Can Prevent It From Happening Again by Atif Mian, Amir Sufi

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Andrei Shleifer, asset-backed security, balance sheet recession, bank run, banking crisis, Ben Bernanke: helicopter money, break the buck, Carmen Reinhart, collapse of Lehman Brothers, creative destruction, debt deflation, Edward Glaeser, en.wikipedia.org, financial innovation, full employment, high net worth, Home mortgage interest deduction, housing crisis, Joseph Schumpeter, Kenneth Rogoff, liquidity trap, Long Term Capital Management, market bubble, Martin Wolf, money market fund, moral hazard, mortgage debt, negative equity, paradox of thrift, quantitative easing, Robert Shiller, Robert Shiller, school choice, shareholder value, the payments system, the scientific method, tulip mania, young professional, zero-sum game

And once the decline in house prices destroyed the net worth of indebted home owners, one consequence proved disastrous—they stopped spending. 3: Cutting Back A powerful narrative of the Great Recession focuses on the collapse of Lehman Brothers in September 2008. Allowing the bank to go bankrupt, the argument goes, was a “colossal error,” and the failure to save it triggered the global economic downturn.1 In an article on the causes of the Great Recession, Jacob Weisberg of the Daily Beast described it as “near-consensus” that “a global recession became inevitable once the government decided not to rescue Lehman Brothers.”2 This narrative is closely tied to the banking view articulated in chapter 1. According to this view, the collapse of Lehman Brothers froze the credit system, preventing businesses from getting the loans they needed to continue operating. As a result, they were forced to cut investment and lay off workers.

As a result, they were forced to cut investment and lay off workers. In this narrative, if we could have prevented Lehman Brothers from failing, our economy would have remained intact. The Consumption-Driven Recession Is the collapse of Lehman Brothers the linchpin of any theory of the recession? Let’s go back to the data. One of the facts that jumped out in chapter 1 is that the Great Recession was consumption-driven. Let’s look more closely at the timing and magnitude of the spending declines. The decline in spending was in full force before the fall of 2008. The National Bureau of Economic Research dates the beginning of the recession in the fourth quarter of 2007, three quarters before the failure of Lehman Brothers. The collapse in residential investment and durable consumption was dramatic well before the events of the fall of 2008.

Residential investment reflects both new construction of housing units and remodeling of existing units. Both new construction and remodeling are a function of household demand for housing services. As a result, residential investment is best viewed as another form of household spending on durable goods. The collapse in residential investment was already in full swing in 2006, a full two years before the collapse of Lehman Brothers. In the second quarter of 2006, residential investment fell by 17 percent on an annualized basis. In every quarter from the second quarter of 2006 through the second quarter of 2009, residential investment declined by at least 12 percent, reaching negative 30 percent in the fourth quarter of 2007 and the first quarter of 2008. The decline in residential investment alone knocked off 1.1 percent to 1.4 percent of GDP growth in the last three quarters of 2006.

Global Financial Crisis by Noah Berlatsky

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accounting loophole / creative accounting, asset-backed security, banking crisis, Bretton Woods, capital controls, Celtic Tiger, centre right, circulation of elites, collapse of Lehman Brothers, collateralized debt obligation, corporate raider, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, deindustrialization, Doha Development Round, energy security, eurozone crisis, financial innovation, Food sovereignty, George Akerlof, God and Mammon, Gordon Gekko, housing crisis, illegal immigration, income inequality, market bubble, market fundamentalism, mass immigration, moral hazard, new economy, Northern Rock, purchasing power parity, quantitative easing, race to the bottom, regulatory arbitrage, reserve currency, Robert Shiller, Robert Shiller, Ronald Reagan, shareholder value, South China Sea, structural adjustment programs, too big to fail, trade liberalization, transfer pricing, working poor

Among the billions 124 Effects of the Global Financial Crisis on Wealthier Nations The Financial Crisis Has Fueled Anti-Semitism As the financial crisis continues to affect markets around the world, anti-Semites are still using it to promote conspiracy theories about Jewish involvement in the crisis, and anti-Semitic statements and other anti-Jewish messages are appearing on a daily basis on financial Internet discussion groups and on Web sites and blogs both in the United States and abroad. The crisis has also given birth to new anti-Semitic conspiracy theories. One of the most common rumors being circulated on the Internet suggests that, just prior to the collapse of Lehman Brothers, “$400 billion was frantically transferred to banks in Israel” by the company. That conspiracy theory, which has no basis in fact, is reminiscent of the one that emerged immediately after the 9/11 terrorist attacks, which claimed that “4,000 Jews” did not report to work at the World Trade Center that day because they had advance warning that an attack was imminent. That Big Lie is now believed by many around the world.

Reproduced by permission of the author. 207 The Global Financial Crisis Introduction I am much honored to be invited to address the 4th Deposit Insurance Corporation of Japan Round Table in Tokyo. As you are well aware, the global financial system is unstable due to the burst of the global credit bubble. In particular, global financial markets have been under severe strain since the collapse of Lehman Brothers last autumn. Both the central bank and the deposit insurance corporation do not draw much attention under normal circumstances, and their presence stands out only when depositors and financial market participants do not have full confidence in the soundness of financial institutions and financial system stability. Today, the activities of the deposit insurance corporation and the central bank draw much attention from the public, and that is a testament that we are facing difficult challenges.

In Japan, the default of a mid-sized securities firm in the interbank money market, despite the small amount of default, triggered a steep liquidity contraction in the money market and led to turmoil in Japan’s financial system as a whole. In the current financial crisis, after the severity of the credit-related debt problem surfaced in August 2007, U.S. and European financial institutions faced a liquidity shortage, and the collapse of Lehman Brothers further exacerbated the conditions in the funding markets. 212 Solutions to the Global Financial Crisis As such, while a lack of liquidity was the starting point of the problem, the root cause of the problem was an issue of the solvency of financial institutions. In the early phase of a crisis, it is difficult to recognize how serious the liquidity problem is and how serious the solvency problem is.


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

Most of the losses that will be sustained by banks domiciled elsewhere among advanced economies will result from their operations in American or British markets, or from their exposure to American mortgage-backed and corporate securities. Given the importance of the US and, to a lesser extent, British economies and financial systems to their global counterparts, it was inevitable that the North Atlantic financial crisis would have serious global consequences. In particular, the collapse of Lehman Brothers and AIG in September 2008 triggered an abrupt decline in business and consumer confidence and, via their impact on share prices, a sudden and substantial loss of household and corporate wealth. The ensuing financial turmoil triggered a sharp contraction in the availability of finance for, among other things, international trade. Given the United States’ position as the world’s largest importer (by a wide margin), and with the United States and the United Kingdom running the world’s largest and third-largest current account deficits, respectively, the abrupt decline in American and British domestic demand (and their associated inventory cycles) was bound to be mirrored in sharp economic downturns for countries whose growth had become increasingly dependent on exports.

The Australian banking system did have an Achilles’ heel in the form of a relatively low deposit-to-loan ratio and, correspondingly, an unusually high level of dependence on “wholesale funding,” especially from offshore. This rendered Australian banks potentially vulnerable to the drying up of international liquidity. As such, the Australian government’s prompt extension of a guarantee of banks’ wholesale borrowing after the collapse of Lehman Brothers was critical in preventing the loss of liquidity. Australia’s Residential Property Market Rested on Firmer Foundation House prices in Australia’s major cities rose by about 150 percent over the twelve years preceding the onset of the financial crisis—more than in the United States or Canada, but less than in a number of European countries, including the Netherlands, Norway, the United Kingdom, Spain, and especially Ireland.

Contraction in Global Manufacturing-Trade Had Little Impact on Australia As noted earlier, one of the principal channels through which the North Atlantic financial crisis was transmitted to the global economy was via the dramatic contraction in trade, particularly in manufactured goods, that was prompted by the abrupt decline in discretionary spending in the United States and Britain, and by the associated fierce inventory cycle that followed the collapse of Lehman Brothers. However, this sharp trade downturn had very little impact on Australia as a result of the unusual (for an advanced economy) composition and orientation of Australia’s exports. North America and Western Europe account for only 15 percent of Australia’s merchandise exports, with Asia taking 70 percent (within that total, non-Japan Asia makes up just over 50 percent); thus, the sharp contraction in American and European imports had little direct impact on Australia’s exports.


pages: 355 words: 92,571

Capitalism: Money, Morals and Markets by John Plender

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activist fund / activist shareholder / activist investor, Andrei Shleifer, asset-backed security, bank run, Berlin Wall, Big bang: deregulation of the City of London, Black Swan, bonus culture, Bretton Woods, business climate, Capital in the Twenty-First Century by Thomas Piketty, central bank independence, collapse of Lehman Brothers, collective bargaining, computer age, Corn Laws, corporate governance, creative destruction, credit crunch, Credit Default Swap, David Ricardo: comparative advantage, deindustrialization, Deng Xiaoping, discovery of the americas, diversification, Eugene Fama: efficient market hypothesis, eurozone crisis, failed state, Fall of the Berlin Wall, fiat currency, financial innovation, financial intermediation, Fractional reserve banking, full employment, God and Mammon, Gordon Gekko, greed is good, Hyman Minsky, income inequality, inflation targeting, information asymmetry, invention of the wheel, invisible hand, Isaac Newton, James Watt: steam engine, Johann Wolfgang von Goethe, John Maynard Keynes: Economic Possibilities for our Grandchildren, John Meriwether, joint-stock company, Joseph Schumpeter, labour market flexibility, liberal capitalism, light touch regulation, London Interbank Offered Rate, London Whale, Long Term Capital Management, manufacturing employment, Mark Zuckerberg, market bubble, market fundamentalism, mass immigration, means of production, Menlo Park, money market fund, moral hazard, moveable type in China, Myron Scholes, Nick Leeson, Northern Rock, Occupy movement, offshore financial centre, paradox of thrift, Paul Samuelson, Plutocrats, plutocrats, price stability, principal–agent problem, profit motive, quantitative easing, railway mania, regulatory arbitrage, Richard Thaler, rising living standards, risk-adjusted returns, Robert Gordon, Robert Shiller, Robert Shiller, Ronald Reagan, savings glut, shareholder value, short selling, Silicon Valley, South Sea Bubble, spice trade, Steve Jobs, technology bubble, The Chicago School, The Great Moderation, the map is not the territory, The Wealth of Nations by Adam Smith, Thorstein Veblen, time value of money, too big to fail, tulip mania, Upton Sinclair, Veblen good, We are the 99%, Wolfgang Streeck, zero-sum game

To the publisher who did take it on board, Iain Dale of Biteback and his enthusiastic team, I am likewise profoundly grateful. Above all I am indebted to my beloved wife Stephanie, who was both a wonderful supporter-in-chief through some very difficult times during the gestation of the book, and a superbly perceptive subeditor. My debt to her in everything is beyond enumeration. INTRODUCTION The great financial crisis that began in 2008 with the collapse of Lehman Brothers, the US investment bank, has been the worst since the Wall Street Crash of 1929. Unlike that earlier crisis, it has not put the survival of the capitalist system in doubt. Indeed, the Great Recession that began shortly before the Lehman debacle was the first modern crisis in which no systemic alternative to capitalism was on offer. No one, after all, is looking to North Korea for an alternative vision of the future.

I conclude by explaining why the world is still on the edge of an abyss despite all the efforts of politicians, central bankers and financial watchdogs to strengthen the global financial system. Sadly, there is every likelihood that we will experience a further and more damaging crisis in due course. CHAPTER ONE THE ROOT OF ALL EVIL (OR NOT, AS THE CASE MAY BE) Capitalism is unloved. Since the collapse of Lehman Brothers, the American investment bank, in September 2008, it has become commonplace to refer to it as broken. Certainly its legitimacy is being questioned more than at any time since the Wall Street Crash of 1929 and the subsequent Great Depression. Few find it easy to live with the turbulent nature of the capitalist market economy, with its constant fluctuations in output and employment, accompanied by recurring financial crises.

This has not been the case in the US, where finance as a percentage of GDP grew from 1.5 per cent in the mid-nineteenth century to 8.3 per cent in 2006 before the financial crisis. What is striking about this progression is that there have been two conspicuous spikes in the level of financial activity and profitability. One was in the Roaring Twenties, which led to a peak contribution by finance to the wider economy of nearly 6 per cent of GDP after the 1929 crash. The other was in the years before the recent credit crunch and subsequent collapse of Lehman Brothers. Even more impressive growth can be seen in the UK, where, over 160 years, financial services outstripped growth in the economy as a whole by 2 percentage points a year, accounting for no less than 9.4 per cent of GDP in 2006. In a less heavily regulated environment, UK bank balance sheets grew much faster than those in the US. Bank assets went from 50 per cent of GDP in the early 1970s to a phenomenal 500 per cent of GDP at the peak of the credit bubble.


pages: 391 words: 102,301

Zero-Sum Future: American Power in an Age of Anxiety by Gideon Rachman

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Asian financial crisis, bank run, battle of ideas, Berlin Wall, Big bang: deregulation of the City of London, Bonfire of the Vanities, borderless world, Bretton Woods, BRICs, capital controls, centre right, clean water, collapse of Lehman Brothers, colonial rule, currency manipulation / currency intervention, deindustrialization, Deng Xiaoping, Doha Development Round, energy security, failed state, Fall of the Berlin Wall, financial deregulation, Francis Fukuyama: the end of history, full employment, global reserve currency, greed is good, Hernando de Soto, illegal immigration, income inequality, invisible hand, Jeff Bezos, laissez-faire capitalism, Live Aid, market fundamentalism, Martin Wolf, mass immigration, Mexican peso crisis / tequila crisis, Mikhail Gorbachev, moral hazard, mutually assured destruction, Naomi Klein, offshore financial centre, open borders, open economy, Peace of Westphalia, peak oil, pension reform, Plutocrats, plutocrats, popular capitalism, price stability, RAND corporation, reserve currency, rising living standards, road to serfdom, Ronald Reagan, shareholder value, Sinatra Doctrine, sovereign wealth fund, special economic zone, Steve Jobs, Stewart Brand, The Chicago School, The Great Moderation, The Myth of the Rational Market, Thomas Malthus, trickle-down economics, Washington Consensus, Winter of Discontent, zero-sum game

They campaign to attract foreign investment and trade. For five days, the world’s leaders seem to agree on a narrative about how the world works. At Davos, even the most intractable political differences are temporarily smothered by the globalization consensus. But at the Davos forum in 2009, it was clear that something had gone badly wrong. The meeting took place just four months after the collapse of Lehman Brothers had tipped the world into the biggest financial crisis since 1929. The international bankers who normally strutted proudly around the Davos cocktail circuit were in hiding as their institutions reeled and public opprobrium mounted. The Obama administration—locked in desperate economic negotiations at home—was conspicuous by its absence. With the Americans out of the way, Wen Jiabao, the prime minister of China, was the star of the Davos show.

She was the champion of the small entrepreneur and the shopkeeper, rather than the union boss or the senior civil servant. She was determined to cut red tape, regulation, and taxes. She believed in the market, not the state. One of her most famous and pithiest statements was “You can’t buck the market,”1 a phrase that essentially sums up the global ideological drift from 1978 until the collapse of Lehman Brothers in 2008. Thatcher was given her chance because by the late 1970s, Britain was in the grip of a powerful sense of national decline. It was a characteristic of the Age of Transformation that in country after country, free-market reforms were pushed through against a background of national economic crisis. From China to India to Brazil, running out of money was a salutary experience: a crisis in government finances provoked economic reform.

The whole neo-conservative philosophy exemplified by Krauthammer’s speech in 2004 was based on an unexamined assumption of continued American economic supremacy. By the end of the Bush presidency, however, the United States was becoming much more conscious of the limits of its own power. Both the Iraq and Afghanistan wars had turned into long, bloody, and unpopular slogs. Then, in September 2008, the collapse of Lehman Brothers precipitated the biggest financial and economic crash in the United States since the Great Depression. The economic crisis was also a turning point in the presidential campaign. In the aftermath of the fall of Lehman, Barack Obama established a lead over John McCain in the opinion polls and went on to decisive victory in November 2008. The new president had called his second book The Audacity of Hope.


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

In Britain, 170,000 savers placed £2.7 billion in deposits with Kaupthing Edge. The FSA required that Kaupthing Singer & Friedlander (Kaupthing’s UK branch) hold 90–95% of the value of deposits. In his book Frozen Assets, Armand Thorvaldsson, the CEO of Kaupthing’s London arm, reveals one remarkable rescue effort. Kaupthing presented the UK FSA with a plan to move its headquarters from Reykjavik to London. Even in the aftermath of the collapse of Lehman Brothers, Kaupthing’s deposits increased from £75–100 million per week to £150 million per week. There were more depositors, but volumes were below the £35,000 limit for deposit insurance. It was after the nationalisation of Iceland’s troubled third biggest bank Glitnir that the bank run on Iceland started. Thorvaldsson likened it to a ‘wildebeest being hunted by hyenas’. The FSA declared a ‘code red’ after a net £37 million was withdrawn on 30 September 2008, indicating fears that Kaupthing would not have enough money to last a week.

By summer it had dawned on officials and ministers that a ‘showstopper’, if necessary a forced recapitalisation with taxpayers’ money, was on the cards. There were all sorts of different views within the tripartite committee representing the Treasury, the Bank of England and the FSA. Britain going it alone on recapitalisation had risks, and so the various UK authorities were keen on a concerted international plan. However, just after the collapse of Lehman Brothers, the US Treasury secretary, Hank Paulson, announced TARP (Troubled Asset Relief Program) – an entirely different type of rescue plan involving the purchase of toxic assets, rather than bolstering up the banks with new capital. Britain paused its bank recapitalisation plans. In August 2008 two senior government figures communicated to the bosses of Lloyds TSB and HBoS that ‘If you want to ask us a question then you should ask.’

And HBoS was coming to be seen, quite rightly, as fair game by aggressive speculators. The fear was that an HBoS collapse would have hit RBS, then Barclays, then the domino effect would have been impossible to stop. The question HBoS and Lloyds did ask was whether competition law could be waived to enable a merger. The Treasury was split, as was most of the tripartite committee, and there was a dither. It took the collapse of Lehman Brothers to convince the doubters. At this point, many in government were convinced that having seen HBoS’s rotten books, Lloyds would drop its bid. It did not. ‘Taxpayers got a great deal. It would have cost a lot more to separately bail out HBoS,’ reflects a former minister. Nonetheless, separate plans to do just that were prepared in case Lloyds pulled out of the HBoS deal. Eric Daniels of Lloyds reached a point where he felt it necessary to take lengthy longhand notes of everything being said at these meetings.


pages: 376 words: 109,092

Paper Promises by Philip Coggan

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accounting loophole / creative accounting, activist fund / activist shareholder / activist investor, balance sheet recession, bank run, banking crisis, barriers to entry, Berlin Wall, Bernie Madoff, Black Swan, Bretton Woods, British Empire, call centre, capital controls, Carmen Reinhart, carried interest, Celtic Tiger, central bank independence, collapse of Lehman Brothers, collateralized debt obligation, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, currency manipulation / currency intervention, currency peg, debt deflation, delayed gratification, diversified portfolio, eurozone crisis, Fall of the Berlin Wall, falling living standards, fear of failure, financial innovation, financial repression, fixed income, floating exchange rates, full employment, German hyperinflation, global reserve currency, hiring and firing, Hyman Minsky, income inequality, inflation targeting, Isaac Newton, John Meriwether, joint-stock company, Kenneth Rogoff, labour market flexibility, light touch regulation, Long Term Capital Management, manufacturing employment, market bubble, market clearing, Martin Wolf, money market fund, money: store of value / unit of account / medium of exchange, moral hazard, mortgage debt, Myron Scholes, negative equity, Nick Leeson, Northern Rock, oil shale / tar sands, paradox of thrift, peak oil, pension reform, Plutocrats, plutocrats, Ponzi scheme, price stability, principal–agent problem, purchasing power parity, quantitative easing, QWERTY keyboard, railway mania, regulatory arbitrage, reserve currency, Robert Gordon, Robert Shiller, Robert Shiller, Ronald Reagan, savings glut, short selling, South Sea Bubble, sovereign wealth fund, special drawing rights, The Chicago School, The Great Moderation, The inhabitant of London could order by telephone, sipping his morning tea in bed, the various products of the whole earth, The Wealth of Nations by Adam Smith, time value of money, too big to fail, trade route, tulip mania, value at risk, Washington Consensus, women in the workforce, zero-sum game

Most people in the developed world keep the core element of their savings in a bank and expect that money to hold its nominal value (i.e. not adjusted for inflation). Banks also are the medium through which most monetary exchanges are made; cheques, debit-card and credit-card payments are all processed through the banking system and cash payments are usually withdrawn from a bank. The reason why the authorities panicked so much in the autumn of 2008 after the collapse of Lehman Brothers was that they feared the banking system was freezing up. Banks seemed unable to raise funds in the money markets (where companies and pension funds store their cash and billions are lent and borrowed on a short-term basis). Without such vital funds, banks might have become unable to perform their role as a medium of exchange; what if the cashpoint machines stopped working or businesses could no longer pay their employees?

He predicted that ways would be found to extend the process, by lengthening the period of repayment, reducing the size of the deposit, and lowering the standards for creditworthiness. In every respect, he proved to be correct. Eventually, however, Galbraith warned that the process would have to come to an end. And what would happen then, he wondered, given that ‘an interruption in the increase in debt means an actual reduction in demand for goods’. The debt crisis provides some clues. After the collapse of Lehman Brothers, credit-card companies started to restrict the amount of credit they offered and consumers started to use their cards less often. The total amount of US credit-card debt fell in every month for the next two years and, by November 2010, was 15 per cent below its peak. ‘Although our economy has experienced other long episodes in which revolving credit growth has slowed, we have never seen such a prolonged period of outright decline,’ said Elizabeth Duke of the Federal Reserve Bank of Philadelphia.7 In part, this was because the default rate on credit cards rose from 4 per cent in 2007 to more than 9 per cent in 2009.

The rescue of the banks caused a great degree of cynicism, especially among those who remembered the arguments advanced back in the 1980s that ‘lame duck’ industries such as mining and steel should not be rescued, and who noticed the change of tune when the powerful banking sector was in trouble. Issues of fiscal probity also seemed to be forgotten. As Joseph Stiglitz, the Nobel prize-winning economist, remarked: ‘When the banks said they needed hundreds of billions of dollars, all worries about the size of the deficit were shunted aside.’1 Stiglitz even sees the collapse of Lehman Brothers as a moment to rival the fall of the Berlin Wall;2 in this case, it was the free market capitalist model that was undermined. To critics like Stiglitz, the US could no longer claim that its financial system was the best allocator of capital. The rival Chinese approach, with governments controlling the banks and restricting the flow of international capital, looked much more appealing to developing countries.


pages: 180 words: 61,340

Boomerang: Travels in the New Third World by Michael Lewis

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Berlin Wall, Bernie Madoff, Carmen Reinhart, Celtic Tiger, collapse of Lehman Brothers, collateralized debt obligation, Credit Default Swap, credit default swaps / collateralized debt obligations, fiat currency, financial thriller, full employment, German hyperinflation, Irish property bubble, Kenneth Rogoff, offshore financial centre, pension reform, Ponzi scheme, Ronald Reagan, Ronald Reagan: Tear down this wall, South Sea Bubble, the new new thing, tulip mania, women in the workforce

(Laxness won the 1955 Nobel Prize in Literature, the greatest global honor for an Icelander until the 1980s, when two Icelandic women, in rapid succession, captured Miss World titles.) THE WORLD IS now pocked with cities that feel as if they are perched on top of bombs. The bombs have yet to explode, but the fuses have been lit, and there’s nothing anyone can do to extinguish them. Walking around Manhattan just before the collapse of Lehman Brothers, you saw empty stores, empty streets, and, even when it was raining, empty taxis; the people had fled before the bomb exploded. Reykjavík had the same feel of incipient doom, but the fuse burned strangely. The government mandates three months’ severance pay, and so the many laid-off bankers were paid until early February, when the government promptly fell. Against a basket of foreign currencies the krona is worth less than a third of its boom-time value.

The interviewer sounded as if he had just finished reading the collected works of Morgan Kelly. The Irish bank regulator, for his part, looked as if he had been dragged from a hole into which he badly wanted to return. He wore an insecure little mustache, stammered rote answers to questions he had not been asked, and ignored the ones he had been asked. A banking system is an act of faith: it survives only for as long as people believe it will. Two weeks earlier the collapse of Lehman Brothers had cast doubt on banks everywhere. Ireland’s banks had not been managed to withstand doubt; they had been managed to exploit blind faith. Now the Irish people finally caught a glimpse of the guy meant to be safeguarding them: the crazy uncle had been sprung from the family cellar. Here he was, on their televisions, insisting that the Irish banks’ problems had nothing whatsoever to do with the loans they’d made . . . when anyone with eyes could see, in the vacant skyscrapers and empty housing estates around them, evidence of bank loans that were not merely bad but insane.


pages: 257 words: 71,686

Swimming With Sharks: My Journey into the World of the Bankers by Joris Luyendijk

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activist fund / activist shareholder / activist investor, bank run, barriers to entry, Bonfire of the Vanities, bonus culture, collapse of Lehman Brothers, collective bargaining, corporate raider, credit crunch, Credit Default Swap, Emanuel Derman, financial deregulation, financial independence, Flash crash, glass ceiling, Gordon Gekko, high net worth, hiring and firing, information asymmetry, inventory management, job-hopping, light touch regulation, London Whale, Nick Leeson, offshore financial centre, regulatory arbitrage, Satyajit Das, selection bias, shareholder value, sovereign wealth fund, the payments system, too big to fail

Complexity can render even insiders helpless, explained the ‘head of structured credit’ at a big bank. In his mid thirties, slightly restless but quick to laugh, he is one of the most good-natured people I have met in two years of researching. We met on a grey day in January for lunch. After fighting the urge to order a glass of cider he settled on alcohol-free ginger beer and a pork pie. ‘Those were scary times’, he said about the days, weeks and months after the collapse of Lehman Brothers in 2008. ‘You think: we are in a new paradigm. Nothing works the way it used to. My department’s potential losses were hundreds of millions of pounds and several billions across the whole of the bank. We began to realise: this could sink the bank. If the market had crashed further we would have gone down.’ His job had been to manage a computer program that bought and sold financial products in order to neutralise risks the bank ran on other products.

I stayed in touch with a few interviewees but most were one-off meetings, and perhaps this is why their stories about the global financial system and the City’s central role in it had somehow remained abstract for me, as if it only affected or threatened others. Until I sat there sipping expensive coffee and eating toasted sandwiches with Peter. Going this far back with someone meant we could skip the small talk and have a truly honest conversation with trust on both sides. This was why I had been so keen to see Peter. I felt almost reluctant to press for the truth. Were the interviewees’ stories about the hours and days following the collapse of Lehman Brothers really true? The hoarding of food, cash and gold, the preparations for the evacuation of the children to the countryside, the alleged stockpiling of arms … If there was anyone who could give me a convincing answer it was Peter. He would set me straight if these anecdotes were crazy exaggerations. Even by Dutch standards he was extremely level-headed. ‘I remember looking out of the window and seeing the buses drive by,’ Peter said.


pages: 270 words: 73,485

Hubris: Why Economists Failed to Predict the Crisis and How to Avoid the Next One by Meghnad Desai

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3D printing, bank run, banking crisis, Berlin Wall, Big bang: deregulation of the City of London, Bretton Woods, BRICs, British Empire, Capital in the Twenty-First Century by Thomas Piketty, Carmen Reinhart, central bank independence, collapse of Lehman Brothers, collateralized debt obligation, correlation coefficient, correlation does not imply causation, creative destruction, Credit Default Swap, credit default swaps / collateralized debt obligations, David Ricardo: comparative advantage, deindustrialization, demographic dividend, Eugene Fama: efficient market hypothesis, eurozone crisis, experimental economics, Fall of the Berlin Wall, financial innovation, Financial Instability Hypothesis, floating exchange rates, full employment, German hyperinflation, Gunnar Myrdal, Home mortgage interest deduction, imperial preference, income inequality, inflation targeting, invisible hand, Isaac Newton, Joseph Schumpeter, Kenneth Arrow, Kenneth Rogoff, laissez-faire capitalism, liquidity trap, Long Term Capital Management, market bubble, market clearing, means of production, Mexican peso crisis / tequila crisis, mortgage debt, Myron Scholes, negative equity, Northern Rock, oil shale / tar sands, oil shock, open economy, Paul Samuelson, price stability, purchasing power parity, pushing on a string, quantitative easing, reserve currency, rising living standards, risk/return, Robert Shiller, Robert Shiller, Ronald Reagan, savings glut, secular stagnation, seigniorage, Silicon Valley, Simon Kuznets, The Chicago School, The Great Moderation, The inhabitant of London could order by telephone, sipping his morning tea in bed, the various products of the whole earth, The Wealth of Nations by Adam Smith, Tobin tax, too big to fail, women in the workforce

It had exposed itself in the securitized mortgage market and as the prices fell, its exposure increased and the Fed could not rescue it. It had assets of $400 billion but a debt of $33 per each dollar of its capital. Bear Stearns had already fired its CEO in January. It had to be sold at the low price of $10 per share compared to its recent peak of $133 to JPMorgan Chase, another US bank. This was followed by the collapse of Lehman Brothers in September of that same year: the fourth largest investment firm in the US went bankrupt after the US government refused to bail it out. Soon the collapse was general and AIG, an insurance firm, had to be rescued. US taxpayers had to put up $800 billion to launch the Troubled Assets Recovery Program (TARP). Geithner ended up as Treasury Secretary to President Obama, working through the aftermath of the TARP.

Even if the debt is held by nationals, they do have the freedom to invest their money elsewhere. Since some of the rentiers may be pension funds, there is an intertemporal aspect to the necessity for the borrower to maintain a good credit rating. The Crisis in the Eurozone This has been shown in the eurozone crisis, which began in 2010 – the second leg of the crisis that had started with the collapse of Lehman Brothers. The European search for stability in exchange rates had climaxed in the decision to have a single currency, the euro, to which the first countries signed up in 1999.10 The European Central Bank (ECB) was set up in the image of the German Bundesbank. It has a mandate to keep inflation low, using an explicitly monetarist strategy. The ECB cannot buy the public debt of any member country in the primary market.


pages: 88 words: 22,980

One Way Forward: The Outsider's Guide to Fixing the Republic by Lawrence Lessig

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collapse of Lehman Brothers, crony capitalism, crowdsourcing, en.wikipedia.org, Filter Bubble, jimmy wales, Occupy movement, Ronald Reagan

Let us learn how this diversity can act now as one network, as an inter-network, as a cooperating crowd, embracing the open-source principles that define our age, and using them to restore this Republic. Conclusion The Promise In 2008, Iceland, like much of the rest of the world, suffered a major economic collapse after its recently privatized banks suffered a catastrophic default. The legalized gambling that the world’s banking system had become left Iceland’s three major banks holding nine times the country’s GDP in debt. When the collapse of Lehman Brothers ended their ability to refinance that debt, the banks entered bankruptcy—the largest collapse, relative to the size of a nation’s economy, in the history of the world. When a coalition government tried to bail out the banks—with a package that would have required each Icelandic citizen to pay about one hundred euros a month for fifteen years at 5.5 percent interest—the citizens revolted.


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

The serial revelations of his picaresque tour will amuse, enlighten, and enrage both lay people and market insiders.” —Yves Smith, Founder of www.nakedcapitalism.com and Author of ECONned: How Unenlightened Self Interest Undermined Democracy and Corrupted Capitalism “Most books written about the global financial crisis have been written by those who only became wise after the event. Das is not one of them. Long before the collapse of Lehman Brothers, he warned about the flaws in modern finance. Extreme Money is his account of what went wrong. Read it!” —Edward Chancellor, Member of GMO’s Asset Allocation Team and Author of Devil Take the Hindmost: A History of Financial Speculation “A rich analysis told with color and verve.” —Philip Augar, Author of Reckless: The Rise and Fall of the City Praise for Traders, Guns & Money “...a distinctly timely book...tries to reach out to the mathematically challenged to explain how the world of derivatives “really” works...explaining not only the high-minded theory behind the business and its various products but the sometimes sordid reality of the industry, illustrated by lively anecdotes...very up to date, covering some of the new areas of finance, such as credit derivatives...also gives an excellent sense of the all-important cultural aspect of the business, detailing the complexities of trading-floor politics, the dangerously skewed incentive systems, the obsession with money and the cultural chasm that separates derivative traders from many of their clients—and from many other parts of the bank.”

If you have a moment of genius [you] will be rewarded now.”39 Out of Sight Banks and companies used special structures to park assets and associated funding off-balance sheet, reducing the firm’s size. Financial institutions moved assets to QSPEs (qualified special purpose entities), recording a sale and the amount received as revenue. Securitization and derivatives shifted assets off-balance sheet, but liquidity puts and standby funding arrangements meant that the risk remained with the bank. Following the collapse of Lehman Brothers, a court-appointed examiner found that the investment bank used repos (repurchase agreements) to shift assets off-balance sheet.40 In a repo, the borrower sells an asset, simultaneously agreeing to repurchase it at an agreed price plus interest for funds advanced at a future date. Normally, a repo is treated as a secured loan. But where the securities are worth significantly more than the loan, the repo is treated as a sale.

Bad loans, excessive investments in structured securities, inadequate capital relative to risk and a host of other failures were irrelevant. Blaming the messenger of bad news, short selling was banned or restricted in many countries. The debate was informed by Mark Twain’s observation that: “I am not one of those who in expressing opinions confine themselves to facts.” In South Korea an online blogger, using the pseudonym Minerva, the Roman goddess of wisdom, predicted the imminent collapse of Lehman Brothers and made dire forecasts about the South Korean currency (the won), his site registering 40 million hits. When the won fell 26 percent, an unimpressed Korean government arrested the celebrity blogger, known to netizens as “the Internet Economic President.” Newtonian Economics In 2003, Robert Lucas, a Nobel-Prize-winning economist, declared: “macroeconomics...has succeeded. Its central problem of depression-prevention has been solved, for all practical purposes, and has been solved for many decades.”24 Gordon Brown boasted that under New Labour’s stewardship the boom-bust cycles of the UK economy had been banished.


pages: 430 words: 109,064

13 Bankers: The Wall Street Takeover and the Next Financial Meltdown by Simon Johnson, James Kwak

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Andrei Shleifer, Asian financial crisis, asset-backed security, bank run, banking crisis, Bernie Madoff, Bonfire of the Vanities, bonus culture, break the buck, capital controls, Carmen Reinhart, central bank independence, collapse of Lehman Brothers, collateralized debt obligation, commoditize, corporate governance, corporate raider, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, Edward Glaeser, Eugene Fama: efficient market hypothesis, financial deregulation, financial innovation, financial intermediation, financial repression, fixed income, George Akerlof, Gordon Gekko, greed is good, Home mortgage interest deduction, Hyman Minsky, income per capita, information asymmetry, interest rate derivative, interest rate swap, Kenneth Rogoff, laissez-faire capitalism, late fees, light touch regulation, Long Term Capital Management, market bubble, market fundamentalism, Martin Wolf, money market fund, moral hazard, mortgage tax deduction, Myron Scholes, Paul Samuelson, Ponzi scheme, price stability, profit maximization, race to the bottom, regulatory arbitrage, rent-seeking, Robert Bork, Robert Shiller, Robert Shiller, Ronald Reagan, Saturday Night Live, Satyajit Das, sovereign wealth fund, The Myth of the Rational Market, too big to fail, transaction costs, value at risk, yield curve

And significant change will require addressing the disproportionate wealth and power of a handful of large banks at the pinnacle of the financial sector. Simply asking bankers to behave differently will not work; the solution can only come by changing the rules of the financial system, which requires government action. Five days after President Obama’s election, his chief of staff, Rahm Emanuel, said, “Rule one: Never allow a crisis to go to waste. They are opportunities to do big things.”6 But more than a year after the collapse of Lehman Brothers, even relatively moderate legislation to reform the financial sector was still stuck in Congress. The Obama administration attempted to show that it was serious about change. “The industry needs to show that they get it on the compensation issue,” Obama said at the March 27, 2009, White House meeting discussed in the Introduction. “Excess is out of fashion.” (According to The New York Times, “The bankers nodded, but made no firm commitments.”)7 On June 17, 2009, President Obama unveiled what he called “a sweeping overhaul of the financial regulatory system, a transformation on a scale not seen since the reforms that followed the Great Depression.”8 He proposed stricter oversight of financial institutions, new regulations for securitization and over-the-counter derivatives, increased consumer protections, and new government powers to cope with a crisis.9 Three months later, standing in the heart of the Manhattan financial district, Obama promised: We will not go back to the days of reckless behavior and unchecked excess that was at the heart of this crisis, where too many were motivated only by the appetite for quick kills and bloated bonuses.… [T]he old ways that led to this crisis cannot stand.

House of Cards: A Tale of Hubris and Wretched Excess on Wall Street. New York: Doubleday, 2009. Kelly, Kate. Street Fighters: The Last 72 Hours of Bear Stearns, the Toughest Firm on Wall Street. New York: Portfolio, 2009. Lewis, Michael. The Big Short: Inside the Doomsday Machine. New York: W. W. Norton, 2010. McDonald, Lawrence G., and Patrick Robinson. A Colossal Failure of Common Sense: The Inside Story of the Collapse of Lehman Brothers. New York: Crown Business, 2009. Sorkin, Andrew Ross. Too Big to Fail: The Inside Story of How Wall Street and Washington Fought to Save the Financial System—and Themselves. New York: Viking, 2009. Tett, Gillian. Fool’s Gold: How the Bold Dream of a Small Tribe at J.P. Morgan Was Corrupted by Wall Street Greed and Unleashed a Catastrophe. New York: Free Press, 2009. Wessel, David. In Fed We Trust: Ben Bernanke’s War on the Great Panic.


pages: 523 words: 111,615

The Economics of Enough: How to Run the Economy as if the Future Matters by Diane Coyle

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accounting loophole / creative accounting, affirmative action, bank run, banking crisis, Berlin Wall, bonus culture, Branko Milanovic, BRICs, call centre, Cass Sunstein, central bank independence, collapse of Lehman Brothers, conceptual framework, corporate governance, correlation does not imply causation, Credit Default Swap, deindustrialization, demographic transition, Diane Coyle, disintermediation, Edward Glaeser, endogenous growth, Eugene Fama: efficient market hypothesis, experimental economics, Fall of the Berlin Wall, Financial Instability Hypothesis, Francis Fukuyama: the end of history, George Akerlof, Gini coefficient, global supply chain, Gordon Gekko, greed is good, happiness index / gross national happiness, Hyman Minsky, If something cannot go on forever, it will stop - Herbert Stein's Law, illegal immigration, income inequality, income per capita, industrial cluster, information asymmetry, intangible asset, Intergovernmental Panel on Climate Change (IPCC), invisible hand, Jane Jacobs, Joseph Schumpeter, Kenneth Arrow, Kenneth Rogoff, knowledge economy, labour market flexibility, light touch regulation, low skilled workers, market bubble, market design, market fundamentalism, megacity, Network effects, new economy, night-watchman state, Northern Rock, oil shock, Pareto efficiency, principal–agent problem, profit motive, purchasing power parity, railway mania, rising living standards, Ronald Reagan, selective serotonin reuptake inhibitor (SSRI), Silicon Valley, South Sea Bubble, Steven Pinker, The Design of Experiments, The Fortune at the Bottom of the Pyramid, The Market for Lemons, The Myth of the Rational Market, The Spirit Level, transaction costs, transfer pricing, tulip mania, ultimatum game, University of East Anglia, web application, web of trust, winner-take-all economy, World Values Survey, zero-sum game

“Free” market outcomes are unlikely to achieve the best outcomes in terms of social welfare when there are important externalities and a growing degree of mutual independence. So in this chapter I’ll argue that markets remain a fundamentally important institution, but the next chapter will look at some of the new challenges of governance. THE MERITS OF MARKETS The economic and financial crisis triggered by the collapse of Lehman Brothers in September 2008 prompted in its turn a wider questioning of the role of markets in the organization of the economy and society. In fact, the questioning of the priority given to markets by the dominant policies in most countries had been under way for some time. The high tide of what some would see as the fetishizing of markets came in the years of Ronald Reagan’s presidency in the United States and Margaret Thatcher’s premiership in the United Kingdom.

Just in case anybody is underestimating the challenge, there’s a cautionary tale in the lesson of the financial crisis for the prospects of achieving changes in the policy framework. Every commentator agreed that it has been the most serious crisis and recession since the 1930s, and that policy reform is essential. But that reform has moved at a snail’s pace given the need to achieve international agreement on both the principles and the practical details of implementation. Two years from the collapse of Lehman Brothers, as I write, very little financial reform has yet been achieved, and indeed the financial crisis has moved into a new phase with the bailout of Greece and crisis of the euro. It will be another three or four years before relatively minor reforms are implemented. With such difficulty on reforms about which there is such a consensus, but a powerful opposition lobby in the banking industry, how much harder will it be when it comes to far more divisive or political challenges?


pages: 274 words: 93,758

Phishing for Phools: The Economics of Manipulation and Deception by George A. Akerlof, Robert J. Shiller, Stanley B Resor Professor Of Economics Robert J Shiller

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Andrei Shleifer, asset-backed security, Bernie Madoff, Capital in the Twenty-First Century by Thomas Piketty, collapse of Lehman Brothers, corporate raider, Credit Default Swap, Daniel Kahneman / Amos Tversky, dark matter, David Brooks, en.wikipedia.org, endowment effect, equity premium, financial intermediation, financial thriller, fixed income, full employment, George Akerlof, greed is good, income per capita, invisible hand, John Maynard Keynes: Economic Possibilities for our Grandchildren, Kenneth Arrow, Kenneth Rogoff, late fees, loss aversion, Menlo Park, mental accounting, Milgram experiment, money market fund, moral hazard, new economy, Pareto efficiency, Paul Samuelson, payday loans, Ponzi scheme, profit motive, publication bias, Ralph Nader, randomized controlled trial, Richard Thaler, Robert Shiller, Robert Shiller, Ronald Reagan, Silicon Valley, the new new thing, The Predators' Ball, the scientific method, The Wealth of Nations by Adam Smith, theory of mind, Thorstein Veblen, too big to fail, transaction costs, Unsafe at Any Speed, Upton Sinclair, Vanguard fund, Vilfredo Pareto, wage slave

Paper presented at the Annual Meeting of the American Sociological Association, Las Vegas, 2011. Maynard, Micheline. “United Air Wins Right to Default on Its Employee Pension Plans.” New York Times, May 11, 2005. McCubbins, Mathew D., and Arthur Lupia. The Democratic Dilemma: Can Citizens Learn What They Really Need to Know? New York: Cambridge University Press, 1998. McDonald, Lawrence G., with Patrick Robinson. A Colossal Failure of Com­ mon Sense: The Inside Story of the Collapse of Lehman Brothers. New York: Crown Business, 2009. McFadden, Robert D. “Charles Keating, 90, Key Figure in ’80s Savings and Loan Crisis, Dies.” New York Times, April 2, 2014. Accessed May 27, 2015. http://www.nytimes.com/2014/04/02/business/charles-keating-key-figure -in-the-1980s-savings-and-loan-crisis-dies-at-90.html?_r=0. McLean, Bethany, and Peter Elkind. “The Guiltiest Guys in the Room.” Fortune, July 5, 2006.

Cohan, Money and Power: How Goldman Sachs Came to Rule the World (New York: Doubleday, 2011); Greg Farrell, Crash of the Titans: Greed, Hubris, the Fall of Merrill Lynch, and the Near-Collapse of Bank of America (New York: Crown Business, 2010); Kate Kelly, Street Fight­ ers: The Last 72 Hours of Bear Stearns, the Toughest Firm on Wall Street (New York: Penguin, 2009); Michael Lewis, Boomerang: Travels in the New Third World (New York: W. W. Norton, 2011) and The Big Short: Inside the Dooms­ day Machine (New York: W. W. Norton, 2010), on financial speculation; Lawrence G. McDonald, with Patrick Robinson, A Colossal Failure of Common Sense: The Inside Story of the Collapse of Lehman Brothers (New York: Crown Business, 2009); Gretchen Morgenson and Joshua A. Rosner, Reckless En­­ dangerment: How Outsized Ambition, Greed, and Corruption Led to Economic Armageddon (New York: Times Books / Henry Holt, 2011), on Fannie Mae and Freddie Mac; Henry M. Paulson, On the Brink: Inside the Race to Stop the Collapse of the Global Financial System (New York: Business Plus, 2010), on the US Treasury; Raghuram Rajan, Fault Lines: How Hidden Fractures Still Threaten the World Economy (Princeton: Princeton University Press, 2010), on the financial system; Robert J.


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

The thing that’s interesting about his nickname is that “whale” is a term from gambling: a whale is a punter who gets free hospitality from casinos because he (usually a he) bets such huge sums. According to the amazing Senate subcommittee report into the affair, by the time the bets went wrong, Iksil and his colleagues were out on the limb for $157 billion53—this nearly four years after the collapse of Lehman Brothers, when the lessons about excessive risk taking were supposed to have been learned. long and short To be long on something is to think that it’s going to go up in value, and to have invested accordingly. If I’m long on Apple, it means I own the shares and am holding them expecting them to rise in value. To be short on something is the opposite—and shorting is a lot more controversial, because you are betting that the value of something will go down.

That’s fine if you have the money—but if you don’t, and especially if you have bought lots of similar contracts and have lots of margin calls arriving simultaneously, then suddenly you’re in real trouble. If you had gone the full monty and used your $100,000 to buy $1,000,000 of wheat on margin, you’d have just used the power of margin to lose all your money, and another $50,000 on top. In finance, a margin call can also be triggered by doubts about an institution’s creditworthiness. In the collapse of Lehman Brothers, one of the short-term triggers was other banks deciding Lehman needed to put up more collateral—in effect to raise more money against the possibility of a margin call. margin, high and low Margin in this sense is the amount of profit a business owner makes by selling something. An Italian restaurant owner once told me that more than anything else in the world, he loves pasta. I asked him why, expecting an answer along the lines of Marcella Hazan’s remark that nothing had contributed more to the sum of human happiness than humble-seeming pasta.

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

In March 2009, UK bank rate – the interest rate set by the Bank of England – fell to a mere 0.5 per cent, the lowest since records for this particular series began in the 1970s. Three years later, bank rate remained at this – by historic standards – absurdly low level. By that stage, the UK government’s long-­term borrowing costs had dropped to well below 2 per cent, the lowest since records began in the early 1700s. The UK’s experience was hardly unique. At the end of 2008, shortly after the collapse of Lehman Brothers, US Fed funds – the equivalent of UK bank rate – dropped more or less to zero. And, as with the UK, US government borrowing costs plummeted. The same was happening in parts of continental Europe, notably Germany. Initially, central bankers hoped remarkably low borrowing costs would kick-­start economic growth. It didn’t work. Success would have allowed interest rates to have gone straight back up again.

The modern-­day equivalent would be for the administration to take away the Fed’s independence and to insist on a radical redrawing of the rules governing monetary and fiscal policy. Yet, in the absence of earlier deflation, the justification for doing so is not immediately obvious. Whereas, in the 1930s, the value of national income dropped 50 per cent from peak to trough, the value of national income at the end of 117 4099.indd 117 29/03/13 2:23 PM When the Money Runs Out 2012, four years after the collapse of Lehman Brothers, was already almost 10 per cent higher than it had been at the previous peak. There is simply no comparison. Outside the eurozone periphery, there is no deflation, no depression and no persistent economic collapse. Those who claim otherwise are confusing the disaster of depression with the melancholy of stagnation, two completely different concepts. In any case, the ammunition available to Roosevelt no longer exists.


The Metropolitan Revolution: How Cities and Metros Are Fixing Our Broken Politics and Fragile Economy by Bruce Katz, Jennifer Bradley

3D printing, additive manufacturing, Affordable Care Act / Obamacare, British Empire, business climate, carbon footprint, clean water, cleantech, collapse of Lehman Brothers, deindustrialization, demographic transition, desegregation, double entry bookkeeping, edge city, Edward Glaeser, global supply chain, immigration reform, income inequality, industrial cluster, intermodal, Jane Jacobs, jitney, Kickstarter, knowledge economy, lone genius, Mark Zuckerberg, Masdar, megacity, Menlo Park, Moneyball by Michael Lewis explains big data, Network effects, new economy, New Urbanism, Occupy movement, place-making, postindustrial economy, purchasing power parity, race to the bottom, Richard Florida, Shenzhen was a fishing village, Silicon Valley, smart cities, smart grid, sovereign wealth fund, the built environment, The Death and Life of Great American Cities, the market place, The Spirit Level, Tony Hsieh, too big to fail, trade route, transit-oriented development, urban planning, white flight

Over the course of the year, global economic activity would shrink by half a percent—the worst downturn since 1945.1 By the end of the year, 7 million Americans had lost their jobs, and an additional 8.8 million were involuntarily working part-time. The unemployment rate had reached 10 percent nationwide. New York’s large financial sector made the city uniquely vulnerable to the fortunes of the industry where the crisis began. The collapse of Lehman Brothers was a watershed moment for New York City’s economy, as it was for the global financial sector. After it became clear that there would be no buyers or bailouts for Lehman Brothers in September of 2008, the city began to lose jobs rapidly from other financial firms and in other sectors across the economy. In the fifteen months between August of 2008 and November of 2009, New York 17 02-2151-2 ch2.indd 17 5/20/13 6:48 PM 18 NYC: INNOVATION AND THE NEXT ECONOMY City lost 36,000 jobs from its financial services sector alone.2 As a result of those and other job losses, city tax revenue shrank by more than $2 billion in fiscal year 2009 and by another $1.4 billion the following year, exacerbating a budget gap of more than $4 billion.

What key aspects of our physical infrastructure are holding back growth? How can we do things differently to get more out of our limited resources? How can we employ our existing community resources to create good jobs for New Yorkers? In early 2009 people all over the country were asking the same kinds of questions, both about their local economies and about the nation’s economy. While New York struggled with the collapse of Lehman Brothers and related shake-outs in other sectors, cities and metros in Nevada and Florida wondered how to move ahead from the loud and painful bursting of the real estate bubble that had inflated their economies to wondrous but unsustainable size. Communities in Ohio, Kentucky, and Michigan were suddenly mired in their own foreclosure crises, compounded by another deep slide in the auto industry as General Motors and Chrysler wobbled on the precipice of bankruptcy.


pages: 121 words: 31,813

The Art of Execution by Lee Freeman-Shor

Black Swan, cognitive bias, collapse of Lehman Brothers, credit crunch, Daniel Kahneman / Amos Tversky, diversified portfolio, family office, I think there is a world market for maybe five computers, index fund, Isaac Newton, Jeff Bezos, Long Term Capital Management, loss aversion, price anchoring, Richard Thaler, Robert Shiller, Robert Shiller, rolodex, Skype, South Sea Bubble, Steve Jobs, technology bubble, The Wisdom of Crowds, too big to fail, tulip mania, zero-sum game

Sadly, nowadays the Royal Bank of Scotland has become synonymous with the credit crunch because it needed to be bailed out by the government, a source of anger for many in the UK. It was deemed too big to fail. At the time of writing the government owns 82% of the shares outstanding, having been forced to recapitalise the bank in order to prevent a run on the banking system. An Assassin bought shares in the Royal Bank of Scotland on 30 May 2008, before the collapse of Lehman Brothers and the onset of the credit crunch, at £22.29. As the credit crisis broke, he actually moved quicker than his stop-loss, killing the investment on 3 October 2008 at £18.62, a loss of 16%. The stock then fell a further 82%. Had he not sold, he would have required his shares in the Royal Bank of Scotland to make a return of 667% just to break even, which equates to 25 years given average market returns.


pages: 829 words: 186,976

The Signal and the Noise: Why So Many Predictions Fail-But Some Don't by Nate Silver

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airport security, availability heuristic, Bayesian statistics, Benoit Mandelbrot, Berlin Wall, Bernie Madoff, big-box store, Black Swan, Broken windows theory, Carmen Reinhart, Claude Shannon: information theory, Climategate, Climatic Research Unit, cognitive dissonance, collapse of Lehman Brothers, collateralized debt obligation, complexity theory, computer age, correlation does not imply causation, Credit Default Swap, credit default swaps / collateralized debt obligations, cuban missile crisis, Daniel Kahneman / Amos Tversky, diversification, Donald Trump, Edmond Halley, Edward Lorenz: Chaos theory, en.wikipedia.org, equity premium, Eugene Fama: efficient market hypothesis, everywhere but in the productivity statistics, fear of failure, Fellow of the Royal Society, Freestyle chess, fudge factor, George Akerlof, haute cuisine, Henri Poincaré, high batting average, housing crisis, income per capita, index fund, Intergovernmental Panel on Climate Change (IPCC), Internet Archive, invention of the printing press, invisible hand, Isaac Newton, James Watt: steam engine, John Nash: game theory, John von Neumann, Kenneth Rogoff, knowledge economy, locking in a profit, Loma Prieta earthquake, market bubble, Mikhail Gorbachev, Moneyball by Michael Lewis explains big data, Monroe Doctrine, mortgage debt, Nate Silver, negative equity, new economy, Norbert Wiener, PageRank, pattern recognition, pets.com, Pierre-Simon Laplace, prediction markets, Productivity paradox, random walk, Richard Thaler, Robert Shiller, Robert Shiller, Rodney Brooks, Ronald Reagan, Saturday Night Live, savings glut, security theater, short selling, Skype, statistical model, Steven Pinker, The Great Moderation, The Market for Lemons, the scientific method, The Signal and the Noise by Nate Silver, The Wisdom of Crowds, Thomas Bayes, Thomas Kuhn: the structure of scientific revolutions, too big to fail, transaction costs, transfer pricing, University of East Anglia, Watson beat the top human players on Jeopardy!, wikimedia commons

David Miles, Bank of England, “Monetary Policy in Extraordinary Times,” speech given to the Centre for Economic Policy Research and London Business School, February 23, 2011. http://www.bankofengland.co.uk/publications/Documents/speeches/2011/speech475.pdf 77. Investopedia staff, “Case Study: The Collapse of Lehman Brothers,” Investopedia; April 2, 2009. http://www.investopedia.com/articles/economics/09/lehman-brothers-collapse.asp#axzz1bZ61K9wz. 78. George A. Akerlof, “The Market for ‘Lemons’: Quality Uncertainty and the Market Mechanism,” Quarterly Journal of Economics 84, no. 3 (Aug. 1970). http://sws.bu.edu/ellisrp/EC387/Papers/1970Akerlof_Lemons_QJE.pdf. 79. “Lehman Brothers F1Q07 (Qtr End 2/28/07) Earnings Call Transcript,” Seeking Alpha, Mar. 14, 2007. http://seekingalpha.com/article/29585-lehman-brothers-f1q07-qtr-end-2-28-07-earnings-call-transcript?part=qanda. 80. Investopedia staff, “Case Study: The Collapse of Lehman Brothers.” 81. Abigail Field, “Lehman Report: Why the U.S. Balked at Bailing Out Lehman,” DailyFinance, March 15, 2010. http://www.dailyfinance.com/2010/03/15/why-the-u-s-balked-at-bailout-out-lehman/ 82.

Some of McLaughlin’s questions—say, to name the next Supreme Court nominee from among several plausible candidates—are difficult to answer. But others are softballs. On the weekend before the 2008 presidential election, for instance, McLaughlin asked his panelists whether John McCain or Barack Obama was going to win.1 That one ought not to have required very much thought. Barack Obama had led John McCain in almost every national poll since September 15, 2008, when the collapse of Lehman Brothers had ushered in the worst economic slump since the Great Depression. Obama also led in almost every poll of almost every swing state: in Ohio and Florida and Pennsylvania and New Hampshire—and even in a few states that Democrats don’t normally win, like Colorado and Virginia. Statistical models like the one I developed for FiveThirtyEight suggested that Obama had in excess of a 95 percent chance of winning the election.


pages: 526 words: 158,913

Crash of the Titans: Greed, Hubris, the Fall of Merrill Lynch, and the Near-Collapse of Bank of America by Greg Farrell

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Airbus A320, Apple's 1984 Super Bowl advert, bank run, banking crisis, bonus culture, call centre, Captain Sullenberger Hudson, collapse of Lehman Brothers, collateralized debt obligation, corporate governance, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, financial innovation, fixed income, glass ceiling, high net worth, Long Term Capital Management, mass affluent, Mexican peso crisis / tequila crisis, Plutocrats, plutocrats, Ronald Reagan, six sigma, sovereign wealth fund, technology bubble, too big to fail, US Airways Flight 1549, yield curve

The program would allow each of these banks access to capital at relatively low rates, since the banks would only have to pay a 5 percent annual dividend to the government for several years, at which point a rising dividend would encourage the banks to buy back the preferred shares. But there was one catch to the program: Executive compensation at the banks receiving the funds would be restricted. The economic devastation wreaked by the bursting of the real estate bubble and the collapse of Lehman Brothers had exacerbated public outrage at the multimillion-dollar pay packages common on Wall Street. To address that contentious topic, the $700 billion bailout fund—known as the “troubled asset relief program” or TARP—placed restrictions on the types of golden parachute payments that could be made to top executives. The same limits would apply to banks that participated in the new capital purchase program.

Obama’s victory meant the White House would return to Democratic Party control for the first time in eight years. McCain’s defeat also foreclosed any chance that existed for John Thain to succeed Hank Paulson as U.S. treasury secretary. Thain had emerged a year earlier as McCain’s primary fundraiser and leading supporter on Wall Street. The Arizona senator’s short-lived lead in the polls, in early September, evaporated with the collapse of Lehman Brothers and the subsequent government bailout of AIG. The creation of the $700 billion TARP fund, by a Republican administration, fueled populist anger at the banking industry to the point where McCain and his running mate, Alaska governor Sarah Palin, blamed “greed on Wall Street” as the driving force behind the financial crisis and the nation’s economic woes. Even if McCain had won the election, his anti–Wall Street rhetoric in the final weeks of the campaign suggested that John Thain, an ex–Goldman Sachs banker who presided over the sale of Merrill Lynch, would probably not emerge as a popular candidate for treasury secretary.


pages: 484 words: 136,735

Capitalism 4.0: The Birth of a New Economy in the Aftermath of Crisis by Anatole Kaletsky

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bank run, banking crisis, Benoit Mandelbrot, Berlin Wall, Black Swan, bonus culture, Bretton Woods, BRICs, Carmen Reinhart, cognitive dissonance, collapse of Lehman Brothers, Corn Laws, correlation does not imply causation, creative destruction, credit crunch, currency manipulation / currency intervention, David Ricardo: comparative advantage, deglobalization, Deng Xiaoping, Edward Glaeser, Eugene Fama: efficient market hypothesis, eurozone crisis, experimental economics, F. W. de Klerk, failed state, Fall of the Berlin Wall, financial deregulation, financial innovation, Financial Instability Hypothesis, floating exchange rates, full employment, George Akerlof, global rebalancing, Hyman Minsky, income inequality, information asymmetry, invisible hand, Isaac Newton, Joseph Schumpeter, Kenneth Arrow, Kenneth Rogoff, laissez-faire capitalism, Long Term Capital Management, mandelbrot fractal, market design, market fundamentalism, Martin Wolf, money market fund, moral hazard, mortgage debt, new economy, Northern Rock, offshore financial centre, oil shock, paradox of thrift, Pareto efficiency, Paul Samuelson, peak oil, pets.com, Ponzi scheme, post-industrial society, price stability, profit maximization, profit motive, quantitative easing, Ralph Waldo Emerson, random walk, rent-seeking, reserve currency, rising living standards, Robert Shiller, Robert Shiller, Ronald Reagan, shareholder value, short selling, South Sea Bubble, sovereign wealth fund, special drawing rights, statistical model, The Chicago School, The Great Moderation, The inhabitant of London could order by telephone, sipping his morning tea in bed, the various products of the whole earth, The Wealth of Nations by Adam Smith, Thomas Kuhn: the structure of scientific revolutions, too big to fail, Vilfredo Pareto, Washington Consensus, zero-sum game

The scorched-earth economics always demanded by free-market ideologues at times of crisis are rejected, and central bankers ensure that the day of reckoning for past excesses is postponed. In short, democracy usually offers capitalism a breathing space that allows the system and its institutions to evolve. Capitalism doesn’t break because it bends. What does this approach imply about the crisis that reached its climax in the weeks after the collapse of Lehman Brothers on September 15, 2008? Rather than destroying or permanently crippling the international financial system, as many commentators suggested at the time, this crisis probably marked the start of a fourth great transition in the 250-year history of modern capitalism. Far from suffering extinction, the capitalist system has started evolving into a new species, which will presumably be better suited for life in the early twenty-first century.

Investment banks of comparable size had failed in the past with no catastrophic damage, most notably Drexel Burnham Lambert in 1989. In the end, the total losses from Lehman’s bankruptcy came to about $75 billion.17 This was a lot of money by the standards of normal business bankruptcies, but modest in comparison with the multitrillion dollar write-downs already suffered by banks around the world before Lehman went down. The collapse of Lehman Brothers was much more catastrophic than the raw numbers might have suggested—or Henry Paulson expected—partly because Lehman was a participant in many of the lending chains that had been gradually unraveling since the start of the credit crunch. Once Lehman defaulted, the orderly unwinding of these mutual obligations, which the Fed had tried to facilitate with the Bear Stearns bailout, become impossible.


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

They have failed to tackle banking problems and excessive private-sector debts. They have done too little to boost investment and implement reforms to open up healthier future growth. And at a time when the private sector was cutting back and non-Europeans were not in a position to take up all the slack, they embarked on premature, front-loaded, slash-and-burn fiscal austerity. When the world economy went into freefall after the chaotic collapse of Lehman Brothers, the leaders of the Group of Twenty (G-20) most important economies in the world agreed in London in April 2009 to embark on a big fiscal stimulus to support growth.86 This was a success, not least thanks to bold pre-emptive action by the Chinese government. But after Greece’s public-debt problems led it to seek an EU-IMF loan in April 2010, eurozone governments took fright at rising debt levels and slammed on the brakes.

Back home, banks’ reckless lending, mostly against the perceived security of booming house prices, saw British households pile on record amounts of debt, rising from 108 per cent of their disposable income in 2000 to a whopping 170 per cent in early 2008.391 When the US housing bubble burst, bank lending froze and then UK house prices slumped too, one bank after another toppled. The first was Northern Rock, an overextended local bank that pumped out cheap, risky mortgages financed by short-term debt, which suffered a run in September 2007 and was eventually nationalised in February 2008. Days after the collapse of Lehman Brothers in September 2008, HBOS, a retail bank similarly laid low by wild mortgage lending financed with fickle debt, was rescued through a government-brokered takeover by Lloyds TSB, a more conservative lender seduced by the prospect of dominating high-street banking. But swallowing HBOS dragged Lloyds down too: to save it from collapse the following month, the British government took a 43 per cent stake in the bank.


pages: 457 words: 128,838

The Age of Cryptocurrency: How Bitcoin and Digital Money Are Challenging the Global Economic Order by Paul Vigna, Michael J. Casey

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3D printing, Airbnb, altcoin, bank run, banking crisis, bitcoin, blockchain, Bretton Woods, California gold rush, capital controls, carbon footprint, clean water, collaborative economy, collapse of Lehman Brothers, Columbine, Credit Default Swap, cryptocurrency, David Graeber, disintermediation, Edward Snowden, Elon Musk, ethereum blockchain, fiat currency, financial innovation, Firefox, Flash crash, Fractional reserve banking, hacker house, Hernando de Soto, high net worth, informal economy, intangible asset, Internet of things, inventory management, Julian Assange, Kickstarter, Kuwabatake Sanjuro: assassination market, litecoin, Long Term Capital Management, Lyft, M-Pesa, Marc Andreessen, Mark Zuckerberg, McMansion, means of production, Menlo Park, mobile money, money: store of value / unit of account / medium of exchange, Network effects, new economy, new new economy, Nixon shock, offshore financial centre, payday loans, Pearl River Delta, peer-to-peer, peer-to-peer lending, pets.com, Ponzi scheme, prediction markets, price stability, profit motive, QR code, RAND corporation, regulatory arbitrage, rent-seeking, reserve currency, Robert Shiller, Robert Shiller, Satoshi Nakamoto, seigniorage, shareholder value, sharing economy, short selling, Silicon Valley, Silicon Valley startup, Skype, smart contracts, special drawing rights, Spread Networks laid a new fibre optics cable between New York and Chicago, Steve Jobs, supply-chain management, Ted Nelson, The Great Moderation, the market place, the payments system, The Wealth of Nations by Adam Smith, too big to fail, transaction costs, tulip mania, Turing complete, Tyler Cowen: Great Stagnation, Uber and Lyft, underbanked, WikiLeaks, Y Combinator, Y2K, zero-sum game, Zimmermann PGP

As if learning from the Renaissance merchant bankers, Wall Street had again found an effective way to take sovereign money and multiply it many times over through a form of private money built on debt. But it was happening in an area that was far more thinly regulated than the traditional banking system. When it finally dawned on people how important this shadow system was, it was too late. With the collapse of Lehman Brothers, this fragile edifice came tumbling down. The Great Moderation had carried a curse. Not only did it foster a false sense of security, but also it caused us to forget our responsibilities as a society to use our political process to change unwelcome economic circumstances. Everyone from voters to Wall Street traders to congressmen to the president wanted to believe the financial system could be left in the hands of the Fed.

Because the banks had become so very, very large and interconnected within the global financial system, governments worldwide felt compelled to put up trillions of taxpayer dollars, pounds, and euros to avoid bringing down that entire system. The rise of cryptocurrencies can properly be understood only in relation to those cataclysmic events. * * * On the Wednesday after the September 15 collapse of Lehman Brothers in 2008, Mohamed El-Erian, then co-CEO of the massive asset manager Pacific Investment Management Co. and at that time working around the clock to try to extract his firm from the swirling financial maelstrom, took the time to call his wife from PIMCO’s headquarters in Newport Beach, California. She should go to an ATM and withdraw as much money as she could. She didn’t understand why.


pages: 413 words: 117,782

What Happened to Goldman Sachs: An Insider's Story of Organizational Drift and Its Unintended Consequences by Steven G. Mandis

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activist fund / activist shareholder / activist investor, algorithmic trading, Berlin Wall, bonus culture, BRICs, business process, collapse of Lehman Brothers, collateralized debt obligation, commoditize, complexity theory, corporate governance, corporate raider, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, disintermediation, diversification, Emanuel Derman, financial innovation, fixed income, friendly fire, Goldman Sachs: Vampire Squid, high net worth, housing crisis, London Whale, Long Term Capital Management, merger arbitrage, Myron Scholes, new economy, passive investing, performance metric, risk tolerance, Ronald Reagan, Saturday Night Live, Satyajit Das, shareholder value, short selling, sovereign wealth fund, The Nature of the Firm, too big to fail, value at risk

New partners generally always wanted to be near retirement at the point when they had the maximum amount of ownership when selling their shares, so they wanted to delay such discussions. They wanted to invest in the business. In contrast, the more-senior partners had reached their highest ownership percentage and were likely incentivized to maximize the value and liquidity of their shares. Swedberg notes that in the case of Lehman (see R. Swedberg, “The Structure of Confidence and the Collapse of Lehman Brothers,” in Markets on Trial: The Economic Sociology of the U.S. Financial Crisis, ed. M. Lounsbury and P. M. Hirsch [Bingley, UK: Emerald, 2010], 81), CEO Richard Fuld ran Lehman in an authoritarian manner, “setting his own distinct mark on the aggressive and competitive type of corporate culture that seems to be characteristic of modern investment banks.” Fuld’s leadership and personal styles were both in sharp contrast to what was typical at Goldman. 31.

Weinberg (a vice chairman and co-head of investment banking). 2. “Without question, direct government support helped stabilize the financial system. We believe that the government action was critical, and we benefited from it.” Testimony by Lloyd Blankfein, www.goldmansachs.com/media-relations/in-the-news/archive/1-13-testimony.html. 3. R. Swedberg, “The Structure of Confidence and the Collapse of Lehman Brothers,” in Markets on Trial: The Economic Sociology of the U.S. Financial Crisis, ed. M. Lounsbury and P. M. Hirsch (Bingley, UK: Emerald, 2010), 69–112. 4. My analysis as a sociologist focusing on the organizational factors should not detract from serious questions and concerns raised by many people, such as the Senate Subcommittee on Investigations, chaired by Carl Levin (D.-Mich.), alongside Tom Coburn (R.


pages: 455 words: 138,716

The Divide: American Injustice in the Age of the Wealth Gap by Matt Taibbi

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banking crisis, Bernie Madoff, butterfly effect, collapse of Lehman Brothers, collateralized debt obligation, Corrections Corporation of America, Credit Default Swap, credit default swaps / collateralized debt obligations, Edward Snowden, ending welfare as we know it, fixed income, forensic accounting, Gordon Gekko, greed is good, illegal immigration, information retrieval, London Interbank Offered Rate, London Whale, naked short selling, offshore financial centre, Ponzi scheme, profit motive, regulatory arbitrage, short selling, telemarketer, too big to fail, War on Poverty

In this second part of the deal, key parts of which were executed literally in the middle of the night, billions of dollars were quietly moved into the coffers of Barclays and out of the reach of Lehman’s creditors. Simultaneously, the insiders from Lehman who had come up with the idea took lucrative jobs at Barclays, taking hundreds of millions in future bonus payments to do so. This is a hard story to follow. But if you keep that one image in mind, of a shopkeeper fleeing town in the middle of the night with borrowed profits, the collapse of Lehman Brothers—one of the great unpunished swindles of all time—starts to make sense. Lehman Brothers succumbed to fraud, bad decisions, and book-cooking, dying not of any one specific thing but more generally of corruption itself, in the manner of elderly mobsters or Soviet rulers. The company was founded by a pair of Bavarian-born immigrants to the American South, Henry and Emmanuel Lehman, who in 1850 set up a cotton-trading business based in Montgomery, Alabama.

And it’s not our job to judge those things. So in the end, after hundreds of thousands of pages of motions and depositions, after all that harried effort scouring emails and documents in search of evidence, and after the long hearing in which it was all formally presented, this was the final excuse that all those expensive minds collectively used to wash away the Lehman case: Shit happens! Years after the collapse of Lehman Brothers, many of the company’s creditors were still feeling the sting. The city of Long Beach, for instance, has been enacting sweeping budget cuts ever since the crash. In the first year after Lehman’s collapse, the Long Beach school system cut summer school classes and bus routes for one thousand students. The city announced plans to lay off thirty-four policemen and close at least one fire station.


pages: 166 words: 49,639

Start It Up: Why Running Your Own Business Is Easier Than You Think by Luke Johnson

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Albert Einstein, barriers to entry, Bernie Madoff, collapse of Lehman Brothers, corporate governance, corporate social responsibility, creative destruction, credit crunch, Grace Hopper, happiness index / gross national happiness, high net worth, James Dyson, Jarndyce and Jarndyce, Jarndyce and Jarndyce, mass immigration, mittelstand, Network effects, North Sea oil, Northern Rock, patent troll, Plutocrats, plutocrats, Ponzi scheme, profit motive, Ralph Waldo Emerson, Silicon Valley, software patent, stealth mode startup, Steve Jobs, Steve Wozniak, The Wealth of Nations by Adam Smith, traveling salesman, tulip mania, Vilfredo Pareto, wealth creators

This leads to waste and an eventual reckoning. As the wheel inevitably turns and conditions deteriorate, so credit tightens, companies fail and assets are recycled. This is an irresistible sequence of events. Mere mortals cannot resist the tide of history. Markets and exchanges are merely mechanisms that reflect the temperament of man. Witnessing and participating in such upheaval can be traumatic. Take the collapse of Lehman Brothers and the forced sell-offs of Merrill Lynch and HBoS. For the staff, their families, and other stakeholders, this classic example of Schumpeter’s ‘creative destruction’ is hardly something to be celebrated. Here is a sudden and jolting reallocation of resources. Overnight, venerable institutions are destroyed, and new ones spring up, phoenix-like, to fill the gap. But this process of renewal is at the heart of capitalism.


pages: 177 words: 50,167

The Populist Explosion: How the Great Recession Transformed American and European Politics by John B. Judis

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affirmative action, Affordable Care Act / Obamacare, Albert Einstein, anti-communist, back-to-the-land, Bernie Sanders, Bretton Woods, capital controls, centre right, collapse of Lehman Brothers, deindustrialization, desegregation, Donald Trump, eurozone crisis, financial deregulation, first-past-the-post, fixed income, full employment, ghettoisation, glass ceiling, hiring and firing, illegal immigration, immigration reform, income inequality, invisible hand, laissez-faire capitalism, mass immigration, means of production, neoliberal agenda, obamacare, Occupy movement, open borders, Plutocrats, plutocrats, Post-materialism, post-materialism, rolodex, Ronald Reagan, Silicon Valley, War on Poverty, We are the 99%, white flight, Winter of Discontent

But in Southern Europe, where unemployment reached Great Depression levels, a new leftwing populism emerged in Spain, Greece, and Italy. When the major center-left and center-right parties, hobbled by their country’s membership in the Eurozone, failed to revive their nation’s economies, voters began looking to the new populist parties in these countries for answers. The Eurocrisis The financial crash, which surfaced in the United States in September 2008 with the collapse of Lehman Brothers, spread by the year’s end to European banks, which had heavily invested in American derivatives. Credit dried up, borrowers defaulted, investment lagged, and unemployment rose. By 2009, the EU’s average unemployment rate was 9.6 percent; in 2012, it would be 11.4 percent. And it would be far worse in Southern Europe—18 percent in Spain in 2009 and 25.1 percent in 2012. By 2012, the United States would begin pulling out of the Great Recession, but in Southern Europe it would endure, and would call into question the viability of the EU and the Euro.

The Handbook of Personal Wealth Management by Reuvid, Jonathan.

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asset allocation, banking crisis, BRICs, collapse of Lehman Brothers, correlation coefficient, credit crunch, cross-subsidies, diversification, diversified portfolio, estate planning, financial deregulation, fixed income, high net worth, income per capita, index fund, interest rate swap, laissez-faire capitalism, land tenure, market bubble, merger arbitrage, negative equity, new economy, Northern Rock, pattern recognition, Ponzi scheme, prediction markets, Right to Buy, risk tolerance, risk-adjusted returns, risk/return, short selling, side project, sovereign wealth fund, statistical arbitrage, systematic trading, transaction costs, yield curve

Not only is the quality of the bond important; its position on wind up is vital to the security of the investment. The sub-prime debacle illustrated the fragility of the banking system and the perceived security of capital lent to or invested in banks. The reason that structured products use bank notes is twofold; the first is that banks are regulated in such a way that assets should always exceed liabilities. The second is that it provides cheap funding to the issuing banks. The collapse of Lehman Brothers, which issued many structured products to retail investors through financial advisers, reminded all investors that capital-protected does not mean guaranteed nor safe. In the UK, the capital structure of most financial institutions is constructed as shown in Figure 1.4.3, representing the priority for repayment in the event of default. Therefore, an investment into senior unsecured debt ranks parri-passu with retail deposits.


pages: 193 words: 11,060

Ethics in Investment Banking by John N. Reynolds, Edmund Newell

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accounting loophole / creative accounting, activist fund / activist shareholder / activist investor, banking crisis, capital controls, collapse of Lehman Brothers, corporate governance, corporate social responsibility, credit crunch, Credit Default Swap, discounted cash flows, financial independence, index fund, invisible hand, light touch regulation, margin call, moral hazard, Nick Leeson, Northern Rock, quantitative easing, shareholder value, short selling, South Sea Bubble, stem cell, the market place, The Wealth of Nations by Adam Smith, too big to fail, zero-sum game

Similarly, there is nothing intrinsically ethical or unethical about a business focused on investing in and trading financial instruments – although this type of activity is sometimes called “speculation”, a term that has negative moral connotations. The ethics of speculation will be considered later. Ethical problems and the financial crisis Despite their strategic importance to the economy, investment banks have faced hostility and come under particular scrutiny during the recent financial crisis, in which three of the largest and best-known went out of business. The collapse of Lehman Brothers in September 2008 sent shock waves around the world and proved to be the tipping point of the “credit 16 Ethics in Investment Banking crunch”, which also saw the fall of Bear Stearns (acquired by JP Morgan with US Government support) and Merrill Lynch (which was bought by the Bank of America). During the financial crisis and in its aftermath, commentators, the press and politicians highlighted a series of shortcomings common across a number of investment banks.


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

They purge excess from the system and foster prudence. Individuals and institutions learn from their losses. During the Great Moderation, individuals and institutions learned that the market was back-stopped by the state, their profits were theirs to keep, and their losses would be picked up by the taxpayer. The Great Panic: Cause and Effect Much 20/20 hindsight lavished on the financial market meltdown revolves around the collapse of Lehman Brothers and the market freefall that ensued. What made the event so shocking was that the Great Moderation had taught the global financial economy that a large market player with huge obligations to and from other key players would somehow be saved. Certainly Lehman’s management must have made this assumption. After all, Bear Stearns, a far less important house with more to answer for in the mortgage securities bubble, had been rescued.


pages: 202 words: 66,742

The Payoff by Jeff Connaughton

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algorithmic trading, bank run, banking crisis, Bernie Madoff, collapse of Lehman Brothers, collateralized debt obligation, corporate governance, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, cuban missile crisis, desegregation, Flash crash, locking in a profit, London Interbank Offered Rate, London Whale, Long Term Capital Management, naked short selling, Neil Kinnock, Plutocrats, plutocrats, Ponzi scheme, risk tolerance, Robert Bork, short selling, Silicon Valley, too big to fail, two-sided market, young professional

Thanks to Josh’s intrepid research and synthesis, tutorials from our covert industry insiders, and our own exhaustive (and exhausting) reading, Ted and I became extremely knowledgeable about these practices and how they affect market stability. In fact, Ted even predicted the flash crash—when the market dropped one thousand points in just minutes on May 6, 2010—eight months before it happened. In a speech on September 14, 2009, the anniversary of the collapse of Lehman Brothers, Ted warned of a flash crash and how HFT would fuel it: [U]nlike specialists and traditional market-makers that are regulated, some of these new high-frequency traders are unregulated, though they are acting in a market-maker capacity. They have no requirements to “maintain a fair and orderly” market. They trade when it benefits them. If we experience another shock to the financial system, will this new, and dominant, type of pseudo market maker act in the interest of the markets when we really need them?


pages: 280 words: 79,029

Smart Money: How High-Stakes Financial Innovation Is Reshaping Our WorldÑFor the Better by Andrew Palmer

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Affordable Care Act / Obamacare, algorithmic trading, Andrei Shleifer, asset-backed security, availability heuristic, bank run, banking crisis, Black-Scholes formula, bonus culture, break the buck, Bretton Woods, call centre, Carmen Reinhart, cloud computing, collapse of Lehman Brothers, collateralized debt obligation, computerized trading, corporate governance, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, Daniel Kahneman / Amos Tversky, David Graeber, diversification, diversified portfolio, Edmond Halley, Edward Glaeser, endogenous growth, Eugene Fama: efficient market hypothesis, eurozone crisis, family office, financial deregulation, financial innovation, fixed income, Flash crash, Google Glasses, Gordon Gekko, high net worth, housing crisis, Hyman Minsky, implied volatility, income inequality, index fund, information asymmetry, Innovator's Dilemma, interest rate swap, Kenneth Rogoff, Kickstarter, late fees, London Interbank Offered Rate, Long Term Capital Management, loss aversion, margin call, Mark Zuckerberg, McMansion, money market fund, mortgage debt, mortgage tax deduction, Myron Scholes, negative equity, Network effects, Northern Rock, obamacare, payday loans, peer-to-peer lending, Peter Thiel, principal–agent problem, profit maximization, quantitative trading / quantitative finance, railway mania, randomized controlled trial, Richard Feynman, Richard Feynman, Richard Thaler, risk tolerance, risk-adjusted returns, Robert Shiller, Robert Shiller, short selling, Silicon Valley, Silicon Valley startup, Skype, South Sea Bubble, sovereign wealth fund, statistical model, transaction costs, Tunguska event, unbanked and underbanked, underbanked, Vanguard fund, web application

One HSBC veteran happily recounted stories of the financial crisis that gripped Asia in the late 1990s, when tellers were instructed to bring piles of cash into view to reassure people that banks were overflowing with money. Tales of improvisation from Asia were not supposed to be relevant to the West’s ultrasophisticated financial system. But far worse was to come. A chain of events was under way that would lead in time to the collapse of Lehman Brothers, a huge US investment bank, state takeovers of swaths of the rich world’s banking systems, a deep global recession, and the Eurozone debt crisis. I observed these later phases of the crisis from the position of the Economist’s finance editor, a post that I held from July 2009 until October 2013. The crisis would lead to a complete reversal in public attitudes toward the financial industry.


pages: 318 words: 77,223

The Only Game in Town: Central Banks, Instability, and Avoiding the Next Collapse by Mohamed A. El-Erian

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activist fund / activist shareholder / activist investor, Airbnb, balance sheet recession, bank run, barriers to entry, break the buck, Bretton Woods, British Empire, capital controls, Capital in the Twenty-First Century by Thomas Piketty, Carmen Reinhart, carried interest, collapse of Lehman Brothers, corporate governance, currency peg, Erik Brynjolfsson, eurozone crisis, financial innovation, Financial Instability Hypothesis, financial intermediation, financial repression, fixed income, Flash crash, forward guidance, friendly fire, full employment, future of work, Hyman Minsky, If something cannot go on forever, it will stop - Herbert Stein's Law, income inequality, inflation targeting, Jeff Bezos, Kenneth Rogoff, Khan Academy, liquidity trap, Martin Wolf, megacity, Mexican peso crisis / tequila crisis, moral hazard, mortgage debt, Norman Mailer, oil shale / tar sands, price stability, principal–agent problem, quantitative easing, risk tolerance, risk-adjusted returns, risk/return, Second Machine Age, secular stagnation, sharing economy, sovereign wealth fund, The Great Moderation, The Wisdom of Crowds, too big to fail, University of East Anglia, yield curve, zero-sum game

Yes, it is costly to think about multiple crises that never materialize (Type I). But it is even more costly not to think about a crisis that does occur (Type II). In taking this approach, I have been heavily influenced not just by my fifteen-year tenure at the IMF, where involvement in tricky crisis management situations was quite common, but also by what I lived through during the disorderly collapse of Lehman Brothers in September 2008. Conventional wisdom is that PIMCO must have predicted Lehman’s collapse. After all, the vast majority of the firm’s clients not only avoided large losses but also outperformed by making money on the funds that had been entrusted to us for investment management services. Whenever confronted with this view, I (and others) have been quick to point out that we did not predict the failure of Lehman.

Rethinking Money: How New Currencies Turn Scarcity Into Prosperity by Bernard Lietaer, Jacqui Dunne

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3D printing, agricultural Revolution, Albert Einstein, Asian financial crisis, banking crisis, Berlin Wall, BRICs, business climate, business process, butterfly effect, carbon footprint, Carmen Reinhart, clockwork universe, collapse of Lehman Brothers, complexity theory, conceptual framework, credit crunch, discounted cash flows, en.wikipedia.org, Fall of the Berlin Wall, fear of failure, fiat currency, financial innovation, Fractional reserve banking, full employment, German hyperinflation, happiness index / gross national happiness, job satisfaction, liberation theology, Marshall McLuhan, microcredit, mobile money, money: store of value / unit of account / medium of exchange, more computing power than Apollo, new economy, Occupy movement, price stability, reserve currency, Silicon Valley, the payments system, too big to fail, transaction costs, trickle-down economics, urban decay, War on Poverty, working poor

They would be forbidden to lend out more than the deposits they collected. Said another way, banks would have to apply a 100 percent compulsory reserves rule, and since no bank-debt money could be created at all, banks would de facto be limited to the role of money brokers.17 The Glass-Steagall Act was repealed with the Gramm-Leach-Bliley Act, signed by President Clinton. Since then, this repeal has been blamed for triggering the subprime crisis and the collapse of Lehman Brothers in September 2008, which in turn precipitated the global banking scramble, leaving so many governments overindebted. The 1930s debate—whether to reinstate some form of the GlassSteagall Act or implement some version of the Chicago Plan—is now starting all over again. Although unofficial reports have surfaced that several nations are discussing the latter strategy, there are clear reasons that the Chicago Plan isn’t the best solution available, given the current understanding of systems.

Unhappy Union by The Economist, La Guardia, Anton, Peet, John

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bank run, banking crisis, Berlin Wall, Bretton Woods, capital controls, Celtic Tiger, central bank independence, centre right, collapse of Lehman Brothers, credit crunch, Credit Default Swap, debt deflation, Doha Development Round, eurozone crisis, Fall of the Berlin Wall, fixed income, Flash crash, illegal immigration, labour market flexibility, labour mobility, light touch regulation, market fundamentalism, moral hazard, Northern Rock, oil shock, open economy, pension reform, price stability, quantitative easing, special drawing rights, supply-chain management, The Great Moderation, too big to fail, transaction costs, éminence grise

Given such uncertainties, the objective for officials preparing contingency plans was clear: regardless of which country left the euro, the rest must be held together almost at any cost. Those involved speak only in guarded terms about precisely what they would have done. Would the departure of, say, Greece have required Cyprus to leave as well, given their close interconnection? The ECB would have flooded the financial system with liquidity to try to ensure that credit markets did not dry up, as they had done after the collapse of Lehman Brothers, and to forestall runs on both banks and sovereigns. Large quantities of banknotes would have been made available in the south to reassure anxious depositors especially if, as during the Cyprus crisis, banks were shut down and capital controls imposed. The ECB would probably have engaged in unprecedented bond-buying to hold down the borrowing costs of vulnerable countries. Loans to countries already under bail-out programmes would have been increased, and some kind of precautionary loan extended to Spain and Italy.


The Fix: How Bankers Lied, Cheated and Colluded to Rig the World's Most Important Number (Bloomberg) by Liam Vaughan, Gavin Finch

asset allocation, asset-backed security, bank run, banking crisis, Bernie Sanders, Big bang: deregulation of the City of London, buy low sell high, call centre, central bank independence, collapse of Lehman Brothers, corporate governance, credit crunch, Credit Default Swap, eurozone crisis, fear of failure, financial deregulation, financial innovation, fixed income, interest rate derivative, interest rate swap, light touch regulation, London Interbank Offered Rate, London Whale, mortgage debt, Northern Rock, performance metric, Ponzi scheme, Ronald Reagan, sovereign wealth fund, urban sprawl

The following day he packed his bags and caught a flight back to Washington to tell his colleagues they had a case on their hands. The Fix: How Bankers Lied, Cheated and Colluded to Rig the World’s Most Important Number By Liam Vaughan and Gavin Finch © 2017 Liam Vaughan and Gavin Finch Chapter 10 Goodbye, Big Nose A fter single-handedly saving UBS tens of millions of dollars following the collapse of Lehman Brothers, Hayes saw out the year in style with a trip to Las Vegas with Sarah Tighe. The couple had been together just over a year, and Hayes had never been happier. What he’d done to deserve this intelligent, attractive woman he didn’t know, but he was smitten. As the clock counted down to midnight on New Year’s Eve, amid the bright lights of the Strip, Hayes asked Tighe to marry him. She said yes.


pages: 265 words: 74,941

The Great Reset: How the Post-Crash Economy Will Change the Way We Live and Work by Richard Florida

banking crisis, big-box store, blue-collar work, car-free, carbon footprint, collapse of Lehman Brothers, congestion charging, creative destruction, deskilling, edge city, Edward Glaeser, falling living standards, financial innovation, Ford paid five dollars a day, high net worth, Home mortgage interest deduction, housing crisis, if you build it, they will come, income inequality, indoor plumbing, interchangeable parts, invention of the telephone, Jane Jacobs, Joseph Schumpeter, knowledge economy, labour mobility, low skilled workers, manufacturing employment, McMansion, Menlo Park, Nate Silver, New Economic Geography, new economy, New Urbanism, oil shock, Own Your Own Home, pattern recognition, peak oil, Ponzi scheme, post-industrial society, postindustrial economy, reserve currency, Richard Florida, Robert Shiller, Robert Shiller, secular stagnation, Silicon Valley, Silicon Valley startup, sovereign wealth fund, the built environment, The Wealth of Nations by Adam Smith, Thomas L Friedman, total factor productivity, urban decay, urban planning, urban renewal, white flight, young professional, Zipcar

And then the cycle starts over again. As is the case today. Chapter Seven Unraveling Now, we all know what it feels like to live through the bursting of a huge economic and financial bubble. We can literally feel the demise of the old suburban way of life all around us. But how exactly did it come to this? Others have chronicled the financial shenanigans and policy blunders that led to the collapse of Lehman Brothers and the onset of the economic and financial crisis. But, to a surprising degree, the causes of the crash are also geographic in nature. The bursting bubble that sparked this crisis signaled a system of economic organization and spatial fix long past its sell-by date. Suburbanization worked well for a time. The lifestyle that played out on millions of television screens was much more than a cultural phenomenon; it made people’s lives better and did much to keep the engines of American mass production humming.


pages: 700 words: 201,953

The Social Life of Money by Nigel Dodd

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accounting loophole / creative accounting, bank run, banking crisis, banks create money, Bernie Madoff, bitcoin, blockchain, borderless world, Bretton Woods, BRICs, capital controls, cashless society, central bank independence, collapse of Lehman Brothers, collateralized debt obligation, commoditize, computer age, conceptual framework, credit crunch, cross-subsidies, David Graeber, debt deflation, dematerialisation, disintermediation, eurozone crisis, fiat currency, financial exclusion, financial innovation, Financial Instability Hypothesis, financial repression, floating exchange rates, Fractional reserve banking, German hyperinflation, Goldman Sachs: Vampire Squid, Hyman Minsky, illegal immigration, informal economy, interest rate swap, Isaac Newton, John Maynard Keynes: Economic Possibilities for our Grandchildren, joint-stock company, Joseph Schumpeter, Kula ring, laissez-faire capitalism, land reform, late capitalism, liberal capitalism, liquidity trap, litecoin, London Interbank Offered Rate, M-Pesa, Marshall McLuhan, means of production, mental accounting, microcredit, mobile money, money market fund, money: store of value / unit of account / medium of exchange, mortgage debt, negative equity, new economy, Nixon shock, Occupy movement, offshore financial centre, paradox of thrift, payday loans, Peace of Westphalia, peer-to-peer, peer-to-peer lending, Ponzi scheme, post scarcity, postnationalism / post nation state, predatory finance, price mechanism, price stability, quantitative easing, quantitative trading / quantitative finance, remote working, rent-seeking, reserve currency, Richard Thaler, Robert Shiller, Robert Shiller, Satoshi Nakamoto, Scientific racism, seigniorage, Skype, Slavoj Žižek, South Sea Bubble, sovereign wealth fund, special drawing rights, The Wealth of Nations by Adam Smith, too big to fail, trade liberalization, transaction costs, Veblen good, Wave and Pay, Westphalian system, WikiLeaks, Wolfgang Streeck, yield curve, zero-coupon bond

Fearful that their savings would be decimated overnight, Greeks were reversing the conventional wisdom that a bank is the most secure place to keep your money. What began as a crisis in the U.S. subprime mortgage market in 2007 was now manifesting itself as a slow-motion bank run. This problem was not confined to Greece but was happening throughout the Eurozone amid widespread doubt about the future of a project that had been launched with such optimism a little more than a decade before. Since the collapse of Lehman Brothers in September 2008, the world’s major central banks have been plowing vast quantities of money into the banking system. The U.S. Federal Reserve has made commitments totaling some $29 trillion, lending $7 trillion to banks during the course of one single fraught week. The Bank of England has spent around £325 billion on quantitative easing alone—a figure that could yet rise to £600 billion—while the U.K. government has committed a total of £1.162 trillion to bank rescues.

In block capitals drawn in black felt tip pen were the words, “If Karl Marx was alive he would say ‘I told you so.’ ”2 Five days earlier, financial services firm Lehman Brothers had filed for Chapter 11 bankruptcy protection in a case that remains the biggest in U.S. history. The firm held more than $600 billion in assets. The Financial Times headline warned of a “Day of Reckoning on Wall Street”; the Telegraph called it “Meltdown Monday”; and Hong Kong’s South China Morning Post simply said, “Wall Street Crumbles.” One month after the collapse of Lehman Brothers, The Times (London) carried a feature on Marx under the headline, “Did he get it all right?”3 And as sales of Capital increased threefold, a quotation from the book, suggesting that Marx had shown prescience worthy of Nostradamus, went viral on the Internet. It read, “Owners of capital will stimulate the working class to buy more and more of expensive goods … until their debt becomes unbearable.


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

Claims against Lehman executives, Richard Fuld, Chris O’Meara, Erin Callan, Ian Lowitt, and against the auditor, Ernst & Young, for failing to adequately disclose the practice of Repo 105. 6. Claims against J.P. Morgan and CitiBank due to their modifications of guarantee agreements and demands for extra collateral from Lehman Brothers in the final days of Lehman’s existence. They found these demands directly impacted Lehman’s liquidity pool and were central in the collapse of Lehman Brothers. Who Would Have Been Next? Once Lehman Brothers failed, the stock prices of remaining investment banks immediately began collapsing (see Figure 11.5). From September 15 to September 18, Goldman Sachs fell 30% and Morgan Stanley fell 39%. By September 15, 2008, the residential real estate market had fallen a total of 23% from its peak. The commercial real estate market had fallen by 9.1% from its peak.

Margasak, Larry. “Some Firms Get Bailouts, Some Don’t. Unfair?” Associated Press Online, September 15, 2008. Martin, Timothy. “Atlanta School Scandal Sparks House Cleaning.” BusinessWeek, July 13, 2011. McDermott, Daniel. “In Search of Certainty.” Wall Street Journal, June 27, 2011. McDonald, Lawrence G. and Patrick Robinson. A Colossal Failure of Common Sense: The Inside Story of the Collapse of Lehman Brothers. Crown Publishing Group, 2009. McGeehan, Patrick. “Lehman Offers a Rare Glimpse of Risk Profile.” Wall Street Journal, October 6, 1998. McGrane, Victoria and Deborah Salomon. “CFTC Chief Feels Need for Speed.” Wall Street Journal, December 14, 2010. McGrane, Victoria and Robin Sidel. “Fed Softens ‘Swipe’ Fees.” Wall Street Journal, June 30, 2011. McGrane, Victoria, Dan Fitzpatrick, and Randall Smith.


Adaptive Markets: Financial Evolution at the Speed of Thought by Andrew W. Lo

Albert Einstein, Alfred Russel Wallace, algorithmic trading, Andrei Shleifer, Arthur Eddington, Asian financial crisis, asset allocation, asset-backed security, backtesting, bank run, barriers to entry, Berlin Wall, Bernie Madoff, bitcoin, Bonfire of the Vanities, bonus culture, break the buck, Brownian motion, business process, butterfly effect, capital asset pricing model, Captain Sullenberger Hudson, Carmen Reinhart, Chance favours the prepared mind, collapse of Lehman Brothers, collateralized debt obligation, commoditize, computerized trading, corporate governance, creative destruction, Credit Default Swap, credit default swaps / collateralized debt obligations, cryptocurrency, Daniel Kahneman / Amos Tversky, delayed gratification, Diane Coyle, diversification, diversified portfolio, double helix, easy for humans, difficult for computers, Ernest Rutherford, Eugene Fama: efficient market hypothesis, experimental economics, experimental subject, Fall of the Berlin Wall, financial deregulation, financial innovation, financial intermediation, fixed income, Flash crash, Fractional reserve banking, framing effect, Gordon Gekko, greed is good, Hans Rosling, Henri Poincaré, high net worth, housing crisis, incomplete markets, index fund, interest rate derivative, invention of the telegraph, Isaac Newton, James Watt: steam engine, job satisfaction, John Maynard Keynes: Economic Possibilities for our Grandchildren, John Meriwether, Joseph Schumpeter, Kenneth Rogoff, London Interbank Offered Rate, Long Term Capital Management, loss aversion, Louis Pasteur, mandelbrot fractal, margin call, Mark Zuckerberg, market fundamentalism, martingale, merger arbitrage, meta analysis, meta-analysis, Milgram experiment, money market fund, moral hazard, Myron Scholes, Nick Leeson, old-boy network, out of africa, p-value, paper trading, passive investing, Paul Lévy, Paul Samuelson, Ponzi scheme, predatory finance, prediction markets, price discovery process, profit maximization, profit motive, quantitative hedge fund, quantitative trading / quantitative finance, RAND corporation, random walk, randomized controlled trial, Renaissance Technologies, Richard Feynman, Richard Feynman, Richard Feynman: Challenger O-ring, risk tolerance, Robert Shiller, Robert Shiller, short selling, sovereign wealth fund, statistical arbitrage, Steven Pinker, stochastic process, survivorship bias, The Great Moderation, the scientific method, The Wealth of Nations by Adam Smith, The Wisdom of Crowds, theory of mind, Thomas Malthus, Thorstein Veblen, Tobin tax, too big to fail, transaction costs, Triangle Shirtwaist Factory, ultimatum game, Upton Sinclair, US Airways Flight 1549, Walter Mischel, Watson beat the top human players on Jeopardy!, WikiLeaks, Yogi Berra, zero-sum game

Beginning on January 1, 2005, Merrill Lynch was the first to volunteer, followed by Fear, Greed, and Financial Crisis • 307 Goldman Sachs, then Bear Stearns, Lehman Brothers, and Morgan Stanley at the beginning of fiscal year 2006.8 As we’ll see shortly, this chronology is important for understanding the narrative. Normally, this rule change would be a minor bit of regulatory history. However, on August 8, 2008, in that nervous month before the collapse of Lehman Brothers, the former director of the SEC’s Division of Trading and Markets, Lee Pickard, published an article in American Banker with a shocking claim: the rule change by the SEC in 2004 allowed broker-dealers to greatly increase their leverage, thereby creating the conditions for the financial crisis.9 This was the smoking gun that crisis watchers had been looking for. Pickard claimed that before the rule change, “the broker-dealer was limited in the amount of debt it could incur, to about twelve times its net capital, though for various reasons broker-dealers operated at significantly lower ratios.”

“Match Madness: Probability Matching in Prediction of the NCAA Basketball Tournament.” Journal of Applied Social Psychology 39: 2809–2839. McCulloch, Warren, and Walter Pitts. 1943. “A Logical Calculus of the Ideas Immanent in Nervous Activity.” Bulletin of Mathematical Biophysics 7: 115–133. McDonald, Lawrence G., and Patrick Robinson. 2009. A Colossal Failure of Common Sense: The Inside Story of the Collapse of Lehman Brothers. New York: Three Rivers Press. McDougall, Ian, Francis H. Brown, and John G. Fleagle. 2005. “Stratigraphic Placement and Age of Modern Humans from Kibish, Ethiopia.” Nature 433: 733–736. Merton, Robert C. 1973. “Theory of Rational Option Pricing.” Bell Journal of Economics and Management Science 4: 141–183. –––. 1989. “On the Application of the Continuous-Time Theory of Finance to Financial Intermediation and Insurance.”


pages: 342 words: 99,390

The greatest trade ever: the behind-the-scenes story of how John Paulson defied Wall Street and made financial history by Gregory Zuckerman

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1960s counterculture, banking crisis, collapse of Lehman Brothers, collateralized debt obligation, Credit Default Swap, credit default swaps / collateralized debt obligations, financial innovation, fixed income, index fund, Isaac Newton, Long Term Capital Management, margin call, Mark Zuckerberg, Menlo Park, merger arbitrage, mortgage debt, mortgage tax deduction, Ponzi scheme, Renaissance Technologies, rent control, Robert Shiller, Robert Shiller, rolodex, short selling, Silicon Valley, statistical arbitrage, Steve Ballmer, Steve Wozniak, technology bubble, zero-sum game

Kate Kelly, “"The Fall of Bear Stearns: Lost Opportunities Haunt Final Days of Bear Stearns—--Executives Bickered Over Raising Cash, Cutting Mortgages,”" The Wall Street Journal, May 27, 2008. 2. Carrick Mollenkamp, Susanne Craig, Jeffrey McCracken, and Jon Hilsenrath, “"The Two Faces of Lehman’'s Fall—--Private Talks of Raising Capital Belied Firm’'s Public Optimism,”" The Wall Street Journal, October 6, 2008; Lawrence G. McDonald with Patrick Robinson, A Colossal Failure of Common Sense—--The Inside Story of the Collapse of Lehman Brothers, New York: Crown Business, 2009. 3. Kate Kelly, “"The Saga of Bear’'s Fund Chiefs—--In a Jail Cell, One Asks, ‘'How Did We End Up in This Spot?,’'”" The Wall Street Journal, June 21, 2008. Epilogue1.Cityfile.com, “"Security Precautions: John Paulson Beefs Up the Hedges,”" http://cityfile.com/dailyfile/4361, February 11, 2009. Copyright ©(c) 2009 by Gregory Zuckerman All rights reserved.


pages: 327 words: 103,336

Everything Is Obvious: *Once You Know the Answer by Duncan J. Watts

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active measures, affirmative action, Albert Einstein, Amazon Mechanical Turk, Black Swan, butterfly effect, Carmen Reinhart, Cass Sunstein, clockwork universe, cognitive dissonance, collapse of Lehman Brothers, complexity theory, correlation does not imply causation, crowdsourcing, death of newspapers, discovery of DNA, East Village, easy for humans, difficult for computers, edge city, en.wikipedia.org, Erik Brynjolfsson, framing effect, Geoffrey West, Santa Fe Institute, George Santayana, happiness index / gross national happiness, high batting average, hindsight bias, illegal immigration, industrial cluster, interest rate swap, invention of the printing press, invention of the telescope, invisible hand, Isaac Newton, Jane Jacobs, Jeff Bezos, Joseph Schumpeter, Kenneth Rogoff, lake wobegon effect, Long Term Capital Management, loss aversion, medical malpractice, meta analysis, meta-analysis, Milgram experiment, natural language processing, Netflix Prize, Network effects, oil shock, packet switching, pattern recognition, performance metric, phenotype, Pierre-Simon Laplace, planetary scale, prediction markets, pre–internet, RAND corporation, random walk, RFID, school choice, Silicon Valley, statistical model, Steve Ballmer, Steve Jobs, Steve Wozniak, supply-chain management, The Death and Life of Great American Cities, the scientific method, The Wisdom of Crowds, too big to fail, Toyota Production System, ultimatum game, urban planning, Vincenzo Peruggia: Mona Lisa, Watson beat the top human players on Jeopardy!, X Prize

Efficiently Estimating Personal Network Size.” Journal of the American Statistical Association 105:59–70. McCotter, Trent. 2008. “Hitting Streaks Don’t Obey Your Rules.” New York Times, March 30. McDonald, Ian. 2005. “Bill Miller Dishes on His Streak and His Strategy.” Wall Street Journal, Jan. 6. McDonald, Lawrence G., and Patrick Robinson. 2009. A Colossal Failure of Common Sense: The Inside Story of the Collapse of Lehman Brothers. New York: Crown Business. McFadden, Daniel. 1999. “Rationality for Economists?” Journal of Risk and Uncertainty 19 (1–3):73–105. McPherson, Miller J., and Lynn Smith-Lovin. 1987. “Homophily in Voluntary Organizations: Status Distance and the Composition of Face-to-Face Groups.” American Sociological Review 52:370–79. McPherson, Miller, Lynn Smith-Lovin, and James M. Cook. 2001. “Birds of a Feather: Homophily in Social Networks.”


pages: 358 words: 106,729

Fault Lines: How Hidden Fractures Still Threaten the World Economy by Raghuram Rajan

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accounting loophole / creative accounting, Andrei Shleifer, Asian financial crisis, asset-backed security, assortative mating, bank run, barriers to entry, Bernie Madoff, Bretton Woods, business climate, Clayton Christensen, clean water, collapse of Lehman Brothers, collateralized debt obligation, colonial rule, corporate governance, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, currency manipulation / currency intervention, diversification, Edward Glaeser, financial innovation, fixed income, floating exchange rates, full employment, global supply chain, Goldman Sachs: Vampire Squid, illegal immigration, implied volatility, income inequality, index fund, interest rate swap, Joseph Schumpeter, Kenneth Rogoff, knowledge worker, labor-force participation, Long Term Capital Management, market bubble, Martin Wolf, medical malpractice, microcredit, money market fund, moral hazard, new economy, Northern Rock, offshore financial centre, open economy, price stability, profit motive, Real Time Gross Settlement, Richard Florida, Richard Thaler, risk tolerance, Robert Shiller, Robert Shiller, Ronald Reagan, school vouchers, short selling, sovereign wealth fund, The Great Moderation, the payments system, The Wealth of Nations by Adam Smith, too big to fail, upwardly mobile, Vanguard fund, women in the workforce, World Values Survey

Trimbath, and Glenn Yago, The Savings and Loan Crisis: Lessons from a Regulatory Failure (Los Angeles: Milken Institute, 2004). 29 Bethany McLean, “Fannie Mae’s Last Stand,” Vanity Fair, February 2009. 30 Steven Holmes, “Fannie Mae Eases Credit to Aid Mortgage Lending,” New York Times, September 30, 1999. 31 Wayne Barrett, “Andrew Cuomo and Fannie and Freddie: How the Youngest Housing and Urban Development Secretary in History Gave Birth to the Mortgage Crisis,” Village Voice, August 5, 2008. 32 National Home Ownership Strategy (Washington, DC: Department of Housing and Urban Development, 1995), chapter 4. I thank Professor Joseph Mason of Louisiana State University for bringing my attention to this document and for first highlighting these issues. 33 See Lawrence McDonald and Patrick Robinson, A Colossal Failure of Common Sense: The Inside Story of the Collapse of Lehman Brothers (New York: Crown Business, 2009). 34 Neil Bhutta, “Giving Credit Where Credit Is Due? The Community Reinvestment Act and Mortgage Lending in Lower-Income Neighborhoods,” Federal Reserve Board Working Paper 2008–61, Washington, DC, 2008. Also see Peter Wallison, “Deregulation and the Financial Crisis: Another Urban Myth,” American Enterprise Institute, www.aei.org/outlook/100089, October 2009. 35 George W.


pages: 370 words: 112,602

Poor Economics: A Radical Rethinking of the Way to Fight Global Poverty by Abhijit Banerjee, Esther Duflo

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Albert Einstein, Andrei Shleifer, business process, business process outsourcing, call centre, Cass Sunstein, charter city, clean water, collapse of Lehman Brothers, congestion charging, demographic transition, diversified portfolio, experimental subject, hiring and firing, land tenure, low skilled workers, M-Pesa, microcredit, moral hazard, purchasing power parity, randomized controlled trial, Richard Thaler, school vouchers, Silicon Valley, The Fortune at the Bottom of the Pyramid, Thomas Malthus, urban planning

There is also political violence, crime (as in the case of Ibu Tina’s daughter), and corruption. There is so much risk in the everyday lives of the poor that somewhat paradoxically, events that are perceived to be cataclysmic in rich countries often seem to barely register with them. In February 2009, the World Bank’s president, Robert Zoellick, warned the world’s leaders: “The global economic crisis [sparked by the collapse of Lehman Brothers in September 2008] threatens to become a human crisis in many developing countries unless they can take targeted measures to protect vulnerable people in their communities. While much of the world is focused on bank rescues and stimulus packages, we should not forget that poor people in developing countries are far more exposed if their economies falter.”5 The World Bank note on the subject added that with the drop in global demand, the poor would lose the market for their agricultural products, their casual jobs on construction sites, and their jobs in factories.


pages: 302 words: 86,614

The Alpha Masters: Unlocking the Genius of the World's Top Hedge Funds by Maneet Ahuja, Myron Scholes, Mohamed El-Erian

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activist fund / activist shareholder / activist investor, Asian financial crisis, asset allocation, asset-backed security, backtesting, Bernie Madoff, Bretton Woods, business process, call centre, collapse of Lehman Brothers, collateralized debt obligation, computerized trading, corporate governance, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, diversification, Donald Trump, en.wikipedia.org, family office, fixed income, high net worth, interest rate derivative, Isaac Newton, Long Term Capital Management, Marc Andreessen, Mark Zuckerberg, merger arbitrage, Myron Scholes, NetJets, oil shock, pattern recognition, Ponzi scheme, quantitative easing, quantitative trading / quantitative finance, Renaissance Technologies, risk-adjusted returns, risk/return, rolodex, short selling, Silicon Valley, South Sea Bubble, statistical model, Steve Jobs, systematic trading, zero-sum game

Anshu Jain, the head of the investment bank, offered to let Weinstein spin out into a hedge fund on the condition that he stay one additional year to transition his responsibilities. . . . Weinstein agreed. That year turned out to be the turbulent 2008. Sensing a period of difficulty, Weinstein’s group was positioned cautiously. Consequently, says Weinstein, “all through the Bear Stearns collapse and into the summer, we were slightly ahead for the year, which was a decent result.” Then came the collapse of Lehman Brothers. “That in itself wasn’t the problem for a fund that is both long and short, but it was the secondary effect, where people actually thought Goldman Sachs and Morgan Stanley could go under, that was stunning.” As part of Deutsche’s senior management, Weinstein spent that dramatic “Lehman Weekend” at the Federal Reserve Bank in New York, in the company of senior government officials and the top executives of the other large banks, attempting to work out contingency plans.


pages: 354 words: 26,550

High-Frequency Trading: A Practical Guide to Algorithmic Strategies and Trading Systems by Irene Aldridge

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algorithmic trading, asset allocation, asset-backed security, automated trading system, backtesting, Black Swan, Brownian motion, business process, capital asset pricing model, centralized clearinghouse, collapse of Lehman Brothers, collateralized debt obligation, collective bargaining, computerized trading, diversification, equity premium, fault tolerance, financial intermediation, fixed income, high net worth, implied volatility, index arbitrage, information asymmetry, interest rate swap, inventory management, law of one price, Long Term Capital Management, Louis Bachelier, margin call, market friction, market microstructure, martingale, Myron Scholes, New Journalism, p-value, paper trading, performance metric, profit motive, purchasing power parity, quantitative trading / quantitative finance, random walk, Renaissance Technologies, risk tolerance, risk-adjusted returns, risk/return, Sharpe ratio, short selling, Small Order Execution System, statistical arbitrage, statistical model, stochastic process, stochastic volatility, systematic trading, trade route, transaction costs, value at risk, yield curve, zero-sum game

These auxiliary types of market risk estimation, however, rely excessively on qualitative assessment and can, as a result, be misleading in comparison with VaR estimates, which are based on realized historical performance. Measuring Credit and Counterparty Risk The credit and counterparty risk reflects the probability of financial loss should one party in the trading equation not live up to its obligations. An example of losses due to a counterparty failure is a situation in which a fund’s money is custodied with a broker-dealer, and the broker-dealer goes bankrupt. The collapse of Lehman Brothers in October 2008 was the most spectacular counterparty failure in recent memory. According to Reuters, close to $300 billion was frozen in bankruptcy proceedings as a result of the bank’s collapse, pushing many prominent hedge funds to the brink of insolvency. Credit risk is manifest in decisions to extend lines of credit or margins. Credit risk determines the likelihood that creditors will default on their margin calls, should they encounter any.


pages: 317 words: 101,475

Chavs: The Demonization of the Working Class by Owen Jones

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Asperger Syndrome, banking crisis, Berlin Wall, British Empire, call centre, collapse of Lehman Brothers, credit crunch, deindustrialization, Etonian, facts on the ground, falling living standards, first-past-the-post, ghettoisation, Gini coefficient, hiring and firing, housing crisis, Hugh Fearnley-Whittingstall, illegal immigration, income inequality, informal economy, low skilled workers, low-wage service sector, mass immigration, Neil Kinnock, Occupy movement, pension reform, place-making, Plutocrats, plutocrats, race to the bottom, Right to Buy, rising living standards, The Bell Curve by Richard Herrnstein and Charles Murray, The Spirit Level, too big to fail, unpaid internship, upwardly mobile, We are the 99%, wealth creators, Winter of Discontent, women in the workforce, working-age population

The New York protests spawned a global 'Occupy' movement, as similar camps were set up in hundreds of cities across the globe-including London, where tents were erected outside St Paul's Cathedral. The key slogan of the Occupy movement, 'We are the 99 per cent', reflected that the interests of the overwhelming majority of people conflicted with those of the elite 1 per cent at the top. It may not have been an accurate figure, but that wasn't the point: the slogan tapped into a deep sense of injustice that had taken root since the collapse of Lehman Brothers in September 2008. Above all, it served as a reminder of who had caused the economic crisis and who was actually being made to pay for it.And itresonated. A poll conducted by ICM in October 2011 revealed that 38 per cent believed 'the protesters are naive; there is no practical alternative to capitalism-the point is to get it moving again'. But another 51 per cent agreed that 'the protesters are right to want to call time on a system that puts profit before people' .


pages: 342 words: 94,762

Wait: The Art and Science of Delay by Frank Partnoy

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algorithmic trading, Atul Gawande, Bernie Madoff, Black Swan, blood diamonds, Cass Sunstein, Checklist Manifesto, cognitive bias, collapse of Lehman Brothers, collateralized debt obligation, computerized trading, corporate governance, Daniel Kahneman / Amos Tversky, delayed gratification, Flash crash, Frederick Winslow Taylor, George Akerlof, Google Earth, Hernando de Soto, High speed trading, impulse control, income inequality, information asymmetry, Isaac Newton, Long Term Capital Management, Menlo Park, mental accounting, meta analysis, meta-analysis, Nick Leeson, paper trading, Paul Graham, payday loans, Ralph Nader, Richard Thaler, risk tolerance, Robert Shiller, Robert Shiller, Ronald Reagan, Saturday Night Live, six sigma, Spread Networks laid a new fibre optics cable between New York and Chicago, statistical model, Steve Jobs, The Market for Lemons, the scientific method, The Wealth of Nations by Adam Smith, upwardly mobile, Walter Mischel

But Kroft persuaded Obama to give him a few more minutes on camera later, after a ceremony for firefighters who lost their lives on 9/11, and that gave 60 Minutes just enough material to fill all three of the show’s segments. Francesco Guerrera was born in Milan and has a first-class degree from City University in London. He has won numerous awards, including a Foreign Press Association Award for his investigation of “blood diamonds,” an Overseas Press Award for his scoop on CNOOC’s takeover bid for Unocal, and a SABEW Award for a video series on the collapse of Lehman Brothers.23 He is widely considered one of the world’s leading business reporters and is editor of the Wall Street Journal’s respected “Money and Investing” section. He is twenty-eight years younger than Kroft. When Guerrera began working as a journalist during the 1990s, technology had not yet transformed journalism, but it was about to. As he described it, “There were no Blackberries or email, and the use of mobile phones was limited.


pages: 357 words: 99,684

Why It's Still Kicking Off Everywhere: The New Global Revolutions by Paul Mason

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back-to-the-land, balance sheet recession, bank run, banking crisis, Berlin Wall, capital controls, centre right, citizen journalism, collapse of Lehman Brothers, collective bargaining, creative destruction, credit crunch, Credit Default Swap, currency manipulation / currency intervention, currency peg, eurozone crisis, Fall of the Berlin Wall, floating exchange rates, Francis Fukuyama: the end of history, full employment, ghettoisation, illegal immigration, informal economy, land tenure, low skilled workers, mass immigration, means of production, megacity, Mohammed Bouazizi, Naomi Klein, Network effects, New Journalism, Occupy movement, price stability, quantitative easing, race to the bottom, rising living standards, short selling, Slavoj Žižek, Stewart Brand, strikebreaker, union organizing, We are the 99%, Whole Earth Catalog, WikiLeaks, Winter of Discontent, women in the workforce, working poor, working-age population, young professional

‘La Crisis Es El Capitalismo’ said the banner in Madrid’s Puerta del Sol, big as a tennis court, held up by similarly good-looking youths. But once you see Spain’s unemployment figures, there is no mystery to the anger: by mid-2011 youth unemployment was running at 46 per cent. As in Cairo, Athens and beyond, it’s economic disruption—joblessness, price rises, austerity—that has driven the unrest. To most people it may feel as though this period of disruption started with the collapse of Lehman Brothers. But the real disruption began much earlier, with the onset of globalization, and in particular after 2001. Once you grasp this, you can grasp the scale of the challenge facing those in power. How we came to the crisis The first decade of the twenty-first century saw an uncontrolled expansion of credit, during which the major financial actors’ understanding of the risks involved in lending became—and was encouraged by governments to become—detached from reality.


pages: 385 words: 101,761

Creative Intelligence: Harnessing the Power to Create, Connect, and Inspire by Bruce Nussbaum

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3D printing, Airbnb, Albert Einstein, Berlin Wall, Black Swan, Chuck Templeton: OpenTable, clean water, collapse of Lehman Brothers, creative destruction, Credit Default Swap, crony capitalism, crowdsourcing, Danny Hillis, declining real wages, demographic dividend, Elon Musk, en.wikipedia.org, Eugene Fama: efficient market hypothesis, Fall of the Berlin Wall, follow your passion, game design, housing crisis, Hyman Minsky, industrial robot, invisible hand, James Dyson, Jane Jacobs, Jeff Bezos, jimmy wales, John Gruber, John Markoff, Joseph Schumpeter, Kickstarter, lone genius, manufacturing employment, Marc Andreessen, Mark Zuckerberg, Martin Wolf, new economy, Paul Graham, Peter Thiel, QR code, race to the bottom, reshoring, Richard Florida, Ronald Reagan, shareholder value, Silicon Valley, Silicon Valley ideology, Silicon Valley startup, six sigma, Skype, Steve Ballmer, Steve Jobs, Steve Wozniak, supply-chain management, Tesla Model S, The Chicago School, The Design of Experiments, the High Line, The Myth of the Rational Market, thinkpad, Tim Cook: Apple, too big to fail, tulip mania, We are the 99%, Y Combinator, young professional, Zipcar

CEOs and top managers trained in metrics and analytics understand the process of squeezing more and more profits out of existing products. What they don’t get is that the profits from innovative new products can have greater value, support higher prices, and generate even greater profits. THE RISE OF FINANCIAL CAPITALISM I attended the World Economic Forum in 2008, just months before the collapse of Lehman Brothers. Hedge fund managers had taken over the tiny village of Davos, Switzerland. They were booking the best hotel rooms, throwing the biggest parties, running the most important panels, and squiring the most beautiful models in the fanciest cars. That year, the influence of hedge fund managers eclipsed that of the old global elite of high-tech hotshots, corporate CEOs, and presidents and premiers from around the world.


pages: 394 words: 85,734

The Global Minotaur by Yanis Varoufakis, Paul Mason

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active measures, banking crisis, Berlin Wall, Big bang: deregulation of the City of London, Bretton Woods, business climate, capital controls, Carmen Reinhart, central bank independence, collapse of Lehman Brothers, collateralized debt obligation, colonial rule, corporate governance, correlation coefficient, creative destruction, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, debt deflation, declining real wages, deindustrialization, endogenous growth, eurozone crisis, financial innovation, first-past-the-post, full employment, Hyman Minsky, industrial robot, Joseph Schumpeter, Kenneth Rogoff, labour market flexibility, light touch regulation, liquidity trap, London Interbank Offered Rate, Long Term Capital Management, market fundamentalism, Mexican peso crisis / tequila crisis, money market fund, mortgage debt, Myron Scholes, negative equity, new economy, Northern Rock, paper trading, Paul Samuelson, planetary scale, post-oil, price stability, quantitative easing, reserve currency, rising living standards, Ronald Reagan, special economic zone, Steve Jobs, structural adjustment programs, systematic trading, too big to fail, trickle-down economics, urban renewal, War on Poverty, Yom Kippur War

MacCulloch, D. (2009) Reformation: Europe’s House Divided 1490–1700, London: Allen Lane. Marx, K. (1972) Capital, Vols. I–III, London: Lawrence and Wishart. Marx, K. (1973) Grundrisse: Foundations of the Critique of Political Economy (Rough Draft), trans. Martin Nicolaus, Harmondsworth: Penguin. McDonald, L. with P. Robinson (2009) A Colossal Failure of Common Sense: The inside story of the collapse of Lehman Brothers, London: Ebury Press. Minsky, H. (2008) Stabilizing an Unstable Economy, New York: McGraw-Hill. Parker, D. (2009) The Official History of Privatisation, Vol. 1, The Formative Years 1970–1987, London: Routledge. Reinhart, C. and K. Rogoff (2009) This Time Is Different: Eight centuries of financial folly, Princeton, NJ: Princeton University Press. Schumpeter, J. (1942) Capitalism, Socialism and Democracy, New York and London: Harper & Brothers.


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

Around the world, banks had grown in size, reduced their capital buffers, made riskier loans, and decreased the liquidity of their assets. More and more had become too big to fail. As a result, the level of credit insurance that sovereigns had implicitly been providing had ballooned. Only when the crisis had struck, and the policy-makers’ initial efforts to control moral hazard collapsed, had the true scale of the subsidy become clear. In November 2009, a year after the collapse of Lehman Brothers, total sovereign support for the banking sector worldwide was estimated at some $14 trillion—more than 25 per cent of global GDP.20 This was the scale of the downside risks, taxpayers realised, that they had been bearing all along—whilst all the upside went to the shareholders, debt investors, and employees of the banks themselves. “Same Old Game” indeed—though today it is not just liquidity, but also credit, insurance that the sovereign generously doles out.


pages: 356 words: 105,533

Dark Pools: The Rise of the Machine Traders and the Rigging of the U.S. Stock Market by Scott Patterson

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algorithmic trading, automated trading system, banking crisis, bash_history, Bernie Madoff, butterfly effect, buttonwood tree, Chuck Templeton: OpenTable, cloud computing, collapse of Lehman Brothers, computerized trading, creative destruction, Donald Trump, fixed income, Flash crash, Francisco Pizarro, Gordon Gekko, Hibernia Atlantic: Project Express, High speed trading, Joseph Schumpeter, latency arbitrage, Long Term Capital Management, Mark Zuckerberg, market design, market microstructure, pattern recognition, pets.com, Ponzi scheme, popular electronics, prediction markets, quantitative hedge fund, Ray Kurzweil, Renaissance Technologies, Sergey Aleynikov, Small Order Execution System, South China Sea, Spread Networks laid a new fibre optics cable between New York and Chicago, stealth mode startup, stochastic process, transaction costs, Watson beat the top human players on Jeopardy!, zero-sum game

In a February 2010 interview on Bloomberg TV, Saluzzi said he continued to worry that the market was vulnerable to a sudden, sharp sell-off because most high-frequency traders didn’t have firm obligations to stay in the market. “What happens is, everyone tries to sell at the same time and the bids and the buyers that you see in the market now will disappear,” he told Bloomberg host Carol Massar. “The price vacuum will start, and we’re going to plunge down. That’s my big fear.” High-speed backers pointed to the stock market’s resilience after the collapse of Lehman Brothers in the fall of 2008, when it seemed as if every other corner of Wall Street was shattering. “We believe that the current national market system is performing extremely well,” John McCarthy, general counsel for Getco, wrote in a letter to the SEC. “For instance, the performance during the 2008 financial crisis suggests that our equity markets are resilient and robust even during times of stress and dislocation.”


pages: 344 words: 94,332

The 100-Year Life: Living and Working in an Age of Longevity by Lynda Gratton, Andrew Scott

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3D printing, Airbnb, assortative mating, carbon footprint, Clayton Christensen, collapse of Lehman Brothers, creative destruction, crowdsourcing, delayed gratification, diversification, Downton Abbey, Erik Brynjolfsson, falling living standards, financial independence, first square of the chessboard, first square of the chessboard / second half of the chessboard, future of work, gender pay gap, gig economy, Google Glasses, indoor plumbing, information retrieval, intangible asset, Isaac Newton, job satisfaction, low skilled workers, Lyft, Network effects, New Economic Geography, old age dependency ratio, pattern recognition, pension reform, Peter Thiel, Ray Kurzweil, Richard Florida, Richard Thaler, Second Machine Age, sharing economy, side project, Silicon Valley, smart cities, Stephen Hawking, Steve Jobs, The Future of Employment, women in the workforce, young professional

Understanding household finances is a growing area of literature, and Harvard Professor John Campbell, in his presidential address to the American Finance Association, identifies some common mistakes households tend to make.14 First, households tend to be underinvested in the equity market – even 20 per cent of wealthy households have no exposure to equity markets. Further, even those who do invest in equities tend not to diversify enough; in other words, they invest in just a few specific companies. Second, when households do invest in equities they tend to have a ‘local’ bias, investing in stocks that are familiar to them or based nearby. Third, households tend to hold concentrated portfolios in the shares of their own employers and, as the collapse of Lehman Brothers demonstrated, by doing so they risk losing both their jobs and their wealth. Fourth, when it comes to selling assets, households tend to sell assets that have been rising in price and hold on to those that have fallen. Finally, there is the question of inertia. Households tend to have a ‘status quo bias’ and do not revisit their portfolios. For instance, the Teachers Insurance and Annuity Assurance scheme in the USA has 850,000 members, and each year members can costlessly reallocate their funds across different portfolios.


pages: 391 words: 97,018

Better, Stronger, Faster: The Myth of American Decline . . . And the Rise of a New Economy by Daniel Gross

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2013 Report for America's Infrastructure - American Society of Civil Engineers - 19 March 2013, Affordable Care Act / Obamacare, Airbnb, American Society of Civil Engineers: Report Card, asset-backed security, Bakken shale, banking crisis, BRICs, British Empire, business process, business process outsourcing, call centre, Carmen Reinhart, clean water, collapse of Lehman Brothers, collateralized debt obligation, commoditize, creative destruction, credit crunch, currency manipulation / currency intervention, demand response, Donald Trump, Frederick Winslow Taylor, high net worth, housing crisis, hydraulic fracturing, If something cannot go on forever, it will stop - Herbert Stein's Law, illegal immigration, index fund, intangible asset, intermodal, inventory management, Kenneth Rogoff, labor-force participation, LNG terminal, low skilled workers, Mark Zuckerberg, Martin Wolf, Maui Hawaii, McMansion, money market fund, mortgage debt, Network effects, new economy, obamacare, oil shale / tar sands, oil shock, peak oil, Plutocrats, plutocrats, price stability, quantitative easing, race to the bottom, reserve currency, reshoring, Richard Florida, rising living standards, risk tolerance, risk/return, Silicon Valley, Silicon Valley startup, six sigma, Skype, sovereign wealth fund, Steve Jobs, superstar cities, the High Line, transit-oriented development, Wall-E, Yogi Berra, zero-sum game, Zipcar

In Germany, by contrast, companies responded to slower demand with Kurzarbeit initiatives, asking workers to share jobs and work fewer hours. The American tendency to add fuel to the fire helps explain the epic, unexpected job losses of early 2009. In six months, between November 2008 and April 2009, the U.S. economy shed 4.4 million jobs, an average of 738,000 per month, or about 25,000 a day. But after the worst of the downturn, procyclicality can also hasten recovery. In the months after the collapse of Lehman Brothers in September 2008, companies were ruthless about cutting payroll, idling factories, wiggling out of commitments, and shirking burdens. Borrowers turned over factories, hotels, and office towers to lenders, who in turn wrote off debts. Companies diluted shareholders’ existing holdings as they raised new capital, jettisoned long-cherished assets, and didn’t hesitate to seek the shelter of bankruptcy protection.


pages: 285 words: 86,174

Twilight of the Elites: America After Meritocracy by Chris Hayes

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affirmative action, Affordable Care Act / Obamacare, asset-backed security, barriers to entry, Berlin Wall, Bernie Madoff, carried interest, circulation of elites, Climategate, Climatic Research Unit, collapse of Lehman Brothers, collective bargaining, creative destruction, Credit Default Swap, dark matter, David Brooks, David Graeber, deindustrialization, Fall of the Berlin Wall, financial deregulation, fixed income, full employment, George Akerlof, Gunnar Myrdal, hiring and firing, income inequality, Jane Jacobs, jimmy wales, Julian Assange, Kenneth Arrow, Mark Zuckerberg, mass affluent, mass incarceration, means of production, meta analysis, meta-analysis, money market fund, moral hazard, Naomi Klein, Nate Silver, peak oil, Plutocrats, plutocrats, Ponzi scheme, Ralph Waldo Emerson, rolodex, The Spirit Level, too big to fail, University of East Anglia, Vilfredo Pareto, We are the 99%, WikiLeaks, women in the workforce

., “Racial and Ethnic Residential Segregation in the Chicago Metropolitan Area, 1980–2009,” in Institute of Government & Public Affairs, University of Illinois, Changing American Neighborhoods and Communities Report, Series 2, p. 2. 10 26 percent of Americans lived in what Bishop calls “landslide counties”: Bill Bishop, The Big Sort: Why the Cluster of Like-Minded America Is Tearing Us Apart (Boston: Houghton Mifflin Harcourt, 2009), p. 9. 11 Dick Fuld … had a separate elevator that was commandeered: See “A Look Back at the Collapse of Lehman Brothers,” PBS NewsHour, http://www.pbs.org/newshour/bb/business/july-dec09/solmanlehman_09-14.html, accessed January 23, 2012. 12 “They help him focus on the real problems people are facing”: See Stephen Splane, “ ‘Dear President Obama’: The President Reads 10 Letters a Day from the Public, with Policy Ramifications,” ABC News, February 23, 2009. 13 The high-power group were far more likely to draw an “E” as if they were reading it themselves: Adam Galinsky et al., “Power and Perspectives Not Taken,” Psychological Science 17, no. 12 (2006): 1069, http://www.kellogg.northwestern.edu/faculty/galinsky/power%252520and%252520perspective-taking%252520psych%252520science%2525202006.pdf, accessed January 23, 2012. 14 “made more accurate inferences about emotion”: Michael W.


pages: 344 words: 93,858

The Post-American World: Release 2.0 by Fareed Zakaria

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affirmative action, agricultural Revolution, airport security, anti-communist, Asian financial crisis, battle of ideas, Berlin Wall, Bretton Woods, BRICs, British Empire, call centre, capital controls, central bank independence, centre right, collapse of Lehman Brothers, conceptual framework, Credit Default Swap, currency manipulation / currency intervention, delayed gratification, Deng Xiaoping, double entry bookkeeping, failed state, Fall of the Berlin Wall, financial innovation, global reserve currency, global supply chain, illegal immigration, interest rate derivative, Intergovernmental Panel on Climate Change (IPCC), knowledge economy, Mahatma Gandhi, Martin Wolf, mutually assured destruction, new economy, oil shock, open economy, out of africa, Parag Khanna, postindustrial economy, purchasing power parity, race to the bottom, reserve currency, Ronald Reagan, Silicon Valley, Silicon Valley startup, South China Sea, Steven Pinker, The Great Moderation, Thomas L Friedman, Thomas Malthus, trade route, Washington Consensus, working-age population, young professional, zero-sum game

In 2008, that growth collapsed in the Western world, but the cause was an economic shock, not a political shock. In the two decades since the end of the Cold War, we have lived through a paradox, one we experience every morning when reading the newspapers. The world’s politics seems deeply troubled, with daily reports of bombings, terror plots, rogue states, and civil strife. And yet the global economy forges ahead. As the events beginning with the collapse of Lehman Brothers reminded us, markets do panic—but over economic, not political news. The front page of the newspaper often seems unconnected to the business section. I remember speaking to a senior member of the Israeli government a few days after the war with Hezbollah in July 2006. He was genuinely worried about his country’s physical security. Hezbollah’s rockets had reached farther into Israel than people had believed possible, and the Israeli military response had not inspired confidence.


pages: 831 words: 98,409

SUPERHUBS: How the Financial Elite and Their Networks Rule Our World by Sandra Navidi

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activist fund / activist shareholder / activist investor, assortative mating, bank run, barriers to entry, Bernie Sanders, Black Swan, Bretton Woods, butterfly effect, Capital in the Twenty-First Century by Thomas Piketty, Carmen Reinhart, central bank independence, cognitive bias, collapse of Lehman Brothers, collateralized debt obligation, commoditize, conceptual framework, corporate governance, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, diversification, East Village, Elon Musk, eurozone crisis, family office, financial repression, Gini coefficient, glass ceiling, Goldman Sachs: Vampire Squid, Google bus, Gordon Gekko, haute cuisine, high net worth, hindsight bias, income inequality, index fund, intangible asset, Jaron Lanier, John Meriwether, Kenneth Arrow, Kenneth Rogoff, knowledge economy, London Whale, Long Term Capital Management, Mark Zuckerberg, mass immigration, McMansion, mittelstand, money market fund, Myron Scholes, NetJets, Network effects, offshore financial centre, old-boy network, Parag Khanna, Paul Samuelson, peer-to-peer, performance metric, Peter Thiel, Plutocrats, plutocrats, Ponzi scheme, quantitative easing, Renaissance Technologies, rent-seeking, reserve currency, risk tolerance, Robert Gordon, Robert Shiller, Robert Shiller, rolodex, Satyajit Das, shareholder value, Silicon Valley, sovereign wealth fund, Stephen Hawking, Steve Jobs, The Future of Employment, The Predators' Ball, too big to fail, women in the workforce, young professional

As a result, international financial markets started to panic and became extremely volatile. Within just five days, one of the smallest economies in Europe had sparked a crisis that threatened to spread to Portugal and Spain, leading to fears of a currency breakup with incalculable consequences. A disorderly currency implosion, or only the fear thereof, triggering a run on the banks and a market crash was everyone’s worst nightmare. Following the traumatic collapse of Lehman Brothers in 2008, the U.S. administration was particularly worried about contagion in the global financial system spreading to U.S. shores. Therefore, it took the liberty of volunteering unsolicited advice and exerting gentle pressure on Europeans. From the perspective of their own more unified system and proactive mentality, they could not understand why the Europeans seemed so lethargic. Meanwhile, the Greek situation grew much worse very fast, and within days it became clear that—for the very first time—one of the eurozone states needed rescue.


pages: 403 words: 111,119

Doughnut Economics: Seven Ways to Think Like a 21st-Century Economist by Kate Raworth

3D printing, Asian financial crisis, bank run, basic income, battle of ideas, Berlin Wall, bitcoin, blockchain, Branko Milanovic, Bretton Woods, Buckminster Fuller, call centre, Capital in the Twenty-First Century by Thomas Piketty, Cass Sunstein, choice architecture, clean water, cognitive bias, collapse of Lehman Brothers, complexity theory, creative destruction, crowdsourcing, cryptocurrency, Daniel Kahneman / Amos Tversky, David Ricardo: comparative advantage, dematerialisation, Douglas Engelbart, Douglas Engelbart, en.wikipedia.org, energy transition, Erik Brynjolfsson, ethereum blockchain, Eugene Fama: efficient market hypothesis, experimental economics, Exxon Valdez, Fall of the Berlin Wall, financial deregulation, Financial Instability Hypothesis, full employment, global supply chain, global village, Henri Poincaré, hiring and firing, Howard Zinn, Hyman Minsky, income inequality, Intergovernmental Panel on Climate Change (IPCC), invention of writing, invisible hand, Isaac Newton, John Maynard Keynes: Economic Possibilities for our Grandchildren, Joseph Schumpeter, Kenneth Arrow, Kenneth Rogoff, land reform, land value tax, Landlord’s Game, loss aversion, low skilled workers, M-Pesa, Mahatma Gandhi, market fundamentalism, Martin Wolf, means of production, megacity, mobile money, Mont Pelerin Society, Myron Scholes, neoliberal agenda, Network effects, Occupy movement, off grid, offshore financial centre, oil shale / tar sands, out of africa, Paul Samuelson, peer-to-peer, planetary scale, price mechanism, quantitative easing, randomized controlled trial, Richard Thaler, Ronald Reagan, Second Machine Age, secular stagnation, shareholder value, sharing economy, Silicon Valley, Simon Kuznets, smart cities, smart meter, South Sea Bubble, statistical model, Steve Ballmer, The Chicago School, The Great Moderation, the map is not the territory, the market place, The Spirit Level, The Wealth of Nations by Adam Smith, Thomas Malthus, Thorstein Veblen, too big to fail, Torches of Freedom, trickle-down economics, ultimatum game, universal basic income, Upton Sinclair, Vilfredo Pareto, wikimedia commons

Many events that first appear to be sudden and external – what mainstream economists often describe as ‘exogenous shocks’ – are far better understood as arising from endogenous change. In the words of the political economist Orit Gal, ‘complexity theory teaches us that major events are the manifestation of maturing and converging underlying trends: they reflect change that has already occurred within the system’.11 From this perspective, the 1989 fall of the Berlin Wall, the 2008 collapse of Lehman Brothers and the imminent collapse of the Greenland ice sheet have much in common. All three are reported in the news as sudden events but are actually visible tipping points that result from slowly accumulated pressure in the system – be it the gradual build-up of political protest in Eastern Europe, the build-up of sub-prime mortgages in a bank’s asset portfolio, or the build-up of greenhouse gases in the atmosphere.


pages: 443 words: 98,113

The Corruption of Capitalism: Why Rentiers Thrive and Work Does Not Pay by Guy Standing

3D printing, Airbnb, Albert Einstein, Amazon Mechanical Turk, Asian financial crisis, asset-backed security, bank run, banking crisis, basic income, Ben Bernanke: helicopter money, Bernie Sanders, Big bang: deregulation of the City of London, bilateral investment treaty, Bonfire of the Vanities, Bretton Woods, Capital in the Twenty-First Century by Thomas Piketty, carried interest, cashless society, central bank independence, centre right, Clayton Christensen, collapse of Lehman Brothers, collective bargaining, credit crunch, crony capitalism, crowdsourcing, debt deflation, declining real wages, deindustrialization, Doha Development Round, Donald Trump, Double Irish / Dutch Sandwich, ending welfare as we know it, eurozone crisis, falling living standards, financial deregulation, financial innovation, Firefox, first-past-the-post, future of work, gig economy, Goldman Sachs: Vampire Squid, Growth in a Time of Debt, housing crisis, income inequality, information retrieval, intangible asset, invention of the steam engine, investor state dispute settlement, James Watt: steam engine, job automation, John Maynard Keynes: technological unemployment, labour market flexibility, light touch regulation, Long Term Capital Management, lump of labour, Lyft, manufacturing employment, Mark Zuckerberg, market clearing, Martin Wolf, means of production, mini-job, Mont Pelerin Society, moral hazard, mortgage debt, mortgage tax deduction, Neil Kinnock, non-tariff barriers, North Sea oil, Northern Rock, nudge unit, Occupy movement, offshore financial centre, oil shale / tar sands, open economy, openstreetmap, patent troll, payday loans, peer-to-peer lending, Plutocrats, plutocrats, Ponzi scheme, precariat, quantitative easing, remote working, rent control, rent-seeking, ride hailing / ride sharing, Right to Buy, Robert Gordon, Ronald Coase, Ronald Reagan, savings glut, Second Machine Age, secular stagnation, sharing economy, Silicon Valley, Silicon Valley startup, Simon Kuznets, sovereign wealth fund, Stephen Hawking, Steve Ballmer, structural adjustment programs, TaskRabbit, The Chicago School, The Future of Employment, the payments system, Thomas Malthus, Thorstein Veblen, too big to fail, Uber and Lyft, Uber for X, Y Combinator, zero-sum game, Zipcar

In early 2008, the Money Advice Trust, a British debt charity, estimated that the average person had only enough money to survive for fifty-two days if they lost their job; a third would run out of cash in just two weeks. So, there was little scope for resilience even before the financial crash. The subsequent shift of the debt burden onto households has made another financial crisis more likely. Adair Turner, former head of the UK’s Financial Services Authority, who took over days after the collapse of Lehman Brothers in 2008, has also argued that the 2008 crash was due to the stoking of household debt by the financial sector, especially to buy property.9 Traditionally, banks took deposits from households and lent to businesses to invest to expand production. These days, most lending is for property, mainly to buy existing assets rather than create new ones. In 1928, across seventeen industrialised countries, only 30 per cent of bank lending was for property; by 2007, the proportion was nearly 60 per cent.10 When central banks cut interest rates to practically zero or indulge in quantitative easing, more money flows into the property market, raising house prices, enriching landlords and encouraging speculative property buying.


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

The success of the EU suggests that good economics and good politics require defining one’s self-interest broadly (eco-centrically), not narrowly (ego-centrically), so that it is aligned with the well-being of others and the whole. Sadly, the emerging failures of the EU prove the same point. Bad economics and bad politics result from defining one’s self-interest too narrowly. In the euro crisis, we can see in a nutshell how a narrowly defined self-interest translates into poor economic and political decision-making. In September 2008, after the collapse of Lehman Brothers, the German finance minister claimed in front of the parliament that this was an American problem, not a European or German problem.13 The second and bigger error of judgment happened on October 12, 2008, when the German chancellor and finance minister met with their EU colleagues in Paris at the first crisis summit and decided that each country would develop its own rescue mechanism rather than a joint European mechanism that could have taken care of all of them.14 What is missing from how this story unfolded is a moment of reflective disruption in which all players would have come together, looked in the mirror, and realized what they were doing to themselves.


pages: 323 words: 95,492

The Rise of the Outsiders: How Mainstream Politics Lost Its Way by Steve Richards

Affordable Care Act / Obamacare, Airbnb, banking crisis, battle of ideas, Bernie Sanders, call centre, centre right, collapse of Lehman Brothers, David Brooks, Donald Trump, Etonian, eurozone crisis, falling living standards, full employment, housing crisis, low skilled workers, manufacturing employment, Martin Wolf, mass immigration, Neil Kinnock, obamacare, Occupy movement, Ronald Reagan, Silicon Valley

What is right and what is politically possible are often unrecognizably different. The crash changed the dynamics of politics immediately. What was the right thing to do not only became politically possible, but urgently necessary. Yet the centre left was trapped by its immediate past and its failure to form accessible arguments about what needed to be done next. In the days leading up to the collapse of Lehman Brothers, the then Cabinet minister, Ed Miliband, caught the end of a radio interview with two guests pleading for governments to intervene, in order to prevent a financial crash across the globe. He assumed that the interviewees were two left-wingers. To his delighted amazement, one was from Goldman Sachs and the other was from Lehman’s, which was heading towards the cliff’s edge. Miliband was one of the most left-wing ministers in the Labour government and he had ached to frame arguments about the benevolent potential of an active state.


pages: 935 words: 267,358

Capital in the Twenty-First Century by Thomas Piketty

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accounting loophole / creative accounting, Asian financial crisis, banking crisis, banks create money, Berlin Wall, Branko Milanovic, British Empire, capital controls, Capital in the Twenty-First Century by Thomas Piketty, carbon footprint, central bank independence, centre right, circulation of elites, collapse of Lehman Brothers, conceptual framework, corporate governance, correlation coefficient, David Ricardo: comparative advantage, demographic transition, distributed generation, diversification, diversified portfolio, European colonialism, eurozone crisis, Fall of the Berlin Wall, financial intermediation, full employment, German hyperinflation, Gini coefficient, high net worth, Honoré de Balzac, immigration reform, income inequality, income per capita, index card, inflation targeting, informal economy, invention of the steam engine, invisible hand, joint-stock company, Joseph Schumpeter, Kenneth Arrow, market bubble, means of production, mortgage debt, mortgage tax deduction, new economy, New Urbanism, offshore financial centre, open economy, Paul Samuelson, pension reform, purchasing power parity, race to the bottom, randomized controlled trial, refrigerator car, regulatory arbitrage, rent control, rent-seeking, Robert Gordon, Ronald Reagan, Simon Kuznets, sovereign wealth fund, Steve Jobs, The Nature of the Firm, the payments system, The Wealth of Nations by Adam Smith, Thomas Malthus, Thorstein Veblen, trade liberalization, very high income, Vilfredo Pareto, We are the 99%, zero-sum game

Early data for 2011–2012 suggest that the increase is still continuing. This is a crucial point: the facts show quite clearly that the financial crisis as such cannot be counted on to put an end to the structural increase of inequality in the United States. To be sure, in the immediate aftermath of a stock market crash, inequality always grows more slowly, just as it always grows more rapidly in a boom. The years 2008–2009, following the collapse of Lehman Brothers, like the years 2001–2002, after the bursting of the first Internet bubble, were not great times for taking profits on the stock market. Indeed, capital gains plummeted in those years. But these short-term movements did not alter the long-run trend, which is governed by other forces whose logic I must now try to clarify. To proceed further, it will be useful to break the top decile of the income hierarchy down into three groups: the richest 1 percent, the next 4 percent, and the bottom 5 percent (see Figure 8.6).

The fact is that all economists—monetarists, Keynesians, and neoclassicals—together with all other observers, regardless of their political stripe, have agreed that central banks ought to act as lenders of last resort and do whatever is necessary to avoid financial collapse and a deflationary spiral. This broad consensus explains why all of the world’s central banks—in Japan and Europe as well as the United States—reacted to the financial crisis of 2007–2008 by taking on the role of lenders of last resort and stabilizers of the financial system. Apart from the collapse of Lehman Brothers in September 2008, bank failures in the crisis have been fairly limited in scope. There is, however, no consensus as to the exact nature of the “unconventional” monetary policies that should be followed in situations like this. What in fact do central banks do? For present purposes, it is important to realize that central banks do not create wealth as such; they redistribute it. More precisely, when the Fed or the ECB decides to create a billion additional dollars or euros, US or European capital is not augmented by that amount.


pages: 374 words: 114,600

The Quants by Scott Patterson

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Albert Einstein, asset allocation, automated trading system, beat the dealer, Benoit Mandelbrot, Bernie Madoff, Bernie Sanders, Black Swan, Black-Scholes formula, Bonfire of the Vanities, Brownian motion, buttonwood tree, buy low sell high, capital asset pricing model, centralized clearinghouse, Claude Shannon: information theory, cloud computing, collapse of Lehman Brothers, collateralized debt obligation, commoditize, computerized trading, Credit Default Swap, credit default swaps / collateralized debt obligations, diversification, Donald Trump, Doomsday Clock, Edward Thorp, Emanuel Derman, Eugene Fama: efficient market hypothesis, fixed income, Gordon Gekko, greed is good, Haight Ashbury, I will remember that I didn’t make the world, and it doesn’t satisfy my equations, index fund, invention of the telegraph, invisible hand, Isaac Newton, job automation, John Meriwether, John Nash: game theory, law of one price, Long Term Capital Management, Louis Bachelier, mandelbrot fractal, margin call, merger arbitrage, money market fund, Myron Scholes, NetJets, new economy, offshore financial centre, old-boy network, Paul Lévy, Paul Samuelson, Ponzi scheme, quantitative hedge fund, quantitative trading / quantitative finance, race to the bottom, random walk, Renaissance Technologies, risk-adjusted returns, Rod Stewart played at Stephen Schwarzman birthday party, Ronald Reagan, Sergey Aleynikov, short selling, South Sea Bubble, speech recognition, statistical arbitrage, The Chicago School, The Great Moderation, The Predators' Ball, too big to fail, transaction costs, value at risk, volatility smile, yield curve, éminence grise

It was Friday afternoon, October 24, one day after Greenspan’s testimony on Capitol Hill. More than a thousand listeners were on the line waiting for Griffin and Beeson to explain what had become of Citadel. Rumors of Citadel’s collapse were spreading rapidly, even hitting TV screens on the financial news network CNBC. Citadel, traders said, was circling the drain. The market turmoil after the collapse of Lehman Brothers had led to massive losses in its giant convertible bond portfolio. If Citadel went under, many feared, the ripple effects would be catastrophic, causing other funds with similar positions to tumble like so many dominoes. According to former senior executives at Citadel, Griffin had started to force out employees as Citadel’s fortunes grew more precarious. Joe Russell, head of Citadel’s credit trading group and the key man in the E*Trade deal, had been agitating for more power.


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

Other diners included Julian Robertson, legendary founder of the Tiger Management hedge fund; Donald Marron, the former chief executive of PaineWebber and now boss of Lightyear Capital; and Leon Black, cofounder of the Apollo private equity group. In a memo about the luncheon discussion he distributed a few weeks later, Wien wrote that the talk focused on one issue: “Were we about to experience a recession?” We all know the answer today. But just over a year before the collapse of Lehman Brothers definitively plunged the world into the most profound financial crisis since the Great Depression, the private consensus among this group of Wall Street savants was that we were not. According to Wien’s memo, “The conclusion was that we were probably in an economic slowdown and a correction in the market, but we were not about to begin a recession or a bear market.” Only two of the twenty-one participants had dissented from that bullish view.


pages: 464 words: 116,945

Seventeen Contradictions and the End of Capitalism by David Harvey

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accounting loophole / creative accounting, bitcoin, Branko Milanovic, Bretton Woods, BRICs, British Empire, business climate, California gold rush, call centre, central bank independence, clean water, cloud computing, collapse of Lehman Brothers, colonial rule, creative destruction, Credit Default Swap, David Ricardo: comparative advantage, deindustrialization, demographic dividend, Deng Xiaoping, deskilling, drone strike, end world poverty, falling living standards, fiat currency, first square of the chessboard, first square of the chessboard / second half of the chessboard, Food sovereignty, Frank Gehry, future of work, global reserve currency, Guggenheim Bilbao, Gunnar Myrdal, income inequality, informal economy, invention of the steam engine, invisible hand, Isaac Newton, Jane Jacobs, Jarndyce and Jarndyce, John Maynard Keynes: Economic Possibilities for our Grandchildren, Joseph Schumpeter, Just-in-time delivery, knowledge worker, low skilled workers, Mahatma Gandhi, market clearing, Martin Wolf, means of production, microcredit, new economy, New Urbanism, Occupy movement, peak oil, phenotype, Plutocrats, plutocrats, Ponzi scheme, quantitative easing, rent-seeking, reserve currency, road to serfdom, Robert Gordon, Ronald Reagan, short selling, Silicon Valley, special economic zone, The Wealth of Nations by Adam Smith, Thomas Malthus, Thorstein Veblen, transaction costs, Tyler Cowen: Great Stagnation, wages for housework, Wall-E, women in the workforce, working poor, working-age population

The state–finance nexus has all the characteristics of a feudal institution, because its operations are usually hidden from view and shrouded in mystery. It operates more like the Vatican or the Kremlin than like an open and transparent institution. It assumes a human face only at times of difficulty, when, for example, Hank Paulson (Secretary of the Treasury) and Ben Bernanke (Chair of the Federal Reserve) jointly took to the airwaves to dictate national policy in the wake of the collapse of Lehman Brothers in September 2008, when both the Executive Branch and Congress appeared paralysed and fearful. ‘When the financial system and the state–finance nexus fails, as it did in 1929 and 2008, then everyone recognises there is a threat to the survival of capital and of capitalism and no stone is left unturned and no compromise left unexamined in the endeavours to resuscitate it.’2 But all is not always harmonious in the relation between the capitalist state and private property.


pages: 380 words: 118,675

The Everything Store: Jeff Bezos and the Age of Amazon by Brad Stone

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3D printing, airport security, AltaVista, Amazon Mechanical Turk, Amazon Web Services, bank run, Bernie Madoff, big-box store, Black Swan, book scanning, Brewster Kahle, call centre, centre right, Chuck Templeton: OpenTable, Clayton Christensen, cloud computing, collapse of Lehman Brothers, crowdsourcing, cuban missile crisis, Danny Hillis, Douglas Hofstadter, Elon Musk, facts on the ground, game design, housing crisis, invention of movable type, inventory management, James Dyson, Jeff Bezos, John Markoff, Kevin Kelly, Kodak vs Instagram, late fees, loose coupling, low skilled workers, Maui Hawaii, Menlo Park, Network effects, new economy, optical character recognition, pets.com, Ponzi scheme, quantitative hedge fund, recommendation engine, Renaissance Technologies, RFID, Rodney Brooks, search inside the book, shareholder value, Silicon Valley, Silicon Valley startup, six sigma, skunkworks, Skype, statistical arbitrage, Steve Ballmer, Steve Jobs, Steven Levy, Stewart Brand, Thomas L Friedman, Tony Hsieh, Whole Earth Catalog, why are manhole covers round?, zero-sum game

Its 2007 gross sales hit $840 million and in 2008 it topped $1 billion. That year, Bezos learned that Zappos was advertising on the bottoms of the plastic bins at airport-security checkpoints. “They are outthinking us!” he snapped at a meeting. But inside Zappos, a big problem had emerged. It had been acquiring inventory with a revolving $100 million line of credit, and the financial crisis, which intensified with the collapse of Lehman Brothers in the fall of 2008, froze the capital markets. With consumer spending declining, Zappos’ inventory constrained by new borrowing limits, and the competition with Amazon cutting into the company’s profit margins, Zappos’ previously spectacular annual growth rate collapsed to a modest 10 percent. The company rolled back its free-overnight-shipping guarantee, and Hsieh reluctantly laid off 8 percent of his workforce.


pages: 386 words: 122,595

Naked Economics: Undressing the Dismal Science (Fully Revised and Updated) by Charles Wheelan

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affirmative action, Albert Einstein, Andrei Shleifer, barriers to entry, Berlin Wall, Bernie Madoff, Bretton Woods, capital controls, Cass Sunstein, central bank independence, clean water, collapse of Lehman Brothers, congestion charging, creative destruction, Credit Default Swap, crony capitalism, currency manipulation / currency intervention, Daniel Kahneman / Amos Tversky, David Brooks, demographic transition, diversified portfolio, Doha Development Round, Exxon Valdez, financial innovation, fixed income, floating exchange rates, George Akerlof, Gini coefficient, Gordon Gekko, greed is good, happiness index / gross national happiness, Hernando de Soto, income inequality, index fund, interest rate swap, invisible hand, job automation, John Markoff, Joseph Schumpeter, Kenneth Rogoff, libertarian paternalism, low skilled workers, lump of labour, Malacca Straits, market bubble, microcredit, money market fund, money: store of value / unit of account / medium of exchange, Network effects, new economy, open economy, presumed consent, price discrimination, price stability, principal–agent problem, profit maximization, profit motive, purchasing power parity, race to the bottom, RAND corporation, random walk, rent control, Richard Thaler, rising living standards, Robert Gordon, Robert Shiller, Robert Shiller, Ronald Coase, Ronald Reagan, school vouchers, Silicon Valley, Silicon Valley startup, South China Sea, Steve Jobs, The Market for Lemons, the rule of 72, The Wealth of Nations by Adam Smith, Thomas L Friedman, Thomas Malthus, transaction costs, transcontinental railway, trickle-down economics, urban sprawl, Washington Consensus, Yogi Berra, young professional, zero-sum game

Because of widespread bank failures in 1930, both banks and individuals began to hoard cash. Money that was stuffed under a mattress or locked in a bank vault could not be loaned back into the economy. The Fed did nothing while America’s credit dried up (and actually raised interest rates sharply in 1931 to defend the gold standard). Fed officials should have been doing just the opposite: pumping money into the system. In September 2009, the one-year anniversary of the collapse of Lehman Brothers, the chair of the Council of Economic Advisers, Christina Romer, gave a talk ominously entitled “Back from the Brink,” which laid much of the credit for our escape from economic disaster at the door of the Federal Reserve. She explained, “The policy response in the current episode, in contrast [to the 1930s], has been swift and bold. The Federal Reserve’s creative and aggressive actions last fall to maintain lending will go down as a high point in central bank history.


pages: 566 words: 155,428

After the Music Stopped: The Financial Crisis, the Response, and the Work Ahead by Alan S. Blinder

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Affordable Care Act / Obamacare, asset-backed security, bank run, banking crisis, banks create money, break the buck, Carmen Reinhart, central bank independence, collapse of Lehman Brothers, collateralized debt obligation, conceptual framework, corporate governance, Credit Default Swap, credit default swaps / collateralized debt obligations, Detroit bankruptcy, diversification, double entry bookkeeping, eurozone crisis, facts on the ground, financial innovation, fixed income, friendly fire, full employment, hiring and firing, housing crisis, Hyman Minsky, illegal immigration, inflation targeting, interest rate swap, Isaac Newton, Kenneth Rogoff, liquidity trap, London Interbank Offered Rate, Long Term Capital Management, market bubble, market clearing, market fundamentalism, McMansion, money market fund, moral hazard, naked short selling, new economy, Nick Leeson, Northern Rock, Occupy movement, offshore financial centre, price mechanism, quantitative easing, Ralph Waldo Emerson, Robert Shiller, Robert Shiller, Ronald Reagan, shareholder value, short selling, South Sea Bubble, statistical model, the payments system, time value of money, too big to fail, working-age population, yield curve, Yogi Berra

That date was exquisitely bad timing for one of the primary dealers that was fighting for its life at the time: an investment bank named Bear Stearns. 5 FROM BEAR TO LEHMAN: INCONSISTENCY WAS THE HOBGOBLIN A foolish consistency is the hobgoblin of little minds. —RALPH WALDO EMERSON The six months between the collapse of Bear Stearns into the waiting arms of JP Morgan Chase and the collapse of Lehman Brothers into bankruptcy was interesting, in the sense of the apocryphal Chinese curse. (May you live in interesting times.) In March the Federal Reserve, supported by the Treasury, kicked in almost $30 billion to facilitate the shotgun marriage of Bear to JP Morgan, presumably because a disorderly failure of Bear might have devastated the financial system. But in September, the Federal Reserve, again with the full support of the Treasury, refused to provide any money at all to facilitate a sale of Lehman—even though Lehman’s failure did devastate the financial system.


pages: 393 words: 115,263

Planet Ponzi by Mitch Feierstein

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Affordable Care Act / Obamacare, Albert Einstein, Asian financial crisis, asset-backed security, bank run, banking crisis, barriers to entry, Bernie Madoff, break the buck, centre right, collapse of Lehman Brothers, collateralized debt obligation, commoditize, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, Daniel Kahneman / Amos Tversky, disintermediation, diversification, Donald Trump, energy security, eurozone crisis, financial innovation, financial intermediation, fixed income, Flash crash, floating exchange rates, frictionless, frictionless market, high net worth, High speed trading, illegal immigration, income inequality, interest rate swap, invention of agriculture, light touch regulation, Long Term Capital Management, mega-rich, money market fund, moral hazard, mortgage debt, negative equity, Northern Rock, obamacare, offshore financial centre, oil shock, pensions crisis, Plutocrats, plutocrats, Ponzi scheme, price anchoring, price stability, purchasing power parity, quantitative easing, risk tolerance, Robert Shiller, Robert Shiller, Ronald Reagan, too big to fail, trickle-down economics, value at risk, yield curve

An elementary school kid would see through the deception‌—‌it’s only our policymakers who are fooled. The issue is not the net levels of debt. The net levels of debt are always going to be OK, those things will always cancel out. The issue is the structure. The quantity of debt we have in our financial system creeps through it like some deadly ivy: poisoning, choking, constricting, and killing. The collapse of Lehman Brothers proves better than anything why it’s not the net levels of debt that count. As we’ve noted before, Lehman collapsed with net debt of ‘just’ $129 billion. In the context of the entire world’s financial system, that $129 billion was a pinprick, nothing more. But it wasn’t the net debt that counted. It was the gross debt. The gross debt of $768 billion. The derivative contracts with notional principal of a further $729 billion.


pages: 632 words: 159,454

War and Gold: A Five-Hundred-Year History of Empires, Adventures, and Debt by Kwasi Kwarteng

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accounting loophole / creative accounting, anti-communist, Asian financial crisis, asset-backed security, Atahualpa, balance sheet recession, bank run, banking crisis, Big bang: deregulation of the City of London, Bretton Woods, British Empire, California gold rush, capital controls, Carmen Reinhart, central bank independence, centre right, collapse of Lehman Brothers, collateralized debt obligation, credit crunch, currency manipulation / currency intervention, Deng Xiaoping, discovery of the americas, Etonian, eurozone crisis, fiat currency, financial innovation, fixed income, floating exchange rates, Francisco Pizarro, full employment, German hyperinflation, hiring and firing, income inequality, invisible hand, Isaac Newton, John Maynard Keynes: Economic Possibilities for our Grandchildren, joint-stock company, joint-stock limited liability company, Joseph Schumpeter, Kenneth Rogoff, labour market flexibility, liberal capitalism, market bubble, money: store of value / unit of account / medium of exchange, moral hazard, new economy, oil shock, Plutocrats, plutocrats, Ponzi scheme, price mechanism, quantitative easing, rolodex, Ronald Reagan, South Sea Bubble, The inhabitant of London could order by telephone, sipping his morning tea in bed, the various products of the whole earth, the market place, The Wealth of Nations by Adam Smith, too big to fail, War on Poverty, Yom Kippur War

Quantitative easing (QE) was said to be ‘an ugly name for a simple idea’. Central banks ‘buy long-term government bonds with newly printed money’.56 The theory was that this purchase of government debt, by which the central bank was effectively printing money and lending it to its own government, would keep bond prices high. High bond prices meant lower interest rates, which would help boost growth. Between November 2010, a full two years after the collapse of Lehman Brothers, and March 2011, the US Treasury issued $589 billion of debt, of which the Federal Reserve bought $514 billion, or 87 per cent. In Britain, from ‘early 2009 through to March 2010’ Her Majesty’s Treasury issued ‘£247 billion ($396 billion) of extra long-term gilts [UK government bonds], of which the Bank of England bought £199 billion’, or 80 per cent.57 In the United States, it was significant that Ben Bernanke, an academic economist who specialized in the history of the Great Depression, had taken over the chairmanship of the Federal Reserve from Alan Greenspan.


pages: 309 words: 114,984

The Digital Doctor: Hope, Hype, and Harm at the Dawn of Medicine’s Computer Age by Robert Wachter

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activist fund / activist shareholder / activist investor, Affordable Care Act / Obamacare, AI winter, Airbnb, Atul Gawande, Captain Sullenberger Hudson, Checklist Manifesto, Chuck Templeton: OpenTable, Clayton Christensen, collapse of Lehman Brothers, computer age, creative destruction, crowdsourcing, deskilling, en.wikipedia.org, Erik Brynjolfsson, everywhere but in the productivity statistics, Firefox, Frank Levy and Richard Murnane: The New Division of Labor, Google Glasses, Ignaz Semmelweis: hand washing, Internet of things, job satisfaction, Joseph Schumpeter, knowledge worker, lifelogging, medical malpractice, medical residency, Menlo Park, minimum viable product, natural language processing, Network effects, Nicholas Carr, obamacare, pattern recognition, peer-to-peer, personalized medicine, pets.com, Productivity paradox, Ralph Nader, RAND corporation, Second Machine Age, self-driving car, Silicon Valley, Silicon Valley startup, six sigma, Skype, Snapchat, software as a service, Steve Jobs, Steven Levy, the payments system, The Wisdom of Crowds, Thomas Bayes, Toyota Production System, Uber for X, US Airways Flight 1549, Watson beat the top human players on Jeopardy!, Yogi Berra

When Brailer left the ONC in 2006 to return to the private sector, he never dreamed that within three years, the federal budget to promote the wiring of healthcare would climb from that $42 million he had fought so desperately to preserve. By 71,000 percent. “You never want a serious crisis to go to waste,” Rahm Emanuel, chief of staff to President-elect Obama, told the Wall Street Journal on November 19, 2008. “It’s an opportunity to do things that you think you could not do before.” The crisis that Emanuel was referring to, of course, was the global recession that had begun with the collapse of Lehman Brothers two months earlier. The Obama administration knew that time was short; it needed to get money flowing through the veins of the American economy promptly or the damage might become irreparable. But if the money appeared to end up lining the pockets of the same Wall Street moneymen who were being blamed for the crisis, or if it failed to have the desired stimulatory effect, the political fallout would be devastating.


pages: 388 words: 125,472

The Establishment: And How They Get Away With It by Owen Jones

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anti-communist, Asian financial crisis, bank run, battle of ideas, Big bang: deregulation of the City of London, bonus culture, Bretton Woods, British Empire, call centre, capital controls, Capital in the Twenty-First Century by Thomas Piketty, centre right, citizen journalism, collapse of Lehman Brothers, collective bargaining, don't be evil, Edward Snowden, Etonian, eurozone crisis, falling living standards, Francis Fukuyama: the end of history, full employment, G4S, glass ceiling, hiring and firing, housing crisis, inflation targeting, Intergovernmental Panel on Climate Change (IPCC), investor state dispute settlement, James Dyson, laissez-faire capitalism, light touch regulation, market fundamentalism, mass immigration, Monroe Doctrine, Mont Pelerin Society, moral hazard, Neil Kinnock, night-watchman state, Northern Rock, Occupy movement, offshore financial centre, old-boy network, open borders, Plutocrats, plutocrats, popular capitalism, profit motive, quantitative easing, race to the bottom, rent control, road to serfdom, Ronald Reagan, shareholder value, short selling, sovereign wealth fund, stakhanovite, statistical model, The Wealth of Nations by Adam Smith, transfer pricing, union organizing, unpaid internship, Washington Consensus, wealth creators, Winter of Discontent

An Independent Commission on Banking was not set up until June 2010, producing a report in September the following year, three years after the financial collapse. When the coalition government pledged to introduce legislation based on the findings, banks were given until 2019 to implement a proposed weak ring-fencing of high street and investment banking – so that investment banks could no longer use ordinary customers’ money to bet on risky products – over a decade after the collapse of Lehman Brothers. Even the Conservative MP Andrew Tyrie claimed that government amendments had reduced the powers of the financial watchdog to enforce such a separation. In opposition, Vince Cable of the Liberal Democrats had called for the total separation of high street and investment banking, but this demand was abandoned by the coalition government. Many of the proposals of the report were watered down or abandoned, including limits on risks that major banks run.


pages: 549 words: 147,112

The Lost Bank: The Story of Washington Mutual-The Biggest Bank Failure in American History by Kirsten Grind

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asset-backed security, bank run, banking crisis, big-box store, call centre, collapse of Lehman Brothers, collateralized debt obligation, corporate governance, fixed income, housing crisis, Maui Hawaii, money market fund, mortgage debt, naked short selling, NetJets, shareholder value, short selling, Shoshana Zuboff, Skype, too big to fail, Y2K

Around the world, banks large and small were borrowing from the Federal Reserve’s discount window, a sign of the panic spreading in financial institutions everywhere, not just at WaMu. Usually banks tap the Fed only in an emergency. But during the first week in September, banks borrowed a collective $19 billion, compared with an average of less than $50 million a week in prior years.46 The borrowing volume continued to grow after the collapse of Lehman Brothers and the government bailout of AIG. Some of the largest borrowers were companies that weren’t in the headlines at all. Right after the government forced Fannie Mae and Freddie Mac into conservatorship, U.S. Bancorp, another large consumer bank like WaMu, took out a $3.4 billion overnight loan. It was the largest amount of money borrowed from the Fed during that time.47 The Fed was encouraging banks to get over the stigma associated with borrowing, and to access money if they needed it.


pages: 515 words: 142,354

The Euro: How a Common Currency Threatens the Future of Europe by Joseph E. Stiglitz, Alex Hyde-White

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bank run, banking crisis, barriers to entry, battle of ideas, Berlin Wall, Bretton Woods, capital controls, Carmen Reinhart, cashless society, central bank independence, centre right, cognitive dissonance, collapse of Lehman Brothers, collective bargaining, corporate governance, correlation does not imply causation, credit crunch, Credit Default Swap, currency peg, dark matter, David Ricardo: comparative advantage, disintermediation, diversified portfolio, eurozone crisis, Fall of the Berlin Wall, fiat currency, financial innovation, full employment, George Akerlof, Gini coefficient, global supply chain, Growth in a Time of Debt, housing crisis, income inequality, incomplete markets, inflation targeting, information asymmetry, investor state dispute settlement, invisible hand, Kenneth Arrow, Kenneth Rogoff, knowledge economy, labour market flexibility, labour mobility, light touch regulation, manufacturing employment, market bubble, market friction, market fundamentalism, Martin Wolf, Mexican peso crisis / tequila crisis, money market fund, moral hazard, mortgage debt, neoliberal agenda, new economy, open economy, paradox of thrift, pension reform, pensions crisis, price stability, profit maximization, purchasing power parity, quantitative easing, race to the bottom, risk-adjusted returns, Robert Gordon, Robert Shiller, Robert Shiller, Ronald Reagan, savings glut, secular stagnation, Silicon Valley, sovereign wealth fund, the payments system, The Wealth of Nations by Adam Smith, too big to fail, transaction costs, transfer pricing, trickle-down economics, Washington Consensus, working-age population

Worse, because of the lack of transparency in the financial market, no one knew exactly how each bank would be affected. Some banks that had not lent to Greece may have lent money to other banks that had, so they, too, might be at risk. Some banks had bought insurance against losses, but some banks had gambled, taking bets that Greece would not default. It was a mess. And it was a mess that could spread. The world had just experienced a dose of this kind of contagion: in the aftermath of the collapse of Lehman Brothers, the entire world went into an economic recession, as financial markets froze. It was not clear whether Greece was small or large relative to Lehman Brothers; most importantly, it was not clear whether it was systemically significant. In chapter 1, I described how as each country went into crisis, the Troika formulated a program supposedly designed to bring the country back to health, and for the countries that had lost access to international credit markets, to regain access.

The End of Power: From Boardrooms to Battlefields and Churches to States, Why Being in Charge Isn’t What It Used to Be by Moises Naim

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additive manufacturing, barriers to entry, Berlin Wall, bilateral investment treaty, business process, business process outsourcing, call centre, citizen journalism, Clayton Christensen, clean water, collapse of Lehman Brothers, collective bargaining, colonial rule, conceptual framework, corporate governance, creative destruction, crony capitalism, deskilling, disintermediation, don't be evil, failed state, Fall of the Berlin Wall, financial deregulation, Francis Fukuyama: the end of history, illegal immigration, immigration reform, income inequality, income per capita, intangible asset, intermodal, invisible hand, job-hopping, Joseph Schumpeter, Julian Assange, Kickstarter, liberation theology, Martin Wolf, mega-rich, megacity, Naomi Klein, Nate Silver, new economy, Northern Rock, Occupy movement, open borders, open economy, Peace of Westphalia, Plutocrats, plutocrats, price mechanism, price stability, private military company, profit maximization, Ronald Coase, Ronald Reagan, Silicon Valley, Skype, Steve Jobs, The Nature of the Firm, Thomas Malthus, too big to fail, trade route, transaction costs, Washington Consensus, WikiLeaks, World Values Survey, zero-sum game

Lasch asked in a cover essay in Harper’s.30 The idea of a “revolt of the elites” has resonated. Despite fuzziness as to what exactly defines the elite (Wealth? Status measured some other way? Particular professions?), the notion of a resurgent elite further strengthening its hold on government is very much alive. In 2008, days after the massive US bank bailout was announced and a few short weeks after the collapse of Lehman Brothers and the rescue of the insurance giant American International Group (AIG), the critic Naomi Klein described the era as “a revolt of the elites . . . and an incredibly successful one.” She argued that both the long neglect of financial regulation and the 50 sudden bailout reflected elite control over policy. And she suggested that a common trend in the concentration of power linked together major countries with seemingly opposed political and economic systems.


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

(The intervention was partially sterilized to prevent inflation.) When the global crisis broke in 2008, the reserves came in very handy. Not only did they serve to cover payments deficits but their very presence inspired confidence and prevented capital flight. Since 2008, however, India’s adherence to its payments regime has become more hesitant. D. Subbarao came in as RBI governor at a difficult time, only a week before the collapse of Lehman Brothers in September 2008. For India, the immediate effect of the global turmoil was that capital inflows dried up for six months. Subbarao responded with a mixture of running down reserves and letting the rupee depreciate. So far, his policy was entirely in consonance with Reddy’s. Then, strong inward capital flows resumed because a) it looked as if the worst of the crisis was over and India had come out of it in better shape than many countries; and b) Western governments slashed interest rates to very low levels and started ‘quantitative easing’, which raised the relative return on Indian assets.


pages: 464 words: 139,088

The End of Alchemy: Money, Banking and the Future of the Global Economy by Mervyn King

Andrei Shleifer, Asian financial crisis, asset-backed security, balance sheet recession, bank run, banking crisis, banks create money, Berlin Wall, Bernie Madoff, Big bang: deregulation of the City of London, bitcoin, Black Swan, Bretton Woods, British Empire, capital controls, Carmen Reinhart, Cass Sunstein, central bank independence, centre right, collapse of Lehman Brothers, creative destruction, Credit Default Swap, crowdsourcing, Daniel Kahneman / Amos Tversky, David Ricardo: comparative advantage, distributed generation, Doha Development Round, Edmond Halley, Fall of the Berlin Wall, falling living standards, fiat currency, financial innovation, financial intermediation, floating exchange rates, forward guidance, Fractional reserve banking, Francis Fukuyama: the end of history, full employment, German hyperinflation, Hyman Minsky, inflation targeting, invisible hand, John Maynard Keynes: Economic Possibilities for our Grandchildren, John Meriwether, joint-stock company, Joseph Schumpeter, Kenneth Arrow, Kenneth Rogoff, labour market flexibility, large denomination, liquidity trap, Long Term Capital Management, manufacturing employment, market clearing, Martin Wolf, Mexican peso crisis / tequila crisis, money market fund, money: store of value / unit of account / medium of exchange, moral hazard, Myron Scholes, Nick Leeson, North Sea oil, Northern Rock, oil shale / tar sands, oil shock, open economy, paradox of thrift, Paul Samuelson, Ponzi scheme, price mechanism, price stability, purchasing power parity, quantitative easing, rent-seeking, reserve currency, Richard Thaler, rising living standards, Robert Shiller, Robert Shiller, Satoshi Nakamoto, savings glut, secular stagnation, seigniorage, stem cell, Steve Jobs, The Great Moderation, the payments system, Thomas Malthus, too big to fail, transaction costs, Tyler Cowen: Great Stagnation, yield curve, Yom Kippur War, zero-sum game

But stability accompanied by unsustainability offers only the appearance of true stability and must at some point come to an end. As in so many crises, the point of greatest vulnerability was in the banking sector. It had become so highly leveraged that, as described in Chapter 1, relatively small items of news from the housing market in the United States in 2006 and the position of some European banks in 2007 led to nervousness about the state of the sector. After the collapse of Lehman Brothers in September 2008, there was both a full-blown banking crisis and an enormous shock to confidence around the world. The stability heuristic was no longer appropriate. The narrative changed. It was now far from obvious how to estimate lifetime income. All that was clear was that spending patterns would have to change. Caution prevailed, borrowers were reluctant to borrow and lenders to lend.


pages: 584 words: 187,436

More Money Than God: Hedge Funds and the Making of a New Elite by Sebastian Mallaby

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Andrei Shleifer, Asian financial crisis, asset-backed security, automated trading system, bank run, barriers to entry, Benoit Mandelbrot, Berlin Wall, Bernie Madoff, Big bang: deregulation of the City of London, Bonfire of the Vanities, Bretton Woods, capital controls, Carmen Reinhart, collapse of Lehman Brothers, collateralized debt obligation, computerized trading, corporate raider, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, currency manipulation / currency intervention, currency peg, Elliott wave, Eugene Fama: efficient market hypothesis, failed state, Fall of the Berlin Wall, financial deregulation, financial innovation, financial intermediation, fixed income, full employment, German hyperinflation, High speed trading, index fund, John Meriwether, Kenneth Rogoff, Long Term Capital Management, margin call, market bubble, market clearing, market fundamentalism, merger arbitrage, money market fund, moral hazard, Myron Scholes, natural language processing, Network effects, new economy, Nikolai Kondratiev, pattern recognition, Paul Samuelson, pre–internet, quantitative hedge fund, quantitative trading / quantitative finance, random walk, Renaissance Technologies, Richard Thaler, risk-adjusted returns, risk/return, rolodex, Sharpe ratio, short selling, Silicon Valley, South Sea Bubble, sovereign wealth fund, statistical arbitrage, statistical model, survivorship bias, technology bubble, The Great Moderation, The Myth of the Rational Market, the new new thing, too big to fail, transaction costs

Whereas the market disruptions of the 1990s could be viewed as a tolerable price to pay for the benefits of sophisticated and leveraged finance, the convulsion of 2007–2009 triggered the sharpest recession since the 1930s. Inevitably, hedge funds were caught up in the panic. In July 2007, a credit hedge fund called Sowood blew up, and the following month a dozen or so quantitative hedge funds tried to cut their positions all at once, triggering wild swings in the equity market and billions of dollars of losses. The following year was more brutal by far. The collapse of Lehman Brothers left some hedge funds with money trapped inside the bankrupt shell, and the turmoil that followed inflicted losses on most others. Hedge funds needed access to leverage, but nobody lent to anyone in the weeks after the Lehman shock. Hedge funds built their strategies on short selling, but governments imposed clumsy restrictions on shorting amid the post-Lehman panic. Hedge funds were reliant upon the patience of their investors, who could yank their money out on short notice.


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

Now our creditability is gone: we are seen to have a political system in which one party tries to disenfranchise the poor, in which money buys politicians and policies that reinforce the inequalities. We should be concerned about the risk of this diminished influence. Even if things had been going better in the United States, the growth of the emerging markets would necessitate a new global order. There was just a short period, between the fall of the Berlin Wall and the collapse of Lehman Brothers, when the United States dominated in virtually every realm. Now the emerging markets are demanding a larger voice in international forums. We moved from the G-8, where the richest industrial countries tried to determine global economic policy, to the G-20, because we had to: the global recession provided the impetus, but one could not deal with global issues, like global warming or global trade, without bringing others in.


pages: 840 words: 202,245

Age of Greed: The Triumph of Finance and the Decline of America, 1970 to the Present by Jeff Madrick

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accounting loophole / creative accounting, Asian financial crisis, bank run, Bretton Woods, capital controls, collapse of Lehman Brothers, collateralized debt obligation, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, desegregation, disintermediation, diversified portfolio, Donald Trump, financial deregulation, fixed income, floating exchange rates, Frederick Winslow Taylor, full employment, George Akerlof, Hyman Minsky, income inequality, index fund, inflation targeting, inventory management, invisible hand, John Meriwether, Kitchen Debate, laissez-faire capitalism, locking in a profit, Long Term Capital Management, market bubble, minimum wage unemployment, money market fund, Mont Pelerin Society, moral hazard, mortgage debt, Myron Scholes, new economy, North Sea oil, Northern Rock, oil shock, Paul Samuelson, Philip Mirowski, price stability, quantitative easing, Ralph Nader, rent control, road to serfdom, Robert Bork, Robert Shiller, Robert Shiller, Ronald Coase, Ronald Reagan, Ronald Reagan: Tear down this wall, shareholder value, short selling, Silicon Valley, Simon Kuznets, technology bubble, Telecommunications Act of 1996, The Chicago School, The Great Moderation, too big to fail, union organizing, V2 rocket, value at risk, Vanguard fund, War on Poverty, Washington Consensus, Y2K, Yom Kippur War

Their highest total purchases of subprime mortgages by far reached 44 percent of the market in 2004 and 33 percent in 2005, before falling back to 20 percent of subprime purchase in 2006, when the frenzy became extreme. 35 FULD’S DREAM HAD COME TRUE: Andrew Ross Sorkin, Too Big to Fail: The Inside Story of How Wall Street and Washington Fought to Save the Financial System—and Themselves (New York: Viking, 2009), pp. 19–23. 36 FULD’S AMBITION COULD NOW BE FULLY UNLEASHED: Lawrence G. McDonald with Patrick Robinson, A Colossal Failure of Common Sense: The Inside Story of the Collapse of Lehman Brothers (New York: Crown, 2009), pp. 136–38. 37 AT A MANAGEMENT MEETING: Ibid., pp. 268–69. 38 IN THE FACE OF GROWING RISK: Ibid., pp. 274–75. 39 IT WAS PROBABLY THE MOST BRILLIANT TRADE: Lewis, The Big Short, pp. 206–14, 128. 40 LEWIS RANIERI HIMSELF … WARNED: Paul Muolo and Mathew Padilla, Chain of Blame: How Wall Street Caused the Mortgage and Credit Crisis (Hoboken, N.J.: John Wiley, 2008), pp. 223–25. 41 ECONOMISTS AT THE BANK FOR INTERNATIONAL SETTLEMENTS: Tett, Fools’ Gold, p. 154. 42 DESPITE THE RUSE: Michael J. de la Merced, “Findings on Lehman Take Even Experts by Surprise,” Wall Street Journal, March 13, 2010, p.


pages: 552 words: 168,518

MacroWikinomics: Rebooting Business and the World by Don Tapscott, Anthony D. Williams

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accounting loophole / creative accounting, airport security, Andrew Keen, augmented reality, Ayatollah Khomeini, barriers to entry, bioinformatics, Bretton Woods, business climate, business process, car-free, carbon footprint, citizen journalism, Clayton Christensen, clean water, Climategate, Climatic Research Unit, cloud computing, collaborative editing, collapse of Lehman Brothers, collateralized debt obligation, colonial rule, commoditize, corporate governance, corporate social responsibility, creative destruction, crowdsourcing, death of newspapers, demographic transition, distributed generation, don't be evil, en.wikipedia.org, energy security, energy transition, Exxon Valdez, failed state, fault tolerance, financial innovation, Galaxy Zoo, game design, global village, Google Earth, Hans Rosling, hive mind, Home mortgage interest deduction, interchangeable parts, Internet of things, invention of movable type, Isaac Newton, James Watt: steam engine, Jaron Lanier, jimmy wales, Joseph Schumpeter, Julian Assange, Kevin Kelly, knowledge economy, knowledge worker, Marc Andreessen, Marshall McLuhan, mass immigration, medical bankruptcy, megacity, mortgage tax deduction, Netflix Prize, new economy, Nicholas Carr, oil shock, old-boy network, online collectivism, open borders, open economy, pattern recognition, peer-to-peer lending, personalized medicine, Ray Kurzweil, RFID, ride hailing / ride sharing, Ronald Reagan, Rubik’s Cube, scientific mainstream, shareholder value, Silicon Valley, Skype, smart grid, smart meter, social graph, social web, software patent, Steve Jobs, text mining, the scientific method, The Wisdom of Crowds, transaction costs, transfer pricing, University of East Anglia, urban sprawl, value at risk, WikiLeaks, X Prize, young professional, Zipcar

The meltdown started in the mortgage offices of America, then crashed down on Wall Street, and spread almost instantly to London, Asia, and the rest of the world. Regulators, if not bankers, are getting the message. “Changes in financial rules and accounting standards . . . must be coordinated globally in the effort to help avoid a recurrence of the economic crisis,” said Federal Reserve governor Elizabeth Duke to an accounting industry audience on the first anniversary of the collapse of Lehman Brothers. “Accounting standard setters, regulators and policy makers around the world are discussing and proposing preventative measures. Now the challenge lies in integrating those changes smoothly and seamlessly,” she said.10 The Securities and Exchange Commission has also been pushing for a single, global set of rules for financial services. Said James Kroeker, chief economist at the SEC: “The financial crisis that erupted last year has highlighted for us the importance of global solutions to complex issues.”11 Sometimes the pejorative word to describe interdependence is “globalization,” but talk to your typical anti-WTO protester and they’ll tell you that globalization needs to be achieved more fairly, not that we should or can turn back the hands of time.


pages: 554 words: 167,247

Money, Politics, Back-Room Deals, and the Fight to Fix Our Broken Healthcare System by Steven Brill

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Affordable Care Act / Obamacare, barriers to entry, Bernie Sanders, business process, call centre, collapse of Lehman Brothers, collective bargaining, crony capitalism, desegregation, Donald Trump, Edward Snowden, employer provided health coverage, medical malpractice, Menlo Park, Nate Silver, obamacare, Potemkin village, Ronald Reagan, Saturday Night Live, side project, Silicon Valley, the payments system, young professional

By the summer of 2009, Washington’s idea of healthcare reform would become the Tea Party’s prime target. For as Santelli screamed into his microphone, a group of capital insiders representing multiple factions of America’s biggest industry—healthcare—was negotiating exactly the kinds of secret deals that would have made Santelli scream louder had he known about them. CHAPTER 8 DEAL TIME March–April 2009 FOR THE SENATE FINANCE COMMITTEE, THERE WAS A SILVER LINING in the collapse of Lehman Brothers that had accelerated the financial meltdown: Antonios “Tony” Clapsis, a bearded, wiry twenty-eight-year-old who loved crunching numbers. When Lehman collapsed in September 2008, Clapsis had been working at the investment bank for about six years as a stock analyst concentrating on the healthcare industry. He managed to hang on for about six months, working for Barclays Bank, which had taken over many of Lehman’s businesses.


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

A Financial History of the United States. Armonk, NY: M. E. Sharpe. Mayer, Colin. 1988. “New Issues in Corporate Finance.” European Economic Review 32: 1167–1188. Mayo, Mike. 2011. Exile on Wall Street: One Analyst’s Fight to Save the Big Banks from Themselves. Hoboken, NJ: John Wiley and Sons. McDonald, Lawrence G. 2010. A Colossal Failure of Common Sense: The Inside Story of the Collapse of Lehman Brothers. New York: Three Rivers. McDonald, Robert L. 2010. “Contingent Capital with a Dual Price Trigger.” Working paper. Kellogg School of Management, Northwestern University. McLean, Bethany, and Peter Elkind. 2004. The Smartest Guys in the Room: The Amazing Rise and Scandalous Fall of Enron. New York: Portfolio Trade. McLean, Bethany, and Joe Nocera. 2010. All the Devils Are Here: The Hidden History of the Financial Crisis.


pages: 598 words: 169,194

Bernie Madoff, the Wizard of Lies: Inside the Infamous $65 Billion Swindle by Diana B. Henriques

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accounting loophole / creative accounting, airport security, Albert Einstein, banking crisis, Bernie Madoff, break the buck, British Empire, centralized clearinghouse, collapse of Lehman Brothers, computerized trading, corporate raider, diversified portfolio, Donald Trump, dumpster diving, Edward Thorp, financial deregulation, financial thriller, fixed income, forensic accounting, Gordon Gekko, index fund, locking in a profit, mail merge, merger arbitrage, money market fund, Plutocrats, plutocrats, Ponzi scheme, Potemkin village, random walk, Renaissance Technologies, riskless arbitrage, Ronald Reagan, short selling, Small Order Execution System, source of truth, sovereign wealth fund, too big to fail, transaction costs, traveling salesman

Aside from the hundreds of millions that Madoff diverted for his own use over the years, the cash handed over by investors had been paid out to other investors as bogus investment earnings. Picard had the bank records showing when the cash was withdrawn and by whom; and he knew whose account in which country received the money. By his estimate, more than $6 billion was withdrawn from the Ponzi scheme between the collapse of Lehman Brothers in September 2008 and Madoff’s arrest in December. In the scheme’s final year, withdrawals totalled nearly $13 billion—most of which had flowed in since early 2006. Still, knowing where the money went was one thing, and getting it back was another. While the federal bankruptcy code allowed Picard to seek the return of cash withdrawn within two years of the Madoff firm’s bankruptcy filing, New York State law extended that window to six years.


pages: 554 words: 167,247

America's Bitter Pill: Money, Politics, Backroom Deals, and the Fight to Fix Our Broken Healthcare System by Steven Brill

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Affordable Care Act / Obamacare, barriers to entry, Bernie Sanders, business process, call centre, collapse of Lehman Brothers, collective bargaining, crony capitalism, desegregation, Donald Trump, Edward Snowden, employer provided health coverage, medical malpractice, Menlo Park, Nate Silver, obamacare, Potemkin village, Ronald Reagan, Saturday Night Live, side project, Silicon Valley, the payments system, young professional

By the summer of 2009, Washington’s idea of healthcare reform would become the Tea Party’s prime target. For as Santelli screamed into his microphone, a group of capital insiders representing multiple factions of America’s biggest industry—healthcare—was negotiating exactly the kinds of secret deals that would have made Santelli scream louder had he known about them. CHAPTER 8 DEAL TIME March–April 2009 FOR THE SENATE FINANCE COMMITTEE, THERE WAS A SILVER LINING in the collapse of Lehman Brothers that had accelerated the financial meltdown: Antonios “Tony” Clapsis, a bearded, wiry twenty-eight-year-old who loved crunching numbers. When Lehman collapsed in September 2008, Clapsis had been working at the investment bank for about six years as a stock analyst concentrating on the healthcare industry. He managed to hang on for about six months, working for Barclays Bank, which had taken over many of Lehman’s businesses.


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

Feds, Neel Kashkari and Phillip Swagel drafted a memo entitled “Break the Glass: Bank Recapitalization Plan.”120 In this memo, Kashkari and Swagel identified alternative emergency measures, argued in favor of using asset auctions to remove mortgage-related assets from bank balance sheets, and set forth a timeline for completing the asset purchases. Secretary of the Treasury Henry Paulson would eventually second their judgment to purchase on ideological grounds, but at that juncture essentially ordered that the plan be set aside.121 So when the emergency did eventually arrive, following the September collapse of Lehman Brothers, breaking the glass was something Paulson and the Federal Reserve chairman, Ben Bernanke, attempted to do. They began to make rounds to convince members of congress of the need for an emergency asset purchase plan, solicited an auction plan from the New York Fed, and approached academic market designers to fill in the details.122 But they almost immediately began to encounter difficulties.


pages: 828 words: 232,188

Political Order and Political Decay: From the Industrial Revolution to the Globalization of Democracy by Francis Fukuyama

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Affordable Care Act / Obamacare, Andrei Shleifer, Asian financial crisis, Atahualpa, banking crisis, barriers to entry, Berlin Wall, blood diamonds, British Empire, centre right, clean water, collapse of Lehman Brothers, colonial rule, conceptual framework, crony capitalism, deindustrialization, Deng Xiaoping, double entry bookkeeping, Edward Snowden, Erik Brynjolfsson, European colonialism, facts on the ground, failed state, Fall of the Berlin Wall, first-past-the-post, Francis Fukuyama: the end of history, Francisco Pizarro, Frederick Winslow Taylor, full employment, Gini coefficient, Hernando de Soto, Home mortgage interest deduction, income inequality, information asymmetry, invention of the printing press, iterative process, knowledge worker, land reform, land tenure, life extension, low skilled workers, manufacturing employment, means of production, Menlo Park, Mohammed Bouazizi, Monroe Doctrine, moral hazard, new economy, open economy, out of africa, Peace of Westphalia, Port of Oakland, post-industrial society, Post-materialism, post-materialism, price discrimination, quantitative easing, RAND corporation, rent-seeking, road to serfdom, Ronald Reagan, Scientific racism, Scramble for Africa, Second Machine Age, Silicon Valley, special economic zone, stem cell, the scientific method, The Wealth of Nations by Adam Smith, Thomas L Friedman, Thomas Malthus, too big to fail, trade route, transaction costs, Tyler Cowen: Great Stagnation, Vilfredo Pareto, women in the workforce, World Values Survey, zero-sum game

And, as the world has come to know through the revelations of Edward Snowden, the National Security Agency has been given broad leave to collect data not just on foreign activities but also on American citizens since September 11, 2001.16 While many American libertarians and conservatives would like to abolish these agencies altogether, it is hard to see how it would be possible to govern properly without them under modern circumstances. America today has a vast, diverse, complex national economy, connected to a globalized world economy that moves with extraordinary speed and that takes a great deal of expertise to master. It faces serious external security threats. During the acute phase of the financial crisis that unfolded after the collapse of Lehman Brothers in September 2008, the Federal Reserve and Treasury Department had to make massive decisions literally overnight, decisions that involved flooding the market with trillions of dollars of liquidity, propping up individual banks, and imposing new regulations. The severity of the crisis led Congress to an emergency appropriation of $700 billion for the Troubled Asset Relief Program, largely on the say-so of the Treasury Department and the Bush administration.